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 31, 2016
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


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

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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company

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

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

Class
 
Outstanding at August 26, 2016
Common Stock, $0.01 par value
 
68,186,790 Shares
 


Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of Photronics, Inc. (“Photronics” or the “Company” or “we”). 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 and acquisitions, expectations with respect to future sales, financial performance, operating efficiencies, or product expansion, are subject to known and unknown risks, uncertainties, and contingencies, many of which are beyond the control of the Company. Various factors may cause actual results, performance, or achievements to differ materially from anticipated results, performance, or achievements expressed or implied by forward-looking statements. Factors that might affect forward-looking statements include, but are not limited to, overall economic and business conditions; economic and political conditions in international markets; the demand for the Company’s products; competitive factors in the industries and geographic markets in which the Company competes; federal, state and international tax requirements (including tax rate changes, new tax laws and revised tax law interpretations); interest rate and other capital market conditions, including changes in the market price of the Company’s securities; foreign currency exchange rate fluctuations; changes in technology; the timing, impact, and other uncertainties relating to transactions and acquisitions, divestitures and joint ventures as well as decisions the Company may make in the future regarding the Company’s business, capital and organizational structure and other matters; the seasonal and cyclical nature of the semiconductor and flat panel display industries; management changes; damage or destruction to the Company’s facilities, or the facilities of its customers or suppliers, by natural disasters, labor strikes, political unrest, or terrorist activity; the ability of the Company to (i) place new equipment in service on a timely basis; (ii) obtain additional financing; (iii) achieve anticipated synergies and cost savings; (iv) fully utilize its tools; (v) achieve desired yields, pricing, product mix, and market acceptance of its products and (vi) obtain necessary export licenses. Any forward-looking statements should be considered in light of these factors. Accordingly, there is no assurance that the Company’s expectations will be realized. The Company does not assume responsibility for the accuracy and completeness of the forward-looking statements and does not assume an obligation to provide revisions to any forward-looking statements, except as otherwise required by securities and other applicable laws.
 
2

PHOTRONICS, INC.
AND SUBSIDIARIES

INDEX
 
PART I.
FINANCIAL INFORMATION
Page
     
Item 1.
 
     
 
4
     
 
5
     
 
6
     
 
7
     
 
8
     
Item 2.
19
     
Item 3.
25
     
Item 4.
25
     
PART II.
OTHER INFORMATION
 
     
Item 1A.
26
     
Item 6.
27
 
3

PART I. FINANCIAL INFORMATION

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

   
July 31,
2016
   
November 1,
2015
 
 
           
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
 
$
291,669
   
$
205,867
 
Accounts receivable, net of allowance of $3,281 in 2016 and $3,301 in 2015
   
107,494
     
110,056
 
Inventories
   
24,615
     
24,157
 
Other current assets
   
17,643
     
24,034
 
                 
Total current assets
   
441,421
     
364,114
 
                 
Property, plant and equipment, net
   
522,192
     
547,284
 
Investment in joint venture
   
-
     
93,021
 
Intangible assets, net
   
20,950
     
24,616
 
Deferred income taxes
   
11,961
     
11,908
 
Other assets
   
3,919
     
4,612
 
                 
Total assets
 
$
1,000,443
   
$
1,045,555
 
                 
                 
LIABILITIES AND EQUITY
               
                 
Current liabilities:
               
Current portion of long-term borrowings
 
$
5,846
   
$
65,495
 
Accounts payable
   
62,987
     
87,983
 
Accrued liabilities
   
28,223
     
39,214
 
                 
Total current liabilities
   
97,056
     
192,692
 
                 
Long-term borrowings
   
63,054
     
67,120
 
Other liabilities
   
20,952
     
23,677
 
                 
Total liabilities
   
181,062
     
283,489
 
                 
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, 67,968 shares issued and outstanding at July 31, 2016 and 66,602 shares issued and outstanding at November 1, 2015
   
680
     
666
 
Additional paid-in capital
   
539,562
     
526,402
 
Retained earnings
   
171,004
     
130,060
 
Accumulated other comprehensive loss
   
(4,936
)
   
(10,573
)
                 
Total Photronics, Inc. shareholders’ equity
   
706,310
     
646,555
 
Noncontrolling interests
   
113,071
     
115,511
 
                 
Total equity
   
819,381
     
762,066
 
                 
Total liabilities and equity
 
$
1,000,443
   
$
1,045,555
 
 
See accompanying notes to condensed consolidated financial statements.
 
4

PHOTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
July 31,
2016
   
August 2,
2015
   
July 31,
2016
   
August 2,
2015
 
   
 
                   
Net sales
 
$
123,209
   
$
131,699
   
$
376,088
   
$
382,513
 
                                 
Costs and expenses:
                               
                                 
Cost of sales
   
(91,759
)
   
(94,456
)
   
(277,915
)
   
(283,991
)
                                 
Selling, general and administrative
   
(11,163
)
   
(12,430
)
   
(34,386
)
   
(36,795
)
                                 
Research and development
   
(5,466
)
   
(6,253
)
   
(16,613
)
   
(16,743
)
                                 
Operating income
   
14,821
     
18,560
     
47,174
     
44,984
 
                                 
Other income (expense):
                               
                                 
Gains on sales of investments
   
157
     
-
     
8,940
     
-
 
Interest expense
   
(612
)
   
(1,209
)
   
(2,750
)
   
(3,812
)
Interest and other income (expense), net
   
1,849
     
1,449
     
1,878
     
1,312
 
                                 
Income before income tax provision
   
16,215
     
18,800
     
55,242
     
42,484
 
                                 
Income tax provision
   
(4,762
)
   
(3,390
)
   
(6,136
)
   
(7,775
)
                                 
Net income
   
11,453
     
15,410
     
49,106
     
34,709
 
                                 
Net income attributable to noncontrolling interests
   
(3,365
)
   
(3,304
)
   
(8,162
)
   
(8,706
)
                                 
Net income attributable to Photronics, Inc. shareholders
 
$
8,088
   
$
12,106
   
$
40,944
   
$
26,003
 
                                 
Earnings per share:
                               
                                 
Basic
 
$
0.12
   
$
0.18
   
$
0.61
   
$
0.39
 
                                 
Diluted
 
$
0.12
   
$
0.17
   
$
0.56
   
$
0.37
 
                                 
Weighted-average number of common shares outstanding:
                               
                                 
Basic
   
67,953
     
66,454
     
67,377
     
66,250
 
                                 
Diluted
   
74,317
     
78,569
     
76,990
     
78,300
 
 
See accompanying notes to condensed consolidated financial statements.
 
5

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

   
Three Months Ended
   
Nine Months Ended
 
   
July 31,
2016
   
August 2,
2015
   
July 31,
2016
   
August 2,
2015
 
                         
Net income
 
$
11,453
   
$
15,410
   
$
49,106
   
$
34,709
 
                                 
Other comprehensive income (loss), net of tax of $0:
                               
                                 
Foreign currency translation adjustments
   
5,051
     
(25,326
)
   
7,787
     
(32,894
)
                                 
Amortization of cash flow hedge
   
32
     
32
     
96
     
96
 
                                 
Total other comprehensive income (loss)
   
5,083
     
(25,294
)
   
7,883
     
(32,798
)
                                 
Comprehensive income (loss)
   
16,536
     
(9,884
)
   
56,989
     
1,911
 
                                 
Less: comprehensive income attributable to noncontrolling interests
   
4,538
     
1,105
     
10,408
     
5,939
 
                                 
Comprehensive income (loss) attributable to Photronics, Inc. shareholders
 
$
11,998
   
$
(10,989
)
 
$
46,581
   
$
(4,028
)
 
See accompanying notes to condensed consolidated financial statements.
 
