UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x     
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 30,May 1, 2011
  
OR
  
o OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-15451
For the transition period from ___ to ___

Commission file number 0-15451

 
PHOTRONICS, INC.
(Exact name of registrant as specified in its charter)
 
Connecticut06-0854886
(State or other jurisdiction(IRS Employer
of incorporation or organization)Identification Number)

15 Secor Road, Brookfield, Connecticut 06804
(Address of principal executive offices and zip code)
 
(203) 775-9000
(Registrant's telephone number, including area code)
 
None
(Former name, former address and formal fiscal year, if changed since last report)
 
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 xNo ¨o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes oNo o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer oAccelerated Filer xNon-Accelerated Filer oSmaller Reporting Company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes oNo x
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
ClassOutstanding at MarchJune 1, 2011
Common Stock, $0.01 par value54,260,11458,785,077 Shares

 

Forward-Looking Statements
 
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements made by or on behalf of Photronics, Inc. ("Photronics" or the "Company"). These statements are based on management's beliefs, as well as assumptions made by, and information currently available to, management. Forward-looking statements may be identified by words like "expect", "anticipate", "believe", "plan", "projects", and similar expressions.expressions, or the negative of such terms, or other comparable terminology. All forward-looking statements involve risks and uncertainties that are difficult to predict. In particular, any statement contained in this quarterly report on Form 10-Q, in press releases, written statements, or other documents filed with the Securities and Exchange Commission or, in the Company's communications and discussions with investors and analysts in the normal course of business through meetings, phone calls, or conference calls, regarding the consummation and benefits of future acquisitions, expectations with respect to future sales, financial performance, operating efficiencies, or product expansion, are subject to known and unknown risks, uncertainties, and contingencies, many of which are beyond the control of the Company. These factors may cause actual results, performance, or achievements to differ materially from anticipated results, performance, or achievements.achievements expressed or implied by such forward-looking statements. Factors that might affect such forward-looking statements include, but are not limited to, overall economic and business conditions; economic and political conditions in international markets; the demand for the Company's products; competitive factors in the industries and geographic markets in which the Company competes; changes in federal, state and international tax requirements (including tax rate changes, new tax laws and revised tax law interpretations); interest rate fluctuations and other capital market conditions, including changes in the market price of the Company's common stock; foreign currency exchange rate fluctuations; changes in technology; the timing, impact, and other uncertainties of future acquisitions; the seasonal and cyclical nature of the semiconductor and flat panel display industries; management changes; damage or destruction to the Company's facilities, or the facilities of its customers or suppliers by natural disasters, labor strikes, political unrest, or terrorist activity; the ability of the Company to:to place new equipment in service on a timely basis; obtain additional financing; achieve anticipated synergies and other cost savings in connection with acquisitions and productivity programs; fully utilize its tools; achieve desired yields, pricing, product mix, and market acceptance of its products; and 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.
 
2
 
 

PHOTRONICS, INC.
AND SUBSIDIARIES
 
INDEX
 
PART I.          FINANCIAL INFORMATIONPage
 Page
Item 1. Condensed Consolidated Financial Statements 
    
  Condensed Consolidated Balance Sheets at
January 30,
May 1, 2011 and October 31, 2010		4
    
  Condensed Consolidated Statements of Income
Operations
for the Three and Six Months Ended
January 30,
May 1, 2011 and January 31,May 2, 2010		5
    
  Condensed Consolidated Statements of Cash Flows

for the ThreeSix Months Ended
January 30,
May 1, 2011 and January 31,May 2, 2010		6
    
  Notes to Condensed Consolidated Financial Statements7
    
Item 2. Management's Discussion and Analysis

of Financial Condition and Results of Operations		2022
    
Item 3. Quantitative and Qualitative Disclosures about Market Risk2629
    
Item 4. Controls and Procedures2730
    
PART II. OTHER INFORMATION 
    
Item 1A. Risk Factors2831
    
Item 6. Exhibits2831

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)
 
 January 30, October 31, May 1, October 31,
     2011     2010 2011 2010
ASSETS                     
Current assets:          
Cash and cash equivalents $    112,723 $      98,945  $     186,112  $     98,945 
Accounts receivable, net of allowance of $4,477 in 2011     
Accounts receivable, net of allowance of $4,249 in 2011     
and $4,235 in 2010 80,672 82,951  98,510 82,951 
Inventories 21,139 15,502  27,904 15,502 
Deferred income taxes 1,280 1,173  1,238 1,173 
Other current assets  7,016  7,231   6,159   7,231 
Total current assets 222,830 205,802  319,923 205,802 
          
Property, plant and equipment, net 386,860 369,814  403,413 369,814 
Investment in joint venture 65,773 61,127  72,001 61,127 
Intangible assets, net 46,242 47,748  44,951 47,748 
Other assets  18,844  19,388   22,263   19,388 
 $740,549 $703,879  $862,551  $703,879 
     
LIABILITIES AND EQUITY          
Current liabilities:          
Current portion of long-term borrowings $12,009 $11,467  $5,827  $11,467 
Accounts payable 95,755 77,630  100,496 77,630 
Accrued liabilities  33,549  30,132   34,128   30,132 
Total current liabilities 141,313 119,229  140,451 119,229 
          
Long-term borrowings 70,631 78,852  159,558 78,852 
Deferred income taxes 493 499  533 499 
Other liabilities  9,650  9,356   9,394   9,356 
Total liabilities 222,087 207,936  309,936 207,936 
          
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, 53,865 shares issued and outstanding     
at January 30, 2011 and 53,779 at October 31, 2010 539 538 
150,000 shares authorized, 58,539 shares issued and outstanding     
at May 1, 2011 and 53,779 at October 31, 2010 585 538 
Additional paid-in capital 437,360 436,825  478,009 436,825 
Retained earnings (accumulated deficit) 9,487 (2,624)
Accumulated deficit (6,951) (2,624)
Accumulated other comprehensive income  12,906  7,062   23,991   7,062 
Total Photronics, Inc. shareholders' equity 460,292 441,801  495,634 441,801 
Noncontrolling interests  58,170  54,142   56,981   54,142 
Total equity  518,462  495,943   552,615   495,943 
 $740,549 $703,879  $862,551  $703,879 

See accompanying notes to condensed consolidated financial statements.
 
4
 
 

PHOTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of IncomeOperations
(in thousands, except per share amounts)
(unaudited)
 
 Three Months Ended Three Months Ended     Six Months Ended
 January 30, January 31,     May 1,     May 2, May 1,     May 2,
     2011     2010 2011 2010 2011 2010
Net sales $     120, 823  $       98,197  $     133,103 $     105,070  $     253,926  $     203,267 
         
Costs and expenses:              
         
Cost of sales (90,229) (80,020) (96,617) (82,980) (186,845) (163,000)
            
Selling, general and administrative (10,713) (10,149) (11,448) (10,870) (22,162) (21,018)
            
Research and development (3,771) (3,954) (3,940) (3,601) (7,711) (7,556)
Consolidation, restructuring and related charges  -   (193)
         
Consolidation, restructuring and related credits  -   5,029   -   4,836 
Operating income 16,110 3,881  21,098 12,648 37,208 16,529 
         
Other income (expense):              
Debt extinguishment loss (30,286) - (30,286) - 
Interest expense (1,711) (2,921) (1,881) (3,059) (3,592) (5,981)
Investment and other income, net  2,668   468 
Income before income taxes 17,067 1,428 
Investment and other income (expense), net  (704)  876   1,963   1,345 
Income (loss) before income taxes (11,773) 10,465 5,293 11,893 
            
Income tax provision  (3,483)  (1,020)  (3,260)  (1,860)  (6,742)  (2,880)
Net income 13,584 408 
Net income attributable to noncontrolling interests  (1,473)  (195)
Net income attributable to Photronics, Inc. $12,111  $213 
Earnings per share:     
Net income (loss) (15,033) 8,605 (1,449) 9,013 
         
Net income attributable to         
noncontrolling interests  (1,405)  (732)  (2,878)  (927)
Net income (loss) attributable to         
Photronics, Inc. $(16,438) $7,873  $(4,327) $8,086 
Earnings (loss) per share:         
         
Basic $0.23  $0.00  $(0.30) $0.15  $(0.08) $0.15 
Diluted $0.20  $0.00  $(0.30) $0.14  $(0.08) $0.15 
Weighted-average number of common shares outstanding:     
Weighted-average number of common shares         
outstanding:         
         
Basic  53,817   53,102   55,685   53,405   54,751   53,253 
Diluted  66,411   54,824   55,685   65,780   54,751   54,291 

See accompanying notes to condensed consolidated financial statements.
 
5
 
 

PHOTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
 Three Months Ended Six Months Ended
 January 30, January 31, May 1,     May 2,
    2011    2010 2011 2010
Cash flows from operating activities:               
Net income $13,584 $408 
Adjustments to reconcile net income     
Net income (loss) $     (1,449) $     9,013 
Adjustments to reconcile net income (loss)     
to net cash provided by operating activities:          
Depreciation and amortization 23,189 22,424  46,467 45,863 
Debt extinguishment loss 23,504 - 
Consolidation, restructuring and related credits - (5,059)
Changes in assets and liabilities:          
Accounts receivable
 4,139 (5,349) (11,380) (12,918)
Inventories
 (5,299) (743) (11,450) (592)
Other current assets
 360 (4,642) 1,500 1,199 
Accounts payable, accrued liabilities, and other
  5,682   4,317   16,798   (3,743)
Net cash provided by operating activities  41,655   16,415   63,990   33,763 
Cash flows from investing activities:          
Purchases of property, plant and equipment       (19,120)       (21,457) (39,254) (31,003)
Investment in joint venture (3,999) -  (8,498) - 
Cash deposit received on sale of facility - 4,190 
Proceeds from sale of facility - 12,880 
Increase in restricted cash - (1,250) - (1,250)
Proceeds from sales of short-term investments and other  -   43 
Other  (250)  255 
Net cash used in investing activities  (23,119)  (18,474)  (48,002)  (19,118)
Cash flows from financing activities:          
Proceeds from issuance of convertible debt 115,000 - 
Proceeds from long-term borrowings 17,000 26,622 
Repayments of long-term borrowings (24,346) (7,250) (60,303) (40,302)
Proceeds from long-term borrowings 17,000 3,822 
Proceeds from share-based payments  159   30 
Net cash used in financing activities  (7,187)  (3,398)
Payments of deferred financing fees (4,145) (1,056)
Repurchase of common stock by subsidiary (3,294) - 
Proceeds from exercise of share-based arrangements  356   71 
Net cash provided by (used in) financing activities  64,614  (14,665)
Effect of exchange rate changes on cash  2,429   1,319   6,565  2,891 
Net increase (decrease) in cash and cash equivalents 13,778 (4,138)
Net increase in cash and cash equivalents 87,167 2,871 
Cash and cash equivalents at beginning of period  98,945   88,539   98,945   88,539 
Cash and cash equivalents at end of period $112,723  $84,401  $186,112  $91,410 
     
Supplemental disclosure of cash flow information:          
Capital lease obligation for purchase of equipment $21,248 $- 
Common stock issued to extinguish debt $17,390 $- 
Change in accrual for purchases of property, plant          
and equipment $13,273 $(227) $3,079  $19,521 
Investment in joint venture $1,750 $- 

See accompanying notes to condensed consolidated financial statements.
 
