0001140361-12-039517.txt : 20120905 0001140361-12-039517.hdr.sgml : 20120905 20120905173046 ACCESSION NUMBER: 0001140361-12-039517 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20120729 FILED AS OF DATE: 20120905 DATE AS OF CHANGE: 20120905 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHOTRONICS INC CENTRAL INDEX KEY: 0000810136 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 060854886 STATE OF INCORPORATION: CT FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15451 FILM NUMBER: 121074816 BUSINESS ADDRESS: STREET 1: 15 SECOR ROAD STREET 2: PO BOX 5226 CITY: BROOKFIELD STATE: CT ZIP: 06804 BUSINESS PHONE: 2037759000 MAIL ADDRESS: STREET 1: 15 SECOR ROAD STREET 2: P O BOX 5226 CITY: BROOKFIELD STATE: CT ZIP: 06804 FORMER COMPANY: FORMER CONFORMED NAME: PHOTRONIC LABS INC DATE OF NAME CHANGE: 19900514 10-Q 1 form10q.htm PHOTRONICS INC 10-Q 7-29-2012 form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended July 29, 2012
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

 Logo1
 
PHOTRONICS, INC.
(Exact name of registrant as specified in its charter)

Connecticut
 
06-0854886
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
15 Secor Road, Brookfield, Connecticut
 
06804
(Address of principal executive offices)
 
(Zip Code)
 
Registrant's telephone number, including area code
 
(203) 775-9000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer," "accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer o
Accelerated Filer x
Non-Accelerated Filer o
Smaller Reporting Company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No x

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

Class
 
Outstanding at August 30, 2012
Common Stock, $0.01 par value
 
60,455,107 Shares
 


 
 

 

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

 
2

 
 
PHOTRONICS, INC.
AND SUBSIDIARIES

 
PART I.
FINANCIAL INFORMATION
Page
 
   
Item 1.
Condensed Consolidated Financial Statements
 
 
   
 
4
 
   
 
5
 
   
 
6
     
 
7
 
 
 
 
8
 
   
Item 2.
20
 
   
Item 3.
25
 
   
Item 4.
26
 
   
PART II.
OTHER INFORMATION
 
 
   
Item 1A.
27
     
Item 6.
27
 
 
3

 
PART I.     FINANCIAL INFORMATION

Item 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PHOTRONICS, INC. AND SUBSIDIARIES
(in thousands, except per share amounts)
(unaudited)
 
   
July 29,
2012
   
October 30,
2011
 
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
  $ 197,295     $ 189,928  
Accounts receivable, net of allowance of $3,836 in 2012 and $4,055 in 2011
    82,522       85,540  
Inventories
    22,743       22,100  
Deferred income taxes
    616       609  
Other current assets
    7,578       7,030  
Total current assets
    310,754       305,207  
                 
Property, plant and equipment, net
    384,792       368,680  
Investment in joint venture
    93,271       79,984  
Intangible assets, net
    38,661       42,462  
Deferred income taxes
    11,749       11,239  
Other assets
    8,463       10,282  
Total assets
  $ 847,690     $ 817,854  
                 
LIABILITIES AND EQUITY
               
                 
Current liabilities:
               
Current portion of long-term borrowings
  $ 7,470     $ 5,583  
Accounts payable
    64,169       54,772  
Accrued liabilities
    26,799       35,546  
Total current liabilities
    98,438       95,901  
                 
Long-term borrowings
    170,989       152,577  
Deferred income taxes
    684       737  
Other liabilities
    7,612       8,883  
Total liabilities
    277,723       258,098  
                 
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, 60,137 shares issued and outstanding at July 29, 2012 and 59,651 at October 30, 2011
    601        597  
Additional paid-in capital
    491,731       486,674  
Retained earnings
    37,640       13,605  
Accumulated other comprehensive income
    2,408       10,171  
Total Photronics, Inc. shareholders' equity
    532,380       511,047  
Noncontrolling interests
    37,587       48,709  
Total equity
    569,967       559,756  
Total liabilities and equity
  $ 847,690     $ 817,854  

See accompanying notes to condensed consolidated financial statements.
 
 
4

 
PHOTRONICS, INC. AND SUBSIDIARIES
(in thousands, except per share amounts)
(unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
July 29,
2012
   
July 31,
2011
   
July 29,
2012
   
July 31,
2011
 
                         
Net sales
  $ 116,616     $ 135,935     $ 346,220     $ 389,861  
                                 
Costs and expenses:
                               
                                 
Cost of sales
    (84,312 )     (97,695 )     (258,598 )     (284,540 )
                                 
Selling, general and administrative
    (11,784 )     (11,833 )     (35,311 )     (33,995 )
                                 
Research and development
    (5,221 )     (3,527 )     (14,106 )     (11,238 )
                                 
Consolidation, restructuring and related charges
    (7 )     -       (1,182 )     -  
Operating income
    15,292       22,880       37,023       60,088  
                                 
Other income (expense):
                               
Debt extinguishment loss
    -       (4,973 )     -       (35,259 )
Interest expense
    (2,012 )     (1,907 )     (5,587 )     (5,499 )
Investment and other income (expense), net
    1,245       1,517       3,444       3,480  
Income before income taxes
    14,525       17,517       34,880       22,810  
                                 
Income tax provision
    (3,258 )     (4,895 )     (9,242 )     (11,637 )
Net income
    11,267       12,622       25,638       11,173  
                                 
Net income attributable to noncontrolling interests
    (317 )     (1,357 )     (1,603 )     (4,235 )
                                 
Net income attributable to Photronics, Inc.
  $ 10,950     $ 11,265     $ 24,035     $ 6,938  
Earnings per share:
                               
                                 
Basic
  $ 0.18     $ 0.19     $ 0.40     $ 0.12  
Diluted
  $ 0.16     $ 0.16     $ 0.37     $ 0.12  
Weighted-average number of common shares outstanding:
                               
                                 
Basic
    60,121       58,987       60,008       56,163  
Diluted
    76,436       76,744       76,460       57,724  
 
See accompanying notes to condensed consolidated financial statements.
 
