UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 2, 2010 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
Commission file number 0-15451
PHOTRONICS, INC.
(Exact name of registrant as specified in its charter)
(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)
(Address of principal executive offices and zip code)
(203) 775-9000
(Registrant's telephone number, including area code)
(Registrant's telephone number, including area code)
Securities registered pursuant to Section
12(b) of the Act: Common Stock, $0.01 par value per share - NASDAQ Global Select
Market
Securities registered pursuant to Section
12(g) of the Act: None
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
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
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
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
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, 2010 |
| Common Stock, $0.01 par value | 53,620,694 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. 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. 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 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 except as otherwise
required by securities and other applicable laws.
2
PHOTRONICS, INC.
AND SUBSIDIARIES
INDEX
| PART I. | FINANCIAL INFORMATION | Page | |
| Item 1. | Condensed Consolidated Financial Statements | 4 | |
| Condensed Consolidated Balance Sheets at May 2, 2010 and November 1, 2009 | 4 | ||
|
Condensed Consolidated
Statements of Operations for the Three and Six Months Ended
May 2, 2010 and
May 3, 2009
|
5 | ||
|
Condensed Consolidated
Statements of Cash Flows for the Six Months Ended
May 2, 2010 and
May 3, 2009
|
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 | 28 | |
| Item 4. | Controls and Procedures | 29 | |
| PART II. | OTHER INFORMATION | ||
| Item 1A. | Risk Factors | 30 | |
| Item 6. | Exhibits | 30 | |
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 2, | November 1, | ||||||
| 2010 | 2009 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 91,410 | $ | 88,539 | |||
| Accounts receivable, net of allowance of $3,434 in 2010 | |||||||
| and $2,669 in 2009 | 81,247 | 66,920 | |||||
| Inventories | 15,861 | 14,826 | |||||
| Deferred income taxes | 3,509 | 3,264 | |||||
| Other current assets | 6,403 | 6,448 | |||||
| Total current assets | 198,430 | 179,997 | |||||
| Property, plant and equipment, net | 360,108 | 347,889 | |||||
| Investment in joint venture | 60,901 | 60,945 | |||||
| Intangible assets, net | 50,794 | 55,054 | |||||
| Other assets | 19,175 | 19,771 | |||||
| $ | 689,408 | $ | 663,656 | ||||
| LIABILITIES AND EQUITY | |||||||
| Current liabilities: | |||||||
| Current portion of long-term borrowings | $ | 11,364 | $ | 10,301 | |||
| Accounts payable | 68,317 | 59,187 | |||||
| Accrued liabilities | 25,700 | 20,967 | |||||
| Total current liabilities | 105,381 | 90,455 | |||||
| Long-term borrowings | 96,897 | 112,137 | |||||
| Deferred income taxes | 1,342 | 1,487 | |||||
| Other liabilities | 9,619 | 9,881 | |||||
| Total liabilities | 213,239 | 213,960 | |||||
| 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, 53,497 shares issued and outstanding | |||||||
| at May 2, 2010 and 53,011 at November 1, 2009 | 535 | 530 | |||||
| Additional paid-in capital | 434,976 | 432,160 | |||||
| Accumulated deficit | (18,460 | ) | (26,546 | ) | |||
| Accumulated other comprehensive income (loss) | 6,218 | (6,389 | ) | ||||
| Total Photronics, Inc. shareholders' equity | 423,269 | 399,755 | |||||
| Noncontrolling interests | 52,900 | 49,941 | |||||
| Total equity | 476,169 | 449,696 | |||||
| $ | 689,408 | $ | 663,656 | ||||
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 2, | May 3, | May 2, | May 3, | ||||||||||||
| 2010 | 2009 | 2010 | 2009 | ||||||||||||
| Net sales | $ | 105,070 | $ | 83,232 | $ | 203,267 | $ | 171,275 | |||||||
| Costs and expenses: | |||||||||||||||
| Cost of sales | (82,980 | ) | (71,792 | ) | (163,000 | ) | (149,275 | ) | |||||||
| Selling, general and administrative | (10,870 | ) | (10,630 | ) | (21,018 | ) | (21,032 | ) | |||||||
| Research and development | (3,601 | ) | (4,177 | ) | (7,556 | ) | (7,801 | ) | |||||||
| Consolidation, restructuring and | |||||||||||||||
| related (charges) credits | 5,029 | (406 | ) | 4,836 | (2,086 | ) | |||||||||
| Impairment of long-lived assets | - | (1,458 | ) | - | (1,458 | ) | |||||||||
| Operating income (loss) | 12,648 | (5,231 | ) | 16,529 | (10,377 | ) | |||||||||
| Other income (expense): | |||||||||||||||
| Interest expense | (3,059 | ) | (4,430 | ) | (5,981 | ) | (9,076 | ) | |||||||
| Investment and other income (expense), net | 876 | (571 | ) | 1,345 | 451 | ||||||||||
| Income (loss) before income taxes | 10,465 | (10,232 | ) | 11,893 | (19,002 | ) | |||||||||
| Income tax (provision) benefit | (1,860 | ) | 76 | (2,880 | ) | (1,122 | ) | ||||||||
| Net income (loss) | 8,605 | (10,156 | ) | 9,013 | (20,124 | ) | |||||||||
| Net (income) loss attributable to | |||||||||||||||
| noncontrolling interests | (732 | ) | 84 | (927 | ) | (181 | ) | ||||||||
| Net income (loss) attributable to | |||||||||||||||
| Photronics, Inc. | $ | 7,873 | $ | (10,072 | ) | $ | 8,086 | $ | (20,305 | ) | |||||
| Earnings (loss) per share: | |||||||||||||||
| Basic | $ | 0.15 | $ | (0.24 | ) | $ | 0.15 | $ | (0.49 | ) | |||||
| Diluted | $ | 0.14 | $ | (0.24 | ) | $ | 0.15 | $ | (0.49 | ) | |||||
| Weighted-average number of common shares | |||||||||||||||
| outstanding: | |||||||||||||||
| Basic | 53,405 | 41,775 | 53,253 | 41,749 | |||||||||||
| Diluted | 65,780 | 41,775 | 54,291 | 41,749 | |||||||||||
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 2, | May 3, | ||||||
| 2010 | 2009 | ||||||
| Cash flows from operating activities: | |||||||
| Net income (loss) | $ | 9,013 | $ | (20,124 | ) | ||
| Adjustments to reconcile net income (loss) | |||||||
| to net cash provided by operating activities: | |||||||
| Depreciation and amortization | 45,863 | 42,027 | |||||
| Consolidation, restructuring and related charges (credits) | (5,059 | ) | 2,086 | ||||
| Impairment of long-lived assets | - | 1,458 | |||||
| Changes in assets and liabilities: | |||||||
| Accounts receivable | (12,918 | ) | 5,952 | ||||
| Inventories | (592 | ) | 756 | ||||
| Other current assets | 1,199 | 2,284 | |||||
| Accounts payable, accrued liabilities, and other | (3,743 | ) | (8,090 | ) | |||
| Net cash provided by operating activities | 33,763 | 26,349 | |||||
| Cash flows from investing activities: | |||||||
| Purchases of property, plant and equipment | (31,003 | ) | (20,375 | ) | |||
| Proceeds from sale of facility | 12,880 | - | |||||
| Increase in restricted cash | (1,250 | ) | - | ||||
| Proceeds from sales of investments and other | 255 | 941 | |||||
| Distribution from joint venture | - | 5,000 | |||||
| Net cash used in investing activities | (19,118 | ) | (14,434 | ) | |||
| Cash flows from financing activities: | |||||||
| Repayments of long-term borrowings | (40,302 | ) | (10,889 | ) | |||
| Proceeds from long-term borrowings | 26,622 | - | |||||
| Payments of deferred financing fees | (1,056 | ) | (2,249 | ) | |||
| Other | 71 | - | |||||
| Net cash used in financing activities | (14,665 | ) | (13,138 | ) | |||
| Effect of exchange rate changes on cash | 2,891 | (1,052 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | 2,871 | (2,275 | ) | ||||
| Cash and cash equivalents at beginning of period | 88,539 | 83,763 | |||||
| Cash and cash equivalents at end of period | $ | 91,410 | $ | 81,488 | |||
| Supplemental disclosure of cash flow information: | |||||||
| Change in accrual for purchases of property, plant | |||||||
| and equipment | $ | 19,521 | $ | (14,542 | ) | ||
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 2, 2010 and May 3, 2009
(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, 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 31, 2010. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
November 1, 2009.