6
 
 

PHOTRONICS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and Six Months Ended January 30,May 1, 2011 and January 31,May 2, 2010
(unaudited)
(in thousands, except share amounts)
 
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
AND SIGNIFICANT ACCOUNTING POLICIES
 
     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, two in Taiwan, one in Korea, one in Singapore, and three in the United States.
 
     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending October 30, 2011. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended October 31, 2010.
 
Revenue Recognition
     The Company recognizes revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Delivery is determined by the shipping terms of the individual sales transactions. For sales with FOB destination shipping terms, delivery occurs when the Company’s product reaches its destination and is received by the customer. For sales with FOB shipping point terms, delivery occurs when the Company’s product is received by the common carrier. The Company uses judgment when estimating the effect on revenue of discounts and product warranty obligations, both of which are accrued when the related revenue is recognized.
Warranties and Other Post Shipment Obligations – For a 30-day period, the Company warrants that items sold will conform to customer specifications. However, the Company’s liability is limited to the repair or replacement of the photomasks as its sole option. The Company inspects photomasks for conformity to customer specifications prior to shipment. Accordingly, customer returns of items under warranty have historically been insignificant. However, the Company records a liability for the insignificant amount of estimated warranty returns based on historical experience. The Company’s specific return policies include accepting returns of products with defects, or products that have not been produced to precise customer specifications. At the time of revenue recognition, a liability is established for these items.
Sales Taxes – The Company presents its revenues in the condensed consolidated statements of operations, net of sales taxes, if any (excluded from revenues).
     See the Company’s Form 10-K for the year ended October 31, 2010 for additional significant accounting policies of the Company.
7
 
 

NOTE 2 - CHANGES IN EQUITY AND COMPREHENSIVE INCOME (LOSS)
 
     The following tables set forth the Company's consolidated changes in equity and comprehensive income (all items(net of other comprehensive income are net of tax of $0)tax) for the three and six months ended January 30,May 1, 2011 and January 31,May 2, 2010:
 
 Three Months Ended January 30, 2011   Three Months Ended May 1, 2011
 Photronics, Inc. Shareholders     Photronics, Inc. Shareholders     
         Accum-                            Accum-                  
       Accum- ulated             Retained ulated       
       ulated Other             Earnings Other       
   Add'l (Deficit) Compre- Total Non-      Add'l (Accum- Compre- Total Non-   
 Common Stock Paid-in Retained hensive Photronics, controlling Total Common Stock Paid-in ulated hensive Photronics, controlling Total
    Shares    Amount    Capital    Earnings    Income    Inc.    Interests    Equity Shares Amount Capital Deficit) Income Inc. Interests Equity
Balance at November 1, 2010 53,779 $538 $436,825 $(2,624) $7,062 $441,801 $54,142 $495,943
Balance at January 31, 2011        53,865 $      539 $      437,360 $      9,487 $      12,906 $      460,292 $      58,170 $     518,462 
Comprehensive income:                 
Net income (loss) - - - (16,438) - (16,438) 1,405 (15,033)
Amortization of cash flow hedges - - - - 32 32 - 32 
Foreign currency translation                 
adjustments - - - -  11,065   11,065   355   11,420 
Total comprehensive income (loss)            (5,341)  1,760   (3,581)
Common stock issued to extinguish debt 4,492 45 39,123 - - 39,168 - 39,168 
Sale of common stock through                 
employee stock option and                 
purchase plans 45 - 88 - - 88 - 88 
Restricted stock awards vesting and expense 15 - 234 - - 234 - 234 
Share-based compensation expense - - 375 - - 375 - 375 
Common stock warrants exercised 122 1 1,157 - - 1,158 - 1,158 
Repurchase of common stock by subsidiary -  -  (328)  -   (12)  (340)  (2,949)  (3,289)
Balance at May 1, 2011 58,539 $585 $478,009  $(6,951) $23,991  $495,634  $56,981  $552,615 
                 
 Three Months Ended May 2, 2010
 Photronics, Inc. Shareholders     
         Accum-       
         ulated       
         Other       
         Compre-       
   Add'l Accum- hensive Total Non-   
 Common Stock Paid-in ulated Income Photronics, controlling Total
 Shares Amount Capital Deficit (Loss) Inc. Interests Equity
Balance at February 1, 2010 53,281 $533 $433,632 $(26,333) $(444) $407,388 $51,051 $458,439 
Comprehensive income:                                 
Net income -  -  -  12,111 - 12,111  1,473  13,584 - - - 7,873 - 7,873 732 8,605 
Unrealized holding gains - - - - 76 76 56 132 
Amortization of cash flow hedges -  -  -  - 32 32  -  32 - - - - 33 33 - 33 
Foreign currency translation                                 
adjustments -  -  -  - 5,812  5,812  2,555  8,367 - - - - 6,553  6,553   1,061   7,614 
Total comprehensive income            17,955  4,028  21,983 - - - - -  14,535   1,849   16,384 
Sale of common stock through                                 
employee stock option and                                 
purchase plans 65  1  58  - - 59  -  59 53 1 74 - - 75 - 75 
Restricted stock awards vesting                
and expense 21  -  188  - - 188  -  188
Share-based compensation expense -  -  289  -   -  289  -  289 1 - 454 - - 454 - 454 
Balance at January 30, 2011 53,865 $     539 $     437,360 $     9,487  $     12,906 $     460,292 $     58,170 $     518,462
Common stock warrants exercised 162  1  816   -   -   817   -   817 
Balance at May 2, 2010 53,497 $535 $434,976  $(18,460) $6,218  $423,269  $52,900  $476,169 
                 
8

   Six Months Ended May 1, 2011
 Photronics, Inc. Shareholders     
                      Accum-                  
         ulated       
         Other       
   Add'l Accum- Compre- Total Non-   
 Common Stock Paid-in ulated hensive Photronics, controlling Total
 Shares Amount Capital Deficit Income Inc. Interests Equity
Balance at November 1, 2010        53,779 $      538 $      436,825 $      (2,624) $      7,062 $      441,801 $      54,142 $     495,943 
Comprehensive income:                 
Net income (loss) - - - (4,327) - (4,327) 2,878 (1,449)
Amortization of cash flow hedges - - - - 64 64 - 64 
Foreign currency translation                 
adjustments - - - - 16,877  16,877   2,910   19,787 
Total comprehensive income            12,614   5,788   18,402 
Common stock issued to extinguish debt 4,492 45 39,123 - - 39,168 - 39,168 
Sale of common stock through                 
employee stock option and                 
purchase plans 110 1 146 - - 147 - 147 
Restricted stock awards vesting and expense 36 - 422 - - 422 - 422 
Share-based compensation expense - - 664 - - 664 - 664 
Common stock warrants exercised 122 1 1,157 - - 1,158 - 1,158 
Repurchase of common stock by subsidiary -  -  (328)  -   (12)  (340)  (2,949)  (3,289)
Balance at May 1, 2011 58,539 $585 $478,009  $(6,951) $23,991  $495,634  $56,981  $552,615 
                 
 Six Months Ended May 2, 2010
 Three Months Ended January 31, 2010 Photronics, Inc. Shareholders     
 Photronics, Inc. Shareholders             Accum-       
         Accum-               ulated       
         ulated               Other       
         Other               Compre-       
   Add'l Accum- Compre- Total Non-      Add'l Accum- hensive Total Non-   
 Common Stock Paid-in ulated hensive Photronics, controlling Total Common Stock Paid-in ulated Income Photronics, controlling Total
    Shares    Amount    Capital    Deficit    Loss    Inc.    Interests    Equity Shares Amount Capital Deficit (Loss) Inc. Interests Equity
Balance at November 2, 2009 53,011 $530 $432,160 $(26,546) $     (6,389) $399,755 $49,941 $449,696 53,011 $530 $432,160 $(26,546) $(6,389) $399,755 $49,941 $449,696 
Comprehensive income:                                 
Net income -  -  -  213 - 213  195  408 - - - 8,086 - 8,086 927 9,013 
Unrealized holding gains - - - - 76 76 56 132 
Amortization of cash flow hedges -  -  -  - 32 32  -  32 - - - - 65 65 - 65 
Foreign currency translation                                 
adjustments -  -  -  - 5,913  5,913  915  6,828 - - - - 12,466  12,466   1,976   14,442 
Total comprehensive income            6,158  1,110  7,268            20,693   2,959   23,652 
Sale of common stock through                                 
employee stock option and                                 
purchase plan 40  -  30  - - 30  -  30
Share-based compensation                
expense -  -  428  - - 428  -  428
Restricted stock awards vesting                
and expense 42  -  149  - - 149  -  149
Common stock warrants exercised 188  3  865  -   -   868  -  868
Balance at January 31, 2010      53,281 $     533 $     433,632 $     (26,333) $(444) $     407,388 $     51,051 $     458,439
purchase plans 93 1 104 - - 105 - 105 
Share-based compensation expense 43 - 1,031 - - 1,031 - 1,031 
Noncontrolling interests’ subsidiary dividend 350  4  1,681   -   -   1,685   -   1,685 
Balance at May 2, 2010 53,497 $535 $434,976  $(18,460) $6,218  $423,269  $52,900  $476,169 
                 

89
 
 

NOTE 3 - JOINT VENTURE
 
     On May 5, 2006, Photronics and Micron Technology, Inc. ("Micron") entered into the MP Mask joint venture, which develops and produces photomasks for leading-edge and advanced next generation semiconductors. As part of the formation of the joint venture, Micron contributed its existing photomask technology center located at its Boise, Idaho, headquarters to MP Mask and Photronics invested $135 million in exchange for a 49.99% interest in MP Mask (to which $64.2 million of the original investment was allocated), a license for photomask technology of Micron, and certain supply agreements.
 
     This joint venture is a variable interest entity ("VIE") (as that term is defined in the Accounting Standards Codification ("ASC") ) primarily because all costs of the joint venture will be passed on to the Company and Micron through purchase agreements they have entered into with the joint venture. In accordance with accounting guidance issued by the Financial Accounting Standards Board (“FASB”) in June 2009, on a quarterly basis the Company in its first quarter of fiscal 2011, performed an analysis to ascertainreassesses whether its interest in MP Mask gives it a controlling financial interest in this VIE. The purpose of this determination wasquarterly reassessment is to identify the primary beneficiary (which is defined in the ASC as the entity that consolidates a VIE) of the VIE. As a result of the analysis,reassessment in the current quarter, the Company determined that Micron is still the primary beneficiary of the VIE, by virtue of its greater voting power, if necessary, within MP Mask’s Board of Managers, thereby giving it the power to direct the activities of MP Mask that most significantly impact its economic performance, which includesincluding its decision making authority in the ordinary course of business as well asand its purchasing the purchase of a majority of the products produced by the VIE.
 
