PHOTRONICS INC - Annual Report: 2017 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

For the transition period from ___ to ___

Commission file number 0-15451

 

 

15 Secor Road, Brookfield, Connecticut 06804

(Address of principal executive offices)(Zip Code)

(203) 775-9000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐  No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐  No ☒

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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒  No ☐

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

Yes ☒  No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)  is not contained herein, and will not be contained, to the best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

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 definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☒	Accelerated Filer ☐	Non-Accelerated Filer ☐	Smaller Reporting Company ☐
Emerging growth company ☐

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

Yes ☐  No ☒

As of April 30, 2017, which was the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the shares of the registrant’s common stock held by non-affiliates was approximately $777,531,974 (based upon the closing price of $11.50 per share as reported by the NASDAQ Global Select Market on that date).

As of December 15, 2017, 69,052,587 shares of the registrant’s common stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

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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”, the “Company”, “we”, “our”, or “us”). These statements are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. Forward-looking statements may be identified by words like “expect,” “anticipate,” “believe,” “plan,” “project,” “could,” “estimate,” “intend,” “may,” “will” and similar expressions, or the negative of such terms, or other comparable terminology. All forward-looking statements involve risks and uncertainties that are difficult to predict. In particular, any statement contained in this annual report on Form 10-K or in other documents filed with the Securities and Exchange Commission in press releases or in the Company’s communications and discussions with investors and analysts in the normal course of business through meetings, phone calls, or conference calls regarding, among other things, the consummation and benefits of transactions, joint ventures, business combinations, divestitures 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; the timing of orders received from customers; the gain or loss of significant customers; competition from other manufacturers; changes in accounting standards; federal, state and international tax requirements (including tax rate changes, new tax laws and revised tax law interpretations); changes in the jurisdictional mix of our earnings and changes in tax laws and rates; 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; technology or intellectual property infringement, including cyber-security breaches, and other innovation risks; unsuccessful or unproductive research and development or capital expenditures; the timing, impact, and other uncertainties related to transactions and acquisitions, divestitures, business combinations, and joint ventures as well as decisions the Company may make in the future regarding the Company’s business, capital and organizational structures and other matters; the seasonal and cyclical nature of the semiconductor and flat panel display industries; management changes; changes in laws and government regulation impacting our operations or our products; the occurrence of regulatory proceedings, claims or litigation; damage or destruction to the Company’s facilities, or the facilities of its customers or suppliers, by natural disasters, labor strikes, political unrest, or terrorist activity; the ability of the Company to (i) place new equipment in service on a timely basis; (ii) obtain additional financing; (iii) achieve anticipated synergies and cost savings; (iv) fully utilize its tools; (v) achieve desired yields, pricing, product mix, and market acceptance of its products and (vi) obtain necessary export licenses. Any forward-looking statements should be considered in light of these factors. Accordingly, there is no assurance that the Company’s expectations will be realized. The Company does not assume responsibility for the accuracy and completeness of the forward-looking statements and does not assume an obligation to provide revisions to any forward-looking statements, except as otherwise required by securities and other applicable laws.

 

PART I

ITEM 1.

BUSINESS

General

Photronics, Inc. (and its subsidiaries, collectively referred to herein as “Photronics”, the “Company”, “we”, “our”, or “us”) is one of the world’s leading manufacturers of photomasks, which are high precision photographic quartz or glass 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 display substrates during the fabrication of integrated circuits (“ICs” or “semiconductors”) and a variety of FPDs and, to a lesser extent, other types of electrical and optical components. The Company currently operates principally from nine manufacturing facilities; two of which are located in Europe, three in Taiwan, one in Korea and three in the United States. We have announced plans to construct two manufacturing facilities in China, as we expand our global manufacturing footprint. See Note 19 to the consolidated financial statements for additional information.

Photronics is a Connecticut corporation, organized in 1969. Our principal executive offices are located at 15 Secor Road, Brookfield, Connecticut 06804, telephone (203) 775-9000. Our website address is http://www.photronics.com. We make available, free of charge through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to these reports as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). The information found on, or incorporated into, our website is not part of this or any other report we file with or furnish to the SEC. These reports may also be obtained at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including Photronics.

 

The Board has adopted a code of ethics, which is posted on the Company’s website at http://www.photronics.com/plab/photronics/. The code of ethics may be found as follows: from the Company’s web address listed above, first click on “Investors” then click on “Corporate Governance”, then on “Photronics, Inc. Code of Ethics”. The Company’s code of ethics applies to the Company’s senior financial officers, including our Chief Executive Officer; Senior Vice President and Chief Financial Officer; Chief Financial Officer, Asia; Vice President and Treasurer; Vice President, Corporate Controller; and Vice President, Tax. We intend to disclose any amendment to, or waiver from, the code of ethics for our senior financial officers, including our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, to the extent disclosure is required by applicable rules of the SEC and NASDAQ Stock Market LLC by posting such information on our website, at the address and location specified above.

Products and Manufacturing Technology

We manufacture photomasks, which are used as masters to transfer circuit patterns onto semiconductor wafers and flat panel display substrates. Photomasks are manufactured in accordance with circuit designs provided to us on a confidential basis by our customers. IC and FPD photomask sets are manufactured in layers, each having a distinct pattern which is etched onto a different photomask. The resulting series of photomasks is then used to image the circuit patterns onto each successive layer of a semiconductor wafer or flat panel display substrate. The typical manufacturing process for a photomask involves the receipt and conversion of circuit design data to manufacturing pattern data. A lithography system then exposes the circuit pattern onto the photomask blank. The exposed areas are developed and etched to produce that pattern on the photomask. The photomask is then inspected for defects and conformity to the customer’s design data. After any defects are repaired, the photomask is cleaned, any required pellicles (protective translucent cellulose membranes) are applied and, after final inspection, the photomask is shipped to the customer.

We currently support customers across the full spectrum of IC production and FPD technologies by manufacturing photomasks using electron beam or optical (laser-based) systems, which are the predominant technologies used for photomask manufacturing, and are capable of producing the finer line resolution, tighter overlay and larger die size for the larger and more complex circuits currently being designed. Electron beam and laser generated photomasks can be used to produce the most advanced semiconductors and FPDs for use in an array of products. However, in the case of IC production, the large majority of higher cost critical layer photomasks are fabricated using electron beam technologies, while photomasks produced using laser-based systems are less expensive and less precise.  End markets served with IC photomasks include devices used for microprocessors, memory, telecommunications and related applications. We currently own a number of both high-end and mature electron beam and laser-based systems.

The first several layers of photomasks are sometimes required to be delivered by us within 24 hours from the time we receive customers’ design data. The ability to manufacture high quality photomasks within short time periods is dependent upon robust processes, efficient manufacturing methods, high production yield, available manufacturing capacity and high equipment reliability. We work to meet these requirements by making significant investments in research and development, capital equipment, manufacturing and data processing systems, and by utilizing statistical process control methods to optimize our manufacturing processes and reduce cycle times.

 

Quality control is an integral part of the photomask manufacturing process. Photomasks are manufactured in temperature, humidity, and particulate-controlled clean rooms because of the high level of precision, quality and manufacturing yield required. Each photomask is inspected several times during the manufacturing process to ensure compliance with customer specifications. We continue to make substantial investments in equipment to inspect and repair photomasks to ensure that customer specifications are met.

The majority of IC photomasks produced for the semiconductor industry employ geometries of larger than 45 nanometers. At these geometries, we can produce full lines of photomasks and there is no significant technology employed by our competitors that is not also available to us. We are also capable of producing full lines of photomasks for high-end IC and FPD applications. In the case of ICs, this includes photomasks at and below the 45 nanometer technology node and, for FPDs, at and above the Generation 8 technology node and active-matrix organic light-emitting diode (AMOLED) display screens. We hold customer-qualified manufacturing capability and own, or have access to, technology that enables us to compete in the high-end markets that serve IC and FPD applications.

Sales and Marketing

The market for photomasks primarily consists of domestic and non-US semiconductor and FPD manufacturers and designers. Photomasks are manufactured by independent merchant manufacturers like Photronics, and by semiconductor and FPD manufacturers that produce photomasks for their own use (captive manufacturers). In some instances, captive manufacturers also sell to other semiconductor or FPD manufacturers. Previously there was a trend towards the divesture or closing of captive photomask operations by semiconductor manufacturers and an increase in the share of the market served by independent manufacturers. This trend was driven by the increased complexity and cost of capital equipment used in manufacturing photomasks and the lack of economy of scale for many semiconductor and FPD manufacturers to effectively utilize the equipment. However, more recently, the remaining and largest captive mask facilities have started investing at faster rates than independent manufacturers to reach certain roadmap milestones, particularly in the foundry logic and memory spaces. Nevertheless, most captive manufacturers maintain business and technology relationships with independent photomask manufacturers for ongoing support.

We conduct our sales and marketing activities primarily through a staff of full-time sales personnel and customer service representatives who work closely with the Company’s management and technical personnel. We support non-US customers through both our domestic and foreign facilities. We consider our presence in non-US markets to be an important factor in attracting new customers, as it provides global solutions to our customers, minimizes delivery time, and allows us to serve customers that utilize manufacturing foundries outside of the United States, principally in Asia. See Note 13 to our consolidated financial statements for the amount of revenues and long-lived assets attributable to each of our geographic areas of operations.

Customers

We primarily sell our products to leading semiconductor and FPD manufacturers. During fiscal year 2017, we sold our products to approximately 600 customers. Revenue from United Microelectronics Corp. accounted for approximately 16%, 17% and 15% of our total revenues, and sales to Samsung Electronics Co. Ltd. accounted for approximately 16%, 19% and 18% of our total revenues in fiscal years 2017, 2016 and 2015, respectively. Our five largest customers, in the aggregate, accounted for approximately 43%, 50% and 52% of our revenue in fiscal years 2017, 2016 and 2015, respectively. A significant decrease in the amount of revenue from any of these customers could have a material adverse effect on our financial performance and business prospects.