Certain amounts in
the November 1, 2009 condensed consolidated financial statements were
reclassified to conform with the current period presentation related to
noncontrolling interests (see Note 2).
NOTE 2 - CHANGES IN EQUITY AND COMPREHENSIVE
INCOME (LOSS)
On November 2, 2009,
the Company adopted new accounting standards for noncontrolling interests as set
forth in the Consolidation Topic No. 810 of the Accounting Standards
Codification. These standards require companies to classify expenses related to
noncontrolling interests' share in income (loss) below net income (loss).
Earnings per share continues to be determined after the impact of the
noncontrolling interests' share in net income (loss) of the Company. In
addition, these standards require noncontrolling interests to be presented as a
separate caption within equity. The presentation and disclosure requirements of
these standards were retrospectively applied. The adoption of these standards
resulted in the reclassification of $49.9 million of noncontrolling interests in
the condensed consolidated balance sheet to equity on November 2, 2009.
7
The following tables
set forth the Company's consolidated changes in equity for the three and six
months ended May 2, 2010 and May 3, 2009:
| Three Months Ended May 2, 2010 | ||||||||||||||||||||||||||||
| Photronics, Inc. Shareholders | ||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Add'l | Other | Total | Non- | |||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Photronics, | controlling | Total | ||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income | Inc. | Interests | Equity | |||||||||||||||||||||
| Balance at January 31, 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 gain | - | - | - | - | 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 | ||||||||||||
| Three Months Ended May 3, 2009 | ||||||||||||||||||||||||||||
| Photronics, Inc. Shareholders | ||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Add'l | Other | Total | Non- | |||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Photronics, | controlling | Total | ||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Loss | Inc. | Interests | Equity | |||||||||||||||||||||
| Balance at February 1, 2009 | 41,757 | $ | 418 | $ | 385,188 | $ | 5,131 | $ | (33,052 | ) | $ | 357,685 | $ | 48,608 | $ | 406,293 | ||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net loss | - | - | - | (10,072 | ) | - | (10,072 | ) | (84 | ) | (10,156 | ) | ||||||||||||||||
| Unrealized holding gains | - | - | - | - | 15 | 15 | - | 15 | ||||||||||||||||||||
| Amortization of cash flow hedges | - | - | - | - | 32 | 32 | - | 32 | ||||||||||||||||||||
| Foreign currency translation | ||||||||||||||||||||||||||||
| adjustments | - | - | - | - | 10,998 | 10,998 | 712 | 11,710 | ||||||||||||||||||||
| Total comprehensive income | - | - | - | - | - | 973 | 628 | 1,601 | ||||||||||||||||||||
| Sale of common stock through | ||||||||||||||||||||||||||||
| employee stock option and | ||||||||||||||||||||||||||||
| purchase plans | - | - | 15 | - | - | 15 | - | 15 | ||||||||||||||||||||
| Share-based compensation expense | 20 | - | 623 | - | - | 623 | - | 623 | ||||||||||||||||||||
| Noncontrolling interests’ subsidiary dividend | - | - | - | - | - | - | (437 | ) | (437 | ) | ||||||||||||||||||
| Balance at May 3, 2009 | 41,777 | $ | 418 | $ | 385,826 | $ | (4,941 | ) | $ | (22,007 | ) | $ | 359,296 | $ | 48,799 | $ | 408,095 | |||||||||||
8
| Six Months Ended May 2, 2010 | ||||||||||||||||||||||||||||
| Photronics, Inc. Shareholders | ||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Add'l | Other | Total | Non- | |||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Photronics, | controlling | Total | ||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income | Inc. | Interests | Equity | |||||||||||||||||||||
| Balance at November 1, 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 gain | - | - | - | - | 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 | ||||||||||||||||||||
| Common stock warrants exercised | 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 | ||||||||||||
| Six Months Ended May 3, 2009 | ||||||||||||||||||||||||||||
| Photronics, Inc. Shareholders | ||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Add'l | Other | Total | Non- | |||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Photronics, | controlling | Total | ||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Loss | Inc. | Interests | Equity | |||||||||||||||||||||
| Balance at November 2, 2008 | 41,712 | $ | 417 | $ | 384,502 | $ | 15,364 | $ | (17,501 | ) | $ | 382,782 | $ | 49,616 | $ | 432,398 | ||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income(loss) | - | - | - | (20,305 | ) | - | (20,305 | ) | 181 | (20,124 | ) | |||||||||||||||||
| Unrealized holding gains | - | - | - | - | 90 | 90 | 39 | 129 | ||||||||||||||||||||
| Amortization of cash flow hedges | - | - | - | - | 513 | 513 | - | 513 | ||||||||||||||||||||
| Foreign currency translation | ||||||||||||||||||||||||||||
| adjustments | - | - | - | - | (5,109 | ) | (5,109 | ) | (600 | ) | (5,709 | ) | ||||||||||||||||
| Total comprehensive loss | - | - | - | - | - | (24,811 | ) | (380 | ) | (25,191 | ) | |||||||||||||||||
| Sale of common stock through | ||||||||||||||||||||||||||||
| employee stock option and | ||||||||||||||||||||||||||||
| purchase plans | - | - | 38 | - | - | 38 | - | 38 | ||||||||||||||||||||
| Share-based compensation expense | 65 | 1 | 1,286 | - | - | 1,287 | - | 1,287 | ||||||||||||||||||||
| Noncontrolling interests’ subsidiary dividend | - | - | - | - | - | - | (437 | ) | (437 | ) | ||||||||||||||||||
| Balance at May 3, 2009 | 41,777 | $ | 418 | $ | 385,826 | $ | (4,941 | ) | $ | (22,007 | ) | $ | 359,296 | $ | 48,799 | $ | 408,095 | |||||||||||
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 (as that term is defined
in the Accounting Standards Codification) 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. The Company determined
that, in regards to this variable interest entity ("VIE"), it and Micron are de
facto agents (as that term is defined in the Accounting Standards Codification)
and that Micron is the primary beneficiary of the VIE as it is the de facto
agent within the aggregated group of de facto agents (i.e. the Company and
Micron) that is the most closely associated with the VIE. The primary reasons
the Company concluded that Micron is the most closely associated of the de facto
agents to the VIE are that Micron is both the ultimate purchaser of
substantially all of the products produced by the VIE and that it is the holder
of decision making authority in the ordinary course of business.
The Company has utilized MP Mask for both high-end IC photomask
production and research and development purposes. MP Mask charges its variable
interest holders based on their actual usage of its facility. MP Mask separately
charges for any research and development activities it engages in at the
requests of its owners. The Company recorded cost of sales of $1.5 million and
$2.7 million and research and development expenses of $0.2 million and $0.5
million during the three and six month periods ended May 2, 2010. Cost of sales
of $0.9 million and $1.2 million and research and development expenses of $0.3
million and $0.8 million were recorded during the three and six month periods
ended May 3, 2009.
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 appointed the majority of its managers. The number of managers
appointed by each party is subject to change as ownership interests change.