 
5

 
PHOTRONICS, INC. AND SUBSIDIARIES
(in thousands)
(unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
July 29,
2012
   
July 31,
2011
   
July 29,
2012
   
July 31,
2011
 
                         
Net income
  $ 11,267     $ 12,622     $ 25,638     $ 11,173  
                                 
Other comprehensive income, net of tax of $0:
                               
                                 
Foreign currency translation adjustments
    (7,035 )     3,370       (7,445 )     23,157  
                                 
Amortization of cash flow hedge
    32       32       96       96  
                                 
Other comprehensive income (loss)
    (7,003 )     3,402       (7,349 )     23,253  
                                 
Comprehensive income
    4,264       16,024       18,289       34,426  
                                 
Less: comprehensive income (loss) attributable to noncontrolling interests
    (681 )     1,456       1,962       7,244  
                                 
Comprehensive income attributable to Photronics, Inc.
  $ 4,945     $ 14,568     $ 16,327     $ 27,182  
 
See accompanying notes to condensed consolidated financial statements.
 
 
6

 
PHOTRONICS, INC. AND SUBSIDIARIES
(in thousands)
(unaudited)
 
   
Nine Months Ended
 
   
July 29,
2012
   
July 31,
2011
 
             
Cash flows from operating activities:
           
Net income
  $ 25,638     $ 11,173  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    65,010       70,090  
Consolidation, restructuring and related charges
    262       -  
Debt extinguishment loss
    -       27,399  
Changes in assets and liabilities:
               
Accounts receivable
    2,324       (10,332 )
Inventories
    (961 )     (14,196 )
Other current assets
    (675 )     (1,154 )
Accounts payable, accrued liabilities and other
    15,926       21,471  
Net cash provided by operating activities
    107,524       104,451  
Cash flows from investing activities:
               
Purchases of property, plant and equipment
    (92,009 )     (59,089 )
Investment in joint venture
    (13,397 )     (10,773 )
Other
    (1,618 )     (250 )
Net cash used in investing activities
    (107,024 )     (70,112 )
Cash flows from financing activities:
               
Proceeds from long-term borrowings
    25,000       17,000  
Proceeds from issuance of convertible debt
    -       115,000  
Repayments of long-term borrowings
    (3,646 )     (63,445 )
Repurchase of common stock by subsidiary
    (11,653 )     (3,294 )
Payments of deferred financing fees
    (198 )     (4,318 )
Proceeds from exercise of share-based arrangements
    517       694  
Net cash provided by financing activities
    10,020       61,637  
Effect of exchange rate changes on cash
    (3,153 )     7,924  
Net increase in cash and cash equivalents
    7,367       103,900  
Cash and cash equivalents at beginning of period
    189,928       98,945  
Cash and cash equivalents at end of period
  $ 197,295     $ 202,845  
Supplemental disclosure of non-cash information:
               
                 
Accrual for property, plant and equipment purchased during period
  $ 3,008     $ 19,979  
Deposit related to facility purchase
    2,000       -  
Capital lease obligation for purchase of equipment
    -       21,248  
Common stock issued to extinguish debt
    -       20,234  
 
See accompanying notes to condensed consolidated financial statements.
 
 
7

 
PHOTRONICS, INC. AND SUBSIDIARIES
Three Months and Nine Months Ended July 29, 2012 and July 31, 2011
(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 eight manufacturing facilities, two of which are located in Europe, two in Taiwan, one in Korea, and three in the United States. The Company ceased manufacturing photomasks at its Singapore facility in December 2011.

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 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 28, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended October 30, 2011.
 
NOTE 2 - CHANGES IN EQUITY

The following tables set forth the Company's consolidated changes in equity for the three and nine month periods ended July 29, 2012 and July 31, 2011:
 
   
Three Months Ended July 29, 2012
   
Photronics, Inc. Shareholders
           
                           
Accumulated
           
         
Additional
         
Other
   
Non-
     
   
Common Stock
   
Paid-in
   
Retained
   
Comprehensive
   
controlling
   
Total
   
Shares
   
Amount
   
Capital
   
Earnings
   
Income
   
Interests
   
Equity
                                         
Balance at April 30, 2012
    60,106     $ 601     $ 490,350     $ 26,690     $ 8,431     $ 42,805     $ 568,877  
                                                         
Net income
    -       -       -       10,950       -       317       11,267  
Other comprehensive income (loss)
    -       -       -       -       (6,004 )     (999 )     (7,003 )
Sale of common stock through employee stock option and purchase plans
    8       -       18       -       -       -       18  
Restricted stock awards vesting and expense
    23       -       221       -       -       -       221  
Share-based compensation expense
    -       -       657       -       -       -       657  
Repurchase of common stock by subsidiary
    -       -       485       -       (19 )     (4,536 )     (4,070 )
Balance at July 29, 2012
    60,137     $ 601     $ 491,731     $ 37,640     $ 2,408     $ 37,587     $ 569,967  
 
 
8

 
   
Three Months Ended July 31, 2011
 
   
Photronics, Inc. Shareholders
             
                     
Retained
                   
                     
Earnings
   
Accumulated
             
         
Additional
   
(Accum-
   
Other
   
Non-
       
   
Common Stock
   
Paid-in
   
ulated
   
Comprehensive
   
controlling
   
Total
 
   
Shares
   
Amount
   
Capital
   
Deficit)
   
Income
   
Interests
   
Equity
 
                                           
Balance at May 2, 2011
    58,539     $ 585     $ 478,009     $ (6,951 )   $ 23,991     $ 56,981     $ 552,615  
                                                         
Net income
    -       -       -       11,265       -       1,357       12,622  
Other comprehensive income
    -       -       -       -       3,303       99       3,402  
Common stock issued to extinguish debt
    738       7       6,461       -       -       -       6,468  
Sale of common stock through
                                                       
employee stock option and
                                                       
purchase plans
    205       2       243       -       -       -       245  
Restricted stock awards vesting and expense
    28       1       341       -       -       -       342  
Share-based compensation expense
    -       -       385       -       -       -       385  
Balance at July 31, 2011
    59,510     $ 595     $ 485,439     $ 4,314     $ 27,294     $ 58,437     $ 576,079  

   
Nine Months Ended July 29, 2012
 
   
Photronics, Inc. Shareholders
             
                           
Accumulated
             
         
Additional
         
Other
   
Non-
       
   
Common Stock
   
Paid-in
   
Retained
   
Comprehensive
   
controlling
   
Total
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Income
   
Interests
   
Equity
 
                                           
Balance at October 31, 2011
    59,651     $ 597     $ 486,674     $ 13,605     $ 10,171     $ 48,709     $ 559,756  
                                                         