     The Company has utilized MP Mask for both high-end IC photomask production and research and development purposes. MP Mask charges its variable interest holders based on their actual usage of its facility. MP Mask separately charges for any research and development activities it engages in at the requests of its owners. The Company recorded cost of sales of $3.5$4.8 million and $1.2$8.3 million during the three month periods ended January 30, 2011 and January 31, 2010, respectively, and research and development expenses of $0.2 million and $0.5 million during each of the three and six month periods.periods ended May 1, 2011. Cost of sales of $1.5 million and $2.7 million and research and development expenses of $0.2 million and $0.5 million were recorded during the three and six month periods ended May 2, 2010.
 
     MP Mask is governed by a Board of Managers, appointed by Micron and the Company. Since MP Mask's inception, Micron, as a result of its majority ownership, has appointedheld majority voting power on the majorityBoard of its managers.Managers. The number of managers appointedvoting power held by each party is subject to change as ownership interests change. Under the MP mask joint venture operating agreement, the Company may be required to make additional capital contributions to the joint venture up to the maximum amount defined in the operating agreement. However, should the Board of Managers determine that further additional funding is required, the joint venture shall pursue its own financing. If the joint venture is unable to obtain its own financing, it may request additional capital contributions from the Company. Should the Company choose not to make a requested contribution to the joint venture, its ownership interestpercentage may be reduced. TheDuring the three and six month periods ended May 1, 2011, the Company made an additional capital contribution of $4 million toincreased its investment in MP Mask during its first quarter of fiscal 2011by $6.2 million and $10.2 million, respectively, primarily related to a capital callcalls requested by the joint venture. The Company did not make any contributions to MP Mask during its first quarterhalf of fiscal 2010, and did not receive any distributions from MP Mask during its first quarterhalf of fiscal 2011 or 2010.
 
     The Company's investment in the VIE, which represents its maximum exposure to loss, was $65.8$72.0 million at January 30,May 1, 2011 and $61.1 million at October 31, 2010. These amounts are reported in the Company's condensed consolidated balance sheets as "Investment in joint venture". The Company recorded income from its investment in the VIE of $0.7$0.6 million in the six month period ended May 1, 2011, and recorded no income from its first quarter of fiscalinvestment in the three month period ended May 1, 2011, whichor in the three and six month periods ended May 2, 2010. Income from the VIE is included in "Investment and other income, net" in itsthe condensed consolidated statementstatements of income.operations.
 
910
 
 

NOTE 4 - LONG-TERM BORROWINGS
 
     Long-term borrowings consist of the following:
 
 January 30, October 31,     May 1,     October 31,
    2011    2010 2011 2010
3.25% convertible senior notes    
due on April 1, 2016 $     115,000 $     -
5.5% convertible senior notes due        
on October 1, 2014 $57,500 $57,500 27,054 57,500
3.09% capital lease obligation payable    
through March 2016 20,867 -
4.75% financing loan with customer 2,464 2,954
8.0% capital lease obligation - 16,220
5.6% capital lease obligation - 8,645
Borrowings under revolving credit facility, which        
bore interest at a variable rate, as defined (3.8% at    
bear interest at a variable rate, as defined (3.8% at    
October 31, 2010) -  5,000  -  5,000
8.0% capital lease obligation payable through    
January 2013 14,557  16,220
5.6% capital lease obligation payable through    
October 2012 7,962  8,645
4.75% financing loan with customer  2,621  2,954
 82,640  90,319 165,385 90,319
Less current portion  12,009  11,467  5,827  11,467
 $70,631 $78,852 $159,558 $78,852

     On February 12, 2010,March 28, 2011, the Company issued through a private offering pursuant to Rule 144A under the Securities Act of 1933, as amended, $115 million aggregate principal amount of 3.25% convertible senior notes. The notes mature on April 1, 2016, and note holders may convert each $1,000 principal amount of notes to 96.3879 shares of common stock (equivalent to an initial conversion price of $10.37 per share of common stock) at any time prior to the close of business on the second scheduled trading day immediately preceding April 1, 2016. The conversion rate is subject to adjustment upon the occurrence of certain events, which are described in the indenture dated March 28, 2011. The Company is not required to redeem the notes prior to their maturity dates. Interest on the notes accrues in arrears, and is to be paid semiannually through the notes’ maturity date, with payments commencing on October 1, 2011. The net proceeds of the notes were approximately $110.5 million, which were used, in part, to repurchase $30.4 million of the Company’s 5.5% convertible senior notes which were to mature on October 1, 2014, and to repay, in full, its then outstanding obligations under capital leases of $19.8 million. The Company intends to use the remainder of the net proceeds to acquire, from time to time, additional amounts of its remaining outstanding 5.5% convertible senior notes and for general corporate purposes, which may include, among other things, working capital and capital expenditures.
     On March 18, 2011, the Company amended its revolving credit facility (“the credit facility”) which was originally establishedincluded, among other things: i) a reduction of the aggregate commitments of the lenders from $65 million to $30 million; ii) a reduction of the applicable interest rates and modifications of the leverage ratios relating thereto; iii) an extension of the maturity date to April 30, 2015; iv) an increase of certain financed capital assets up to $75 million outstanding at any one time; v) an allowance to issue the 3.25% convertible senior notes; vi) an increase in the investments “basket” from $15 million to $25 million per year; vii) an allowance to repurchase the 5.5% convertible senior notes and other indebtedness; and viii) removal of the limitation on June 6, 2007, to a three-year $50 million revolvingmaximum last twelve months capital expenditures. The credit facility ("bears interest (2.75% at May 1, 2011), based on the Company’s total leverage ratio, at LIBOR plus a spread, as defined in the credit facility"). At the timefacility.
11

     The credit facility is secured by substantially all of the Company’s assets located in the United States, as well as common stock the Company owns in certain of its foreign subsidiaries, and is subject to the following financial covenants: minimum fixed charge ratio, total leverage ratio and minimum unrestricted cash balance. The Company, in connection with a February 12, 2010 amendment the then existing revolving credit facility and term loan were repaid in full with borrowings fromto the credit facility, of $20.8 million and, in connection therewith, the Company wrote off $1.0 million of deferred financing fees. On May 7, 2010, the credit facility was further amended to increasefees in its borrowing capacity to $65 million. The credit facility bears interest at LIBOR plus a spread (3.8% atsecond quarter of fiscal 2010.
     In January 30, 2011), as defined in the agreement, based upon the Company's total leverage ratio. On January 5, 2011 a $10 million irrevocable stand-by letter of credit for the purchase of manufacturing equipment was issued under the Company's revolving credit facility. As of January 30,May 1, 2011, the Company had no outstanding borrowings under the credit facility and $55$20 million was available for borrowing.
 
     The credit facility, which matures on February 12, 2013, is secured by substantially all of the Company's assets in the United States as well as common stock the Company owns in certain of its foreign subsidiaries. The credit facility includes the following financial covenants: fixed charge coverage ratio, total leverage ratio, minimum unrestricted cash balance, and maximum capital expenditures, all as defined in the agreement.
In MaySeptember 2009 the Company amended its then existing revolving credit facility and entered into a warrant agreement with its lenders for 2.1 million shares of its common stock. Forty percent of the warrants (0.8 million) were exercisable upon issuance while the remaining warrants were cancelled as a result of the Company's September 2009 early repayment of a portion of the outstanding balance under its June 6, 2007 credit agreement. As of January 30, 2011, approximately 0.5 million warrants had been exercised, and an additional 0.1 million warrants were exercised in February 2011. The warrants, approximately 0.3 million of which remained outstanding at January 30, 2011, are exercisable for one share of the Company's common stock, at an exercise price of $.01 per share. The warrant agreement also includes a net cash settleable put provision exercisable starting in May 2012 and a call provision exercisable starting in May 2013, both of which would be exercisable only if the Company's common stock was not traded on a national exchange. As a result of the aforementioned net cash settleable put provisions, the warrants were initially recorded as a liability (included in other liabilities) and have been subsequently reported at their fair value.
     On September 11, 2009, the Company sold,issued, through a public offering, $57.5 million aggregate principal amount of 5.5% convertible senior notes, which were to mature on October 1, 2014. NoteUnder the terms of the offering, the note holders maycould convert each $1,000 principal amount of notes to 196.7052 shares of common stock (equivalent to an initial conversion price of approximately $5.08 per share of common stock) on, or before, September 30, 2014. The conversion rate may be increasedis subject to adjustment upon the occurrence of certain events which are described in the event of a make-whole fundamental change (as defined in the prospectus supplement filed by theindenture dated September 16, 2009. The Company on September 11, 2009) and the Company mayis not required to redeem the notes prior to their maturity date.maturity. The net proceeds of the convertible senior notesthis offering were approximately $54.9 million, which were used to reduce amounts outstanding amounts under the Company’s then existing credit facility.
 
10

     In January 2010On March 29, 2011, the Company borrowed $3.7repurchased approximately $30.4 million from a customer to purchase manufacturing equipment. This loan bears interest at 4.75%of its 5.5% convertible senior notes in exchange for approximately 4.5 million shares of its common stock with an approximate fair value of $39.2 million and will be repaid with product supplied to the customer. Product valued at $0.3cash of approximately $19.7 million was shipped to the customer(the note holders received 147.529 shares and applied against the loan during the first quartercash of fiscal 2011; no product was shipped and applied against the loan during the first quarter of fiscal 2010.$647 for each $1,000 note). The Company, estimates thatin connection with this repurchase, recorded an extinguishment loss of $30.1 million, which includes the loan will be fully repaidwrite off of deferred financing fees of $1.7 million. The loss is included in fiscal 2014.other income (expense) in the Company's condensed consolidated statements of operations.
 
     In the first quarter of 2008 a capital lease agreement commenced for the U.S. nanoFab facility. Quarterly lease payments, which bore interest at 8%, were $3.8 million through January 2013. This lease was cancelled in the third fiscal quarter of 2009, at which time the Company and Micron (the lessor) entered into a new lease agreement for the facility. Under the provisions of the new lease agreement, quarterly lease payments were reduced from $3.8 million to $2.0 million, the term of the lease was extended from December 31, 2012 to December 31, 2014, and ownership of the property will not transfer to the Company at the end of the lease term. The interest rate of the new lease agreement remained at 8%. As a result of the new lease agreement, the Company reduced its lease obligation and the carrying value of its assets under capital leases by approximately $28 million. The lease obligation was paid in full with a portion of the net proceeds of the March 28, 2011 issuance of its 3.25% convertible senior notes. The lease will continue to be accounted for as a capitalan operating lease until the end of its original lease term. Forduring the additional two years of the new lease term,term.
     On April 29, 2011, the Company entered into a 5-year, $21.2 million capital lease for manufacturing equipment. Payments under the lease, will be accounted for as an operating lease.which bears interest at 3.09%, are $0.4 million per month through March 2016. The lease agreement provides that the Company must maintain the equipment in good working order, and includes a cross default with cross acceleration provision related to certain non-financial covenants incorporated in the Company's credit facility agreement. As of January 30,May 1, 2011, the total capitalamount payable through the end of the lease amounts payable were $15.9term was $22.5 million, of which $14.6$20.9 million represented principal and $1.3$1.6 million represented interest.
 