6

PHOTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
   
Nine Months Ended
 
   
July 31,
2016
   
August 2,
2015
 
             
Cash flows from operating activities:
           
Net income
 
$
49,106
   
$
34,709
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
60,471
     
61,465
 
Gains on sales of investments
   
(8,940
)
   
-
 
Changes in assets and liabilities:
               
Accounts receivable
   
3,936
     
(13,744
)
Inventories
   
(204
)
   
(1,814
)
Other current assets
   
9,177
     
1,496
 
Accounts payable, accrued liabilities and other
   
(22,159
)
   
9,715
 
                 
Net cash provided by operating activities
   
91,387
     
91,827
 
                 
Cash flows from investing activities:
               
Purchases of property, plant and equipment
   
(44,828
)
   
(80,107
)
Proceeds from sales of investments
   
101,853
     
-
 
Other
   
584
     
(283
)
                 
Net cash provided by (used in) investing activities
   
57,609
     
(80,390
)
                 
Cash flows from financing activities:
               
Repayments of long-term borrowings
   
(56,276
)
   
(7,152
)
Proceeds from share-based arrangements
   
3,172
     
2,375
 
Dividends paid to noncontrolling interests
   
(11,890
)
   
-
 
Other
   
(19
)
   
(171
)
                 
Net cash used in financing activities
   
(65,013
)
   
(4,948
)
                 
Effect of exchange rate changes on cash and cash equivalents
   
1,819
     
(7,856
)
                 
Net increase (decrease) in cash and cash equivalents
   
85,802
     
(1,367
)
Cash and cash equivalents at beginning of period
   
205,867
     
192,929
 
                 
Cash and cash equivalents at end of period
 
$
291,669
   
$
191,562
 
                 
Supplemental disclosure of noncash information:
               
                 
Accrual for property, plant and equipment purchased during the period
 
$
7,169
   
$
40,632
 
 
See accompanying notes to condensed consolidated financial statements.
 
7

PHOTRONICS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three Months and Nine Months Ended July 31, 2016 and August 2, 2015
(unaudited)
(in thousands, except share amounts)

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
 
Photronics, Inc. and its subsidiaries (“Photronics” or “the Company”) is one of the world’s leading manufacturers of photomasks, which are high precision photographic quartz plates containing microscopic images of electronic circuits. Photomasks are a key element in the manufacture of semiconductors and flat panel displays (“FPDs”), and are used as masters to transfer circuit patterns onto semiconductor wafers and flat panel substrates during the fabrication of integrated circuits (“ICs”) and a variety of FPDs and, to a lesser extent, other types of electrical and optical components. The Company currently operates principally from nine manufacturing facilities, two of which are located in Europe, three in Taiwan, one in Korea, and three in the United States. In August 2016 the Company announced its plans to build a research and development and manufacturing facility in Xiamen, China, with construction commencing in 2017 and production estimated to start in late 2018. See Note 14 for additional information.

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. The Company is typically impacted during its first fiscal quarter by the North American and European holiday periods, as some customers reduce their effective workdays and orders during these periods. Additionally, the Company can be impacted during its first or second quarter by the Asian New Year holiday period, which may also reduce customer orders. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending October 30, 2016. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended November 1, 2015.

NOTE 2 - CHANGES IN EQUITY

The following tables set forth the Company’s consolidated changes in equity for the three and nine month periods ended July 31, 2016 and August 2, 2015:

   
Three Months Ended July 31, 2016
 
   
Photronics, Inc. Shareholders
         
   
Common Stock
   
Additional
       
Accumulated
Other
   
Non-
       
   
Shares
   
Amount
   
Paid-in
Capital
   
Retained
Earnings
   
Comprehensive
Loss
   
controlling
Interests
   
Total
Equity
 
                                           
Balance at May 1, 2016
   
67,943
   
$
679
   
$
538,535
   
$
162,916
   
$
(8,846
)
 
$
109,488
   
$
802,772
 
                                                         
Net income
   
-
     
-
     
-
     
8,088
     
-
     
3,365
     
11,453
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
3,910
     
1,173
     
5,083
 
Sale of common stock through employee stock option and purchase plans
   
7
     
-
     
53
     
-
     
-
     
-
     
53
 
Restricted stock awards vesting and expense
   
18
     
1
     
313
     
-
     
-
     
-
     
314
 
Share-based compensation expense
   
-
     
-
     
661
     
-
     
-
     
-
     
661
 
Return of capital to noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
(955
)
   
(955
)
                                                         
Balance at July 31, 2016
   
67,968
   
$
680
   
$
539,562
   
$
171,004
   
$
(4,936
)
 
$
113,071
   
$
819,381
 
 
8

   
Three Months Ended August 2, 2015
 
    Photronics, Inc. Shareholders              
   
Common Stock
   
Additional
         
Accumulated
Other
   
Non-
       
   
Shares
   
Amount
   
Paid-in
Capital
   
Retained
Earnings
   
Comprehensive
Income (Loss)
   
controlling
Interests
   
Total
Equity
 
                                           
Balance at May 3, 2015
   
66,298
   
$
663
   
$
522,873
   
$
99,332
   
$
14,838
   
$
116,277
   
$
753,983
 
                                                         
Net income
   
-
     
-
     
-
     
12,106
     
-
     
3,304
     
15,410
 
Other comprehensive loss
   
-
     
-
     
-
     
-
     
(23,094
)
   
(2,200
)
   
(25,294
)
Sale of common stock through employee stock option and purchase plans
   
194
     
2
     
1,076
     
-
     
-
     
-
     
1,078
 
Restricted stock awards vesting and expense
   
15
     
-
     
268
     
-
     
-
     
-
     
268
 
Share-based compensation expense
   
-
     
-
     
680
     
-
     
-
     
-
     
680
 
Purchase of common stock of subsidiary
   
-
     
-
     
27
     
-
     
-
     
(105
)
   
(78
)
                                                         
Balance at August 2, 2015
   
66,507
   
$
665
   
$
524,924
   
$
111,438
   
$
(8,256
)
 
$
117,276
   
$
746,047
 

   
Nine Months Ended July 31, 2016
 
    Photronics, Inc. Shareholders              
   
Common Stock
   
Additional
         
Accumulated
Other
   
Non-
       
   
 
Shares
   
 
Amount
   
Paid-in
Capital
   
Retained
Earnings
   
Comprehensive
Loss
   
controlling
Interests
   
Total
Equity
 
                                           
Balance at November 1, 2015
   
66,602
   
$
666
   
$
526,402
   
$
130,060
   
$
(10,573
)
 
$
115,511
   
$
762,066
 
                                                         
Net income
   
-
     
-
     
-
     
40,944
     
-
     
8,162
     
49,106
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
5,637
     
2,246
     
7,883
 
Sale of common stock through employee stock option and purchase plans
   
521
     
5
     
2,890
     
-
     
-
     
-
     
2,895
 
Restricted stock awards vesting and expense
   
128
     
2
     
876
     
-
     
-
     
-
     
878
 
Share-based compensation expense
   
-
     
-
     
1,971
     
-
     
-
     
-
     
1,971
 
Conversion of debt to common stock
   
717
     
7
     
7,431
     
-
     
-
     
-
     
7,438
 
Repurchase of common stock of subsidiary
   
-
     
-
     
(8
)
   
-
     
-
     
8
     
-
 
Subsidiary dividend
   
-
     
-
     
-
     
-
     
-
     
(11,901
)
   
(11,901
)
Return of capital to noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
(955
)
   
(955
)
                                                         
Balance at July 31, 2016
   
67,968
   
$
680
   
$
539,562
   
$
171,004
   
$
(4,936
)
 
$
113,071
   
$
819,381
 
 
9

   
Nine Months Ended August 2, 2015
       
   
Photronics, Inc. Shareholders
         
   
Common Stock
   
Additional
         
Accumulated
Other
   
Non-
       
   
Shares
   
Amount
   
Paid-in
Capital
   
Retained
Earnings
   
Comprehensive
Income (Loss)
   
controlling
Interests
   
Total
Equity
 
                                           
Balance at November 2, 2014
   
65,930
   
$
659
   
$
520,183
   
$
85,435
   
$
21,774
   
$
111,443
   
$
739,494
 
                                                         
Net income
   
-
     
-
     
-
     
26,003
     
-
     
8,706
     
34,709
 
Other comprehensive loss
   
-
     
-
     
-
     
-
     
(30,030
)
   
(2,768
)
   
(32,798
)
Sale of common stock through employee stock option and purchase plans
   
433
     
4
     
1,932
     
-
     
-
     
-
     
1,936
 
Restricted stock awards vesting and expense
   
144
     
2
     
800
     
-
     
-
     
-
     
802
 
Share-based compensation expense
   
-
     
-
     
1,982
     
-
     
-
     
-
     
1,982
 
Purchase of common stock of subsidiary
   
-
     
-
     
27
     
-
     
-
     
(105
)
   
