<Page>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________to__________________
Commission file number 0-15451
PHOTRONICS, INC
----------------------
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-0854886
--------------- -----------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1061 EAST INDIANTOWN ROAD, JUPITER, FL 33477
- ----------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(561) 745-1222
--------------------
(Registrant's telephone number, including area code)
---------------------------------------------------
(Former name, former address and former 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 /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 2, 2002
COMMON STOCK, $.01 PAR VALUE 31,977,706 SHARES
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PHOTRONICS, INC.
AND SUBSIDIARIES
INDEX
<Table>
<Caption>
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
at July 31, 2002 (unaudited) and
October 31, 2001 3 - 4
Condensed Consolidated Statements of
Operations for the Three and Nine Months
Ended July 31, 2002 (unaudited) and
July 31, 2001 (unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended
July 31, 2002 (unaudited) and
July 31, 2001 (unaudited) 6
Notes to Condensed Consolidated
Financial Statements (unaudited) 7 - 12
Item 2. Management's Discussion and Analysis
of Results of Operations and
Financial Condition 12 - 17
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 17 - 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
</Table>
2
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PART I. FINANCIAL INFORMATION
ITEM I. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PHOTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<Table>
<Caption>
JULY 31, OCTOBER 31,
2002 2001
----------- ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 133,698 $ 34,684
Short term investments 15,274 -
Accounts receivable, net 68,782 70,704
Inventories 19,718 21,492
Deferred income taxes and
other current assets 39,706 24,516
--------- ---------
Total current assets 277,178 151,396
Property, plant and equipment, net 448,336 402,776
Intangible assets, net 121,884 93,199
Investments and other assets 22,785 26,167
--------- ---------
$ 870,183 $ 673,538
========= =========
</Table>
See accompanying notes to condensed consolidated financial statements.
3
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PHOTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<Table>
<Caption>
JULY 31, OCTOBER 31,
2002 2001
----------- ----------
(UNAUDITED)
Current liabilities:
Current portion of long-term debt $ 7,979 $ 33,918
Accounts payable 31,396 37,142
Other accrued liabilities 31,429 31,604
--------- ---------
Total current liabilities 70,804 102,664
Long-term debt 351,390 188,021
Deferred income taxes and other liabilities 49,301 50,682
--------- ---------
Total liabilities 471,495 341,367
Minority interest 44,122 45,010
Commitments and contingencies
Shareholders' 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, 31,953 shares issued and
outstanding at July 31, 2002 and
30,276 shares issued and outstanding at
October 31, 2001 320 303
Additional paid-in capital 194,792 146,378
Retained earnings 168,671 163,220
Accumulated other comprehensive loss (8,917) (22,740)
Deferred compensation on restricted stock (300) -
--------- ---------
Total shareholders' equity 354,566 287,161
--------- ---------
$ 870,183 $ 673,538
========= =========
</Table>
See accompanying notes to condensed consolidated financial statements.
4
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PHOTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
Three Months Ended Nine Months Ended
------------------------- ----------------------
July 31, July 31, July 31, July 31,
2002 2001 2002 2001
---------- ---------- ---------- ---------
Net sales $ 98,070 $ 85,016 $ 296,813 $ 284,145
Costs and expenses:
Cost of sales 69,992 60,569 209,011 188,033
Selling, general and administrative 15,075 12,979 43,629 39,590
Research and development 7,692 6,250 22,276 18,236
Consolidation, restructuring and related charges - - - 38,100
--------- --------- --------- ---------
Operating income 5,311 5,218 21,897 186
Other expenses, net (4,060) (2,080) (11,252) (6,693)
--------- --------- --------- ---------
Income (loss) before income taxes
and minority interest 1,251 3,138 10,645 (6,507)
Income tax (benefit) provision (900) 500 400 (4,000)
--------- --------- --------- ---------
Income (loss) before minority interest 2,151 2,638 10,245 (2,507)
Minority interest in income of
consolidated subsidiaries (966) (861) (4,794) (3,505)
--------- --------- --------- ---------
Net income (loss) $ 1,185 $ 1,777 $ 5,451 $ (6,012)
========= ========= ========= =========
Earnings (loss) per share:
Basic $ 0.04 $ 0.06 $ 0.18 $ (0.20)
========= ========= ========= =========
Diluted $ 0.04 $ 0.06 $ 0.17 $ (0.20)
========= ========= ========= =========
Weighted average number of common
shares outstanding:
Basic 31,895 29,972 31,030 29,865
========= ========= ========= =========
Diluted 32,237 29,972 31,783 29,865
========= ========= ========= =========
</Table>
See accompanying notes to condensed consolidated financial statements.
