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Watchlist
Account
Photronics
PLAB
#4390
Rank
$2.38 B
Marketcap
๐บ๐ธ
United States
Country
$40.41
Share price
9.28%
Change (1 day)
94.65%
Change (1 year)
๐ Semiconductors
๐ฉโ๐ป Tech
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Annual Reports (10-K)
Photronics
Quarterly Reports (10-Q)
Submitted on 2011-06-08
Photronics - 10-Q quarterly report FY
Text size:
Small
Medium
Large
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 2011
OR
o
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)
Connecticut
06-0854886
(State or other jurisdiction
(IRS Employer
of incorporation or organization)
Identification Number)
15 Secor Road, Brookfield, Connecticut 06804
(Address of principal executive offices and zip code)
(203) 775-9000
(Registrant's telephone number, including area code)
None
(Former name, former address and formal fiscal year, if changed since last report)
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
x
No
o
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
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
o
Accelerated Filer
x
Non-Accelerated Filer
o
Smaller Reporting Company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
Outstanding at June 1, 2011
Common Stock, $0.01 par value
58,785,077 Shares
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"). 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", "projects", 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, in press releases, written statements, or other documents filed with the Securities and Exchange Commission 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 the consummation and benefits of future 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. These factors may cause actual results, performance, or achievements to differ materially from anticipated results, performance, or achievements expressed or implied by such forward-looking statements. Factors that might affect such 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; changes in federal, state and international tax requirements (including tax rate changes, new tax laws and revised tax law interpretations); interest rate fluctuations and other capital market conditions, including changes in the market price of the Company's common stock; foreign currency exchange rate fluctuations; changes in technology; the timing, impact, and other uncertainties of future acquisitions; 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 place new equipment in service on a timely basis; obtain additional financing; achieve anticipated synergies and other cost savings in connection with acquisitions and productivity programs; fully utilize its tools; achieve desired yields, pricing, product mix, and market acceptance of its products; and 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.
2
PHOTRONICS, INC.
AND SUBSIDIARIES
INDEX
PART I.
FINANCIAL INFORMATION
Page
Item 1.
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at
May 1, 2011 and October 31, 2010
4
Condensed Consolidated Statements of Operations
for the Three and Six Months Ended
May 1, 2011 and May 2, 2010
5
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended
May 1, 2011 and May 2, 2010
6
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
22
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
29
Item 4.
Controls and Procedures
30
PART II.
OTHER INFORMATION
Item 1A.
Risk Factors
31
Item 6.
Exhibits
31
3
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)
May 1,
October 31,
2011
2010
ASSETS
Current assets:
Cash and cash equivalents
$
186,112
$
98,945
Accounts receivable, net of allowance of $4,249 in 2011
and $4,235 in 2010
98,510
82,951
Inventories
27,904
15,502
Deferred income taxes
1,238
1,173
Other current assets
6,159
7,231
Total current assets
319,923
205,802
Property, plant and equipment, net
403,413
369,814
Investment in joint venture
72,001
61,127
Intangible assets, net
44,951
47,748
Other assets
22,263
19,388
$
862,551
$
703,879
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term borrowings
$
5,827
$
11,467
Accounts payable
100,496
77,630
Accrued liabilities
34,128
30,132
Total current liabilities
140,451
119,229
Long-term borrowings
159,558
78,852
Deferred income taxes
533
499
Other liabilities
9,394
9,356
Total liabilities
309,936
207,936
Commitments and contingencies
Equity:
Preferred stock, $0.01 par value,
2,000 shares authorized, none issued and outstanding
-
-
Common stock, $0.01 par value,
150,000 shares authorized, 58,539 shares issued and outstanding
at May 1, 2011 and 53,779 at October 31, 2010
585
538
Additional paid-in capital
478,009
436,825
Accumulated deficit
(6,951
)
(2,624
)
Accumulated other comprehensive income
23,991
7,062
Total Photronics, Inc. shareholders' equity
495,634
441,801
Noncontrolling interests
56,981
54,142
Total equity
552,615
495,943
$
862,551
$
703,879
See accompanying notes to condensed consolidated financial statements.
4
PHOTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
Six Months Ended
May 1,
May 2,
May 1,
May 2,
2011
2010
2011
2010
Net sales
$
133,103
$
105,070
$
253,926
$
203,267
Costs and expenses:
Cost of sales
(96,617
)
(82,980
)
(186,845
)
(163,000
)
Selling, general and administrative
(11,448
)
(10,870
)
(22,162
)
(21,018
)
Research and development
(3,940
)
(3,601
)
(7,711
)
(7,556
)
Consolidation, restructuring and related credits
-
5,029
-
4,836
Operating income
21,098
12,648
37,208
16,529
Other income (expense):
Debt extinguishment loss
(30,286
)
-
(30,286
)
-
Interest expense
(1,881
)
(3,059
)
(3,592
)
(5,981
)
Investment and other income (expense), net
(704
)
876
1,963
1,345
Income (loss) before income taxes
(11,773
)
10,465
5,293
11,893
Income tax provision
(3,260
)
(1,860
)
(6,742
)
(2,880
)
Net income (loss)
(15,033
)
8,605
(1,449
)
9,013
Net income attributable to
noncontrolling interests
(1,405
)
(732
)
(2,878
)
(927
)
Net income (loss) attributable to
Photronics, Inc.
$
(16,438
)
$
7,873
$
(4,327
)
$
8,086
Earnings (loss) per share:
Basic
$
(0.30
)
$
0.15
$
(0.08
)
$
0.15
Diluted
$
(0.30
)
$
0.14
$
(0.08
)
$
0.15
Weighted-average number of common shares
outstanding:
Basic
55,685
53,405
54,751
53,253
Diluted
55,685
65,780
54,751
54,291
See accompanying notes to condensed consolidated financial statements.
5
PHOTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended
May 1,
May 2,
2011
2010
Cash flows from operating activities:
Net income (loss)
$
(1,449
)
$
9,013
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization
46,467
45,863
Debt extinguishment loss
23,504
-
Consolidation, restructuring and related credits
-
(5,059
)
Changes in assets and liabilities:
Accounts receivable
(11,380
)
(12,918
)
Inventories
(11,450
)
(592
)
Other current assets
1,500
1,199
Accounts payable, accrued liabilities, and other
16,798
(3,743
)
Net cash provided by operating activities
63,990
33,763
Cash flows from investing activities:
Purchases of property, plant and equipment
(39,254
)
(31,003
)
Investment in joint venture
(8,498
)
-
Proceeds from sale of facility
-
12,880
Increase in restricted cash
-
(1,250
)
Other
(250
)
255
Net cash used in investing activities
(48,002
)
(19,118
)
Cash flows from financing activities:
Proceeds from issuance of convertible debt
115,000
-
Proceeds from long-term borrowings
17,000
26,622
Repayments of long-term borrowings
(60,303
)
(40,302
)
Payments of deferred financing fees
(4,145
)
(1,056
)
Repurchase of common stock by subsidiary
(3,294
)
-
Proceeds from exercise of share-based arrangements
356
71
Net cash provided by (used in) financing activities
64,614
(14,665
)
Effect of exchange rate changes on cash
6,565
2,891
Net increase in cash and cash equivalents
87,167
2,871
Cash and cash equivalents at beginning of period
98,945
88,539
Cash and cash equivalents at end of period
$
186,112
$
91,410
Supplemental disclosure of cash flow information:
Capital lease obligation for purchase of equipment
$
21,248
$
-
Common stock issued to extinguish debt
$
17,390
$
-
Change in accrual for purchases of property, plant
and equipment
$
3,079
$
19,521
Investment in joint venture
$
1,750
$
-
See accompanying notes to condensed consolidated financial statements
.
6
PHOTRONICS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and Six Months Ended May 1, 2011 and May 2, 2010
(unaudited)
(in thousands, except share amounts)
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
AND SIGNIFICANT ACCOUNTING POLICIES
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, two in Taiwan, one in Korea, one in Singapore, and three in the United States.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending October 30, 2011. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended October 31, 2010.
Revenue Recognition
The Company recognizes revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Delivery is determined by the shipping terms of the individual sales transactions. For sales with FOB destination shipping terms, delivery occurs when the Company’s product reaches its destination and is received by the customer. For sales with FOB shipping point terms, delivery occurs when the Company’s product is received by the common carrier. The Company uses judgment when estimating the effect on revenue of discounts and product warranty obligations, both of which are accrued when the related revenue is recognized.