(78
)
                                                         
Balance at August 2, 2015
   
66,507
   
$
665
   
$
524,924
   
$
111,438
   
$
(8,256
)
 
$
117,276
   
$
746,047
 

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

   
July 31,
2016
   
November 1,
2015
 
             
Land
 
$
8,096
   
$
8,172
 
Buildings and improvements
   
122,077
     
121,472
 
Machinery and equipment
   
1,481,252
     
1,458,623
 
Leasehold improvements
   
19,079
     
18,856
 
Furniture, fixtures and office equipment
   
12,879
     
12,700
 
Construction in progress
   
18,903
     
6,657
 
                 
     
1,662,286
     
1,626,480
 
Less accumulated depreciation and amortization
   
1,140,094
     
1,079,196
 
                 
   
$
522,192
   
$
547,284
 

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

   
July 31,
2016
   
November 1,
2015
 
             
Machinery and equipment
 
$
34,917
   
$
56,245
 
Less accumulated amortization
   
9,479
     
16,054
 
                 
   
$
25,438
   
$
40,191
 

Depreciation and amortization expense for property, plant and equipment was $ 18.4 million and $56.4 million for the three and nine month periods ended July 31, 2016, respectively, and $19.4 million and $56.4 million for the three and nine month periods ended August 2, 2015, respectively.
 
10

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

In May 2006, Photronics and Micron Technology, Inc. (“Micron”) entered into the MP Mask joint venture (“MP Mask”), which developed and produced photomasks for leading-edge and advanced next generation semiconductors. At the time of the formation of the joint venture, the Company also entered into both an agreement to license photomask technology developed by Micron and certain supply agreements.

This joint venture was a variable interest entity (“VIE”) (as that term is defined in the ASC) because all costs of the joint venture were passed on to the Company and Micron through purchase agreements they had entered into with the joint venture, and it was dependent upon the Company and Micron for any additional cash requirements. On a quarterly basis the Company reassessed whether its interest in MP Mask gave it a controlling financial interest in this VIE. The purpose of this quarterly reassessment was to identify the primary beneficiary (which is defined in the ASC as the entity that consolidates a VIE) of the VIE. As a result of the reassessment in the current quarter, the Company determined that Micron was still the primary beneficiary of the VIE, by virtue of its tie-breaking voting rights within MP Mask’s Board of Managers, thereby having given it the power to direct the activities of MP Mask that most significantly impacted its economic performance, including its decision making authority in the ordinary course of business and its purchasing the majority of products produced by the VIE.

The Company utilized MP Mask for both high-end IC photomask production and research and development purposes. MP Mask charged its variable interest holders based on their actual usage of its facility. MP Mask separately charged for any research and development activities it engaged in at the requests of its owners. The Company incurred cost of sales from MP Mask of $0.8 and $5.7 million in the three month and nine month periods ended July 31, 2016, respectively, and $1.5 million and $4.9 million during the respective prior year periods. The Company incurred research and development costs from MP Mask of $0.2 million during the three month period ended August 2, 2015, and $0.5 million and $0.7 million during the nine month periods ended July 31, 2016 and August 2, 2015, respectively. At November 1, 2015, the Company owed MP Mask $4.3 million and had a receivable from Micron of $6.4 million, both primarily related to the aforementioned supply agreements.

MP Mask was governed by a Board of Managers, appointed by Micron and the Company. Since MP Mask’s inception, Micron, as a result of its majority ownership, had held majority voting power on its Board of Managers. The voting power held by each party was subject to change as ownership interests changed. Under the MP Mask joint venture operating agreement, the Company may have been required to make additional capital contributions to MP Mask up to the maximum amount defined in the operating agreement. However, had the Board of Managers determined that further additional funding was required, MP Mask would have pursued its own financing. If MP Mask was unable to obtain its own financing, it may have requested additional capital contributions from the Company. Had the Company chosen not to make a requested contribution to MP Mask, its ownership percentage may have been reduced.

The Company’s investment in the VIE, which represented its maximum exposure to loss, was $93.0 million at November 1, 2015. This amount is reported in the Company’s condensed consolidated balance sheets as “Investment in joint venture.” The Company recorded losses from its investment in the VIE of $0.1 million in the nine month periods ended July 31, 2016 and August 2, 2015.
 
On May 5, 2016, the Company sold its investment in MP Mask to Micron for $93.1 million and recorded a gain on the sale of $0.2 million, which is included in the Company’s 2016 condensed consolidated statement of income in Interest and other income (expense) net. On that same date a supply agreement commenced between the Company and Micron, which provides that the Company will be the majority outsourced supplier of Micron’s photomasks and related services. The supply agreement has a one year term, subject to mutually agreeable renewals. In addition, the Company forevermore has the rights to use technology under the prior technology license agreement.
 
11

NOTE 5 - LONG-TERM BORROWINGS

Long-term borrowings consist of the following:

   
July 31,
2016
   
November 1,
2015
 
             
3.25% convertible senior notes due in April 2019
 
$
57,500
   
$
57,500
 
                 
3.25% convertible senior notes due in April 2016
   
-
     
57,500
 
                 
2.77% capital lease obligation payable through July 2018
   
11,400
     
15,346
 
                 
3.09% capital lease obligation payable through March 2016
   
-
     
2,269
 
     
68,900
     
132,615
 
Less current portion
   
5,846
     
65,495
 
                 
   
$
63,054
   
$
67,120
 
 
In April 2016 $57.5 million of the Company’s senior convertible notes matured. The Company repaid $50.1 million to noteholders and issued approximately 0.7 million shares to noteholders that elected to convert their notes to common stock. The notes were exchanged at the rate of approximately 96 shares per $1,000 note principle, equivalent to a conversion rate of $10.37 per share.
 
In January 2015 the Company privately exchanged $57.5 million in aggregate principal amount of its 3.25% convertible senior notes with a maturity date of April 1, 2016, for new 3.25% convertible senior notes with an aggregate principal amount of $57.5 million with a maturity date of April 1, 2019. The conversion rate of the new notes is the same as that of the exchanged notes, which were issued in March 2011 with a conversion rate of approximately 96 shares of common stock per $1,000 note principal, equivalent to a conversion price of $10.37 per share of common stock, and is subject to adjustment upon the occurrence of certain events, which are described in the indenture dated January 22, 2015. Noteholders may convert each $1,000 principal amount of notes at any time prior to the close of business on the second scheduled trading day immediately preceding April 1, 2019, and the Company is not required to redeem the notes prior to their maturity date. Interest on the notes accrues in arrears, and is paid semiannually through the notes’ maturity date.
 
The Company’s credit facility, which expires in December 2018, has a $50 million limit with an expansion capacity to $75 million, and is secured by substantially all of the Company’s assets located in the United States and common stock the Company owns in certain of its foreign subsidiaries. The credit facility precludes the Company from paying cash dividends, and is subject to a minimum interest coverage ratio, total leverage ratio and minimum unrestricted cash balance financial covenants, all of which the Company was in compliance with at July 31, 2016. The Company had no outstanding borrowings against the credit facility at July 31, 2016, and $50 million was available for borrowing. The interest rate on the credit facility (1.73% at July 31, 2016) is based on the Company’s total leverage ratio at LIBOR plus a spread, as defined in the credit facility.
 
In August 2013 a $26.4 million principal amount, five year capital lease commenced to fund the purchase of a high-end lithography tool. Payments under the capital lease, which bears interest at 2.77%, are $0.5 million per month through July 2018.  Under the terms of the lease agreement, the Company must maintain the equipment in good working order, and is subject to a cross default with cross acceleration provision related to certain nonfinancial covenants incorporated in its credit facility. As of July 31, 2016, the total amount payable through the end of the lease term was $11.7 million, of which $11.4 million represented principal and $0.3 million represented interest.
 
In April 2011 the Company entered into a five year, $21.2 million capital lease for manufacturing equipment. Payments under the lease, which bore interest at 3.09%, were $0.4 million per month through March 2016. The lease agreement provided that the Company must maintain the equipment in good working order, and included a cross default with cross acceleration provision related to certain non-financial covenants incorporated in the Company’s credit facility agreement. In March 2016 the Company paid the final installment on this lease and assumed ownership of the related equipment.
 
