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

FORM 10-Q

☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 28, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission file number 0-15451

GRAPHIC

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

Connecticut
 
06-0854886
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

15 Secor Road, Brookfield, Connecticut
 
06804
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code
 
(203) 775-9000

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

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
COMMON
PLAB
NASDAQ Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐  No ☒

The registrant had 67,196,843 shares of common stock outstanding as of August 30, 2019.


Index

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 quarterly report on Form 10-Q or in other documents filed with the Securities and Exchange Commission in press releases or in the Company’s communications and discussions with investors and analysts in the normal course of business through meetings, phone calls, or conference calls regarding, among other things, the consummation and benefits of 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, business, and political conditions in both domestic as well as 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 cybersecurity 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, including laws relating to export controls and import laws, rules and tariffs; 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; construction of new facilities and assembly of new equipment; dilutive issuances of the Company’s stock; 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 import and export licenses. Any forward-looking statements should be considered in light of these factors. Accordingly, there is no assurance that the Company’s expectations will be realized. The Company does not assume responsibility for the accuracy and completeness of the forward-looking statements and does not assume an obligation to provide revisions to any forward-looking statements, except as otherwise required by securities and other applicable laws.

2
Index

PHOTRONICS, INC.

INDEX

PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
4
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
9
 
 
 
 
10
 
 
 
Item 2.
25
 
 
 
Item 3.
32
 
 
 
Item 4.
32
 
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1A.
33
 
 
 
Item 2.
33
     
Item 5.
33
 
 
 
Item 6.
34


3
Index

PART I.          FINANCIAL INFORMATION

Item 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PHOTRONICS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
(unaudited)

 
July 28,
2019
   
October 31,
2018
 
             
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
197,243
   
$
329,277
 
Accounts receivable, net of allowance of $1,382 in 2019 and $1,526 in 2018
   
134,369
     
120,515
 
Inventories
   
39,982
     
29,180
 
Prepaid expenses
   
10,439
     
6,901
 
Other current assets
   
38,434
     
16,858
 
                 
Total current assets
   
420,467
     
502,731
 
                 
Property, plant and equipment, net
   
636,743
     
571,781
 
Intangible assets, net
   
9,013
     
12,368
 
Deferred income taxes
   
17,498
     
18,109
 
Other assets
   
30,474
     
5,020
 
                 
Total assets
 
$
1,114,195
   
$
1,110,009
 
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Short-term debt
 
$
3,900
   
$
-
 
Current portion of long-term debt
   
2,200
     
57,453
 
Accounts payable
   
87,938
     
89,149
 
Accrued liabilities
   
65,236
     
44,474
 
                 
Total current liabilities
   
159,274
     
191,076
 
                 
Long-term debt
   
43,015
     
-
 
Deferred income taxes
   
518
     
643
 
Other liabilities
   
11,050
     
13,721
 
                 
Total liabilities
   
213,857
     
205,440
 
                 
Commitments and contingencies
               
                 
Equity:
               
Preferred stock, $0.01 par value, 2,000 shares authorized, none issued and outstanding
   
-
     
-
 
Common stock, $0.01 par value, 150,000 shares authorized, 70,044 shares issued and 66,349 outstanding at July 28, 2019 and 69,700 shares issued and 67,142 outstanding at October 31, 2018
   
700
     
697
 
Additional paid-in capital
   
559,437
     
555,606
 
Retained earnings
   
251,491
     
231,445
 
Treasury stock, 3,695 shares at July 28, 2019 and 2,558 shares at October 31, 2018
   
(33,807
)
   
(23,111
)
Accumulated other comprehensive loss
   
(14,427
)
   
(4,966
)
                 
Total Photronics, Inc. shareholders’ equity
   
763,394
     
759,671
 
Noncontrolling interests
   
136,944
     
144,898
 
                 
Total equity
   
900,338
     
904,569
 
                 
Total liabilities and equity
 
$
1,114,195
   
$
1,110,009
 

See accompanying notes to condensed consolidated financial statements.

4

PHOTRONICS, INC.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(unaudited)

 
Three Months Ended
   
Nine Months Ended
 
   
July 28,
2019
   
July 29,
2018
   
July 28,
2019
   
July 29,
2018
 
                         
Revenue
 
$
138,112
   
$
136,391
   
$
394,404
   
$
390,616
 
                                 
Cost of goods sold
   
107,542
     
100,794
     
311,721
     
294,538
 
                                 
Gross profit
   
30,570
     
35,597
     
82,683
     
96,078
 
                                 
Operating expenses:
                               
                                 
Selling, general and administrative
   
13,124
     
12,504
     
40,186
     
37,891
 
                                 
Research and development
   
4,046
     
2,653
     
11,852
     
10,574
 
                                 
Total operating expenses
   
17,170
     
15,157
     
52,038
     
48,465
 
                                 
Operating income
   
13,400
     
20,440
     
30,645
     
47,613
 
                                 
Other income (expense):
                               
Interest income and other income (expense), net
   
29
     
1,968
     
5,955
     
2,319
 
Interest expense
   
(377
)
   
(557
)
   
(1,263
)
   
(1,682
)
                                 
Income before income taxes
   
13,052
     
21,851
     
35,337
     
48,250
 
                                 
Income tax provision
   
3,218
     
2,054
     
7,883
     
3,783
 
                                 
Net income
   
9,834
     
19,797
     
27,454
     
44,467
 
                                 
Net income attributable to noncontrolling interests
   
3,487
     
6,792
     
7,361
     
14,899
 
                                 
Net income attributable to Photronics, Inc. shareholders
 
$
6,347
   
$
13,005
   
$
20,093
   
$
29,568
 
                                 
Earnings per share:
                               
                                 
Basic
 
$
0.10
   
$
0.19
   
$
0.30
   
$
0.43
 
                                 
Diluted
 
$
0.10
   
$
0.18
   
$
0.30
   
$
0.41
 
                                 
Weighted-average number of common shares outstanding:
                               
                                 
Basic
   
66,313
     
69,374
     
66,386
     
69,141
 
                                 
Diluted
   
66,570
     
75,258
     
69,919
     
75,121
 

See accompanying notes to condensed consolidated financial statements.

5

PHOTRONICS, INC.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)

 
Three Months Ended
   
Nine Months Ended
 
   
July 28,
2019
   
July 29,
2018
   
July 28,
2019
   
July 29,
2018
 
                         
Net income
 
$
9,834
   
$
19,797
   
$
27,454
   
$
44,467
 
                                 
Other comprehensive (loss) income, net of tax of $0:
                               
                                 
Foreign currency translation adjustments
   
(8,882
)
   
(24,572
)
   
(9,364
)
   
(5,583
)
                                 
Amortization of cash flow hedge
   
-
     
-
     
-
     
48
 
Other
   
28
     
65
     
72
     
86
 
                                 
Net other comprehensive loss
   
(8,854
)
   
(24,507
)
   
(9,292
)
   
(5,449
)
                                 
Comprehensive income (loss)
   
980
     
(4,710
)
   
18,162
     
39,018
 
                                 
Less: comprehensive income attributable to noncontrolling interests
   
2,232
     
2,019
     
7,530
     
12,319
 
                                 
Comprehensive (loss) income attributable to Photronics, Inc. shareholders
 
$
(1,252
)
 
$
(6,729
)
 
$
10,632
   
$
26,699
 

See accompanying notes to condensed consolidated financial statements.

6

PHOTRONICS, INC.
Condensed Consolidated Statements of Equity
(in thousands)
(unaudited)

 
Three Months Ended July 28, 2019
 
   
Photronics, Inc. Shareholders
             
   
Common Stock
   
Additional
Paid-in
   
Retained
   
Treasury
   
Accumulated
Other
Comprehensive
   
Non-
controlling
   
Total
 
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Stock
   
Loss
   
Interests
   
Equity
 
                                                 
Balance at April 29, 2019
   
69,984
   
$
700
   
$
558,359
   
$
245,144
   
$
(33,807
)
 
$
(6,828
)
 
$
134,760
   
$
898,328
 
                                                                 
Net income
   
-
     
-
     
-
     
6,347
     
-
     
-
     
3,487
     
9,834
 
Other comprehensive loss
   
-
     
-
     
-
     
-
     
-
     
(7,599
)
   
(1,255
)
   
(8,854
)
Sale of common stock through employee   stock option and purchase plans
   
38
     
-
     
169
     
-
     
-
     
-
     
-
     
169
 
Restricted stock awards vesting and expense
   
22
     
-
     
636
     
-
     
-
     
-
     
-
     
636
 
Share-based compensation expense
   
-
     
-
     
273
     
-
     
-
     
-
     
-
     
273
 
Repurchase of common stock of subsidiary
   
-
     
-
     
-
     
-
     
-
     
-
     
(48
)
   
(48
)
                                                                 
Balance at July 28, 2019
   
70,044
   
$
700
   
$
559,437
   
$
251,491
   
$
(33,807
)
 
$
(14,427
)
 
$
136,944
   
$
900,338
 

       
Three Months Ended July 29, 2018
 
         
Photronics, Inc. Shareholders
             
   
Common Stock
   
Additional
Paid-in
   
Retained
   
Treasury
   
Accumulated
Other
Comprehensive
   
Non-
controlling
   
Total
 
  
   
Shares
   
Amount
   
Capital
   
Earnings
   
Stock
   
Income
   
Interests
   
Equity
 
                                                 
Balance at April 30, 2018
   
69,443
   
$
694
   
$
552,977
   
$
205,953
   
$
-
   
$
23,756
   
$
134,686
   
$
918,066
 
                                                                 
Net income
   
-
     
-
     
-
     
13,005
     
-
     
-
     
6,792
     
19,797
 
Other comprehensive loss
   
-
     
-
     
-
     
-
     
-
     
(19,734
)
   
(4,773
)
   
(24,507
)
Sale of common stock through employee stock option and purchase plans
   
39
     
1
     
162
     
-
     
-
     
-
     
-
     
163
 
Restricted stock awards vesting and expense
   
23
     
-
     
449
     
-
     
-
     
-
     
-
     
449
 
Share-based compensation expense
   
-
     
-
     
334
     
-
     
-
     
-
     
-
     
334
 
Contribution from noncontrolling interest
 
   
-
     
-
     
-
     
-
     
-
     
-
     
5,998
     
5,998
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
(6,787
)
   
-
     
-
     
(6,787
)
                                                                 
Balance at July 29, 2018
   
69,505
   
$
695
   
$
553,922
   
$
218,958
   
$
(6,787
)
 
$
4,022
   
$
142,703
   
$
913,513
 

See accompanying notes to condensed consolidated financial statements.

7

PHOTRONICS, INC.
Condensed Consolidated Statements of Equity (continued)
(in thousands)
(unaudited)

 
Nine Months Ended July 28, 2019
 
   
Photronics, Inc. Shareholders
             
   
Common Stock
   
Additional
Paid-in
   
Retained
   
Treasury
   
Accumulated
Other
Comprehensive
   
Non-
controlling
   
Total
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Stock
   
Loss
   
Interests
   
Equity
 
                                                 
Balance at November 1, 2018
   
69,700
   
$
697
   
$
555,606
   
$
231,445
   
$
(23,111
)
 
$
(4,966
)
 
$
144,898
   
$
904,569
 
                                                                 
Adoption of ASU 2014-09
   
-
     
-
     
-
     
1,083
     
-
     
-
     
121
     
1,204
 
Adoption of ASU 2016-16
   
-
     
-
     
-
     
(1,130
)
   
-
     
-
     
(3
)
   
(1,133
)
Net income
   
-
     
-
     
-
     
20,093
     
-
     
-
     
7,361
     
27,454
 
Other comprehensive (loss) income
   
-
     
-
     
-
     
-
     
-
     
(9,461
)
   
169
     
(9,292
)
Sale of common stock through employee stock option and purchase plans
   
174
     
2
     
961
     
-
     
-
     
-
     
-
     
963
 
Restricted stock awards vesting and expense
   
170
     
1
     
1,853
     
-
     
-
     
-
     
-
     
1,854
 
Share-based compensation expense
   
-
     
-
     
1,017
     
-
     
-
     
-
     
-
     
1,017
 
Contribution from noncontrolling interest
   
-
     
-
     
-
     
-
     
-
     
-
     
29,394
     
29,394
 
Dividends to noncontrolling interest
   
-
     
-
     
-
     
-
     
-
     
-
     
(44,939
)
   
(44,939
)
Repurchase of common stock of subsidiary
   
-
     
-
     
-
     
-
     
-
     
-
     
(57
)
   
(57
)
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
(10,696
)
   
-
     
-
     
(10,696
)
                                                                 
Balance at July 28, 2019
   
70,044
   
$
700
   
$
559,437
   
$
251,491
   
$
(33,807
)
 
$
(14,427
)
 
$
136,944
   
$
900,338
 

       
Nine Months Ended July 29, 2018
 
         
Photronics, Inc. Shareholders
             
   
Common Stock
   
Additional
Paid-in
   
Retained
   
Treasury
   
Accumulated
Other
Comprehensive
   
Non-
controlling
   
Total
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Stock
   
Income
   
Interests
   
Equity
 
                                                 
Balance at October 30, 2017
   
68,666
   
$
687
   
$
547,596
   
$
189,390
   
$
-
   
$
6,891
   
$
120,731
   
$
865,295
 
                                                                 
Net income
   
-
     
-
     
-
     
29,568
     
-
     
-
     
14,899
     
44,467
 
Other comprehensive loss
   
-
     
-
     
-
     
-
     
-
     
(2,869
)
   
(2,580
)
   
(5,449
)
Sale of common stock through employee stock option and purchase plans
   
702
     
7
     
3,755
     
-
     
-
     
-
     
-
     
3,762
 
Restricted stock awards vesting and expense
   
137
     
1
     
1,291
     
-
     
-
     
-
     
-
     
1,292
 
Share-based compensation expense
   
-
     
-
     
1,132
     
-
     
-
     
-
     
-
     
1,132
 
Contribution from noncontrolling interest
   
-
     
-
     
148
     
-
     
-
     
-
     
17,849
     
17,997
 
Dividends to noncontrolling interest
   
-
     
-
     
-
     
-
     
-
     
-
     
(8,196
)
   
(8,196
)
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
(6,787
)
   
-
     
-
     
(6,787
)
                                                                 
Balance at July 29, 2018
   
69,505
   
$
695
   
$
553,922
   
$
218,958
   
$
(6,787
)
 
$
4,022
   
$
142,703
   
$
913,513
 

See accompanying notes to condensed consolidated financial statements.

8

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

 
Nine Months Ended
 
   
July 28,
2019
   
July 29,
2018
 
             
Cash flows from operating activities:
           
Net income
 
$
27,454
   
$
44,467
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
60,387
     
64,485
 
Changes in assets and liabilities:
               
Accounts receivable
   
(14,185
)
   
(15,097
)
Inventories
   
(15,083
)
   
(8,386
)
Other current assets
   
(9,406
)
   
(9,330
)
Accounts payable, accrued liabilities, and other
   
(25,663
)
   
10,818
 
                 
Net cash provided by operating activities
   
23,504
     
86,957
 
                 
Cash flows from investing activities:
               
Purchases of property, plant and equipment
   
(160,149
)
   
(64,372
)
Government incentives
   
17,694
     
-
 
Other
   
(24
)
   
313
*
                 
Net cash used in investing activities
   
(142,479
)
   
(64,059
)*
                 
Cash flows from financing activities:
               
Proceeds from debt
   
53,227
     
-
 
Contribution from noncontrolling interest
   
29,394
     
17,997
 
Repayments of debt
   
(61,319
)
   
(4,170
)
Dividends paid to noncontrolling interest
   
(26,102
)
   
(8,166
)
Purchase of treasury stock
   
(10,696
)
   
(6,787
)
Proceeds from share-based arrangements
   
1,314
     
4,028
 
Other
   
(92
)
   
(274
)
                 
Net cash (used in) provided by financing activities
   
(14,274
)
   
2,628
 
                 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
   
1,206
     
(975
)*
                 
Net (decrease) increase in cash, cash equivalents, and restricted cash
   
(132,043
)
   
24,551
*
Cash, cash equivalents, and restricted cash at beginning of period
   
331,989
*
   
310,936
*
                 
Cash, cash equivalents, and restricted cash at end of period
 
$
199,946
   
$
335,487
*
                 
Supplemental disclosure information:
               
                 
Accrual for property, plant and equipment purchased during the period
 
$
20,015
   
$
6,958
 
Accrual for property, plant and equipment purchased with funds receivable from government incentives
 
$
11,686
   
$
-
 
Subsidiary dividend payable
 
$
18,760
   
$
-
 

* Amount has been modified to reflect the adoption of ASU 2016-18 (see Note 14).

See accompanying notes to condensed consolidated financial statements.

9

PHOTRONICS, INC.
Notes to Condensed Consolidated Financial Statements
Three Months and Nine Months Ended July 28, 2019 and July 29, 2018
(unaudited)
(in thousands, except share amounts and per share data)

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION


Photronics, Inc. ("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 FPD 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. We currently have eleven manufacturing facilities, which are located in Taiwan (3), Korea, the United States (3), Europe (2), and two recently constructed facilities in China. Our FPD Facility in Hefei, China, commenced production in the second quarter of our fiscal 2019; our IC facility in Xiamen, China, commenced production in the third quarter of our fiscal 2019.


The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, adjustments, all of which are of a normal recurring nature, considered necessary for a fair presentation have been included. Our business is typically impacted during the first, and sometimes the second, quarter of our fiscal year by the North American, European, and Asian holiday periods, as some customers reduce their development and buying activities during those periods. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2019. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended October 31, 2018.