Net income
    -       -       -       24,035       -       1,603       25,638  
Other comprehensive income
    -       -       -       -       (7,708 )     359       (7,349 )
Sale of common stock through employee stock option and purchase plans
    211       2       255       -       -       -       257  
Restricted stock awards vesting and expense
    98       -       673       -       -       -       673  
Share-based compensation expense
    -       -       1,576       -       -       -       1,576  
Common stock warrants exercised
    177       2       1,051       -       -       -       1,053  
Repurchase of common stock by subsidiary
    -       -       1,502       -       (55 )     (13,084 )     (11,637 )
Balance at July 29, 2012
    60,137     $ 601     $ 491,731     $ 37,640     $ 2,408     $ 37,587     $ 569,967  
 
   
Nine Months Ended July 31, 2011
 
   
Photronics, Inc. Shareholders
             
                     
Retained
                   
                     
Earnings
   
Accumulated
             
         
Additional
   
(Accum-
   
Other
   
Non-
       
   
Common Stock
   
Paid-in
   
ulated
   
Comprehensive
   
controlling
   
Total
 
   
Shares
   
Amount
   
Capital
   
Deficit)
   
Income
   
Interests
   
Equity
 
                                           
Balance at November 1, 2010
    53,779     $ 538     $ 436,825     $ (2,624 )   $ 7,062     $ 54,142     $ 495,943  
                                                         
Net income
    -       -       -       6,938       -       4,235       11,173  
Other comprehensive income
    -       -       -       -       20,244       3,009       23,253  
Common stock issued to extinguish debt
    5,229       52       45,585       -       -       -       45,637  
Sale of common stock through employee stock option and purchase plans
    315       3       387       -       -       -       390  
Restricted stock awards vesting and expense
    65       1       763       -       -       -       764  
Share-based compensation expense
    -       -       1,050       -       -       -       1,050  
Common stock warrants exercised
    122       1       1,157       -       -       -       1,158  
Repurchase of common stock by subsidiary
    -       -       (328 )     -       (12 )     (2,949 )     (3,289 )
Balance at  July 31, 2011
    59,510     $ 595     $ 485,439     $ 4,314     $ 27,294     $ 58,437     $ 576,079  
 
 
9

 
NOTE 3 - JOINT VENTURE, TECHNOLOGY LICENSE AND OTHER AGREEMENTS WITH MICRON TECHNOLOGY, INC.
 
On May 5, 2006, Photronics and Micron Technology, Inc. ("Micron") entered into the MP Mask joint venture (“MP Mask”), 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 in Boise, Idaho, (headquarters of MP Mask) and Photronics invested $135 million in exchange for a 49.99% interest in MP Mask (to which $64.2 million of the original investment was allocated), a license for photomask technology of Micron, and certain supply agreements.
 
This joint venture is a variable interest entity ("VIE") (as that term is defined in the Accounting Standards Codification ("ASC")) because all costs of the joint venture are passed on to the Company and Micron through purchase agreements they have entered into with the joint venture, and it is dependent upon the Company and Micron for any additional cash requirements. On a quarterly basis the Company reassesses whether its interest in MP Mask gives it a controlling financial interest in this VIE. The purpose of this quarterly reassessment is to identify the primary beneficiary (which is defined in the ASC as the entity that consolidates a VIE) of the VIE. As a result of the reassessment in the current quarter, the Company determined that Micron is still the primary beneficiary of the VIE, by virtue of its tie-breaking voting rights within MP Mask’s Board of Managers, thereby giving it the power to direct the activities of MP Mask that most significantly impact its economic performance, including its decision making authority in the ordinary course of business and its purchasing the majority of products produced by the VIE.
 
The Company has utilized MP Mask for both high-end IC photomask production and research and development purposes. MP Mask charges its variable interest holders based on their actual usage of its facility. MP Mask separately charges for any research and development activities it engages in at the requests of its owners. The Company recorded cost of sales of $1.6 million and $5.7 million and research and development expenses of $0.2 million and $0.7 million during the three and nine month periods ended July 29, 2012. Cost of sales of $6.5 million and $14.8 million and research and development expenses of $0.2 million and $0.7 million were recorded during the three and nine month periods ended July 31, 2011.
 
MP Mask is governed by a Board of Managers, appointed by Micron and the Company. Since MP Mask's inception, Micron, as a result of its majority ownership, has held majority voting power on the Board of Managers. The voting power held by each party is subject to change as ownership interests change. Under the MP Mask joint venture operating agreement, the Company may be required to make additional capital contributions to MP Mask up to the maximum amount defined in the operating agreement. However, should the Board of Managers determine that further additional funding is required, MP Mask shall pursue its own financing. If MP Mask 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 MP Mask, its ownership percentage may be reduced. The Company increased its investment in the MP Mask joint venture by $7.4 million and $13.3 million during the three and nine month periods ended July 29, 2012, respectively. During the three and nine month periods ended July 31, 2011, the Company increased its investment in MP Mask by $0.5 million and $10.7 million, respectively. These investments were primarily related to capital calls made by the joint venture.
 
The Company's investment in the VIE, which represents its maximum exposure to loss, was $93.3 million at July 29, 2012, and $80.0 million at October 30, 2011. These amounts are reported in the Company's condensed consolidated balance sheets as "Investment in joint venture". The Company recorded income from its investment in the VIE of $0.6 million in the nine month period ended July 31, 2011, and recorded no income from its investment in the three month period ended July 31, 2011, or in the three or nine month periods ended July 29, 2012. Income from the VIE is included in "Investment and other income, net" in the condensed consolidated statements of income.
 
In the first quarter of 2008 a capital lease agreement with Micron commenced for the U.S. nanoFab facility in Boise, Idaho. Quarterly lease payments, which bore interest at 8%, were $3.8 million through January 2013. This lease was cancelled in the third fiscal quarter of 2009, at which time the Company and Micron (the lessor) entered into a new lease agreement for the facility. Under the provisions of the new lease agreement, quarterly lease payments were reduced from $3.8 million to $2.0 million, the term of the lease was extended from December 31, 2012 to December 31, 2014, and ownership of the property would not transfer to the Company at the end of the lease term. The interest rate of the new lease agreement remained at 8%.  As a result of the new lease agreement, the Company reduced its lease obligation and the carrying value of its assets under capital leases by approximately $28 million. The Company paid the capital lease obligation in full in April 2011 with a portion of the net proceeds of the March 2011 issuance of its 3.25% convertible senior notes.
 