12

NOTE 6 - 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 that have been reacquired by the Company (in the open-market or in private transactions) and that are being held in 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 the Company or its subsidiaries. In the event of a change in control (as defined in the Plan), the vesting of awards may be accelerated. The Plan, aspects of which are more fully described below, prohibits further awards from being issued under prior plans. Total share-based compensation costs for the three and nine month periods ended July 31, 2016, were $1.0 million and $2.8 million, respectively, and $0.9 million and $2.8 million for the three and nine month periods ended August 2, 2015, respectively. The Company received cash from option exercises of $0.1 million and $2.9 million for the three and nine month periods ended July 31, 2016, respectively, and $1.1 million and $2.1 million for the three and nine month periods ended August 2, 2015, respectively. No share-based compensation cost was capitalized as part of an asset and no related income tax benefits were recorded during the periods presented.

Stock Options

Option awards generally vest in one to four years, and have a ten-year contractual term. All incentive and non-qualified stock option grants have an exercise price equal to the market value of the underlying common stock on the date of grant. The grant date fair values of options are based on closing prices of the Company’s common stock on the dates of grant using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of the Company’s stock. The Company uses historical option exercise behavior and employee termination data to estimate expected term, which represents the period of time that the options granted are expected to remain outstanding. The risk-free rate of return for the estimated term of the option is based on the U.S. Treasury yield curve in effect at the date of grant.

The weighted-average inputs and risk-free rate of return ranges used to calculate the grant date fair value of options issued during the three and nine month periods ended July 31, 2016 and August 2, 2015, are presented in the following table.

   
Three Months Ended
   
Nine Months Ended
 
   
July 31,
2016
   
August 2,
2015
   
July 31,
2016
   
August 2,
2015
 
                         
Volatility
   
38.9%
 
   
42.9%
 
   
48.8%
 
   
53.9%
 
                                 
Risk free rate of return
   
1.2%
 
   
1.4% – 1.6%
 
   
1.2%-1.7%
 
   
1.3% - 1.6%
 
                                 
Dividend yield
   
0.0%
 
   
0.0%
 
   
0.0%
 
   
0.0%
 
                                 
Expected term
 
5.1 years
   
4.7 years
   
5.1 years
   
4.7 years
 
 
Information on outstanding and exercisable option awards as of July 31, 2016, is presented below.

 
 
 
 
Options
 
Shares
   
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 
                     
Outstanding at July 31, 2016
   
3,575,610
   
$
7.52
 
6.5 years
 
$
9,210
 
                           
Exercisable at July 31, 2016
   
2,027,160
   
$
5.87
 
5.0 years
 
$
7,807
 

There were 45,000 share options granted during the three month period ended July 31, 2016, with a weighted-average grant date fair value of $3.44 per share and 63,000 share options granted during the three month period ended August 2, 2015, with a weighted-average grant date fair value of $3.46 per share. There were 647,250 share options granted during the nine month period ended July 31, 2016, with a weighted-average grant date fair value of $4.55 per share and 667,800 share options granted during the nine month period ended August 2, 2015, with a weighted-average grant date fair value of $3.82 per share. As of July 31, 2016, the total unrecognized compensation cost related to unvested option awards was approximately $4.8 million. That cost is expected to be recognized over a weighted-average amortization period of 2.6 years.
 
13

Restricted Stock

The Company periodically grants restricted stock awards. The restrictions on these awards lapse over a service period that has ranged from less-than-one to four years. No restricted stock awards were granted during the three month period ended July 31, 2016, and 115,225 restricted stock awards were issued during the nine month period ended July 31, 2016, with a weighted average grant date fair value of $12.13 per share. Awards totaling 10,000 shares of restricted stock were granted during the three month period ended August 2, 2015, with a weighted-average grant date fair value of $8.84 per share, and 121,334 restricted stock awards were issued during the nine month period ended August 2, 2015, with a weighted-average grant date fair value of $8.28 per share. As of July 31, 2016, the total compensation cost not yet recognized related to unvested restricted stock awards was approximately $1.3 million. That cost is expected to be recognized over a weighted-average amortization period of 2.1 years. As of July 31, 2016, there were 177,375 shares of restricted stock outstanding.

NOTE 7 - INCOME TAXES
 
The effective tax rate differs from the U.S. statutory rate of 35% in the three and nine month periods ended July 31, 2016 and August 2, 2015, primarily due to earnings being taxed at lower statutory rates in foreign jurisdictions, combined with the realization of certain tax benefits (as further noted below) in a foreign jurisdiction and the benefit of various investment credits in a foreign jurisdiction. Valuation allowances in jurisdictions with historic losses eliminated the effective rate impact of these jurisdictions.

As of July 31, 2016 and August 2, 2015, the Company determined that deferred tax assets of $2.5 million and $1.7 million, respectively, including $0.2 million within the three month period ended August 2, 2015, whose realization was previously not considered to be more likely than not, are realizable and, therefore, reduced their related valuation allowances. During the nine month period ended July 31, 2016, the Company realized a $2.4 million benefit, which resulted from the reversal of a previously recorded undistributed earnings tax liability in a foreign jurisdiction. As a result of a shareholder action to approve a dividend in this jurisdiction, the Company determined that it is no longer liable for this tax. In addition, during the nine month period ended July 31, 2016, $0.7 million of withholding tax was incurred upon the completion of a foreign subsidiary share redemption which commenced in fiscal year 2015.
 
Unrecognized tax benefits related to uncertain tax positions were $4.8 million at July 31, 2016, and $4.1 million at November 1, 2015, all of which would favorably impact the Company’s effective tax rate if recognized. Accrued interest and penalties related to unrecognized tax benefits was $0.1 million at July 31, 2016 and November 1, 2015. As of July 31, 2016, the total amount of unrecognized tax benefits is not expected to significantly increase or decrease in the next twelve months.

PKLT, the Company’s FPD manufacturing facility in Taiwan, has been accorded a tax holiday, which started in 2012 and expires in 2017. This tax holiday had no dollar or per share effect in the three and nine month periods ended July 31, 2016 and August 2, 2015. PDMC, the Company’s IC manufacturing facility in Taiwan was accorded a tax holiday that commenced in 2015 and expires in 2019. The Company realized tax benefits from this tax holiday of $0.1 million in the three month periods ended July 31, 2016 and August 2, 2015, and $0.3 million and $0.2 million in the respective nine month periods. The tax holiday had no per share effect in the three and nine month periods ended July 31, 2016 and August 2, 2015.
 
14

NOTE 8 - EARNINGS PER SHARE

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

   
Three Months Ended
   
Nine Months Ended
 
   
July 31,
2016
   
August 2,
2015
   
July 31,
2016
   
August 2,
2015
 
                         
Net income attributable to Photronics, Inc. shareholders
 
$
8,088
   
$
12,106
   
$
40,944
   
$
26,003
 
Effect of dilutive securities:
                               
Interest expense on convertible notes, net of related tax effects
   
496
     
1,071
     
2,442
     
3,292
 
                                 
Earnings for diluted earnings per share
 
$
8,584
   
$
13,177
   
$
43,386
   
$
29,295
 
                                 
Weighted-average common shares computations:
                               
Weighted-average common shares used for basic earnings per share
   
67,953
     
66,454
     
67,377
     
66,250
 
Effect of dilutive securities:
                               
Convertible notes
   
5,542
     
11,085
     
8,607
     
11,085
 
Share-based payment awards
   
822
     
1,030
     
1,006
     
965
 
                                 
Potentially dilutive common shares
   
6,364
     
12,115
     
9,613
     
12,050
 
                                 
Weighted-average common shares used for diluted earnings per share
   
74,317
     
78,569
     
76,990
     
78,300
 
                                 
                                 
Basic earnings per share
 
$
0.12
   
$
0.18
   
$
0.61
   
$
0.39
 
Diluted earnings per share
 
$
0.12
   
$
0.17
   
$
0.56
   
$
0.37
 

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 price exceeded the average market value of the common shares for the period.