NOTE 2 - INVENTORIES


Inventories are stated at the lower of cost, determined under the first-in, first-out ("FIFO") method, or net realizable value. Presented below are the components of inventory at the balance sheet dates:


 
July 28,
2019
   
October 31,
2018
 
             
Raw materials
 
$
38,500
   
$
25,110
 
Work in process
   
1,343
     
3,402
 
Finished goods
   
139
     
668
 
                 
   
$
39,982
   
$
29,180
 


10
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT


Property, plant and equipment consists of the following:


 
July 28,
2019
   
October 31,
2018
 
             
Land
 
$
11,686
   
$
11,139
 
Buildings and improvements
   
173,234
     
124,771
 
Machinery and equipment
   
1,707,210
     
1,566,163
 
Leasehold improvements
   
19,513
     
19,577
 
Furniture, fixtures and office equipment
   
13,508
     
12,415
 
Construction in progress
   
40,052
     
128,649
 
                 
     
1,965,203
     
1,862,714
 
Accumulated depreciation and amortization
   
(1,328,460
)
   
(1,290,933
)
                 
   
$
636,743
   
$
571,781
 


Depreciation and amortization expense for property, plant and equipment was $20.7 million and $56.9 million in the three- and nine-month periods ended July 28, 2019, respectively, and $18.9 million and $60.8 million in the three- and nine-month periods ended July 29, 2018, respectively.


In January 2017, we entered into a noncash transaction with a customer which resulted in the acquisition of equipment with fair values of approximately $6.7 million during the nine-month period ended July 29, 2018.

NOTE 4 - PDMCX JOINT VENTURE


In January 2018, Photronics, through its wholly owned Singapore subsidiary (hereinafter, within this Note “we”, or “Photronics”), and Dai Nippon Printing Co., Ltd., through its wholly owned subsidiary “DNP Asia Pacific PTE, Ltd.” (hereinafter, within this Note, “DNP”) entered into a joint venture under which DNP obtained a 49.99% interest in our recently established IC business in Xiamen, China, which commenced production in the third quarter of 2019. The joint venture, known as “Xiamen American Japan Photronics Mask Co., Ltd.” (hereinafter, “PDMCX”), was established to develop and manufacture photomasks for leading edge and advanced generation semiconductors. We entered into this joint venture to enable us to compete more effectively for the merchant photomask business in China, and to benefit from the additional resources and investment that DNP provides to enable us to offer advanced-process technology to our customers. No gain or loss was recorded upon the formation of this joint venture.


The total investment per the PDMCX operating agreement (“the Agreement”) is $160 million. As of July 28, 2019, Photronics and DNP had each contributed cash of approximately $48 million, and PDMCX obtained local financing of $35 million. The remaining $29 million investment will be funded, over the next several quarters, with  additional local financing of $15 million and approximately $14 million of cash contributions from Photronics and DNP.


Under the Agreement, DNP is afforded, under certain circumstances, the right to put its interest in PDMCX to Photronics. These circumstances include disputes regarding the strategic direction of PDMCX that may arise after the initial two-year term of the Agreement and cannot be resolved between the two parties. In addition, both Photronics and DNP have the option to purchase, or put, their interest from, or to, the other party, should their ownership interest fall below twenty percent for a period of more than six consecutive months. Under all such circumstances, the sales of ownership interests would be at the exiting party’s ownership percentage of the joint venture’s net book value, with closing to take place within three business days of obtaining required approvals and clearance.



We recorded net losses from the operations of PDMCX of approximately $1.3 million, and $3.2 million during the three and nine-month periods ended July 28, 2019, respectively, and $0.2 million and $0.9 million in the three and nine-month periods ended July 29, 2018, respectively. General creditors of PDMCX do not have recourse to the assets of Photronics, Inc., and our maximum exposure to loss from PDMCX at July 28, 2019, was $42.5 million.


11

As required by the guidance in Topic 810 - “Consolidation” of the Accounting Standards Codification, we evaluated our involvement in PDMCX for the purpose of determining whether we should consolidate its results in our financial statements. The initial step of our evaluation was to determine whether PDMCX was a variable interest entity (“VIE”). Due to its lack of sufficient equity at risk to finance its activities without additional subordinated financial support, we determined that it was a VIE. Having made this determination, we then assessed whether we were the primary beneficiary of the VIE, and concluded that we were the primary beneficiary during the current and prior year reporting periods; thus, as required, the PDMCX financial results have been consolidated with Photronics, Inc. Our conclusion was based on the facts that we held a controlling financial interest in PDMCX (which resulted from our having the power to direct the activities that most significantly impacted its economic performance), had the obligation to absorb losses, and the right to receive benefits that could potentially be significant to PDMCX. Our conclusions that we had the power to direct the activities that most significantly affected the economic performance of PDMCX during the current and prior year reporting periods were based on our right to appoint the majority of its board of directors, which has, among others, the powers to manage the business (through its rights to appoint and evaluate PDMCX management), incur indebtedness, enter into agreements and commitments, and acquire and dispose of PDMCX’s assets. In addition, as a result of the 50.01% variable interest we held during the current and prior-year periods, we had the obligation to absorb losses, and the right to receive benefits, that could potentially be significant to PDMCX.


The carrying amounts of PDMCX assets and liabilities included in our condensed consolidated balance sheets are presented in the following table, together with our exposure to loss related to these assets and liabilities.


 
July 28, 2019
   
October 31, 2018
 
Classification
 
Carrying
Amount
   
Photronics
Interest
   
Carrying
Amount
   
Photronics
Interest
 
                         
Current assets
 
$
20,751
   
$
10,378
   
$
9,625
   
$
4,813
 
Non-current assets
   
123,015
     
61,520
     
43,415
     
21,708
 
                                 
Total assets
   
143,766
     
71,898
     
53,040
     
26,521
 
                                 
Current liabilities
   
15,792
     
7,898
     
21,205
     
10,603
 
Non-current liabilities
   
43,015
     
21,512
     
20
     
10
 
                                 
Total liabilities
   
58,807
     
29,410
     
21,225
     
10,613
 
                                 
Net assets
 
$
84,959
   
$
42,488
   
$
31,815
   
$
15,908
 

NOTE 5 – DEBT


Debt consists of the following:


 
July 28,
2019
   
October 31,
2018
 
             
Project Loans
 
$
35,419
   
$
-
 
Working Capital Loans
   
13,696
     
-
 
3.25% convertible senior notes matured April 2019
   
-
     
57,453
 
                 
     
49,115
     
57,453
 
Current portion
   
(6,100
)
   
(57,453
)
                 
   
$
43,015
   
$
-
 


In November 2018, PDMCX was approved for credit of $50 million, subject to certain limitations related to PDMCX registered capital at the time of the initial approval, pursuant to which PDMCX has and will enter into separate loan agreements (“the Project Loans”) for intermittent borrowings. The Project Loans, which are denominated in Chinese renminbi (RMB), are being used to finance certain capital expenditures in China. PDMCX granted liens on its land, building, and certain equipment as collateral for the Project Loans. As of July 28, 2019, PDMCX had borrowed 243.4 million RMB ($35.4 million) against this approval, which includes $9.6 million borrowed during the three-month period ended July 28, 2019. Payments on these borrowings are due semi-annually through December 2025; the initial payment is scheduled for June 2020. The table below presents, in U.S. dollars, the timing of future payments against the borrowings.


12



 
Fiscal Year
 
   
2020
(all within one year of
July 28, 2019)
   
2021
   
2022
   
2023
   
2024
   
2025
   
2026
 
                                           
Principal payments
 
$
1,310
   
$
6,548
   
$
5,838
   
$
3,533
   
$
6,766
   
$
6,476
   
$
4,948
 


The interest rates on the Project Loans are based on the benchmark lending rate of the People’s Bank of China (4.9% at July 28, 2019). Interest incurred on the loans will be reimbursed through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provide for such reimbursements up to a prescribed limit.


 In November 2018, PDMCX received approval for unsecured credit of $25.0 million, pursuant to which PDMCX may enter into separate loan agreements. Under this credit agreement (the “Working Capital Loan”), PDMCX can borrow up to 140.0 million RMB, or approximately $20.4 million, to pay value-added taxes (“VAT”) and up to 60.0 million RMB ($8.7 million) to fund operations; combined total borrowings are limited to $25.0 million. Through July 28, 2019, PDMCX borrowed 68.0 million RMB ($9.9 million) to pay VAT. Payments on these borrowings are due semiannually, at an increasing rate, through January 2022; PDMCX made installment payments totaling $0.1 million during the three-month period ended July 28, 2019. The table below presents, in U.S. dollars, the timing of future payments against these borrowings.


 
 
Fiscal Year 2020
(all within one year of
July 28, 2019)
   
Fiscal Year
2021
   
Fiscal Year
2022
 
                   
Principal payments
 
$
890
   
$
1,979
   
$
6,927
 


In addition, during the quarter ended July 28, 2019, PDMCX borrowed 11.4 million RMB ($3.9 million) against this approval to fund operations, with repayments due one year from the borrowing dates.


The interest rates on borrowings to fund operations is approximately 4.6% and interest rates on borrowings to pay VAT are approximately 5.0%; both rates are based on the RMB Loan Prime Rate of the National Interbank Funding Center, plus a spread of 67.75 basis points. Interest incurred on the loans will be reimbursed through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provide for such reimbursements up to a prescribed limit.


In January 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 was 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. In April 2019, the entire $57.5 million principal amount was repaid upon maturity.


In September 2018, we entered into a five-year amended and restated credit agreement (“the credit agreement”), which has a $50 million borrowing limit, with an expansion capacity to $100 million. The credit agreement is secured by substantially all of our assets located in the United States and common stock we own in certain foreign subsidiaries. The credit agreement includes minimum interest coverage ratio, total leverage ratio, and minimum unrestricted cash balance covenants (all of which we were in compliance with at July 28, 2019), and limits the amount of dividends, distributions, and redemptions we can pay on our stock to an aggregate amount of $100 million. We had no outstanding borrowings against the credit agreement at July 28, 2019, and $50 million was available for borrowing. The interest rate on the credit agreement (2.5% at July 28, 2019) is based on our total leverage ratio at LIBOR plus a spread, as defined in the credit agreement.



Effective July 25, 2019, the Company entered into a Master Lease Agreement (“MLA”) which enables us to request advance payments or other funds for equipment or enter into an equipment lease in the U.S. In connection with this MLA, we were approved for financing of $35 million for the purchase of equipment; as of July 28, 2019, we had no outstanding borrowings against this MLA. In the fourth quarter of fiscal 2019, the financing entity, upon our request, made an advance payment of $3.4 million to an equipment vendor on our behalf. Interest on this borrowing is payable monthly at thirty-day LIBOR plus 1%, and will continue to accrue until the borrowing is repaid or, as allowed under the MLA, we enter into a lease for the equipment. All borrowings under the MLA are secured by the equipment purchased or financed.

13
NOTE 6 - REVENUE



We adopted Accounting Standards Update 2014-09 and all subsequent amendments which are collectively codified in Accounting Standards Codification Topic 606 - “Revenue from Contracts with Customers” (“Topic 606”) - on November 1, 2018, under the modified retrospective transition method, only with respect to contracts that were not complete as of the date of adoption. This approach required prospective application of the guidance with a cumulative effect adjustment to retained earnings to reflect the impact of the adoption on contracts that were not complete as of the date of the adoption. In accordance with the modified retrospective transition method, the results of the prior year period presented have not been adjusted for the effects of Topic 606.


Under Topic 606, we recognize revenue when, or as, control of a good or service transfers to a customer, in an amount that reflects the consideration to which we expect to be entitled in exchange for transferring those goods or services, whereas, prior to our adoption of Topic 606, we recognized revenue when we shipped to customers or, under some arrangements, when the customers received the goods. The following tables present the impacts of our adoption of Topic 606 on our July 28, 2019, condensed consolidated balance sheet, and condensed consolidated statements of income for the three and nine months ended July 28, 2019, and cash flows for the nine-months ended July 28, 2019.


Condensed Consolidated Balance Sheet
July 28, 2019


 
As Reported
   
Adjustments
   
Balance without
Adoption of Topic 606
 
Assets
                 
Accounts receivable
 
$
134,369
   
$
(363
)
 
$
134,006
 
Inventory
   
39,982
     
4,744
     
44,726
 
Other current assets
   
38,434
     
(6,209
)
   
32,225
 
Deferred income taxes
   
17,498
     
103
     
17,601
 
                         
Liabilities
                       
Accrued liabilities
 
$
65,236
   
$
743
   
$
65,979
 
Deferred income taxes
   
518
     
(326
)
   
192
 
                         
Equity
                       
Photronics, Inc. shareholders’ equity
 
$
763,394
   
$
(1,728
)
 
$
761,666
 
Noncontrolling interests
   
136,944
     
(414
)
   
136,530
 

Condensed Consolidated Statement of Income
Three Months Ended July 28, 2019


 
As Reported
   
Adjustments
   
Balance without
Adoption of Topic 606
 
                   
Revenue
 
$
138,112
   
$
340
   
$
138,452
 
Cost of goods sold
   
107,542
     
87
     
107,629
 
Gross profit
   
30,570
     
253
     
30,823
 
Provision for taxes
   
3,218
     
(15
)
   
3,203
 
                         
Net income
   
9,834
     
238
     
10,072
 
Noncontrolling interests
   
3,487
     
53
     
3,540
 
Income attributable to Photronics, Inc. shareholders
 
$
6,347
   
$
185
   
$
6,532
 

14

Condensed Consolidated Statement of Income
Nine Months Ended July 28, 2019


 
As Reported
   
Adjustments
   
Balance without
Adoption of Topic 606
 
                   
Revenue
 
$
394,404
   
$
(2,180
)
 
$
392,224
 
Cost of goods sold
   
311,721
     
(987
)
   
310,734
 
Gross profit
   
82,683
     
(1,193
)
   
81,490
 
Provision for taxes
   
7,883
     
(149
)
   
7,734
 
                         
Net income
   
27,454
     
(1,044
)
   
26,410
 
Noncontrolling interests
   
7,361
     
(300
)
   
7,061
 
Income attributable to Photronics, Inc. shareholders
 
$
20,093
   
$
(744
)
 
$
19,349
 

Condensed Consolidated Statement of Cash Flows
Nine Months Ended July 28, 2019


 
As Reported
   
Adjustments
   
Balance without
Adoption of Topic 606
 
                   
Net Income
 
$
27,454
   
$
(1,044
)
 
$
26,410
 
Changes in operating accounts:
                       
Accounts receivable
 
$
(14,185
)
 
$
(223
)
 
$
(14,408
)
Inventories
   
(15,083
)
   
(1,268
)
   
(16,351
)
Other current assets
   
(9,406
)
   
1,926
     
(7,480
)
Accounts payable, accrued liabilities, and other
   
(25,663
)
   
609
     
(25,054
)


We account for an arrangement as a revenue contract when each party has approved and is committed to perform under the contract, the rights of the contracting parties regarding the goods or services to be transferred and the payment terms are identifiable, the arrangement has commercial substance, and collection of consideration is probable. Substantially all of our revenue comes from the sales of photomasks. We typically contract with our customers to sell sets of photomasks (referred to as “mask sets”), which are comprised of multiple layers, the predominance of which we invoice as they ship to customers. As the photomasks are manufactured to customer specifications, they have no alternative use to us and, as our contracts generally provide us with the right to payment for work completed to date, we recognize revenue as we perform, or “over time” on most of our contracts. We measure our performance to date using an input method, which is based on our estimated costs to complete the various manufacturing phases of a photomask. At the end of a reporting period, there will be a number of revenue contracts on which we have performed; for any such contracts that we are entitled to be compensated for our costs incurred plus a reasonable profit, we recognize revenue and a corresponding contract asset for such performance. We account for shipping and handling activities that we perform after a customer obtains control of a good as being activities to fulfill our promise to transfer the good to the customer, rather than as promised services, or performance obligations, under the contract.



As stated above, photomasks are manufactured in accordance with proprietary designs provided by our customers; thus, they are individually unique. Due to their uniqueness and other factors, their transaction prices are individually established through negotiations with customers; consequently, our photomasks do not have standard or “list” prices. The transaction prices of the vast majority of our revenue contracts include only fixed amounts of consideration. In certain instances, such as when we offer a customer an early payment discount, an estimate of variable consideration would be included in the transaction price, but only to the extent that a significant reversal of revenue would not occur when the uncertainty related to the variability is resolved.
15

Contract Assets, Contract Liabilities and Accounts Receivable


We recognize a contract asset when our performance under a contract precedes our receipt of consideration from a customer, or before payment is due, and our receipt of consideration is conditional upon factors other than the passage of time. Contract assets reflect our transfer of control to customers of photomasks that are in process or completed but not yet shipped. A receivable is recognized when we have an unconditional right to payment for our performance, which generally occurs when we ship the photomasks. Our contract assets primarily consist of a significant amount of our work-in-process inventory and fully manufactured photomasks which have not yet shipped, for which we have an enforceable right to collect consideration (including a reasonable profit) in the event the in-process orders are cancelled by customers. On an individual contract basis, we net contract assets with contract liabilities (deferred revenue) for financial reporting purposes. Our contract assets and liabilities are typically classified as current, as our production cycle and our lead times are both under one year. Contract assets of $6.2 million are included in “Other” current assets, and contract liabilities of $10.2 million are included in “Other” current liabilities in our July 28, 2019 condensed consolidated balance sheet. At November 1, 2018, our date of adoption of Topic 606, we had contract assets of $4.6 million and contract liabilities of $7.8 million. We did not impair any contract assets during the nine-month period ended July 28, 2019, and, during the respective three and nine-month periods ended July 28, 2019, we recognized $0.8 million and $1.1 million of revenue from the settlement of contract liabilities that existed at the beginning of those periods.


We generally record our accounts receivable at their billed amounts. All outstanding past due customer invoices are reviewed during, and at the end of, every period for collectibility. To the extent we believe a loss on the collection of a customer invoice is probable, we record the loss and credit the allowance for doubtful accounts. In the event that an amount is determined to be uncollectible, we charge the allowance for doubtful accounts and derecognize the related receivable. Credit losses incurred on our accounts receivable during the nine-month period ended July 28, 2019 were immaterial.