In the second quarter of fiscal 2012 the Company paid $35 million to Micron in connection with the purchase of the U.S. nanoFab facility and the remaining term of the operating lease agreement through 2014 was cancelled. Also in connection with this purchase, the Company entered into a $25 million term loan agreement in the second quarter of fiscal 2012 (see Note 4 for further discussion).

 
10

 
NOTE 4 - LONG-TERM BORROWINGS

Long-term borrowings consist of the following:

   
July 29,
2012
   
October 30,
2011
 
             
3.25% convertible senior notes due on April 1, 2016
  $ 115,000     $ 115,000  
Term loan, which bears interest at a variable rate, as defined (2.5% at July 29, 2012)
     24,375        -  
5.5% convertible senior notes due on October 1, 2014
     22,054        22,054  
3.09% capital lease obligation payable through March 2016
     16,198        19,218  
4.75% financing loan with customer
    832       1,888  
      178,459       158,160  
Less current portion
    7,470       5,583  
    $ 170,989     $ 152,577  
 
In March 2012 the Company, in connection with its purchase of the U.S. nanoFab facility (see Note 3 for further discussion), amended its credit facility (“the credit facility”) to include the addition of a $25 million term loan maturing in March 2017 with minimum quarterly principal payments of $0.6 million (quarterly payments commenced in June 2012 and are based on a ten year repayment period). The amendment also included a twenty-five basis point reduction in the interest rate charged on any borrowings under the credit facility. The credit facility bears interest (2.5% at July 29, 2012), based on the Company’s total leverage ratio, at LIBOR plus a spread, as defined in the credit facility.
 
In March 2011 the Company issued through a private offering, pursuant to Rule 144A under the Securities Act of 1933, as amended, $115 million aggregate principal amount of 3.25% convertible senior notes. The notes mature on April 1, 2016, and note holders may convert each $1,000 principal amount of notes to 96.3879 shares of common stock (equivalent to an initial conversion price of $10.37 per share of common stock) at any time prior to the close of business on the second scheduled trading day immediately preceding April 1, 2016.  The conversion rate is subject to adjustment upon the occurrence of certain events, which are described in the indenture dated March 28, 2011.  The Company is not required to redeem the notes prior to their maturity date. Interest on the notes accrues in arrears, and is paid semiannually through the notes’ maturity date. Interest payments on the notes commenced on October 1, 2011. The net proceeds of the notes were approximately $110.7 million, which were used, in part, to acquire $35.4 million of the Company’s 5.5% convertible senior notes which were to mature on October 1, 2014, and to repay, in full, its then outstanding obligations under capital leases of $19.8 million.
 
In March 2011 the Company amended the credit facility which, as amended, included, among other things: i) a reduction of the aggregate commitments of the lenders from $65 million to $30 million; ii) a reduction of the applicable interest rates and modifications of the leverage ratios related thereto; iii) an extension of the maturity date to April 30, 2015; iv) an increase in the permitted amount of certain financed capital assets up to $75 million outstanding at any one time; v) an allowance to issue the 3.25% convertible senior notes; vi) an increase in the investments “basket” from $15 million to $25 million per year; vii) an allowance to repurchase the 5.5% convertible senior notes and other indebtedness and viii) removal of the limitation on maximum last twelve months capital expenditures.
 
The credit facility is secured by substantially all of the Company’s assets located in the United States, as well as common stock the Company owns in certain of its foreign subsidiaries, and is subject to the following financial covenants:  minimum fixed charge ratio, total leverage ratio and minimum unrestricted cash balance. As of July 29, 2012, the Company had no outstanding borrowings under the credit facility’s revolving loan and $30 million was available for borrowing.
 
In June 2011 the Company acquired $5.0 million of its 5.5% convertible senior notes in exchange for 0.7 million shares of its common stock, with a fair value of $6.5 million, and cash of $3.2 million (the note holders received 147.529 shares and cash of $647 for each $1,000 note). The Company, in connection with this repurchase, recorded an extinguishment loss of $5.0 million, which included the write off of deferred financing fees of $0.3 million. The loss is included in other income (expense) in the Company’s condensed consolidated statements of income.

 
11

 
In March 2011 the Company acquired $30.4 million of its 5.5% convertible senior notes in exchange for 4.5 million shares of its common stock, with a fair value of $39.2 million, and cash of $19.7 million (the note holders received 147.529 shares and cash of $647 for each $1,000 note). The Company, in connection with this repurchase, recorded an extinguishment loss of $30.1 million, which included the write off of deferred financing fees of $1.7 million. The loss is included in other income (expense) in the Company’s condensed consolidated statements of income.
 
In September 2009 the Company issued, through a public offering, $57.5 million aggregate principal amount of 5.5% convertible senior notes, which were to mature on October 1, 2014.  Under the terms of the offering, the note holders could convert each $1,000 principal amount of notes to 196.7052 shares of common stock (equivalent to an initial conversion price of $5.08 per share of common stock) on, or before, September 30, 2014.  The conversion rate is subject to adjustment upon the occurrence of certain events which are described in the indenture dated September 16, 2009.  The Company is not required to redeem the notes prior to their maturity.  The net proceeds of this offering were approximately $54.9 million, which were used to reduce amounts outstanding under the Company’s credit facility. As discussed above, $35.4 million aggregate principal amount of these notes were acquired by the Company during fiscal year 2011.

In April 2011 the Company entered into a five year, $21.2 million capital lease for manufacturing equipment. Payments under the lease, which bears interest at 3.09%, are $0.4 million per month through March 2016. The lease agreement provides that the Company must maintain the equipment in good working order, and includes a cross default with cross acceleration provision related to certain nonfinancial covenants incorporated in the Company's credit facility agreement. As of July 29, 2012, the total amount payable through the end of the lease term was $17.2 million, of which $16.2 million represented principal and $1.0 million represented interest.
 
In January 2010 the Company borrowed $3.7 million from a customer to purchase manufacturing equipment. This loan bears interest at 4.75% and is primarily being repaid with product supplied to the customer. Product valued at $0.4 million and $0.9 million was shipped to the customer and applied against the loan during the three and nine month periods ended July 29, 2012, respectively, and product valued at $0.3 million and $0.9 million was applied against the loan in the respective prior year periods. The Company estimates that the loan will be fully repaid in fiscal 2013.

