---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2016

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission file number 0-15451

PHOTRONICS, INC.

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐  No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

---

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of Photronics, Inc. (“Photronics” or the “Company” or “we”). These statements are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. Forward-looking statements may be identified by words like “expect,” “anticipate,” “believe,” “plan,” “project,” “could,” “estimate,” “intend,” “may,” “will” and similar expressions, or the negative of such terms, or other comparable terminology. All forward-looking statements involve risks and uncertainties that are difficult to predict. In particular, any statement contained in this quarterly report on Form 10-Q or in other documents filed with the Securities and Exchange Commission, in press releases or in the Company’s communications and discussions with investors and analysts in the normal course of business through meetings, phone calls, or conference calls regarding, among other things, the consummation and benefits of transactions and acquisitions, expectations with respect to future sales, financial performance, operating efficiencies, or product expansion, are subject to known and unknown risks, uncertainties, and contingencies, many of which are beyond the control of the Company. Various factors may cause actual results, performance, or achievements to differ materially from anticipated results, performance, or achievements expressed or implied by forward-looking statements. Factors that might affect forward-looking statements include, but are not limited to, overall economic and business conditions; economic and political conditions in international markets; the demand for the Company’s products; competitive factors in the industries and geographic markets in which the Company competes; federal, state and international tax requirements (including tax rate changes, new tax laws and revised tax law interpretations); interest rate and other capital market conditions, including changes in the market price of the Company’s securities; foreign currency exchange rate fluctuations; changes in technology; the timing, impact, and other uncertainties relating to transactions and acquisitions, divestitures and joint ventures as well as decisions the Company may make in the future regarding the Company’s business, capital and organizational structure and other matters; the seasonal and cyclical nature of the semiconductor and flat panel display industries; management changes; damage or destruction to the Company’s facilities, or the facilities of its customers or suppliers, by natural disasters, labor strikes, political unrest, or terrorist activity; the ability of the Company to (i) place new equipment in service on a timely basis; (ii) obtain additional financing; (iii) achieve anticipated synergies and cost savings; (iv) fully utilize its tools; (v) achieve desired yields, pricing, product mix, and market acceptance of its products and (vi) obtain necessary export licenses. Any forward-looking statements should be considered in light of these factors. Accordingly, there is no assurance that the Company’s expectations will be realized. The Company does not assume responsibility for the accuracy and completeness of the forward-looking statements and does not assume an obligation to provide revisions to any forward-looking statements, except as otherwise required by securities and other applicable laws.

 

PHOTRONICS, INC.

AND SUBSIDIARIES

INDEX

 

 

PART I.

FINANCIAL INFORMATION

Item 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PHOTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

(unaudited)

 

See accompanying notes to condensed consolidated financial statements.

 

PHOTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(in thousands, except per share amounts)

(unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

 

PHOTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

 

See accompanying notes to condensed consolidated financial statements.

 

PHOTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

PHOTRONICS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Three Months and Nine Months Ended July 31, 2016 and August 2, 2015

(unaudited)

(in thousands, except share amounts)

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

 

Photronics, Inc. and its subsidiaries (“Photronics” or “the Company”) is one of the world’s leading manufacturers of photomasks, which are high precision photographic quartz plates containing microscopic images of electronic circuits. Photomasks are a key element in the manufacture of semiconductors and flat panel displays (“FPDs”), and are used as masters to transfer circuit patterns onto semiconductor wafers and flat panel substrates during the fabrication of integrated circuits (“ICs”) and a variety of FPDs and, to a lesser extent, other types of electrical and optical components. The Company currently operates principally from nine manufacturing facilities, two of which are located in Europe, three in Taiwan, one in Korea, and three in the United States. In August 2016 the Company announced its plans to build a research and development and manufacturing facility in Xiamen, China, with construction commencing in 2017 and production estimated to start in late 2018. See Note 14 for additional information.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, adjustments, all of which are of a normal recurring nature, considered necessary for a fair presentation have been included. The Company is typically impacted during its first fiscal quarter by the North American and European holiday periods, as some customers reduce their effective workdays and orders during these periods. Additionally, the Company can be impacted during its first or second quarter by the Asian New Year holiday period, which may also reduce customer orders. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending October 30, 2016. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended November 1, 2015.