5
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PHOTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Nine Months Ended
---------------------------------
July 31, July 31,
2002 2001
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 5,451 $ (6,012)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 61,807 54,779
Deferred taxes and other 425 (5,312)
Consolidation, restructuring and related charges - 38,100
Changes in assets and liabilities:
Accounts receivable 4,655 887
Inventories 2,889 476
Other current assets (4,991) 820
Accounts payable and accrued liabilities (623) 5,574
--------- --------
Net cash provided by operating activities 69,613 89,312
--------- --------
Cash flows from investing activities:
Investment in photomask operations - (33,798)
Deposits on and purchases of property,
plant and equipment (88,416) (38,570)
Purchase of investments (15,274) -
Other (1,362) 4,042
--------- --------
Net cash used in investing activities (105,052) (68,326)
--------- --------
Cash flows from financing activities:
Repayments of long-term debt (68,224) (36,664)
Proceeds from issuance of common stock 4,467 5,973
Proceeds from issuance of convertible debt, net 193,237 -
--------- --------
Net cash provided by (used in) financing activities 129,480 (30,691)
--------- --------
Effect of exchange rate changes on cash flows 4,973 (3,771)
--------- --------
Net increase (decrease) in cash 99,014 (13,476)
Cash and cash equivalents at beginning of period 34,684 38,182
--------- --------
Cash and cash equivalents at end of period $ 133,698 $ 24,706
========= ========
Cash paid during the period for:
Interest $ 13,150 $ 9,164
Income taxes $ 987 $ 239
</Table>
See accompanying notes to condensed consolidated financial statements.
6
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PHOTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JULY 31, 2002 AND 2001
(UNAUDITED)
NOTE 1 - BUSINESS AND BASIS OF PRESENTATION
Photronics, Inc. and its subsidiaries (the "Company" or "Photronics")
manufacture 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 are used as masters to transfer
circuit patterns onto semiconductor wafers during the fabrication of integrated
circuits and, to a lesser extent, other types of electrical components. The
Company operates principally from 10 facilities, four of which are located in
the United States, three in Europe and one each in Korea, Singapore and Taiwan.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States 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 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 full year ending November 3, 2002. Certain amounts in the
condensed consolidated financial statements for prior periods have been
reclassified to conform to the current presentation. 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, 2001.
NOTE 2 - ACQUISITION OF PKL LTD.
In 2001, the Company completed the acquisition of a majority equity
interest (approximately 51%) in PKL Ltd. ("PKL"), a leading Korean photomask
supplier, for $56 million. In April 2002, the Company acquired an additional 28%
of PKL in exchange for 1,212,218 shares of Photronics common stock. The
acquisition was accounted for as a purchase and accordingly goodwill in the
aggregate of $69.4 million was recorded. The operating results of PKL have been
included in the Company's Consolidated Statements of Operations since August 27,
2001. Had the acquisition of PKL occurred at the beginning of fiscal 2001, the
unaudited pro forma condensed consolidated net sales for the three and nine
months ended July 31, 2001 would have been $97.8 million and $318.1 million,
respectively, the pro forma net income (loss) would have been $4.4 million and
$(5.1) million, respectively, and income (loss) per share would have been $0.15
and $(0.17) per share, respectively. In management's opinion, these unaudited
pro forma amounts are not necessarily indicative of what the actual combined
results of operations might have been if the acquisition of PKL had been
effective at the beginning of the periods presented.