Warranties and Other Post Shipment Obligations
– For a 30-day period, the Company warrants that items sold will conform to customer specifications. However, the Company’s liability is limited to the repair or replacement of the photomasks as its sole option. The Company inspects photomasks for conformity to customer specifications prior to shipment. Accordingly, customer returns of items under warranty have historically been insignificant. However, the Company records a liability for the insignificant amount of estimated warranty returns based on historical experience. The Company’s specific return policies include accepting returns of products with defects, or products that have not been produced to precise customer specifications. At the time of revenue recognition, a liability is established for these items.
Sales Taxes
– The Company presents its revenues in the condensed consolidated statements of operations, net of sales taxes, if any (excluded from revenues).
See the Company’s Form 10-K for the year ended October 31, 2010 for additional significant accounting policies of the Company.
7
NOTE 2 - CHANGES IN EQUITY AND COMPREHENSIVE INCOME (LOSS)
The following tables set forth the Company's consolidated changes in equity and comprehensive income (net of tax) for the three and six months ended May 1, 2011 and May 2, 2010:
Three Months Ended May 1, 2011
Photronics, Inc. Shareholders
Accum-
Retained
ulated
Earnings
Other
Add'l
(Accum-
Compre-
Total
Non-
Common Stock
Paid-in
ulated
hensive
Photronics,
controlling
Total
Shares
Amount
Capital
Deficit)
Income
Inc.
Interests
Equity
Balance at January 31, 2011
53,865
$
539
$
437,360
$
9,487
$
12,906
$
460,292
$
58,170
$
518,462
Comprehensive income:
Net income (loss)
-
-
-
(16,438
)
-
(16,438
)
1,405
(15,033
)
Amortization of cash flow hedges
-
-
-
-
32
32
-
32
Foreign currency translation
adjustments
-
-
-
-
11,065
11,065
355
11,420
Total comprehensive income (loss)
(5,341
)
1,760
(3,581
)
Common stock issued to extinguish debt
4,492
45
39,123
-
-
39,168
-
39,168
Sale of common stock through
employee stock option and
purchase plans
45
-
88
-
-
88
-
88
Restricted stock awards vesting and expense
15
-
234
-
-
234
-
234
Share-based compensation expense
-
-
375
-
-
375
-
375
Common stock warrants exercised
122
1
1,157
-
-
1,158
-
1,158
Repurchase of common stock by subsidiary
-
-
(328
)
-
(12
)
(340
)
(2,949
)
(3,289
)
Balance at May 1, 2011
58,539
$
585
$
478,009
$
(6,951
)
$
23,991
$
495,634
$
56,981
$
552,615
Three Months Ended May 2, 2010
Photronics, Inc. Shareholders
Accum-
ulated
Other
Compre-
Add'l
Accum-
hensive
Total
Non-
Common Stock
Paid-in
ulated
Income
Photronics,
controlling
Total
Shares
Amount
Capital
Deficit
(Loss)
Inc.
Interests
Equity
Balance at February 1, 2010
53,281
$
533
$
433,632
$
(26,333
)
$
(444
)
$
407,388
$
51,051
$
458,439
Comprehensive income:
Net income
-
-
-
7,873
-
7,873
732
8,605
Unrealized holding gains
-
-
-
-
76
76
56
132
Amortization of cash flow hedges
-
-
-
-
33
33
-
33
Foreign currency translation
adjustments
-
-
-
-
6,553
6,553
1,061
7,614
Total comprehensive income
-
-
-
-
-
14,535
1,849
16,384
Sale of common stock through
employee stock option and
purchase plans
53
1
74
-
-
75
-
75
Share-based compensation expense
1
-
454
-
-
454
-
454
Common stock warrants exercised
162
1
816
-
-
817
-
817
Balance at May 2, 2010
53,497
$
535
$
434,976
$
(18,460
)
$
6,218
$
423,269
$
52,900
$
476,169
8
Six Months Ended May 1, 2011
Photronics, Inc. Shareholders
Accum-
ulated
Other
Add'l
Accum-
Compre-
Total
Non-
Common Stock
Paid-in
ulated
hensive
Photronics,
controlling
Total
Shares
Amount
Capital
Deficit
Income
Inc.
Interests
Equity
Balance at November 1, 2010
53,779
$
538
$
436,825
$
(2,624
)
$
7,062
$
441,801
$
54,142
$
495,943
Comprehensive income:
Net income (loss)
-
-
-
(4,327
)
-
(4,327
)
2,878
(1,449
)
Amortization of cash flow hedges
-
-
-
-
64
64
-
64
Foreign currency translation
adjustments
-
-
-
-
16,877
16,877
2,910
19,787
Total comprehensive income
12,614
5,788
18,402
Common stock issued to extinguish debt
4,492
45
39,123
-
-
39,168
-
39,168
Sale of common stock through
employee stock option and
purchase plans
110
1
146
-
-
147
-
147
Restricted stock awards vesting and expense
36
-
422
-
-
422
-
422
Share-based compensation expense
-
-
664
-
-
664
-
664
Common stock warrants exercised
122
1
1,157
-
-
1,158
-
1,158
Repurchase of common stock by subsidiary
-
-
(328
)
-
(12
)
(340
)
(2,949
)
(3,289
)
Balance at May 1, 2011
58,539
$
585
$
478,009
$
(6,951
)
$
23,991
$
495,634
$
56,981
$
552,615
Six Months Ended May 2, 2010
Photronics, Inc. Shareholders
Accum-
ulated
Other
Compre-
Add'l
Accum-
hensive
Total
Non-
Common Stock
Paid-in
ulated
Income
Photronics,
controlling
Total
Shares
Amount
Capital
Deficit
(Loss)
Inc.
Interests
Equity
Balance at November 2, 2009
53,011
$
530
$
432,160
$
(26,546
)
$
(6,389
)
$
399,755
$
49,941
$
449,696
Comprehensive income:
Net income
-
-
-
8,086
-
8,086
927
9,013
Unrealized holding gains
-
-
-
-
76
76
56
132
Amortization of cash flow hedges
-
-
-
-
65
65
-
65
Foreign currency translation
adjustments
-
-
-
-
12,466
12,466
1,976
14,442
Total comprehensive income
20,693
2,959
23,652
Sale of common stock through
employee stock option and
purchase plans
93
1
104
-
-
105
-
105
Share-based compensation expense
43
-
1,031
-
-
1,031
-
1,031
Noncontrolling interests’ subsidiary dividend
350
4
1,681
-
-
1,685
-
1,685
Balance at May 2, 2010
53,497
$
535
$
434,976
$
(18,460
)
$
6,218
$
423,269
$
52,900
$
476,169
9
NOTE 3 - JOINT VENTURE
On May 5, 2006, Photronics and Micron Technology, Inc. ("Micron") entered into the MP Mask joint venture, which develops and produces photomasks for leading-edge and advanced next generation semiconductors. As part of the formation of the joint venture, Micron contributed its existing photomask technology center located at its Boise, Idaho, headquarters to MP Mask and Photronics invested $135 million in exchange for a 49.99% interest in MP Mask (to which $64.2 million of the original investment was allocated), a license for photomask technology of Micron, and certain supply agreements.
This joint venture is a variable interest entity ("VIE") (as that term is defined in the Accounting Standards Codification ("ASC") ) primarily because all costs of the joint venture will be passed on to the Company and Micron through purchase agreements they have entered into with the joint venture. In accordance with accounting guidance issued by the Financial Accounting Standards Board (“FASB”) in June 2009, on a quarterly basis the Company reassesses whether its interest in MP Mask gives it a controlling financial interest in this VIE. The purpose of this quarterly reassessment is to identify the primary beneficiary (which is defined in the ASC as the entity that consolidates a VIE) of the VIE. As a result of the reassessment in the current quarter, the Company determined that Micron is still the primary beneficiary of the VIE, by virtue of its greater voting power, if necessary, within MP Mask’s Board of Managers, thereby giving it the power to direct the activities of MP Mask that most significantly impact its economic performance, including its decision making authority in the ordinary course of business and its purchasing the majority of products produced by the VIE.
The Company has utilized MP Mask for both high-end IC photomask production and research and development purposes. MP Mask charges its variable interest holders based on their actual usage of its facility. MP Mask separately charges for any research and development activities it engages in at the requests of its owners. The Company recorded cost of sales of $4.8 million and $8.3 million and research and development expenses of $0.2 million and $0.5 million during the three and six month periods ended May 1, 2011. Cost of sales of $1.5 million and $2.7 million and research and development expenses of $0.2 million and $0.5 million were recorded during the three and six month periods ended May 2, 2010.