Under the operating agreement relating 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
interest may be reduced. The Company received no distributions from MP Mask
during the three and six month periods ended May 2, 2010, and received a $5
million distribution during the three and six month periods ended May 3, 2009.
The Company made no contributions to MP Mask during the three and six month
periods ended May 2, 2010 and May 3, 2009.
The Company's investment in the VIE, which represents its maximum
exposure to loss, was $60.9 million at May 2, 2010 and November 1, 2009. These
amounts are reported in the Company's condensed consolidated balance sheets as
"Investment in joint venture".
10
NOTE 4 - EARNINGS (LOSS) PER SHARE
The calculation of basic and diluted
earnings (loss) per share is presented below.
| Three Months Ended | Six Months Ended | |||||||||||||
| May 2, | May 3, | May 2, | May 3, | |||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||
| Net income (loss) attributable to Photronics, Inc. | $ | 7,873 | $ | (10,072 | ) | $ | 8,086 | $ | (20,305 | ) | ||||
| Effect of dilutive securities: | ||||||||||||||
| Interest expense on convertible notes, | ||||||||||||||
| net of related tax effects | 1,016 | - | - | - | ||||||||||
| Earnings (loss) for diluted earnings (loss) per share | $ | 8,889 | $ | (10,072 | ) | $ | 8,086 | $ | (20,305 | ) | ||||
| Weighted-average common shares computations: | ||||||||||||||
| Weighted-average common shares used for | ||||||||||||||
| basic earnings (loss) per share | 53,405 | 41,775 | 53,253 | 41,749 | ||||||||||
| Effect of dilutive securities: | ||||||||||||||
| Convertible notes | 11,311 | - | - | - | ||||||||||
| Employee stock options and restricted shares | 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 | 65,780 | 41,775 | 54,291 | 41,749 | ||||||||||
| Basic earnings (loss) per share | $ | 0.15 | $ | (0.24 | ) | $ | 0.15 | $ | (0.49 | ) | ||||
| Diluted earnings (loss) per share | $ | 0.14 | $ | (0.24 | ) | $ | 0.15 | $ | (0.49 | ) | ||||
The table below shows the outstanding weighted-average employee stock
options, restricted shares 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 2, | May 3, | May 2, | May 3, | |||||
| 2010 | 2009 | 2010 | 2009 | |||||
| Convertible notes | - | - | 11,311 | - | ||||
| Employee stock options and restricted shares | 2,844 | 2,193 | 2,652 | 2,200 | ||||
| Common stock warrants | 747 | - | 854 | - | ||||
| Total potentially dilutive shares excluded | 3,591 | 2,193 | 14,817 | 2,200 | ||||
In periods in which the Company incurred a net loss, the assumed exercise
of certain outstanding employee stock options and the vesting of restricted
shares had an antidilutive effect. Had the Company recognized sufficient net
income, there would have been 0.1 million and 0.3 million of incremental
weighted-average shares of these employee stock options and restricted shares
outstanding during the three and six month periods ended May 3, 2009,
respectively.
11
NOTE 5 - SHARE-BASED COMPENSATION PLANS
In March 2007, the Company’s shareholders approved a new share-based
compensation plan ("Plan"), under which options, restricted stock, restricted
stock units, stock appreciation rights, performance stock, performance units,
and other awards based on, or related to, shares of the Company's common stock
may be granted from shares authorized but unissued, shares previously issued and
reacquired by the Company, or both. The maximum number of shares of common stock
approved by the Company’s shareholders to be issued under the Plan was increased
from three million shares to six million shares during the three month period
ended May 2, 2010. Awards may be granted to officers, employees, directors,
consultants, advisors, and independent contractors of the Company or its
subsidiaries. The Plan, aspects of which are more fully described below,
prohibits further awards from being issued under prior plans. The Company
incurred compensation cost under the Plan for the three and six month periods
ended May 2, 2010 of $0.3 million and $0.8 million, respectively, and $0.6
million and $1.3 million for the three and six month periods ended May 3, 2009,
respectively. The Company received cash from option exercises of $0.1 million
for the three and six month periods ended May 2, 2010, respectively, and did not
receive any cash from option exercises during the three and six month periods
ended May 3, 2009. No share-based compensation cost was capitalized as part of
inventory and no related income tax benefits were recorded during the periods
presented.
Stock Options
Option awards generally vest in one to four years, and have a ten-year
contractual term. All incentive and non-qualified stock option grants have an
exercise price equal to the market value of the underlying common stock on the
date of grant. The option and share awards provide for accelerated vesting if
there is a change in control as defined in the Plan.
The grant date fair value of options is based upon the closing price on
the date 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 time of grant. Inputs used to calculate the grant date fair value of
options issued during the three month and six month periods ended May 2, 2010
and May 3, 2009, are presented in the following table.
| Three Months Ended | Six Months Ended | |||||||||
| May 2, | May 3, | May 2, | May 3, | |||||||
| 2010 | 2009 | 2010 | 2009 | |||||||
| Expected volatility | N/A | 82.1 | % | 89.3% | 69.8 | % | ||||
| Risk free rate of return | N/A | 1.9 | % | 2.2 – 2.4% | 2.5 | % | ||||
| Dividend yield | N/A | 0.0 | % | 0.0% | 0.0 | % | ||||
| Expected term | N/A | 4.7 | years | 4.5 years | 4.7 | years | ||||
A summary of option awards under the
plan as of May 2, 2010 is presented below.
| Weighted | ||||||||||
| Weighted | Average | |||||||||
| Average | Remaining | Aggregate | ||||||||
| Exercise | Contractual | Intrinsic | ||||||||
| Options | Shares | Price | Life | Value | ||||||
| Outstanding at May 2, 2010 | 4,013,990 | $ | 9.95 | 6.6 years | $ | 6,804 | ||||
| Exercisable at May 2, 2010 | 2,014,230 | $ | 16.69 | 4.4 years | $ | 1,133 | ||||
12
There were no share options granted during the three month period ended
May 2, 2010. There were 5,000 share options granted with a weighted-average
grant date fair value of $0.84 during the three month period ended May 3, 2009.
There were 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 and
1,348,250 share options granted during the six month period ended May 3, 2009,
with a weighted-average grant date fair value of $0.44 per share. As of May 2,
2010, the total unrecognized compensation cost related to non-vested option
awards was approximately $2.4 million. That cost is expected to be recognized
over a weighted-average amortization period of 3.2 years.
Restricted Stock
The Company periodically grants restricted stock awards. The restrictions
on these awards lapse over a service period that has ranged from less-than-one
to eight years. No restricted stock awards were issued during the three or six
month periods ended May 2, 2010 or during the three month period ended May 3,
2009, and 75,000 shares with a weighted-average grant date fair value of $0.76
per share were granted during the six months ended May 3, 2009. As of May 2,
2010, the total compensation cost related to nonvested restricted stock awards
not yet recognized was approximately $1.5 million. That cost is expected to be
recognized over a weighted-average amortization period of 3.3 years. A summary
of the status of the Company's non-vested restricted shares as of May 2, 2010 is
presented below.
| Weighted | |||||||
| Average | |||||||
| Remaining | Aggregate | ||||||
| Contractual | Intrinsic | ||||||
| Restricted Stock | Shares | Life | Value | ||||
| Outstanding at May 2, 2010 | 114,335 | 3.1 years | $ | 623 | |||
NOTE 6 - CONSOLIDATION, RESTRUCTURING AND
RELATED CHARGES
Shanghai, China,
Facility
During the three months ended August 2, 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 $5.4 million
through May 2, 2010, including $4.2 million of net asset write-downs. 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
during the three month period ended August 2, 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. During the three months ended
May 2, 2010, the Company sold its facility in Shanghai, China, for net proceeds
of $12.9 million which resulted in a gain of $5.2 million. This gain was
recorded as a credit to the restructuring reserve during the three months ended
May 2, 2010.