 

Seasonality

Our quarterly revenues can be affected by the seasonal purchasing patterns of our customers. We are typically impacted during our first quarter by the North American and European holiday periods, as some customers reduce their effective workdays and orders during this period. Additionally, we can be impacted during our first or second fiscal quarter by the Asian New Year holiday period, which also may reduce customer orders and deliveries.

Research and Development

On May 5, 2016, we sold our investment in MP Mask to Micron for $93.1 million and recorded a gain on the sale of $0.1 million, which is included in our 2016 consolidated statements of income in interest income and other income (expense). On that same date, a supply agreement commenced between Photronics and Micron, which provided that we would be the majority outsourced supplier of Micron’s photomasks and related services. The supply agreement had a one year term, and expired in May 2017. Photronics has unlimited rights to use the technology it acquired under its prior technology license agreement.

Patents and Trademarks

We have ownership interests in approximately 49 issued U.S. patents. The subject matter of these patents, which are registered in various countries, generally relates to the manufacture of IC photomasks or the use of photomasks to manufacture other products. The expiration dates of these patents range from 2018 to 2034. We also have a number of trademarks and trademark registrations in the United States and in other countries.

While we believe that our intellectual property is, and will continue to be, important to our technical leadership in the field of photomasks, our operations are not dependent on any one individual patent. We protect our intellectual property rights and proprietary processes by utilizing patents and non-disclosure agreements with employees, customers and vendors.

Materials, Supplies and Equipment

Raw materials used by Photronics generally include: high precision quartz plates (including large area plates), which are used as photomask blanks and are primarily obtained from Japanese and Korean suppliers; pellicles and electronic grade chemicals, which are used in the manufacturing process; and compacts, which are durable plastic containers in which photomasks are shipped. These materials are generally sourced from several suppliers. We believe that our utilization of a select group of strategic suppliers enables us to access the most technologically advanced materials available. On an ongoing basis, we continue to consider additional supply sources.

We rely on a limited number of equipment suppliers to develop and supply the equipment used in the photomask manufacturing process. Although, historically, we have been able to obtain equipment on a timely basis, an inability to obtain equipment when required could adversely affect our business and results of operations.

 

Backlog

The first several layers of a set of photomasks for a circuit pattern are often required to be shipped within 24 hours of receiving a customer’s designs. Because of the short period between order and shipment dates (typically from 1 day to 2 weeks) for a significant amount of our revenue, the dollar amount of our current backlog is not considered to be a reliable indicator of future revenue.

International Operations

Revenues from our non-U.S. operations were approximately 77%, 76% and 75% of our total revenues in fiscal 2017, 2016 and 2015, respectively. We believe that our ability to serve non-US markets is enhanced by our having, among other things, a local presence in the markets that we serve. This requires significant investments in financial, managerial, operational, and other resources.

Operations outside of the United States are subject to inherent risks, including fluctuations in exchange rates, political and economic conditions in various countries, legal compliance and regulatory requirements, tariffs and other trade barriers, difficulties in staffing and managing international operations, longer accounts receivable collection cycles, potential restrictions on transfers of funds and potentially adverse tax consequences. These factors may have a material adverse effect on our ability to generate revenue outside of the United States and to deploy resources where they could otherwise be used to their greatest advantage and, consequently, may adversely affect our financial condition and results of operations. Note 13 of the notes to our consolidated financial statements presents revenue and long-lived assets by geographic area.

Competition

The photomask industry is highly competitive and most of our customers utilize multiple photomask suppliers. Our ability to compete depends primarily upon the consistency of our product quality, timeliness of delivery, as well as pricing, technical capability, and service, which we believe are the principal factors considered by customers in selecting their photomask suppliers. An inability to meet these requirements could adversely affect our financial condition, results of operations and cash flows. We also believe that geographic proximity to customers is an important factor in certain markets where cycle time from order to delivery is critical. While some of our competitors have greater financial, technical, sales, marketing or other resources than Photronics, we believe that we are able to compete effectively because of our dedication to customer service, investments in state-of-the-art photomask equipment and facilities, and experienced technical employees.

We estimate that, for the types of photomasks we manufacture (IC and FPD), the size of the total market (captive and merchant) is approximately $4.1 billion. Our competitors include Compugraphics International, Ltd., Dai Nippon Printing Co., Ltd (outside of Taiwan), Hoya Corporation, SK-Electronics Co. Ltd., Taiwan Mask Corporation, Toppan Printing Co., Ltd., Supermask Co. Ltd., and Chengdu NeWay Photomask Making Co., Ltd. We also compete with semiconductor manufacturers’ captive photomask manufacturing operations that supply photomasks for internal use and, in some instances, also for external customers and foundries. We expect to face continued competition which, in the past, has led to pressure to reduce prices. We believe the pressure to reduce prices, together with the significant investment required in capital equipment to manufacture high-end photomasks, has contributed to the decrease in the number of independent manufacturers, and we expect such pressure to continue in the future.

Employees

As of October 29, 2017, we had 1,475 employees. We believe we offer competitive compensation and other benefits and that our employee relations are good.

ITEM 1A.

RISK FACTORS

Technology failures or cyber security breaches could have a material adverse effect on our operations.

We rely on information technology systems to process, transmit, store, and protect electronic information. For example, a significant portion of the communications between our personnel, customers, and suppliers depends on information technology. Our information technology systems may be vulnerable to a variety of interruptions due to events beyond our control, including, but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers, and other security issues. We have technology and information security processes and disaster recovery plans in place to mitigate our risks to these vulnerabilities. However, these measures may not be adequate to ensure that our operations will not be disrupted, should such an event occur.

 

Our dependency on the microelectronics industry, which as a whole is volatile, could have a negative material impact on our business.

We sell substantially all of our photomasks to semiconductor or flat panel display designers, manufacturers and foundries, as well as to other high performance electronics manufacturers. We believe that the demand for photomasks depends primarily on design activity rather than sales volume from products using photomask technologies. Consequently, an increase in semiconductor or FPD sales does not necessarily result in a corresponding increase in photomask sales. In addition, the reduced use of customized ICs, a reduction in design complexity, other changes in the technology or methods of manufacturing or designing semiconductors or FPDs, or a slowdown in the introduction of new semiconductor or FPD designs could reduce demand for photomasks ‒ even if the demand for semiconductors and FPDs increases. 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.

We may, in the future, incur net losses.

Although we have been profitable since fiscal 2010, we have, in the past, incurred net losses. The net losses experienced in prior years were due, in part, to macroeconomic factors, which resulted in our incurring significant charges for restructurings and impairments of long-lived assets. We cannot provide assurance that we will not incur net losses in the future.

We have a high level of fixed costs; thus we must achieve minimum sales volumes sufficient to cover our fixed costs.

As a consequence of the capital-intensive nature of the photomask manufacturing business, we have a high level of fixed costs and a high degree of operating leverage. Accordingly, should our sales volumes decline as a result of a decrease in design releases from our customers or for any other reason, we may have excess or underutilized production capacity which could significantly impact our operating margins or result in write-offs from asset impairments.

Our quarterly operating results fluctuate significantly and may continue to do so in the future.

We have experienced fluctuations in our quarterly operating results, and we anticipate that such fluctuations will continue and could intensify in the future. Fluctuations in operating results may result in volatility in the prices of our common stock and financial instruments linked to its value. Operating results may fluctuate as a result of many factors, including the size and timing of orders and shipments, the loss of significant customers, changes in product mix, the flow of customer design releases, technological change, fluctuations in manufacturing yields, competition and general economic conditions. We operate in a high fixed-cost environment and, should our revenues and asset utilization decrease, our operating margins could be negatively impacted.

Our customers generally order photomasks on an as-needed basis, and our revenue in any quarter is dependent on orders received during that quarter. Since we operate with little backlog, and the rate of new orders may vary significantly from quarter-to-quarter, our capital expenditures and, to some extent, expense levels are based primarily on sales forecasts and technological advancements in photomask manufacturing equipment. Consequently, if anticipated revenues in any quarter do not occur when expected, capital expenditures could be higher than needed, resulting in underutilized capacity and disproportionately high expense levels, causing operating results to be adversely affected. Due to the foregoing factors, we believe that quarter-to-quarter comparisons of our operating results cannot be relied upon as indicators of future performance. In addition, in future quarters, our operating results could be below guidance we may provide as well as the expectations of public market analysts and investors which, in turn, could have a material adverse effect on the market price of our common stock.

 

The photomask industry is subject to rapid technological change, and we might fail to remain competitive, which could have a material adverse effect on our business and results of operations.

Our operations will continue to require substantial capital expenditures, for which we may be unable to obtain funding.

The manufacture of photomasks requires us to make substantial investments in high-end manufacturing capability. We expect that we will be required to continue to make substantial capital expenditures to meet the technological demands of our customers and to position us for future growth. Our capital expenditure payments for fiscal 2018 are expected to be approximately $250 million, of which $3 million was included in accounts payable on our October 29, 2017, consolidated balance sheet. We cannot provide assurance that we will be able to obtain the additional capital required to fund our operations on reasonable terms, if at all, or that any such inability will not have a material adverse effect on our business and results of operations.

We have been dependent on sales to a limited number of large customers; the loss of any of these customers or a significant reduction in orders from these customers could have a material adverse effect on our revenues and results of operations.

Historically, we have sold a significant proportion of photomasks to a limited number of IC and FPD manufacturers. During fiscal years 2017, 2016 and 2015 our two largest customers accounted for 32%, 36% and 33%, respectively, of our revenue. Our five largest customers accounted for 43%, 50% and 52% of our revenue in fiscal years 2017, 2016 and 2015 respectively. The loss of a significant customer or a significant reduction or delay in orders from any significant customer, (including reductions or delays due to customer departures from recent buying patterns), or an unfavorable change in competitive conditions in the semiconductor or FPD industries, could have a material adverse effect on our financial performance and business prospects. The consolidation of semiconductor manufacturers or an economic downturn in the semiconductor industry may increase the likelihood of losing a significant customer and could also have an adverse effect on our financial performance and business prospects.