7
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NOTE 3 - COMPREHENSIVE INCOME (LOSS)
The following table summarizes comprehensive income (loss) for the three
and nine months ended July 31, 2002 and 2001 (in thousands):
<Table>
<Caption>
Three Months Ended Nine Months Ended
------------------------ ----------------------
July 31, July 31, July 31, July 31,
2002 2001 2002 2001
--------- --------- --------- ---------
Net income (loss) $ 1,185 $ 1,777 $ 5,451 $ (6,012)
Other comprehensive income (loss):
Unrealized gain (loss) on investments, net (854) 4,112 (2,036) 2,621
Foreign currency translation adjustments 14,706 (3,344) 16,549 (9,519)
Net change in cash flow hedges - - (690) -
-------- -------- -------- ---------
13,852 768 13,823 (6,898)
-------- -------- -------- ---------
$ 15,037 $ 2,545 $ 19,274 $ (12,910)
======== ======== ======== =========
</Table>
For fiscal year 2002, the foreign currency translation gain primarily
resulted from the appreciation of the Korean won, British pounds sterling and
New Taiwan dollar as compared to the U.S. dollar. The Company's foreign currency
translation adjustment amounts relate to investments which are permanent in
nature, and as a result no provision for income taxes is necessary.
NOTE 4 - EARNINGS PER SHARE
Earnings per share ("EPS") amounts are calculated in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings Per Share." Basic EPS is based on the weighted average number of
common shares outstanding for the period, excluding any dilutive common share
equivalents. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted.
A reconciliation of basic and diluted EPS for the three and nine months
ended July 31, 2002 and 2001, respectively, follows (in thousands, except per
share amounts):
<Table>
<Caption>
AVERAGE
NET SHARES EARNINGS
INCOME OUTSTANDING PER SHARE
--------- ------------- ---------
THREE MONTHS
2002:
Basic $ 1,185 31,895 $ 0.04
Effect of potential dilution
from exercise of stock options (a) - 342
-------- ------ ------
Diluted $ 1,185 32,237 $ 0.04
======== ====== ======
2001:
Basic and diluted (b) $ 1,777 29,972 $ 0.06
======== ====== ======
</Table>
8
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<Table>
<Caption>
NET AVERAGE EARNINGS
INCOME SHARES (LOSS)
(LOSS) OUTSTANDING PER SHARE
------ ------------ ---------
NINE MONTHS
2002:
Basic $ 5,451 31,030 $ 0.18
Effect of potential dilution
from exercise of stock options (a) - 753 (0.01)
-------- ------ -------
Diluted $ 5,451 31,783 $ 0.17
======== ====== =======
2001:
Basic and diluted (b) $ (6,012) 29,865 $ (0.20)
======== ====== =======
</Table>
(a) The effect of the conversion of the Company's convertible notes for the
three and nine months ended July 31, 2002 is anti-dilutive. If the
assumed conversion of convertible subordinated notes had been dilutive,
the incremental additional shares outstanding would have been 9,098 and
8,197 for the three and nine months ended July 31, 2002, respectively.
(b) The effect of stock options and the conversion of the Company's
convertible notes for the three and nine months ended July 31, 2001 is
anti-dilutive. If the assumed exercise of stock options and conversion of
convertible subordinated notes had been dilutive, the incremental
additional shares outstanding would have been 4,413 and 4,510 for the
three and nine months ended July 31, 2001, respectively.
NOTE 5 - LONG-TERM DEBT
On December 12, 2001 the Company sold $200 million of 4.75% Convertible
Subordinated Notes due 2006 ("Notes") in a private offering pursuant to SEC Rule
144A. The Notes are convertible into the Company's common stock at a conversion
price of $37.00 per share. Net proceeds from the issuance amounted to
approximately $193.4 million. Concurrent with the issuance of the Notes, on
December 12, 2001 the Company repaid all of the outstanding borrowings under its
former Revolving Credit Agreement which amounted to $57.7 million and terminated
the agreement.