     In October 2007, the Company entered into a capital lease agreement in the amount of $19.9 million associated with certain equipment. Under the capital lease agreement, the Company is required to maintain the equipment in good working condition, and is required to comply with certain non-financial covenants. Payments under the lease arewere $0.4 million per month over a 5-year term at a 5.6% interest rate. On April 6, 2011, the Company used a portion of the net proceeds of the March 28, 2011 issuance of its 3.25% convertible senior notes, to repay in full the outstanding balance of this lease of $7.0 million. In connection with this repayment, the Company paid a $0.2 million prepayment penalty which was recorded as a debt extinguishment loss, included in other income (expense) in the Company's condensed statement of operations.
 
12

     In January 2010 the Company borrowed $3.7 million from a customer to purchase manufacturing equipment. This loan bears interest at 4.75% and is primarily being repaid with product supplied to the customer. Product valued at $0.3 million and $0.6 million was shipped to the customer and applied against the loan during the three and six month periods ended May 1, 2011, and product valued at $0.2 million was shipped and applied against the loan during the comparable prior year periods. During the three month period ending July 31, 2011, the Company will make a cash payment against this loan of approximately $0.9 million. The Company estimates that the loan will be fully repaid in fiscal 2013.
NOTE 5 - COMMON STOCK WARRANTS
 
     On September 10, 2009, the Company entered into two warrant agreements with Intel Capital Corporation to purchase a total of 750,000 shares of the Company's common stock. Under one warrant agreement 500,000 shares of the Company's common stock can be purchased at an exercise price of $4.15 per share and under the second warrant agreement 250,000 shares of the Company's common stock can be purchased at an exercise price of $5.08 per share. The warrant agreements expire on September 10, 2014. Also on September 10, 2009 the Company and Intel Corporation entered into an agreement to share technical and operations information regarding the development of the Company's products, the capabilities of the Company's photomask manufacturing lines and the alignment of photomask toolsets. Intel Capital Corporation also invested in the Company's September 2009 convertible debt offering. The warrants were recorded at their fair value on their date of grant, which was determined using the Black-Scholes option pricing model. As of January 30,May 1, 2011, none of the warrants had been exercised.
 
     In conjunction with the May 2009 amendment to its then existing credit facility, the Company also entered into a warrant agreement with its lenders. See Notes 4 andNote 6 for further discussion of these warrants.
 
NOTE 6 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
     The Company utilizes derivative instruments to reduce its exposure to the effects of the variability of interest rates and foreign currencies on its financial performance when it believes such action is warranted. Historically, the Company has been a party to derivative instruments to hedge either the variability of cash flows of a prospective transaction or the fair value of a recorded asset or liability. In certain instances, the Company has designated these transactions as hedging instruments. However, whether or not a derivative was designated as being a hedging instrument, the Company's purpose for engaging in the derivative has always been for risk management and not speculative purposes. The Company historically has not been a party to a significant number of derivative instruments and does not expect its derivative activity to significantly increase in the foreseeable future.
 
11

     In addition to the utilization of derivative instruments discussed above, the Company attempts to minimize its risk of foreign currency exchange rate variability by, whenever possible, procuring production materials within the same country that it will utilize the materials in manufacturing, and by selling to customers from manufacturing sites within the country in which the customers are located.
 
     On May 15, 2009, in connection with an amendment to its credit facility, the Company issued 2.1 million warrants, each exercisable for one share of the Company's common stock at an exercise price of $0.01 per share. Forty percent of the warrants (0.8 million) were exercisable upon issuance, and the remaining balance was to become exercisable in twenty percent increments at various points in time after October 31, 2009. As a result of certain net cash settleable put provisions within the warrant agreement, the warrants were recorded as a liability in the Company's consolidated balance sheet. As of the issuance date and for future periods that such warrants remain outstanding, the Company has, and will continue to, adjust the liability based upon the current fair value of the warrants, with any changes in their fair value being recognized in earnings. Due to the warrants' exercise price of $0.01 per share, their fair value will approximate the market price of the Company's common stock. Approximately 1.2 million of these warrants were cancelled as a result of the Company's early repayment of certain amounts under its credit facility during the year ended November 1, 2009, and the associated liability was reduced accordingly (see Note 4 for further discussion).accordingly.
 
13

     A portion of an existing loss on a cash flow hedge in the amount of $0.1 million is expected to be reclassified intoto earnings over the next twelve months.
 
     The table below presents the effect of derivative instruments on the Company's condensed consolidated balance sheets at January 30,May 1, 2011 and October 31, 2010.
 
Derivatives                          
Not Designated        
as Hedging   Fair Value at   Fair Value at
Instruments Under   January 30, October 31,   May 1, October 31,
ASC 815     Balance Sheet Location     2011     2010 Balance Sheet Location 2011 2010
Warrants on common stock Other liabilities $     1,956 $     1,881 Other liabilities $     1,544 $     1,881

     The table below presents the effect of derivative instruments on the Company's condensed consolidated statements of incomeoperations for the three and six month periods ended January 30,May 1, 2011 and January 31,May 2, 2010.
 
Derivatives   Amount of Gain (Loss) Recognized            
Not Designated   Related to Derivative Instruments   Amount of Loss Recognized Related to Derivative Instruments
as Hedging   Three Months Ended Location of Loss Three Months Ended Six Months Ended
Instruments Under Location of Gain (Loss) January 30, January 31, Related to May 1,     May 2,     May 1,     May 2,
ASC 815     Related to Derivative Instruments     2011     2010 Derivative Instruments 2011 2010 2011 2010
Warrants on common stock Investment and other income (expense), net $     (75) $     109 Investment and other income                
        (expense), net $             (745) $             (860) $             (820) $             (751)

NOTE 7 - SHARE-BASED COMPENSATION
 
     In March 2007 shareholders approved a new share-based compensation plan ("Plan"), under which options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance units, and other awards based on, or related to, shares of the Company's common stock may be granted from shares authorized but unissued, or shares previously issued and reacquired by the Company. A maximum of six million shares of common stock may be issued under the Plan. Awards may be granted to officers, employees, directors, consultants, advisors, and independent contractors of the Company or its subsidiaries. In the event of a change in control (as defined in the Plan), the vesting of awards may be accelerated. The Plan, aspects of which are more fully described below, prohibits further awards from being issued under prior plans. The Company incurred total share-based compensation costs for the three and six month periods ended May 1, 2011, of $0.5$0.6 million and $0.6$1.1 million, respectively, and $0.3 million and $0.8 million for the three monthsand six month periods ended January 30,May 2, 2010, respectively. The Company received cash from option exercises of $0.1 million and $0.2 million for the three and six month periods ended May 1, 2011, respectively, and January 31, 2010, respectively.$0.1 million for both the three and six month periods ended May 2, 2010. No share-based compensation cost was capitalized as part of inventory and no related income tax benefits were recorded during the periods presented.
 
1214
 
 

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 on the dates of grant using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of the Company's stock. The Company uses historical option exercise behavior and employee termination data to estimate expected term, which represents the period of time that the options granted are expected to remain outstanding. The risk-free rate of return for the estimated term of the option is based on the U.S. Treasury yield curve in effect at the date of grant. The weighted-average inputs and risk-free rate of return ranges used to calculate the grant date fair value of options issued during the three and six month periods ended January 30,May 1, 2011 and January 31,May 2, 2010, are presented in the following table.
 
 Three Months Ended     Three Months Ended Six Months Ended
 January 30, January 31, May 1,     May 2,     May 1,     May 2,
     2011     2010 2011 2010 2011 2010
Volatility 98.6% 89.3%
Expected volatility 98.8% N/A 98.7% 89.3%
        
Risk free rate of return 1.0% - 1.6% 2.2% - 2.4% 1.9% N/A 1.0 – 1.9% 2.2 – 2.4%
        
Dividend yield 0.0% 0.0% N/A N/A N/A N/A
        
Expected term 4.2 years 4.5 years 4.2 years N/A 4.2 years 4.5 years

     Information on outstanding and exercisable option awards as of January 30,May 1, 2011, is presented below.below:
 
       Weighted   
    Weighted Average   
    Average Remaining Aggregate
    Exercise Contractual Intrinsic
Options     Shares     Price     Life     Value
Outstanding at January 30, 2011      3,944,109 $     9.07      6.6 years $     8,729
Exercisable at January 30, 2011 2,287,515 $13.21 5.2 years $3,370
                   Weighted       
    Weighted Average   
    Average Remaining Aggregate
    Exercise Contractual Intrinsic
Options Shares Price Life Value
Outstanding at May 1, 2011        4,262,841 $      8.94        6.7 years $      14,325
           
Exercisable at May 1, 2011 2,243,185 $13.41 4.9 years $4,703

     There were 251,500369,250 share options granted during the three month period ended January 30,May 1, 2011, with a weighted-average grant date fair value of $4.67$4.81 per share and there were 846,400no share options granted during the three month period ended January 31,May 2, 2010. There were 620,750 share options granted during the six month period ended May 1, 2011, with a weighted-average grant date fair value of $4.75 per share and 846,400 share options granted during the six month period ended May 2, 2010, with a weighted-average grant date fair value of $2.97 per share. As of January 30,May 1, 2011, the total unrecognized compensation cost related to unvestednon-vested option awards was approximately $3.0$3.9 million. That cost is expected to be recognized over a weighted-average amortization period of 3.1 years.
 
15

Restricted Stock
 
The Company periodically grants restricted stock awards. The restrictions on these awards lapse over a service period that has ranged from less-than-one to eight years. There were 176,250No restricted stock awards issuedwere granted during the three month period ended January 30,May 1, 2011, and 176,250 restricted stock awards were granted during the six month period ended May 1, 2011, with a weighted-average grant date fair value of $6.71 per share and there were noshare. No restricted stock awards were granted during the threesix month periodperiods ended January 31,May 2, 2010. As of January 30,May 1, 2011, the total compensation cost not yet recognized related to unvested restricted stock awards was approximately $1.8$1.6 million. That cost is expected to be recognized over a weighted-average amortization period of 2.82.7 years. As of January 30,May 1, 2011, there were 251,639236,389 shares of restricted stock outstanding with an aggregate intrinsic value of $1.6 million.outstanding.
 