Our invoice terms generally range from net thirty to ninety days, depending on both the geographic market in which the transaction occurs and our payment agreements with specific customers. In the event that our evaluation of a customer’s business prospects and financial condition indicate that the customer presents a collectibility risk, we require payment in advance of performance. We have elected the practical expedient allowed under Topic 606 that permits us not to adjust a contract’s promised amount of consideration to reflect a financing component when the period between when we transfer control of goods or services to customers and when we are paid is one year or less.


In instances when we are paid in advance of our performance, we record a contract liability and, as allowed under the practical expedient in Topic 606, recognize interest expense only if the period between when we receive payment from the customer and the date when we expect to be entitled to the payment is greater than one year. Historically, advance payments we’ve received from customers have not preceded the completion of our performance obligations by more than one year.

Disaggregation of Revenue


The following tables present our revenue for the three and nine-month periods ended July 28, 2019, disaggregated by product type, geographic location, and timing of recognition.

Revenue by Product Type
 
Three Months Ended
July 28, 2019
   
Nine Months Ended
July 28, 2019
 
IC
           
High-end
 
$
38,460
   
$
111,455
 
Mainstream
   
61,725
     
182,197
 
Total IC
 
$
100,185
   
$
293,652
 
                 
FPD
               
High-end
 
$
25,939
   
$
70,361
 
Mainstream
   
11,988
     
30,391
 
Total FPD
 
$
37,927
   
$
100,752
 
   
$
138,112
   
$
394,404
 
Revenue by Geographic Location
         
Taiwan
 
$
61,273
   
$
175,482
 
Korea
   
37,120
     
110,395
 
United States
   
25,364
     
74,579
 
Europe
   
7,937
     
24,725
 
China
   
5,963
     
7,693
 
Other
   
455
     
1,530
 
   
$
138,112
   
$
394,404
 
Revenue by Timing of Recognition
         
Over time
 
$
122,938
   
$
362,078
 
At a point in time
   
15,174
     
32,326
 
   
$
138,112
   
$
394,404
 

16

Contract Costs


We pay commissions to third party sales agents for certain sales that they obtain for us. However, the bases of the commissions are the transaction prices of the sales, which are completed in less than one year; thus, no relationship is established with a customer that will result in future business. Therefore, we would not recognize any portion of these sales commissions as costs of obtaining a contract, nor do we currently foresee other circumstances under which we would recognize such assets.

Remaining Performance Obligations


As we are typically required to fulfill customer orders within a short time period, our backlog of orders is generally not in excess of one to two weeks for IC photomasks and two to three weeks for FPD photomasks. As allowed under Topic 606, we have elected not to disclose our remaining performance obligations, which represent the costs associated with the completion of the manufacturing process of in-process photomasks related to contracts that have an original duration of one year or less.

Sales and Similar Taxes


We report our revenue net of any sales or similar taxes we collect on behalf of governmental entities.

Product Warranty


Our photomasks are sold under warranties that generally range from 1 to 24 months. We warrant that our photomasks conform to customer specifications, and will typically repair, replace, or issue a refund, at our option, any photomasks that fail to do so. The warranties do not represent separate performance obligations in our revenue contracts. Historically, customer claims under warranty have been immaterial.

NOTE 7 - SHARE-BASED COMPENSATION


In March 2016, shareholders approved a new equity incentive compensation plan (the “Plan”), under which incentive stock options, non-qualified stock options, stock grants, stock-based awards, restricted stock, restricted stock units, stock appreciation rights, performance units, performance stock, and other stock or cash awards may be granted. Shares to be issued under the Plan may be authorized and unissued shares, issued shares we have  reacquired  (in the open-market or in private transactions), shares  held in the treasury, or a combination thereof. The maximum number of shares of common stock approved that may be issued under the Plan is four million shares. Awards may be granted to officers, employees, directors, consultants, advisors, and independent contractors of Photronics or its subsidiaries. In the event of a change in control (as defined in the Plan), the vesting of awards may be accelerated. The Plan, aspects of which are more fully described below, prohibits further awards from being issued under prior plans. Total share-based compensation costs for the three and nine-month periods ended July 28, 2019, were $0.9 million and $2.9 million, respectively, and $0.8 million and $2.4 million for the three and nine-month periods ended July 29, 2018, respectively. The Company received cash from option exercises of $0.2 million and $1.0 million for the three and nine-month periods ended July 28, 2019, respectively, and $0.2 million and $3.8 million for the three and nine-month periods ended July 29, 2018, respectively. No share-based compensation cost was capitalized as part of an asset and no related income tax benefits were recorded during the periods presented.

Stock Options


Option awards generally vest in one to four years, and have a ten-year contractual term. All incentive and non-qualified stock option grants have an exercise price no less than the market value of the underlying common stock on the date of grant. The grant date fair values of options are based on closing prices of our common stock on the dates of grant and are calculated using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of our common stock. We use historical option exercise behavior and employee termination data to estimate expected term, which represents the period of time that options are expected to remain outstanding. The risk-free rate of return for the estimated term of an option is based on the U.S. Treasury yield curve in effect at the date of grant.


There were no share options granted during the three-month period ended July 28, 2019, and there were 12,000 options granted during the three-month period ended July 29, 2018, with a weighted-average grant-date fair value of $2.84 per share. There were 132,000 share options granted during the nine-month period ended July 28, 2019, with a weighted-average grant-date fair value of $3.31 per share, and 264,000 share options granted during the nine-month period ended July 29, 2018, with a weighted-average grant-date fair value of $2.74 per share. As of July 28, 2019, the total unrecognized compensation cost related to unvested option awards was approximately $1.0 million. That cost is expected to be recognized over a weighted-average amortization period of 2.3 years.

17


The weighted-average inputs and risk-free rate of return ranges used to calculate the grant-date fair value of options issued during the three and nine-month periods ended July 28, 2019 and July 29, 2018, are presented in the following table.

 
Three Months Ended
 
Nine Months Ended
 
 
 
 
 
 
 
 
July 28,
2019
 
 
July 29,
2018
 
 
July 28,
2019
 
 
July 29,
2018
 
 
 
 
 
 
 
 
 
 
 
 
Volatility
 
 
N/A
 
 
 
32.3%
 
 
 
33.1%
 
 
 
31.7%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk free rate of return
 
 
N/A
 
 
 
2.8%
 
 
 
2.5%-2.9%
 
 
 
2.2%-2.8%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend yield
 
 
N/A
 
 
 
0.0%
 
 
 
0.0%
 
 
 
0.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expected term
 
 
N/A
 
 
 
5.1 years
 
 
5.1 years
 
 
5.0 years


Information on outstanding and exercisable option awards as of July 28, 2019, is presented below.

Options
 
Shares
   
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 
                     
Outstanding at July 28, 2019
   
2,366,868
   
$
8.95
 
5.6 years
 
$
3,288
 
                           
Exercisable at July 28, 2019
   
1,785,201
   
$
8.57
 
4.7 years
 
$
3,060
 

Restricted Stock


We periodically grant restricted stock awards, the restrictions on which typically lapse over a service period of one to four years. The fair value of an award is determined on the date of grant, based on the closing price of our common stock. There were 435,000 restricted stock awards granted during the nine-month period ended July 28, 2019, with a weighted-average grant-date fair value of $9.80 per share. There were no restricted stock awards granted during the three-month periods ended July 28,2019 and July 29, 2018; there were 290,000 restricted stock awards granted during the nine-month period ended July 29, 2018, with a weighted-average grant-date fair value of $8.62 per share. As of July 28, 2019, the total compensation cost not yet recognized related to unvested restricted stock awards was approximately $5.0 million. That cost is expected to be recognized over a weighted-average amortization period of 2.7 years. As of July 28, 2019, there were 676,863 shares of restricted stock outstanding.

NOTE 8 - INCOME TAXES


We calculate our provision for income taxes at the end of each interim reporting period on the basis of an estimated annual effective tax rate adjusted for tax items that are discrete to each period.



The effective tax rate of 24.7% in the three-month period ended July 28, 2019, differs from the U.S. statutory rate of 21.0%, primarily due to the elimination of tax benefits in jurisdictions, including the U.S., in which it is not more likely than not that the benefit will be realized; the effects of these eliminations were partially offset by the benefits of tax holidays and investment credits in certain foreign jurisdictions.

18


The effective tax rate of 22.3% in the nine-month period ended July 28, 2019, differs from the U.S. statutory rate of 21.0%, primarily due to the elimination of tax benefits in jurisdictions, including the U.S., in which it is not more likely than not that the benefit will be realized; the effects of these eliminations were partially offset by the benefits of the settlement of a tax audit, as well as a tax holiday and investment credits in certain foreign jurisdictions.



Unrecognized tax benefits related to uncertain tax positions were $1.2 million at July 28, 2019, and $1.9 million at October 31, 2018, all of which, if recognized, would favorably impact the Company’s effective tax rate. Accrued interest and penalties related to unrecognized tax benefits was $0.1 million at July 28, 2019 and October 31, 2018. The year-to-date reduction in the amount primarily resulted from the settlement of a tax audit in Taiwan in the first quarter of 2019. Although the timing of the expirations of statutes of limitations may be uncertain, as they can be dependent upon the settlement of tax audits, the Company believes that it is reasonably possible that an immaterial amount of its uncertain tax positions (including accrued interest and penalties, net of tax benefits) may be resolved over the next twelve months. The resolution of these uncertain tax positions may result from either or both the lapses of statutes of limitations and tax settlements.



We were granted a five-year tax holiday in Taiwan which expires at the end of calendar year 2019. This tax holiday reduced foreign taxes by $0.4 million, and $1.5 million in the three and nine-month periods ended July 28, 2019, and $1.1 and $1.8 million in the respective prior-year periods. The per-share impact of the tax holiday was a deminimus amount for the three-month period ended July 28, 2019, and one cent per share for the nine-month periods ended July 28, 2019 and July 29, 2018, and the three-month period ended July 29, 2018.



The effective tax rates of 9.4% and 7.8% in the three and nine-month periods ended July 29, 2018, differ from the post U.S. Tax Reform blended statutory rate of 23.4%, primarily due to benefits from U.S. and Taiwan Tax Reform (as discussed below), earnings being taxed at lower statutory rates in foreign jurisdictions, the benefits of various investment credits in a foreign jurisdiction, a tax holiday in Taiwan, and changes in unrecognized tax benefits related to an audit settlement and an assessment statute expiration.



On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Act”), was signed into law, enacting significant changes to the United States Internal Revenue Code of 1986, as amended. Based on the enactment date, we accounted for the Act in our interim period ended January 28, 2018. In December 2017, the Securities and Exchange Commission released Staff Accounting Bulletin No. 118 (“SAB 118”) to address situations in which the accounting under Accounting Standards Codification Topic 740 – “Income Taxes” is incomplete for certain income tax effects of the Act. We adopted SAB 118 in our first quarter of fiscal year 2018, and finalized its effects in our fourth quarter of fiscal 2018. In the period ended January 28, 2018, we recognized the following effects in our provision for income taxes:


•
The Act repealed the corporate alternative minimum tax (“AMT”) for tax years beginning after December 31, 2017, and provided that existing AMT credit carryforwards are fully refundable. We recognized a $3.9 million benefit on AMT credit carryforwards that we previously determined were not more likely than not going to be realized and reversed the previously recorded valuation allowance.
•
As of January 1, 2018, the Act reduced the corporate income tax rate from a maximum 35% to a flat 21%, requiring us to revalue our deferred tax assets and liabilities utilizing the rate applicable to the period when a temporary difference will reverse. Our net deferred tax asset is fully offset by a valuation allowance, and the revaluation of the deferred tax assets and liabilities resulted in a net-zero impact for the period.
•
The Act imposed a transition tax for a one-time deemed repatriation of the accumulated earnings of foreign subsidiaries. The entire amount of transition tax was fully offset by tax credits (including carryforwards) that resulted in a provisional net-zero impact on the period.


On January 18, 2018, the Taiwan Legislature Yuan approved amendments to the Income Tax Act, enacting an increase in the corporate tax rate from 17% to 20%, which required us to revalue our deferred tax assets and liabilities utilizing the rate applicable to the period when a temporary difference will reverse. Accordingly, a net benefit of $0.2 million is reflected in our tax provision for the period.

Adoption of New Accounting Standard


In the first quarter of 2019, the Company adopted Accounting Standards Update No. 2016-16 – “Intra-Entity Transfers Other Than Inventory”, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. In connection therewith, we recorded a transition adjustment of $1.1 million that reduced prepaid income taxes (included in Other current assets on the condensed consolidated balance sheets) against beginning retained earnings.


19
NOTE 9 - EARNINGS PER SHARE


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


 
Three Months Ended
   
Nine Months Ended
 
             
   
July 28,
2019
   
July 29,
2018
   
July 28,
2019
   
July 29
2018
 
                         
                         
Net income attributable to Photronics, Inc. shareholders
 
$
6,347
   
$
13,005
   
$
20,093
   
$
29,568
 
                                 
Effect of dilutive securities:
                               
Interest expense on convertible notes, net of tax
   
-
     
496
     
845
     
1,488
 
                                 
Earnings used for diluted earnings per share
 
$
6,347
   
$
13,501
   
$
20,938
   
$
31,056
 
                                 
Weighted-average common shares computations:
                               
Weighted-average common shares used for basic earnings per share
   
66,313
     
69,374
     
66,386
     
69,141
 
Effect of dilutive securities:
                               
Convertible notes
   
-
     
5,542
     
3,147
     
5,542
 
Share-based payment awards
   
257
     
342
     
386
     
438
 
                                 
Potentially dilutive common shares
   
257
     
5,884
     
3,533
     
5,980
 
                                 
Weighted-average common shares used for diluted earnings per share
   
66,570
     
75,258
     
69,919
     
75,121
 
                                 
                                 
Basic earnings per share
 
$
0.10
   
$
0.19
   
$
0.30
   
$
0.43
 
Diluted earnings per share
 
$
0.10
   
$
0.18
   
$
0.30
   
$
0.41
 


The table below shows the outstanding weighted-average share-based payment awards that were excluded from the calculation of diluted earnings per share because their exercise prices exceeded the average market value of the common shares for the period or, under application of the treasury stock method, they were otherwise determined to be anti-dilutive.


 
Three Months Ended
   
Nine Months Ended
 
   
July 28,
2019
   
July 29,
2018
   
July 28,
2019
   
July 29,
2018
 
                         
                         
Potentially dilutive shares excluded
   
1,979
     
1,873
     
1,415
     
1,826
 


20
NOTE 10 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT


The following tables set forth the changes in our accumulated other comprehensive income by component (net of tax of $0) for the three and nine-month periods ended July 28, 2019 and July 29, 2018.


 
Three Months Ended July 28, 2019
 
       
   
Foreign Currency
Translation
Adjustments
   
Other
   
Total
 
                   
Balance at April 29, 2019
 
$
(6,212
)
 
$
(616
)
 
$
(6,828
)
Other comprehensive (loss) income
   
(8,882
)
   
28
     
(8,854
)
Less: other comprehensive (loss) income attributable to noncontrolling interests
   
(1,269
)
   
14
     
(1,255
)
                         
Balance at July 28, 2019
 
$
(13,825
)
 
$
(602
)
 
$
(14,427
)


 
Three Months Ended July 29, 2018
 
   
Foreign Currency
Translation
Adjustments
   
Other
   
Total
 
                   
Balance at April 30, 2018
 
$
24,433
   
$
(677
)
 
$
23,756
 
Other comprehensive (loss) income
   
(24,572
)
   
65
     
(24,507
)
Less: other comprehensive (loss) income attributable to noncontrolling interests
   
(4,806
)
   
33
     
(4,773
)
                         
Balance at July 29, 2018
 
$
4,667
   
$
(645
)
 
$
4,022
 


 
Nine Months Ended July 28, 2019
 
       
   
Foreign Currency
Translation
Adjustments
   
Other
   
Total
 
                   
Balance at November 1, 2018
 
$
(4,328
)
 
$
(638
)
 
$
(4,966
)
Other comprehensive (loss) income
   
(9,364
)
   
72
     
(9,292
)
Less: other comprehensive income   attributable to noncontrolling interests
   
133
     
36
     
169
 
                         
Balance at July 28, 2019
 
$
(13,825
)
 
$
(602
)
 
$
(14,427
)

21


 
Nine Months Ended July 29, 2018
 
       
   
Foreign Currency
Translation
Adjustments
   
Amortization
of Cash
Flow Hedge
   
Other
   
Total
 
                         
Balance at October 30, 2017
 
$
7,627
   
$
(48
)
 
$
(688
)
 
$
6,891
 
Other comprehensive (loss) income before Reclassifications
   
(5,583
)
   
-
     
86
     
(5,497
)
Amounts reclassified from accumulated other comprehensive income
   
-
     
48
     
-
     
48
 
                                 
Net current period other comprehensive (loss) income
   
(5,583
)
   
48
     
86
     
(5,449
)
Less: other comprehensive (loss) income attributable to noncontrolling interests
   
(2,623
)
   
-
     
43
     
(2,580
)
                                 
Balance at July 29, 2018
 
$
4,667
   
$
-
   
$
(645
)
 
$
4,022
 


NOTE 11 - FAIR VALUE MEASUREMENTS


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



The fair values of our cash and cash equivalents (Level 1 measurements), accounts receivable, accounts payable, and certain other current assets and current liabilities (Level 2 measurements) approximate their carrying values due to their short-term maturities. The fair values of our variable rate debt instruments is a Level 2 measurement and approximates their carrying values due to the variable nature of the underlying interest rates. The fair values of our convertible senior notes is a Level 2 measurement, as it was determined using inputs that were either observable market data, or could be derived from, or corroborated with, observable market data. These inputs included our stock price and interest rates offered on debt issued by entities with credit ratings similar to ours. We did not have any assets or liabilities measured at fair value, on a recurring or a nonrecurring basis, at July 28, 2019 or October 31, 2018.