MP Mask is governed by a Board of Managers, appointed by Micron and the Company. Since MP Mask's inception, Micron, as a result of its majority ownership, has held majority voting power on the Board of Managers. The voting power held by each party is subject to change as ownership interests change. Under the MP mask joint venture operating agreement, the Company may be required to make additional capital contributions to the joint venture up to the maximum amount defined in the operating agreement. However, should the Board of Managers determine that further additional funding is required, the joint venture shall pursue its own financing. If the joint venture is unable to obtain its own financing, it may request additional capital contributions from the Company. Should the Company choose not to make a requested contribution to the joint venture, its ownership percentage may be reduced. During the three and six month periods ended May 1, 2011, the Company increased its investment in MP Mask by $6.2 million and $10.2 million, respectively, primarily related to capital calls requested by the joint venture. The Company did not make any contributions to MP Mask during its first half of fiscal 2010, and did not receive any distributions from MP Mask during its first half of fiscal 2011 or 2010.
The Company's investment in the VIE, which represents its maximum exposure to loss, was $72.0 million at May 1, 2011 and $61.1 million at October 31, 2010. These amounts are reported in the Company's condensed consolidated balance sheets as "Investment in joint venture". The Company recorded income from its investment in the VIE of $0.6 million in the six month period ended May 1, 2011, and recorded no income from its investment in the three month period ended May 1, 2011, or in the three and six month periods ended May 2, 2010. Income from the VIE is included in "Investment and other income, net" in the condensed consolidated statements of operations.
10
NOTE 4 - LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
May 1,
October 31,
2011
2010
3.25% convertible senior notes
due on April 1, 2016
$
115,000
$
-
5.5% convertible senior notes due
on October 1, 2014
27,054
57,500
3.09% capital lease obligation payable
through March 2016
20,867
-
4.75% financing loan with customer
2,464
2,954
8.0% capital lease obligation
-
16,220
5.6% capital lease obligation
-
8,645
Borrowings under revolving credit facility, which
bear interest at a variable rate, as defined (3.8% at
October 31, 2010)
-
5,000
165,385
90,319
Less current portion
5,827
11,467
$
159,558
$
78,852
On March 28, 2011, the Company issued through a private offering pursuant to Rule 144A under the Securities Act of 1933, as amended, $115 million aggregate principal amount of 3.25% convertible senior notes. The notes mature on April 1, 2016, and note holders may convert each $1,000 principal amount of notes to 96.3879 shares of common stock (equivalent to an initial conversion price of $10.37 per share of common stock) at any time prior to the close of business on the second scheduled trading day immediately preceding April 1, 2016. The conversion rate is subject to adjustment upon the occurrence of certain events, which are described in the indenture dated March 28, 2011. The Company is not required to redeem the notes prior to their maturity dates. Interest on the notes accrues in arrears, and is to be paid semiannually through the notes’ maturity date, with payments commencing on October 1, 2011. The net proceeds of the notes were approximately $110.5 million, which were used, in part, to repurchase $30.4 million of the Company’s 5.5% convertible senior notes which were to mature on October 1, 2014, and to repay, in full, its then outstanding obligations under capital leases of $19.8 million. The Company intends to use the remainder of the net proceeds to acquire, from time to time, additional amounts of its remaining outstanding 5.5% convertible senior notes and for general corporate purposes, which may include, among other things, working capital and capital expenditures.
On March 18, 2011, the Company amended its revolving credit facility (“the credit facility”) which included, among other things: i) a reduction of the aggregate commitments of the lenders from $65 million to $30 million; ii) a reduction of the applicable interest rates and modifications of the leverage ratios relating thereto; iii) an extension of the maturity date to April 30, 2015; iv) an increase of certain financed capital assets up to $75 million outstanding at any one time; v) an allowance to issue the 3.25% convertible senior notes; vi) an increase in the investments “basket” from $15 million to $25 million per year; vii) an allowance to repurchase the 5.5% convertible senior notes and other indebtedness; and viii) removal of the limitation on maximum last twelve months capital expenditures. The credit facility bears interest (2.75% at May 1, 2011), based on the Company’s total leverage ratio, at LIBOR plus a spread, as defined in the credit facility.
11
The credit facility is secured by substantially all of the Company’s assets located in the United States, as well as common stock the Company owns in certain of its foreign subsidiaries, and is subject to the following financial covenants: minimum fixed charge ratio, total leverage ratio and minimum unrestricted cash balance. The Company, in connection with a February 2010 amendment to the credit facility, wrote off $1.0 million of deferred financing fees in its second quarter of fiscal 2010.
In January 2011 a $10 million irrevocable stand-by letter of credit for the purchase of manufacturing equipment was issued under the credit facility. As of May 1, 2011, the Company had no outstanding borrowings under the credit facility and $20 million was available for borrowing.
In September 2009 the Company issued, through a public offering, $57.5 million aggregate principal amount of 5.5% convertible senior notes, which were to mature on October 1, 2014. Under the terms of the offering, the note holders could convert each $1,000 principal amount of notes to 196.7052 shares of common stock (equivalent to an initial conversion price of $5.08 per share of common stock) on, or before, September 30, 2014. The conversion rate is subject to adjustment upon the occurrence of certain events which are described in the indenture dated September 16, 2009. The Company is not required to redeem the notes prior to their maturity. The net proceeds of this offering were approximately $54.9 million, which were used to reduce amounts outstanding under the Company’s credit facility.
On March 29, 2011, the Company repurchased approximately $30.4 million of its 5.5% convertible senior notes in exchange for approximately 4.5 million shares of its common stock with an approximate fair value of $39.2 million and cash of approximately $19.7 million (the note holders received 147.529 shares and cash of $647 for each $1,000 note). The Company, in connection with this repurchase, recorded an extinguishment loss of $30.1 million, which includes the write off of deferred financing fees of $1.7 million. The loss is included in other income (expense) in the Company's condensed consolidated statements of operations.
In the first quarter of 2008 a capital lease agreement commenced for the U.S. nanoFab facility. Quarterly lease payments, which bore interest at 8%, were $3.8 million through January 2013. This lease was cancelled in the third fiscal quarter of 2009, at which time the Company and Micron (the lessor) entered into a new lease agreement for the facility. Under the provisions of the new lease agreement, quarterly lease payments were reduced from $3.8 million to $2.0 million, the term of the lease was extended from December 31, 2012 to December 31, 2014, and ownership of the property will not transfer to the Company at the end of the lease term. The interest rate of the new lease agreement remained at 8%. As a result of the new lease agreement, the Company reduced its lease obligation and the carrying value of its assets under capital leases by approximately $28 million. The lease obligation was paid in full with a portion of the net proceeds of the March 28, 2011 issuance of its 3.25% convertible senior notes. The lease will be accounted for as an operating lease during the additional two years of the new lease term.
On April 29, 2011, the Company entered into a 5-year, $21.2 million capital lease for manufacturing equipment. Payments under the lease, which bears interest at 3.09%, are $0.4 million per month through March 2016. The lease agreement provides that the Company must maintain the equipment in good working order, and includes a cross default with cross acceleration provision related to certain non-financial covenants incorporated in the Company's credit facility agreement. As of May 1, 2011, the total amount payable through the end of the lease term was $22.5 million, of which $20.9 million represented principal and $1.6 million represented interest.
In October 2007, the Company entered into a capital lease agreement in the amount of $19.9 million associated with certain equipment. Payments under the lease were $0.4 million per month over a 5-year term at a 5.6% interest rate. On April 6, 2011, the Company used a portion of the net proceeds of the March 28, 2011 issuance of its 3.25% convertible senior notes, to repay in full the outstanding balance of this lease of $7.0 million. In connection with this repayment, the Company paid a $0.2 million prepayment penalty which was recorded as a debt extinguishment loss, included in other income (expense) in the Company's condensed statement of operations.
12
In January 2010 the Company borrowed $3.7 million from a customer to purchase manufacturing equipment. This loan bears interest at 4.75% and is primarily being repaid with product supplied to the customer. Product valued at $0.3 million and $0.6 million was shipped to the customer and applied against the loan during the three and six month periods ended May 1, 2011, and product valued at $0.2 million was shipped and applied against the loan during the comparable prior year periods. During the three month period ending July 31, 2011, the Company will make a cash payment against this loan of approximately $0.9 million. The Company estimates that the loan will be fully repaid in fiscal 2013.