We rely on a limited number of photomask equipment manufacturers to develop and supply the equipment we use. These equipment manufacturers currently require lead times of up to twelve months or longer between the order and the delivery of certain photomask imaging and inspection equipment. The failure of such manufacturers to develop or deliver such equipment on a timely basis could have a material adverse effect on our business and results of operations. In addition, the manufacturing equipment necessary to produce advanced photomasks could become prohibitively expensive, which could similarly affect us.

We use high precision quartz photomask blanks, pellicles, and electronic grade chemicals in our manufacturing processes. There are a limited number of suppliers of these raw materials and we have no long-term contracts with these suppliers. Any delays or quality problems in connection with significant raw materials, particularly photomask blanks, could cause delays in the shipments of photomasks, which could have a material adverse effect on our business and results of operations. The fluctuation of foreign currency exchange rates, with respect to prices of equipment and raw materials used in manufacturing, could also have a material adverse effect on our business and results of operations.

 

Our complex manufacturing processes require the use of expensive and technologically sophisticated equipment and materials, and are continually modified in an effort to improve manufacturing yields and product quality. Minute impurities, defects or other difficulties in the manufacturing process can lower manufacturing yields and make products unmarketable. Moreover, the manufacture of leading-edge photomasks is more complex and time consuming than manufacturing less advanced photomasks, and their fabrication may result in delays in the manufacture of all levels of photomasks. We have, on occasion, experienced manufacturing difficulties and capacity limitations that have delayed our ability to deliver products within the time frames contracted for by our customers. We cannot provide assurance that, under such circumstances, we will not experience these or other manufacturing difficulties, or be subject to increased costs or production capacity constraints in the future, any of which could result in a loss of customers or could otherwise have a material adverse effect on our business and results of operations.

We could be subject to damages based on claims brought against us by our customers or lose customers as a result of the failure of our products to meet certain quality specifications.

Our products provide important performance attributes to our customers’ products. If a product fails to perform in a manner consistent with quality specifications, or has a shorter useful life than warranted, a customer could seek replacement of the product or damages for costs incurred as a result of the product failing to perform, particularly if such products are sold under agreements that contain limited performance and life cycle warrantees. Our customers often require us to represent that our products conform to certain product specifications that they provide. Any failure to comply with such specifications could result in claims or legal action. A successful claim or series of claims against us could have a material adverse effect on our financial condition and results of operations and could result in a loss of one or more customers.

Our debt agreements limit our ability to obtain additional financing and may obligate us to repay debt before its maturity.

Financial covenants related to our credit facility, which expires in December 2018, include a Total Leverage Ratio, a Minimum Interest Coverage Ratio, and Minimum Unrestricted Cash Balances. Existing covenant restrictions limit our ability to obtain additional debt financing and, should we be unable to meet one or more of these covenants, our lenders may require us to repay any outstanding balance prior to the expiration date of the agreements. Our ability to comply with the financial and other covenants in our debt agreements may be affected by worsening economic or business conditions, or other events. We cannot assure that, under such circumstances, additional sources of financing would be available to pay off any long-term borrowings, so as to avoid default.  Should we default on certain of our long-term borrowings, a cross default would occur on other long-term borrowings, unless amended or waived.

Joint ventures may not operate according to their business plans if our partners fail to fulfill their obligations, which may adversely affect our results of operations and may force us to dedicate additional resources to these joint ventures.

The nature of a joint venture requires us to share control in certain areas with unaffiliated third parties. If our joint venture partners do not fulfill their obligations, the affected joint venture may not be able to operate according to its business plan. In that case, our results of operations may be adversely affected and we may be required to increase the level of our commitment to the joint venture. Also, differences in views among joint venture participants may result in delayed decisions or failures to agree on major issues. If these differences cause the joint ventures to deviate from their business plans, our results of operations could be adversely affected.

 

We may not be able to consummate future acquisitions or integrate acquisitions into our business, which could result in unanticipated expenses and losses.

As part of our business growth strategy, we have acquired businesses and entered into joint ventures in the past, and we may pursue acquisitions and joint venture opportunities in the future. Our ability to implement this component of our growth strategy will be limited by our ability to identify appropriate acquisition or joint venture candidates and our financial resources, including our available cash and borrowing capacity. The expense incurred in consummating acquisitions or entering into joint ventures, the time it takes to integrate an acquisition, or our failure to integrate businesses successfully, could result in unanticipated expenses and losses. Furthermore, we may not be able to realize any of the anticipated benefits from acquisitions or joint ventures.

The process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties, and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Some of the risks associated with the integration of acquisitions include: potential disruption of our ongoing business and distraction of management; unforeseen claims and liabilities, including unexpected environmental exposures; unforeseen adjustments, taxes, charges and write-offs; problems enforcing the indemnification obligations of sellers of businesses or joint venture partners for claims and liabilities; unexpected losses of customers of, or suppliers to, the acquired business; difficulty in conforming the acquired businesses’ standards, processes, procedures and controls with our operations; variability in financial information arising from the implementation of purchase price accounting; inability to coordinate new product and process development; loss of senior managers and other critical personnel and problems with new labor unions; and challenges arising from the increased scope, geographic diversity and complexity of our operations.

Our announced expansions into China entail substantial risks.

Our cash flows from operations and current holdings of cash may not be adequate for our current and long-term needs.

Our liquidity, as we operate in a high fixed cost environment, is highly dependent on our revenue volume and the timing of our capital expenditures, which can vary significantly from period to period. Depending on conditions in the semiconductor and FPD markets, our cash flows from operations and current holdings of cash may not be adequate to meet our current and long-term needs for capital expenditures, operations and debt repayments. Historically, in certain years, we have used external financing to fund these needs. Due to conditions in the credit markets and covenant restrictions on our existing debt, some financing instruments used by us in the past may not be available. Therefore, we cannot provide assurance that additional sources of financing would be available to us on commercially favorable terms, if at all, should our cash requirements exceed our existing cash and cash available under our credit facility.

We may incur unforeseen charges related to possible future facility closures or restructurings.

We cannot provide assurance that there will not be facility closures or restructurings in the near or long-term, nor can we assure that we will not incur significant charges should there be any future facility closures or restructurings.

 

We operate in a highly competitive environment, and, should we be unable to meet our customers’ requirements for product quality, timeliness of delivery or technical capabilities, our revenue could be adversely affected.

The photomask industry is highly competitive, and most of our customers utilize more than one photomask supplier. Our competitors include Compugraphics International, Ltd., DNP (outside of Taiwan), Hoya Corporation, SK-Electronics Co., Ltd., Taiwan Mask Corporation and Toppan Printing Co., Ltd. We also compete with semiconductor manufacturers’ captive photomask manufacturing operations, some of which market their photomask manufacturing services to outside customers. We expect to face continued competition from these and other suppliers in the future. Some of our competitors have substantially greater financial, technical, sales, marketing or other resources than us. Also, when producing smaller geometry photomasks, some of our competitors may be able to more rapidly develop, produce, and achieve higher manufacturing yields than us. We believe that consistency of product quality and timeliness of delivery, as well as price, technical capability, and service are the principal factors considered by customers when selecting their photomask suppliers. Our inability to meet these competitive requirements could have a material adverse effect on our business and results of operations. In the past, competition has led to pressure to reduce prices and the need to invest in advanced manufacturing technology, which, we believe, contributed to the decrease in the number of independent photomask suppliers. These pressures may continue in the future.

Our substantial non-US operations are subject to additional risks.

Changes in foreign currency exchange rates could have a material adverse effect on our results of operations, financial condition or cash flows.

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and are reported in U.S. dollars. Our operations have transactions and balances denominated in currencies other than the U.S. dollar, primarily the Korean won, New Taiwan dollar, Japanese yen, euro, Singapore dollar, and the pound sterling. As a result of commencing construction of two new facilities in China, we now also have transactions and balances denominated in the Chinese renminbi. In fiscal year 2017, we recorded a net loss from changes in foreign currency exchange rates of $5.2 million in our statement of income, while our net assets were increased by $19.7 million as a result of the translation of foreign currency financial statements to U.S. dollars. Significant foreign currency fluctuations may adversely affect our results of operations, financial condition or cash flows.

Our business depends on managerial and technical personnel, who are in great demand, and our inability to attract and retain qualified employees could adversely affect our business and results of operations.

Our success depends, in part, upon key managerial and technical personnel, as well as our ability to continue to attract and retain additional qualified personnel. The loss of certain key personnel could have a material adverse effect on our business and results of operations. There can be no assurance that we can retain our key managerial, and technical employees, or that we can attract similar additional employees in the future.

 

We may be unable to enforce or defend our ownership and use of proprietary technology, and the utilization of unprotected company developed technology by our competitors could adversely affect our business, results of operations and financial position.

We believe that the success of our business depends more on proprietary technology, information and processes, and know-how than on our patents or trademarks. Much of our proprietary information and technology related to manufacturing processes is not patented and may not be patentable. We cannot offer assurance that:

·	we will be able to adequately protect our technology;

·	competitors will not independently develop similar technology; or

·	international intellectual property laws will adequately protect our intellectual property rights.

We may become the subject of infringement claims or legal proceedings by third parties with respect to current or future products or processes. Any such claims, with or without merit, or litigation to enforce or protect our intellectual property rights that require us to defend against claimed infringements of the rights of others, could result in substantial costs, diversion of resources, and product shipment delays or could force us to enter into royalty or license agreements, rather than dispute the merits of these claims. Any of the foregoing could have a material adverse effect on our business, results of operations and financial position.

