0001140361-13-024132.txt : 20130605 0001140361-13-024132.hdr.sgml : 20130605 20130605144653 ACCESSION NUMBER: 0001140361-13-024132 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20130428 FILED AS OF DATE: 20130605 DATE AS OF CHANGE: 20130605 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: 13893929 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 4-28-2013 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 April 28, 2013
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___ to ___
 
Commission file number 0-15451
 
 
 
PHOTRONICS, INC.
(Exact name of registrant as specified in its charter)

Connecticut
 
06-0854886
(State or other jurisdiction 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 May 31, 2013
Common Stock, $0.01 par value
 
60,967,777 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 or in other documents filed with the Securities and Exchange Commission, in press releases or in the Company's communications and discussions with investors and analysts in the normal course of business through meetings, phone calls, or conference calls regarding, among other things, the consummation and benefits of future transactions and acquisitions, expectations with respect to future sales, financial performance, operating efficiencies, or product expansion, are subject to known and unknown risks, uncertainties, and contingencies, many of which are beyond the control of the Company. Various factors may cause actual results, performance, or achievements to differ materially from anticipated results, performance, or achievements expressed or implied by forward-looking statements. Factors that might affect forward-looking statements include, but are not limited to, overall economic and business conditions; economic and political conditions in international markets; the demand for the Company's products; competitive factors in the industries and geographic markets in which the Company competes; federal, state and international tax requirements (including tax rate changes, new tax laws and revised tax law interpretations); interest rate and other capital market conditions, including changes in the market price of the Company's securities; foreign currency exchange rate fluctuations; changes in technology; the timing, impact, and other uncertainties of future transactions and acquisitions, divestitures and joint ventures as well as decisions the Company may make in the future regarding the Company’s business, capital and organizational structure and other matters; the seasonal and cyclical nature of the semiconductor and flat panel display industries; management changes; damage or destruction to the Company's facilities, or the facilities of its customers or suppliers, by natural disasters, labor strikes, political unrest, or terrorist activity; the ability of the Company to (i) place new equipment in service on a timely basis; (ii) obtain additional financing; (iii) achieve anticipated synergies and cost savings; (iv) fully utilize its tools; (v) achieve desired yields, pricing, product mix, and market acceptance of its products and (vi) obtain necessary export licenses. Any forward-looking statements should be considered in light of these factors. Accordingly, there is no assurance that the Company's expectations will be realized. The Company does not assume responsibility for the accuracy and completeness of the forward-looking statements and does not assume an obligation to provide revisions to any forward-looking statements, except as otherwise required by securities laws.

 
2

 
 
PHOTRONICS, INC.
AND SUBSIDIARIES

INDEX

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.
 
26
       
Item 6.
 
27

 
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)
 
   
April 28,
2013
   
October 28,
2012
 
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
  $ 210,552     $ 218,043  
Accounts receivable, net of allowance of $3,468 in 2013 and $3,902 in 2012
    82,715       75,685  
Inventories
    18,585       17,702  
Other current assets
    9,525       8,364  
Total current assets
    321,377       319,794  
                 
Property, plant and equipment, net
    410,757       380,808  
Investment in joint venture
    93,050       93,252  
Intangible assets, net
    36,776       37,384  
Deferred income taxes
    11,169       11,395  
Other assets
    7,730       6,601  
Total assets
  $ 880,859     $ 849,234  
                 
LIABILITIES AND EQUITY
               
                 
Current liabilities:
               
Current portion of long-term borrowings
  $ 10,473     $ 7,781  
Accounts payable
    79,432       53,031  
Accrued liabilities
    24,493       24,701  
Total current liabilities
    114,398       85,513  
                 
Long-term borrowings
    169,348       168,956  
Other liabilities
    9,665       8,764  
Total liabilities
    293,411       263,233  
                 
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, 60,598 shares issued and outstanding at April 28, 2013 and 60,213 at October 28, 2012
    606         602  
Additional paid-in capital
    496,204       493,411  
Retained earnings
    48,660       41,473  
Accumulated other comprehensive income
    11,416       15,900  
Total Photronics, Inc. shareholders' equity
    556,886       551,386  
Noncontrolling interests
    30,562       34,615  
Total equity
    587,448       586,001  
Total liabilities and equity
  $ 880,859     $ 849,234  

See accompanying notes to condensed consolidated financial statements.