NOTE 5 - COMMON STOCK WARRANTS
On September 10, 2009, the Company entered into two warrant agreements with Intel Capital Corporation to purchase a total of 750,000 shares of the Company's common stock. Under one warrant agreement 500,000 shares of the Company's common stock can be purchased at an exercise price of $4.15 per share and under the second warrant agreement 250,000 shares of the Company's common stock can be purchased at an exercise price of $5.08 per share. The warrant agreements expire on September 10, 2014. Also on September 10, 2009 the Company and Intel Corporation entered into an agreement to share technical and operations information regarding the development of the Company's products, the capabilities of the Company's photomask manufacturing lines and the alignment of photomask toolsets. The warrants were recorded at their fair value on their date of grant, which was determined using the Black-Scholes option pricing model. As of May 1, 2011, none of the warrants had been exercised.
In conjunction with the May 2009 amendment to its credit facility, the Company also entered into a warrant agreement with its lenders. See Note 6 for further discussion of these warrants.
NOTE 6 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company utilizes derivative instruments to reduce its exposure to the effects of the variability of interest rates and foreign currencies on its financial performance when it believes such action is warranted. Historically, the Company has been a party to derivative instruments to hedge either the variability of cash flows of a prospective transaction or the fair value of a recorded asset or liability. In certain instances, the Company has designated these transactions as hedging instruments. However, whether or not a derivative was designated as being a hedging instrument, the Company's purpose for engaging in the derivative has always been for risk management and not speculative purposes. The Company historically has not been a party to a significant number of derivative instruments and does not expect its derivative activity to significantly increase in the foreseeable future.
In addition to the utilization of derivative instruments discussed above, the Company attempts to minimize its risk of foreign currency exchange rate variability by, whenever possible, procuring production materials within the same country that it will utilize the materials in manufacturing, and by selling to customers from manufacturing sites within the country in which the customers are located.
On May 15, 2009, in connection with an amendment to its credit facility, the Company issued 2.1 million warrants, each exercisable for one share of the Company's common stock at an exercise price of $0.01 per share. Forty percent of the warrants were exercisable upon issuance, and the remaining balance was to become exercisable in twenty percent increments at various points in time after October 31, 2009. As a result of certain net cash settleable put provisions within the warrant agreement, the warrants were recorded as a liability in the Company's consolidated balance sheet. As of the issuance date and for future periods that such warrants remain outstanding, the Company has, and will continue to, adjust the liability based upon the current fair value of the warrants, with any changes in their fair value being recognized in earnings. Due to the warrants' exercise price of $0.01 per share, their fair value will approximate the market price of the Company's common stock. Approximately 1.2 million of these warrants were cancelled as a result of the Company's early repayment of certain amounts under its credit facility during the year ended November 1, 2009, and the associated liability was reduced accordingly.
13
A portion of an existing loss on a cash flow hedge in the amount of $0.1 million is expected to be reclassified to earnings over the next twelve months.
The table below presents the effect of derivative instruments on the Company's condensed consolidated balance sheets at May 1, 2011 and October 31, 2010.
Derivatives
Not Designated
as Hedging
Fair Value at
Instruments Under
May 1,
October 31,
ASC 815
Balance Sheet Location
2011
2010
Warrants on common stock
Other liabilities
$
1,544
$
1,881
The table below presents the effect of derivative instruments on the Company's condensed consolidated statements of operations for the three and six month periods ended May 1, 2011 and May 2, 2010.
Derivatives
Not Designated
Amount of Loss Recognized Related to Derivative Instruments
as Hedging
Location of Loss
Three Months Ended
Six Months Ended
Instruments Under
Related to
May 1,
May 2,
May 1,
May 2,
ASC 815
Derivative Instruments
2011
2010
2011
2010
Warrants on common stock
Investment and other income
(expense), net
$
(745
)
$
(860
)
$
(820
)
$
(751
)
NOTE 7 - SHARE-BASED COMPENSATION
In March 2007 shareholders approved a new share-based compensation plan ("Plan"), under which options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance units, and other awards based on, or related to, shares of the Company's common stock may be granted from shares authorized but unissued, or shares previously issued and reacquired by the Company. A maximum of six million shares of common stock may be issued under the Plan. Awards may be granted to officers, employees, directors, consultants, advisors, and independent contractors of the Company or its subsidiaries. In the event of a change in control (as defined in the Plan), the vesting of awards may be accelerated. The Plan, aspects of which are more fully described below, prohibits further awards from being issued under prior plans. The Company incurred total share-based compensation costs for the three and six month periods ended May 1, 2011, of $0.6 million and $1.1 million, respectively, and $0.3 million and $0.8 million for the three and six month periods ended May 2, 2010, respectively. The Company received cash from option exercises of $0.1 million and $0.2 million for the three and six month periods ended May 1, 2011, respectively, and $0.1 million for both the three and six month periods ended May 2, 2010. No share-based compensation cost was capitalized as part of inventory and no related income tax benefits were recorded during the periods presented.
14
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 equal to 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 on the dates of grant using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of the Company's stock. The Company uses historical option exercise behavior and employee termination data to estimate expected term, which represents the period of time that the options granted are expected to remain outstanding. The risk-free rate of return for the estimated term of the option is based on the U.S. Treasury yield curve in effect at the date of grant. The weighted-average inputs and risk-free rate of return ranges used to calculate the grant date fair value of options issued during the three and six month periods ended May 1, 2011 and May 2, 2010, are presented in the following table.
Three Months Ended
Six Months Ended
May 1,
May 2,
May 1,
May 2,
2011
2010
2011
2010
Expected volatility
98.8%
N/A
98.7%
89.3%
Risk free rate of return
1.9%
N/A
1.0 – 1.9%
2.2 – 2.4%
Dividend yield
N/A
N/A
N/A
N/A
Expected term
4.2 years
N/A
4.2 years
4.5 years
Information on outstanding and exercisable option awards as of May 1, 2011, is presented below:
Weighted
Weighted
Average
Average
Remaining
Aggregate
Exercise
Contractual
Intrinsic
Options
Shares
Price
Life
Value
Outstanding at May 1, 2011
4,262,841
$
8.94
6.7 years
$
14,325
Exercisable at May 1, 2011
2,243,185
$
13.41
4.9 years
$
4,703
There were 369,250 share options granted during the three month period ended May 1, 2011, with a weighted-average grant date fair value of $4.81 per share and there were no share options granted during the three month period ended May 2, 2010. There were 620,750 share options granted during the six month period ended May 1, 2011, with a weighted-average grant date fair value of $4.75 per share and 846,400 share options granted during the six month period ended May 2, 2010, with a weighted-average grant date fair value of $2.97 per share. As of May 1, 2011, the total unrecognized compensation cost related to non-vested option awards was approximately $3.9 million. That cost is expected to be recognized over a weighted-average amortization period of 3.1 years.
15
Restricted Stock
The Company periodically grants restricted stock awards. The restrictions on these awards lapse over a service period that has ranged from less-than-one to eight years. No restricted stock awards were granted during the three month period ended May 1, 2011, and 176,250 restricted stock awards were granted during the six month period ended May 1, 2011, with a weighted-average grant date fair value of $6.71 per share. No restricted stock awards were granted during the six month periods ended May 2, 2010. As of May 1, 2011, the total compensation cost not yet recognized related to unvested restricted stock awards was approximately $1.6 million. That cost is expected to be recognized over a weighted-average amortization period of 2.7 years. As of May 1, 2011, there were 236,389 shares of restricted stock outstanding.
NOTE 8 - CONSOLIDATION, RESTRUCTURING AND RELATED CREDITS
In the third quarter of fiscal 2009, the Company ceased the manufacture of photomasks at its Shanghai, China, facility and recorded an initial restructuring charge of $10.1 million, which included $7.7 million to write down the carrying value of the Company's Shanghai manufacturing facility to its estimated fair value at that time. In the second quarter of fiscal 2010, the Company sold its facility in Shanghai, China, for net proceeds of $12.9 million ($4.2 million of which was received as a deposit in the first quarter of fiscal 2010), which resulted in a gain of $5.4 million. The gain was recorded as a credit to the restructuring reserve in that quarter. On a cumulative basis the Company recorded total net charges of $5.2 million, including $4.7 million of net asset write-downs, through its completion in fiscal 2010. The fair value of the assets written down was determined by management using a market approach. The following tables set forth the Company's restructuring reserve related to its Shanghai, China, facility as of May 2, 2010, and reflects the activity affecting the reserve for the three and six month periods then ended.