We may be unprepared for changes to environmental laws and regulations and may incur liabilities arising from environmental matters.

We are subject to numerous environmental laws and regulations that impose various environmental controls on, among other things, the discharge of pollutants into the air and water and the handling, use, storage, disposal and clean-up of solid and hazardous wastes. Changes in these laws and regulations may have a material adverse effect on our financial position and results of operations, and inadequate compliance with their requirements could give rise to significant liabilities.

If we violate environmental, health and safety laws or regulations, in addition to being required to correct such violations, we can be held liable in administrative, civil or criminal proceedings, and substantial fines and other sanctions could be imposed that could disrupt or limit our operations. Liabilities associated with the investigation and cleanup of hazardous substances, as well as personal injury, property damages or natural resource damages arising from the release of, or exposure to, such hazardous substances, may be imposed in many situations without regard to violations of laws or regulations or other fault, and may also be imposed jointly and severally (so that a responsible party may be held liable for more than its share of the losses involved, or even the entire loss). Such liabilities may also be imposed on many different entities with a relationship to the hazardous substances at issue, including, for example, entities that formerly owned or operated the property affected by the hazardous substances and entities that arranged for the disposal of the hazardous substances at the affected property, as well as entities that currently own or operate such property. The nature of our business, including historical operations at our current and former facilities, exposes us to risks of liability under these laws and regulations due to the production, storage, use, transportation and sale of materials that can cause contamination or personal injury if released into the environment. Additional information may arise in the future concerning the nature or extent of our liability with respect to identified sites and additional sites that may be identified for which we are alleged to be liable.

Our production facilities could be damaged or disrupted by natural disasters or labor strikes, either of which could adversely affect our financial position, results of operations and cash flows.

A major catastrophe, such as an earthquake or other natural disaster, labor strike, or work stoppage at any of our manufacturing facilities, or a manufacturing facility of our suppliers or customers, could result in a prolonged interruption of our business. A disruption resulting from any one of these events could cause significant delays in shipments of our products and the loss of revenue and customers, which could have a material adverse effect on our financial position, results of operations, and cash flows. Our facilities in Taiwan are located in a seismically active area.

 

Our sales can be impacted by the health and stability of the general economy, which could adversely affect our results of operations and cash flows.

Unfavorable general economic conditions in the U.S. or other countries in which we or our customers conduct business may have the effect of reducing the demand for photomasks. Economic downturns may lead to a decrease in demand for end products whose manufacturing processes involve the use of photomasks, which may result in a reduction in new product design and development by semiconductor or FPD manufacturers and adversely affect our results of operations and cash flows.

Additional taxes could adversely affect our financial results.

Our tax filings are subject to audits by tax authorities in the various jurisdictions in which we do business. These audits may result in assessments of additional taxes that are subsequently resolved with the taxing authorities or through the courts. Currently, we believe there are no outstanding assessments whose resolution would result in a material adverse financial result. However, we cannot offer assurances that unasserted or potential future assessments would not have a material adverse effect on our financial condition or results of operations.

Our financial results may be adversely impacted by proposed legislative tax reform.

In addition to the U.S. tax proposals, corporate tax reform proposals are under consideration in Taiwan and Korea including, among other items, corporate income tax rate changes, the modification or elimination of certain tax incentives, changes in unremitted earnings tax rates and modification of the related rules, and measures to prevent BEPS.  Enactment of such changes could materially affect the tax treatment of our foreign subsidiaries’ earnings and their statutory deferred tax assets and liabilities.

Our business could be adversely impacted by global or regional catastrophic events.

Our business could be adversely affected by terrorist acts, major natural disasters, widespread outbreaks of infectious diseases, or the outbreak or escalation of wars, especially in the Asian markets, where we generate a significant portion of our sales, and in Japan where we purchase raw materials and capital equipment. Such events in the geographic regions in which we do business, including escalations of political tensions and military operations within the Korean Peninsula, where a significant portion of our foreign operations are located, could have material adverse impacts on our revenue, cost and availability of raw materials, results of operations, cash flows and financial condition.

Servicing our debt requires a significant amount of cash, and we may not generate sufficient cash flows from our operations to pay our indebtedness.

Our ability to make scheduled payments of debt principal and interest, or to refinance our indebtedness, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate sufficient cash flows from operations to both service our debt and make necessary capital expenditures. If we are unable to generate such cash flows, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness would depend upon the conditions in the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

 

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

The following table presents certain information about the Company’s photomask manufacturing facilities:

(1)  The Company owns its manufacturing facility in Taichung and one of its manufacturing facilities in Hsinchu. However, it leases the related land.

 

ITEM 3.

LEGAL PROCEEDINGS

We are subject to various claims that arise in the ordinary course of business. We believe such claims, individually or in the aggregate, will not have a material adverse effect on our business.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

The Common Stock of the Company is traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol PLAB. The table below shows the range of high and low sale prices per share in each quarter for fiscal years 2017 and 2016, as reported by the NASDAQ Global Select Market.

On December 15, 2017, the closing sale price of our Common Stock, per the NASDAQ Global Select Market, was $8.70. Based on available information, we estimate that we have approximately 11,285 shareholders.

To date, we have not paid any cash dividends on PLAB shares and, for the foreseeable future, we anticipate that earnings will continue to be retained for use in our business. Further, our credit facility precludes us from paying cash dividends.

Securities authorized for issuance under equity compensation plans

The information regarding our equity compensation required to be disclosed by Item 201(d) of Regulation S-K is incorporated by reference from the Photronics, Inc. 2018 definitive Proxy Statement in Item 12 of Part III of this report. The 2018 Proxy Statement will be filed within 120 days after our fiscal year ended October 29, 2017.

 

ITEM 6.

SELECTED FINANCIAL DATA

The following selected financial data (in thousands, except per share amounts) is derived from our audited consolidated financial statements. The data should be read in conjunction with the audited consolidated financial statements and notes thereto, and other financial information included elsewhere in this Annual Report on Form 10-K.

 

		Year Ended
		October 29, 2017				October 30, 2016				November 1, 2015				November 2, 2014				November 3, 2013
OPERATING DATA:
Revenue		$	450,678			$	483,456			$	524,206			$	455,527			$	422,180
Cost of goods sold			(359,363	)			(364,750	)			(381,070	)			(355,181	)			(322,540	)
Gross profit			91,315				118,706				143,136				100,346				99,640
Selling, general and administrative			(43,585	)			(44,577	)			(48,983	)			(49,638	)(d)			(48,213	)(f)
Research and development			(15,862	)			(21,654	)			(21,920	)			(21,913	)			(20,758	)
Operating income			31,868				52,475				72,233				28,795				30,669
Other income (expense):
Interest and other income (expense), net			(3,068	)			2,424				2,797	(c)			3,410				3,892
Interest expense			(2,235	)			(3,365	)			(4,990	)			(7,247	)			(7,756	)
Gains on sales of investments			-				8,940	(a)			-				-				-
Gain on acquisition			-				-				-				16,372	(e)			-
Income before income tax provision			26,565				60,474				70,040				41,330				26,805
Income tax provision			(5,276	)			(4,798	)(b)			(13,181	)			(9,295	)			(7,229	)
Net income			21,289				55,676				56,859	(c)			32,035	(d)(e)			19,576	(f)
Net income attributable to noncontrolling interests			(8,159	)			(9,476	)			(12,234	)			(6,039	)			(1,610	)
Net income attributable to Photronics, Inc. shareholders		$	13,130			$	46,200	(a)(b)		$	44,625	(c)		$	25,996	(d)(e)		$	17,966	(f)
Earnings per share:
Basic		$	0.19			$	0.68	(a)(b)		$	0.67	(c)		$	0.42	(d)(e)		$	0.30	(f)
Diluted		$	0.19			$	0.64	(a)(b)		$	0.63	(c)		$	0.41	(d)(e)		$	0.29	(f)
Weighted-average number of common shares outstanding:
Basic			68,436				67,539				66,331				61,779				60,644
Diluted			69,288				76,354				78,383				66,679				61,599

 

BALANCE SHEET DATA

 

(a)

Includes $8.8 million gain on sale of investment in a foreign entity and $0.2 million gain on the sale of the Company’s 49.99% interest in the MP Mask joint venture

(b)

Includes tax benefits in Taiwan of $4.8 million primarily related to the recognition of prior period tax benefits and other tax positions no longer deemed necessary.

(c)

Includes $0.9 million of financing expenses related to the exchange of $57.5 million of 3.25% convertible senior notes.

(d)

Includes $2.5 million, net of tax, of expenses related to the acquisition of DPTT.

(e)

Includes non-cash gain of $16.4 million, net of tax, on acquisition of DPTT.

(f)

Includes $0.8 million, net of tax, of expenses related to the acquisition of DPTT.

(g)

Balances reflect the impact of the adoption of a new accounting standard in fiscal year 2016 (ASU 2015-03) related to the balance sheet classification of debt issuance costs. See Note 6 to the consolidated financial statements for additional information.

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations for the Years Ended October 29, 2017, October 30, 2016 and November 1, 2015

Overview

We sell substantially all of our 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. Our selling cycle is tightly interwoven with the development and release of new semiconductor designs and flat panel display applications, particularly as they relate to the semiconductor industry’s migration to more advanced product innovation, design methodologies and fabrication processes. We believe that the demand for photomasks primarily depends on design activity rather than sales volumes from products manufactured 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 the demand for semiconductors and FPDs increases. Advances in semiconductor, FPD and photomask design and semiconductor and FPD production methods that shift the burden of achieving device performance away from lithography could also reduce the demand for photomasks. Historically, the microelectronic industry has been volatile, experiencing periodic downturns and slowdowns in design activity. These downturns have been characterized by, among other things, diminished product demand, excess production capacity and accelerated erosion of selling prices.