NOTE 5 - COMMON STOCK WARRANTS
 
In September 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 in September 2014. Also in September 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 convertible debt offering of September 2009. 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 July 29, 2012, none of the warrants issued to Intel Capital Corporation had been exercised.
 
In conjunction with the May 2009 amendment to its then existing credit facility, the Company also entered into a warrant agreement with its lenders. See Note 6 for further discussion of these warrants.
 
NOTE 6 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
The Company utilizes derivative instruments to reduce its exposure to the effects of the variability of interest rates and foreign currencies on its financial performance when it believes such action is warranted. Historically, the Company has been a party to derivative instruments to hedge either the variability of cash flows of a prospective transaction or the fair value of a recorded asset or liability. In certain instances, the Company has designated these transactions as hedging instruments. However, whether or not a derivative was designated as being a hedging instrument, the Company's purpose for engaging in the derivative has always been for risk management (and not speculative) purposes. The Company historically has not been a party to a significant number of derivative instruments and does not expect its derivative activity to significantly increase in the foreseeable future.
 
In addition to the utilization of derivative instruments discussed above, the Company attempts to minimize its risk of foreign currency exchange rate variability by, whenever possible, procuring production materials within the same country that it will utilize the materials in manufacturing, and by selling to customers from manufacturing sites within the country in which the customers are located.

 
12

 
In May 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 remained outstanding, the Company had adjusted 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 approximated 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. During the three month period ended January 29, 2012, all of the 0.2 million of these warrants that remained outstanding were exercised. In connection with this exercise, the Company recognized a gain of $0.1 million, included in investment and other income (expense), net, in its condensed consolidated statements of income. During the three and nine month periods ended July 31, 2011, the Company recognized a gain of $0.2 million and a loss of $0.6 million, respectively, in connection with these warrants, which were also included in investment and other income (expense), net. See Note 5 for disclosures related to other common stock warrants.

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 July 29, 2012 and October 30, 2011.
 
Derivatives
               
Not Designated
         
as Hedging
     
Fair Value at
 
Instruments Under
     
July 29,
   
October 30,
 
ASC 815
 
Balance Sheet Location
 
2012
   
2011
 
 
               
Warrants on common stock
 
Other liabilities
  $ -     $ 1,147  

The table below presents the effect of derivative instruments on the Company's condensed consolidated statements of income for the three and nine month periods ended July 29, 2012 and July 31, 2011.
 
       
Amount of Gain (Loss) Recognized
 
Derivatives
     
Related to Derivative Instruments
 
Not Designated
               
as Hedging
 
Location of Gain (Loss)
 
Three Months Ended
   
Nine Months Ended
 
Instruments Under
 
Related to
 
July 29,
   
July 31,
   
July 29,
   
July 31,
 
ASC 815
 
Derivative Instruments
 
2012
   
2011
   
2012
   
2011
 
 
                           
Warrants on common stock
 
Investment and other income (expense), net
  $ -     $ 221     $ 94     $ (599 )

NOTE 7 - SHARE-BASED COMPENSATION
 
In March 2007 shareholders approved a new share-based compensation plan ("Plan"), under which options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance units, and other awards based on, or related to, shares of the Company's common stock may be granted from shares authorized but unissued or shares previously issued and reacquired by the Company. A maximum of six million shares of common stock may be issued under the Plan. Awards may be granted to officers, employees, directors, consultants, advisors, and independent contractors of the Company or its subsidiaries. In the event of a change in control (as defined in the Plan), the vesting of awards may be accelerated. The Plan, aspects of which are more fully described below, prohibits further awards from being issued under prior plans. The Company incurred total share-based compensation costs for the three and nine month periods ended July 29, 2012, of $0.9 million and $2.3 million, respectively, and $0.7 million and $1.8 million for the three and nine month periods ended July 31, 2011, respectively. The Company received cash from option exercises of $0.1 million and $0.3 million for the three and nine month periods ended July 29, 2012, respectively, and $0.2 million and $0.4 million for the three and nine month periods ended July 31, 2011, respectively. No share-based compensation cost was capitalized as part of an asset and no related income tax benefits were recorded during the periods presented.

 
13

 
Stock Options
 
Option awards generally vest in one to four years, and have a ten-year contractual term. All incentive and non-qualified stock option grants have an exercise price equal to the market value of the underlying common stock on the date of grant. The grant date fair values of options are based on closing prices of the Company’s common stock on the dates of grant using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of the Company's stock. The Company uses historical option exercise behavior and employee termination data to estimate expected term, which represents the period of time that the options granted are expected to remain outstanding. The risk-free rate of return for the estimated term of the option is based on the U.S. Treasury yield curve in effect at the date of grant. The weighted-average inputs and risk-free rate of return ranges used to calculate the grant date fair value of options issued during the three and nine month periods ended July 29, 2012 and July 31, 2011, are presented in the following table.
 
   
Three Months Ended
   
Nine Months Ended
 
   
July 29,
2012
   
July 31,
2011
   
July 29,
2012
   
July 31,
2011
 
                         
Expected volatility
  102.2%     N/A     102.1%     98.7%  
                         
Risk free rate of return
  0.6%     N/A     0.6% - 0.9%     1.0% - 1.9%  
                         
Dividend yield
  0.0%     N/A     0.0%     0.0%  
                         
Expected term
 
4.3 years
    N/A    
4.3 years
   
4.2 years
 

Information on outstanding and exercisable option awards as of July 29, 2012, is presented below.

 
 
 
 
Options
 
 
 
 
Shares
   
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
 
 
Aggregate
Intrinsic
Value
 
                     
Outstanding at July 29, 2012
     4,053,752     $ 8.29  
6.3 years
  $ 5,554  
 
                         
Exercisable at July 29, 2012
     2,266,521     $ 10.97  
4.8 years
  $ 3,013  

There were 30,000 share options granted during the three month period ended July 29, 2012, with a grant date fair value of $4.37 per share, and there were no share options granted during the three month period ended July 31, 2011. There were 554,500 share options granted during the nine month period ended July 29, 2012, with a weighted-average grant date fair value of $4.47 per share and 620,750 share options granted during the nine month period ended July 31, 2011, with a weighted-average grant date fair value of $4.75 per share. As of July 29, 2012, the total unrecognized compensation cost related to unvested option awards was approximately $4.2 million. That cost is expected to be recognized over a weighted-average amortization period of 2.6 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 granted during the three month period ended July 29, 2012, and 168,750 restricted stock awards were issued during the nine month period ended July 29, 2012, with a weighted-average grant date fair value of $6.28 per share. No restricted stock awards were granted during the three month period ended July 31, 2011, and 176,250 restricted stock awards were issued during the nine month period ended July 31, 2011, with a weighted-average grant date fair value of $6.71 per share. As of July 29, 2012, the total compensation cost not yet recognized related to unvested restricted stock awards was approximately $1.6 million. That cost is expected to be recognized over a weighted-average amortization period of 2.5 years. As of July 29, 2012, there were 262,314 shares of restricted stock outstanding.