   
Three Months Ended
   
Nine Months Ended
 
   
July 31,
2016
   
August 2,
2015
   
July 31,
2016
   
August 2,
2015
 
                         
Share-based payment awards
   
2,016
     
1,667
     
1,615
     
1,636
 
                                 
Total potentially dilutive shares excluded
   
2,016
     
1,667
     
1,615
     
1,636
 
 
15

NOTE 9 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

The following tables set forth the changes in the Company’s accumulated other comprehensive income by component (net of tax of $0) for the three and nine month periods ended July 31, 2016 and August 2, 2015:
 
   
Three Months Ended July 31, 2016
 
   
Foreign Currency
Translation
Adjustments
   
Amortization
of Cash
Flow Hedge
   
Other
   
Total
 
 
                       
Balance at May 1, 2016
 
$
(7,966
)
 
$
(242
)
 
$
(638
)
 
$
(8,846
)
Other comprehensive income (loss) before reclassifications
   
5,064
     
-
     
(13
)
   
5,051
 
Amounts reclassified from other comprehensive income
   
-
     
32
     
-
     
32
 
                                 
Net current period other comprehensive income (loss)
   
5,064
     
32
     
(13
)
   
5,083
 
Less: other comprehensive (income) loss  attributable to noncontrolling interests
   
(1,180
)
   
-
     
7
     
(1,173
)
                                 
Balance at July 31, 2016
 
$
(4,082
)
 
$
(210
)
 
$
(644
)
 
$
(4,936
)

   
Three Months Ended August 2, 2015
 
   
Foreign Currency
Translation
Adjustments
   
Amortization
of Cash
Flow Hedge
   
Other
   
Total
 
                         
Balance at May 3, 2015
 
$
15,648
   
$
(370
)
 
$
(440
)
 
$
14,838
 
Other comprehensive income (loss) before reclassifications
   
(25,342
)
   
-
     
16
     
(25,326
)
Amounts reclassified from other  comprehensive income
   
-
     
32
     
-
     
32
 
                                 
Net current period other comprehensive income (loss)
   
(25,342
)
   
32
     
16
     
(25,294
)
Less: other comprehensive income (loss) attributable to noncontrolling interests
   
2,208
     
-
     
(8
)
   
2,200
 
                                 
Balance at August 2, 2015
 
$
(7,486
)
 
$
(338
)
 
$
(432
)
 
$
(8,256
)
 
16

   
Nine Months Ended July 31, 2016
 
   
Foreign Currency
Translation
Adjustments
   
Amortization
of Cash
Flow Hedge
   
Other
   
Total
 
                         
Balance at November 1, 2015
 
$
(9,634
)
 
$
(306
)
 
$
(633
)
 
$
(10,573
)
Other comprehensive income (loss) before reclassifications
   
7,810
     
-
     
(23
)
   
7,787
 
Amounts reclassified from other  comprehensive income
   
-
     
96
     
-
     
96
 
                                 
Net current period other comprehensive income (loss)
   
7,810
     
96
     
(23
)
   
7,883
 
Less: other comprehensive (income) loss attributable to noncontrolling interests
   
(2,258
)
   
-
     
12
     
(2,246
)
                                 
Balance at July 31, 2016
 
$
(4,082
)
 
$
(210
)
 
$
(644
)
 
$
(4,936
)

 
Nine Months Ended August 2, 2015
 
 
Foreign Currency
Translation
Adjustments
 
Amortization
of Cash
Flow Hedge
 
Other
 
Total
 
                 
Balance at November 2, 2014
 
$
22,651
   
$
(434
)
 
$
(443
)
 
$
21,774
 
Other comprehensive income (loss) before reclassifications
   
(32,915
)
   
-
     
21
     
(32,894
)
Amounts reclassified from other  comprehensive income
   
-
     
96
     
-
     
96
 
                                 
Net current period other comprehensive income (loss)
   
(32,915
)
   
96
     
21
     
(32,798
)
Less: other comprehensive income (loss) attributable to noncontrolling interests
   
2,778
     
-
     
(10
)
   
2,768
 
                                 
Balance at August 2, 2015
 
$
(7,486
)
 
$
(338
)
 
$
(432
)
 
$
(8,256
)

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

NOTE 10 - 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 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 Company did not have any assets or liabilities measured at fair value on a recurring or a nonrecurring basis at July 31, 2016 or November 1, 2015.
 
17

Fair Value of Other Financial Instruments

The fair values of the Company’s cash and cash equivalents (Level 1 measurements), accounts receivable, accounts payable, and certain other current assets and current liabilities (Level 2 measurements) approximate their carrying value due to their short-term maturities. The fair value of the Company’s convertible senior notes is a Level 2 measurement that is determined using recent bid prices.

The table below presents the fair and carrying values of the Company’s convertible senior notes at July 31, 2016 and November 1, 2015.

   
July 31, 2016
   
November 1, 2015
 
   
Fair Value
   
Carrying Value
   
Fair Value
   
Carrying Value
 
                         
3.25% convertible senior notes due 2019
 
$
67,701
   
$
57,500
   
$
64,550
   
$
57,500
 
3.25% convertible senior notes due 2016
 
$
-
   
$
-
   
$
60,375
   
$
57,500
 

NOTE 11 - COMMITMENTS AND CONTINGENCIES

As of July 31, 2016, the Company had commitments outstanding for capital expenditures of approximately $51 million.

The Company is subject to various claims that arise in the ordinary course of business. The Company believes such claims, individually or in the aggregate, will not have a material effect on its condensed consolidated financial statements.

Please see Note 14 for a discussion of the Company’s announced expansion into China.

NOTE 12 – GAINS ON SALES OF INVESTMENTS

In the first quarter of fiscal 2016 the Company sold a minority interest it held in a foreign entity, which resulted in it recognizing a gain of $8.8 million. As discussed in Note 4, in the third quarter of fiscal year 2016 we sold our investment in the MP Mask joint venture.
 
NOTE 13 – SUBSIDIARY DIVIDEND
 
In June 2016 PDMC, the Company’s majority owned IC facility in Taiwan, paid a dividend of which 49.99%, or approximately $11.9 million, was paid to its noncontrolling interest.
 
NOTE 14 – EXPANSION INTO CHINA
 
In August 2016 the Company announced that it had signed an investment agreement with the Xiamen Torch Hi-Tech Industrial Development Zone (Xiamen Torch) to establish an IC manufacturing facility in Xiamen, China. Under the terms of the agreement the Company will build and operate a state-of-the-art IC manufacturing and research and development facility, in return for which Xiamen Torch will provide certain investment incentives and support.
 
The Company plans to invest $160 million over the next five years, with construction commencing in 2017 and production estimated to start in late 2018. The investment will be in the form of cash, transferred capital equipment and, possibly, local financing. Support for the project has been obtained from an existing customer.

NOTE 15 - RECENT ACCOUNTING PRONOUNCEMENTS

In March 2016 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016 – 09 “Improvements to Employee Share-Based Payment Accounting”, which simplifies the accounting for share-based payment transactions including their income tax consequences, classification as either equity or liability awards, classification on the statement of cash flows, and other areas. The method of adoption varies with the different aspects of the Update. The Update is effective for the Company in its first quarter of fiscal year 2018, with early application permitted. The Company is currently evaluating the effect this ASU will have on its 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. The Update is to be adopted using a modified retrospective approach, which includes a number of practical expedients, that require leases to be measured and recognized under the new guidance at the beginning of the earliest period presented. The ASU is effective for the Company in its first quarter of fiscal year 2020, with early application permitted, and the Company is currently evaluating the effect this ASU will have on its consolidated financial statements.
 
18

In January 2016 the FASB issued ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities”, which provides targeted improvements to the recognition, measurement, presentation and disclosure of financial assets and financial liabilities. Specific accounting areas addressed include, equity investments, financial liabilities reported under the fair value option and valuation allowance assessment resulting from unrealized losses on available-for-sale securities. The ASU also changes certain presentation and disclosure requirements for financial instruments. The Update is to be applied by means of a cumulative effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. This ASU is effective for the Company in its first quarter of fiscal year 2019. Early adoption, with certain exceptions, is not permitted. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements.

In November 2015 the FASB issued ASU 2015-17 “Balance Sheet Classification of Deferred Taxes”, which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This ASU is effective for the Company in its first quarter of fiscal year 2018, with early application permitted and, upon adoption, may be applied either prospectively or retrospectively. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements.