We are typically required to fulfill customer orders within a short period of time, sometimes within 24 hours. This results in our having a minimal level of backlog orders, typically one to two weeks of backlog for IC photomasks and two to three weeks of backlog for FPD photomasks.

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 display devices, mobile communications, and computing solutions. While we 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, we believe that such transitions and cycles will continue into the future, beneficially and adversely affecting our business, financial condition and operating results as they occur. We believe our ability to remain successful in these environments is dependent upon the achievement of our goals of being a service and technology leader and efficient solutions supplier, which we believe should enable us to continually reinvest in our global infrastructure.

The photomask industry has been, and is expected to continue to be, characterized by technological change and evolving industry standards. In order to remain competitive, we will be required to continually anticipate, respond to, and utilize changing technologies. In particular, we believe that, as semiconductor geometries continue to become smaller, and FPD designs become larger or otherwise more advanced, we will be required to manufacture even more complex optically-enhanced reticles, including optical proximity correction and phase-shift photomasks. Additionally, demand for photomasks has been, and could in the future be, adversely affected by changes in semiconductor and high performance electronics fabrication methods that affect the type or quantity of photomasks used, such as changes in semiconductor demand that favor field-programmable gate arrays and other semiconductor designs that replace application-specific ICs, or the use of certain chip stacking methodologies that lessen the emphasis on conventional lithography technology. Furthermore, increased market acceptance of alternative methods of transferring circuit designs onto semiconductor wafers could reduce or eliminate the need for photomasks in the production of semiconductors. As of the end of fiscal year 2017, one alternative method, direct-write lithography, has not been proven to be a commercially viable alternative to photomasks, as it is considered to be too slow for high volume semiconductor wafer production, and we have not experienced a significant loss of revenue as a result of this or other alternative semiconductor design methodologies. However, should direct-write or any other alternative method of transferring IC designs to semiconductor wafers without the use of photomasks achieve market acceptance, and we do not anticipate, respond to, or utilize these or other changing technologies due to resource, technological or other constraints, our business and results of operations could be materially adversely affected.

 

Both our revenues and costs have been affected by the increased demand for high-end technology photomasks that require more advanced manufacturing capabilities, but generally command higher average selling prices (“ASPs”). Our capital expenditure payments aggregated approximately $246 million for the three fiscal years ended October 29, 2017, which has significantly contributed to our cost of goods sold. We intend to continue to make the required investments to support the technological demands of our customers that we believe will position us for future growth. In support of this effort, we expect capital expenditure payments to be approximately $250 million in fiscal year 2018.

The manufacture of photomasks for use in fabricating ICs, FPDs, and other related products built using comparable photomask-based process technologies has been, and continues to be, capital intensive. Our employees and our integrated global manufacturing network, which currently consists of nine manufacturing sites, represent a significant portion of our fixed operating cost base. Should our revenue decrease as a result of a decrease in design releases from our customers, we may have excess or underutilized production capacity, which could significantly impact our operating margins, or result in write-offs from asset impairments.

In the third quarter of fiscal 2017, we agreed to create a joint venture with DNP to encompass the Xiamen project. Under the agreement, our wholly-owned Singapore subsidiary will own 50.01% of the joint venture, which will be named Photronics DNP Mask Corporation Xiamen (PDMCX), and a subsidiary of DNP will own the remaining 49.99%. The financial results of the joint venture will be included in Photronics’ consolidated financial statements.

In the third quarter of fiscal 2017, our majority owned IC facility in Taiwan paid a dividend of $8.3 million to its noncontrolling interests.

In the third quarter of fiscal 2016, our majority owned IC facility in Taiwan paid a dividend of $11.9 million to its noncontrolling interests.

In the third quarter of fiscal 2016, we sold our investment in MP Mask to Micron for $93.1 million and recorded a gain of $0.1 million on the sale. On that same date a supply agreement commenced between Photronics and Micron, which provided that we would be the majority outsourced supplier of Micron’s photomasks and related services. The supply agreement had a one year term and expired in May 2017. We have unlimited rights to use the technology under our prior technology license agreement.

In the second quarter of fiscal 2016, $57.5 million of our senior convertible notes matured. We repaid $50.1 million to noteholders, and issued approximately 0.7 million shares to noteholders that elected to convert their notes to common stock. The notes were exchanged at the rate of approximately 96 shares per $1,000 note principle, equivalent to a conversion rate of $10.37 per share.

 

In the first quarter of fiscal 2015 we privately exchanged $57.5 million in aggregate principal amount of our 3.25% convertible senior notes with a maturity date of April 1, 2016, for new 3.25% convertible senior notes with an aggregate principal amount of $57.5 million with a maturity date of April 1, 2019. The conversion rate of the new notes is the same as that of the exchanged notes, which were issued in March 2011 with a conversion rate of approximately 96 shares of common stock per $1,000 note principal, equivalent to a conversion price of $10.37 per share of common stock, and is subject to adjustment upon the occurrence of certain events which are described in the indenture dated January 22, 2015. Note holders may convert each $1,000 principal amount of notes at any time prior to the close of business on the second scheduled trading day immediately preceding April 1, 2019, and we are 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.

Results of Operations

The following table presents selected operating information expressed as a percentage of revenue:

Note:  All the following tabular comparisons, unless otherwise indicated, are for the fiscal years ended October 29, 2017 (2017), October 30, 2016 (2016) and November 1, 2015 (2015), in millions of dollars.

 

Revenue

Revenue decreased 6.8% in 2017 to $450.7 million from $483.5 million in 2016. IC photomask revenue decreased $14.3 million, or 3.9%, as a result of decreased volume of both high-end (4.8%) and mainstream (3.4%) products. Revenue from high-end IC products decreased $23.9 million, or 18.3%, from $130.4 million last year to $106.5 million, primarily as a result of decreased ASPs, while revenue from mainstream IC products increased $9.7 million, or 4.1%, from $234.1 million to $243.8 million which resulted from increased ASPs. FPD sales decreased in 2017 by $18.5 million, or 15.6% from 2016. Revenue from high-end FPD sales fell $18.7 million, or 21.6%, year-over-year, the causes of which were $11.8 million and $6.9 million from decreased ASPs and volume, respectively. FPD mainstream photomask revenue was $32.5 million, essentially flat year-over-year, with a modest increase in volume offsetting a slightly lower decrease in ASPs. 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. High-end photomasks typically have higher ASPs than mainstream products.

We believe our revenue will increase in 2018, as we expect revenues to increase for both high-end IC and FPD products. Our projected increase in high-end IC revenue is based on our expectation that our largest IC customer will increase its market share at the 28 nanometer node. In addition, we are anticipating growth at the 22 and 14 nanometer node levels. We are expecting increased demand for AMOLED products to lead to revenue growth in 2018, and plan to support this growth, in part, with a new high-end mask writing tool, which is due for delivery to us in the first half of 2018. Beyond 2018, we are anticipating our IC and FPD facilities under construction in China and expected to commence production in the spring of 2019 to fuel growth.

Net revenue decreased 7.8% in 2016, compared with 2015. IC photomask revenue was down primarily as a result of a decline in customer new product launches that require logic masks, as well as some reduction in foundry demand for memory masks. Revenue from high-end IC products decreased $36.5 million from last year to $130.4 million. FPD revenue increased from 2015 primarily due to increased demand for high-end large area masks. Revenue from high-end FPD Masks increased by $15.7 million to $86.6 million in 2016. High-end photomasks typically have higher ASPs than mainstream photomasks.

The following table presents changes in revenue from fiscal years 2016 to 2017 and 2015 to 2016 by geographic area:

 

Gross Profit

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $1.0 million in 2017, compared with 2016, primarily due to reduced bad debt expense and professional fees, which were partially offset by increased compensation costs and selling expenses. Selling, general and administrative expenses decreased $4.4 million in 2016, compared with 2015, primarily due to reduced compensation, freight, and other expenses.

Research and Development

Research and development expenses primarily consist of development efforts related to high-end process technologies for 10nm and below IC nodes, FPD G8 and above, and AMOLED applications. Research and development expenses decreased by $5.8 million in 2017 to $15.9 million, from $21.7 million in 2016 as a result of lower customer qualification costs for high-end reticles in both Asia and the U.S. Research and development expenses did not change significantly from 2015 to 2016.

 

Other Income (Expense), net

In January 2016, we sold a minority interest investment in a foreign entity and recognized a gain of $8.8 million. In May 2016, we sold our 49.99% interest in the MP Mask joint venture and recognized a gain of $0.1 million.

Income Tax Provision

Net Income Attributable to Noncontrolling Interests

Liquidity and Capital Resources

Cash Requirements

Contractual Obligations

The following table presents our contractual obligations as of October 29, 2017:

Off-Balance Sheet Arrangements

We lease certain office facilities and equipment under operating leases that may require us to pay taxes, insurance and maintenance expenses related to the properties. Certain of these leases contain renewal or purchase options exercisable at the end of the lease terms. See Note 7 to the consolidated financial statements for additional information on these operating leases.

Business Outlook

A majority of our revenue growth is expected to continue to come from the Asian region, predominantly in China. In response to this expectation, we agreed to enter into a joint venture that will complete the construction of an IC research and development and manufacturing facility in Xiamen, China, in late 2018. Production is anticipated to begin at this facility in early 2019. In addition, in August 2017, we announced our plan to construct an FPD manufacturing facility in Hefei, China, in which production is also anticipated to begin in early 2019. Please refer to Note 19 of our consolidated financial statements for additional information on these undertakings.

 

We continue to assess our global manufacturing strategy and monitor our sales volume and related cash flows from operations. This ongoing assessment could result in future facility closures, asset redeployments, additional impairments of intangible or long-lived assets, workforce reductions, or the addition of increased manufacturing facilities, all of which would be based on market conditions and customer requirements.