13

NOTE 8 - CONSOLIDATION, RESTRUCTURING AND RELATED CHARGESCREDITS
 
     In the third quarter of fiscal 2009, the Company ceased the manufacture of photomasks at its Shanghai, China, facility and recorded an initial restructuring charge of $10.1 million, in the third quarter of fiscal 2009, which included $7.7 million to write down the carrying value of the Company's Shanghai manufacturing facility to its estimated fair value at that time. In the second quarter of fiscal 2010, the Company sold its facility in Shanghai, China, for net proceeds of $12.9 million ($4.2 million of which was received as a deposit in the first quarter of fiscal 2010), which resulted in a gain of $5.4 million. The gain was recorded as a credit to the restructuring reserve in that quarter. On a cumulative basis the Company recorded total net charges of $5.2 million, including $4.7 million of net asset write-downs, through its completion in fiscal 2010. The fair value of the assets written down was determined by management using a market approach. The following table setstables set forth the Company's restructuring reserve related to its Shanghai, China, facility as of January 31,May 2, 2010, and reflects the activity affecting the reserve for the three and six month periodperiods then ended.
 
 Three Months Ended Three Months Ended Six Months Ended
 January 31, 2010 May 2, 2010 May 2, 2010
 November 2,     January 31, February 1, Charges   May 2, November 2, Charges   May 2,
     2009     Charges     Utilized     2010     2010     (credit)     Utilized     2010     2009     (credit)     Utilized     2010
Net gain on sales of assets $ - $(5,020) $5,238 $218 $- $(5,020) $5,238  $218
Employee terminations                        
and other $     134 $     193 $     (327) $     -  -  (9)  9  -  134  184   (318)  -
 $    - $   (5,029) $   5,247 $   218 $   134 $   (4,836) $   4,920  $   218

NOTE 9 - INCOME TAXES
 
     The effective income tax rate differs from the amount computed by applying the U.S. statutory rate of 35% to income before income taxes in the second quarter and the first quarterhalf of fiscal year 2011 primarily due to the impact of the non-deductible debt extinguishment loss recorded in the second quarter of 2011 and a higher level of earnings taxed at lowerlowered statutory rates in foreign jurisdictions,jurisdictions. In the second quarter and in the first quarterhalf of fiscal year 2010, the effective tax rate differed from the U.S. statutory rate primarily because income tax provisions incurred in jurisdictions where the Company generated income before income taxes were, due to valuation allowances, not significantly offset by income tax benefits in jurisdictions where the Company incurred losses before income taxes. Further, in Korea and at PSMC in Taiwan, various investment tax credits have been earned, which reduced the Company’s effective income tax rate.
 
     The Company accounts for uncertain tax positions by recording a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to be taken, in its tax returns. The Company recognizes any interest and penalties related to uncertain tax positions in the income tax provision in its condensed consolidated statementstatements of income.operations.
 
16

     Unrecognized tax benefits associated with uncertain tax positions of $2.0 million, including $0.3 million for interest and penalties, were included in other liabilities in the condensed consolidated balance sheets at January 30,May 1, 2011 and October 31, 2010. Included in these amounts were $0.3 million for interest and penalties in the two periods. If recognized, the benefits would favorably affect the Company's effective income tax rate in future periods. As of January 30,May 1, 2011, the Company believes it is not reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease in the next twelve months. Currently, the statutes of limitations remain open subsequent to, and including, 2006 in the U.S., 2008 in the U.K., 2008 in Germany, 2005 in Korea and 20072009 in Taiwan.
 
14

NOTE 10 - EARNINGS (LOSS) PER SHARE
 
     The calculation of basic and diluted earnings (loss) per share is presented below.
 
 Three Months Ended Three Months Ended Six Months Ended
 January 30, January 31, May 1, May 2, May 1, May 2,
     2011     2010     2011     2010     2011     2010
Net income attributable to Photronics, Inc. $     12,111 $     213 
Net income (loss) attributable to Photronics, Inc. $(16,438) $7,873 $(4,327) $8,086
Effect of dilutive securities:             
Interest expense on convertible notes, net of related tax effects 1,022 - 
Fair value adjustment related to common stock warrants  -  (109)
Earnings for diluted earnings per share $13,133 $104 
Interest expense on convertible notes,        
net of related tax effects  -   1,016  -   -
Earnings (loss) for diluted earnings (loss) per share $(16,438) $8,889 $(4,327) $8,086
Weighted-average common shares computations:             
Weighted-average common shares used for             
basic earnings per share 53,817 53,102 
basic earnings (loss) per share 55,685 53,405 54,751 53,253
Effect of dilutive securities:             
Convertible notes 11,311 -  - 11,311 - -
Share-based payment awards 1,067 991  - 989 - 990
Common stock warrants  216  731   -   75  -   48
Potentially dilutive common shares  12,594  1,722   -   12,375  -   1,038
Weighted-average common shares used for             
diluted earnings per share  66,411  54,824 
Basic earnings per share $0.23 $0.00 
Diluted earnings per share $0.20 $0.00 
diluted earnings (loss) per share  55,685   65,780  54,751   54,291
Basic earnings (loss) per share $(0.30) $0.15 $(0.08) $0.15
Diluted earnings (loss) per share $     (0.30) $     0.14 $     (0.08) $     0.15

17

     In periods in which the Company incurred a net loss, the assumed exercises and vestings of certain outstanding share-based awards had an antidilutive effect. The assumed exercise of certain outstanding common stock warrants and the conversion of convertible senior notes to common stock would also have been antidilutive in the periods that the Company reported a net loss. The table below shows the amounts of incremental weighted-average shares of these share-based payment awards, common stock warrants, and convertible debt that were not considered potentially dilutive common shares in the fiscal periods presented.
  Three Months Ended Six Months Ended
  May 1, May 2, May 1, May 2,
      2011     2010     2011     2010
Convertible notes 13,336 - 14,455 -
Share-based payment awards 1,374 - 1,221 -
Common stock warrants 554 - 535 -
Total potentially dilutive shares excluded 15,264 - 16,211 -

     The table below shows the outstanding weighted-average share-based payment awards and common stock warrants that were excluded from the calculation of diluted earnings per share because their exercise price exceeded the average market value of the common shares for the period or, under application of the treasury stock method, they were otherwise determined to be anti-dilutive. The table also shows convertible notes that, if converted, would have been anti-dilutive in the first fiscal quarter of 2010.anti-dilutive.
 
 Three Months Ended Three Months Ended Six Months Ended
 January 30,     January 31, May 1, May 2, May 1, May 2,
     2011 2010     2011     2010      2011     2010
Convertible notes - - - 11,311
Share-based payment awards 2,816 2,460 2,215 2,844 2,044 2,652
Common stock warrants 299 43 - 747 - 854
Convertible notes - 11,311
Total potentially dilutive shares excluded      3,115      13,814 2,215 3,591 2,044 14,817

     In February 2011, the Company awarded approximately 0.3 million share-based payment awards to its employees, and approximately 0.1 million common stock warrants were exercised.
1518
 
 

NOTE 11 –- GEOGRAPHIC INFORMATION
 
     The Company operates as a single operating segment as a manufacturer of photomasks, which are high precision quartz plates containing microscopic images of electronic circuits for use in the fabrication of ICs and FPDs. Geographic net sales are based primarily on where the Company's manufacturing facility is located. The Company's net sales by geographic area and for ICs and FPDs for the three and six month periods ended January 30,May 1, 2011 and January 31,May 2, 2010 and its long-lived assets by geographic area as of January 30,May 1, 2011, and October 31, 2010, are presented below.
 
 Three Months Ended Three Months Ended Six Months Ended
 January 30, January 31, May 1, May 2, May 1, May 2,
     2011     2010     2011     2010     2011     2010
Net sales            
Asia $     78,691 $     60,807 $79,482 $61,821 $158,173 $122,628
Europe 10,764 9,518 13,046 10,665 23,810 20,182
North America  31,368  27,872  40,575  32,584  71,943  60,457
 $133,103 $105,070 $253,926 $203,267
 $120,823 $98,197
IC $88,801 $74,492 $100,999 $83,996 $189,800 $158,489
FPD  32,022  23,705  32,104  21,074  64,126  44,778
 $120,823 $98,197 $133,103 $105,070 $      253,926 $      203,267
    
 As of As of    
 January 30, October 31, May 1, October 31,    
 2011 2010 2011   2010    
Long-lived assets            
Asia $     220,714 $     221,283 $216,122 $221,283    
Europe 13,506 14,182 12,212 14,182    
North America  152,640  134,349  175,079  134,349    
 $386,860 $369,814 $      403,413 $      369,814    

19

NOTE 12 - FAIR VALUE MEASUREMENTS
 
     Fair value, as defined in     The accounting guidance, is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. An "orderly transaction" is a transaction that assumes exposure to the marketframework for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities (i.e. it is not a forced transaction). The transaction to sell an asset or transfer a liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. Therefore, the objective of adetermining fair value measurement is to determineincludes a hierarchy for ranking the price that would be received to sellquality and reliability of the asset or paid to transfer the liability (an exit price) at the measurement date.
     A fair value measurement further assumes that the hypothetical transaction occurs in the principal (or if no principal market exists, the most advantageous) market for the asset or liability. Further, a fair value measurement assumes a transaction involving the highest and best use of an asset and the consideration of assumptions that would be made by market participants when pricing an asset or liability, such as transfer restrictions or non-performance risk.
16

     Accounting guidance provides a fair value hierarchy that prioritizes the inputs to valuation techniquesinformation used to measure fair value, into three broad levels.which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy gives the highest priority to unadjusted,consists of three tiers as follows: Level 1, defined as quoted market prices in active markets for identical assets or liabilities (including when the liabilities are tradedsecurities; Level 2, defined as assets) while giving the lowest priority to unobservable inputs which are inputs that reflect the Company's assumptions about the factors that market participants would use in valuing assets or liabilities, based upon the best information available under existing circumstances. In cases when the inputs used to measure fair value fall in different levels of the fair value hierarchy, the level within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. When, due to changes in the inputs to valuation techniques used to measure its fair value, an asset or liability is transferred between levels of the fair value hierarchy, the Company recognizes all transfer to or from any level to be as of the beginning of the reporting period. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, including the consideration of factors specific to the asset or liability. The hierarchy consists of the following three levels:
other than Level 1 - Inputs are prices for identical securities in active markets that are accessible at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 are observable, for the asset or liability, either directly or indirectly. At January 30, 2011indirectly; and October 31, 2010, the Company's Level 2 liability consists of its common stock warrants which3, defined as unobservable inputs that are included in other liabilities.not corroborated by market data.
 
Level 3 - Inputs are unobservable inputs for the asset or liability.
17

Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
     The tables below present assets and liabilities as of January 30,May 1, 2011 and October 31, 2010, that are measured at fair value on a recurring basis.
 