 
14

 
NOTE 8 - CONSOLIDATION, RESTRUCTURING AND RELATED CHARGES
 
In the first quarter of fiscal 2012 the Company ceased the manufacture of photomasks at its Singapore facility and, in connection therewith, recorded charges of $1.2 million during the nine month period ended July 29, 2012. The Company expects that this restructuring will be completed in 2012, and expects its total cost to range between $1.5 million and $1.9 million, with that cost primarily being comprised of employee termination costs and asset write-downs. The following table sets forth the Company’s restructuring reserve primarily related to its Singapore facility as of July 29, 2012, and reflects the activity affecting the reserve for the three and nine month periods then ended.
 
   
Three Months Ended
   
Nine Months Ended
 
   
July 29, 2012
   
July 29, 2012
 
   
April 30,
2012
   
Charges
   
Utilized
   
July 29,
2012
   
October 31,
2011
   
Charges
   
Utilized
   
July 29,
2012
 
                                                 
Employee terminations and other
  $ 199     $ 7     $ (69 )   $ 137     $ -     $ 920     $ (783 )   $ 137  
Asset write-downs
     -        -        -        -        -        262       (262 )      -  
    $ 199     $ 7     $ (69 )   $ 137     $ -     $ 1,182     $ (1,045 )   $ 137  

NOTE 9 - INCOME TAXES
 
The effective income tax rates for the three and nine month periods ended July 29, 2012, differ from the U.S. statutory rate of 35% primarily due to changes in the deferred tax asset and valuation allowance, combined with income taxed at lower rates in non-U.S. jurisdictions. The effective income tax rates for the three and nine month periods ended July 31, 2011, differ from the U.S. statutory rate primarily due to the impact of the non-deductible debt extinguishment losses recorded in the second and third quarters of fiscal 2011, combined with income taxed at lower rates in non-U.S. jurisdictions, which were offset by the impact of a foreign subsidiary’s tax settlement in the three month period ended July 31, 2011. Entities within certain jurisdictions are excluded from the Company’s effective income tax rate if they are projected to generate a loss for the year and the tax benefits of such losses are not anticipated to be realized in the foreseeable future.

The net liability for unrecognized tax benefits included in the condensed balance sheets at July 29, 2012 and October 30, 2011, is $3.9 million and $1.9 million respectively, $2.0 million and $1.9 million which if recognized, would reduce the Company’s effective tax rate.  In the nine month period ended July 29, 2012, the Company recorded gross unrecognized tax benefits of $1.9 million, related to tax return filing positions claimed in the current period. These unrecognized tax benefits did not have a material impact on the effective tax rate, as the corresponding tax benefits were offset by a previously recorded valuation allowance.
 
PKLT, the Company’s FPD manufacturing facility in Taiwan, is accorded a tax holiday which commences in 2012 and expires in 2017.  Due to PKLT’s current tax loss position, the tax holiday did not impact the Company’s 2012 effective tax rate, and had no dollar or per share effect in the three or nine month periods ended July 29, 2012 and July 31, 2011.

 
15

 
NOTE 10 - EARNINGS PER SHARE
 
The calculation of basic and diluted earnings per share is presented below.
 
   
Three Months Ended
   
Nine Months Ended
 
   
July 29,
2012
   
July 31,
2011
   
July 29,
2012
   
July 31,
2011
 
                         
Net income attributable to Photronics, Inc.
  $ 10,950     $ 11,265     $ 24,035     $ 6,938  
Effect of dilutive securities:
                               
Interest expense on convertible notes, net of related tax effects
     1,542        1,595        4,626        -  
Gains related to common stock warrants fair value adjustment
     -       (221 )     (94 )      -  
Earnings for diluted earnings per share
  $ 12,492     $ 12,639     $ 28,567     $ 6,938  
Weighted-average common shares computations:
                               
Weighted-average common shares used for basic earnings per share
     60,121        58,987        60,008        56,163  
Effect of dilutive securities:
                               
Convertible notes
    15,423       15,909       15,423       -  
Share-based payment awards
    707       1,314       789       1,252  
Common stock warrants
    185       534       240       309  
Potentially dilutive common shares
    16,315       17,757       16,452       1,561  
Weighted-average common shares used for diluted earnings per share
     76,436        76,744        76,460        57,724  
                                 
Basic earnings per share
  $ 0.18     $ 0.19     $ 0.40     $ 0.12  
Diluted earnings per share
  $ 0.16     $ 0.16     $ 0.37     $ 0.12  

The table below shows the outstanding weighted-average share-based payment awards and common stock warrants that were excluded from the calculation of diluted earnings per share because their exercise price exceeded the average market value of the common shares for the period or, under application of the treasury stock method, they were otherwise determined to be anti-dilutive. The table also shows convertible notes that, if converted, would have been anti-dilutive.

   
Three Months Ended
   
Nine Months Ended
 
   
July 29,
2012
   
July 31,
2011
   
July 29,
2012
   
July 31,
2011
 
                         
Share-based payment awards
    2,616       2,206       2,546       2,412  
Convertible notes
    -       -       -       13,519  
Common stock warrants
    -       -       -       225  
Total potentially dilutive shares excluded
    2,616       2,206       2,546       16,156  

 
16

 
NOTE 11 – GEOGRAPHIC INFORMATION

The Company operates as a single operating segment as a manufacturer of photomasks, which are high precision quartz plates containing microscopic images of electronic circuits for use in the fabrication of ICs and FPDs. Geographic net sales are based primarily on where the Company's manufacturing facility is located. The Company's net sales by geographic area and for ICs and FPDs for the three and nine month periods ended July 29, 2012 and July 31, 2011, and its long-lived assets by geographic area as of July 29, 2012, and October 30, 2011, are presented below.