Our future results of operations and the other forward-looking statements contained in this filing involve a number of risks and uncertainties. While various risks and uncertainties have been discussed, a number of other unforeseen factors could cause actual results to differ materially from our expectations.

Critical Accounting Estimates

Our consolidated financial statements are based on the selection and application of accounting policies, which require management to make significant estimates and assumptions. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our financial condition and results of operations:

·

the determination of the useful lives of our property, plant, and equipment and the timing of when depreciation should begin on such assets, as these determinations can significantly impact our gross margin and research and development expenses;

·

the evaluation of the recoverability of our long-lived and definite-lived intangible assets, which requires us to forecast the future cash flows related to these assets, and impacts our gross margin and operating expenses;

·

the estimation of the collectability of our accounts receivables, which impacts our gross margin and operating expenses;

·

the recognition and measurement of current and deferred income taxes, including the measurement of uncertain tax positions, which impact our provision for income taxes and our tax-related asset and liability balances.

Please refer to Note 1 to our consolidated financial statements for additional information on these critical accounting estimates and our other significant accounting policies.

Recent Accounting Pronouncements

See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 21 Recent Accounting Pronouncements” for recent accounting pronouncements that may affect our financial reporting.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Rate Risk

We conduct business in several major international currencies throughout our worldwide operations, and our financial performance may be affected by fluctuations in the exchange rates of these currencies. Changes in exchange rates can positively or negatively affect our reported revenue, operating income, assets, liabilities, and equity. The functional currencies of our Asian subsidiaries are the South Korean won, the New Taiwan dollar, the Chinese renminbi and the Singapore dollar. The functional currencies of our European subsidiaries are the British pound and the euro. In addition, we have transactions and balances in Japanese yen.

Our primary net foreign currency exposures as of October 29, 2017, included the South Korean won, the Japanese yen, the New Taiwan dollar, the Chinese renminbi, the Singapore dollar, the British pound, and the euro. As of October 29, 2017, a 10% adverse movement in the value of these currencies against the functional currencies of our subsidiaries would have resulted in a net unrealized pre-tax loss of $13.0 million, which represents an increase of $3.9 million from October 30, 2016. The increase in foreign currency rate change risk is primarily the result of increased exposures of the Chinese renminbi against the U.S. dollar, and the Taiwan dollar against the U.S. dollar and, to a lesser extent, the Japanese yen. We do not believe that a 10% change in the exchange rates of other non-US dollar currencies would have had a material effect on our October 29, 2017 consolidated financial statements.

Interest Rate Risk

At October 29, 2017, we did not have any variable rate borrowings. Therefore, a 10% change in interest rates would not have had a material effect on our consolidated financial position, results of operations, or cash flows in the year ended October 29, 2017.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Photronics, Inc.

Brookfield, Connecticut

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Deloitte & Touche LLP

Hartford, Connecticut

December 20, 2017

 

PHOTRONICS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except per share amounts)

 

 

See accompanying notes to consolidated financial statements.

 

		Year Ended
		October 29, 2017				October 30, 2016				November 1, 2015
Revenue		$	450,678			$	483,456			$	524,206
Cost of goods sold			(359,363	)			(364,750	)			(381,070	)
Gross profit			91,315				118,706				143,136
Operating expenses:
Selling, general and administrative			(43,585	)			(44,577	)			(48,983	)
Research and development			(15,862	)			(21,654	)			(21,920	)
Total operating expenses			(59,447	)			(66,231	)			(70,903	)
Operating income			31,868				52,475				72,233
Other income (expense):
Interest income and other income (expense)			(3,068	)			2,424				2,797
Interest expense			(2,235	)			(3,365	)			(4,990	)
Gains on sales of investments			-				8,940				-
Income before income tax provision			26,565				60,474				70,040
Income tax provision			(5,276	)			(4,798	)			(13,181	)
Net income			21,289				55,676				56,859
Net income attributable to noncontrolling interests			(8,159	)			(9,476	)			(12,234	)
Net income attributable to Photronics, Inc. shareholders		$	13,130			$	46,200			$	44,625
Earnings per share:
Basic		$	0.19			$	0.68			$	0.67
Diluted		$	0.19			$	0.64			$	0.63
Weighted-average number of common shares outstanding:
Basic			68,436				67,539				66,331
Diluted			69,288				76,354				78,383

		Year Ended
		October 29, 2017				October 30, 2016				November 1, 2015
Net income		$	21,289			$	55,676			$	56,859
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments			19,799				6,334				(40,154	)
Amortization of cash flow hedge			129				129				128
Other			478				(589	)			(381	)
Net other comprehensive income (loss)			20,406				5,874				(40,407	)
Comprehensive income			41,695				61,550				16,452
Less: comprehensive income attributable to noncontrolling interests			14,003				12,448				4,174
Comprehensive income attributable to Photronics, Inc. shareholders		$	27,692			$	49,102			$	12,278

		Year Ended
		October 29, 2017				October 30, 2016				November 1, 2015
Cash flows from operating activities:
Net income		$	21,289			$	55,676			$	56,859
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment			81,699				77,613				75,684
Amortization of intangible assets			4,874				5,228				6,729
Gains on sales of investments			-				(8,940	)			-
Share-based compensation			3,627				3,827				3,689
Deferred income taxes			1,633				(3,816	)			3,401
Changes in assets, liabilities, and other:
Accounts receivable			(9,625	)			18,807				(21,815	)
Inventories			(602	)			2,268				(2,893	)
Other current assets			1,127				7,936				(2,557	)
Accounts payable, accrued liabilities and other			(7,189	)			(36,462	)			14,098
Net cash provided by operating activities			96,833				122,137				133,195
Cash flows from investing activities:
Purchases of property, plant and equipment			(91,965	)			(50,147	)			(104,033	)
Acquisition of business			(5,400	)			-				-
Proceeds from sales of investments			167				101,853				-
Purchases of intangible assets			(834	)			(13	)			(771	)
Other			(34	)			597				499
Net cash (used in) provided by investing activities			(98,066	)			52,290				(104,305	)
Cash flows from financing activities:
Repayments of long-term borrowings			(5,428	)			(57,609	)			(9,571	)
Dividends paid to noncontrolling interests			(8,298	)			(11,890	)			-
Proceeds from share-based arrangements			2,830				3,463				2,651
Return of capital to noncontrolling interests			-				(966	)			-
Other			(32	)			(20	)			(179	)
Net cash used in financing activities			(10,928	)			(67,022	)			(7,099	)
Effects of exchange rate changes on cash and cash equivalents			6,108				802				(8,853	)
Net (decrease) increase in cash and cash equivalents			(6,053	)			108,207				12,938
Cash and cash equivalents at beginning of year			314,074				205,867				192,929
Cash and cash equivalents at end of year		$	308,021			$	314,074			$	205,867
Supplemental disclosure of non-cash information:
Accrual for property, plant and equipment purchased during year		$	2,767			$	7,866			$	25,858
Conversion of debt to common stock			-				7,439				-

		October 29 2017				October 30, 2016
Finished goods		$	664			$	142
Work in process			2,957				2,987
Raw materials			20,082				18,952
		$	23,703			$	22,081

		October 29, 2017				October 30, 2016
Land		$	9,959			$	8,036
Buildings and improvements			125,290				121,873
Machinery and equipment			1,547,870				1,475,755
Leasehold improvements			20,050				19,224
Furniture, fixtures and office equipment			12,989				12,700
Construction in progress			72,045				23,961
			1,788,203				1,661,549
Less: Accumulated depreciation and amortization			1,253,006				1,155,115
		$	535,197			$	506,434

		October 29, 2017				October 30, 2016
Machinery and equipment		$	34,917			$	34,917
Less accumulated amortization			13,843				10,352
		$	21,074			$	24,565

As of October 29, 2017		Gross Amount				Accumulated Amortization				Net Amount
Technology license agreement		$	59,616			$	(45,374	)		$	14,242
Customer relationships			9,375				(7,793	)			1,582
Software and other			8,195				(6,897	)			1,298
		$	77,186			$	(60,064	)		$	17,122
As of October 30, 2016
Technology license agreement		$	59,616			$	(41,400	)		$	18,216
Customer relationships			8,657				(7,522	)			1,135
Software and other			6,444				(5,941	)			503
		$	74,717			$	(54,863	)		$	19,854

Fiscal Years:
2018		$	4,742
2019			4,564
2020			4,510
2021			2,747
2022			128

		Fiscal Year
		2016				2015
Revenue		$	49,626			$	96,068
Gross profit			2,736				1,215
Net loss			-				(151	)

		October 29, 2017				October 30, 2016
3.25% convertible senior notes due in April 2019		$	57,337			$	57,221
2.77% capital lease obligation payable through July 2018			4,639				10,067
			61,976				67,288
Less current portion			4,639				5,428
		$	57,337			$	61,860

Classification		Previously Reported				Change Due to Adoption				Retrospectively Adjusted
Other assets		$	4,071			$	(279	)		$	3,792
Long-term borrowings			62,139				(279	)			61,860

2018		$	1,051
2019			684
2020			439
2021			380
2022			371
Thereafter			1,000
		$	3,925

		Year Ended
		October 29, 2017				October 30, 2016				November 1, 2015
Expected volatility			32.2	%			48.4	%			53.7	%
Risk-free rate of return			1.9 – 2.0	%			1.2 – 1.7	%			1.3 – 1.6	%
Dividend yield			0.0	%			0.0	%			0.0	%
Expected term		5.0 years				5.1 years				4.7 years

Options		Shares				Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at October 31, 2016			3,535,335			$	7.59
Granted			344,750				11.33
Exercised			(401,750	)			6.09
Cancelled and forfeited			(133,100	)			11.17
Outstanding at October 29, 2017			3,345,235			$	8.01		5.8 years		$	7,108
Exercisable at October 29, 2017			2,142,094			$	6.60		4.6 years		$	6,661
Vested and expected to vest as of October 29, 2017			3,180,991			$	7.87		5.7 years		$	7,052