In July 2002, the Company entered into a credit agreement with a group of
financial institutions that provides for a three-year, revolving credit facility
(the "credit facility") with an aggregate commitment of $100 million. The credit
facility, which allows for borrowings in various currencies, includes a
provision for an increase in the aggregate commitment up to $125 million upon
the conversion of at least 50% of the Company's $103 million, 6% outstanding
convertible notes. The applicable interest rate spread and facility fee varies
dependent upon the Company's senior leverage ratio. As of July 31, 2002 $100
million was available under the facility. The Company is subject to compliance
with and maintenance of certain financial and other covenants. The credit
facility is secured by a pledge of the Company's stock in certain of its
subsidiaries.
The revolving credit facility provides management with the ability to
refinance a portion of its debt on a long-term basis. At July 31, 2002, $30
million in outstanding borrowings due over the course of the next year were
9
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classified as long term debt based on the Company's ability and intent to
refinance these borrowings on a long-term basis.
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
Effective November 1, 2001 the Company adopted "SFAS" No. 142, "Goodwill
and Other Intangible Assets." The standard changes the accounting for goodwill
and intangible assets with an indefinite life whereby such assets will no longer
be amortized; however, the standard does require evaluation for impairment and a
corresponding writedown, if appropriate. SFAS No. 142 requires an initial
evaluation of goodwill impairment upon adoption. Such evaluation was performed
as of November 1, 2001 resulting in no impairment in the value of the Company's
goodwill.
Comparative information as if goodwill had not been amortized in the three
and nine months ended July 31, 2001 is as follows (in thousands except per share
information):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- -----------------------
JULY 31, JULY 31, JULY 31, JULY 31,
2002 2001 2002 2001
-------- -------- -------- ---------
Reported net income (loss) $ 1,185 $ 1,777 $ 5,451 $ (6,012)
Goodwill amortization - 188 - 524
-------- ------- ------- --------
Adjusted net income (loss) $ 1,185 $ 1,965 $ 5,451 $ (5,488)
======== ======= ======= ========
Basic and diluted earnings per share:
Reported basic and diluted earnings (loss)
per share $ 0.04 $ 0.06 $ 0.18 $ (0.20)
Goodwill amortization - .01 - 0.02
-------- ------- ------- --------
Adjusted basic and diluted earnings (loss)
per share $ 0.04 $ 0.07 $ 0.18 $ (0.18)
======== ======= ======= ========
</Table>
Goodwill at July 31, 2002 and October 31, 2001 amounted to approximately
$115.9 million and $85.1 million, respectively. Other intangible assets, which
continue to be amortized, consist of software development costs and a
non-compete agreement. The balance of other intangible assets (in thousands)
consists of a gross carrying amount of $12,984 at July 31, 2002 and October 31,
2001, less accumulated amortization (in thousands) of $6,966 and $4,911 at July
31, 2002 and October 31, 2001, respectively.
Amortization expense of other intangible assets for the three and nine
months ended July 31, 2002 was approximately $0.6 million and $2.1 million,
respectively. Estimated annual amortization expense (in thousands) of other
intangible assets is expected to be $2,740 in 2002, $2,707 in 2003, and $1,942
in 2004.
10
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NOTE 7 - DERIVATIVE INSTRUMENTS, HEDGING INSTRUMENTS AND HEDGING ACTIVITY
In fiscal year 2001, the Company entered into forward currency contracts to
hedge transactions to purchase equipment to be settled in Japanese yen. Such
derivatives were designated and qualified as cash flow hedging instruments and
were reported at fair value. These transactions were settled during 2002
resulting in a loss of $1.1 million, which was recorded in other comprehensive
loss, as these hedges were highly effective and the forecasted purchase of
equipment occurred. Therefore, the losses on the contracts are included in
Accumulated Other Comprehensive Loss and will be amortized as a charge to
earnings over the estimated useful life of the related equipment.