   
Three Months Ended
   
Nine Months Ended
 
   
July 29,
2012
   
July 31,
2011
   
July 29,
2012
   
July 31,
2011
 
Net sales
                       
Asia
  $ 71,707     $ 80,051     $ 211,880     $ 238,224  
Europe
    10,639       11,833       31,372       35,643  
North America
    34,270       44,051       102,968       115,994  
    $ 116,616     $ 135,935     $ 346,220     $ 389,861  
                                 
IC
  $ 90,269     $ 104,891     $ 266,185     $ 294,691  
FPD
    26,347       31,044       80,035       95,170  
    $ 116,616     $ 135,935     $ 346,220     $ 389,861  
 
   
As of
 
   
July 29,
2012
   
October 30,
2011
 
Long-lived assets
           
Asia
  $ 191,506     $ 197,956  
Europe
    9,534       10,879  
North America
    183,752       159,845  
    $ 384,792     $ 368,680  
 
The Company is typically impacted during its first fiscal quarter by the North American and European holiday periods, as some customers reduce their effective workdays and orders during these periods. Additionally, the Company can be impacted during its first or second quarter by the Asian New Year holiday period, which may also reduce customer orders.

NOTE 12 - FAIR VALUE MEASUREMENTS
 
The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers as follows: Level 1, defined as quoted market prices in active markets for identical securities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly; and Level 3, defined as unobservable inputs that are not corroborated by market data.
 
 
17

 
Assets and Liabilities Measured at Fair Value on a Recurring Basis

The table below presents assets and liabilities as of October 30, 2011, that are measured at fair value on a recurring basis. The Company did not have any assets or liabilities measured at fair value on a recurring basis as of July 29, 2012.

   
October 30, 2011
 
   
Quoted
Prices
in Active
Markets
for Identical
Instruments
(Level 1)
   
 
Significant
Other
Observable
Inputs
(Level 2)
   
 
 
Significant
Unobservable
Inputs
(Level 3)
   
 
 
 
 
 
Total
 
                         
Common stock warrants (liability)
  $ -     $ 1,147     $ -     $ 1,147  
Total liabilities
  $ -     $ 1,147     $ -     $ 1,147  

The fair value of the common stock warrants liability was determined using the Black-Scholes option pricing model. A significant observable input into the model included the market price of the Company's common stock at the measurement date. Gains or losses related to fair value adjustments to the common stock warrants liability are included in other income (expense), net.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company did not have any nonfinancial assets or liabilities measured at fair value on a nonrecurring basis as of July 29, 2012 and October 30, 2011.

Fair Value of Other Financial Instruments

The fair values of the Company's cash and cash equivalents (Level 1 measurements), accounts receivable, accounts payable, and certain other current assets and current liabilities (Level 2 measurements) approximate their carrying value due to their short-term maturities. The fair value of the Company’s financing loan with a customer is a Level 2 measurement that approximates its carrying value due to its short-term maturity. The fair value of the Company’s variable rate term loan is a Level 2 measurement and approximates its carrying value due to the variable nature of the underlying interest rates. The fair value of the Company’s convertible senior notes is a Level 2 measurement that is determined using recent bid prices. The table below presents the fair and carrying values of the Company’s convertible senior notes at July 29, 2012 and October 30, 2011.

   
July 29, 2012
   
October 30, 2011
 
   
Fair Value
   
Carrying Value
   
Fair Value
   
Carrying Value
 
                         
3.25% convertible senior notes
  $ 113,758     $ 115,000     $ 109,260     $ 115,000  
5.5% convertible senior notes
  $ 31,740     $ 22,054     $ 32,791     $ 22,054  

 
18

 
NOTE 13 - SUBSIDIARY SHARE REPURCHASE
 
Since the second quarter of fiscal 2011, the board of directors of Photronics Semiconductor Mask Corporation (PSMC), a subsidiary of the Company based in Taiwan, authorized several share repurchase programs for PSMC to purchase for retirement shares of its outstanding common stock. During the three and nine month periods ended July 29, 2012, PSMC purchased 9.1 million and 27.1 million shares, respectively, at a cost of $4.1 million and $11.7 million, respectively and, during the nine month period ended July 31, 2011, PSMC purchased 7.7 million shares at a cost of $3.3 million. These repurchase programs increased the Company’s ownership in PSMC to 59.14% at July 31, 2011, to 62.25% at October 30, 2011, and to 69.40% at July 29, 2012.
 
The table below presents the effect of the change in the Company’s ownership interest in PSMC on the Company's equity for the three and nine month periods ended July 29, 2012 (9.1 million and 27.1 million shares of common stock of PSMC repurchased, respectively) and July 31, 2011 (7.7 million shares of PSMC stock repurchased).

   
Three Months Ended
   
Nine Months Ended
 
   
July 29,
2012
   
July 31,
2011
   
July 29,
2012
   
July 31,
2011
 
                         
Net income attributable to Photronics, Inc.
  $ 10,950     $ 11,265     $ 24,035     $ 6,938  
                                 
Increase (decrease) in Photronics, Inc.'s additional paid-in capital
    485       -       1,502       (328 )
                                 
Decrease in accumulated other comprehensive income
    (19 )      -       (55 )      -  
                                 
Change from net income attributable to Photronics, Inc. and transfer from noncontrolling interest
  $ 11,416     $ 11,265     $ 25,482     $ 6,610  

Subsequent to the quarter ended July 29, 2012, PSMC completed its most recent share repurchase program in August 2012 with the repurchase of an additional 6.2 million shares for $2.7 million, which increased the Company’s ownership in PSMC to 71.28%.
 
NOTE 14 - COMMITMENTS AND CONTINGENCIES

As of July 29, 2012, the Company had commitments outstanding for capital expenditures of approximately $86 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 effect on its condensed consolidated financial statements.

NOTE 15 - RECENT ACCOUNTING PRONOUNCEMENTS
 
There have been no recent accounting pronouncements whose adoption would affect the Company’s financial statements or related disclosures.

 
19

 
 
Overview

Management's discussion and analysis ("MD&A") of the Company's financial condition, results of operations and outlook should be read in conjunction with its condensed consolidated financial statements and related notes. Various segments of this MD&A contain forward-looking statements, all of which are presented based on current expectations and may be adversely affected by uncertainties and risk factors (presented throughout this filing and in the Company's Annual Report on Form 10-K for the fiscal 2011 year), that may cause actual results to materially differ from these expectations.