Restricted Stock		Shares				Weighted-Average Fair Value at Grant Date
Outstanding at October 31, 2016			162,375			$	9.61
Granted			317,750				10.94
Vested			(126,869	)			9.78
Cancelled			(14,075	)			10.89
Outstanding at October 29, 2017			339,181			$	10.74
Vested and expected to vest as of October 29, 2017			302,898			$	10.75

		Year Ended
		October 29 2017				October 30, 2016				November 1, 2015
United States		$	(11,544	)		$	6,270			$	6,646
Foreign			38,109				54,204				63,394
		$	26,565			$	60,474			$	70,040

		Year Ended
		October 29, 2017				October 30, 2016				November 1, 2015
Current:
Federal		$	173			$	492			$	160
State			(4	)			(2	)			(109	)
Foreign			3,474				8,115				9,729
Deferred:
Federal			-				-				-
State			15				10				7
Foreign			1,618				(3,817	)			3,394
Total		$	5,276			$	4,798			$	13,181

		Year Ended
		October 29, 2017				October 30, 2016				November 1, 2015
U.S. federal income tax at statutory rate		$	9,298			$	21,166			$	24,514
Changes in valuation allowances			(3,632	)			(9,516	)			(11,471	)
Distributions from foreign subsidiaries			6,471				3,438				448
Foreign tax rate differentials			(5,230	)			(9,620	)			(4,356	)
Tax credits			(1,925	)			(944	)			(2,729	)
Uncertain tax positions, including reserves, settlements and resolutions			(932	)			134				(175	)
Income tax holiday			(743	)			(507	)			(869	)
Employee stock compensation			512				452				634
Tax on foreign subsidiary earnings			1,712				225				6,589
Other, net			(255	)			(30	)			596
		$	5,276			$	4,798			$	13,181

		As of
		October 29, 2017				October 30, 2016
Deferred income tax assets:
Net operating losses		$	40,942			$	46,158
Reserves not currently deductible			4,196				5,904
Alternative minimum tax credits			3,946				3,772
Tax credit carryforwards			10,037				8,814
Share-based compensation			2,335				1,972
Other			1,503				1,719
			62,959				68,339
Valuation allowances			(25,590	)			(29,315	)
			37,369				39,024
Deferred income tax liabilities:
Undistributed earnings of foreign subsidiaries			(4,335	)			(3,962	)
Property, plant and equipment			(19,280	)			(19,977	)
Other			(322	)			(254	)
			(23,937	)			(24,193	)
Net deferred income tax assets		$	13,432			$	14,831
Reported as:
Deferred income tax assets		$	15,481			$	16,322
Deferred income tax liabilities			(2,049	)			(1,491	)
		$	13,432			$	14,831

Operating Loss Carryforwards		Amount				Expiration  Periods
Federal		$	86,358				2025-2033
State			214,532				2018-2037
Foreign			15,414				2019-2023

Tax Credit Carryforwards		Amount				Expiration Period
Federal research and development		$	5,580				2019-2037
Federal alternative minimum			3,946			Indefinite
State			5,829				2018-2031
Foreign			667				2022

		Year Ended
		October 29, 2017				October 30, 2016				November 1, 2015
Balance at beginning of year		$	4,606			$	4,029			$	4,993
Additions (reductions) for tax positions in prior years			207				744				(212	)
Additions based on current year tax positions			323				268				318
Settlements			(922	)			(378	)			(720	)
Lapses of statutes of limitations			(830	)			(57	)			(350	)
Balance at end of year		$	3,384			$	4,606			$	4,029

		Year Ended
		October 29, 2017				October 30, 2016				November 1, 2015
Net income attributable to Photronics, Inc. shareholders		$	13,130			$	46,200			$	44,625
Effect of dilutive securities:
Interest expense on convertible notes, net of related tax effects			-				2,938				4,363
Earnings for diluted earnings per share		$	13,130			$	49,138			$	48,988
Weighted-average common shares computations:
Weighted-average common shares used for basic earnings per share			68,436				67,539				66,331
Effect of dilutive securities:
Share-based payment awards			852				974				967
Convertible notes			-				7,841				11,085
Dilutive common shares			852				8,815				12,052
Weighted-average common shares used for diluted earnings per share			69,288				76,354				78,383
Basic earnings per share		$	0.19			$	0.68			$	0.67
Diluted earnings per share		$	0.19			$	0.64			$	0.63

		Year Ended
		October 29, 2017				October 30, 2016				November 1, 2015
Convertible notes			5,542				-				-
Share based payment awards			1,308				1,635				1,641
Total potentially dilutive shares excluded			6,850				1,635				1,641

		Year Ended
		October 29, 2017				October 30, 2016				November 1, 2015
Net revenue
Taiwan		$	187,818			$	193,216			$	205,141
Korea			122,165				141,017				147,921
United States			102,040				113,670				132,792
Europe			36,081				33,384				35,792
All other Asia			2,574				2,169				2,560
		$	450,678			$	483,456			$	524,206
IC		$	350,260			$	364,531			$	420,833
FPD			100,418				118,925				103,373
		$	450,678			$	483,456			$	524,206

		As of
		October 29, 2017				October 30, 2016				November 1, 2015
Long-lived assets
Taiwan		$	186,192			$	176,644			$	185,087
United States			180,095				173,658				184,282
Korea			147,265				146,515				167,618
Europe			13,372				9,617				10,287
All other Asia			8,273				-				10
		$	535,197			$	506,434			$	547,284

		Year Ended October 29, 2017
		Foreign Currency Translation Adjustments				Amortization of Cash Flow Hedge				Other				Total
Balance at October 31, 2016		$	(6,567	)		$	(177	)		$	(927	)		$	(7,671	)
Other comprehensive income before reclassifications			19,799				-				478				20,277
Amounts reclassified from other accumulated comprehensive income			-				129				-				129
Net current period other comprehensive income			19,799				129				478				20,406
Less: other comprehensive income attributable to noncontrolling interests			(5,605	)			-				(239	)			(5,844	)
Balance at October 29, 2017		$	7,627			$	(48	)		$	(688	)		$	6,891

		Year Ended October 30, 2016
		Foreign Currency Translation Adjustments				Amortization of Cash Flow Hedge				Other				Total
Balance at November 1, 2015		$	(9,634	)		$	(306	)		$	(633	)		$	(10,573	)
Other comprehensive income (loss) before reclassifications			6,334				-				(589	)			5,745
Amounts reclassified from other accumulated comprehensive income			-				129				-				129
Net current period other comprehensive income (loss)			6,334				129				(589	)			5,874
Less: other comprehensive (income) loss attributable to noncontrolling interests			(3,267	)			-				295				(2,972	)
Balance at October 30, 2016		$	(6,567	)		$	(177	)		$	(927	)		$	(7,671	)

		October 29, 2017								October 30, 2016
		Fair Value				Carrying Value				Fair Value				Carrying Value
3.25% convertible senior notes due 2019		$	67,396			$	57,337			$	68,230			$	57,221

		First				Second				Third				Fourth				Year
Fiscal 2017:
Net sales		$	109,831			$	108,297			$	111,579			$	120,971			$	450,678
Gross profit			22,999				20,157				21,717				26,442				91,315
Net income			4,510				1,484				4,799				10,496				21,289
Net income attributable to Photronics, Inc. shareholders			1,946				1,797				4,001				5,386				13,130
Earnings per share:
Basic		$	0.03			$	0.03			$	0.06			$	0.08			$	0.19
Diluted		$	0.03			$	0.03			$	0.06			$	0.08			$	0.19
Fiscal 2016:
			(a)				(b)								(c)				(a)(d)
Net sales		$	129,956			$	122,923			$	123,209			$	107,368			$	483,456
Gross profit			35,436				31,287				31,450				20,533				118,706
Net income			23,501				14,153				11,453				6,569				55,676
Net income attributable to Photronics, Inc. shareholders			21,002				11,854				8,088				5,256				46,200
Earnings per share:
Basic		$	0.31			$	0.18			$	0.12			$	0.08			$	0.68
Diluted		$	0.28			$	0.16			$	0.12			$	0.08			$	0.64

		Page No.
1.	Financial Statements: See “INDEX TO CONSOLIDATED FINANCIAL STATEMENTS” in Part II, Item 8 of this Form 10-K.	28
2.	Financial Statement Schedule:
	Report of Independent Registered Public Accounting Firm on financial statement schedule	59
	Schedule II - Valuation and Qualifying Accounts for the years ended October 29, 2017, October 30, 2016 and November 1, 2015	59
	All other schedules are omitted because they are not applicable.
3.	Exhibits	59

		Schedule II   Valuation and Qualifying Accounts for the Years Ended October 29, 2017, October 30, 2016 and November 1, 2015 (in $ thousands)
		Balance at Beginning of Year				Charged to Costs and Expenses					Deductions					Balance at End of Year
Allowance for Doubtful Accounts
Year-ended October 29, 2017			3,901				(1,600	)	(b)			18		(a)			2,319
Year ended October 30, 2016			3,301				642					(42	)	(a)			3,901
Year ended November 1, 2015			3,078				730					(507	)	(a)			3,301
Deferred Tax Asset Valuation Allowance
Year-ended October 29, 2017			29,315				-					(3,725	)	(c)			25,590
Year ended October 30, 2016			38,763				(4,262	)	(b)			(5,186	)	(c)			29,315
Year ended November 1, 2015			49,548				(2,364	)	(b)			(8,421	)	(c)			38,763