The Company expects this restructuring to be completed during the third
quarter of fiscal 2010, and does not expect the remaining restructuring costs to
be significant. The following table sets 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. The remaining balance at May 2, 2010 primarily relates to expenses
incurred relating to the sale of the facility.
| 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 | ||||||||||
13
Manchester, U.K.,
Facility
During the three months ended February 1, 2009, the Company ceased the
manufacture of photomasks at its Manchester, U.K., facility and, in connection
therewith, incurred total restructuring charges of $3.3 million through its
completion in the fourth quarter of fiscal 2009, primarily for employee
termination costs and asset write-downs. Approximately 85 employees were
affected by this restructuring. The following table sets forth the Company's
2009 restructuring reserve related to its Manchester, U.K., facility as of May
3, 2009, and reflects the activity affecting the reserve for the three and six
month periods then ended.
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| May 3, 2009 | May 3, 2009 | |||||||||||||||||||||||||
| February 1, | May 3, | November 2, | May 3, | |||||||||||||||||||||||
| 2009 | Charges | Utilized | 2009 | 2008 | Charges | Utilized | 2009 | |||||||||||||||||||
| Employee terminations | $ | - | $ | 328 | $ | (328 | ) | $ | - | $ | - | $ | 1,390 | $ | (1,390 | ) | $ | - | ||||||||
| Asset write-downs | ||||||||||||||||||||||||||
| and other | 154 | 78 | (232 | ) | - | - | 696 | (696 | ) | - | ||||||||||||||||
| $ | 154 | $ | 406 | $ | (560 | ) | $ | - | $ | - | $ | 2,086 | $ | (2,086 | ) | $ | - | |||||||||
NOTE 7 - INCOME TAXES
The effective income tax rates differ from the amount computed by
applying the U.S. statutory rate of 35% to the income (loss) before income taxes
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, various investment tax
credits have been utilized in Korea and Taiwan 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 statement of operations.
As of May 2, 2010 and November 1, 2009, the gross unrecognized tax
benefits for income taxes associated with uncertain tax positions totaled
approximately $2.0 million (including interest and penalties of $0.4 million).
If recognized, the benefits would favorably impact the Company's effective tax
rate in future periods. As of May 2, 2010, the Company believes it is not
reasonably possible that the total amounts of unrecognized 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., 2007 in the U.K., 2008 in Germany and 2005 in Korea.
NOTE 8 - 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 has historically 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.
14
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.
The Company was a party to two foreign
currency forward contracts which expired during the year ended November 1, 2009,
both of which were not accounted for as hedges, as they were economic hedges of
intercompany loans denominated in U.S. dollars that were remeasured at fair
value and recognized immediately in earnings. A portion of an existing loss on a
cash flow hedge in the amount of $0.1 million is expected to be reclassified
into 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 2, 2010 and November 1, 2009.
| Derivatives | ||||||||
| Not Designated | ||||||||
| as Hedging | Fair Value at | |||||||
| Instruments Under | May 2, | November 1, | ||||||
| ASC 815 | Balance Sheet Location | 2010 | 2009 | |||||
| Warrants on common stock | Other liabilities | $ | 2,272 | $ | 3,205 | |||
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 2, 2010 and May 3,
2009.
| Derivatives | ||||||||||||||
| Not Designated | Location of Gain (Loss) | Amount of Gain (Loss) Recognized in Income on Derivatives | ||||||||||||
| as Hedging | Recognized in | Three Months Ended | Six Months Ended | |||||||||||
| Instruments Under | Income on | May 2, | May 3, | May 2, | May 3, | |||||||||
| ASC 815 | Derivatives | 2010 | 2009 | 2010 | 2009 | |||||||||
| Warrants on common stock | Investment and other income (expense), net | $ | (860) | $ | - | $ | (751) | $ | - | |||||
| Foreign exchange contracts | Investment and other income (expense), net | $ | - | $ | (425) | $ | - | $ | 93 | |||||
15
NOTE 9 - LONG-TERM
BORROWINGS
Long-term
borrowings consist of the following:
| May 2, | November 1, | |||||
| 2010 | 2009 | |||||
| 5.5% convertible senior notes due | ||||||
| on October 1, 2014 | $ | 57,500 | $ | 57,500 | ||
| Borrowings under revolving credit facility, which | ||||||
| bears interest at a variable rate, as defined (4.31% at | ||||||
| May 2, 2010 and 8.0% at November 1, 2009) | 17,000 | 2,568 | ||||
| 8.0% capital lease obligation payable through | ||||||
| January 2013 | 19,449 | 22,552 | ||||
| 5.6% capital lease obligation payable through | ||||||
| October 2012 | 10,987 | 12,614 | ||||
| 4.75% financing loan with customer | 3,325 | - | ||||
| Term loan which bore interest at a variable rate | ||||||
| as defined (8.0% at November 1, 2009) | - | 27,204 | ||||
| 108,261 | 122,438 | |||||
| Less current portion | 11,364 | 10,301 | ||||
| $ | 96,897 | $ | 112,137 | |||
On February 12, 2010, the Company amended
its revolving credit facility, which was originally established on June 6, 2007,
to a three-year $50 million revolving credit facility ("the credit facility")
with an expansion option up to $65 million. At the time of the amendment, the
then existing revolving credit facility and term loan were repaid in full with
borrowings from the credit facility of $20.8 million, and in connection
therewith the Company wrote off $1.0 million of deferred financing fees. Net
repayments made towards the credit facility during the three month period ended
May 2, 2010 further reduced the outstanding balance of the facility to $17
million and increased the unused commitment to $33 million as of May 2, 1010.
The credit facility bears interest at LIBOR plus a spread, as defined in the
agreement (4.31% at May 2, 2010) based upon the Company's total leverage ratio.
On May 7, 2010, the revolving credit facility was amended to expand its capacity
from $50 million to $65 million. On May 18, 2010, the Company paid $12 million
towards its revolving credit balance, which resulted in an outstanding balance
of $5 million and an unused available balance of $60 million.
The credit facility, which matures on
February 12, 2013, is secured by substantially all of the Company's assets in
the United States as well as common stock the Company owns in certain of its
foreign subsidiaries. The credit facility is subject to the following financial
covenants: fixed charge coverage ratio, total leverage ratio, minimum
unrestricted cash balance, and maximum capital expenditures, all as defined in
the agreement.
In May 2009, the Company amended its then
existing revolving credit facility and entered into a warrant agreement with its
lenders for 2.1 million shares of its common stock. Forty percent of the
warrants were exercisable upon issuance while the remaining warrants were
cancelled as a result of the Company's September 2009 early repayment of a
portion of the outstanding balance under its June 6, 2007 credit agreement. As
of May 2, 2010, approximately 0.4 million warrants have been exercised,
including 0.1 million and 0.3 million of which were exercised during the three
and six month periods ended May 2, 2010, respectively. The warrants,
approximately 0.4 million of which remained outstanding at May 2, 2010, are
exercisable for one share of the Company's common stock, at an exercise price of
$.01 per share. The warrant agreement also included a net cash settleable put
provision exercisable starting in May 2012 and a call provision exercisable
starting in May 2013, both of which were exercisable only if the Company's
common stock was not traded on a national exchange or, in the case of the put
provision, such repurchase does not create a default under the credit facility
or any refinancing of it. As a result of the aforementioned net cash settleable
put provisions, the warrants were initially recorded as a liability (included in
other liabilities) and were subsequently reported at their fair
value.
16
In addition to the former credit facility discussed above, the Company
also entered into a term loan agreement with an aggregate commitment of $27.2
million in the U.S. dated on June 8, 2009. This loan was repaid in February 2010
with funds from the credit facility.