      January 30, 2011
  Quoted           
  Prices                       
  in Active Significant       
  Markets Other Significant    
  for Identical Observable Unobservable    
  Instruments Inputs Inputs    
  (Level 1) (Level 2) (Level 3) Total
Common stock warrants $    - $        (1,956) $    - $    (1,956)
Total liabilities $- $(1,956) $- $(1,956)

     October 31, 2010 May 1, 2011
 Quoted                       Quoted        
 Prices      Prices        
 in Active Significant    in Active Significant     
 Markets Other Significant    Markets Other Significant   
 for Identical Observable Unobservable    for Identical Observable Unobservable   
 
Instruments
 Inputs Inputs    Instruments Inputs Inputs   
 (Level 1) (Level 2) (Level 3) Total     (Level 1)     (Level 2)     (Level 3)     Total
Common stock warrants $    - $         (1,881) $    - $    (1,881) $- $(1,544) $- $(1,544)
Total liabilities $- $(1,881) $- $(1,881) $- $(1,544) $- $(1,544)
 October 31, 2010
 Quoted        
 Prices        
 in Active Significant     
 Markets Other Significant   
 for Identical Observable Unobservable   
 Instruments Inputs Inputs   
 (Level 1) (Level 2) (Level 3) Total
Common stock warrants $- $(1,881) $- $(1,881)
Total liabilities $     - $        (1,881) $     - $     (1,881)

     The fair value of the common stock warrants liability was determined using the Black-Scholes option pricing model. A significant observable input into the model included the market price of the Company's common stock at the measurement date. Gains or losses related to fair value adjustments to the common stock warrants liability are included in other income (expense), net.
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
 
     The Company did not have any nonfinancial assets or liabilities measured at fair value on a nonrecurring basis as of January 30,May 1, 2011 and October 31, 2010.
 
20

Fair Value of Other Financial Instruments
 
     The fair values of the Company's cash and cash equivalents, accounts receivable, accounts payable, and certain other current assets and current liabilities approximate their carrying value due to their short-term maturities. The fair value of the Company's variable rate long-term debt approximates its carrying value due to the variable nature of the underlying interest rates.rate. The estimated fair valuevalues of the Company's outstanding3.25% and 5.5% convertible senior notes was approximately $86.7were $131.0 million and $51.6 million, respectively, as of January 30,May 1, 2011, and were $0 and $83.2 million, respectively, as of October 31, 2010.
NOTE 13 - SUBSIDIARY SHARE REPURCHASE
     During the three month period ended May 1, 2011, the board of directors of Photronics Semiconductor Mask Corporation (PSMC), a subsidiary of the Company based in Taiwan, authorized PSMC to repurchase for retirement up to 5% of its outstanding common stock on the open market. The repurchase program, which expired in April 2011, resulted in approximately 7.7 million shares (or approximately 2.7 % of its outstanding shares) being repurchased at a total cost of $3.3 million. PSMC’s repurchase of these shares increased the Company’s ownership of PSMC from 57.53% at October 31, 2010, to 59.14% at May 1, 2011. The tables below present the effect of the change in Photronics, Inc.'s ownership interest in PSMC on the Company's equity for the three and six month periods ended May 1, 2011 and May 2, 2010.
 
18
  Three Months Ended Six Months Ended
  May 1, May 2, May 1, May 2,
  2011 2010 2011 2010
Net (loss) income attributable to Photronics, Inc.     $(16,438)     $7,873     $(4,327)     $8,086
Decrease in Photronics, Inc.'s additional              
       paid-in capital for PSMC's repurchase of              
       7.7 million shares of its common stock  (328)  -  (328)  -
Change from net income attributable              
       to Photronics, Inc. and transfer to              
       noncontrolling interest $     (16,766) $     7,873 $     (4,655) $     8,086

NOTE 1314 - COMMITMENTS AND CONTINGENCIES
 
     As of January 30,May 1, 2011, the Company had commitments outstanding for capital expenditures of approximately $29$6 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 adverse effect on theits business, financial condition or results of the Company.operations.
 
NOTE 14 - RECENT ACCOUNTING PRONOUNCEMENTS
     In July 2010, the FASB amended its guidance on disclosures for financing receivables with the intention of providing additional information to assist financial statement users in assessing an entity's credit risk exposures and evaluating the adequacy of its allowance for credit losses. Upon reviewing the guidance the Company determined that disclosures relating to activity that occurs during and at the end of a reporting period are not applicable to it.
     In September 2009, the FASB issued revised guidance for multiple-deliverable revenue arrangements. This guidance changes the criteria for separating consideration in multiple-deliverable arrangements by establishing a selling price hierarchy for determining the selling price of a deliverable. Under the revised guidance, the selling price for each deliverable in a multiple-deliverable arrangement will, in order of preference and when available, be based on vendor specific objective evidence, third party evidence, or estimated selling price. The revised guidance prescribes that an estimated selling price be determined in a manner that is consistent with that used to determine the price to sell the deliverable on a stand-alone basis, eliminates the residual method of allocation, and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The revised guidance also significantly expands the disclosures related to multiple-deliverable arrangements, and is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption of this guidance by the Company on November 1, 2010 did not have an impact on the Company's consolidated financial statements.
     In June 2009, the FASB issued amended standards for determining whether to consolidate a VIE. The amended standards require an enterprise to perform an analysis to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis is performed in order to identify the primary beneficiary of the variable interest entity as being the enterprise that has certain characteristics described in the amended standards. The amended standards, in addition to other requirements, require an enterprise to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity's financial performance, and mandates ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. During its first quarter of fiscal 2011, the Company adopted the provisions of these amended standards and determined that, similar to the determination made under previous accounting standards, it is not the primary beneficiary of the variable interest entity of which it holds an interest in. Therefore, the Company has continued to account for this interest using the equity method of accounting for investments. See Note 3 for further discussion of the Company’s determination.
1921
 
 

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE 15 - RECENT ACCOUNTING GUIDANCE

     In May 2011 the FASB issued Accounting Standards Update (ASU) No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." which amended its guidance on fair value measurements with the purpose of achieving commonality of its fair value measurement and disclosure requirements with those of International Financial Reporting Standards (IFRSs). ASU No. 2011-04 clarifies the FASBs intentions regarding the application of existing fair value measurement and disclosure requirements, changes certain principles for measuring fair value and changes the disclosure requirements for fair value measurements. ASU No. 2011-04 is to be applied prospectively and is effective during interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the effect, if any, ASU No. 2011-04 will have 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 2010 year), that may cause actual results to materially differ from these expectations.
 
     The Company sells substantially all of its photomasks to semiconductor designers and manufacturers, and manufacturers of FPDs. Photomask technology is also being applied to the fabrication of other higher performance electronic products such as photonics, micro-electronic mechanical systems and certain nanotechnology applications. Thus, the Company's selling cycle is tightly interwoven with the development and release of new semiconductor designs and flat panel applications, particularly as it relates to the semiconductor industry's migration to more advanced design methodologies and fabrication processes. The Company believes that the demand for photomasks primarily depends on design activity rather than sales volumes from products produced using photomask technologies. Consequently, an increase in semiconductor or FPD sales does not necessarily result in a corresponding increase in photomask sales. However, the reduced use of customized ICs, reductions in design complexity, other changes in the technology or methods of manufacturing or designing semiconductors, or a slowdown in the introduction of new semiconductor or FPD designs could reduce demand for photomasks even if demand for semiconductors and FPDs increases. Advances in semiconductor and photomask design and semiconductor production methods could reduce the demand for photomasks. Historically, the semiconductor industry has been volatile, with sharp periodic downturns and slowdowns. These downturns have been characterized by, among other things, diminished product demand, excess production capacity and accelerated erosion of selling prices.
 
     The global semiconductor industry is driven by end markets which have been closely tied to consumer driven applications of high performance semiconductor devices including, but not limited to, communications and mobile 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 back-log 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's ability to remain successful in these environments is dependent upon achieving its goals of being a service and technology leader, an efficient solutions supplier, and a company able to continually reinvest in its global infrastructure.
 
     TheAlthough the Company issued $115 million in convertible senior notes on March 28, 2011, the effects of the weakened global economy and the tightened credit market have mademay make it increasingly difficult for the Company to obtain additional external sources, if necessary, of financing to fund its operations. As the Company continues to face challenges in the current and near term that require it to continue to make significant improvements in its competitiveness, it continues to evaluate further cost reduction initiatives.
 
22

The Company's ability to comply with the financial and other covenants in its debt agreements may be affected by economic or business conditions, or other events. Existing covenant restrictions limit the Company's ability to obtain additional debt financing and, should the Company be unable to meet one or more of these covenants, its lenders may require the Company to repay its outstanding balances prior to the expiration date of the agreements. The Company cannot assure that additional sources of financing would be available to the Company to pay off its long-term borrowings to avoid default. Should the Company default on any of its long-term borrowings, a cross default would occur on certain of its other long-term borrowings, unless amended or waived. As of January 30,May 1, 2011, the Company was in compliance with its debt covenants.
 
20

Material Changes in Results of Operations

Three and Six Months ended January 30,May 1, 2011 versus January 31,and May 2, 2010
 
     The following table represents selected operating information expressed as a percentage of net sales.
 
     Three Months Ended Three Months Ended Six Months Ended
 January 30,     January 31, May 1, May 2, May 1, May 2,
 2011 2010     2011     2010     2011     2010
Net sales            100.0%            100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (74.7) (81.5) (72.6) (79.0) (73.6) (80.2)
Gross margin 25.3  18.5  27.4  21.0  26.4  19.8 
Selling, general and administrative expenses (8.9) (10.4) (8.6) (10.3) (8.7) (10.3)
Research and development expenses (3.1) (4.0) (3.0) (3.4) (3.0) (3.7)
Consolidation, restructuring and related charges -  (0.2)
Consolidation, restructuring and         
related credits -  4.7  -  2.3 
Operating income 13.3  3.9  15.8  12.0  14.7  8.1 
Other income (expense), net 0.8  (2.5)
Net income before income taxes 14.1  1.4 
Debt extinguishment loss (22.8) -  (11.9) - 
Other expense, net (1.9) (2.0) (0.7) (2.3)
Net income (loss) before income taxes (8.9) 10.0  2.1  5.8 
Income tax provision (2.9) (1.0) (2.4) (1.8) (2.7) (1.4)
Net income 11.2  0.4 
Net income attributable to noncontrolling interests (1.2) (0.2)
Net income attributable to Photronics, Inc. 10.0% 0.2%
Net income (loss) (11.3) 8.2  (0.6) 4.4 
Net income attributable to         
noncontrolling interests (1.0) (0.7) (1.1) (0.4)
Net income (loss) attributable to         
Photronics, Inc.       (12.3)%       7.5%       (1.7)%       4.0%

     Note: All of the following tabular comparisons, unless otherwise indicated, are for the three months ended January 30,May 1, 2011 (Q1-11)(Q2-11) and January 31,May 2, 2010 (Q1-10)(Q2-10) and for the six months ended May 1, 2011 (YTD-11) and May 2, 2010 (YTD-10) in millions of dollars.
 