Exhibit Number	Description
3.1	Certificate of Incorporation as amended July 9, 1986, April 9, 1990, March 16, 1995, November 13, 1997, April 15, 2002 and June 20, 2005 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed January 3, 2014).
3.2	Amended and Restated By-laws of the Company dated as of September 7, 2016 (incorporated by reference to the Company’s Current Report on Form 8-K filed on September 13, 2016).
4.4	Indenture dated January 22, 2015, by and between the Company and the Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on January 28, 2015).
10.1	The Company’s 1992 Employee Stock Purchase Plan. *+
10.2	Amendment to the Employee Stock Purchase Plan as of March 24, 2004 (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K filed on January 6, 2017). +
10.3	Amendment to the Employee Stock Purchase Plan as of April 8, 2010  (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K filed on January 7, 2016). +
10.4	Amendment to the Employee Stock Purchase Plan as of March 28, 2012 (incorporated by reference to Exhibit 10.9 of the Company’s Quarterly Report on Form 10-Q filed September 5, 2012).+
10.5	2016 Equity Incentive Compensation Plan (incorporated by reference to the Company’s Definitive Proxy Statement filed on February 26, 2016). +
10.6	The Company’s 2007 Long-Term Equity Incentive Plan (incorporated by reference to the Company’s Definitive Proxy Statement filed on March 3, 2014). +
10.7	Amendment to the 2007 Long-Term Equity Incentive Plan as of April 8, 2010 (incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K Field on January 7, 2016). +

10.8	Amendment to the 2007 Long Term Equity Incentive Plan as of April 11, 2014 (incorporated by reference to Exhibit 10.8 of the Company’s Annual Report on Form 10-K filed January 6, 2015). +
10.9	2011 Executive Incentive Compensation Plan effective as of November 1, 2010  (incorporated by reference to Exhibit 10.9 of the Company’s Annual Report on Form 10-K filed January 6, 2015).+
10.10	Executive Employment Agreement between the Company and Constantine Macricostas dated May 4, 2015 (incorporated by reference to Exhibit 10.31 to the Company’s Quarterly Report on Form 10-Q filed on September 9, 2015). +
10.11	Executive Employment Agreement between the Company and Sean T. Smith dated February 20, 2003 (incorporated by reference to Exhibit 10.12 of the Company’s Annual Report on Form 10-K filed January 6, 2015). +
10.12	Limited Liability Company Operating Agreement of MP Mask Technology Center, LLC (MP Mask) between Micron Technology, Inc. (“Micron”) and Photronics, Inc. (“Photronics”) dated May 5, 2006 (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K filed on January 13, 2012). #
10.13	Contribution and Units Purchase Agreement between Micron, Photronics and MP Mask dated May 5, 2006 (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K filed on January 13, 2012). #
10.14	Technology License Agreement among Micron, Photronics and MP Mask dated May 5, 2006 (incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K filed on January 13, 2012). #
10.15	Photronics to Micron Supply Agreement between Micron and Photronics dated May 5, 2006 (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K filed on January 13, 2012). #
10.16	MP Mask to Photronics Supply Agreement between MP Mask and Photronics dated May 5, 2006 (incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K filed on January 13, 2012). #
10.17	Special Warranty Deed dated as of February 29, 2012 (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on March 6, 2012).
10.18	Outsource Supply Agreement between Micron and Photronics dated March 24, 2015 (incorporated by reference to Exhibit 10.18 to the Company’s Quarterly Report on Form 10-Q filed on June 4, 2015). #
10.19	Bridge License Agreement between Micron and Photronics dated March 24, 2015 (incorporated by reference to Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q filed on June 4, 2015). #
10.20	Joint Venture Framework Agreement dated November 20, 2013, between the Company and Dai Nippon Printing  Co., Ltd (incorporated by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K/A filed July 8, 2015). #
10.21	Joint Venture Operating Agreement dated November 20, 2013, between the Company and Dai Nippon Printing Co., Ltd. (incorporated by reference to Exhibit 10.20 of the Company’s Annual Report on Form 10-K/A filed July 8, 2015).#
10.22	Outsourcing Agreement dated November 20, 2013, among the Company, Dai Nippon Printing Co., Ltd and Photronics Semiconductor Mask Corporation (incorporated by reference to Exhibit 10.21 of the Company’s Annual Report on Form 10-K/A filed July 8, 2015).#
10.23	License Agreement dated November 20, 2013, between the Company and Photronics Semiconductor Mask Corporation (incorporated by reference to Exhibit 10.22 of the Company’s Annual Report on Form 10-K/A filed July 8, 2015).#
10.24	License Agreement dated November 20, 2013, between Dai Nippon Printing Co., Ltd and Photronics Semiconductor Mask Corporation (incorporated by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K/A filed July 8, 2015). #
10.25	Margin Agreement dated November 20, 2013, among the Company, Dai Nippon Printing Co., Ltd and Photronics Semiconductor Mask Corporation (incorporated by reference to Exhibit 10.24 of the Company’s Annual Report on Form 10-K/A filed July 8, 2015).#

10.26	Merger Agreement dated January 16, 2014, between Photronics Semiconductor Mask Corporation and DNP Photomask Technology Taiwan Co., Ltd. (incorporated by reference to Exhibit 10.25 of the Company’s Annual Report on Form 10-K/A filed July 8, 2015).#
10.27	Executive Employment Agreement between the Company and Soo Hong Jeong dated May 31, 2011 (incorporated by reference to Exhibit 10.27 of the Company’s Annual Report on Form 10-K filed on January 6, 2017). +
10.28	Executive Employment Agreement between the Company and Christopher J. Progler, Vice President, Chief Technology Officer dated September 10, 2007 (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K filed on January 11, 2008).+
10.29	Executive Employment Agreement between the Company and Peter S. Kirlin dated May 4, 2015 (incorporated by reference to Exhibit 10.28 of the Company’s Quarterly Report on Form 10-Q filed on September 9, 2015).+
10.30	Executive Employment Agreement between the Company and Richelle E. Burr dated May 21, 2010 (incorporated by reference to Exhibit 10.30 of the Company’s Annual Report on Form 10-K filed on January 7, 2016).+
10.31	Executive Employment Agreement between the Company and John P. Jordan dated September 5, 2017* +
10.32	Form of Amendment to Executive Employment Agreement dated March 16, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 16, 2012). +
10.33	Third Amended and Restated Credit Agreement Dated as of December 5, 2013 (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K filed on January 3, 2014).
10.34	Amendment No. 1 Dated as of August 22, 2014 to the Third Amended and Restated Credit Agreement Dated as of December 5, 2013 (incorporated by reference to Exhibit 10.32 of the Company’s Annual Report on Form 10-K filed on January 6, 2015).
10.35	Amendment No. 2 to the Third Amended and Restated Credit Agreement Dated May 15, 2017 (incorporated by reference to Exhibit 10.30 of the Company’s Quarterly Report on Form 10-Q filed on june 8, 2017).
10.36	Second Amended and Restated Security Agreement (incorporated by reference to Exhibit 10.33 of the Company’s Annual Report on Form 10-K filed on January 6, 2015).
10.37	Investment Agreement between Xiamen Torch Hi-Tech Industrial Development Zone Management Committee and Photronics Singapore Pte. Ltd. dated August 18, 2016 (incorporated by reference to Exhibit 10.35 to the Company’s Quarterly Report on Form 10-Q filed on September 2, 2016).#
10.38	Contribution Agreement dated May 16, 2017 among Dai Nippon Printing Co., Ltd. (“DNP), DNP Asia Pacific Pte. Ltd. (“DNP  Asia Pacific”), Photronics, Inc. (“Photronics”), Photronics Sigapore Pte. Ltd., (“Photronics Sigapore”), and Xiamen American Japan Photronics Mask Co., Ltd. (“PDMCX”) (incorporated by reference to Exhibit 10.26 to the Company’s Quarterly Report on Form 10-Q/A filed on December 19, 2017).#
10.39	Joint Venture Operating Agreement dated May 16, 2017 among Photronics, Photronics Singapore, DNP and DNP Asia Pacific (incorporated by reference to Exhibit 10.27 to the Company’s Quarterly Report on Form 10-Q/A filed on December 19, 2017).#
10.40	Outsourcing Agreement dated May 16, 2017 among Photronics, DNP, Photronics DNP Photomask Corporation (“PDMC”), and PDMCX (incorporated by reference to Exhibit 10.28 to the Company’s Quarterly Report on Form 10-Q/A filed on December 19, 2017).#
10.41	Amended and Restated License Agreement dated May 16, 2017 between DNP and PDMC (incorporated by reference to Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q/A filed on December 19, 2017).#
10.42	Investment Cooperation Agreement between Hefei State Hi-tech Industry Development Zone and Photronics UK, Ltd. *#
21	List of Subsidiaries of the Company.*
23	Consent of Deloitte & Touche LLP.*
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

	PHOTRONICS, INC.
	(Registrant)
By	/s/ JOHN P. JORDAN		December 20, 2017
	John P. Jordan
	Senior Vice President
	Chief Financial Officer
	(Principal Accounting Officer/
	Principal Financial Officer)

By	/s/ PETER S. KIRLIN		December 20, 2017
	Peter S. Kirlin
	Chief Executive Officer
	Director
	(Principal Executive Officer)
By	/s/ JOHN P. JORDAN		December 20, 2017
	John P. Jordan
	Senior Vice President
	Chief Financial Officer
	(Principal Accounting Officer/
	Principal Financial Officer)
By	/s/ CONSTANTINE S. MACRICOSTAS		December 20, 2017
	Constantine S. Macricostas
	Executive Chairman of the Board
By	/s/ WALTER M. FIEDEROWICZ		December 20, 2017
	Walter M. Fiederowicz
	Director
By	/s/ JOSEPH A. FIORITA, JR.		December 20, 2017
	Joseph A. Fiorita, Jr.
	Director
By	/s/ LIANG-CHOO HSIA		December 20, 2017
	Liang-Choo Hsia
	Director
By	/s/ GEORGE MACRICOSTAS		December 20, 2017
	George Macricostas
	Director
By	/s/ MITCHELL G. TYSON		December 20, 2017
	Mitchell G. Tyson
	Director