Fair Value of Financial Instruments Not Measured at Fair Value


The fair value of our convertible senior notes was a Level 2 measurement, as it was determined using inputs that were either observable market data or could be derived from, or corroborated with, observable market data. These inputs included our stock price and interest rates offered on debt issued by entities with credit ratings similar to ours. The table below presents the fair and carrying values of our convertible senior notes at October 31, 2018.


 
October 31, 2018
 
       
   
Fair Value
   
Carrying Value
 
             
3.25% convertible senior notes matured April 2019
 
$
62,094
   
$
57,453
 


22
NOTE 12 – SHARE REPURCHASE PROGRAM


In October 2018, the Company’s board of directors authorized the repurchase of up to $25 million of its common stock, to have been executed in open-market transactions or in accordance with a repurchase plan under rule 10b5-1 of the Securities Act of 1933 (as amended). The share repurchase program commenced on October 22, 2018, and was terminated on February 1, 2019.


 
Nine Months Ended
July 28, 2019
   
From Inception Date of
October 22, 2018
 
             
Number of shares repurchased
   
1,137
     
1,467
 
                 
Cost of shares repurchased
 
$
10,694
   
$
13,807
 
                 
Average price paid per share
 
$
9.40
   
$
9.41
 


In August 2019, the Company’s board of directors authorized the repurchase of up to $100 million of its common stock, to be executed in accordance with a repurchase plan under rule 10b5-1 of the Securities Act of 1933 (as amended). The authorization does not obligate the Company to repurchase any dollar amount or number of shares of common stock, and the repurchase program may be suspended or discontinued at any time.

NOTE 13 - COMMITMENTS AND CONTINGENCIES



As of  July 28, 2019, the Company had commitments outstanding for capital expenditures of approximately $100 million, nearly all of which related to building and equipping our China facilities.



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

NOTE 14 - RECENT ACCOUNTING PRONOUNCEMENTS


Accounting Standards Updates to be Implemented


In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13 “Measurement of Credit Losses”, the main objective of which is to provide more useful information about expected credit losses on financial instruments and other commitments of an entity to extend credit. In support of this objective, the ASU replaces the incurred loss model, found in current GAAP, with an expected credit loss model; the new model requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU requires a cumulative-effect adjustment as of the beginning of the first reporting period in which the guidance is adopted. ASU 2016-13 is effective for Photronics, Inc. in its first quarter of fiscal year 2021, with early adoption permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.


In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)”, which requires lessees to recognize right-of-use assets and corresponding liabilities for all leases with an initial term in excess of twelve months. ASU 2016-02 was to be adopted using a modified retrospective approach, that requires leases to be measured and recognized under the new guidance at the beginning of the earliest period presented. In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842) – Targeted Improvements” (“ASU 2018-11”), which provided entities with an additional (and optional) transition method to adopt the new leases standard. Under this optional transition method, an entity initially applies the new leases standard at its adoption date and recognizes the effects of adoption through cumulative-effect adjustments to its beginning balance sheet. We will utilize this optional method when we transition to the new leases guidance and, as a result, expect to recognize significant amounts of right-of-use assets and lease liabilities in our fiscal year 2020 beginning balance sheet. ASU 2016-02 included a number of practical expedients, which we are currently in the process of evaluating, that entities can elect to use as they transition to the new guidance. To date, an implementation team has been established to evaluate our lease portfolio, system process and policy change requirements. The Company has made progress in drafting new lease accounting policies, and is gathering the necessary data elements for the lease population.


23
Accounting Standards Updates Implemented


In November 2016, the FASB issued ASU 2016-18 “Restricted Cash”, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 was effective for Photronics, Inc. in its first quarter of fiscal year 2019 and was applied on a retrospective transition basis. Our adoption of this Update did not materially impact our cash flows statement.


In October 2016, the FASB issued ASU 2016-16 “Intra-Entity Transfers of Assets Other Than Inventory”, which eliminates the exception of recognizing, at the time of transfer, current and deferred income taxes for intra-entity asset transfers other than inventory. ASU 2016-16 was effective for us in our first quarter of fiscal year 2019 and applied on a modified retrospective transition basis. Please see Note 8 for a discussion of the effects of adopting this guidance.


In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers”, which superseded nearly all then existing revenue recognition guidance under accounting principles generally accepted in the United States. The core principle of this ASU is that revenue should be recognized for the amount of consideration expected to be received for promised goods or services transferred to customers. This ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments, and assets recognized for costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 by one year and allowed entities to early adopt, but no earlier than the original effective date. This update allowed for either full retrospective or modified retrospective adoption. In April 2016, the FASB issued ASU 2016-10 “Identifying Performance Obligations and Licensing” which amended guidance previously issued on these matters in ASU 2014-09. The effective date and transition requirements of ASU 2016-10 were the same as those for ASU 2014-09.


We adopted the new revenue and related guidance on November 1, 2018, using the modified retrospective approach, under which we increased our accounts receivable by $0.6 million, recognized contract assets of $4.6 million, reduced our inventories balance by $3.7 million, and recorded an accrual for income taxes of $0.3 million. The recognition of, and adjustments to, these items were reflected in increases to our retained earnings and noncontrolling interest balances of $1.1 million and $0.1 million, respectively. The most significant impact of the new guidance on our financial statements is its requirement for us to recognize revenue as we manufacture products for which, in the event that the customer cancels the contract, we are entitled to reasonable compensation for work we have completed prior to cancellation. Prior to our adoption of Topic 606, we recognized revenue when we shipped to customers or, under some arrangements, when the customers received the goods. The impact of the adoption of this guidance on our July 28, 2019, financial statements is presented in Note 6.



The guidance allows for a number of accounting policy elections and practical expedients. In addition to our above-mentioned election to use the modified retrospective application method for adopting the guidance, those we have employed that are most significant to us are summarized below.
 
Shipping and handling activities performed after control of a good is transferred to a customer
 

We have elected to treat shipping and handling activities that occur after control of a good is transferred to a customer as activities to fulfill our promise to transfer goods to the customer. Thus, such activities will not be considered to be separate performance obligations under contracts with our customers.
 
Non-recognition of financing component when we transfer goods to a customer and the period between when we transfer and when we are paid will be less than one year
 

We have elected the practical expedient that allows for the non-recognition, as a component of a customer contract, of a financing component when the period between when we transfer a good and when we are paid will be less than one year.
 
Exclusion of sales and similar taxes collected from customers in the transaction price
 

Consistent with our practice before adoption of the new guidance, we will not recognize sales and similar taxes we collect from customers as revenue.
 
Use of an “input method” to measure our progress towards the transfer of control of performance obligations to customers
 

As, in our judgment, an input method based on our efforts to satisfy our performance obligations will best serve to depict the transfer of control of our performance obligations to our customers, we have adopted an accounting policy to employ such a method. Our decision was based primarily on the facts that our photomasks are not physically transferred to customers until they are complete, and that we can employ our input-based cost accumulation systems and methods to measure our progress towards the transfer of control of our performance obligations to customers.
 
Non-disclosure of the transaction prices of unsatisfied or partially satisfied performance obligations
 

For contracts that have an original expected duration of one year or less, we have elected the practical expedient that allows us not to disclose the aggregate transaction prices of unsatisfied or partially satisfied performance obligations that exist at the end of a reporting period.

24

Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Management's discussion and analysis ("MD&A") of the Company's financial condition, results of operations and outlook should be read in conjunction with its condensed consolidated financial statements and related notes. Various segments of this MD&A contain forward-looking statements, all of which are presented based on current expectations, which may be adversely affected by uncertainties and risk factors (presented throughout this filing and in the Company's Annual Report on Form 10-K for the fiscal 2018 year), that may cause actual results to materially differ from these expectations.

We sell substantially all of our photomasks to semiconductor and FPD designers and manufacturers. Photomask technology is also being applied to the fabrication of other higher-performance electronic products such as photonics, microelectronic mechanical systems and certain nanotechnology applications. Our selling cycle is tightly interwoven with the development and release of new semiconductor and FPD designs and applications, particularly as they relate to the microelectronic 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, with a concomitant effect on revenue and profitability.

We are typically required to fulfill customer orders within a short period of time after receipt of an order, sometimes within twenty-four hours. This results in 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 and FPD industries are driven by end markets which have been closely tied to consumer-driven applications of high-performance 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.

In the fourth quarter of fiscal 2019, the Company’s board of directors authorized the repurchase of up to $100 million of its common stock, to be executed in accordance with a repurchase plan under rule 10b5-1 of the Securities Act of 1933 (as amended). The authorization does not obligate the Company to repurchase any dollar amount or number of shares of common stock, and the repurchase program may be suspended or discontinued at any time.

Effective the third quarter of fiscal 2019, the Company entered into a Master Lease Agreement (“MLA”) which enables us to request advance payments or other funds for equipment or enter into an equipment lease in the U.S. In connection with this MLA, we were approved for financing of $35 million for the purchase of equipment; as of July 28, 2019, we had no outstanding borrowings against this MLA. In the fourth quarter of fiscal 2019, the financing entity, upon our request, made an advance payment of $3.4 million to an equipment vendor on our behalf. Interest on this borrowing is payable monthly at thirty-day LIBOR plus 1%, and will continue to accrue until the borrowing is repaid or, as allowed under the MLA, we enter into a lease for the equipment. All borrowings under the MLA are secured by the equipment purchased or financed.

In the second quarter of fiscal 2019, we repaid, upon maturity, the entire $57.5 million principal amount of the convertible senior notes we issued in April 2016.

In the second quarter of fiscal 2019, PDMC, the Company’s majority-owned IC subsidiary in Taiwan, declared a dividend of which 49.99%, or approximately $18.8 million, will be paid to noncontrolling interests in the fourth quarter of fiscal 2019.

In the first quarter of fiscal 2019, PDMC paid a dividend, of which 49.99%, or approximately $26.1 million, was paid to noncontrolling interests.

25
In the first quarter of fiscal 2019, PDMCX was approved for credit of $50 million, subject to certain limitations related to PDMCX registered capital at the time of the initial approval, pursuant to which PDMCX has and will enter into separate loan agreements (“the Project Loans”) for intermittent borrowings. The Project Loans, which are denominated in Chinese renminbi (RMB), are being used to finance certain capital expenditures in China. PDMCX granted liens on its land, building, and certain equipment as collateral for the Project Loans. As of July 28, 2019, PDMCX had borrowed 243.4 million RMB ($35.4 million) against this approval, which includes $9.6 million borrowed during the three-month period ended July 28, 2019. See Note 5 of the condensed consolidated financial statements for additional information on these loans.

In the first quarter of fiscal 2019, PDMCX received approval for unsecured credit of $25.0 million, pursuant to which PDMCX may enter into separate loan agreements. Under this credit agreement (the “Working Capital Loan”), PDMCX can borrow up to 140.0 million RMB, or approximately $20.4 million, to pay value-added taxes (“VAT”) and up to 60.0 million RMB ($8.7 million) to fund operations; combined total borrowings are limited to $25.0 million. During the quarter ended July 28, 2019, PDMCX borrowed 11.4 million RMB ($3.9 million) to fund operations, with repayments due one year from their borrowing dates. Through July 28, 2019, PDMCX borrowed 68.0 million RMB ($9.9 million) to pay VAT, and repaid $0.1 million as of that date. Payments on these borrowings are due semiannually, at an increasing rate, through January 2022. See Note 5 of the condensed consolidated financial statements for additional information on these loans.

In the fourth quarter of fiscal 2018, we entered into a five year amended and restated credit agreement (“the credit agreement”), which has a $50 million borrowing limit, with an expansion capacity to $100 million. The credit agreement is secured by substantially all of our assets located in the United States and common stock we own in certain foreign subsidiaries. The credit agreement includes minimum interest coverage ratio, total leverage ratio, and minimum unrestricted cash balance covenants (all of which we were in compliance with at July 28, 2019), and limits the amount of dividends, distributions, and redemptions we can pay on our stock to an aggregate amount of $100 million. We had no outstanding borrowings against the credit agreement at July 28, 2019, and $50 million was available for borrowing. The interest rate on the credit agreement (2.5% at July 28, 2019) is based on our total leverage ratio at LIBOR plus a spread, as defined in the credit agreement.

In the fourth quarter of fiscal 2018, the Company’s board of directors authorized the repurchase of up to $25 million of its common stock, to have been executed in open-market transactions or in accordance with a repurchase plan under rule 10b5-1 of the Securities Act of 1933 (as amended). The share repurchase program commenced, under rule 10b5-1, on October 22, 2018, and expired on February 1, 2019. In total, we repurchased 1.5 million shares at a cost of $13.8 million (an average of $9.41 per share) under this program.

In the third quarter of fiscal 2018, the Company’s board of directors authorized the repurchase of up to $20 million of its common stock, which was effectuated in open-market transactions or in accordance with a repurchase plan under rule 10b5-1 of the Securities Act of 1933 (as amended). The share repurchase program commenced on July 10, 2018, and ended in October 2018. In total, under this program, we repurchased 2.2 million shares at a cost of $20 million (an average of $8.97 per share).

In the first quarter of fiscal 2018, we announced the successful closing of the China joint venture agreement with Dai Nippon Printing Co., Ltd. (“DNP”), which we had agreed to enter into and announced in the third quarter of fiscal 2017. Under the agreement, our wholly owned Singapore subsidiary owns 50.01% of the joint venture, which is named Xiamen American Japan Photronics Mask Co., Ltd. (PDMCX), and a subsidiary of DNP owns the remaining 49.99%. The financial results of the joint venture are included in the Photronics, Inc. consolidated financial statements. See Note 4 of the condensed consolidated financial statements for additional information on the joint venture.

In the fourth quarter of fiscal 2017, we announced that Photronics UK, Ltd., a wholly owned subsidiary of ours, signed an investment agreement with Hefei State Hi-tech Industry Development Zone to establish a manufacturing facility in Hefei, China. Under the terms of the agreement, through our subsidiary, we agreed to invest a minimum of $160 million to build and operate a research and development and manufacturing facility for high-end and mainstream FPD photomasks. As of April 28, 2019, we had met the minimum investment requirement and satisfied the terms of the agreement. Hefei State Hi-tech Industry Development Zone is providing certain investment incentives and support for this facility, which has the capability to produce up to G10.5+ large area masks and AMOLED products. Construction of this facility was completed in late 2018, and production commenced in the second quarter of 2019.

26
Material Changes in Results of Operations
Three and Nine Months ended July 28, 2019

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

 
Three Months Ended
   
Nine Months Ended
 
   
July 28,
2019
   
April 28,
2019
   
July 29,
2018
   
July 28,
2019
   
July 29,
2018
 
                               
Revenue
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
Cost of goods sold
   
77.9
     
80.2
     
73.9
     
79.0
     
75.4
 
                                         
Gross profit
   
22.1
     
19.8
     
26.1
     
21.0
     
24.6
 
Selling, general and administrative expenses
   
9.5
     
10.1
     
9.2
     
10.2
     
9.7
 
Research and development expenses
   
2.9
     
2.7
     
1.9
     
3.0
     
2.7
 
                                         
Operating income
   
9.7
     
7.0
     
15.0
     
7.8
     
12.2
 
Other (expense) income, net
   
(0.2
)
   
3.0
     
1.0
     
1.2
     
0.2
 
                                         
Income before income taxes
   
9.5
     
10.0
     
16.0
     
9.0
     
12.4
 
Income tax provision
   
2.4
     
2.5
     
1.5
     
2.0
     
1.0
 
                                         
Net income
   
7.1
     
7.5
     
14.5
     
7.0
     
11.4
 
Net income attributable to noncontrolling interests
   
2.5
     
1.1
     
5.0
     
1.9
     
3.8
 
                                         
Net income attributable to Photronics, Inc. shareholders
   
4.6
%
   
6.4
%
   
9.5
%
   
5.1
%
   
7.6
%

Note: All of the following tabular comparisons, unless otherwise indicated, are for the three months ended July 28, 2019 (Q3 FY19), April 28, 2019 (Q2 FY19) and July 29, 2018 (Q3 FY18), and for the nine months ended July 28, 2019 (YTD FY19) and July 29, 2018 (YTD FY18), in millions of dollars.

Revenue

The following tables present revenue changes by product type and geographic areas. Columns may not total due to rounding.