Net Sales
 
     Three Months Ended   Three Months Ended Six Months Ended
             Percent      Percent     Percent
 Q1-11 Q1-10 Change     Q2-11     Q2-10     Change     YTD-11     YTD-10     Change
IC $    88.8 $      74.5      19.2% $101.0 $84.0 20.2% $189.8 $158.5 19.8%
FPD  32.0  23.7 35.1%  32.1  21.1 52.3%  64.1  44.8 43.2%
Total net sales $120.8 $98.2 23.0% $133.1 $105.1 26.7% $253.9 $203.3 24.9%

23

     Net sales for Q1-11Q2-11 increased 23.0%26.7% to $120.8$133.1 million as compared to $98.2$105.1 million for Q1-10.Q2-10. The increase was due to increases in both IC and FPD photomask sales, primarily as a result of increased high-end unit demand, which typically have higher average selling prices (ASPs). To a lesser extent, mainstream IC photomasks also had increased sales.sales, primarily for FPDs. Revenues attributable to high-end products increased by $14.9$17.4 million to $39.2$43.5 million in Q1-11Q2-11 as compared to $24.3$26.1 million in Q1-10.Q2-10. High-end photomask applications include mask sets for 65 nanometer and below for IC products and G7 and above technologies for FPD products. By geographic area, net sales increased in Asia in Q1-11,Q2-11 as compared to Q1-10, $17.9Q2-10 increased by $17.7 million or 29.4%,28.6% in Asia, increased by $8.0 million or 24.5% in North America, and increased by $3.5$2.4 million or 12.5%, and increased22.3% in Europe by $1.2 million or 13.1%.Europe. As a percent of total sales, in Q2-11 net sales net sales in Q1-11were 60% in Asia, were 65%,30% in North America, 26%, and Europe 9%;10% in Europe; and net sales in Q1-10Q2-10 in Asia were 62%59%, North America 28%31%, and Europe 10%.
 
21     Net sales for YTD-11 increased 24.9% to $253.9 million as compared to $203.3 million for YTD-10. The increase was due to increased sales of both IC and FPD photomasks. IC photomask sales increased $31.3 million primarily as a result of increased units for both high-end and mainstream products. FPD photomask sales increased $19.3 million, primarily as a result of increased units and ASPs for both high-end and mainstream products. The Company's quarterly revenues can be affected by the seasonal purchasing of its customers. Although 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, such seasonality was not experienced during YTD-11.
 

Gross Margin
 
     Three Months Ended Three Months Ended Six Months Ended
             Percent Percent Percent
 Q1-11 Q1-10 ChangeQ2-11      Q2-10      Change      YTD-11      YTD-10      Change
Gross margin $    30.6 $    18.2       68.3%$      36.5 $      22.1         65.2% $      67.1 $      40.3         66.6%
Percentage of net sales 25.3% 18.5%  27.4% 21.0% 26.4% 19.8%   

     Gross margin percentage increased to 25.3%27.4% in Q1-11 as comparedQ2-11 from 21.0% in Q2-10 and increased to 18.5%26.4% in Q1-10 asYTD-11 from 19.8% in YTD-10. These increases were a result of increased FPD and IC sales, as well as increased sales in all geographic regions, including increased high-end sales which have higher ASPs.sales. 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 Three Months Ended Six Months Ended
             Percent Percent Percent
 Q1-11 Q1-10 ChangeQ2-11      Q2-10      Change      YTD-11      YTD-10      Change
S, G & A expenses $    10.7 $    10.1       5.6%
Selling, general and   
administrative expenses$      11.5  $      10.9         5.3% $      22.2  $      21.0         5.4%
Percentage of net sales 8.9% 10.4%  8.6% 10.3% 8.7% 10.3%   

24

     Selling, general and administrative expenses increased $0.6 million to $10.7$11.5 million in Q1-11Q2-11, compared with $10.9 million in Q2-10, and to $22.2 million in YTD-11 as compared to $10.1$21.0 million in Q1-10,YTD-10. These increases were primarily due to increased employee compensation and related benefit expenses, and increased selling expenses.
 
Research and Development
 
     Three Months Ended  Three Months Ended Six Months Ended
             Percent Percent Percent
 Q1-11 Q1-10 ChangeQ2-11      Q2-10      Change      YTD-11      YTD-10      Change
R&D expenses $    3.8 $    4.0       (4.6)%
Research and development$      3.9  $      3.6         9.4% $      7.7  $      7.6         2.1%
Percentage of net sales 3.1% 4.0%   3.0% 3.4%   3.0% 3.7%   

     Research and development expenses consist primarily of global development efforts related to high-end process technologies for advanced sub-wavelength reticle solutions for IC and FPD technologies. Research and development expenses decreased $0.2increased by $0.3 million to $3.9 million in Q1-11Q2-11, as compared to Q1-10,$3.6 million in Q2-10. On a YTD basis, research and development expenses increased $0.1 million to $7.7 million in YTD-11, as compared to $7.6 million in YTD-10. The increase in research and development expenses in Q2-11 and YTD-11 as compared to the same periods in the prior year were primarily as a result of decreaseddue to increased expenditures in the U.S.Asia.
 
Consolidation, Restructuring and Related ChargesCredits
 
      Three Months Ended
  Q1-10     Q1-10
Employee terminations $    - $    0.2
Asset write-downs  -  -
Total consolidation, restructuring and related charges $- $0.2

22
 Three Months Ended Six Months Ended
 Q2-11      Q2-10      YTD-11      YTD-10
Net gain on sales of assets$      - $          (5.0) $      - $      (5.0)
Employee terminations and other -  -   -  0.2 
              
Total consolidation, restructuring             
       and related credits$- $(5.0) $- $(4.8)

     In the third quarter of fiscal 2009, the Company ceased the manufacture of photomasks at its Shanghai, China, facility. In connection with this restructuring, the Company has recorded total net charges of $5.2 million, including $4.7 million of net asset write-downs through its completion in fiscal 2010. The fair value of the assets written down was determined by management using a market approach. Approximately 75 employees were affected by this restructuring.
 
     The Company recorded an initial restructuring charge of $10.1 million in the third quarter of fiscal 2009, which included $7.7 million to write down the carrying value of the Company's Shanghai manufacturing facility to its estimated fair value at that time. In the second quarter of fiscal 2010, the Company sold its facility in Shanghai, China, for net proceeds of $12.9 million, ($4.2 million of which was received as a deposit in the first quarter of fiscal 2010), which resulted in a gain of $5.4 million. The gain was recorded as a credit to the restructuring reserve in that quarter.
 
Other Income (Expense),Expense, net
 
      Three Months Ended
  Q1-11     Q1-10
Interest expense $        (1.7) $        (2.9)
Investment and other income, net  2.7   0.4 
Other income (expense), net $1.0  $(2.5)
 Three Months Ended Six Months Ended
 Q2-11      Q2-10      YTD-11      YTD-10
Debt extinguishment loss$      (30.3) $      -  $      (30.3) $      - 
Interest expense (1.9)  (3.1)  (3.6)  (6.0)
Investment and other               
       income (expense), net (0.7)  0.9   2.0   1.4 
Other expense, net$(32.9) $(2.2) $(31.9) $(4.6)

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     In the second quarter of fiscal 2011 the Company acquired $30.4 million aggregate principal amount of its 5.5% convertible senior notes by delivering $19.7 million in cash and approximately 4.5 million shares of its common stock, with an approximate fair value of $39.2 million. In connection with this acquisition the Company recorded a debt extinguishment loss of $30.1 million, which included the write-off of $1.7 million of deferred financing fees. A portion of the net proceeds of the Company’s March 28, 2011, 3.25% convertible senior notes offering was used to repay these obligations.
     Interest expense decreased in Q1-11Q2-11 as compared to Q1-10Q2-10 and in YTD-11 as compared to YTD-10, primarily as a result of a $1.0 million write-off of deferred financing fees in Q2-10 in connection with an amendment of the Company's credit facility. Interest expense in YTD-11 decreased as compared to YTD-10 also as a result of lower debt levelsweighted average borrowings and lower average interest rates on the Company's long-term borrowings.rates.
     Investment and other income net, increased primarily(expense) decreased in Q2-11 as compared to Q2-10 by $1.6 million due to more favorableunfavorable foreign currency transaction resultsresults. On a comparative YTD basis, investment and other income (expense) increased by $0.6 million due to higher interest and investment income, associated with increased cash balances.which was offset in part by reduced foreign currency transaction gains.
 
Provision for Income TaxesTax Provision
 
      Three Months Ended
  Q1-11     Q1-10
Income tax provision $3.5 $1.0
 Three Months Ended Six Months Ended
 Q2-11      Q2-10      YTD-11      YTD-10
Income tax provision$         (3.3) $         (1.9) $         (6.7) $         (2.9)

     The effective income tax rate differs from the amount computed by applying the U.S. statutory rate of 35% to income before income taxes in the second quarter and the first quarterhalf of fiscal year 2011 primarily due to the impact of the non-deductible debt extinguishment loss recorded in the second quarter of 2011 and a higher level of earnings taxed at lowerlowered statutory rates in foreign jurisdictions,jurisdictions. In the second quarter and in the first quarterhalf of fiscal year 2010, the effective tax rate differed from the U.S. statutory rate primarily because income tax provisions incurred in jurisdictions where the Company generated income before income taxes were, due to valuation allowances, not significantly offset by income tax benefits in jurisdictions where the Company incurred losses before income taxes. Further, in Korea and at PSMC in Taiwan, various investment tax credits have been earned, which reduced the Company’s effective income tax rate.
 
     PKLT, the Company's FPD manufacturing facility in Taiwan, is accorded a tax holiday which commences in 2012 and expires in 2017. The availability of this tax holiday did not have a significant impact on the Company's decision to increase its Asian presence, as the Company's decision was in response to fundamental changes that took place in the semiconductor industry. This tax holiday had no dollar or per share effect in the threesix month periods ended January 30,May 1, 2011 and January 31,May 2, 2010.
 