NOTE 8 - SUBSEQUENT EVENT - CONSOLIDATION
On August 14, 2002, the Company announced a plan to reduce its operating
cost structure by reducing its work force in the United States and ceasing
manufacturing at its Northern California facility to maximize capacity at the
Company's remaining facilities.
The total estimated after-tax consolidation charge of $9.0 to $10.0 million
will be recorded in the fourth quarter of fiscal year 2002. Approximately 25% of
the after-tax charge will be cash charges for severance and related benefits for
terminated employees that will be paid during their entitlement periods.
Approximately 75% of the charge relates to non-cash items for the impairment in
value of fixed assets that will no longer be utilized in production.
NOTE 9 - OTHER NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 supersedes previous guidance for financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes previous
guidance for financial accounting and reporting for the impairment or disposal
of long-lived assets.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds certain guidance for reporting
extinguishments of debt and provides guidance to determine if the transactions
are part of recurring operations or if they meet the criteria for classification
as an extraordinary item. Additionally, SFAS No. 145 requires that certain lease
modifications be accounted for in the same manner as sale-leaseback
transactions.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146,
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)."
11
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SFAS No.'s 143, 144, 145 and 146 become effective for the Company's
financial statements for fiscal year 2003. The Company does not expect the
adoption of these statements to have a material impact on its consolidated
financial position, consolidated results of operations or consolidated cash
flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
In 2001, the Company completed the acquisition of a majority equity
interest (approximately 51%) in PKL Ltd. ("PKL"), a leading Korean photomask
supplier, for $56 million. In April 2002, the Company acquired an additional 28%
of PKL in exchange for 1,212,218 shares of Photronics common stock. The
acquisition was accounted for as a purchase and accordingly goodwill in the
aggregate of $69.4 million was recorded. The operating results of PKL have been
included in the Company's Consolidated Statements of Operations since August 27,
2001.
As the final phase of its merger with Align-Rite in April 2001, the Company
initiated a plan to consolidate its global photomask manufacturing network in
order to increase capacity utilization and manufacturing efficiencies, as well
as to accelerate the expansion of its world-class technology development. Total
consolidation and related charges associated with this plan of $38.1 million
were recorded in the second quarter of 2001. The consolidation charge consisted
of cash charges of $8.5 million for severance benefits, facility closings and
lease termination costs, and non-cash charges of $22.1 million related to the
disposition of fixed assets. Through July 31, 2002 cash charges of approximately
$6.0 million had been paid. Other related charges include $7.5 million for the
impairment in value of associated intangible assets.
On August 14, 2002, the Company announced a plan to reduce its operating
cost structure by reducing its work force in the United States and ceasing
manufacturing at its Northern California facility to maximize capacity at the
Company's remaining facilities. The total estimated after-tax consolidation
charge of $9.0 to $10.0 million will be recorded in the fourth quarter of fiscal
year 2002. Approximately 25% of the after tax charge will be cash charges for
severance and related benefits for terminated employees that will be paid during
their entitlement periods. Approximately 75% of the charge relates to non-cash
items for the impairment in value of fixed assets that will no longer be
utilized in production.
12
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MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED JULY 31, 2002 VERSUS JULY 31, 2001
The following table represents selected financial information, expressed as
a percentage of net sales:
<Table>
<Caption>
Three Months Ended Nine Months Ended
--------------------------- -------------------------
July 31, July 31, July 31, July 31,
2002 2001 2002 2001
-------- --------- --------- --------
Net sales 100% 100% 100% 100%
Cost of sales 71.4 71.2 70.4 66.2
----- ----- ----- -----
Gross margin 28.6 28.8 29.6 33.8
Selling, general and
administrative expenses 15.4 15.3 14.7 13.9
Research and development expenses 7.8 7.4 7.5 6.4
Consolidation, restructuring - - - 13.4
and related charges ----- ------ ----- -----
Operating income 5.4% 6.1% 7.4% 0.1%
===== ====== ===== =====
</Table>
Net sales for the three and nine month periods ended July 31, 2002
increased 15.4% to $98.1 million and 4.4% to $296.8 million, respectively, as
compared to $85.0 million and $284.1 million for the three and nine month period
ended July 31, 2001. The increase in sales for the three and nine month periods
ended July 31, 2002 resulted primarily from the inclusion of our majority-held
subsidiary in Korea and an improved mix of high-end technology products which
have design rules of 0.18 micron and below. This increase, however, was
mitigated by decreased demand, primarily in North America and increased
competitive pricing pressures for mature products. Net sales from international
operations for the three and nine months ended July 31, 2002 accounted for 56%
and 51% of total net sales, respectively, as compared to 40% and 37% for the
three and nine months ended July 31, 2001, respectively.