 
4

 
PHOTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
   
April 28,
2013
   
April 29,
2012
   
April 28,
2013
   
April 29,
2012
 
                         
Net sales
  $ 106,680     $ 117,451     $ 206,519     $ 229,605  
                                 
Costs and expenses:
                               
                                 
Cost of sales
    (81,891 )     (87,590 )     (160,632 )     (174,286 )
                                 
Selling, general and administrative
    (12,151 )     (12,201 )     (23,218 )     (23,526 )
                                 
Research and development
    (4,556 )     (4,441 )     (9,395 )     (8,885 )
                                 
Consolidation, restructuring and related charges
    -       (58 )     -       (1,176 )
Operating income
    8,082       13,161       13,274       21,732  
                                 
Other income (expense):
                               
Interest expense
    (1,909 )     (1,795 )     (3,796 )     (3,575 )
Interest and other income (expense), net
    993       827       2,289       2,198  
Income before income tax provision
    7,166       12,193       11,767       20,355  
                                 
Income tax provision
    (1,724 )     (2,663 )     (3,466 )     (5,984 )
Net income
    5,442       9,530       8,301       14,371  
                                 
Net income attributable to noncontrolling
                               
interests
    (579 )     (712 )     (1,114 )     (1,285 )
                                 
Net income attributable to Photronics, Inc. shareholders
  $ 4,863     $ 8,818     $ 7,187     $ 13,086  
Earnings per share:
                               
                                 
Basic
  $ 0.08     $ 0.15     $ 0.12     $ 0.22  
Diluted
  $ 0.08     $ 0.14     $ 0.12     $ 0.21  
Weighted-average number of common shares outstanding:
                               
                                 
Basic
    60,493       60,086       60,385       59,952  
Diluted
    61,501       76,590       61,298       76,472  

See accompanying notes to condensed consolidated financial statements.

 
5


PHOTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
   
April 28,
2013
   
April 29,
2012
   
April 28,
2013
   
April 29,
2012
 
                         
Net income
  $ 5,442     $ 9,530     $ 8,301     $ 14,371  
                                 
Other comprehensive income (loss), net of tax of $0:
                               
                                 
Foreign currency translation adjustments
    (13,104 )     741       (4,963 )     (412 )
                                 
Amortization of cash flow hedge
    32       32       64       64  
                                 
Other
    14       -       10       -  
Other comprehensive income (loss)
    (13,058 )     773       (4,889 )     (348 )
Comprehensive income (loss)
    (7,616 )     10,303       3,412       14,023  
                                 
Less: comprehensive income (loss) attributable to noncontrolling interests
    (82 )     1,795       682       2,642  
Comprehensive income (loss) attributable to Photronics, Inc. shareholders
  $ (7,534 )   $ 8,508     $ 2,730     $ 11,381  

See accompanying notes to condensed consolidated financial statements.

 
6

 
PHOTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

   
Six Months Ended
 
   
April 28,
2013
   
April 29,
2012
 
             
Cash flows from operating activities:
           
Net income
  $ 8,301     $ 14,371  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    37,490       44,135  
Consolidation, restructuring and related charges
    -       262  
Changes in assets and liabilities:
               
Accounts receivable
    (8,086 )     (2,829 )
Inventories
    (1,063 )     1,622  
Other current assets
    (1,572 )     (698 )
Accounts payable, accrued liabilities and other
    864       5,536  
Net cash provided by operating activities
    35,934       62,399  
Cash flows from investing activities:
               
Purchases of property, plant and equipment
    (31,866 )     (67,626 )
Investment in joint venture
    -       (5,899 )
Other
    (2,822 )     (1,600 )
Net cash used in investing activities
    (34,688 )     (75,125 )
Cash flows from financing activities:
               
Proceeds from long-term borrowings
    -       25,000  
Repayments of long-term borrowings
    (3,319 )     (2,343 )
Repurchase of common stock by subsidiary
    (4,190 )     (7,577 )
Proceeds from share-based arrangements
    588       431  
Payments of deferred financing fees
    (40 )     (198 )
Net cash provided by (used in) financing activities
    (6,961 )     15,313  
Effect of exchange rate changes on cash and cash equivalents
    (1,776 )     (555 )
Net increase (decrease) in cash and cash equivalents
    (7,491 )     2,032  
Cash and cash equivalents at beginning of period
    218,043       189,928  
Cash and cash equivalents at end of period
  $ 210,552     $ 191,960  
Supplemental disclosure of non-cash information:
               
                 
Accrual for property, plant and equipment purchased during the period
  $ (32,502 )   $ (2,549 )
Deposit related to facility purchase
    -       2,000  

See accompanying notes to condensed consolidated financial statements.