On September 11, 2009, the Company sold, through a public offering, $57.5
million aggregate principal amount of 5.5% convertible senior notes which mature
on October 1, 2014. Note holders may convert each $1,000 principal amount of
notes to 196.7052 shares of stock (equivalent to an initial conversion price of
approximately $5.08 per share of common stock) on September 30, 2014. The
conversion rate may be increased in the event of a make-whole fundamental change
(as defined in the prospectus supplement filed by the Company on September 11,
2009) and the Company may not redeem the notes prior to their maturity date. The
net proceeds of the convertible senior notes offering were approximately $54.9
million.
In January 2010 the Company borrowed $3.7 million from a customer to
purchase manufacturing equipment. This loan bears interest at 4.75% and will be
repaid with product supplied to the customer. Product valued at $0.2 million was
shipped to the customer and applied against the loan during the three month
period ended May 2, 2010. The Company estimates that the loan will be fully
repaid by December 2014.
In the first quarter of 2008 a capital lease agreement commenced for the
U.S. nanoFab facility which bore interest at 8%. 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. 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 will continue to be
accounted for as a capital lease until the end of its original lease term. For
the additional two years of the new lease term, the lease will be accounted for
as an operating lease. As of May 2, 2010, total capital lease amounts payable
were $21.8 million, of which $19.5 million represented principal and $2.3
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. Under the capital
lease agreement, the Company is required to maintain the equipment in good
working condition, and is required to comply with certain non-financial
covenants. Payments under the lease are $0.4 million per month over a 5-year
term at a 5.6% interest rate.
NOTE 10 - 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. Intel Capital Corporation also invested in the Company's
September 2009 convertible debt offering. 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 2, 2010, none of the warrants had been
exercised.
In conjunction with an amendment to its credit facility on May 15, 2009,
the Company also entered into a warrant agreement with its lenders. See Note 9
for further discussion of these warrants.
17
NOTE 11 - FAIR VALUE
MEASUREMENTS
Fair value, as defined in accounting guidance, is the price that would be
received to sell an asset or transfer a liability in an orderly transaction
between market participants at the measurement date. An "orderly transaction" is
a transaction that assumes exposure to the market for a period prior to the
measurement date to allow for marketing activities that are usual and customary
for transactions involving such assets or liabilities (i.e. it is not a forced
transaction). The transaction to sell an asset or transfer a liability is a
hypothetical transaction at the measurement date, considered from the
perspective of a market participant that holds the asset or owes the liability.
Therefore, the objective of a fair value measurement is to determine the price
that would be received to sell the asset or paid to transfer the liability (an
exit price) at the measurement date.
A fair value measurement further assumes that the hypothetical
transaction occurs in the principal (or if no principal market exists, the most
advantageous) market for the asset or liability. Further, a fair value
measurement assumes a transaction involving the highest and best use of an asset
and the consideration of assumptions that would be made by market participants
when pricing an asset or liability, such as transfer restrictions or
non-performance risk.
The Company follows a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels. This
fair value hierarchy gives the highest priority to unadjusted, quoted market
prices in active markets for identical assets or liabilities (including when the
liabilities are traded as assets) while giving the lowest priority to
unobservable inputs, which are inputs that reflect the Company's assumptions
about the factors that market participants would use in valuing assets or
liabilities, based upon the best information available under existing
circumstances. In cases when the inputs used to measure fair value fall in
different levels of the fair value hierarchy, the level within which the fair
value measurement in its entirety falls is determined based on the lowest level
input that is significant to the fair value measurement in its entirety. When,
due to changes in the inputs to valuation techniques used to measure its fair
value, an asset or liability is transferred between levels of the fair value
hierarchy, the Company recognizes all transfer to or from any level to be as of
the beginning of the reporting period. Assessing the significance of a
particular input to the fair value measurement in its entirety requires
judgment, including the consideration of factors specific to the asset or
liability. The hierarchy consists of the following three levels:
Level 1 - Inputs are prices in active markets that
are accessible at the measurement date.
Level 2 - Inputs other than quoted prices included
within Level 1 are observable for the asset or liability, either directly or
indirectly. At May 2, 2010, the Company's Level 2 asset is a foreign bond fund
and its Level 2 liability consists of its common stock warrants which are
reported in other liabilities.
Level 3 - Inputs are unobservable inputs for the
asset or liability.
18
Assets and Liabilities Measured at Fair Value
on a Recurring Basis
The tables below present assets and
liabilities as of May 2, 2010 and November 1, 2009 that are measured at fair
value on a recurring basis.
| May 2, 2010 | |||||||||||||
| Quoted | |||||||||||||
| Prices | |||||||||||||
| in Active | Significant | ||||||||||||
| Markets | Other | Significant | |||||||||||
| for Identical | Observable | Unobservable | |||||||||||
| Instruments | Inputs | Inputs | |||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||
| Foreign bond fund | $ | - | $ | 330 | $ | - | $ | 330 | |||||
| Total assets | $ | - | $ | 330 | $ | - | $ | 330 | |||||
| Common stock warrants | $ | - | $ | (2,272 | ) | $ | - | $ | (2,272 | ) | |||
| Total liabilities | $ | - | $ | (2,272 | ) | $ | - | $ | (2,272 | ) | |||
| November 1, 2009 | |||||||||||||
| Quoted | |||||||||||||
| Prices | |||||||||||||
| in Active | Significant | ||||||||||||
| Markets | Other | Significant | |||||||||||
| for Identical | Observable | Unobservable | |||||||||||
| Instruments | Inputs | Inputs | |||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||
| Foreign bond fund | $ | - | $ | - | $ | 148 | $ | 148 | |||||
| Total assets | $ | - | $ | - | $ | 148 | $ | 148 | |||||
| Common stock warrants | $ | - | $ | (3,205 | ) | $ | - | $ | (3,205 | ) | |||
| Total liabilities | $ | - | $ | (3,205 | ) | $ | - | $ | (3,205 | ) | |||
The foreign bond fund above
represents the Company's investment in a fund whose fair value was provided by
the trustee. The fund was transferred from Level 3 to Level 2 during the three
month period ended May 2, 2010 because its fair value had become determinable
through the use of significant other observable inputs. An unrealized net of tax
gain of $0.1 million related to this fund is included in other comprehensive
income at May 2, 2010.
The fair value of the common stock
warrants liability was determined using the Black-Scholes option pricing model.
Significant inputs to the model include the market price and expected volatility
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.
19
Assets and Liabilities Measured at Fair Value
on a Nonrecurring Basis
The Company, as permitted under
accounting guidance issued in 2008, deferred the effective date for applying
fair value guidance to nonfinancial assets and liabilities that are measured at
fair value on a nonrecurring basis until November 2, 2009. As a result of this
election, certain long-lived assets that, in fiscal year 2009 and in connection
with the Company's restructuring initiatives, were measured at fair value on a
nonrecurring basis did not have fair value disclosure provisions applied to
them. The Company did not have any nonfinancial assets or liabilities measured
at fair value on a nonrecurring basis during the three and six month periods
ended May 2, 2010.
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 rates. As of May 2, 2010, the estimated fair value of
the Company's outstanding 5.5% convertible senior notes was approximately $75.1
million.
NOTE 12 - 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 semiconductors. Geographic net sales are based primarily on
where the Company's manufacturing facility is located. The Company's net sales
for the three and six month periods ended May 2, 2010 and May 3, 2009, and its
long-lived assets by geographic area as of May 2, 2010 and November 1, 2009, are
presented below.
| Three Months Ended | Six Months Ended | |||||||||||
| May 2, | May 3, | May 2, | May 3, | |||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||
| Net sales | ||||||||||||
| Asia | $ | 61,821 | $ | 50,942 | $ | 122,628 | $ | 107,183 | ||||
| Europe | 10,665 | 9,336 | 20,182 | 18,085 | ||||||||
| North America | 32,584 | 22,954 | 60,457 | 46,007 | ||||||||
| $ | 105,070 | $ | 83,232 | $ | 203,267 | $ | 171,275 | |||||
| As of | ||||||
| May 2, | November 1, | |||||
| 2010 | 2009 | |||||
| Long-lived assets | ||||||
| Asia | $ | 205,892 | $ | 199,179 | ||
| Europe | 14,215 | 9,579 | ||||
| North America | 140,001 | 139,131 | ||||
| $ | 360,108 | $ | 347,889 | |||
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 this
period.