In April 2015 the FASB issued ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs”, which requires debt issuance costs related to recognized debt liability to be presented in the balance sheet as a direct deduction from that debt liability, consistent with the presentation of a debt discount. This ASU is effective for the Company in its first quarter of fiscal year 2017 and, upon adoption, should be applied retrospectively. Early adoption is permitted. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers”, which will supersede nearly all 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 defers the effective date of ASU 2014-09 by one year and allows entities to early adopt, but no earlier than the original effective date. ASU 2014-09 will now be effective for the Company in its first quarter of fiscal year 2019. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. In April 2016 the FASB issued ASU 2016-10 “Identifying Performance Obligations and Licensing” which amends guidance previously issued on these matters in ASU 2014-09. The effective date and transition requirements of ASU 2016-10 are the same as those for ASU 2014-09. The Company is evaluating the transition method that will be elected and the potential effects of the adoption of these Updates on its consolidated financial statements.

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 and may be adversely affected by uncertainties and risk factors (presented throughout this filing and in the Company’s Annual Report on Form 10-K for the fiscal 2015 year), that may cause actual results to materially differ from these expectations.

In August 2016 the Company announced that it had signed an investment agreement with the Xiamen Torch Hi-Tech Industrial Development Zone (Xiamen Torch) to establish an IC manufacturing facility in Xiamen, China. Under the terms of the agreement the Company will build and operate a state-of-the-art IC manufacturing and research and development facility, in return for which Xiamen Torch will provide certain investment incentives and support.
 
The Company plans to invest $160 million over the next five years, with construction commencing in 2017 and production estimated to start in late 2018. The investment will be in the form of cash, transferred capital equipment and, possibly, local financing. Support for the project has been obtained from an existing customer.
 
The Company sells substantially all of its photomasks to semiconductor designers and manufacturers, and manufacturers of FPDs. Photomask technology is also being applied to the fabrication of other higher performance electronic products such as photonics, micro-electronic mechanical systems and certain nanotechnology applications. Thus, the Company’s selling cycle is tightly interwoven with the development and release of new semiconductor designs and flat panel applications, particularly as it relates to the semiconductor industry’s migration to more advanced design methodologies and fabrication processes. The Company believes that the demand for photomasks primarily depends on design activity rather than sales volumes from products produced using photomask technologies. Consequently, an increase in semiconductor or FPD sales does not necessarily result in a corresponding increase in photomask sales. However, the reduced use of customized ICs, reductions in design complexity, other changes in the technology or methods of manufacturing or designing semiconductors, or a slowdown in the introduction of new semiconductor or FPD designs could reduce demand for photomasks even if demand for semiconductors and FPDs increases. Advances in semiconductor, FPD and photomask design and semiconductor production methods could also reduce the demand for photomasks. Historically, the semiconductor industry has been volatile, with sharp periodic downturns and slowdowns. These downturns have been characterized by, among other things, diminished product demand, excess production capacity and accelerated erosion of selling prices.
 
19

The global semiconductor industry, including mobile displays, is driven by end markets which have been closely tied to consumer driven applications of high performance semiconductor devices including, but not limited to, mobile communications and computing solutions. The Company is typically required to fulfill its customer orders within a short period of time, sometimes within 24 hours. This results in the Company having a minimal level of backlog orders, typically one to two weeks for IC photomasks and two to three weeks for FPD photomasks. The Company cannot predict the timing of the industry’s transition to volume production of next generation technology nodes or the timing of up and down cycles with precise accuracy, but believes that such transitions and cycles will continue into the future, beneficially and adversely affecting its business, financial condition and operating results in the near term. The Company believes its ability to remain successful in these environments is dependent upon achieving its goals of being a service and technology leader and efficient solutions supplier, which it believes should enable it to continually reinvest in its global infrastructure.

Material Changes in Results of Operations
Three and Nine Months ended July 31, 2016 and August 2, 2015

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

   
Three Months Ended
   
Nine Months Ended
 
   
July 31,
2016
   
August 2,
2015
   
July 31,
2016
   
August 2,
2015
 
                         
Net sales
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
Cost of sales
   
(74.5
)
   
(71.7
)
   
(73.9
)
   
(74.2
)
                                 
Gross margin
   
25.5
     
28.3
     
26.1
     
25.8
 
Selling, general and administrative expenses
   
(9.1
)
   
(9.4
)
   
(9.1
)
   
(9.6
)
Research and development expenses
   
(4.4
)
   
(4.8
)
   
(4.5
)
   
(4.4
)
                                 
Operating income
   
12.0
     
14.1
     
12.5
     
11.8
 
Gains on sales of investments
   
0.2
     
-
     
2.4
     
-
 
Other income (expense), net
   
1.0
     
0.2
     
(0.2
)
   
(0.7
)
                                 
Income before income tax provision
   
13.2
     
14.3
     
14.7
     
11.1
 
Income tax provision
   
(3.9
)
   
(2.6
)
   
(1.6
)
   
(2.0
)
                                 
Net income
   
9.3
     
11.7
     
13.1
     
9.1
 
Net income attributable to noncontrolling interests
   
(2.7
)
   
(2.5
)
   
(2.2
)
   
(2.3
)
                                 
Net income attributable to Photronics, Inc. shareholders
   
6.6
%
   
9.2
%
   
10.9
%
   
6.8
%

Note: All of the following tabular comparisons, unless otherwise indicated, are for the three months ended July31, 2016 (Q3-16) and August 2, 2015 (Q3-15) and for the nine months ended July 31, 2016 (YTD-16) and August 2, 2015 (YTD-15), in millions of dollars.
 
20

Net Sales

   
Three Months Ended
   
Nine Months Ended
 
   
Q3-16
   
Q3-15
 
Percent
Change
   
YTD-16
   
YTD-15
   
Percent
Change
 
                                         
IC
 
$
91.7
   
$
104.0
     
(11.9
)%
 
$
282.3
   
$
309.3
     
(8.7
)%
FPD
   
31.5
     
27.7
     
13.9
%
   
93.8
     
73.2
     
28.1
%
                                                 
Total net sales
 
$
123.2
   
$
131.7
     
(6.4
)%
 
$
376.1
   
$
382.5
     
(1.7
)%

Net sales for Q3-16 decreased 6.4% to $123.2 million as compared to $131.7 million for Q3-15. The decrease was primarily a result of reduced demand for both high-end and mainstream IC photomasks, which was partially offset by increased demand for  FPD photomasks, including high-end. Revenues attributable to high-end products decreased by $3.7 million to $53.3 million in Q3-16 as compared to $57.0 million in Q3-15. High-end photomask applications include mask sets for 45 nanometer and below for IC products, and G8 and above and active matrix organic light-emitting diode (AMOLED) display screen technologies for FPD products. By geographic area, net sales in Q3-16, as compared to Q3-15, increased (decreased) by $1.4 million or 2.8% to $52.0 million in Taiwan, $(9.1) million or (26.9)%, to $24.7 million in the United States, and $(0.8) million or (8.3)% to $8.4 million in Europe. Net sales in Korea in Q3-16 were $37.6 million, unchanged from Q3-15.

Net sales for YTD-16 decreased to $376.1 million as compared with $382.5 million for YTD-15, as a result of lower high-end and mainstream IC revenues, partially offset by strong high-end FPD revenues.  Revenues attributable to high-end products increased by $11.1 million to $176.5 million in YTD-16 as compared to $165.4 million in YTD-15 primarily due to increased advanced display FPD revenues offset by decreased demand for high-end IC photomasks.

The Company’s quarterly revenues can be affected by the seasonal purchasing of its customers. Demand for the Company’s products is typically negatively impacted during the first six months of its fiscal year by the North American, European and Asian holiday periods, as some customers reduce their effective workdays and orders during this period.