 
 
Q3 FY19 from Q2 FY19
   
Q3 FY19 from Q3 FY18
   
YTD FY19 from YTD FY18
 
   
Revenue in
Q3 FY19
   
Increase
(Decrease)
   
Percent
Change
   
Increase
(Decrease)
   
Percent
Change
   
Revenue in
YTD FY19
   
Increase
(Decrease)
   
Percent
Change
 
                                                 
IC
                                               
High-end
 
$
38.5
   
$
0.0
     
0.1
%
 
$
(7.6
)
   
(16.5
)%
 
$
111.5
   
$
(9.5
)
   
(7.8
)%
Mainstream
   
61.7
     
1.6
     
2.6
%
   
0.6
     
0.9
%
   
182.2
     
(2.1
)
   
(1.1
)%
                                                                 
Total IC
 
$
100.2
   
$
1.6
     
1.6
%
 
$
(7.1
)
   
(6.6
)%
 
$
293.7
   
$
(11.5
)
   
(3.8
)%
                                                                 
FPD
                                                               
High-end
 
$
25.9
   
$
3.0
     
13.0
%
 
$
8.9
     
52.0
%
 
$
70.4
   
$
16.3
     
30.1
%
Mainstream
   
12.0
     
2.0
     
19.4
%
   
(0.1
)
   
(0.7
)%
   
30.4
     
(1.0
)
   
(3.0
)%
                                                                 
Total FPD
 
$
37.9
   
$
4.9
     
15.0
%
 
$
8.8
     
30.1
%
 
$
100.8
   
$
15.3
     
17.9
%
                                                                 
Total Revenue
 
$
138.1
   
$
6.5
     
5.0
%
 
$
1.7
     
1.3
%
 
$
394.4
   
$
3.8
     
1.0
%

27

 
Q3 FY19 from Q2 FY19
   
Q3 FY19 from Q3 FY18
   
YTD FY19 from YTD FY18
 
   
Revenue in
Q3 FY19
   
Increase
(Decrease)
   
Percent
Change
   
Increase
(Decrease)
   
Percent
Change
   
Revenue in
YTD FY19
   
Increase
(Decrease)
   
Percent
Change
 
Taiwan
 
$
61.3
   
$
4.8
     
8.5
%
 
$
(0.8
)
   
(1.3
)%
 
$
175.5
   
$
0.7
     
0.4
%
Korea
   
37.1
     
(0.9
)
   
(2.4
)%
   
(0.1
)
   
(0.3
)%
   
110.4
     
4.1
     
3.8
%
United States
   
25.4
     
(1.4
)
   
(5.2
)%
   
(2.4
)
   
(8.5
)%
   
74.6
     
(7.4
)
   
(9.0
)%
Europe
   
7.9
     
(0.5
)
   
(5.9
)%
   
(0.6
)
   
(7.0
)%
   
24.7
     
(1.0
)
   
(4.0
)%
China
   
6.0
     
4.5
     
306.4
%
   
5.7
     
2,225.3
%
   
7.7
     
7.2
     
1,363.0
%
Other
   
0.5
     
0.0
     
6.2
%
   
(0.1
)
   
(17.4
)%
   
1.5
     
0.2
     
14.5
%
                                                                 
   
$
138.1
   
$
6.5
     
5.0
%
 
$
1.7
     
1.3
%
 
$
394.4
   
$
3.8
     
1.0
%

Our quarterly revenues can be affected by the seasonal purchasing tendencies of our customers. As a result, demand for our products is typically negatively impacted during the first, and sometimes the second, quarters of our fiscal year, by the North American, European, and Asian holiday periods, as some of our customers reduce their development and, consequently, their buying activities during those periods. High-end photomask applications include mask sets for 28 nanometer and smaller products for IC, and G8 and above and active matrix organic light-emitting diode (AMOLED) display technologies for FPD products. High-end photomasks typically have higher selling prices (ASPs) than mainstream products.

Revenue increased 5.0% in Q3 FY19, compared with Q2 FY19, as a result of overall FPD and IC growth. FPD revenue increased 15% due to increased demand for AMOLED products, as our customers in Korea and China continued to release new designs, and we benefited from an increase in capacity as we ramp production in China, including for G10.5+ photomasks. IC revenue increased 1.6% due to increased demand from Asian foundries for mainstream nodes.

Revenue increased 1.3% in Q3 FY19, compared with Q3 FY18, as increased FPD revenues offset a decline in IC. FPD revenues increased 30.1% primarily due to significantly increased demand for AMOLED products. We also ramped production of G10.5+ photomasks at our new facility in China. IC revenue decreased 6.6% from the prior year quarter, due in part to the geopolitical conditions in Asia tempering growth in that region.

Revenue increased 1.0% in YTD FY19, compared with YTD FY18, as increased demand for AMOLED products offset a moderate decline in IC demand and a more substantial decrease in demand for other high-end FPD products (excluding G10.5+ masks). Demand for IC was notably strong from both foundries and customers with captive mask shops in YTD FY18.

Looking forward, we expect demand for both AMOLED and large format FPD masks (i.e. G10.5+) to increase, as more panel fabrication facilities begin production and new design releases occur at both new and existing facilities. High-end IC is expected to be stable to improving, but growth may be temporarily forestalled in Asia due to the effects of the current state of U.S. – China trade relations, as well as rising tensions between Japan and Korea, which may present supply-chain challenges for some of our customers. Despite these issues, we believe that the IC and FPD markets in Asia represent long-term growth opportunities.

Gross Margin

 
Three Months Ended
   
Nine Months Ended
 
   
Q3 FY19
   
Q2 FY19
   
Percent
Change
   
Q3 FY18
   
Percent
Change
   
YTD FY19
   
YTD FY18
   
Percent
Change
 
 
                                               
Gross profit
 
$
30.6
   
$
26.0
     
17.5
%
 
$
35.6
     
(14.1
)%
 
$
82.7
   
$
96.1
     
(13.9
)%
Gross margin
   
22.1
%
   
19.8
%
           
26.1
%
           
21.0
%
   
24.6
%
       

Gross margin increased 2.3% from Q2 FY19, primarily as a result of the $6.5 million increase in revenue discussed above. Reduced compensation and related expenses of $0.3 million, and an increase of $0.6 million of overhead costs transferred to research and development expense, also favorably impacted gross margin. Somewhat offsetting these favorable impacts, depreciation expense increased $2.2 million in Q3 FY19, as we recognized a full quarter of depreciation for assets placed in service at our China FPD plant and commenced depreciation on a significant number of assets at our China IC plant. In addition, equipment costs, primarily related to tool relocations to our China facilities, increased $0.6 million from the prior quarter. On a consolidated basis, material costs, as a percentage of revenue, sequentially increased 1.7%, primarily due to changes in product mix.

28
Gross margin decreased 4.0% in Q3 FY19 from Q3 FY18, despite a 1.3% increase in revenue from the prior year quarter. The decrease was, in significant part, due to increased losses at our two China facilities of $6.3 million, both of which recently commenced manufacturing operations. The increased losses at the China facilities were, to a great degree, caused by increased depreciation expense of $2.8 million, as depreciation commenced on equipment when it achieved customer qualification, which precedes revenue generation. Compensation and related expenses at the China facilities increased by $0.9 million from the prior year quarter, reflecting the increased staffing required for qualification and production.

On a year-to-date basis, gross margin decreased 3.6%, with increased losses totaling $9.8 million at our two China-based facilities constituting the most significant causes; our FPD facility in China commenced production late in Q2 FY19, and our IC facility commenced production in Q3 FY19.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $0.1 million, or 1.1%, to $13.1 million in Q3 FY19, from $13.3 million in Q2 FY19, primarily due to decreased general and administrative expenses of $0.3 million, partially offset by increased selling expenses in China. Selling, general and administrative expenses increased in Q3 FY19 $0.6 million, or 5.0%, to $13.1 million from $12.5 million in Q3 FY18. Selling general and administrative expenses incurred in China increased $0.7 million from the prior year quarter, reflecting the completion of construction and commencement of operations at our two China facilities. On a year-to-date basis, selling, general and administrative expenses increased $2.3 million, or 6.1%, to $40.2 million from $37.9 million. Expenses related to our expansion into China accounted for $2.0 million of this increase; increased compensation and related expenses at other sites comprised an additional $0.2 million of the total increase.

Research and Development Expenses

Research and development expenses consist of development efforts related to high-end process technologies for 28nm and smaller IC nodes. In Asia, in addition to the focus on high-end IC process technology nodes, G8 and above FPDs and AMOLED applications are also under development.

Research and development expenses increased $0.5 million, or 14.2%, from Q2 FY19, reflecting an increase in IC related qualification activities somewhat offset by decreased qualification activities in FPD (except China). Research and development expenses increased $1.4 million in Q3 FY19, or 52.5% from Q3 FY18; increased IC related qualification activities accounted for the preponderance of the change, with most of the remainder being attributable to qualification activities at our China FPD facility. On a year-to-date basis, research and development expenses increased $1.3 million, or 12.1%, as qualification related expenses increased for both IC and FPD products.

Other Income (Expense), net

 
Three Months Ended
   
Nine Months Ended
 
   
Q3 FY19
   
Q2 FY19
   
Q3 FY18
   
YTD FY19
   
YTD FY18
 
                               
Interest income and other income (expense), net
 
$
-
   
$
4.3
   
$
2.0
   
$
6.0
   
$
2.3
 
Interest expense
   
(0.4
)
   
(0.4
)
   
(0.6
)
   
(1.3
)
   
(1.7
)
                                         
Other income (expense), net
 
$
(0.4
)
 
$
3.9
   
$
1.4
   
$
4.7
   
$
0.6
 

Interest income and other income (expense), net decreased from Q2 FY19 by $4.3 million, primarily due to a $4.0 million negative change in foreign currency exchange results. Interest income and other income (expense), net decreased from Q3 FY18 by $2.0 million, primarily because of a $1.2 million negative change in foreign currency exchange results and decreased interest income of $0.4 million, which was due to our lower average cash balance in the current year period. On a year-to-date basis, Interest income and other income (expense), net, increased $3.7 million, primarily because of the impact of $6.2 million from foreign currency exchange gains in YTD FY19, in contrast to losses incurred in YTD FY18. The effect of the foreign exchange gains was somewhat offset by government incentives of $0.8 million received, a $0.6 million gain on the sale of certain assets recognized in YTD FY18, and reduced interest income of $1.1 million, due to the lower average cash balance in the current year period.

29
Interest expense was $0.4 million in Q3 FY19, unchanged from Q2 FY19. Interest expense decreased $0.2 million in Q3 FY19 from Q3 FY18, and $0.4 million in YTD FY19 from YTD FY18, primarily due to the repayment of our $57.5 million convertible senior notes in April 2019; interest incurred on our loans in China partially offset these reductions.

Income Tax Provision

 
Three Months Ended
   
Nine Months Ended
 
   
Q3 FY19
   
Q2 FY19
   
Q3 FY18
   
YTD FY19
   
YTD FY18
 
                               
Income tax provision
 
$
3.2
   
$
3.3
   
$
2.1
   
$
7.9
   
$
3.8
 
Effective income tax rate
   
24.7
%
   
25.0
%
   
9.4
%
   
22.3
%
   
7.8
%

The effective income tax rate is sensitive to the jurisdictional mix of earnings, due, in part, to the non-recognition of tax benefits on losses in jurisdictions with valuation allowances.

The effective income tax rate decreased in Q3 FY19, compared with Q2 FY19, primarily due to changes in the jurisdictional mix of earnings. The effective income tax rate increased in Q3 FY19, compared with Q3 FY18, due to changes in the jurisdictional mix of earnings and nonrecurring tax benefits related to a settlement with a taxing authority and a statute of limitations expiration in Q3 FY18.

The effective income tax rate increased in YTD FY19, compared with YTD FY18, primarily due to our recognition in YTD FY18 of nonrecurring tax benefits related to tax reform in the U.S. and Taiwan of $4.2 million, and a one-time audit settlement benefit of $1.9 million. The year-over-year increase in the effective tax rate was somewhat tempered by a one-time audit settlement benefit of $0.9 million in YTD FY19, as well as changes in the jurisdictional mix of earnings.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests was $3.5 million in Q3 FY19, which represented an increase of $2.1 million and a decrease $3.3 million from Q2 FY19 and Q3 FY18, respectively. Year-to-date, noncontrolling interests’ share decreased $7.5 million from YTD FY18. The changes for all comparative periods were due to changes in net income at our IC manufacturing facilities in Taiwan and China, in which noncontrolling interests hold 49.99% ownership interests.

Liquidity and Capital Resources

Our working capital at the end of Q3 FY19 was $261.2 million, compared with $311.7 million at the end of fiscal 2018. The $50.5 million net decrease is primarily attributable to:
- Decreased cash and cash equivalents of $74.5 million (net of $57.5 million used to repay our convertible senior notes, which had no impact on working capital);
- Increased inventories of $10.8 million, the predominance of which was to supply our China FPD facility and,
- Receivables for investment subsidies in China of $11.9 million at the end of Q3 FY19.

We had cash and cash equivalents of $197.2 million at the end of Q3 FY19, compared with $329.3 million at the end of fiscal 2018. The net decrease is primarily attributable to:
- $57.5 million used to repay our convertible notes;
- $160.1 million used to purchase capital assets (the preponderance of which related to equipping our China-based facilities);
- $10.7 million used to repurchase our common stock;
- $53.2 million received from borrowings in China;
- $17.7 million received from investment incentives in China and,
- $23.5 million provided by operating activities.

The net cash provided by operating activities of $23.5 million in YTD FY19 decreased $63.5 million, from $87.0 million provided in YTD FY18. The net decrease was due primarily to:
- Lower net income of $17.0 million in YTD FY19;
- A greater increase in the change in inventories balances of $6.7 million in YTD FY19 (primarily attributable to the stocking of our FPD facility in China) and,
- A comparative increase in value added tax prepayments related to our China facilities of $24.3 million in YTD FY19. These prepayments are recoverable through future sales transactions of the facilities.

The favorable effects of foreign currency exchange rates contributed $1.2 million to our reported cash balance at July 28, 2019.

Net cash used in investing activities was $142.5 million in YTD FY19, an increase of $78.4 million from the $64.1 million used in YTD FY18. The net increase was primarily attributable to increased capital expenditures of $95.8 million, the predominance of which related to the building and equipping of our China facilities. Partially offsetting the increased capital expenditures was $17.7 million received in China from investment incentives.

Net cash flows from financing activities decreased from funds provided of $2.6 million in YTD FY18 to $14.3 million of funds used in YTD FY19. Significant components of the net decrease were:
- $57.5 million used to repay (upon their maturity) our convertible senior notes;
- $26.1 million used to pay dividends to DNP (related to their 49.99% interest in our IC facility in Taiwan);
- $10.7 million used to acquire our common stock under a share repurchase program;
- $53.2 million received from borrowings in China and,
- $29.4 million contributed by DNP for their investment in our recently established IC joint venture in China.


30
As of July 28, 2019, and October 31, 2018, our total cash and cash equivalents included $153.9 million and $244.5 million, respectively, held by our foreign subsidiaries. The majority of earnings of our foreign subsidiaries are considered to be indefinitely reinvested. Repatriation of these funds to the U.S. may subject them to U.S. state income taxes and local country withholding taxes in certain jurisdictions. Furthermore, our foreign subsidiaries continue to grow through the reinvestment of earnings in additional manufacturing capacity and capability, particularly in the high-end IC and FPD areas.

As of July 28, 2019, we had capital commitments outstanding of approximately $100 million, much of which related to building and equipping our China facilities (discussed below). We intend to finance our capital expenditures with our working capital, cash generated from operations and, if necessary, additional borrowings. We entered into a joint venture that constructed an IC facility in China with an estimated total joint investment of $160 million. Our remaining funding commitment for the joint venture is approximately $7 million which we will fulfill over the next several quarters. In Q2 FY19, we commenced production at our newly constructed FPD facility in China in which, as of July 28, 2019, we had invested $160 million. We believe that our cash on hand, cash generated from operations and amounts available to borrow will be sufficient to meet our cash requirements for the next twelve months. We regularly review the availability and terms at which we might issue additional equity or debt securities in the public or private markets. However, we cannot assure that additional sources of financing would be available to us on commercially favorable terms, should our requirements exceed our existing cash, cash generated by operations, and cash available under our credit agreement.

Our liquidity, as we operate in a high fixed cost environment, is highly dependent on our revenue, cash conversion cycle, 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 we have used in the past may not be available to us when required. Consequently, we cannot assure that additional sources of financing would be available to us on commercially favorable terms, should our long-term cash requirements exceed our existing cash and cash available under our credit agreements.

Off-Balance Sheet Arrangements

In January 2018, Photronics, through its wholly owned Singapore subsidiary, and DNP, through its wholly owned subsidiary “DNP Asia Pacific PTE, Ltd.” entered into a joint venture under which DNP obtained a 49.99% interest in our IC business in Xiamen, China. The joint venture, known as “Photronics DNP Mask Corporation Xiamen” (“PDMCX”), was established to develop and manufacture photomasks for leading-edge and advanced-generation semiconductors. Under the Joint Venture Operating Agreement of PDMCX (“the Agreement”), DNP is afforded, under certain circumstances, the right to “put” its interest in PDMCX to Photronics. These circumstances include disputes regarding the strategic direction of PDMCX that may arise after the initial two-year term of the Agreement that cannot be resolved between the two parties. In addition, both Photronics and DNP have the option to purchase, or put, their interest from, or to, the other party, should their ownership interest fall below 20% for a period of more than six consecutive months. Under all such circumstances, the sales of ownership interests would be at the exiting party’s ownership percentage of the joint venture’s net book value, with closing to take place within three business days of obtaining required approvals and clearance. Should DNP exercise an option to put their, or purchase our, interest in PDMCX we may, depending on the relationship of the fair and book value of PDMCX’s net assets, incur a loss. As of July 28, 2019, Photronics and DNP each had net investments in PDMCX of approximately $42.5 million.

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.

Business Outlook

A majority of our revenue growth is expected to continue to come from the Asia region, predominantly China. In response to this expectation, we have entered into a joint venture that completed the construction of an IC research and development and manufacturing facility in Xiamen, China, in late 2018; Production commenced at this facility in Q3 FY19. In addition, in August 2017, we entered into an investment agreement to construct an FPD manufacturing facility in Hefei, China. Construction of this facility was completed in late 2018, and production commenced in the second quarter of 2019.

We make continual assessments of our global manufacturing strategy and monitor our revenue and related cash flows from operations. These ongoing assessments could result in future facility closures, asset redeployments, 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.


31
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 were discussed in Part1, Item 1A in our Annual Report on Form 10-K for the year ended October 31, 2018, a number of other unforeseen factors could cause actual results to differ materially from our expectations.

Effect of Recent Accounting Pronouncements

See “Item 1. Condensed Consolidated Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 14 – Recent Accounting Pronouncements” for recent accounting pronouncements that may affect the Company’s financial reporting.

Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Rate Risk

We transact in a number of different 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 engage in transactions and have exposures to the Japanese yen.

We attempt to minimize our risk of foreign currency transaction losses by producing products in the same country in which the products are sold (thereby generating revenues and incurring expenses in the same currency), and by managing our working capital. However, in some instances, we sell and collect for products in a currency other than the functional currency of the country where it was produced, or purchase products in a currency that differs from the functional currency of the purchasing entity. In addition, to the extent practicable, we attempt to reduce our exposure to foreign currency exchange fluctuations by converting cash and cash equivalents into the functional currency of the subsidiary which holds the cash. We may also enter into derivative contracts to mitigate our exposure to foreign currency fluctuations when we have a significant purchase obligation or significant receivable denominated in a currency that differs from the transacting subsidiaries’ functional currencies. We do not enter into derivatives for speculative purposes. There can be no assurance that our attempts to minimize our foreign currency exchange rate risks will protect us from the need to recognize significant foreign currency transaction gains and losses, especially in the event of a significant adverse movement in the value of any foreign currency in which we conduct business against any of our functional currencies, including the U.S. dollar.