 
7

 
PHOTRONICS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three Months and Six Months Ended April 28, 2013 and April 29, 2012
(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 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 November 3, 2013. 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 28, 2012.

NOTE 2 - CHANGES IN EQUITY

The following tables set forth the Company's consolidated changes in equity for the three and six month periods ended April 28, 2013 and April 29, 2012:

   
Three Months Ended April 28, 2013
 
   
Photronics, Inc. Shareholders
             
                                           
                           
Accumulated
             
         
Additional
         
Other
   
Non-
       
   
Common Stock
   
Paid-in
   
Retained
   
Comprehensive
   
controlling
   
Total
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Income
   
Interests
   
Equity
 
                                           
Balance at January 28, 2013
    60,362     $ 603     $ 494,984     $ 43,797     $ 23,812     $ 30,645     $ 593,841  
                                                         
Net income
    -       -       -       4,863       -       579       5,442  
Other comprehensive loss
    -       -       -       -       (12,396 )     (662 )     (13,058 )
Sale of common stock through employee stock option and purchase plans
    212       2       281       -       -       -       283  
Restricted stock awards vesting and expense
    24       1       340       -       -       -       341  
Share-based compensation expense
    -       -       599       -       -       -       599  
Balance at April 28, 2013
    60,598     $ 606     $ 496,204     $ 48,660     $ 11,416     $ 30,562     $ 587,448  

 
8

 
   
Three Months Ended April 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 January 30, 2012
    60,015     $ 600     $ 488,674     $ 17,873     $ 8,773     $ 48,526     $ 564,446  
                                                         
Net income
    -       -       -       8,818       -       712       9,530  
Other comprehensive income (loss)
    -       -       -       -       (310 )     1,083       773  
Sale of common stock through employee stock option and purchase plans
    81       1       94       -       -       -       95  
Restricted stock awards vesting and expense
    10       -       210       -       -       -       210  
Share-based compensation expense
    -       -       506       -       -       -       506  
Repurchase of common stock by subsidiary
    -       -       866       -       (32 )     (7,516 )     (6,682 )
Balance at April 29, 2012
    60,106     $ 601     $ 490,350     $ 26,691     $ 8,431     $ 42,805     $ 568,878  
 
   
Six Months Ended April 28, 2013
 
   
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 29, 2012
    60,213     $ 602     $ 493,411     $ 41,473     $ 15,900     $ 34,615     $ 586,001  
                                                         
Net income
    -       -       -       7,187       -       1,114       8,301  
Other comprehensive loss
    -       -       -       -       (4,457 )     (432 )     (4,889 )
Sale of common stock through employee stock option and purchase plans
    289       3       390       -       -       -       393  
Restricted stock awards vesting and expense
    96       1       610       -       -       -       611  
Share-based compensation expense
    -       -       1,214       -       -       -       1,214  
Repurchase of common stock by subsidiary
    -       -       579       -       (27 )     (4,735 )     (4,183 )
Balance at April 28, 2013
    60,598     $ 606     $ 496,204     $ 48,660     $ 11,416     $ 30,562     $ 587,448  

 
9

 
   
Six Months Ended April 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
    -       -       -       13,086       -       1,285       14,371  
Other comprehensive income (loss)
    -       -       -       -       (1,705 )     1,357       (348 )
Sale of common stock through employee stock option and purchase plans
    203       2       237       -       -       -       239  
Restricted stock awards vesting and expense
    75       -       452       -       -       -       452  
Share-based compensation expense
    -       -       919       -       -       -       919  
Common stock warrants exercised
    177       2       1,051       -       -       -       1,053  
Repurchase of common stock by subsidiary
    -       -       1,017       -       (35 )     (8,546 )     (7,564 )
Balance at April 29, 2012
    60,106     $ 601     $ 490,350     $ 26,691     $ 8,431     $ 42,805     $ 568,878  

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

   
April 28,
2013
   
October 28,
2012
 
 
           