Three Months Ended
Six Months Ended
May 2, 2010
May 2, 2010
February 1,
Charges
May 2,
November 2,
Charges
May 2,
2010
(credit)
Utilized
2010
2009
(credit)
Utilized
2010
Net gain on sales of assets
$
-
$
(5,020
)
$
5,238
$
218
$
-
$
(5,020
)
$
5,238
$
218
Employee terminations
and other
-
(9
)
9
-
134
184
(318
)
-
$
-
$
(5,029
)
$
5,247
$
218
$
134
$
(4,836
)
$
4,920
$
218
NOTE 9 - INCOME TAXES
The effective tax rate differs from the U.S. statutory rate of 35% in the second quarter and the first half of fiscal year 2011 primarily due to the impact of the non-deductible debt extinguishment loss recorded in the second quarter of 2011 and a higher level of earnings taxed at lowered statutory rates in foreign jurisdictions. In the second quarter and first half of fiscal year 2010, the effective tax rate differed from the U.S. statutory rate primarily because income tax provisions incurred in jurisdictions where the Company generated income before income taxes were, due to valuation allowances, not significantly offset by income tax benefits in jurisdictions where the Company incurred losses before income taxes. Further, in Korea and in Taiwan, various investment tax credits have been earned, which reduced the Company’s effective income tax rate.
The Company accounts for uncertain tax positions by recording a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to be taken, in its tax returns. The Company recognizes any interest and penalties related to uncertain tax positions in the income tax provision in its condensed consolidated statements of operations.
16
Unrecognized tax benefits associated with uncertain tax positions of $2.0 million, including $0.3 million for interest and penalties, were included in other liabilities in the condensed consolidated balance sheets at May 1, 2011 and October 31, 2010. If recognized, the benefits would favorably affect the Company's effective income tax rate in future periods. As of May 1, 2011, the Company believes it is not reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease in the next twelve months. Currently, the statutes of limitations remain open subsequent to, and including, 2006 in the U.S., 2008 in the U.K., 2008 in Germany, 2005 in Korea and 2009 in Taiwan.
NOTE 10 - EARNINGS (LOSS) PER SHARE
The calculation of basic and diluted earnings (loss) per share is presented below.
Three Months Ended
Six Months Ended
May 1,
May 2,
May 1,
May 2,
2011
2010
2011
2010
Net income (loss) attributable to Photronics, Inc.
$
(16,438
)
$
7,873
$
(4,327
)
$
8,086
Effect of dilutive securities:
Interest expense on convertible notes,
net of related tax effects
-
1,016
-
-
Earnings (loss) for diluted earnings (loss) per share
$
(16,438
)
$
8,889
$
(4,327
)
$
8,086
Weighted-average common shares computations:
Weighted-average common shares used for
basic earnings (loss) per share
55,685
53,405
54,751
53,253
Effect of dilutive securities:
Convertible notes
-
11,311
-
-
Share-based payment awards
-
989
-
990
Common stock warrants
-
75
-
48
Potentially dilutive common shares
-
12,375
-
1,038
Weighted-average common shares used for
diluted earnings (loss) per share
55,685
65,780
54,751
54,291
Basic earnings (loss) per share
$
(0.30
)
$
0.15
$
(0.08
)
$
0.15
Diluted earnings (loss) per share
$
(0.30
)
$
0.14
$
(0.08
)
$
0.15
17
In periods in which the Company incurred a net loss, the assumed exercises and vestings of certain outstanding share-based awards had an antidilutive effect. The assumed exercise of certain outstanding common stock warrants and the conversion of convertible senior notes to common stock would also have been antidilutive in the periods that the Company reported a net loss. The table below shows the amounts of incremental weighted-average shares of these share-based payment awards, common stock warrants, and convertible debt that were not considered potentially dilutive common shares in the fiscal periods presented.
Three Months Ended
Six Months Ended
May 1,
May 2,
May 1,
May 2,
2011
2010
2011
2010
Convertible notes
13,336
-
14,455
-
Share-based payment awards
1,374
-
1,221
-
Common stock warrants
554
-
535
-
Total potentially dilutive shares excluded
15,264
-
16,211
-
The table below shows the outstanding weighted-average share-based payment awards and common stock warrants that were excluded from the calculation of diluted earnings per share because their exercise price exceeded the average market value of the common shares for the period or, under application of the treasury stock method, they were otherwise determined to be anti-dilutive. The table also shows convertible notes that, if converted, would have been anti-dilutive.
Three Months Ended
Six Months Ended
May 1,
May 2,
May 1,
May 2,
2011
2010
2011
2010
Convertible notes
-
-
-
11,311
Share-based payment awards
2,215
2,844
2,044
2,652
Common stock warrants
-
747
-
854
Total potentially dilutive shares excluded
2,215
3,591
2,044
14,817
18
NOTE 11 - GEOGRAPHIC INFORMATION
The Company operates as a single operating segment as a manufacturer of photomasks, which are high precision quartz plates containing microscopic images of electronic circuits for use in the fabrication of ICs and FPDs. Geographic net sales are based primarily on where the Company's manufacturing facility is located. The Company's net sales by geographic area and for ICs and FPDs for the three and six month periods ended May 1, 2011 and May 2, 2010 and its long-lived assets by geographic area as of May 1, 2011, and October 31, 2010, are presented below.
Three Months Ended
Six Months Ended
May 1,
May 2,
May 1,
May 2,
2011
2010
2011
2010
Net sales
Asia
$
79,482
$
61,821
$
158,173
$
122,628
Europe
13,046
10,665
23,810
20,182
North America
40,575
32,584
71,943
60,457
$
133,103
$
105,070
$
253,926
$
203,267
IC
$
100,999
$
83,996
$
189,800
$
158,489
FPD
32,104
21,074
64,126
44,778
$
133,103
$
105,070
$
253,926
$
203,267
As of
May 1,
October 31,
2011
2010
Long-lived assets
Asia
$
216,122
$
221,283
Europe
12,212
14,182
North America
175,079
134,349
$
403,413
$
369,814
19
NOTE 12 - FAIR VALUE MEASUREMENTS
The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers as follows: Level 1, defined as quoted market prices in active markets for identical securities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly; and Level 3, defined as unobservable inputs that are not corroborated by market data.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below present assets and liabilities as of May 1, 2011 and October 31, 2010, that are measured at fair value on a recurring basis.
May 1, 2011
Quoted
Prices
in Active
Significant
Markets
Other
Significant
for Identical
Observable
Unobservable
Instruments
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
Total
Common stock warrants
$
-
$
(1,544
)
$
-
$
(1,544
)
Total liabilities
$
-
$
(1,544
)
$
-
$
(1,544
)
October 31, 2010
Quoted
Prices
in Active
Significant
Markets
Other
Significant
for Identical
Observable
Unobservable
Instruments
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
Total
Common stock warrants
$
-
$
(1,881
)
$
-
$
(1,881
)
Total liabilities
$
-
$
(1,881
)
$
-
$
(1,881
)
The fair value of the common stock warrants liability was determined using the Black-Scholes option pricing model. A significant observable input into the model included the market price of the Company's common stock at the measurement date. Gains or losses related to fair value adjustments to the common stock warrants liability are included in other income (expense), net.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company did not have any nonfinancial assets or liabilities measured at fair value on a nonrecurring basis as of May 1, 2011 and October 31, 2010.
20
Fair Value of Other Financial Instruments
The fair values of the Company's cash and cash equivalents, accounts receivable, accounts payable, and certain other current assets and current liabilities approximate their carrying value due to their short-term maturities. The fair value of the Company's variable rate long-term debt approximates its carrying value due to the variable nature of the underlying interest rate. The estimated fair values of the Company's 3.25% and 5.5% convertible senior notes were $131.0 million and $51.6 million, respectively, as of May 1, 2011, and were $0 and $83.2 million, respectively, as of October 31, 2010.
NOTE 13 - SUBSIDIARY SHARE REPURCHASE
During the three month period ended May 1, 2011, the board of directors of Photronics Semiconductor Mask Corporation (PSMC), a subsidiary of the Company based in Taiwan, authorized PSMC to repurchase for retirement up to 5% of its outstanding common stock on the open market. The repurchase program, which expired in April 2011, resulted in approximately 7.7 million shares (or approximately 2.7 % of its outstanding shares) being repurchased at a total cost of $3.3 million. PSMC’s repurchase of these shares increased the Company’s ownership of PSMC from 57.53% at October 31, 2010, to 59.14% at May 1, 2011. The tables below present the effect of the change in Photronics, Inc.'s ownership interest in PSMC on the Company's equity for the three and six month periods ended May 1, 2011 and May 2, 2010.
Three Months Ended
Six Months Ended
May 1,
May 2,
May 1,
May 2,
2011
2010
2011
2010
Net (loss) income attributable to Photronics, Inc.