As of July 28, 2019, a 10% adverse movement in the value of currencies different than the functional currencies of the Company or its subsidiaries would have resulted in a net unrealized pre-tax loss of $34.0 million, which represents an increase of $20.8 million from our exposure at October 31, 2018. The increase in foreign currency rate change risk is primarily the result of increased exposures of the Chinese renminbi, South Korean won, and New Taiwan dollar against the U.S. dollar. We do not believe that a 10% change in the exchange rates of non-US dollar currencies, other than the aforementioned currencies and the Japanese yen, would have had a material effect on our July 28, 2019, condensed consolidated financial statements.

Interest Rate Risk

A 10% adverse movement in the interest rates on our variable rate borrowings would not have had a material effect on our July 28, 2019, condensed consolidated financial statements.

Item 4.
CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have established and currently maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), designed to provide reasonable assurance that information required to be disclosed in reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost—benefit relationship of possible controls and procedures.

32
Our management, under the supervision and with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the third quarter of fiscal year 2019 that has materially affected, or is reasonably likely to materially effect, our internal control over financial reporting.

PART II.          OTHER INFORMATION

Item 1A.
RISK FACTORS

There have been no material changes to risks relating to our business as disclosed in Part 1, Item 1A of our Form 10-K for the year ended October 31, 2018.

Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

In October 2018, the Company’s board of directors authorized the repurchase of up to $25 million of its common stock, to have been executed in open-market transactions or in accordance with a repurchase plan under rule 10b5-1 of the Securities Act of 1933 (as amended). The repurchase program was terminated on February 1, 2019.

 
Total Number of
Shares Purchased
(in millions)
 
Average Price
Paid
Per share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Program (in millions)
 
Dollar Value of
Shares That May
Yet Be Purchased
(in millions)
                 
Period
               
October 12, 2018 – October 31, 2018
 
0.3
 
$9.45
 
0.3
 
$21.9
November 1, 2018 – November 25, 2018
 
0.2
 
$9.49
 
0.2
 
$20.1
November 26, 2018 – December 23, 2018
 
0.7
 
$9.38
 
0.7
 
$13.4
December 24, 2018 – January 27, 2019
 
0.2
 
$9.41
 
0.2
 
  $11.2 *
Total
 
1.4
     
1.4
   

* The share repurchase program was terminated on February 1, 2019, with no additional shares being purchased subsequent to January 27, 2019.

Item 5.
OTHER INFORMATION

Effective July 25, 2019, the Company entered into a Master Lease Agreement (“MLA”) with Banc of America Leasing and Capital LLC (the Company received the MLA fully executed by the counter party on September 3, 2019) which enables us to request advance payments or other funds for equipment or enter into an equipment lease in the U.S. In connection with this MLA, we were approved for financing of $35 million for the purchase of equipment; as of July 28, 2019, we had no outstanding borrowings against this MLA. In the fourth quarter of fiscal 2019, the financing entity, upon our request, made an advance payment of $3.4 million to an equipment vendor on our behalf. Interest on this borrowing is payable monthly at thirty-day LIBOR plus 1%, and will continue to accrue until the borrowing is repaid or, as allowed under the MLA, we enter into a lease for the equipment. All borrowings under the MLA are secured by the equipment purchased or financed.
33
Item 6.
EXHIBITS

 
 
 
 
Incorporated by Reference
 
Exhibit
Number
 
 
Description
 
Form
File
Number
Exhibit
Filing
Date
Filed or
Furnished
Herewith
 
 
 
 
 
 
 
 
 
 
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.
 
 
 
 
 
 X
 
 
 
 
 
 
 
 
 
 
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.
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
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.
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
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.
 
 
 
 
 
X
                 
 
Master Lease Agreement Number: 48869-90000 between the Company and Banc of America Leasing & Capital, LLC dated July 25, 2019
         
X
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
X

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
Photronics, Inc.
 
 
(Registrant)
 
 
   
By:
/s/ JOHN P. JORDAN
 
 
JOHN P. JORDAN
 
 
Senior Vice President
 
 
Chief Financial Officer
 
 
(Principal Accounting Officer/
 
 
Principal Financial Officer)
 

Date:  September 4, 2019

34
Exhibit 10.28


l,ra:wf,,\· '•in e1.··p..l•. ·. Banc of America Leasing & Capital, LLC Mas te r· Lease Agreement Numb er: 48869-90000 T1I is Master Lease Agreement, dnted ns of July 25, 2019. (this·'Agreement"), is by and between Banc of America Leasing & Capital, LLC, a Delaware limited liability company having an o!lice m 3400 Pawtucket Avenue, Riverside, RI 02915 (together with its successo rs and assigns, " Lessor" ), and Photronics, Inc. as "Lessee", a corporation existing under the laws of the state of .Connecticut, and having its chief executive olTicc and any organizational identification number as speci fied with its execution of this Agreement below. Certa in defined terms used herein arc identified in ob l d face and quotation mar lL throughout this Agr ee ment and in Section 15 below. This Agreement sets forth the terms and conditions for the lease of Equipment betwee n Lessor and Lessee pursuant 10 one or more "Schedules" incorporating by reference the terms of this Agreement. togetherw i th all exhibits, addenda, schedules, ccrtilicatcs, riders and other documents and instruments executed and delivered in connection with such Sch edu el (as amended from time to time, a "Lease"). Each Lease constitutes a separate, distinct and independent lease of Equipment and contractual obligation or Lessee. This Agreement is not an agreement or commitment by Lessor or Lessee to en ter into any fliture Leases or other agreements. or for Lessor to provide any financinl accommodations to Lessee. Lessor shall not be obligated under any circumstances to advance any progress payments or other funds for any Equipmentor to enter into m1y Lease if there shall have occurred a material adverse change in the o perations. business, properties or condition, financial or otherwise, or Lessee or any Guurantor. This Agreement and each Lease shall become e ffective only upon Lessor's acceptance andexecuti o n thereofat its corporate ofl1ces set forth above. I. Lease; Term; Non-Interference. Lessor and Lessee agree to lease Equipment describe d in Schedules entered into from time 10 time, 1ogell1er with all other documentation from Lessee required by Lessor with respect to such Lease. Upon receipt of any item o r group of Equipmen t intendedo! r Lease hereunder, Lessee shall execute a Schedule, with all information fully completed and irrevocably accepti ng such Equipment tor Lease, and del iver such Schedule to Lessor !'or its review and acceptance. Provided no Event of Default has occurred, Lessee shall be entitled lo use and possess the Equipmentduring the original Lease Tern1 provided in the Schedule (logether with any extensions or renewals thereof in acco rdance with terms of the Lease, the "Lease Term" ) free from intc rlcrcnce by any person claiming by, through or under Lessor. 2. Rent. ·'Rent'" s hall be payable to Lessor during the Lease Tenn in the amounts and at the times provided in the Schedule. If any Rent or other mnount payable hereunder is not paid within IO daysof its due date, Lessee shall pay an administrative late charge of 5% of the amount not timelypa i d. All Ren\ and other amounts payable under a Lease sha ll be made in immediately available funds at Lessor's address above or such other place as Lessor shall specify in writing. Unless otherwise provided herein, payments received under any Lease will be applied to all interest. lees and amounts owing thereunder(other than Rent), and then 11, Rent payable thereunder. 3. Net Lease; Disclaimer Of Warranties. Each Lease is a net lease and a '' finance lease" under Article 2A of the UCC, and Lessee waives all rights and remedies Lessee may have under sectio ns 2A-508 - 2A-522 thcreoi: includingany right to cancel or repudiate any Lease or tore ejc t orrevo ke a ccep tance of any Equipment. Upon th "Acceptance Date" provided in the Schedule for each Lease. Lessee's Obligations thereund.er (i) sah ll benon- cancelable, absolute and unconditional under all circumstances for the entire Lease Term, (ii) shall be unatleeted by the loss or destructiono r any Equipment, and (iii) shall not be subject to any aba tement, deferment, reduction, set-on: counterclaim, recoupmenl or defense forany reason whatsoever. LESSOR IS NOT A VENDOR OR AGENT Of' THE EQUIPMENT VENDOR, AND HAS NOT ENGAGED IN Tl-IE SALE OR DISTRl!3UTION Of' ANY EQUIPMENT. LESSOR MAKES NO EXPRESS OR.IMPLIED REPRESENTATIONS OR WARRANTIES AS TOTI TLE, MERCI-IANTJ\BILITY, PERFORMA\JCE, CONDITION, EXISTENCE, FITNESS OR SUITABILITY FOR LESSEE'S PURPOSES OF ANY EQUIPMENT, PATENT, T RADEMARK OR COPYR IGHT IN FRINGEMENTS, THE CONFORMITY OF THE EQU IPMENT TO THE DESCRIPTION THEREOF IN ANY LEASE. OR ANY OTHER REPRESENTATION OR WARRANTY OF ANY KIND WITH RESPECT TO THE EQUIPMENT. If Equipment is not delivered or properly installed, does not operate as warranted, becomes obsolete, or is unsatisfactory for any rc,t on, Lessee shall make all claims on account thereof solely against Vendo r and not against Lessor. Lessee is solely responsible for the selection, shipment, delivery and instullation of the Equipment and its Vendo rs, expressly disclaims any reliance upon any statements or representations made by eLssor ni connection therewith, and has received and approved the terms of any purchase orders, warranties, licenses or agreements with respect to theEq u pi m en t. During the l.,case Te rm, Lessee shall be ent itled, on a non-exclusive basis, to enforce any applicable Vendor warranties, to the extent permitted thereby and by applicable law. Lessor assigns uch warranties to Lessee, to the extent permitted thereby, and agrees to cooperate with Lessee, at Lessee's solecost iuid expense, in making any reasonab le claim against such Vendor arising from any defect in the Equipment. 4. Use; Maintc,rnncc; Location; Inspection. l..cssee shall: (i) use. operate, protect and maintain the Equipment (a) in good operating order. repair, condition and appearance, in the same ondition as when rel-eived, ordinary wear and tear excepted, (b) consistent with prudent industl)' practice (but in no even! less than the extent 10 which Lessee maintains other similar equipment in the prudent management of its assets and properties), and (c) in compliance with all applicable insur,mce policies. laws, ordimmc,es rules, regulations and manufacturer's recommended maintenance and repair procedures, and (ii) maintain com prehensive books ::ind records regarding the use, operation, ma intenance and repair of the Equipment. The Equipment shall be used only within the 48 contiguous United States, solely for business purposes (and not for any consumer, personal, home, or family purpose). and shall not be abandoned or used for any unlnwtl, I purpose. Lessee shall not disco ntinue use or any Equipment except for nonnal maintenance nor. through modilicatio ns. alterations or 01hcrwise, impair the current or residual value, useful lite, utility or originally intended function of any Equipment without Lessor 's prior consent. Any rc,,laccmcnlor substitution of parts, improvements, upgrades, or additions 10 the Equipment during the Len,e Ter m shall be the properly or Lessor nnd s ul jcc t to the Lease, except that if no Event o f Default exists, Lessee may at its expense remove improvements or additions provided by Lessee that cnn he readily removed without impairing the value, !'unction or rema ining useful life of the Equipment. If requested by Lessor. Lessee shall cause Equipmen t to be plainly marked to disclose Lessor's ownership, asspecified by Lessor. Lessee shall not change the location or, in the case of over-the-road vehicles. the base of any Equipment specified in its Schedule without Lessor's prior written consent. Lessor shall have the right lo enter any premises where Equipmentis located and inspect it (toge lher with re lated books and records) at any reasonable time. Mas1er Lease Agreement


5. Loss and Damage. Lessee tt,sumcs all ris k of (and shall promptly notify Le$sor in writing of any occurrence ot) any damage to or loss, the ll. confiscalion or destruction o r any Equipment from any cause whatsoever (a ··Casualty'') from the date shipped or otherwise made available to Lessee and continuing unti l it i, retllrncd to and accepted by Lessor in the condition required by the Lease, including Section 8 of this Agreement. Ir any l quipment sul1crs a Casually which I,essec determines is reparable, l<;ssec shall al its expense promptly place the same in good repair, condition or working order. Ir any Equip111c n1 s ulfors a Cas ualty whic h Lessee determ ines is beyond repair or materially impairs its residual value (a ·T otal Loss..). Lessee shall at Lesse·cs option (unless ,111 !:vent of Default hit, occurred and is then continuing. in which case it shall be at Lessor' s option) either (a) promptly replace such Equipment with a similar item re:t onably acceptable to Lessor having an equivalent value. utility and remaining useful life of such Equipment. whereupon such repluccmcnt items shall cons titule Equipment for all purposes the Lease. or (b) on the Rent payment date following such Casually (or. if none. within 30 days) pa,· Lessor the Stipulated Loss Value for such Equipment. together with all Rent scheduled for pa nent on such dnlc. .ind all accrued interes t. late char¥C> and other amoums then due and owing under the Lease. Upon such payment follow ing a To tal Loss. the Lease wilh respccl to the Equipmentsuflering a '1"0 1al Los, shall terminate, and Lessor shall transfer all of its right. titk and interest in such Equipment. free from all liens and encumbrances created by Lessor. but othern'ise on an " AS-IS. WHERE-ls:· quitclaim basis. If l..:ss th m1 all Equipment under a Schedule sufTers a Total Loss. (i) the Stipulated Loss Value with rcspccl to any such item of Equipment shall be calculated by reference to the allocable portion of"Lcssor's Cost" provided in the app lica ble Schedule, Rent or other amoum related to such item, as reasonably determined by Lessor. and (ii) the remaining Rent under the Sche dule shall Ix: proportion,ttely reducc:d as reasonably calculated by Lessor upon Lessor's receipt of the payments described above. 6. Insura nce. Lessee. al i1s011·n expense, shall keep each it.:m or Equipment insured against all risks for its replacement value, and in no event less than its Stipulated Loss Value. and shall nmintain public liability and, with respect to Equipment that is over-the-road vehicles. automotive liability insurance against such risks and for such amounts as Lessor may n::quire. All such insuranc..: shall (a) be with companies rated '"A-" or better by A.M. Best Com, p my. in such form as L..:ssor s ha ll approve. (b) speci(y Lessor and Lessee as insureds and provide that it may not be canceled or altered in any way that would ailed the interes t of l..:ssor without at lea,t 30 days' prior 11·1i1tcn notice to Lessor (10 days' in the case of nonpayment of premium). (c) be primary. without right of contribution from any other insurance carri..:d by Lessor and contain waiver of subrogation and '·breach or warranty'· provisions satisfactory 10 Lessor, (d) provide that all iunounts payable by reason of loss or damage to Equipment shall be payable solely to Lessor. unless Lessor other wise agrees (.provided. ho\\'cver. that absent lhe existence of an Event of Default. Lessor agrees to promptly remit to Lessee any such insurance proceeds thm are to be usi.:d by L..:sscc to repair or replace the applicable Equipment),and (c) contain such other endorsements as Lessor may reasonably requin:. Lessee shall provide Lessor with evidence satislilc1ory to I,essor of the required insurance upon the execution or any Schedule and promptly upon any renewal of any required policy. 7. Indemnities; Taxes. Lcss!.:c's i ndemnit y and reimburscme111 o bligations sci forth below shall survive the cancellation, termination or expiration of any Lease or this /\gn:emcnt. (a) .General lndcmnitv. Lessee ,hall indcmnil)·. 0 11 an after-tax b:isis. delcnd and hold hannlcss Lessor and its respective ofliccrs. directors. cmployi:es.agents and i\lliliatc;; ("Indemnified Persons..) against all claims, liabilities. losses and expenses whatsoever (except those determined by final decis ion or a court of compct<.:lll juris dict ion to have been directly and primarily caused by the Indemnified Person's gross negligence or willful miscond uct ). including rnm1costs and r<::asonable attorneys' lees and expenses (together, "'Attorneys' Fees"), in any way relating to or arising out or the Equipment or any Lease m any time. or the ordering. acquisition. rejection. installation. possession, maintenance. use. ownership. condition. destruction or return or the Equipmcnl. including any claims based in negligence. strict liability in tort. environmental liability or infringement. (b) .General Tm< l ndcmnitv.. Lessee shal l pay or reimb urse Lessor, and indcmnily, delend and hold Lessor harmless from. on an allcr-tm, basis, all taxes. assessments, Ice s and other go vernmental charges paid or required to be paid by Lessor or Lessee in any way arising out of or n.:lated to the Equipment or any Lease- before or during the Lease Term or al\c r the Lease Term ll>llowing an Event of Default, including foreign, Federal, state, county and municipal lees. ta,, c and assessme nts. and property. value-added, sales, use. gross receipts, excise, stamp and documenlmy taxes. and all related pena lties. lines, additio, n. to ta, nnd interest charges (··Impositions·} excluding only Federal and state taxes based on Lessor's net income unless such taxes are in lieu or any lmposilio n Lessee would otherwise be requiredto pay hereunder. Lessee sha ll timely pay any Imposition for which Lessee is primarily responsible under law and any other Imposition not payable or not paid by Lessor, but Lessee shall have no obligatio n to pay any lmposition being contested in good faith and by appropriate l.:gal proceedings, the nonpaymentof which does not. in the opinion of Lessor. result in a material risk or adverse cfTcct on 1he lith:. propc1iy. use, disposition or other rights of Lessor with respect to the Equipment. Upon Lessor's request. Lessee shall furnish proofof its pa yme nt orany Imposition. (c) .lncorne Tax ,I11 k 111ni1v. Lessor shall be treated for federal and state income tax purposes as the owner or the Equipment and shall be cmilled to tak.: into an:ount certain Tax lknclits in computing its income tax liabilities in connection with any Lease. If Lessor sullcrs a Tax Loss by reason ol' any acl or failure to act by 1.e,, ec. or Lessc·e s breach or any representa tion. warranty or agrccmellt in any Lease ihcn. upon Lesso1's demand and at Lessor's option. either: (i) all i"unhcr R 111 under the Lease. ii'any. shall be increased by an amount. or (ii) Lessee shall pay Lessor a lump sum amount, .which in either ca.,e shall mai,n11i11 ihc 11<:1 e co nomic a tler-tax yield, cash-llow and rate of re tum Lessor originally anticipated, based on Lcssor·s lcdcral and state corporate income HL, r,1t'c in c!'li:ct o n rhe Acceptance Datt: of the applicable Schedule and other assumptions originally used by Lessor in evalua ting 1he transaction and sc11i11g the Rc111 therefor and other le1111s thc:rco r Lessee shall also pay Lessor on demand all interest. costs (including Attorneys· Fees). penalties and additions l o ta, associ ated wilh the TcLx Loss. Lessor shall have no obligation 10 contest any Tax Loss. /\II references 10 --Lessor.. in this Scclion 7(c) shall ind11.I.: (, \ ) I.cssor's successors and J\ssign..:cs, and (B) each member or the a!l11iated gro up of corporations, as dc11ned in Section I 50'1(a)of the Code'. ol"" hid1 Lcs,or or such successor or Assignee is m any time a member. As used herein: "Tax Benefits"means all items or income. deduction (including dq m.:ciation consis1cn1 with Lessee's representation in the app licab le Sched ule), credit, gain or loss relating to owners hip of the Equipment as arc pw,, i kd to o"·ncrs ot' similar equipmem under the Code and applicable state t,L, laws in efTcct on the /\eccptancc Date of such Schedule: and "Tax L,o ', n ca ns and will be deemed to be sullcred if Lessor loses. is delayed in claiming. is required to recapture. is not allowed or may not claim all or any poni" n of any Tax Bcnclits. provided, however., that Lessee, hall be under no obligation to make m1y paymenst with respect 10 a T(t, Loss to the C.\ tCnt thal ii ( I J is caused by Lessor's foilure to have sullicicnt ta\ able income to benefit from m1y Ta., Benefits. or (2) results from any disposition of Equipmi.:nt h) I .cssor olhcr than a dis positionof Cquip111c 111 following an Event or Default. 8. Return. Upon any c,mcdlation. 1ennination or expiration of any Lease (alkr th<;: occurrence of an Event ofDcfoult or 01herwisc). Lessee shall. at its expense. cause the Equipment to be prepared and adequalcly protected for shipment by an authorized manufacturer's representative and ci1hcr surrender it to Lessor in place or. if,in tructt:d by I.essor. ship the Equipment to Lessor. freight and insurance pre-paid. to a pince designated by Lessor within the 48 Muster Lease /\grccmc111 2