Land
  $ 8,506     $ 8,538  
Buildings and improvements
    102,207       101,409  
Machinery and equipment
    1,180,839       1,197,854  
Leasehold improvements
    4,128       5,854  
Furniture, fixtures and office equipment
    12,885       13,484  
Construction in progress
    84,362       26,642  
      1,392,927       1,353,781  
Less accumulated depreciation and amortization
    982,170       972,973  
    $ 410,757     $ 380,808  

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

   
April 28,
2013
   
October 28,
2012
 
 
           
Machinery and equipment
  $ 21,327     $ 21,327  
Construction in progress
    6,916       -  
      28,243       21,327  
Less accumulated amortization
    3,824       2,758  
    $ 24,419     $ 18,569  

 
10

 
Depreciation expense for property, plant and equipment (excluding equipment under capital leases) was $16.1 million and $33.1 million for the three and six month periods ended April 28, 2013, respectively, and $18.7 million and $37.1 million for the three and six month periods ended April 29, 2012, respectively. Amortization expense for equipment under capital leases was $0.5 million and $1.0 million for the three and six month periods ended April 28, 2013, respectively and $1.2 million and $3.8 million for the three and six month periods ended April 29, 2012, respectively.

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

In May 2006, Photronics and Micron Technology, Inc. ("Micron") entered into the MP Mask joint venture (“MP Mask”), which 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 $3.5 million and $5.4 million and research and development expenses of $0.2 million and $0.5 million during the three and six month periods ended April 28, 2013. Cost of sales of $2.1 million and $4.1 million and research and development expenses of $0.2 million and $0.5 million were recorded during the three and six month periods ended April 29, 2012. As of April 28, 2013 and October 28, 2012, the Company owed MP Mask $5.5 million and $6.4 million, respectively, and had a receivable from Micron of $7.9 million and $9.0 million, respectively, both primarily related to the aforementioned supply agreements.

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 $5.4 million and $5.8 million during the three and six month periods ended April 29, 2012, respectively. These investments were primarily related to capital calls made by the joint venture. The Company did not make any capital contributions to the joint venture during the six month period ended April 28, 2013, and did not receive any distributions from the joint venture during the six month periods ended April 28, 2013 and April 29, 2012.

The Company's investment in the VIE, which represents its maximum exposure to loss, was $93.1 million at April 28, 2013, and $93.3 million at October 28, 2012. These amounts are reported in the Company's condensed consolidated balance sheets as "Investment in joint venture". The Company recorded a loss from its investment in the VIE of $0.2 million in the six month period ended April 28, 2013, and recorded no income from its investment in the three month period ended April 28, 2013, or in the three or six month periods ended April 29, 2012. Income from the VIE is included in "Interest and other income (expense), net" in the condensed consolidated statements of income.

In the second quarter of fiscal 2012 the Company paid $35 million to Micron in connection with its purchase of the U.S. nanoFab facility, which it had been leasing from Micron under a lease which ran through December 31, 2014.

 
11

 
NOTE 5 - LONG-TERM BORROWINGS

Long-term borrowings consist of the following:

   
April 28,
2013
   
October 28,
2012
 
             
3.25% convertible senior notes due on April 1, 2016
  $ 115,000     $ 115,000  
Variable rate term loan, maturing March 1, 2017
    22,500       23,750  
5.5% convertible senior notes due on October 1, 2014
    22,054       22,054  
3.09% capital lease obligation payable through March 2016
    13,106       15,175  
Capital lease obligation payable through 2018
    6,916       -  
4.75% financing loan with customer
    245       758  
      179,821       176,737  
Less current portion
    10,473       7,781  
    $ 169,348     $ 168,956  

In February 2013 the Company entered into a five year capital lease to fund the purchase of a high-end lithography tool. The principal amount of the lease, which is currently estimated to be approximately $27 million, will be determined by the Japanese yen exchange rate to the U.S. dollar as progress payments are made on the tool. The interest rate will be fixed, based on the five year interest rate swap plus a spread, upon acceptance of the tool which is expected to occur in the fourth quarter of fiscal year 2013. Progress payments totaling $6.9 million have been made by the lessor through April 28, 2013, and are included in the Company’s long-term borrowings as a non-cash capital lease obligation as of that date. Accordingly, this amount was excluded from both operating and financing cash activities.