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Net Income Attributable to Noncontrolling Interests
 
     Net income attributable to noncontrolling interests increased $1.3$0.7 million to $1.5$1.4 million in Q1-11Q2-11 as compared to Q1-10,Q2-10, primarily due to increased net income at the Company's non-wholly owned subsidiary in Taiwan. The Company's ownershipYear to date, net income attributable to noncontrolling interests increased to $2.9 million in its2011 as compared to $0.9 million in 2010, primarily as a result of increased net income at the Company’s non-wholly owned subsidiary in Taiwan wasTaiwan.
     During the three month period ended May 1, 2011, the board of directors of PSMC authorized PSMC to repurchase for retirement up to 5% of its outstanding common stock. The program, which expired in April, 2011, resulted in approximately 58%7.7 million shares (or 2.7% of its outstanding shares) being purchased at January 30, 2011 anda total cost of $3.3 million. PSMC’s repurchase of these shares increased the Company’s ownership percentage in PSMC from 57.53% at October 31, 2010, and itsto 59.14% at May 1, 2011. The Company’s ownership percentage in its subsidiary in Korea was approximately 99.7% at January 30,May 1, 2011 and October 31, 2010.
 
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Liquidity and Capital Resources
 
     The Company's working capital was $81.5$179.5 million at January 30,May 1, 2011, and $86.6 million at October 31, 2010. The decreaseincrease in working capital was primarily related to net proceeds of the Company’s issuance of 3.25% convertible debt, offset in part by repayments of certain other higher interest rate long-term borrowings. Cash and cash equivalents increased to $112.7$186.1 million at January 30,May 1, 2011, as compared to $98.9 million at October 31, 2010, primarily due to increased cash generated from operations and the issuance of 3.25% convertible debt, which was partially offset by payments for capital expenditures and repayments of certain other long-term borrowings. Net cash provided by operating activities was $41.7$64.0 million in Q1-11,for the six month period ended May 1, 2011, as compared to $16.4$33.8 million in Q1-10,for the six month period ended May 2, 1010, the increase primarily being due to the Company's increased net income before recognition of the non-cash portion of the debt extinguishment losses of $23.5 million and increases in accounts payable and accrued liabilities primarily related to capital expenditures.liabilities. Net cash used in investing activities for the three monthssix month period ended January 30,May 1, 2011, was $23.1$48.0 million, which was primarily comprised primarily of capital expenditure payments.payments and an increased investment in the MP Mask joint venture. Net cash used inprovided by financing activities of $7.2$64.6 million for the three monthssix month period ended January 30,May 1, 2011, was primarily comprised of net repaymentsproceeds from the March 2011 issuance of 3.25% convertible notes, partially offset by repayment of certain other long-term borrowings.
 
     On March 28, 2011, the company issued $115 million aggregate principal amount of 3.25% convertible senior notes. Net proceeds realized from the sale of the notes, which mature on April 1, 2016, and pay interest semiannually commencing on October 1, 2011, were approximately $110.5 million.
     During the three month period ended May 1, 2011, the Company used $19.7 million of the net proceeds of the 3.25% convertible senior note sale and issued common stock to extinguish approximately $30.4 million principal amount of its 5.5% convertible senior notes, and used an additional $19.8 million of the net proceeds to repay its outstanding principal obligations under capital leases. The Company'sCompany may use the remaining net proceeds to retire additional debt and for capital expenditure and working capital purposes.
     On March 18, 2011, the Company and its lenders amended its revolving credit facility. Under the terms of the amended credit facility, ("the credit facility") provides for a maximum borrowing capacity oftotal amount available to the Company to borrow was reduced from $65 million to $30 million. The credit facility bears interest (2.75% at May 1, 2011), based on the Company’s total leverage ratio, at LIBOR plus a spread, (3.8% at January 30, 2011), as defined in the agreement, based uponagreement.
     The credit facility is secured by substantially all of the Company'sCompany’s assets located in the United States, as well as common stock the Company owns in certain of its foreign subsidiaries, and is subject to the following financial covenants: minimum fixed charge ratio, total leverage ratio. Onratio and minimum unrestricted cash balance.
     In January, 5, 2011 a $10 million irrevocable stand-by letter of credit for the purchase of manufacturing equipment was issued under the Company's revolving credit facility. As of January 30,May 1, 2011, the Company had no outstanding borrowings under the credit facility and $55$20 million was available for borrowing.
 
     The credit facility,On April 29, 2011, the Company entered into a 5 year, $21.2 million capital lease of manufacturing equipment. Payments under the lease, which matures on February 12, 2013, is secured by substantially allbears interest at 3.09%, are $0.4 million per month through March 2016. As of May 1, 2011, the total lease amount payable through the end of the Company's assets in the United States as well as common stock the Company owns in certainlease term was $22.5 million, of its foreign subsidiaries. The credit facility is subject to the following financial covenants: fixed charge coverage ratio, total leverage ratio, minimum unrestricted cash balance,which $20.9 million represented principal and maximum capital expenditures, all as defined in the agreement.$1.6 million represented interest.
 
     At January 30, 2011, the Company had capital commitments outstanding of approximately $29 million, primarily for investment in high-end IC photomask manufacturing capability. Photronics 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)period-to-period), as it operates in a high fixed cost environment. Depending on conditions in the IC semiconductor and FPD market,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. Historically, in certain years the Company has used external financing to partially 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. The Company may, from time to time, opportunistically repurchase its convertible senior notes, in open market or privately negotiated transactions, on terms it believes to be favorable.
 
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Share-Based Compensation
 
     Total share-based compensation expense for the three and six month periods ended May 1, 2011, was $0.6 million and $1.1 million, respectively, as compared to $0.5 million and $0.6$1.0 million, respectively, for the three monthcomparable prior year periods, ended January 30, 2011 and January 31, 2010, respectively,substantially all of which is recorded in selling, general and administrative expenses. No compensation cost was capitalized as part of inventory, and no related income tax benefit was recorded in either period.has been recorded. As of January 30,May 1, 2011, total unrecognized compensation cost of $4.9$5.5 million is expected to be recognized over a weighted-average amortization period of 2.93.0 years.
 
Off-Balance Sheet Arrangements
 
     Under the operating agreement related to the MP Mask joint venture, operating agreement, in order to maintain its 49.99% ownership interest, the Company may be requestedrequired to make additional capital contributions to the joint venture up to the maximum amount specifieddefined in the operating agreement. However, should the Board of Managers determine that further additional funding is required, the joint venture shall pursue its own financing. If the joint venture is unable to obtain its own financing, it may request additional capital contributions from the Company. Should the Company choose not to make a requested contribution to the joint venture, its ownership interestpercentage may be reduced. Cumulatively, through January 30,May 1, 2011, including a contribution of $4.0 million made in Q1-11, the Company has contributed $10.1$16.3 million to the joint venture, and has received distributions from the joint venture totaling $10.0 million. During the three and six month periods ended May 1, 2011, the Company increased its investment in MP Mask by $6.2 million and $10.2 million, respectively, primarily related to capital calls requested by the joint venture. The Company received no distributions from the joint venture during the six month period ended May 1, 2011. During the six month period ended May 2, 2010, there were no contributions made to the joint venture by the Company, and no distributions were received by the Company from the joint venture.
 
     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. On May 19, 2009, the Company and Micron Technologies, Inc. (Micron) entered into a new lease agreement for the U.S. nanoFab building and cancelled its prior lease agreement. The new lease, among other changes discussed in Note 4 to the condensed consolidated financial statements, extends the lease term from December 31, 2012 to December 31, 2014. The Company will continue to account for the lease as a capital lease for the remainder of its original term and account for it as an operating lease for the period of the lease extension. Rental payments due during the lease extension period total $13.9 million.
 
Business Outlook
 
     A majority of the Company's revenue growth is expected 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 benefits from advanced technology it may utilize under its technology license with Micron. The Company's Korean and Taiwanese operations are non-wholly owned subsidiaries, therefore, a portion of earnings generated at each of these locations is allocated to noncontrolling interests.
 
     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 1415 of the condensed consolidated financial statements for a summary of recent accounting pronouncements that may affect the Company'sCompany’s financial reporting.
 
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ItemITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     The Company records derivatives on the condensed consolidated balance sheets as assets or liabilities, measured at fair value. The Company does not engage in derivative instruments for speculative purposes. Gains or losses resulting from changes in the values of those derivatives are reported in the condensed consolidated statements of operations, or as accumulated other comprehensive income, a separate component of shareholders' equity, depending on the use of the derivatives and whether they qualify for hedge accounting. In order to qualify for hedge accounting, among other criteria, the derivative must be a hedge forof an interest rate, price, foreign currency exchange rate, or credit risk, that is expected to be highly effective at the inception of the hedge and be highly effective in achieving offsetting changes in the fair value or cash flows of the hedged item during the term of the hedge, and formally documented at the inception of the hedge. In general, the types of risks hedged are those related to the variability of future cash flows caused by movements in foreign currency exchange and interest rates. The Company documents its risk management strategy and hedge effectiveness at the inception of, and during the term of each hedge.
 
Foreign Currency Exchange Rate Risk
 
     The Company conducts business in several major international currencies through its worldwide operations and is subject to changes in foreign exchange rates of such 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 Korean won, the New Taiwan dollar, and the Singapore dollar. The functional currencies of the Company's European subsidiaries are the British pound sterling and the euro.
 
     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. In some instances, the Company may sell or purchase products in a currency other than the functional currency of the country where it was produced. 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 currencies against the U.S. dollar. In certain recent years the Company experienced significant foreign exchange losses on these transactions.
 
     The Company's primary net foreign currency exposures as of January 30,May 1, 2011 included the Korean won, the Japanese yen, the Singapore dollar, the New Taiwan dollar, the British pound, and the euro. As of January 30,May 1, 2011, a 10% adverse movement in the value of these currencies against the U.S. dollar would have resulted in a net unrealized pre-tax loss of $2.8 million. The Company does not believe that a 10% change in the exchange rates of other non-U.S. dollar currencies would have a material effect on its consolidated financial position, results of operations, or cash flows.
 
Interest Rate Risk
 
     At January 30,May 1, 2011, the Company did not have any variable rate borrowings. Accordingly, a 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 six month period ended January 30,May 1, 2011.
 
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Item 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
     The Company has established and currently maintains disclosure controls and procedures designed to ensure that information required to be disclosed in its reports filed under the Securities Exchange Act of 1934 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'sCompany’s management, under the supervision and with the participation of the Company'sCompany’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company'sdesign and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based onupon that evaluation the Company’s chief executive officer and chief financial officer concluded that the Company'sCompany’s disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report, were designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (ii) accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding disclosure.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 firstsecond quarter of fiscal 2011 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
 
There have been no material changes to risks relating to the Company's business as disclosed in Part 1, Item 1A of the Company's Form 10-K for the year ended October 31, 2010.2010.
 
Item 6. EXHIBITS
 
          (a)     Exhibits      
       
    Exhibit  
    Number Description
4.5
Indenture dated March 28, 2011 between the Company and Bank of Nova Scotia Trust Company of New York (incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K filed on March 29, 2011).
4.6First Supplemental Indenture dated April 27, 2011 between the Company and Bank of Nova Scotia Trust Company of New York.
10.40Executive Employment Agreement between the Company and Soo Hong Jeong dated May 31, 2011.
    31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
    31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
    32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
    32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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: March 3,June 8, 2011

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