$
(16,438
)
$
7,873
$
(4,327
)
$
8,086
Decrease in Photronics, Inc.'s additional
paid-in capital for PSMC's repurchase of
7.7 million shares of its common stock
(328
)
-
(328
)
-
Change from net income attributable
to Photronics, Inc. and transfer to
noncontrolling interest
$
(16,766
)
$
7,873
$
(4,655
)
$
8,086
NOTE 14 - COMMITMENTS AND CONTINGENCIES
As of May 1, 2011, the Company had commitments outstanding for capital expenditures of approximately $6 million.
The Company is subject to various claims that arise in the ordinary course of business. The Company believes such claims, individually or in the aggregate, will not have a material adverse effect on its business, financial condition or results of operations.
21
NOTE 15 - RECENT ACCOUNTING GUIDANCE
In May 2011 the FASB issued Accounting Standards Update (ASU) No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." which amended its guidance on fair value measurements with the purpose of achieving commonality of its fair value measurement and disclosure requirements with those of International Financial Reporting Standards (IFRSs). ASU No. 2011-04 clarifies the FASBs intentions regarding the application of existing fair value measurement and disclosure requirements, changes certain principles for measuring fair value and changes the disclosure requirements for fair value measurements. ASU No. 2011-04 is to be applied prospectively and is effective during interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the effect, if any, ASU No. 2011-04 will have on its consolidated financial statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Management's discussion and analysis ("MD&A") of the Company's financial condition, results of operations and outlook should be read in conjunction with its condensed consolidated financial statements and related notes. Various segments of this MD&A contain forward-looking statements, all of which are presented based on current expectations and may be adversely affected by uncertainties and risk factors (presented throughout this filing and in the Company's Annual Report on Form 10-K for the fiscal 2010 year), that may cause actual results to materially differ from these expectations.
The Company sells substantially all of its photomasks to semiconductor designers and manufacturers, and manufacturers of FPDs. Photomask technology is also being applied to the fabrication of other higher performance electronic products such as photonics, micro-electronic mechanical systems and certain nanotechnology applications. Thus, the Company's selling cycle is tightly interwoven with the development and release of new semiconductor designs and flat panel applications, particularly as it relates to the semiconductor industry's migration to more advanced design methodologies and fabrication processes. The Company believes that the demand for photomasks primarily depends on design activity rather than sales volumes from products produced using photomask technologies. Consequently, an increase in semiconductor or FPD sales does not necessarily result in a corresponding increase in photomask sales. However, the reduced use of customized ICs, reductions in design complexity, other changes in the technology or methods of manufacturing or designing semiconductors, or a slowdown in the introduction of new semiconductor or FPD designs could reduce demand for photomasks even if demand for semiconductors and FPDs increases. Advances in semiconductor and photomask design and semiconductor production methods could reduce the demand for photomasks. Historically, the semiconductor industry has been volatile, with sharp periodic downturns and slowdowns. These downturns have been characterized by, among other things, diminished product demand, excess production capacity and accelerated erosion of selling prices.
The global semiconductor industry is driven by end markets which have been closely tied to consumer driven applications of high performance semiconductor devices including, but not limited to, communications and mobile computing solutions. The Company is typically required to fulfill its customer orders within a short period of time, sometimes within 24 hours. This results in the Company having a minimal level of back-log orders, typically one to two weeks for IC photomasks and two to three weeks for FPD photomasks. The Company cannot predict the timing of the industry's transition to volume production of next generation technology nodes or the timing of up and down cycles with precise accuracy, but believes that such transitions and cycles will continue into the future, beneficially and adversely affecting its business, financial condition and operating results in the near term. The Company's ability to remain successful in these environments is dependent upon achieving its goals of being a service and technology leader, an efficient solutions supplier, and a company able to continually reinvest in its global infrastructure.
Although the Company issued $115 million in convertible senior notes on March 28, 2011, the effects of the weakened global economy and the tightened credit market may make it increasingly difficult for the Company to obtain additional external sources, if necessary, of financing to fund its operations.
22
The Company's ability to comply with the financial and other covenants in its debt agreements may be affected by economic or business conditions, or other events. Existing covenant restrictions limit the Company's ability to obtain additional debt financing and, should the Company be unable to meet one or more of these covenants, its lenders may require the Company to repay its outstanding balances prior to the expiration date of the agreements. The Company cannot assure that additional sources of financing would be available to the Company to pay off its long-term borrowings to avoid default. Should the Company default on any of its long-term borrowings, a cross default would occur on certain of its other long-term borrowings, unless amended or waived. As of May 1, 2011, the Company was in compliance with its debt covenants.
Material Changes in Results of Operations
Three and Six Months ended May 1, 2011 and May 2, 2010
The following table represents selected operating information expressed as a percentage of net sales.
Three Months Ended
Six Months Ended
May 1,
May 2,
May 1,
May 2,
2011
2010
2011
2010
Net sales
100.0
%
100.0
%
100.0
%
100.0
%
Cost of sales
(72.6
)
(79.0
)
(73.6
)
(80.2
)
Gross margin
27.4
21.0
26.4
19.8
Selling, general and administrative expenses
(8.6
)
(10.3
)
(8.7
)
(10.3
)
Research and development expenses
(3.0
)
(3.4
)
(3.0
)
(3.7
)
Consolidation, restructuring and
related credits
-
4.7
-
2.3
Operating income
15.8
12.0
14.7
8.1
Debt extinguishment loss
(22.8
)
-
(11.9
)
-
Other expense, net
(1.9
)
(2.0
)
(0.7
)
(2.3
)
Net income (loss) before income taxes
(8.9
)
10.0
2.1
5.8
Income tax provision
(2.4
)
(1.8
)
(2.7
)
(1.4
)
Net income (loss)
(11.3
)
8.2
(0.6
)
4.4
Net income attributable to
noncontrolling interests
(1.0
)
(0.7
)
(1.1
)
(0.4
)
Net income (loss) attributable to
Photronics, Inc.
(12.3
)%
7.5
%
(1.7
)%
4.0
%
All of the following tabular comparisons, unless otherwise indicated, are for the three months ended May 1, 2011 (Q2-11) and May 2, 2010 (Q2-10) and for the six months ended May 1, 2011 (YTD-11) and May 2, 2010 (YTD-10) in millions of dollars.
Net Sales
Three Months Ended
Six Months Ended
Percent
Percent
Q2-11
Q2-10
Change
YTD-11
YTD-10
Change
IC
$
101.0
$
84.0
20.2
%
$
189.8
$
158.5
19.8
%
FPD
32.1
21.1
52.3
%
64.1
44.8
43.2
%
Total net sales
$
133.1
$
105.1
26.7
%
$
253.9
$
203.3
24.9
%
23
Net sales for Q2-11 increased 26.7% to $133.1 million as compared to $105.1 million for Q2-10. The increase was due to increases in both IC and FPD photomask sales, primarily as a result of increased high-end unit demand, which typically have higher average selling prices (ASPs). To a lesser extent, mainstream photomasks also had increased sales, primarily for FPDs. Revenues attributable to high-end products increased by $17.4 million to $43.5 million in Q2-11 as compared to $26.1 million in Q2-10. High-end photomask applications include mask sets for 65 nanometer and below for IC products and G7 and above technologies for FPD products. By geographic area, net sales in Q2-11 as compared to Q2-10 increased by $17.7 million or 28.6% in Asia, increased by $8.0 million or 24.5% in North America, and increased by $2.4 million or 22.3% in Europe. As a percent of total sales, in Q2-11 net sales were 60% in Asia, 30% in North America, and 10% in Europe; and net sales in Q2-10 in Asia were 59%, North America 31%, and Europe 10%.
Net sales for YTD-11 increased 24.9% to $253.9 million as compared to $203.3 million for YTD-10. The increase was due to increased sales of both IC and FPD photomasks. IC photomask sales increased $31.3 million primarily as a result of increased units for both high-end and mainstream products. FPD photomask sales increased $19.3 million, primarily as a result of increased units and ASPs for both high-end and mainstream products. The Company's quarterly revenues can be affected by the seasonal purchasing of its customers. Although demand for the Company's products is typically negatively impacted during the first six months of its fiscal year by the North American, European and Asian holiday periods, such seasonality was not experienced during YTD-11.