In March 2012 the Company, in connection with its purchase of the U.S. nanoFab facility (see Note 4 for further discussion), amended its credit facility ("the credit facility") to include the addition of a $25 million variable rate (2.5% at April 28, 2013) 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 April 28, 2013) based on the Company's total leverage ratio, at LIBOR plus a spread, as defined in the credit facility. 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 April 28, 2013, the Company had no outstanding borrowings under the credit facility and $30 million was available for borrowing.

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 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. A portion of the notes from this issuance having an aggregate principal amount of $35.4 million were acquired by the Company during fiscal year 2011.

 
12

 
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 non-financial covenants incorporated in the Company's credit facility agreement. As of April 28, 2013, the total amount payable through the end of the lease term was $13.7 million, of which $13.1 million represented principal and $0.6 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 $0.3 million and $0.5 million was shipped to the customer and applied against the loan during the three and six month periods ended April 28, 2013, respectively, and product valued at $0.2 million and $0.5 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 6 - 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 April 28, 2013, none of the warrants issued to Intel Capital Corporation had been exercised.

NOTE 7 - SHARE-BASED COMPENSATION

In March 2007 shareholders approved a new share-based compensation plan ("Plan"), under which options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance units, and other awards based on, or related to, shares of the Company's common stock may be granted from shares authorized but unissued or shares previously issued and reacquired by the Company. A maximum of six million shares of common stock may be issued under the Plan. Awards may be granted to officers, employees, directors, consultants, advisors, and independent contractors of the Company or its subsidiaries. In the event of a change in control (as defined in the Plan), the vesting of awards may be accelerated. The Plan, aspects of which are more fully described below, prohibits further awards from being issued under prior plans. The Company incurred total share-based compensation costs for the three and six month periods ended April 28, 2013, of $0.9 million and $1.8 million, respectively, and $0.7 million and $1.4 million for the three and six month periods ended April 29, 2012, respectively. The Company received cash from option exercises of $0.3 million and $0.4 million for the three and six month periods ended April 28, 2013, respectively, and $0.1 million and $0.2 million for the three and six month periods ended April 29, 2012, 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.

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 value 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 six month periods ended April 28, 2013 and April 29, 2012, are presented in the following table.

 
13

 
   
Three Months Ended
   
Six Months Ended
 
   
April 28,
2013
   
April 29,
2012
   
April 28,
2013
   
April 29,
2012
 
                         
Expected volatility
    84.5 %     102.2 %     99.6 %     102.1 %
                                 
Risk free rate of return
    0.6 %     0.9 %     0.5% - 0.7 %     0.7% - 0.9 %
                                 
Dividend yield
    N/A       N/A       N/A       N/A  
                                 
Expected term
 
4.3 years
   
4.3 years
   
4.3 years
   
4.3 years
 
 
Information on outstanding and exercisable option awards as of April 28, 2013, is presented below.

Options
 
Shares
   
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 
                     
Outstanding at April 28, 2013
    4,200,167     $ 8.38  
6.1 years
  $ 8,041  
 
                         
Exercisable at April 28, 2013
    2,705,897     $ 9.80  
4.8 years
  $ 5,544  

There were 20,000 share options granted during the three month period ended April 28, 2013, with a weighted-average grant date fair value of $4.07 per share, and there were 32,000 share options granted during the three month period ended April 29, 2012, with a grant date fair value of $4.72 per share. There were 584,000 share options granted during the six month period ended April 28, 2013, with a weighted-average grant date fair value of $3.99 per share and 524,500 share options granted during the six month period ended April 29, 2012, with a weighted-average grant date fair value of $4.47 per share. As of April 28, 2013, the total unrecognized compensation cost related to unvested option awards was approximately $4.6 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. There were 5,000 restricted stock awards granted during the three month period ended April 28, 2013 with a weighted-average grant date fair value of $6.43 per share, and 209,500 restricted stock awards were issued during the six month period ended April 28, 2013, with a weighted-average grant date fair value of $5.48 per share. No restricted stock awards were granted during the three month period ended April 29, 2012, and 168,750 restricted stock awards were issued during the six month period ended April 29, 2012, with a weighted-average grant date fair value of $6.28 per share. As of April 28, 2013, the total compensation cost not yet recognized related to unvested restricted stock awards was approximately $1.8 million. That cost is expected to be recognized over a weighted-average amortization period of 2.1 years. As of April 28, 2013, there were 365,564 shares of restricted stock outstanding.