Gross Margin

   
Three Months Ended
   
Nine Months Ended
 
   
Q3-16
   
Q3-15
   
Percent
Change
   
YTD-16
   
YTD-15
   
Percent
Change
 
                                         
Gross margin
 
$
31.5
   
$
37.2
     
(15.6
)%
 
$
98.2
   
$
98.5
     
(0.4
)%
Percentage of net sales
   
25.5
%
   
28.3
%
           
26.1
%
   
25.8
%
       

Gross margin percentage decreased to 25.5% in Q3-16 from 28.3% in Q3-15, primarily due to lower demand for IC products. YTD-16 gross margin percentage increased to 26.1% from 25.8% in YTD-15, primarily due to improved manufacturing efficiencies and cost reductions. The Company operates in a high fixed cost environment and, to the extent that the Company’s revenues and utilization increase or decrease, gross margin will generally be positively or negatively impacted.

Selling, General and Administrative Expenses

   
Three Months Ended
   
Nine Months Ended
 
   
Q3-16
   
Q3-15
   
Percent
Change
   
YTD-16
   
YTD-15
   
Percent
Change
 
                                         
Selling, general and administrative expenses
 
$
11.2
   
$
12.4
     
(10.2
)%
 
$
34.4
   
$
36.8
     
(6.5
)%
Percentage of net sales
   
9.1
%
   
9.4
%
           
9.1
%
   
9.6
%
       

Selling, general and administrative expenses were $11.2 million in Q3-16 and $12.4 million in Q3-15, and were $34.4 million in YTD-16 and $36.8 million in YTD-15. These decreases were primarily the result of reduced costs, including freight and other items.
 
21

Research and Development

   
Three Months Ended
   
Nine Months Ended
 
   
Q3-16
   
Q3-15
   
Percent
Change
   
YTD-16
   
YTD-15
   
Percent
Change
 
                                         
Research and development
 
$
5.5
   
$
6.3
     
(12.6
)%
 
$
16.6
   
$
16.7
     
(0.8
)%
Percentage of net sales
   
4.4
%
   
4.8
%
           
4.5
%
   
4.4
%
       

Research and development expenses consist primarily of global development efforts related to high-end process technologies for advanced sub-wavelength reticle solutions for IC technologies. Research and development expenses decreased by $0.8 million to $5.5 million in Q3-16, as compared to $6.3 million in Q3-15 due to decreased advanced nanometer technology development activities in the Asian region. YTD-16 research and development expenses did not significantly change from YTD-15.

Other Income (Expense), net

   
Three Months Ended
   
Nine Months Ended
 
    Q3-16    
Q3-15
   
YTD-16
   
YTD-15
 
                             
Gains on sales of investments
 
$
0.2
   
$
-
   
$
8.9
   
$
-
 
Interest expense
   
(0.6
)
   
(1.2
)
   
(2.7
)
   
(3.8
)
Interest and other income (expense), net
   
1.8
     
1.4
     
1.9
     
1.3
 
                                 
Other income (expense), net
 
$
1.4
   
$
0.2
   
$
8.1
   
$
(2.5
)

In January 2016 the Company sold a minority interest investment in a foreign entity and recognized a gain of $8.8 million. In May the Company sold its 49.99% interest in the MP Mask joint venture and recognized a gain of $0.2 million.

Interest expense decreased by $0.6 million in Q3-16, as compared to Q3-15, and by $1.1 million in YTD-16, as compared to YTD-15, primarily as a result of the impact of the 3.25% convertible debt that matured on April 1, 2016.

Interest and other income (expense), net increased in Q3-16 as compared to Q3-15 by $0.4 million primarily due to the favorable settlement of a liability related to a prior year’s acquisition, which was partially offset by less favorable foreign currency exchange gains. Interest and other income (expense), net increased in FY-16 from FY-15, primarily as the result of the aforementioned settlement of the liability related to a prior year’s acquisition.

Income Tax (Benefit) Provision

   
Three Months Ended
   
Nine Months Ended
 
    Q3-16    
Q3-15
   
YTD-16
   
YTD-15
 
                             
Income tax provision
 
$
4.8
   
$
3.4
   
$
6.1
   
$
7.8
 
                                 
Effective income tax rate
   
29.4
%
   
18.0
%
   
11.1
%
   
18.3
%

The Company’s 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 increase in Q3-16, as compared with Q3-15, was primarily attributable to a greater percentage of income before income taxes being earned in jurisdictions where the Company does not maintain valuation allowances and, therefore recognizes a tax expense. The effective income tax rate decrease in YTD-16, as compared with YTD-15, is primarily a result of the following factors: the recognition in FY-16 of $2.5 million, compared with $1.5 million in FY-15, of previously unrecognized deferred tax assets which resulted from the improved performance of the Company’s FPD operations; the reversal of previously recognized tax expense of $2.4 million that was eliminated by a distribution of the FY-15 earnings of a foreign subsidiary to its foreign parent; and a higher percentage of income before income taxes, including the $8.8 million gain on the sale of investment in Q1-16 that was generated in jurisdictions where the Company previously incurred losses which, due to valuation allowances, did not result in the Company recognizing tax benefits. These positive factors were offset in part by the accrual of $0.7 million of withholding taxes related to a foreign subsidiary share redemption in a foreign jurisdiction. As of each reporting date, the Company considers new evidence, both positive and negative, that could impact management’s view with regards to the future realizations of deferred tax assets.
 
22

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests increased $0.1 million to $3.4 million in Q3-16, as compared to $3.3 million in Q3-15, and decreased by $0.5 million to $8.2 million in YTD-16, as compared to $8.7 million in YTD-15, as a result of fluctuations in net income of the Company’s IC manufacturing facility in Taiwan.

Liquidity and Capital Resources

The Company’s working capital increased to $344.4 million at July 31, 2016 as compared to $171.4 million at November 1, 2015, primarily as a result of the following: increased cash and cash equivalents due to the sale of the Company’s 49.99% interest in the MP Mask joint venture for $93.1 million in May 2016; the conversion of $7.4 million of debt to common stock in April 2016; proceeds from the sale of an investment in a foreign entity of $8.8 million in January 2016; and cash generated from operating activities. Net cash provided by operating activities was $91.4 million for the nine month period ended July 31, 2016, essentially unchanged from $91.8 million for the nine month period ended August 2, 2015. Net cash provided by investing activities for the nine month period ended July 31, 2016, was $57.6 million, which was comprised primarily of proceeds of $101.9 million received from the sale of investments, partially offset by capital expenditure payments. Net cash used in financing activities of $65.0 million for the nine month period ended July 31, 2016, was comprised of repayments of long-term borrowings of $56.3 million and the payment by a subsidiary of a dividend to noncontrolling interests of $11.9 million in June 2016, which were partially offset by proceeds of $3.2 million received from exercises of employee stock options. The Company may use its cash available on hand for operations, capital expenditures, debt repayments, strategic opportunities, stock repurchases or other corporate uses, any of which may be material.

As of July 31, 2016 and November 1, 2015, the Company’s total cash and cash equivalents include $115.9 million and $102.9 million, respectively, held by its foreign subsidiaries. The majority of earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested. However, in the event that the Company was to repatriate these earnings, such action may result in increased U.S. federal income taxes and local country withholding tax in certain jurisdictions. The Company’s 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.

In August 2016 the Company announced that it had signed an investment agreement with the Xiamen Torch Hi-Tech Industrial Development Zone (Xiamen Torch) to establish an IC manufacturing facility in Xiamen, China. Under the terms of the agreement the Company will build and operate a state-of-the-art IC manufacturing and research and development facility, in return for which Xiamen Torch will provide certain investment incentives and support.
 
The Company plans to invest $160 million over the next five years, with construction commencing in 2017 and production estimated to start in late 2018. The investment will be in the form of cash, transferred capital equipment and, possibly, local financing. Support for the project has been obtained from an existing customer.
 
In June 2016 PDMC, the Company’s majority owned IC facility in Taiwan, paid a dividend of $11.9 million to its noncontrolling interests.
 
In May 2016, the Company sold its investment in MP Mask to Micron for $93.1 million. On that same date a supply agreement commenced between the Company and Micron, which provides that the Company will be the majority outsourced supplier of Micron’s photomasks and related services. The supply agreement has a one year term, subject to mutually agreeable renewals. In addition, the Company forevermore has the rights to use technology under the prior technology license agreement.

In April 2016 $57.5 million of the Company’s senior convertible notes matured. The Company repaid $50.1 million to noteholders and issued approximately 0.7 million shares to noteholders that elected to convert their notes to common stock. The notes were exchanged at the rate of approximately 96 shares per $1,000 note principle, equivalent to a conversion rate of $10.37 per share.
 