The Company sells substantially all of its photomasks to semiconductor designers and manufacturers, and manufacturers of FPDs. Photomask technology is also being applied to the fabrication of other higher performance electronic products such as photonics, micro-electronic mechanical systems and certain nanotechnology applications. Thus, the Company's selling cycle is tightly interwoven with the development and release of new semiconductor designs and flat panel applications, particularly as it relates to the semiconductor industry's migration to more advanced design methodologies and fabrication processes. The Company believes that the demand for photomasks primarily depends on design activity rather than sales volumes from products produced using photomask technologies. Consequently, an increase in semiconductor or FPD sales does not necessarily result in a corresponding increase in photomask sales. However, the reduced use of customized ICs, reductions in design complexity, other changes in the technology or methods of manufacturing or designing semiconductors, or a slowdown in the introduction of new semiconductor or FPD designs could reduce demand for photomasks even if demand for semiconductors and FPDs increases. Advances in semiconductor, FPD 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 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, mobile communications and 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 for IC photomasks and two to three weeks for FPD photomasks. The Company cannot predict the timing of the industry's transition to volume production of next generation technology nodes or the timing of up and down cycles with precise accuracy, but believes that such transitions and cycles will continue into the future, beneficially and adversely affecting its business, financial condition and operating results in the near term. The Company believes its ability to remain successful in these environments is dependent upon achieving its goals of being a service and technology leader and efficient solutions supplier, which it believes should enable it to continually reinvest in its global infrastructure.

 
20

 
Material Changes in Results of Operations
Three and Nine Months ended July 29, 2012 and July 31, 2011
 
The following table represents selected operating information expressed as a percentage of net sales.

   
Three Months Ended
   
Nine Months Ended
 
   
July 29,
2012
   
July 31,
2011
   
July 29,
2012
   
July 31,
2011
 
                         
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales
    (72.3 )     (71.9 )     (74.7 )     (73.0 )
Gross margin
    27.7       28.1       25.3       27.0  
Selling, general and administrative expenses
    (10.1 )     (8.7 )     (10.2 )     (8.7 )
Research and development expenses
    (4.5 )     (2.6 )     (4.1 )     (2.9 )
Consolidation, restructuring and related charges
    -       -       (0.3 )     -  
Operating income
    13.1       16.8       10.7       15.4  
Debt extinguishment loss
    -       (3.6 )     -       (9.0 )
Other expense, net
    (0.6 )     (0.3 )     (0.6 )     (0.5 )
Income before income taxes
    12.5       12.9       10.1       5.9  
Income tax provision
    (2.8 )     (3.6 )     (2.7 )     (3.0 )
Net income
    9.7       9.3       7.4       2.9  
Net income attributable to noncontrolling interests
    (0.3 )     (1.0 )     (0.5 )     (1.1 )
Net income attributable to Photronics, Inc.
    9.4 %     8.3 %     6.9 %     1.8 %
 
Note: All of the following tabular comparisons, unless otherwise indicated, are for the three months ended July 29, 2012 (Q3-12) and July 31, 2011 (Q3-11) and for the nine months ended July 29, 2012 (YTD-12) and July 31, 2011 (YTD-11), in millions of dollars.

Net Sales

   
Three Months Ended
   
Nine Months Ended
 
      Q3-12       Q3-11    
Percent
Change
   
YTD-12
   
YTD-11
   
Percent
Change
 
                                         
IC
  $ 90.3     $ 104.9       (13.9 )%   $ 266.2     $ 294.7       (9.7 )%
FPD
    26.3       31.0       (15.1 )%     80.0       95.2       (15.9 )%
Total net sales
  $ 116.6     $ 135.9       (14.2 )%   $ 346.2     $ 389.9       (11.2 )%
 
Net sales for Q3-12 decreased 14.2% to $116.6 million as compared to $135.9 million for Q3-11. The decrease was primarily due to reduced demand for both IC and FPD photomasks as a result of a general slowdown in the semiconductor industry. Revenues attributable to high-end products decreased by $3.8 million to $44.7 million in Q3-12 as compared to $48.5 million in Q3-11. High-end photomask applications include mask sets for 45 nanometer and below for IC products, and G8 and above and active matrix organic light-emitting diode (AMOLED) display screen technologies for FPD products. By geographic area, net sales in Q3-12, as compared to Q3-11, decreased by $8.3 million or 10.4% in Asia, decreased by $9.8 million or 22.2% in North America, and decreased by $1.2 million or 10.1% in Europe. As a percent of total sales, net sales in Q3-12 in Asia were 61%, North America 29% and Europe 10%, and in Q3-11 in Asia were 59%, North America 32%, and Europe 9%.

 
21

 
Net sales for YTD-12 decreased 11.2% to $346.2 million as compared to $389.9 million for YTD-11. The decrease was primarily due to a decrease in demand for mainstream products due to a slowdown in the industry, which was partially offset by increased demand for high-end IC products. Revenues attributable to high-end products increased by $17.5 million to $138.1 million in YTD-12 as compared to $120.6 million in YTD-11 due to increased IC product demand. The Company’s quarterly revenues can be affected by the seasonal purchasing of its customers.
 
Gross Margin

   
Three Months Ended
   
Nine Months Ended
 
      Q3-12       Q3-11    
Percent
Change
   
YTD-12
   
YTD-11
   
Percent
Change
 
                                         
Gross margin
  $ 32.3     $ 38.2       (15.5 )%   $ 87.6     $ 105.3       (16.8 )%
Percentage of net sales
    27.7 %     28.1 %             25.3 %     27.0 %        
 
Gross margin percentage decreased to 27.7% in Q3-12 from 28.1% in Q3-11 and decreased to 25.3% in YTD-12 from 27.0% in YTD-11. These decreases were a result of the decreases in sales from the prior year periods, as the Company operates in a high fixed cost environment.  To the extent that the Company's revenues and utilization increase or decrease, gross margin will generally be positively or negatively impacted. The decreases in gross margins as a result of decreases in sales were partially offset by reduced manufacturing expenses related to the Singapore restructuring and the purchase of the U.S. nanoFab facility.

Selling, General and Administrative Expenses

   
Three Months Ended
   
Nine Months Ended
 
      Q3-12        Q3-11    
Percent
Change
   
YTD-12