NOTE 2 - CHANGES IN EQUITY

The following tables set forth the Company’s consolidated changes in equity for the three and nine month periods ended July 31, 2016 and August 2, 2015:

 

 

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

Equipment under capital leases are included in above property, plant and equipment as follows:

Depreciation and amortization expense for property, plant and equipment was $ 18.4 million and $56.4 million for the three and nine month periods ended July 31, 2016, respectively, and $19.4 million and $56.4 million for the three and nine month periods ended August 2, 2015, respectively.

 

NOTE 4 - JOINT VENTURE, TECHNOLOGY LICENSE AND OTHER AGREEMENTS WITH MICRON TECHNOLOGY, INC.

In May 2006, Photronics and Micron Technology, Inc. (“Micron”) entered into the MP Mask joint venture (“MP Mask”), which developed and produced photomasks for leading-edge and advanced next generation semiconductors. At the time of the formation of the joint venture, the Company also entered into both an agreement to license photomask technology developed by Micron and certain supply agreements.

This joint venture was a variable interest entity (“VIE”) (as that term is defined in the ASC) because all costs of the joint venture were passed on to the Company and Micron through purchase agreements they had entered into with the joint venture, and it was dependent upon the Company and Micron for any additional cash requirements. On a quarterly basis the Company reassessed whether its interest in MP Mask gave it a controlling financial interest in this VIE. The purpose of this quarterly reassessment was to identify the primary beneficiary (which is defined in the ASC as the entity that consolidates a VIE) of the VIE. As a result of the reassessment in the current quarter, the Company determined that Micron was still the primary beneficiary of the VIE, by virtue of its tie-breaking voting rights within MP Mask’s Board of Managers, thereby having given it the power to direct the activities of MP Mask that most significantly impacted its economic performance, including its decision making authority in the ordinary course of business and its purchasing the majority of products produced by the VIE.

The Company utilized MP Mask for both high-end IC photomask production and research and development purposes. MP Mask charged its variable interest holders based on their actual usage of its facility. MP Mask separately charged for any research and development activities it engaged in at the requests of its owners. The Company incurred cost of sales from MP Mask of $0.8 and $5.7 million in the three month and nine month periods ended July 31, 2016, respectively, and $1.5 million and $4.9 million during the respective prior year periods. The Company incurred research and development costs from MP Mask of $0.2 million during the three month period ended August 2, 2015, and $0.5 million and $0.7 million during the nine month periods ended July 31, 2016 and August 2, 2015, respectively. At November 1, 2015, the Company owed MP Mask $4.3 million and had a receivable from Micron of $6.4 million, both primarily related to the aforementioned supply agreements.

MP Mask was governed by a Board of Managers, appointed by Micron and the Company. Since MP Mask’s inception, Micron, as a result of its majority ownership, had held majority voting power on its Board of Managers. The voting power held by each party was subject to change as ownership interests changed. Under the MP Mask joint venture operating agreement, the Company may have been required to make additional capital contributions to MP Mask up to the maximum amount defined in the operating agreement. However, had the Board of Managers determined that further additional funding was required, MP Mask would have pursued its own financing. If MP Mask was unable to obtain its own financing, it may have requested additional capital contributions from the Company. Had the Company chosen not to make a requested contribution to MP Mask, its ownership percentage may have been reduced.

The Company’s investment in the VIE, which represented its maximum exposure to loss, was $93.0 million at November 1, 2015. This amount is reported in the Company’s condensed consolidated balance sheets as “Investment in joint venture.” The Company recorded losses from its investment in the VIE of $0.1 million in the nine month periods ended July 31, 2016 and August 2, 2015.