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 $0.1 million and $1.2 million during the three and six month periods ended April 29, 2012, respectively. This restructuring, which was comprised primarily of employee termination costs, was substantially completed in fiscal 2012 at a cost of $1.4 million.

The following table sets forth the Company’s restructuring reserve, primarily related to its Singapore facility, as of April 28, 2013 and April 29, 2012, and reflects the activity affecting the reserve for the three month period and six month periods then ended.

 
14

 
   
Three Months Ended
   
Six Months Ended
 
   
April 28, 2013
   
April 28, 2013
 
   
January 28,
2013
   
Charges
   
Utilized
   
April 28,
2013
   
October 29,
2012
   
Charges
   
Utilized
   
April 28,
2013
 
 
                                               
Employee terminations
  $ 40     $ -     $ -     $ 40     $ 295     $ -     $ (255 )   $ 40  
    $ 40     $ -     $ -     $ 40     $ 295     $ -     $ (255 )   $ 40  

   
Three Months Ended
   
Six Months Ended
 
   
April 29, 2012
   
April 29, 2012
 
   
January 30,
2012
   
Charges
   
Utilized
   
April 29,
2012
   
October 31,
2011
   
Charges
   
Utilized
   
April 29,
2012
 
 
                                               
Employee terminations
  $ 419     $ 28     $ (248 )   $ 199     $ -     $ 914     $ (715 )   $ 199  
Asset write-downs
    -       30       (30 )     -       -       262       (262 )     -  
    $ 419     $ 58     $ (278 )   $ 199     $ -     $ 1,176     $ (977 )   $ 199  

NOTE 9 - INCOME TAXES

The effective income tax rates for the three and six month periods ended April 28, 2013 and April 29, 2012, differ from the U.S. statutory rate of 35% primarily due to foreign tax rate differences, as well as the existence of valuation allowances in jurisdictions with historical and continuing tax losses.
 
Unrecognized tax benefits related to uncertain tax positions were $3.9 million at April 28, 2013 and October 28, 2012, of which $1.9 million would favorably impact the Company's effective tax rate if recognized. Accrued interest and penalties related to unrecognized tax benefits were $0.1 million at April 28, 2013 and October 28, 2012. As of April 28, 2013, the total amount of unrecognized tax benefits is not expected to significantly increase or decrease in the next twelve months.
 
PKLT, the Company's FPD manufacturing facility in Taiwan, is accorded a tax holiday which commenced in 2012 and expires in 2017. The tax holiday had no dollar or per share effect in the three and six month periods ended April 28, 2013 or the three and six month periods ended April 29, 2012.
 
 
15

 
NOTE 10 - EARNINGS PER SHARE

The calculation of basic and diluted earnings per share is presented below.

   
Three Months Ended
   
Six Months Ended
 
   
April 28,
2013
   
April 29,
2012
   
April 28,
2013
   
April 29,
2012
 
                         
Net income attributable to Photronics, Inc. shareholders
  $ 4,863     $ 8,818     $ 7,187     $ 13,086  
Effect of dilutive securities:
                               
Interest expense on convertible notes, net of related tax effects
    -       1,542       -       3,084  
Gain related to common stock warrants fair value adjustment
    -       -       -       (94 )
Earnings for diluted earnings per share
  $ 4,863     $ 10,360     $ 7,187     $ 16,076  
Weighted-average common shares computations:
                               
Weighted-average common shares used for basic earnings per share
    60,493       60,086       60,385       59,952  
Effect of dilutive securities:
                               
Share-based payment awards
    766       829       726       830  
Common stock warrants
    242       252       187       267  
Convertible notes
    -       15,423       -       15,423  
Potentially dilutive common shares
    1,008       16,504       913       16,520  
Weighted-average common shares used for diluted earnings per share
    61,501       76,590       61,298       76,472  
                                 
Basic earnings per share
  $ 0.08     $ 0.15     $ 0.12     $ 0.22  
Diluted earnings per share
  $ 0.08     $ 0.14     $ 0.12     $ 0.21  

The table below shows the outstanding weighted-average convertible notes and share-based payment awards that were excluded from the calculation of diluted earnings or loss 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.