co ntiguous United States. in the condition required under Section 4 hereorand underthe applicable Schedule, able to be put into immediate service andot perform at manufacturer's rated leve ls (irany), together with all relatedmmrnals, documents and records, and, if applicable, reassembled by an authorized manufactun::r's representativeand immediately qualified for the manufacturer's (or its authorized servicing representative's) then available service contract or warranty. II'requested by Lessor, Lessee shall, at its expense: (i) cause the Equipment to qualify for all applicable licenses or permits necessary fori ts operation and for its intended purpose, and to comply with all specil1cations and requirements of applicable fede ral, state and local laws, regulations and ordinances;(ii) provide sale, suitable storage, acceptable to Lessor, for the Equipment for a period not to exceed 90 days from the date or return; and (iii) cooperate with Lessor in a11c mpling to remarkct the Equipment, including display and demonstration to prospective partie , and allowing Lessr o to conduct a private sale on Lessee's premises. Ir Lessee docs not su rrender or rctum any item of Equipment to Lessor on the date or in the condition required under a Lease. in addition 10 all other available rights and remedies, at Lessor's election, such Equipment shall continue lo be subject to all the temis and conditions of the Lease. with Re nt and other charges continuing to accrue and be payable under the Lease with respect lo such Equpim en ut n itl ii is so surrendered or returned lo Lessor. 9 . Lessee llc prcscnl ations and Agreements. Lessee represents, warrants and agrees that: (a) Lessee has had for the previous 5 years (except as previously dis closed to Lessor in \\1·iting) the legal name and form of business organization in the state described above; (b) Lessee's chiefexecu ivet office and notice address, t:t,;payer identification number and any organizmional idcntilication number is as describedwith its execution of this i\grccment below; (c) Lessee shall no1 il)' Lessor in writing at leas t 30 days before changing its legal name, state of organizaiton. chief executive oftice locatino ro org aniw tional identification number; (d) Lessee is dulyorgimized and existing in good standi ng underthe laws of the state described above and all other jurisdictions where legally required in order to carry on its business, shall maintain its good standing in all such jurisdictions, and shall condcu t its businesses and manage its properties (and cause each of its Afliliates to cond11ct its businesses and manage its prope11ics) in compliancew it h a ll app l ci a b el al ws, rules or regulations bindi ng. in m1y jurisdiction. on Lessee and its Afliliates including, without limitation, all anti-money laundering laws mid regulations;(e) the execution. delivery nd performance or this Agreement, each Lease and Related Agreement to which it is a party has been duyl authorized by Lessee, each or which arc and will be binding on and enforceable against Lessee in accord1111ce with their terms, and do not andw i lnl o t contravene any other instrument o r agreement binding on Lessee;and (t) there is no pending litigation, ta'< or e nvironmentalclaim. proceedin, gd ispu te or regulatol) ' or cnforccmcn1 act io n (and Lessee shall promptly notilY Lessor of ruiy or the same that may hereafter arise) that may adversely affect any Equipment or Lessee'slinancial conditi onor impair its ability to perform itsObligations. i\11 c ovenants of Lessee that arc based upon a specified level or ratio relating to assets, liabilities, indebtedness, rentals, net worth, cash llow, earnings, profitability, or any other acco11111ing-based measurementor test, now or hcreafler existing (collectively, the ·'Additional Covenants''), in that cre tain .Fourth Amended and Restated Credit Agre.::ment dated September 27, 2018., by and between Lessee and .Bank of America N.A.. as Syndication Agent. and JPMorgan Chase Bank. N.i\ ., as Administrative Agent and Collateral Agent or in any replacement credit facil ity accepted in \'lriting by Lessor between Lessee and a United States national banking association or other financialinstitution (a "Bruik f acility''), arc hereby incorporated into and maden pait of this Agrcemcnl ( with such adjustments to defined terms as may be necess81)' to assure consiste ncy) without modificat ion or amendment unless specifically accepted and approved in writing by Lessor. Lessee acknowledges and ag rees that (i) the Additional Covenants in the form included in the ex sit ing Bank Facitli y slwll bt: deemed to be permanently incorporatt:d into this Agreement, and shall remain in effect for all purposesof this Agreement notwithstanding the canc<:llatio n or termination of a Bank Facility due to voluntmy prepayment, payment at maturity, de fault or otherwise. unless a replacement credit facility with Additional Covenants has been accepted in writing by Lessor in its sole discretion prior to the effective date of such cancellation or termination of such 13ai1k Facilily, and (ii) any waiver nf any breach (o r anticipated breach) of any Add itional Covenant under the Bank Facility (by reason ora111e nd1 ncnt, li.irbcnrance or otherwise) shall not constitute a waiver or the corresponding delault (or anticipated defi1Ult) under this Agreement unless spccilically agreedto in writing by Lessor. Lessee hereby certifies that Lessor hns been furnished a true. correct and complete copy of all documentationconcerning the existing 13nnk Faciltiy, and fortllcr covenants and agrees to promptly provide Lessor: (a) certified copies of tr,ue correct and complete documenttaion of any other Brn1k Facility in c11cct from time to time, aiicl any all proposed amendments and modifications to any Bank Facility; (b) notices or any event or default or other condition of non-compliance issued to Lessee in connection with a Bank Facility; (c) all financial statements and reportsrequired pursuant to a Bank Facility and any certificatesof compliance in the form required thereunder as they pertain to the Additional Covenants. and shall continue to provide the same to Lessor notwithstanding the crnice llation or other termination or such Bank Facility for so long as any Obligations owing to Lessor remain outstanding in connection with this Agreement; and (d) prior written notice of the cancellation or terminationor a Bank Facility for :my reason. Lessee fi.1t1her acknowledges and ngrccs that any event of default under a 13:mk Facility shall constitute mi Event of Default under this 1\g rccment 10. Title; Property; Adcliiional Secur ity. (a) .Title; Personnl Propertv.. Each Lease is and is intended lo be a lease of personal property for all purposes. Lessee docs not acquire uny right. title or interest in or to any Equipment, except the right to use and possess the same under the terms of the applicable Lease. Except as specifically provided in the applicable Schedule, Lessee has no right or option lo extend the Lease Term of a Lease or purchase any Equipment. Lessee assigns all or its rights (but noneof its ob ligations)to Lessor under any purchase o rders, invoices or other contracts of sale with respect to the Equipment. and conveys whatc,cr right. title and interest it may now or hereafter have in any Equipment to Lessor. Lessor shall be the sole owner of Equipment rrce and clear or all liens or enc umbrances, other than Lessee's rights under the Lease. Lessee will not create or permit to exist any lien. security interes t, charge or cncu111brancc on any Equipme nt except those created by Lessor. The Equipment shall remain personal property ,lt all times, notwithstandi ngthe manner in which it may be allixed to really. Lessee shall obtain and recordsuch instruments and take such steps as may be necessary to (i) prevent any crcdi1or. l.mdlord.. mortgagee or other entity (other than Lessor) from having any lien. charge, security interest or encumbrance on any Equipment, and (ii) ensure Lesso r's right of access to and removal of Equipment in accordance with the Lease. (h) .Additional Scrnritv.. To secure 1he punctual payment and performance of Lessee's Obligations under each Lease and. as a sepnrnte grant of security, to secure the paymc:nt and pc1fo nnanccof all other Obligations o wing to Lessor. Lessee grants lo Lessor a continu ing sec urity interest in the Collateral. .provided.however., that if thcrc then exists no Event or Default, Lessor's security interest in Collateral subject to a Lease shall terminate upon the payment and performance of all Obligationsof Lessee under the applicable Lca5c. Notwithstanding the grant of a security interest in any Collateral, Lessee shall have no right 10 sell, lca,c. rent, dispose or su rrende r possession, use or operation of any Equipment to any third parties without the prior wriuen consent of Lessor. The foregoing grant of a security interest shall not or itself be a factor in determining whether any Lease creates a lease or s<.:curity interc t in the: 1:q 11ipmc:n1 u nck r app l icab le: provisions ol"th c UCC . Master I.case Agreement


3 11. Default. Each or the follow ing (il ··o efaulf") shall. with the gi1·ing of any notice or passage of any time period specified. constitute an "Event of Default" hereunder and under all Leases: ( I ) Lessee fails 10 pay any Rent or other amount owing under any Lease within 10 days of its due date; (2) Lessee fails to mainlain insurance as required herein, or se lls. lca es. subleases. assigns, conveys. or suflers to exist any lien. charge. security interest or encumbrance on. any Equipment without Lessor's prior consent, or any Equipment is subjected to levy, seizure or attachment; (3) Lessee fails to perfom, or comply with any other co venant or obligation under any Lease or Related Agreement and, if curable, such failure con tinues for 30 days afler written notice thereof by Lessor 10 Lessee: (4) .iny representation. warranyt or other written statement made to Lessor by Lessee in connection ll'ith this Agreement. any Lease. Relai..:d /\grc..:ment or othe r Ob ligation. or by any Guarantor pursuant to any Guaran1y (including finan cial statements) proves lo have been incorrect in any material respect when made; (5) Lessee (w) enters into any merger or consolidation with, or sells or trnnslc rs all or any substantial por1io11 of its assds to. or cnh:rs into any partnership orjoint venture other lhan in the ordinary course of business with. any cntily. (x) dies (if a natural person), dissolves. liquidates ur ceases or suspends the co nduct of business. or cea,es to maintain its existence, (y) if Lessee is a privately held entity. en1ers into or sulk:rs any trnnsaclion or series of transaelionsas a result or which Lessee is directly or indireclly controlled by persons or entities not directly or indirec tly controlling Lessee it of !he date herco L o r (z) if Lessee is a publicly held entity, there shall be a change in the 01111ership of Lessee's stock or orhcr equivalent o wnership interes t such that Lessee is no longer sut jcct to the reporting requireme nts o[ or no longer has a class of equity securities registered under. the Securities Act or 1933 or the Securities Exchange Act of 1934 : (6 ) Lessee undertakes any general assignmcnl for the hcnc!JI o r credi tors or co1111rn::nccs any vol untary case or proceeding for relief under the federal bankruptc y code. or anyother law for the relief of debtors. or takes any aclion 10 aulhorizc or implement any of the foregoi ng: (7) the filing of any petition or application against Lessee under any law for the relief or deb tors. including proceedings under the lederal bankruptcy code, or for the sul jec tion or prope11y of I ,essee to the control of any court. receiver or agency for the benefit of cnxlitors if such pctilion or application is consented to by Lessee or is otherwise not dismissed within 60 days from the date or fi ling; (8) any delault occurs under any other lease. credit or other agreeme nt or instrument to which Lessee and Lessor or any Affiliate of Lessor arc now or herealler party: (9) any dclault occ urs under any other agreement or instrument to which Lessee is a party and under which there is outstanding, owing or committed an aggregate a mount greater than $5,000.000: (10) any attempted rt:pudiation. breach \Jr default of any Guaranty; or (!I) the occurrence of any evenI described in clauses (4) through (9) above with reference to ,iny Guarantor or any controlling shareholde r, general partner or memher of Lessee. Lesseeshall promptly n,Hil I,cssor in writing of any Default or Event or Defaull. 12. Remedies. (a) Upon the occurrence of an Event ofDclault. Lessor may. in its discretio n. exercise any one or more of the following remedies with respec t tu any or all !,cases or Equ ipment: (! ) cause Lessee to promptly discontinue use or or disable any Equipment, or to assemble and return any Equipment or other Collateral in accordance with the tcnns of the applicabk:Lease: (2) remedy such Event of Default or proceed hy court action. either at law or in equity. to c nforcc performance of the applicable provisions of :my Lease; (3) with o r without court order. enter upon !he premises where Equipmentis located and repossess and remove the sa me, all without liabilily for damage to such premises or by reason such entry or repossesion, except for Lessor's gross neglige nce or willrul misconduct: (4) dispose of any Equipment in a puhlic or private transaction, or hold, use. operate or keep idle the Equipment. lree and clear or any rig hts or interests of Lessee therein; (5) recover direct. incidental. consequential mid other damages for the breach of any Lease, including the payme nt or all Rent and other amounts payable thereunde r (discounted m the Disco unt Rate with respect to any accele rated future amounts). and all costs and exp.::nses incurred by Lessor in exercising its remedies or enforcing its rights thereunder (including all Attorneys· Fees): (6) by written notice to Lessee. cancel any I.ease and. as liquidated damages for the loss of Lessor's bargain .ind not as a penalty. declare immediately due and payable an amount equal to the Stipulated Loss Value applicable to such Leases which Lessee acknowledges to be reasonable liquidated damages in light of the anticipated harm to Lessor that might be caused by an Event or Default and the facts and circumstances existing a, of the Acceptance Date of each Lease: (7) without notice to Lessee, apply or set-on·against any Obligations all security deposits, advance payments, proceeds of lette rs or credit. ccni l7ca les or deposit ( wherher or not malurcd). securities or other udtlitional collate ral held by Lessor or otherwise credited by or due from Lessor to Lessee: or (8) pursL1c all o the r remedies pro1·dicd under the UCC or other applicable law. Upon the commencement or any voluntary case under the lcdcral bankruptcy code concerning the Lessee. the remedy provided in clause (6) above shall be automatically exe rcised without the requirement of prior writte n notice to I.csscc or o r :my other act or declaration by Lessor. and the liquidated damages descri bed therein shall be immediately due and payable. Lessee shull p,1y interest cq ual to thc lesser of (a) 12% per annum. or (b) the highest rate pcrmitted by applicable law ("Dcfouh Rate") 011 ( i) any amount other than Rent owing under any Lt:ascand 1101 paid when due. (ii) Re nt not paid \\ thin 30 daysor its due date. and (iii) any amount required io be paid upon cam:cllation or any Le,,sc under this Section 12 . Any payments received by Lessor aflcr an Event of Default. including proceeds of any disposi tion of Equipment. shall be applied in lhc ibllowing order: (A) to all of Lessor's costs ( including Attorneys· Fees). charges und expenses incurred in taking. remo\·ing. holding. repairing and selling or leasing the Equipment o r o ther Co llateral or enforcing the provisions hereof; (B) to the extent not previo usly paid by Lessee. lo pay Lessor for mi) dm m iges then remaining unpaid h.::reunder; (C) to reimburse Lessee for any sums previously paid by Lessee as damages hereunder: and (D) ihc balance. if any. s hall be retained by Lessor. (b) No remedy rclcrred to in this Sect ion 12 shall be exclusive. each shall be cumulative (but not duplicative or recovery of any Obligation) and in addition lo any other remedy relc rrecl to above or otherwise available to Lessor at law or in equity. imd all such remedies shall survive the canccllalion of any Lease. 1.cssor"s c c:rcise or partial exercise 01: or failure to exercise. any remedy shall not restric t Lessor from further exc:rcise of that remedy or any other available re1m:d y. No extension or time for payment or performance of any Obligation sh all operate to release. discharge, modify, change or alk ct !he original liability or Lessee for any Obligations. either in whole or in pan. Lessor may proceed against any Co llateral or Guarantor. or may proceed contemporaneously or in the first instance against Lessee, in such order and at such times follow ing an Event of Default as Lessor determines in its sole discretion. In any action lo repossess any Equipmentor other Collateral, Lessee waives any bonds and any surety or security required by any applicable laws as an incident to such n:posscssio n. Not.ices of Lesso1's intention to accelernlc. acce le ration. nonpayment, presentment. protest, disho nor. or any other notice whatsoe ver (other than notices of Delault specifically required of Lessor pursuant to Section 11 above) are waived by J.,essec and any Guaran1or. Any notice given by Lessor of an) disposition of Collateral or other intended action of Lessor which is given in accordance with this Agreement a1 least 5 business dnys prior 10 such acti()n. shnil cons titute l 1irand reuso nahlc notice of such action . 13. Assignment. Lessor and any Assignee may assign or transler any of Lessor's interests in ,my Le.ise or Equipment without notice 10 Lessee. subject. however. to th.: rig hts of 1.cssec 10 use and possess the Equipment under such Lease l<>r so long as no Event of Default has occurred and is cominuing. Lessee agrees that: (i) thc rights of any Assignee shall not be allcc ted byany bf'l!ach or default of Lessor or any prior Assigne<.:. and Lessee slrnll not assert any clclcnse. rights or sel-off or cou111crd uim against any Assignee. nor hold or attempt to hold such Assignee liab le for any such hrcach or default: (i i) no Assigne..: s hnll be required to a$sumc ,my obligations of Lessor under any, l ..:a:;eexcept th.: obligation or non-interrerence in Section I above. (iii) any Assignee expressly assuming the o blig nl io ns of l.c:sso r shall thereupon he responsible for Lessor's duties under the applicable LcRse acc ruing al1cr Maste r I.cast /\grccm,111 4