 

NOTE 5 - LONG-TERM BORROWINGS

Long-term borrowings consist of the following:

 

		Three Months Ended								Nine Months Ended
		July 31, 2016				August 2, 2015				July 31, 2016				August 2, 2015
Volatility			38.9%				42.9%				48.8%				53.9%
Risk free rate of return			1.2%				1.4% – 1.6%				1.2%-1.7%				1.3% - 1.6%
Dividend yield			0.0%				0.0%				0.0%				0.0%
Expected term		5.1 years				4.7 years				5.1 years				4.7 years

Options		Shares				Weighted Average Exercise Price			Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at July 31, 2016			3,575,610			$	7.52		6.5 years		$	9,210
Exercisable at July 31, 2016			2,027,160			$	5.87		5.0 years		$	7,807

		Three Months Ended								Nine Months Ended
		July 31, 2016				August 2, 2015				July 31, 2016				August 2, 2015
Net income attributable to Photronics, Inc. shareholders		$	8,088			$	12,106			$	40,944			$	26,003
Effect of dilutive securities:
Interest expense on convertible notes, net of related tax effects			496				1,071				2,442				3,292
Earnings for diluted earnings per share		$	8,584			$	13,177			$	43,386			$	29,295
Weighted-average common shares computations:
Weighted-average common shares used for basic earnings per share			67,953				66,454				67,377				66,250
Effect of dilutive securities:
Convertible notes			5,542				11,085				8,607				11,085
Share-based payment awards			822				1,030				1,006				965
Potentially dilutive common shares			6,364				12,115				9,613				12,050
Weighted-average common shares used for diluted earnings per share			74,317				78,569				76,990				78,300
Basic earnings per share		$	0.12			$	0.18			$	0.61			$	0.39
Diluted earnings per share		$	0.12			$	0.17			$	0.56			$	0.37

		Three Months Ended								Nine Months Ended
		July 31, 2016				August 2, 2015				July 31, 2016				August 2, 2015
Share-based payment awards			2,016				1,667				1,615				1,636
Total potentially dilutive shares excluded			2,016				1,667				1,615				1,636

		Three Months Ended July 31, 2016
		Foreign Currency Translation Adjustments				Amortization of Cash Flow Hedge				Other				Total
Balance at May 1, 2016		$	(7,966	)		$	(242	)		$	(638	)		$	(8,846	)
Other comprehensive income (loss) before reclassifications			5,064				-				(13	)			5,051
Amounts reclassified from other comprehensive income			-				32				-				32
Net current period other comprehensive income (loss)			5,064				32				(13	)			5,083
Less: other comprehensive (income) loss  attributable to noncontrolling interests			(1,180	)			-				7				(1,173	)
Balance at July 31, 2016		$	(4,082	)		$	(210	)		$	(644	)		$	(4,936	)

		Three Months Ended August 2, 2015
		Foreign Currency Translation Adjustments				Amortization of Cash Flow Hedge				Other				Total
Balance at May 3, 2015		$	15,648			$	(370	)		$	(440	)		$	14,838
Other comprehensive income (loss) before reclassifications			(25,342	)			-				16				(25,326	)
Amounts reclassified from other  comprehensive income			-				32				-				32
Net current period other comprehensive income (loss)			(25,342	)			32				16				(25,294	)
Less: other comprehensive income (loss) attributable to noncontrolling interests			2,208				-				(8	)			2,200
Balance at August 2, 2015		$	(7,486	)		$	(338	)		$	(432	)		$	(8,256	)

		Nine Months Ended July 31, 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			7,810				-				(23	)			7,787
Amounts reclassified from other  comprehensive income			-				96				-				96
Net current period other comprehensive income (loss)			7,810				96				(23	)			7,883
Less: other comprehensive (income) loss attributable to noncontrolling interests			(2,258	)			-				12				(2,246	)
Balance at July 31, 2016		$	(4,082	)		$	(210	)		$	(644	)		$	(4,936	)

	Nine Months Ended August 2, 2015
	Foreign Currency Translation Adjustments				Amortization of Cash Flow Hedge				Other				Total
Balance at November 2, 2014		$	22,651			$	(434	)		$	(443	)		$	21,774
Other comprehensive income (loss) before reclassifications			(32,915	)			-				21				(32,894	)
Amounts reclassified from other  comprehensive income			-				96				-				96
Net current period other comprehensive income (loss)			(32,915	)			96				21				(32,798	)
Less: other comprehensive income (loss) attributable to noncontrolling interests			2,778				-				(10	)			2,768
Balance at August 2, 2015		$	(7,486	)		$	(338	)		$	(432	)		$	(8,256	)