   
Three Months Ended
   
Six Months Ended
 
   
April 28,
2013
   
April 29,
2012
   
April 28,
2013
   
April 29,
2012
 
 
                       
Convertible notes
    15,423       -       15,423       -  
Share-based payment awards
    2,901       2,471       2,922       2,511  
Total potentially dilutive shares excluded
    18,324       2,471       18,345       2,511  

 
16

 
NOTE 11 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

The following tables set forth the changes in the Company's accumulated other comprehensive income by component (net of tax of $0) for the three and six month periods ended April 28, 2013:

   
Three Months Ended April 28, 2013
 
   
Foreign Currency
   
Amortization
             
   
Translation
   
of Cash
             
   
Adjustments
   
Flow Hedge
   
Other
   
Total
 
                         
Balance at January 28, 2013
  $ 25,152     $ (658 )   $ (682 )   $ 23,812  
Other comprehensive income (loss) before reclassifications
    (13,104 )     -       14       (13,090 )
Amounts reclassified from other comprehensive income
    -       32       -       32  
Net current period other comprehensive income (loss)
    (13,104 )     32       14       (13,058 )
Less: other comprehensive loss attributable to noncontrolling interests
    662       -       -       662  
Balance at April 28, 2013
  $ 12,710     $ (626 )   $ (668 )   $ 11,416  

   
Six Months Ended April 28, 2013
 
   
Foreign Currency
   
Amortization
             
   
Translation
   
of Cash
             
   
Adjustments
   
Flow Hedge
   
Other
   
Total
 
                         
Balance at October 29, 2012
  $ 17,241     $ (690 )   $ (651 )   $ 15,900  
Other comprehensive income (loss) before reclassifications
    (4,963 )     -       10       (4,953 )
Amounts reclassified from other comprehensive income
    -       64       -       64  
Net current period other comprehensive income (loss)
    (4,963 )     64       10       (4,889 )
Less: other comprehensive loss attributable to noncontrolling interests
    432       -       -       432  
Repurchase of common stock by subsidiary
    -       -       (27 )     (27 )
Balance at April 28, 2013
  $ 12,710     $ (626 )   $ (668 )   $ 11,416  

The amortization of the cash flow hedge is included in cost of sales in the condensed consolidated statements of income for all periods presented.

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 ICs and FPDs. Geographic net sales are based primarily on where the Company's manufacturing facility is located.

 
17

 
The Company's net sales by geographic area and for ICs and FPDs for the three and six month periods ended April 28, 2013 and April 29, 2012, and its long-lived assets by geographic area as of April 28, 2013 and October 28, 2012, are presented below.

   
Three Months Ended
   
Six Months Ended
 
   
April 28,
2013
   
April 29,
2012
   
April 28,
2013
   
April 29,
2012
 
Net sales
                       
United States
  $ 37,045     $ 37,128     $ 65,265     $ 68,698  
Korea
    32,332       41,514       66,304       83,426  
Taiwan
    27,425       27,680       55,819       54,159  
Europe
    9,388       10,384       17,988       20,734  
All other
    490       745       1,143       2,588  
    $ 106,680     $ 117,451     $ 206,519     $ 229,605  
                                 
IC
  $ 82,164     $ 89,111     $ 156,588     $ 175,917  
FPD
    24,516       28,340       49,931       53,688  
    $ 106,680     $ 117,451     $ 206,519     $ 229,605  

 
   
As of
 
   
April 28,
2013
   
October 28,
2012
 
Long-lived assets
           
United States
  $ 181,499     $ 177,614  
Korea
    147,649       120,628  
Taiwan
    71,319       72,185  
Europe
    10,252       10,262  
All other
    38       119  
    $ 410,757     $ 380,808  

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 13 - 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.

The Company did not have any assets or liabilities measured at fair value, on a recurring or a nonrecurring basis, at April 28, 2013 or October 28, 2012.

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.

 
18

 
The table below presents the fair and carrying values of the Company's convertible senior notes at April 28, 2013 and October 28, 2012.