assignment and Lessor shall be releasedfrom such duties, and (iv) Lessee shall execute and deliver upon request such addit ional documents. instruments and assurances as Lessor dee ms necessary in order to (y) m.:knowledgc and confir m all or the terms and conditions of any Lease and Lessor's or such Assignee's rights with rc. pcct thereto. and Lessee's compliance with all ol"the terms and provisions thereof: and (z) preserve, protect and perfect Lcssor·s or Assignee·s right. title or interest h<!rc undcr and in any Equipment, including, without limitation. such UCC financing statements or amendments. control agrt-.emcnts, corporate or member resolutions, votes, notices or a signn1ent of interests, and con firmations of Lessec·s obligations and representations and warranties with respect thereto as of the dates requested. Lessor may disclose to any potential Assignee any informatio n regarding Lessee, any Guarantor and their Allilimes. Less ee shall not assig, n pledge, hyporhccatc or in an y way dispose of any of ils rig hts or obliga tions under any Lease, or cnlrc into any sublease of any Eq uipment, without Lessor's prior writt en consent. Any purpor ted assignment, pledg, e hypothecation, disposal or su blease hy Lessee made without Lessor's prior writte n consent shall be null and void. 14. Financial and Othe r Data. (a) During any Lease Term, Lessee sha ll (i) maintain books and records in acco rdance with generally accepted accounting principles consistently app lied ('"GAAi'") and prudent business practice; (ii) promptly provide Lessor, within 120 days afier the close of each liscal year, and, upon Lessor's request. within 45 daysof the end of each quarter of Lessee's liscal year, a copy of linancial statements for Lessee requested by Lessor, in each case prepared in accordance with GAAi' and (in the case of annual statements) audited by independent certified public accountants and (in the case of quarterly state ments) certified by the chief' linancial ofl1ccr of Lessee; .provided. however, that for so long as Lessee is legally and timely Ii ling annual and quarterly linancial reports on Fo1111s I0 - K and I0-Q with the Securities and Exchange Commission which arc readily available to the public, the liling orsuch reports sha ll satisfy the foregoing finm1eial s tatement reporting requirements for such entity; and (iii) furnish Lessor all other financ ial information and reports and such other information as Lessor may reasonably request concerning Lessee, its affa irs, or the Equipment or its condition, location. use oroperation. (b) Lessee represents mid warrants that all information and linancial statements at any time fornishecl by or on behalf of Lessee are accurate and reasonably reflect as of their respective dates. results of o perations and the fimmcial condit ion of Lessee or such other entity they purport to cover. Credit and other information regarding Lessee. its Aniliatcs, any Lease or Equipment ma}' be disclosed by Lessor to its Anilia tes, agents and potential Assignees. notwithstanding anythingcontnincd in any agreement that may purport to limit or prohibit such disclosure. 15 . Octinilions As used herein. the following terms shall have the meanings a5signcd or relen-ed to them below: " Affiliate"means any entity comrolling, controlled by or under common control with the referent entity; ·'control'· includes (i) the ownership or 25% or more or the voting stock or other ownership interest of any entity and (ii) the status of a general partner o r a partnership or managing member of a limited li<1b ility company. "Assignee" means any assignee or transferee of all or any of Lessor's right, title and interest in any Lease or any Equipment. "Code" means the Internal Revenue Code or 1986, as amended. " Co llta eral" means and includes all or Lessee's right, title and interest in and 10 all Equipment, together with: (i) all parts, attachments, accessories and accessions lo, substitutions and replacements for, each item of Equipment; (ii) all accounts, chattel paper, and general intangibles ar ising from or r elta ed to any sale, lease, rental or other dispos ition of any Equipment to third panics, or otherwise resulting from the possession, use or operation of any qli uipmcnt by th ird parties, ind uding ins!rnments, investment property, deposit accounts, le tter or credit rights, and supporting obligations arising htere underor in co11nection therewith: (iii) all insurance, warnmty and other claims against third parties with respect to any Equipment; (iv) all sol1warc and other intclk:ctual properly rights used in connection therewith; (v) proceeds of all of the foregoing, including insurance proceeds and any proceeds in t he formo f goods, accounts. chattel pnper. documen,ts instruments. general intangibles, investment property, deposit accounts, le tter or credit right$ nncl suppor ting obligations; and (vi) all books and records regarding the foregoing, in each case, now existing or herealkr arising. "Discount Rate" means the I-year Treasury Consrnnl Maturity rate as published in the Selected Interest Rates table of the Federal Reserve statistical release 1-1. 15(519) for the week ending immedia tely prior to the original Acceptance Date or a Lease (or if suc h rate is no longer cle tennincd or published, a successor or alternate rate scle<:tcd by, I cssor). "E quipment" means the items, units and groups of personal property, licensed materials and fixt ures described in each Schedule, together with all rep lacements, parts, additions, ncccssories and substitutions therefor; and "item of Eq uipmcnt" means a "commercial unit" as defined and described in A11icle 21\ of the UCC, and includes each fl!nctionally integratedand sepm·ately marketable group or unit of Equipment. "Guarantor" means any guaranto r. s urety. endorser , general pm1ncr or co-lessee of Lessee, or other party liab le in any capacity. or providing additional collateral security for, th.: payment or performance of any Obligations of Lessee. · 'Guaranty'" means any guaranty.surely instrument, security, indemnity,' ' keep-well" agreement or other instrument or arrangement from or with any Guarantor. "Ohligations" 111crn1s and includes all obligations of Lessee owing to Lessor under this Agrec:mcnt, any Lease or Related Agreement, or of any G uarantor owing to I,cssor under an Guaranty. together with all other obligatio ns, indebtedness and liabilit ies or Lessee to Lessor under any other nlianc i ngs. leases, loans, notes. progress payment ag ree ments, guaranties or other agreemen ts, or every kine! an d descr iption, now existing or hcreafier m i si ng. direct or indirect. joint or several. absolute or contingent, whether for payment or perlonnance, regardless of how the same may arise or by what ni s utrme nt, agreement or hook account they may be evidenced, including without limitation, any such obligations, indebtedness and liabilities of Lessee to others which may beobtained by Lessor through purchase, negotiation. discount, transfer, assignment or otherwise. " Re lated l\gn, cmcnf" means and includes any Guaranty and any approval letter or progress payment. assignment, security or other agreement or addendumrelated to this Agreement. any Lease or any Collateral to which Lessee or any Guarantor is a party. "St ipulated Loss Value" means, as of any particul;u· elate, the product obtuincd by multiplying the ·'L esso r's Cost" specified in the Schedule by the percentage set forth in the ·'Schedule of Stip ulated Loss Values" attached to 1he Schedule, specified opposite the Rent inst11ll111en t numb re o(r elate) becomingdue i mmediately allcr the Casualty. Event of Default or other event requiring the calculation of St ipulated Loss V,1luc. lf therc is no Schedule of Stipulaicd Loss Values attached to a Sd1cdulc, or if the Schedule of Stipulated Loss Values docs not otherwise cover a Rent installment number (orda te,) Stipulated Loss Value on any Rent payment date shall equal the net present valueof: (a) all unpaid Rent for the remainder of the Lease Term-. (b) the amount of rniy purchase obligatio n. fixed price purchase option, or TRAC amount payment or, if there is no such obligation, option or payment, then the foir mmketva l ue of the Equipment ns of the end of the Lensc Term. ,l estimated by Lessor in ils sole discretion. all discounted to present value at the Discount Rate. "lJCC" 111em1s the Uniform Commercial Code in eflcct in the state specified in Section 16(() of this Agreement. Master Lease Agrcc,11cm 5


BANC OF AMERICA LEASING & CAPITAL, LLC (Lessor)
 
PHOTRONICS, INC. (Lessee)
       
 
By:
/s/ Denise C. Simpson
 
By:
/s/ John P. Jordan
  Print Name:
Denise C. Simpson   Print Name:
John P. Jordan
 
Title:
Vice President
 
Title:
Sr. Vice President, CFO & Treasurer

 
Taxpayer ID #:
06-0854886
 
Org. ID # (if any)
       
  Chief Executive Office:
   
15 Secor Road
   
Brookfield, CT 06804

"Vendor" menns the 111am1lactur.:r. d is tributor, supplie r or other seller (whether or not a merehnnt or dealer) of the Equipment and any sales re presentative or agent tl1creo i: 16. Miscellaneous. (a) i\t Lessor's request Lessee shall execute. deliver, lile and record such linnncing statements and other documents as Lessor deems necessary to proti:ct 1.-:ssor's interest in the Equipment and to ellcctuate the purposes of any Lease or Related Agreement, and Lessee authorizes. and irrevocably appoints Lessor as its agcm and attorney-in-fact. with right of substitu tion and coupled with an interes t, to (i) execute, deliver. lilc. and record any such item, and to take suc h action for Lessee and in Le;see's name, place and stead, (ii) make minor corrections to manilcst errors in factual data in any Schedule and any addendn. a1tuch1m:nts. exhibits and riders thereto. and (iii) aticr the occurrence or an Event of Default. enforce claims relatingto the Equipment against insurers . Vendors or other persons. and to make. adjust. compromise. settle and receive payment under such claims: but without any obligation to do so. (b) Federal law requires all linancial insti tutions to obtain. verily and record information that identifies each entity that o btains a loan or other financial accommodtaion. ·111cfirst time Lessee requests a linancial accommodation from Lesso r. rhe Lessor may ask for Lessee's (or any Guanmtor"s) legal name. address. tm, ID number and other iden ti lying information. Lessee shall promptly provide copies of business licenses or other documents evidenc ing the existence and good standing of Lessee or any Guaranwrrequested by Lessor. (c) Time is of the c.,sencc in the payment and performance or all of Lessee's Obligations under any Lease or Relmed Agreement. 'll1is Agreement, mid each Lease or Rd utcd Agreemen t may be executed in one or more countc rpan,s each of which shall constitu te one and the same agreement. All demands, notices. requests. consents. waivers and other communications conccming this Agreement and any Lease or Related Agreement shall be in writing and shall be deemed to have been du ly given when received. personally delivered or three business days after being deposited in the mail, first class postage prepaid. or the business day aflc r delivery to an express carrier, charges prepaid, addressed to each pruty at the address provided herein. or at such other address as may hcreal1cr be fi1rnished in writing by such party to the other. ld) Except as otherwiseagreed bet,, een Lessee and Lessor in writing. Lessee shall reimburse Lessor upon dcm,md for costs and expc.nses incurred by Lessor in connection with the e xecution and deli\'ery of this Agreemen t. any Lease or Related Agreement. Lessee shall reimburse Lessor on demand for all rnsts (including Attorneys" Fees ) incurred by Lessor in connection with Lesscc·s exercise of any purchase or extension option under any Lease. or any ,unendmcnt or waiver of the tenns of this /\g rccnient or any Lease or Related Agreement requested by Lessee. (e) i\ny provis ions 0· 1 this Agrcc111c111or any Lease or Related Agreement which arc unenforceable in any jurisdiction shall. a to such jurisdiction. be inctlcctive to the extent of such unenfbrceabilitv without invalidating th e remaining provisions thereo[ and any such unenforccability shall 1101 render un1.:nforccable such provisions in any other jurisdiction. Any requirement for the c ccutio n and delivery of any document. instrument or notice may be satislicd. in Lessor's discretion. by authenlication as a record within the meaning ol: and to the extent pennittcd by. Article 9 of the UCC. (I) Tl IIS ,1\ GREEMENT AND /\NY LEASE OR RELA T ED AGREEMENT. AND HIE LEGAL RELi\TIONS OF Tl IE PARTIES T!IERETO. Slli\LL IN i\LL RESPECTS 13E GOVERNED 13Y AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF RHODE IS LAND. WITHOUT REGARD TO CIIO!CE OF LAW PRINCIPLES: THE l'i\ RTI ES CONSENT AND SUBMIT TO THE JURIS DICT IO N OF THE STATE AND FEDERi\l.. COURTS OF SUCH STATE FOR THE PUR POSES or ANY SU IT, ACTION OR OTHER PROC EEDING AR ISI NG THEREFROM. i\ND EXPRESSLY WAIVE ANY OBJECTIONS THi\T IT MAY HAVE TO THE VENUE OF SUCH COURTS. TIIE PARTIES EXPRESSLYWi\lVE ANY RIGHT TO T Rli\ L BY JURY IN ANY ACTION BROUGHT ON OR WITH RESPEC r THERETO. IN NO EVENT SHALL LESSOR HAVE ANY LIA BILITY TO LESSEE FOR INC!OENT/\L. GENERAL, CONSEQUENTli\ L, PUNITI VE OR EXEMPL ARY Di\MAGES. Any cause or aclion by I.csscc agains t Lessor rela ting 10 this i\greement or any Lease or Related Agreement shall be brought within one year al\cr any such causeo f action lirst arise,. and Lessee hereby waives the benclit or any longer period provided by statute. (g) Ei\CH LEASE. TO Ci ET! IER WITH THIS AGREEMENT AND ANY RELATED AGREEMENTS, (i) CONSTIT UTES THE FINAL i\ND ENT!RI. AGREEMENT IW.TWEEN THE l'i\ RTIES SUPERSEDING ALL CONF LICT ING TERMS OR PROVIS IONS OF ANY PRIOR PROPOSALS. Al'PROYi\ L LET l"ERS. TERM SHEETS OR OTIIER AGREEMENTS OR UNDERSTANDINGS BETWEEN THE Pi\ RTIES. (ii) MAY NOT l3E CONTR/\l) IC T IJ) BY EVIDENCEOF (y) ANY PRIOR WR!TrEN OR O RAL AGREEMENTS OR UNDER ST ANDINGS. OR (z) ANY CONTEMPORANloO lJS OR SUBSEQUENT ORAL AGREEMENTS OR UNDERSTAN DINGS BETWEEN THE Pi\RTIES : and (iii) MAY NOT BE AMENDED. NOR MAY ANY RIGI ITS T HEREUNDER BE WAIVED, EXCEPT BY AN INSTRUMENTIN WRITING SIGNED 13Y THE Pi\RTY Clli\RGED WITII SUCH AMENDMENT OR WAIVER. In W itnl ,sS Whereof, I.c ssor a nd Lessee have executed this Agreement as ol"the date first above wTittcn. BANC OF Al\1EIUCA LEASli\'G & CAPITAL., LLC (Lessor) PIIOTRONICS, INC. (Lessee) / , / i j- 'l . . ,. ' !,, . ' // 1 -i /, /,.,(.,, )//.,0,·,1 By: - . , ..,;1t.c'.,.Ji, . ( . ,':)_ J, ,._. 1, -••··Cr- 13y: ...1 ,., > I ,' . / / If . ,-,(,,• Print Name: C - ,: Print Name: ,_1, , . l' ;·.; ' ;·, , ;, ) f ,I -.1 ' · _,,{/J/ f/ \. l f ' A. .'. /t /i . /I J, ··  • . , , / Title: Title: .\;I ·'( <• 1, f« ,./i,£/.f ft, 1 /- t


EXHIBIT 31.1

I, Peter S. Kirlin, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Photronics, Inc.

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;


c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):


a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ PETER S. KIRLIN
 
Peter S. Kirlin
Chief Executive Officer
September 4, 2019
 


EXHIBIT 31.2

I, John P. Jordan, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Photronics, Inc.

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;


c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):


a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ JOHN P. JORDAN
 
John P. Jordan
Chief Financial Officer
September 4, 2019
 


EXHIBIT 32.1

Section 1350 Certification of the Chief Executive Officer

I, Peter S. Kirlin, Chief Executive Officer of Photronics, Inc. (the “Company”), certify, to my knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1)
The Quarterly Report on Form 10-Q of the Company for the quarter ended July 28, 2019 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

The foregoing certification is being furnished pursuant to 18 U.S.C. § 1350 and will not be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

/s/ PETER S. KIRLIN
 
Peter S. Kirlin
Chief Executive Officer
September 4, 2019
 


EXHIBIT 32.2

Section 1350 Certification of the Chief Financial Officer

I, John P. Jordan, Chief Financial Officer of Photronics, Inc. (the “Company”), certify, to my knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1)
The Quarterly Report on Form 10-Q of the Company for the quarter ended July 28, 2019 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

The foregoing certification is being furnished pursuant to 18 U.S.C. § 1350 and will not be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

/s/ JOHN P. JORDAN
 
John P. Jordan
Chief Financial Officer
September 4, 2019