		July 31, 2016								November 1, 2015
		Fair Value				Carrying Value				Fair Value				Carrying Value
3.25% convertible senior notes due 2019		$	67,701			$	57,500			$	64,550			$	57,500
3.25% convertible senior notes due 2016		$	-			$	-			$	60,375			$	57,500

		Three Months Ended								Nine Months Ended
		July 31, 2016				August 2, 2015				July 31, 2016				August 2, 2015
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of sales			(74.5	)			(71.7	)			(73.9	)			(74.2	)
Gross margin			25.5				28.3				26.1				25.8
Selling, general and administrative expenses			(9.1	)			(9.4	)			(9.1	)			(9.6	)
Research and development expenses			(4.4	)			(4.8	)			(4.5	)			(4.4	)
Operating income			12.0				14.1				12.5				11.8
Gains on sales of investments			0.2				-				2.4				-
Other income (expense), net			1.0				0.2				(0.2	)			(0.7	)
Income before income tax provision			13.2				14.3				14.7				11.1
Income tax provision			(3.9	)			(2.6	)			(1.6	)			(2.0	)
Net income			9.3				11.7				13.1				9.1
Net income attributable to noncontrolling interests			(2.7	)			(2.5	)			(2.2	)			(2.3	)
Net income attributable to Photronics, Inc. shareholders			6.6	%			9.2	%			10.9	%			6.8	%

		Three Months Ended												Nine Months Ended
		Q3-16				Q3-15				Percent Change				YTD-16				YTD-15				Percent Change
IC		$	91.7			$	104.0				(11.9	)%		$	282.3			$	309.3				(8.7	)%
FPD			31.5				27.7				13.9	%			93.8				73.2				28.1	%
Total net sales		$	123.2			$	131.7				(6.4	)%		$	376.1			$	382.5				(1.7	)%

		Three Months Ended												Nine Months Ended
		Q3-16				Q3-15				Percent Change				YTD-16				YTD-15				Percent Change
Gross margin		$	31.5			$	37.2				(15.6	)%		$	98.2			$	98.5				(0.4	)%
Percentage of net sales			25.5	%			28.3	%							26.1	%			25.8	%

		Three Months Ended												Nine Months Ended
		Q3-16				Q3-15				Percent Change				YTD-16				YTD-15				Percent Change
Selling, general and administrative expenses		$	11.2			$	12.4				(10.2	)%		$	34.4			$	36.8				(6.5	)%
Percentage of net sales			9.1	%			9.4	%							9.1	%			9.6	%

		Three Months Ended												Nine Months Ended
		Q3-16				Q3-15				Percent Change				YTD-16				YTD-15				Percent Change
Research and development		$	5.5			$	6.3				(12.6	)%		$	16.6			$	16.7				(0.8	)%
Percentage of net sales			4.4	%			4.8	%							4.5	%			4.4	%

		Three Months Ended								Nine Months Ended
		Q3-16				Q3-15				YTD-16				YTD-15
Gains on sales of investments		$	0.2			$	-			$	8.9			$	-
Interest expense			(0.6	)			(1.2	)			(2.7	)			(3.8	)
Interest and other income (expense), net			1.8				1.4				1.9				1.3
Other income (expense), net		$	1.4			$	0.2			$	8.1			$	(2.5	)

		Three Months Ended								Nine Months Ended
		Q3-16				Q3-15				YTD-16				YTD-15
Income tax provision		$	4.8			$	3.4			$	6.1			$	7.8
Effective income tax rate			29.4	%			18.0	%			11.1	%			18.3	%

Item 6.	EXHIBITS
	(a)	Exhibits
		Exhibit Number	Description
		10.35	Investment Agreement between Xiamen Torch Hi-Tech Industrial Development Zone Management Committee and Photronics Singapore Pte, Ltd  dated August 18, 2016.*
		31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
		31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
		32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
		32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
		101.INS	XBRL Instance Document
		101.SCH	XBRL Taxonomy Extension Schema Document
		101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
		101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
		101.LAB	XBRL Taxonomy Extension Label Linkbase Document
		101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

	Photronics, Inc. (Registrant)
By:	/s/ SEAN T. SMITH
	Sean T. Smith
	Senior Vice President
	Chief Financial Officer
	(Duly Authorized Officer and
	Principal Financial Officer)
Date:  September 2, 2016