Gross Margin
Three Months Ended
Six Months Ended
Percent
Percent
Q2-11
Q2-10
Change
YTD-11
YTD-10
Change
Gross margin
$
36.5
$
22.1
65.2
%
$
67.1
$
40.3
66.6
%
Percentage of net sales
27.4
%
21.0
%
26.4
%
19.8
%
Gross margin percentage increased to 27.4% in Q2-11 from 21.0% in Q2-10 and increased to 26.4% in YTD-11 from 19.8% in YTD-10. These increases were a result of increased sales in all geographic regions, including increased high-end sales. The Company operates in a high fixed cost environment and, to the extent that the Company's revenues and utilization increase or decrease, gross margin will generally be positively or negatively impacted.
Selling, General and Administrative Expenses
Three Months Ended
Six Months Ended
Percent
Percent
Q2-11
Q2-10
Change
YTD-11
YTD-10
Change
Selling, general and
administrative expenses
$
11.5
$
10.9
5.3
%
$
22.2
$
21.0
5.4
%
Percentage of net sales
8.6
%
10.3
%
8.7
%
10.3
%
24
Selling, general and administrative expenses increased to $11.5 million in Q2-11, compared with $10.9 million in Q2-10, and to $22.2 million in YTD-11 as compared to $21.0 million in YTD-10. These increases were primarily due to increased employee compensation and related benefit expenses, and increased selling expenses.
Research and Development
Three Months Ended
Six Months Ended
Percent
Percent
Q2-11
Q2-10
Change
YTD-11
YTD-10
Change
Research and development
$
3.9
$
3.6
9.4
%
$
7.7
$
7.6
2.1
%
Percentage of net sales
3.0
%
3.4
%
3.0
%
3.7
%
Research and development expenses consist primarily of global development efforts related to high-end process technologies for advanced sub-wavelength reticle solutions for IC and FPD technologies. Research and development expenses increased by $0.3 million to $3.9 million in Q2-11, as compared to $3.6 million in Q2-10. On a YTD basis, research and development expenses increased $0.1 million to $7.7 million in YTD-11, as compared to $7.6 million in YTD-10. The increase in research and development expenses in Q2-11 and YTD-11 as compared to the same periods in the prior year were primarily due to increased expenditures in Asia.
Consolidation, Restructuring and Related Credits
Three Months Ended
Six Months Ended
Q2-11
Q2-10
YTD-11
YTD-10
Net gain on sales of assets
$
-
$
(5.0
)
$
-
$
(5.0
)
Employee terminations and other
-
-
-
0.2
Total consolidation, restructuring
and related credits
$
-
$
(5.0
)
$
-
$
(4.8
)
In the third quarter of fiscal 2009, the Company ceased the manufacture of photomasks at its Shanghai, China, facility. In connection with this restructuring, the Company has recorded total net charges of $5.2 million, including $4.7 million of net asset write-downs through its completion in fiscal 2010. The fair value of the assets written down was determined by management using a market approach. Approximately 75 employees were affected by this restructuring.
The Company recorded an initial restructuring charge of $10.1 million in the third quarter of fiscal 2009, which included $7.7 million to write down the carrying value of the Company's Shanghai manufacturing facility to its estimated fair value at that time. In the second quarter of fiscal 2010, the Company sold its facility in Shanghai, China, for net proceeds of $12.9 million, which resulted in a gain of $5.4 million. The gain was recorded as a credit to the restructuring reserve in that quarter.
Other Expense, net
Three Months Ended
Six Months Ended
Q2-11
Q2-10
YTD-11
YTD-10
Debt extinguishment loss
$
(30.3
)
$
-
$
(30.3
)
$
-
Interest expense
(1.9
)
(3.1
)
(3.6
)
(6.0
)
Investment and other
income (expense), net
(0.7
)
0.9
2.0
1.4
Other expense, net
$
(32.9
)
$
(2.2
)
$
(31.9
)
$
(4.6
)
25
In the second quarter of fiscal 2011 the Company acquired $30.4 million aggregate principal amount of its 5.5% convertible senior notes by delivering $19.7 million in cash and approximately 4.5 million shares of its common stock, with an approximate fair value of $39.2 million. In connection with this acquisition the Company recorded a debt extinguishment loss of $30.1 million, which included the write-off of $1.7 million of deferred financing fees. A portion of the net proceeds of the Company’s March 28, 2011, 3.25% convertible senior notes offering was used to repay these obligations.
Interest expense decreased in Q2-11 as compared to Q2-10 and in YTD-11 as compared to YTD-10, primarily as a result of a $1.0 million write-off of deferred financing fees in Q2-10 in connection with an amendment of the Company's credit facility. Interest expense in YTD-11 decreased as compared to YTD-10 also as a result of lower weighted average borrowings and lower interest rates.
Investment and other income (expense) decreased in Q2-11 as compared to Q2-10 by $1.6 million due to unfavorable foreign currency transaction results. On a comparative YTD basis, investment and other income (expense) increased by $0.6 million due to higher interest and investment income, which was offset in part by reduced foreign currency transaction gains.
Income Tax Provision
Three Months Ended
Six Months Ended
Q2-11
Q2-10
YTD-11
YTD-10
Income tax provision
$
(3.3
)
$
(1.9
)
$
(6.7
)
$
(2.9
)
The effective tax rate differs from the U.S. statutory rate of 35% in the second quarter and the first half of fiscal year 2011 primarily due to the impact of the non-deductible debt extinguishment loss recorded in the second quarter of 2011 and a higher level of earnings taxed at lowered statutory rates in foreign jurisdictions. In the second quarter and first half of fiscal year 2010, the effective tax rate differed from the U.S. statutory rate primarily because income tax provisions incurred in jurisdictions where the Company generated income before income taxes were, due to valuation allowances, not significantly offset by income tax benefits in jurisdictions where the Company incurred losses before income taxes. Further, in Korea and PSMC in Taiwan, various investment tax credits have been earned, which reduced the Company’s effective income tax rate.
PKLT, the Company's FPD manufacturing facility in Taiwan, is accorded a tax holiday which commences in 2012 and expires in 2017. The availability of this tax holiday did not have a significant impact on the Company's decision to increase its Asian presence, as the Company's decision was in response to fundamental changes that took place in the semiconductor industry. This tax holiday had no dollar or per share effect in the six month periods ended May 1, 2011 and May 2, 2010.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests increased $0.7 million to $1.4 million in Q2-11 as compared to Q2-10, primarily due to increased net income at the Company's non-wholly owned subsidiary in Taiwan. Year to date, net income attributable to noncontrolling interests increased to $2.9 million in 2011 as compared to $0.9 million in 2010, primarily as a result of increased net income at the Company’s non-wholly owned subsidiary in Taiwan.
During the three month period ended May 1, 2011, the board of directors of PSMC authorized PSMC to repurchase for retirement up to 5% of its outstanding common stock. The program, which expired in April, 2011, resulted in approximately 7.7 million shares (or 2.7% of its outstanding shares) being purchased at a total cost of $3.3 million. PSMC’s repurchase of these shares increased the Company’s ownership percentage in PSMC from 57.53% at October 31, 2010, to 59.14% at May 1, 2011. The Company’s ownership percentage in its subsidiary in Korea was approximately 99.7% at May 1, 2011 and October 31, 2010.
26
Liquidity and Capital Resources
The Company's working capital was $179.5 million at May 1, 2011, and $86.6 million at October 31, 2010. The increase in working capital was primarily related to net proceeds of the Company’s issuance of 3.25% convertible debt, offset in part by repayments of certain other higher interest rate long-term borrowings. Cash and cash equivalents increased to $186.1 million at May 1, 2011, as compared to $98.9 million at October 31, 2010, primarily due to increased cash generated from operations and the issuance of 3.25% convertible debt, which was partially offset by payments for capital expenditures and repayments of certain other long-term borrowings. Net cash provided by operating activities was $64.0 million for the six month period ended May 1, 2011, as compared to $33.8 million for the six month period ended May 2, 1010, the increase primarily being due to the Company's increased net income before recognition of the non-cash portion of the debt extinguishment losses of $23.5 million and increases in accounts payable and accrued liabilities. Net cash used in investing activities for the six month period ended May 1, 2011, was $48.0 million, which was primarily comprised of capital expenditure payments and an increased investment in the MP Mask joint venture. Net cash provided by financing activities of $64.6 million for the six month period ended May 1, 2011, was primarily comprised of proceeds from the March 2011 issuance of 3.25% convertible notes, partially offset by repayment of certain other long-term borrowings.
On March 28, 2011, the company issued $115 million aggregate principal amount of 3.25% convertible senior notes. Net proceeds realized from the sale of the notes, which mature on April 1, 2016, and pay interest semiannually commencing on October 1, 2011, were approximately $110.5 million.