20
NOTE 13 - COMMITMENTS AND
CONTINGENCIES
As of May 2, 2010, the Company had
commitments outstanding for capital expenditures of approximately $23
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 the business of the
Company.
NOTE 14 - RECENT ACCOUNTING
PRONOUNCEMENTS
In January 2010, the Financial Accounting Standards Board ("FASB") issued
updated guidance to improve disclosures related to fair value measurements. The
amended guidance includes new requirements to separately disclose transfers in
and out of Level 1 and Level 2, and to present separately information about
purchases, sales, issuances, and settlements in the reconciliation of Level 3
fair value measurements. The guidance also clarifies existing disclosures by
changing the level of disaggregation of fair value measurements to the class of
asset or liability, which is often a subset of a line item within the statement
of financial position. In addition, the guidance requires reporting entities to
provide disclosures about inputs and valuation techniques for both recurring and
nonrecurring fair value measurements. The guidance is effective for interim and
annual periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3, which are effective for interim and annual periods
beginning after December 15, 2010. The Company adopted the guidance related to
the disclosure of transfers in and out of Level 1 and 2 during the three month
period ended May 2, 2010.
In September 2009, the FASB issued revised guidance for
multiple-deliverable revenue arrangements. This guidance changes the criteria
for separating consideration in multiple-deliverable arrangements by
establishing a selling price hierarchy for determining the selling price of a
deliverable. Under the revised guidance, the selling price for each deliverable
in a multiple-deliverable arrangement will, in order of preference and when
available, be based on vendor specific objective evidence, third party evidence,
or estimated selling price. The revised guidance prescribes that an estimated
selling price be determined in a manner that is consistent with that used to
determine the price to sell the deliverable on a stand alone basis, eliminates
the residual method of allocation, and requires that arrangement consideration
be allocated at the inception of the arrangement to all deliverables using the
relative selling price method. The revised guidance also significantly expands
the disclosures related to multiple-deliverable arrangements, and is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, with early adoption permitted.
The Company does not expect that the adoption of the revised guidance will have
a material impact on its consolidated financial statements.
In June 2009, the FASB issued amended standards for determining whether
to consolidate a variable interest entity. The amended standards require an
enterprise to perform an analysis to determine whether its variable interest or
interests give it a controlling financial interest in a variable interest
entity. This analysis is performed in order to identify the primary beneficiary
of the variable interest entity as being the enterprise that has certain
characteristics described in the amended standards. The amended standards, in
addition to other requirements, require an enterprise to assess whether it has
an implicit financial responsibility to ensure that a variable interest entity
operates as designed when determining whether it has the power to direct the
activities of the variable interest entity that most significantly impact the
entity's financial performance and, mandates ongoing reassessments of whether an
enterprise is the primary beneficiary of a variable interest entity. These
amended standards are effective for financial statements issued for fiscal years
beginning after November 15, 2009, and interim financial statements within those
fiscal years. The Company is currently evaluating the impact, if any, this
guidance will have on its consolidated financial statements.
21
| 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 conditions, 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 2009 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 in 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. In
addition, 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 also 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 semiconductor industry experienced a downturn in 2008
that continued into 2009, which had a negative impact on the Company's 2009
operating results. The Company's 2009 operating results were also negatively
impacted by the global recession, which could also impact the Company's 2010
operating results.
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 backlog orders, typically one to two
weeks. 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 based 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.
The effects of the weakened global economy and the tightened credit
market require the Company to continue to make significant improvements in its
competitiveness. In connection therewith, the Company continues to delay capital
expenditures and evaluate further cost reduction initiatives.
The Company's ability to comply with the financial and other covenants in
its debt agreements may be affected by worsening 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, the Company's 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 other of its other long-term borrowings, unless
amended or waived. As of May 2, 2010, the Company was in compliance with its
debt covenants.
22
Material Changes in Results of
Operations
Three and Six Months ended May 2, 2010 and May 3, 2009
Three and Six Months ended May 2, 2010 and May 3, 2009
The following table represents
selected operating information expressed as a percentage of net sales.
| Three Months Ended | Six Months Ended | |||||||||||
| May 2, | May 3, | May 2, | May 3, | |||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
| Cost of sales | (79.0 | ) | (86.3 | ) | (80.2 | ) | (87.2 | ) | ||||
| Gross margin | 21.0 | 13.7 | 19.8 | 12.8 | ||||||||
| Selling, general and administrative expenses | (10.3 | ) | (12.8 | ) | (10.3 | ) | (12.3 | ) | ||||
| Research and development expenses | (3.4 | ) | (5.0 | ) | (3.7 | ) | (4.6 | ) | ||||
| Consolidation, restructuring and related (charges) credits | 4.7 | (0.5 | ) | 2.3 | (1.2 | ) | ||||||
| Impairment of long-lived assets | - | (1.7 | ) | - | (0.8 | ) | ||||||
| Operating income (loss) | 12.0 | (6.3 | ) | 8.1 | (6.1 | ) | ||||||
| Other expense, net | (2.0 | ) | (6.0 | ) | (2.3 | ) | (5.0 | ) | ||||
| Net income (loss) before income taxes | 10.0 | (12.3 | ) | 5.8 | (11.1 | ) | ||||||
| Income tax benefit (provision) | (1.8 | ) | 0.1 | (1.4 | ) | (0.7 | ) | |||||
| Net income (loss) | 8.2 | (12.2 | ) | 4.4 | (11.8 | ) | ||||||
| Net (income) loss attributable to noncontrolling interests | (0.7 | ) | 0.1 | (0.4 | ) | (0.1 | ) | |||||
| Net income (loss) attributable to Photronics, Inc. | 7.5 | % | (12.1 | )% | 4.0 | % | (11.9 | )% | ||||
All of the following tabular comparisons, unless otherwise indicated, are
for the three months ended May 2, 2010 (Q2-10) and May 3, 2009 (Q2-09) and for
the six months ended May 2, 2010 (YTD-10) and May 3, 2009 (YTD-09) in millions
of dollars.
Net Sales
| Three Months Ended | Six Months Ended | |||||||||||||||||
| Percent | Percent | |||||||||||||||||
| Q2-10 | Q2-09 | Change | YTD-10 | YTD-09 | Change | |||||||||||||
| IC | $ | 84.0 | $ | 63.8 | 31.7 | % | $ | 158.5 | $ | 127.4 | 24.5 | % | ||||||
| FPD | 21.1 | 19.4 | 8.4 | % | 44.8 | 43.9 | 1.9 | % | ||||||||||
| Total net sales | $ | 105.1 | $ | 83.2 | 26.2 | % | $ | 203.3 | $ | 171.3 | 18.7 | % | ||||||
Net sales for Q2-10 increased 26.2% to $105.1 million as compared to
$83.2 million for Q2-09. The increase is primarily related to increased IC
sales, as a result of increased high-end and mainstream unit demand, and higher
average selling prices (ASPs), primarily for high-end products. FPD sales
increased as a result of increased unit demand and ASPs. Revenues attributable
to high-end products were $26.1 million in Q2-10 and $15.9 million in Q2-09.