23

In January 2015 the Company privately exchanged $57.5 million in aggregate principal amount of its 3.25% convertible senior notes with a maturity date of April 1, 2016, for new 3.25% convertible senior notes with an aggregate principal amount of $57.5 million with a maturity date of April 1, 2019. The conversion rate of the new notes is the same as that of the exchanged notes, which were issued in March 2011 with a conversion rate of approximately 96 shares of common stock per $1,000 note principal, equivalent to a conversion price of $10.37 per share of common stock, and is subject to adjustment upon the occurrence of certain events, which are described in the indenture dated January 22, 2015. Noteholders may convert each $1,000 principal amount of notes at any time prior to the close of business on the second scheduled trading day immediately preceding April 1, 2019, and the Company is not required to redeem the notes prior to their maturity date. Interest on the notes accrues in arrears, and is paid semiannually through the notes’ maturity date.

The Company’s credit facility, which expires in December 2018, has a $50 million limit with an expansion capacity to $75 million, and is secured by substantially all of the Company’s assets located in the United States and common stock the Company owns in certain of its foreign subsidiaries. The credit facility precludes the Company from paying cash dividends and is subject to a minimum interest coverage ratio, total leverage ratio and minimum unrestricted cash balance financial covenants, all of which the Company was in compliance with at July 31, 2016. The Company had no outstanding borrowings against the credit facility at July 31, 2016, and $50 million was available for borrowing. The interest rate on the credit facility (1.73% at July 31, 2016) is based on the Company’s total leverage ratio at LIBOR plus a spread, as defined in the credit facility.

As of July 31, 2016, the Company had capital equipment commitments outstanding of approximately $51 million. The Company believes that its currently available resources, together with its capacity for growth, and its access to equity and other financing sources, will be sufficient to satisfy its currently planned capital expenditures, as well as its anticipated working capital requirements for the next twelve months. However, the Company cannot assure that additional sources of financing would be available to the Company on commercially favorable terms should the Company’s capital requirements exceed cash available from operations, existing cash, and cash available under its credit facility.

The Company’s liquidity is highly dependent on its sales volume, cash conversion cycle, and the timing of its capital expenditures (which can vary significantly from period to period), as it operates in a high fixed cost environment. Depending on conditions in the semiconductor and FPD markets, the Company’s cash flows from operations and current holdings of cash may not be adequate to meet its current and long-term needs for capital expenditures, operations and debt repayments. However, the Company believes its cash on hand, cash generated from its operations and cash committed under its credit facility will allow it to fund its operations through at least the next twelve months. Historically, in certain years, the Company has used external financing to fund these needs. Due to conditions in the credit markets, some financing instruments used by the Company in the past may not be currently available to it. The Company continues to evaluate further cost reduction initiatives. However, the Company cannot assure that additional sources of financing would be available to it on commercially favorable terms, should its cash requirements exceed cash available from operations, existing cash, and cash available under its credit facility.

Off-Balance Sheet Arrangements

In April 2014 the Company acquired 50.01% (a controlling interest) of PDMC, its IC manufacturing facility located in Taiwan. Under the PDMC operating agreement the shareholders of PDMC may be requested to make additional contributions to PDMC. In the event that PDMC requests additional capital from its shareholders, the Company may be required to make additional capital contributions to PDMC in order to maintain its 50.01% ownership. The PDMC operating agreement limits the amount of contributions that may be requested during both the first four years of PDMC and during any individual year within those first four years. As of July 31, 2016, the Company had not been requested to make any capital contribution to PDMC.

The Company leases certain office facilities and equipment under operating leases that may require it to pay taxes, insurance and maintenance expenses related to the properties. Certain of these leases contain renewal or purchase options exercisable at the end of the lease terms.

Business Outlook

A majority of the Company’s revenue growth is expected to continue to come from the Asian region, as customers increase their use of manufacturing foundries located outside of North America and Europe. Additional revenue growth is also anticipated in North America, as the Company expects to continue to benefit from advanced technology it may utilize under its technology license with Micron.

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

Effect of Recent Accounting Pronouncements

See “Note 15 – Recent Accounting Pronouncements” to the condensed consolidated financial statements.
 
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Rate Risk

The Company conducts business in several major international currencies through its worldwide operations and its financial performance may be affected by fluctuations in the exchange rates of these currencies. Changes in exchange rates can positively or negatively affect the Company’s sales, operating margins, assets, liabilities, and equity. The functional currencies of the Company’s Asian subsidiaries are the South Korean won, the New Taiwan dollar, and the Singapore dollar. The functional currencies of the Company’s European subsidiaries are the British pound and the euro. The Company also engages in transactions and holds balances in Japanese yen.

The Company attempts to minimize its risk of foreign currency transaction losses by producing its products in the same country in which the products are sold (thereby generating revenues and incurring expenses in the same currency), and by managing its working capital. There can be no assurance that this approach will continue to be successful, especially in the event of a significant adverse movement in the value of any foreign currency against the U.S. dollar, the New Taiwan dollar or the South Korean won. However, in some instances, the Company sells products in a currency other than the functional currency of the country where it was produced or purchases products in a currency that differs from the functional currency of the purchasing manufacturing facility.

The Company’s primary net foreign currency exposures as of July 31, 2016, included the South Korean won, the Japanese yen, the New Taiwan dollar, the Singapore dollar, the British pound, and the euro. As of July 31, 2016, a 10% adverse movement in the value of these currencies against the functional currencies of our subsidiaries would have resulted in a net unrealized pre-tax loss of $7.5 million. The Company does not believe that a 10% change in the exchange rates of other non-US dollar currencies would have a material effect on its results of operations or cash flows.

Interest Rate Risk

At July 31, 2016, the Company did not have any variable rate borrowings. A 10% change in interest rates would not have had a material effect on the Company’s consolidated financial position, results of operations, or cash flows in the three or nine month periods ended July 31, 2016.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company has established and currently maintains 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 its 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 the Company’s chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

The Company’s management, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation the Company’s chief executive officer and chief financial officer concluded that the Company’s 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 the Company’s internal control over financial reporting during the Company’s third quarter of fiscal 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
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PART II. OTHER INFORMATION

Item 1A. RISK FACTORS

The Company’s announced expansion into China entails substantial risks.
 
In August 2016 the Company announced that it would invest $160 million over the next five years to construct an IC manufacturing facility in Xiamen, China. This investment is subject to substantial risks which may include, but are not limited to: delays in or the inability to obtain necessary permits that are needed to enable us to construct our facility or conduct our ongoing business; the inability to protect our intellectual property rights under Chinese law, which may not offer as high of a level of protection as U.S. law; unexpectedly long negotiation periods with Chinese suppliers and customers; quality issues related to materials sourced from local vendors; unexpectedly high labor costs due to a tight labor supply; and difficulty in repatriating funds and selling or transferring assets. Our investment in China also exposes us to a significant additional foreign currency exchange risk, which we have not been subject to in recent years. These and other risks may result in our not realizing a return on, or losing some of or all of our planned investment in China, which would have a material adverse effect on our financial condition and financial performance.
 
Please refer to Part 1, Item 1A of the Company’s Form 10-K for the year ended November 1, 2015, for additional risks related to the Company’s business.
 
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Item 6.
EXHIBITS
 
     
 
(a)
Exhibits
 
       
   
Exhibit
Number
 
Description
       
   
Investment Agreement between Xiamen Torch Hi-Tech Industrial Development Zone Management Committee and Photronics Singapore Pte, Ltd  dated August 18, 2016.*
       
   
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.
       
   
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.
       
   
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.
       
   
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
   
101.INS
XBRL Instance Document
       
   
101.SCH
XBRL Taxonomy Extension Schema Document
       
   
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
       
   
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
       
   
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
       
   
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
*
Confidential information has been omitted and filed separately with the Commission.
 
SIGNATURES

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

 
Photronics, Inc.
(Registrant)
 
     
By:
/s/ SEAN T. SMITH
 
 
Sean T. Smith
 
 
Senior Vice President
 
 
Chief Financial Officer
 
 
(Duly Authorized Officer and
 
 
Principal Financial Officer)
 
     
Date:  September 2, 2016
 
 
 
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