During the three month period ended May 1, 2011, the Company used $19.7 million of the net proceeds of the 3.25% convertible senior note sale and issued common stock to extinguish approximately $30.4 million principal amount of its 5.5% convertible senior notes, and used an additional $19.8 million of the net proceeds to repay its outstanding principal obligations under capital leases. The Company may use the remaining net proceeds to retire additional debt and for capital expenditure and working capital purposes.
On March 18, 2011, the Company and its lenders amended its revolving credit facility. Under the terms of the amended credit facility, the total amount available to the Company to borrow was reduced from $65 million to $30 million. The credit facility bears interest (2.75% at May 1, 2011), based on the Company’s total leverage ratio, at LIBOR plus a spread, as defined in the agreement.
The credit facility is secured by substantially all of the Company’s assets located in the United States, as well as common stock the Company owns in certain of its foreign subsidiaries, and is subject to the following financial covenants: minimum fixed charge ratio, total leverage ratio and minimum unrestricted cash balance.
In January, 2011 a $10 million irrevocable stand-by letter of credit for the purchase of manufacturing equipment was issued under the credit facility. As of May 1, 2011, the Company had no outstanding borrowings under the credit facility and $20 million was available for borrowing.
On April 29, 2011, the Company entered into a 5 year, $21.2 million capital lease of manufacturing equipment. Payments under the lease, which bears interest at 3.09%, are $0.4 million per month through March 2016. As of May 1, 2011, the total lease amount payable through the end of the lease term was $22.5 million, of which $20.9 million represented principal and $1.6 million represented interest.
The Company's liquidity is highly dependent on its sales volume, cash conversion cycle, and the timing of its capital expenditures (which can vary significantly from period-to-period), as it operates in a high fixed cost environment. Depending on conditions in the IC semiconductor and FPD markets, the Company's cash flows from operations and current holdings of cash may not be adequate to meet its current and long-term needs for capital expenditures, operations and debt repayments. Historically, in certain years the Company has used external financing to partially fund these needs. However, the Company cannot assure that additional sources of financing would be available to it on commercially favorable terms should its cash requirements exceed cash available from operations, existing cash, and cash available under its credit facility. The Company may, from time to time, opportunistically repurchase its convertible senior notes, in open market or privately negotiated transactions, on terms it believes to be favorable.
27
Share-Based Compensation
Total share-based compensation expense for the three and six month periods ended May 1, 2011, was $0.6 million and $1.1 million, respectively, as compared to $0.5 million and $1.0 million, respectively, for the comparable prior year periods, substantially all of which is in selling, general and administrative expenses. No compensation cost was capitalized as part of inventory, and no income tax benefit has been recorded. As of May 1, 2011, total unrecognized compensation cost of $5.5 million is expected to be recognized over a weighted-average amortization period of 3.0 years.
Off-Balance Sheet Arrangements
Under the operating agreement related to the MP Mask joint venture, in order to maintain its 49.99% interest, the Company may be required to make additional capital contributions to the joint venture up to the maximum amount defined in the operating agreement. However, should the Board of Managers determine that further additional funding is required, the joint venture shall pursue its own financing. If the joint venture is unable to obtain its own financing, it may request additional capital contributions from the Company. Should the Company choose not to make a requested contribution to the joint venture, its ownership percentage may be reduced. Cumulatively, through May 1, 2011, the Company has contributed $16.3 million to the joint venture, and has received distributions from the joint venture totaling $10.0 million. During the three and six month periods ended May 1, 2011, the Company increased its investment in MP Mask by $6.2 million and $10.2 million, respectively, primarily related to capital calls requested by the joint venture. The Company received no distributions from the joint venture during the six month period ended May 1, 2011. During the six month period ended May 2, 2010, there were no contributions made to the joint venture by the Company, and no distributions were received by the Company from the joint venture.
The Company leases certain office facilities and equipment under operating leases that may require it to pay taxes, insurance and maintenance expenses related to the properties. Certain of these leases contain renewal or purchase options exercisable at the end of the lease terms. On May 19, 2009, the Company and Micron Technologies, Inc. (Micron) entered into a new lease agreement for the U.S. nanoFab building and cancelled its prior lease agreement. The new lease, among other changes discussed in Note 4 to the condensed consolidated financial statements, extends the lease term from December 31, 2012 to December 31, 2014. The Company will account for it as an operating lease for the period of the lease extension. Rental payments due during the lease extension period total $13.9 million.
Business Outlook
A majority of the Company's revenue growth is expected to come from the Asian region, as customers increase their use of manufacturing foundries located outside of North America and Europe. Additional revenue growth is also anticipated in North America as the Company benefits from advanced technology under its technology license with Micron. The Company's Korean and Taiwanese operations are non-wholly owned subsidiaries, therefore, a portion of earnings generated at each of these locations is allocated to noncontrolling interests.
The Company continues to assess its global manufacturing strategy and monitor its market capitalization, sales volume and related cash flows from operations. This ongoing assessment could result in future facility closures, asset redeployments, additional impairments of intangible or long-lived assets, workforce reductions, or the addition of increased manufacturing facilities, all of which would be based on market conditions and customer requirements.
Effect of Recent Accounting Pronouncements
See Note 15 of the condensed consolidated financial statements for a summary of recent accounting pronouncements that may affect the Company’s financial reporting.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company records derivatives on the condensed consolidated balance sheets as assets or liabilities, measured at fair value. The Company does not engage in derivative instruments for speculative purposes. Gains or losses resulting from changes in the values of those derivatives are reported in the condensed consolidated statements of operations, or as accumulated other comprehensive income, a separate component of equity, depending on the use of the derivatives and whether they qualify for hedge accounting. In order to qualify for hedge accounting, among other criteria, the derivative must be a hedge of an interest rate, price, foreign currency exchange rate, or credit risk, that is expected to be highly effective at the inception of the hedge and be highly effective in achieving offsetting changes in the fair value or cash flows of the hedged item during the term of the hedge, and formally documented at the inception of the hedge. In general, the types of risks hedged are those related to the variability of future cash flows caused by movements in foreign currency exchange and interest rates. The Company documents its risk management strategy and hedge effectiveness at the inception of, and during the term of each hedge.
Foreign Currency Exchange Rate Risk
The Company conducts business in several major international currencies through its worldwide operations and is subject to changes in foreign exchange rates of such currencies. Changes in exchange rates can positively or negatively affect the Company's sales, operating margins, assets, liabilities, and equity. The functional currencies of the Company's Asian subsidiaries are the Korean won, New Taiwan dollar, and the Singapore dollar. The functional currencies of the Company's European subsidiaries are the pound sterling and the euro.
The Company attempts to minimize its risk of foreign currency transaction losses by producing its products in the same country in which the products are sold (thereby generating revenues and incurring expenses in the same currency), and by managing its working capital. In some instances, the Company may sell or purchase products in a currency other than the functional currency of the country where it was produced. There can be no assurance that this approach will continue to be successful, especially in the event of a significant adverse movement in the value of any foreign currencies against the U.S. dollar. In certain recent years the Company experienced significant foreign exchange losses on these transactions.
The Company's primary net foreign currency exposures as of May 1, 2011 included the Korean won, the Japanese yen, the Singapore dollar, the New Taiwan dollar, the British pound, and the euro. As of May 1, 2011, a 10% adverse movement in the value of these currencies against the U.S. dollar would have resulted in a net unrealized pre-tax loss of $2.8 million. The Company does not believe that a 10% change in the exchange rates of other non-U.S. dollar currencies would have a material effect on its consolidated financial position, results of operations, or cash flows.
Interest Rate Risk
At May 1, 2011, the Company did not have any variable rate borrowings. Accordingly, a change in interest rates would not have had a material effect on the Company's consolidated financial position, results of operations, or cash flows in the three or six month period ended May 1, 2011.
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Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company has established and currently maintains disclosure controls and procedures designed to ensure that information required to be disclosed in its reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including the Company's chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company’s management, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over financial reporting during the Company's second quarter of fiscal 2011 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1A. RISK FACTORS
There have been no material changes to risks relating to the Company's business as disclosed in Part 1, Item 1A of the Company's Form 10-K for the year ended October 31, 2010.
Item 6. EXHIBITS
(a)
Exhibits
Exhibit
Number
Description
4.5
Indenture dated March 28, 2011 between the Company and Bank of Nova Scotia Trust Company of New York (incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K filed on March 29, 2011).
4.6
First Supplemental Indenture dated April 27, 2011 between the Company and Bank of Nova Scotia Trust Company of New York.
10.40
Executive Employment Agreement between the Company and Soo Hong Jeong dated May 31, 2011.
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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: June 8, 2011
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