High-end photomask applications, which typically have higher ASPs, 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 Q2-10 as compared to Q2-09
increased by $10.9 million or 21.4% in Asia, increased by $9.6 million or 42.0%
in North America, and increased by $1.3 million or 14.2% in Europe. As a percent
of total sales in Q2-10, net sales were 59% in Asia, 31% in North America, and
10% in Europe; and net sales in Q2-09 in Asia were 61%, North America 28%, and
Europe 11%.
23
Net sales for YTD-10 increased 18.7% to $203.3 million as compared to
$171.3 million for YTD-09. The increase was caused by higher sales of both IC
and FPD photomasks, due in part to improved overall business conditions. IC
photomask sales increased $31.1 million as a result of increased units for
high-end and mainstream products, and higher ASPs for high-end products. FPD
photomask sales increased $0.9 million, primarily as a result of increased unit
demand. The Company's quarterly revenues can be affected by the seasonal
purchasing of its customers. The Company is typically impacted during the first
six months of its fiscal year by the North American, European and Asian holiday
periods as some customers reduce their effective workdays and orders during this
period. This seasonality was experienced to a greater than normal extent during
YTD-09 as many of the Company's customers placed their fabs on extended
shutdowns.
Gross Margin
| Three Months Ended | Six Months Ended | |||||||||||||||||||||
| Percent | Percent | |||||||||||||||||||||
| Q2-10 | Q2-09 | Change | YTD-10 | YTD-09 | Change | |||||||||||||||||
| Gross margin | $ | 22.1 | $ | 11.4 | 93.1 | % | $ | 40.3 | $ | 22.0 | 83.0 | % | ||||||||||
| Percentage of net sales | 21.0 | % | 13.7 | % | 19.8 | % | 12.8 | % | ||||||||||||||
Gross margin percentage increased to 21.0% in Q2-10 from 13.7% in Q2-09
and increased to 19.8% in YTD-10 from 12.8% in YTD-09. These increases were a
result of increased sales in all geographic regions, including increased
high-end sales, and, as a result of reduced costs associated with the 2009
closures of the Company's manufacturing facilities in Manchester, U.K., and
Shanghai, China. 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 | |||||||||||||||||||||
| Q2-10 | Q2-09 | Change | YTD-10 | YTD-09 | Change | |||||||||||||||||
| Selling, general and administrative expenses | $ | 10.9 | $ | 10.6 | 2.3 | % | $ | 21.0 | $ | 21.0 | 0.0 | % | ||||||||||
| Percentage of net sales | 10.3 | % | 12.8 | % | 10.3 | % | 12.3 | % | ||||||||||||||
Selling, general and administrative expenses increased slightly to $10.9
million in Q2-10, compared with $10.6 million in Q2-09. Selling, general and
administrative expenses were $21.0 million in YTD-10 and YTD-09.
Research and Development
| Three Months Ended | Six Months Ended | |||||||||||||||||||||
| Percent | Percent | |||||||||||||||||||||
| Q2-10 | Q2-09 | Change | YTD-10 | YTD-09 | Change | |||||||||||||||||
| Research and development | $ | 3.6 | $ | 4.2 | (13.8 | )% | $ | 7.6 | $ | 7.8 | (3.1 | )% | ||||||||||
| Percentage of net sales | 3.4 | % | 5.0 | % | 3.7 | % | 4.6 | % | ||||||||||||||
Research and development expenses consist primarily of global development
efforts relating to high-end process technologies for advanced sub-wavelength
reticle solutions for IC and FPD technologies. Research and development expenses
decreased by $0.6 million to $3.6 million in Q2-10, as compared to $4.2 million
in Q2-09. On a YTD basis, research and development expenses decreased $0.2
million to $7.6 million in YTD-10, as compared to $7.8 million in YTD-09. The
reduction in research and development expenses in Q2-10 and YTD-10 as compared
to the same periods in the prior year were primarily due to reduced expenditures
in the U.S.
24
Consolidation, Restructuring and Related Charges (Credit)
| Three Months Ended | Six Months Ended | |||||||||||||
| Q2-10 | Q2-09 | YTD-10 | YTD-09 | |||||||||||
| Net gain on sales of assets | $ | (5.0 | ) | - | $ | (5.0 | ) | - | ||||||
| Employee terminations | - | $ | 0.3 | 0.2 | $ | 1.4 | ||||||||
| Asset write-downs and other | - | 0.1 | - | 0.7 | ||||||||||
| Total consolidation, restructuring and related charges | $ | (5.0 | ) | $ | 0.4 | $ | (4.8 | ) | $ | 2.1 | ||||
Shanghai, China,
Facility
During the three months ended August 2, 2009, the Company ceased the
manufacture of photomasks at its Shanghai, China, facility. In connection with
this restructuring, the Company has recorded total net restructure charges of
$5.4 million through May 2, 2010, including $4.2 million of net asset
write-downs. 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
during the three month period ended August 2, 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. During the three months ended
May 2, 2010, the Company sold its facility in Shanghai, China, for net proceeds
of $12.9 million which resulted in a gain of $5.2 million. This gain was
recorded as a credit to the restructure reserve during the three months ended
May 2, 2010.
The Company expects this restructuring to be completed during the third
quarter of fiscal 2010, and does not expect the remaining restructuring costs to
be significant.
Manchester, U.K.,
Facility
During the three months ended February 1, 2009, the Company ceased the
manufacture of photomasks at its Manchester, U.K., facility, and in connection
therewith incurred total restructuring charges of $3.3 million through its
completion in the fourth quarter of fiscal 2009, primarily for employee
termination costs and asset write-downs. Approximately 85 employees were
affected by this restructuring.
Other Income (Expense), net
| Three Months Ended | Six Months Ended | |||||||||||||||
| Q2-10 | Q2-09 | YTD-10 | YTD-09 | |||||||||||||
| Interest expense | $ | (3.1 | ) | $ | (4.4 | ) | $ | (6.0 | ) | $ | (9.1 | ) | ||||
| Investment and other income (expense), net | 0.9 | (0.6 | ) | 1.4 | 0.5 | |||||||||||
| Other income (expense), net | $ | (2.2 | ) | $ | (5.0 | ) | $ | (4.6 | ) | $ | (8.6 | ) | ||||
Interest expense decreased in Q2-10 as compared to Q2-09 and in YTD-10 as
compared to YTD-09, primarily as a result of lower debt levels and lower average
interest rates on the Company's long-term borrowings. Interest expense in Q2-10
and YTD-10 includes $1.0 million relating to the write-off of deferred financing
fees in connection with an amendment to the Company’s credit facility. The
outstanding balance of the Company's variable rate debt and related higher
interest costs were reduced substantially during the three month period ended
November 1, 2009, with net proceeds from its common stock and convertible debt
offerings.
25
Investment and other income (expense), net, increased in Q2-10 and in
YTD-10 as compared to the same periods in the prior year. These increases were
primarily due to improved foreign currency transaction results, which were
offset in part by losses related to the Company’s common stock warrants.
Income Tax Benefit (Provision)
| Three Months Ended | Six Months Ended | ||||||||||||||
| Q2-10 | Q2-09 | YTD-10 | YTD-09 | ||||||||||||
| Income tax benefit (provision) | $ | (1.9 | ) | $ | 0.1 | $ | (2.9 | ) | $ | (1.1 | ) | ||||
The effective income tax rates differ from the amount computed by
applying the U.S. statutory rate of 35% to the income (loss) before income taxes
primarily because income tax provisions 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, various investment tax credits
have been utilized in Korea and Taiwan which reduced the Company's effective
income tax rate.
PKLT, the Company's FPD manufacturing facility in Taiwan, is accorded a
tax holiday, which expires in 2012. In addition, the Company has been accorded a
tax holiday in China which is expected to expire in 2011. The availability of
these tax holidays did not have a significant impact on the Company's decisions
to increase or decrease its Asian presence, as the Company's decisions were in
response to fundamental changes that took place in the semiconductor industry.