   
April 28, 2013
   
October 28, 2012
 
   
Fair Value
   
Carrying Value
   
Fair Value
   
Carrying Value
 
                         
3.25% convertible senior notes
  $ 125,247     $ 115,000     $ 110,239     $ 115,000  
5.5% convertible senior notes
  $ 35,288     $ 22,054     $ 27,755     $ 22,054  

NOTE 14 - SUBSIDIARY SHARE REPURCHASE AND TENDER OFFER

Since the second quarter of fiscal 2011, the board of directors of PSMC, a subsidiary of the Company based in Taiwan, has authorized several share repurchase programs for PSMC to purchase for retirement shares of its outstanding common stock. The last of these repurchase programs concluded in the first quarter of fiscal 2013. During the six month period ended April 28, 2013, PSMC purchased 9.2 million shares at a cost of $4.2 million. PSMC did not purchase any shares during the three month period ended April 28, 2013. PSMC purchased 15.7 million shares at a cost of $6.7 million and 18.0 million shares at a cost of $7.6 million during the three and six month periods ended April 29, 2012, respectively. These repurchase programs increased the Company's ownership in PSMC to 66.81% at April 29, 2012, 72.09% at October 28, 2012, and 75.11% at January 27, 2013.
 
In April 2013 PSMC obtained approval from Taiwan's GreTai Securities Market ("GTSM") to delist its stock from the GTSM. On April 30, 2013, the Company commenced a tender offer, which is expected to conclude on June 18, 2013, to acquire the outstanding shares of PSMC that it does not currently own at NTD16.30 per share. The Company expects, upon completion of the tender offer, to acquire the tendered shares at an estimated cost of up to approximately $30 million, should substantially all of the remaining outstanding shares be tendered.
 
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 six month periods ended April 28, 2013 (9.2 million shares of common stock of PSMC repurchased) and April 29, 2012 (15.7 million shares and 18.0 million of PSMC stock repurchased, respectively). There were no shares of common stock of PSMC repurchased during the three month period ended April 28, 2013.
 
   
Three Months Ended
   
Six Months Ended
 
   
April 28,
2013
   
April 29,
2012
   
April 28,
2013
   
April 29,
2012
 
                         
Net income attributable to Photronics, Inc. shareholders
  $ 4,863     $ 8,818     $ 7,187     $ 13,086  
                                 
Increase in Photronics, Inc.'s additional paid-in capital
    -       866       579       1,017  
                                 
Decrease in accumulated other comprehensive income
    -       (32 )     (27 )     (35 )
Change from net income attributable to Photronics, Inc. shareholders and transfer from noncontrolling interest
  $ 4,863     $ 9,652     $ 7,739     $ 14,068  

NOTE 15 - COMMITMENTS AND CONTINGENCIES

As of April 28, 2013, the Company had commitments outstanding for capital expenditures of approximately $58 million. See Note 14 for discussion of the Company’s tender offer to acquire the outstanding shares of PSMC.

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.

 
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NOTE 16 - RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013 the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-02, “Reporting Amounts Reclassified Out of Other Comprehensive Income”. The amendments included in ASU No. 2013-02 require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component, and present changes in accumulated balances for each component of comprehensive income on an interim basis. The Company adopted the provisions of ASU No. 2013-02 in the three month period ended April 28, 2013, as disclosed in Note 11.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Management's discussion and analysis ("MD&A") of the Company's financial condition, results of operations and outlook should be read in conjunction with its condensed consolidated financial statements and related notes. Various segments of this MD&A contain forward-looking statements, all of which are presented based on current expectations and may be adversely affected by uncertainties and risk factors (presented throughout this filing and in the Company's Annual Report on Form 10-K for the fiscal 2012 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.

 
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Material Changes in Results of Operations
Three and Six Months ended April 28, 2013 and April 29, 2012

The following table represents selected operating information expressed as a percentage of net sales.

   
Three Months Ended
   
Six Months Ended
 
   
April 28,
2013
   
April 29,
2012
   
April 28,
2013
   
April 29,
2012
 
                         
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales
    (76.8 )     (74.6 )     (77.8 )     (75.9 )
Gross margin
    23.2       25.4       22.2       24.1  
Selling, general and administrative expenses
    (11.4 )     (10.4 )     (11.2 )     (10.2 )
Research and development expenses
    (4.2 )     (3.8 )     (4.6 )     (3.9 )
Consolidation, restructuring and related charges
    -       -       -       (0.5 )
Operating income
    7.6       11.2       6.4       9.5  
Other income (expense), net
    (0.9 )     (0.8 )     (0.7 )     (0.6 )
Net income before income tax provision
    6.7       10.4       5.7       8.9  
Income tax provision
    (1.6 )     (2.3 )     (1.7 )     (2.6 )
Net income
    5.1       8.1       4.0       6.3