These tax holidays had no dollar or per share effect in the three and six month
periods ended May 2, 2010 and May 3, 2009.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests (formerly referred to
as "minority interests") increased $0.8 million to $0.7 million in Q2-10 as
compared to Q2-09, 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 $0.9 million in YTD-10 as compared to $0.2
million in YTD-09, primarily as a result of increased net income at the
Company’s non-wholly owned subsidiary in Taiwan. The Company's ownership in its
subsidiary in Taiwan was approximately 58% at May 2, 2010 and November 1, 2009,
and its ownership in its subsidiary in Korea was approximately 99.7% at May 2,
2010 and November 1, 2009.
Liquidity and Capital Resources
The Company's working capital was $93.0 million at May 2, 2010 and $89.5
million at November 1, 2009. Cash and cash equivalents increased to $91.4
million at May 2, 2010, as compared to $88.5 million at November 1, 2009. Cash
provided by operating activities was $33.8 million for the six months ended May
2, 2010, as compared to $26.3 million for the same period last year. The
increase was primarily due to the Company's increased net income as compared to
the same prior year period, partially offset by changes in operating assets and
liabilities (primarily accounts receivable). Cash used in investing activities
for the six months ended May 2, 2010 was $19.1 million, which was comprised
primarily of capital expenditure payments of $31.0 million, offset by net
proceeds of $12.9 million from the sale of the Company’s Shanghai, China,
facility. Cash used in financing activities of $14.7 million for the six months
ended May 2, 2010 was primarily comprised of net repayments of long-term
borrowings.
On February 12, 2010, the Company amended its revolving credit facility
to a three-year $50 million revolving credit facility ("the credit facility")
with an expansion option up to $65 million. The credit facility, which matures
on February 12, 2013, bears interest at LIBOR plus a spread, as defined in the
agreement (4.31% at May 2, 2010), is secured by substantially all of the
Company's assets in the United States as well as stock the Company owns in
certain of its foreign subsidiaries and, includes the following financial
covenants: fixed charge coverage ratio, total leverage ratio, minimum
unrestricted cash balance, and maximum capital expenditures, all as defined in
the agreement. On May 7, 2010, the revolving credit facility was amended to
expand its capacity from $50 million to $65 million. On May 18, 2010, the
Company repaid $12 million of the outstanding balance of its credit facility,
which resulted in an outstanding balance of $5 million and an unused available
balance of $60 million.
26
At May 2, 2010, the Company had capital commitments outstanding of
approximately $23 million. Photronics believes that its currently available
resources, together with its capacity for growth, and its access to equity and
other financing sources, will be sufficient to satisfy its currently planned
capital expenditures, as well as its anticipated working capital requirements for the next twelve months.
However, the Company cannot assure that additional sources of financing would be
available to the Company on commercially favorable terms should the Company's
capital requirements exceed cash available from operations, existing cash, and
cash available under its credit facility.
The Company's liquidity is highly dependent on its sales volume, cash
conversion cycle, and the timing of its capital expenditures, as it operates in
a high fixed cost environment. Depending on conditions in the IC semiconductor
and FPD market, 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 fund these needs. Due to conditions in
the credit markets, some financing instruments used by the Company in the past
may not be currently available to it. The Company continues to evaluate
alternatives to delay capital expenditures and evaluate further cost reduction
initiatives. However, the Company cannot assure that additional sources of
financing would be available to it on commercially favorable terms should its
capital requirements exceed cash available from operations and existing cash,
and cash available under its credit facility.
Share-Based Compensation
Total share-based compensation expense for the three and six months ended
May 2, 2010 was $0.5 million and $1.0 million, respectively, as compared to $0.6
million and $1.3 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 2, 2010, total unrecognized compensation
cost of $3.9 million is expected to be recognized over a weighted-average
amortization period of 3.3 years.
Off-Balance Sheet Arrangements
Under the operating agreement relating 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 interest may be reduced. Cumulatively, through May 2,
2010, the Company has contributed $6.1 million to the joint venture, and has
received distributions from the joint venture totaling $10.0 million. During the
six months 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. 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 9 to the condensed consolidated financial
statements, extends the lease term from December 31, 2012 to December 31, 2014.
The Company will continue to account for the lease as a capital lease for the
remainder of its original term and 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 it
may utilize 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.
27
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 14 of the condensed consolidated financial statements for a
summary of recent accounting pronouncements that may affect the Company's
financial reporting.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company records derivatives on the balance sheet 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
statement of operations, or as accumulated other comprehensive income, a
separate component of shareholders' 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 for
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 relating
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 reported sales, operating margins, assets, liabilities, and
retained earnings. The functional currencies of the Company's Asian subsidiaries
are the Korean won, New Taiwan dollar, Chinese renminbi, and Singapore dollar.
The functional currencies of the Company's European subsidiaries are the British
pound 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 2, 2010
included the Korean won, the Japanese yen, the Singapore dollar, the New Taiwan
dollar, the British pound, the euro, and the Chinese renminbi. As of May 2,
2010, 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 $3.9 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.
In April 2008, the Company's Korean and Taiwanese subsidiaries each
entered into separate foreign currency exchange rate swap contracts that
effectively converted a $12 million interest bearing intercompany loan
denominated in U.S. dollars into their respective local currencies. Both
contracts expired in conjunction with the April 2009 maturity date of the
intercompany loan. The Company did not elect to designate either contract as a
fair value hedge.
Interest Rate Risk
At May 2, 2010, the Company had $17.0 million in variable rate
borrowings. A 10% 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 and six month periods ended May 2, 2010.
28
Common Stock Market Price Risk
In May 2009, the Company amended its then existing revolving credit
facility and entered into a warrant agreement with its lenders for 2.1 million
shares of its common stock. The warrants, approximately 0.4 million of which
remained outstanding at May 2, 2010, are exercisable for one share of the
Company’s common stock, at an exercise price of $0.1 per share. 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. A ten percent change in the May
2, 2010 market price of the Company's common stock would increase or decrease
the Company's net income by approximately $0.2 million and, increase or decrease
its other liabilities by the same amount. The Company's cash flows would not be
affected by such a change in the market price of its common stock. However, the
Company's stock may fluctuate more than ten percent. Any change in the fair
value of the warrants resulting from changes in the market price of the
Company's common stock would result in a non-cash charge or credit to the
Company's operating results. Approximately 0.1 million and 0.3 million warrants
were exercised during the three and six month periods ended May 2, 2010. Changes
in the fair value of the warrants during the three and six month periods ended
May 2, 2010 resulted in non-cash charges of $0.9 million and $0.8 million,
respectively, which are included in other income (expense) net.
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, with the participation of the Company's chief
executive officer and chief financial officer, evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the chief executive officer
and chief financial officer concluded that the Company's disclosure controls and
procedures, as of the end of the period covered by this report, were designed
and are functioning effectively to provide reasonable assurance that the
information required to be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934 is (i) recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
(ii) accumulated and communicated to management, including the chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding disclosure.
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 2010 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
29
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 November 1, 2009.
Item 6. EXHIBITS
|
(a)
|
Exhibits
|
|||||
| Exhibit | ||||||
| Number | Description | |||||
|
10.40
|
Executive
Employment Agreement between the Company and Peter Kirlin, Senior Vice
President, U.S. and Europe, dated May 21, 2010.
|
|||||
|
10.41
|
Executive
Employment Agreement between the Company and Richelle Burr, Vice
President, General Counsel and Secretary, dated May 21,
2010.
|
|||||
|
10.42
|
Amendment to the
Employee Stock Purchase Plan as of April 8, 2010.
|
|||||
|
10.43
|
Amendment No. 1 to
the 2007 Long-Term Equity Incentive Plan as of April 8,
2010.
|
|||||
|
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 10, 2010
30