Gross margins decreased to 28.6% and 29.6% for the three and nine months
ended July 31, 2002, respectively, as compared to 28.8% and 33.8% for the three
and nine months ended July 31, 2001, respectively. The decreases for the three
and nine months ended July 31, 2002 as compared to the three and nine months
ended July 31, 2001 are primarily associated with lower utilization of our fixed
equipment cost base due in part to decreased demand and competitive pricing
pressures for mature product technologies.
Selling, general and administrative expenses increased 16.1% to $15.1
million and 10.2% to $43.6 million for the three and nine months ended July 31,
2002, respectively, compared with $13.0 million and $39.6 million for the same
periods in the prior fiscal year. As a percentage of net sales, selling, general
and administrative expenses increased to 15.4% and 14.7% for the three and nine
month periods ended July 31, 2002, respectively, compared with 15.3% and 13.9%
for the same periods in the prior fiscal year. The increases for the three and
nine months ended July 31, 2002 primarily relate to the inclusion of our Korean
subsidiary in 2002 coupled with increased data communication costs associated
with the Company's global infrastructure.
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Research and development expenses increased 23.1% to $7.7 million and
22.2% to $22.3 million for the three and nine months ended July 31, 2002,
respectively, compared with $6.3 million and $18.2 million for the same
periods in the prior fiscal year. As a percentage of net sales, research and
development expenses increased to 7.8% and 7.5% for the three and nine months
ended July 31, 2002, respectively, compared with 7.4% and 6.4% for the same
periods in the prior fiscal year. This increase in costs reflects the
continued investment in the development of advanced, sub-wavelength reticle
solutions for the Company's nanotechnology lines, coupled with the inclusion
of expenses associated with our Korean subsidiary in 2002.
Net other expenses of $4.1 million and $11.3 million for the three and
nine months ended July 31, 2002, respectively, represent an increase of $2.0
million and $4.6 million, as compared to the three and nine months ended July
31, 2001, respectively. The increased costs for the three and nine months
ended July 31, 2002 are primarily associated with higher interest costs from
our $200 million convertible debt issuance in December 2001 which were
partially offset by higher investment income related to the Company's cash
position.
The (benefit) provision for income taxes was $(0.9) million and $0.4
million for the three and nine months ended July 31, 2002, respectively, as
compared to an income tax provision (benefit) of $0.5 million and $(4.0) million
for the three and nine months ended July 31, 2001, respectively. During the
third quarter of 2002 the Company recorded a year to date change in the
Company's effective tax rate to reflect increased income from foreign
jurisdictions with favorable tax attributes and holidays.
The minority interest charge, which reflects the portion of income
attributable to the minority shareholders of the Company's non-wholly owned
subsidiaries in Asia, was $1.0 million and $4.8 million, for the three and
nine months ended July 31, 2002, respectively, as compared to $0.9 million
and $3.5 million for the three and nine months ended July 31, 2001,
respectively.
Net income was $1.2 million, or $0.04 per diluted share and $5.5 million,
and $0.17 per diluted share for the three and nine months ended July 31, 2002,
respectively. These amounts compare to a net income (loss) of $1.8 million and
$(6.0) million or $0.06 and $(0.20) per diluted share for the three and nine
months ended July 31, 2001, respectively. Financial results for fiscal year 2001
includes the effect of the consolidation and related charges amounting to $26.1
million after tax, or $0.75 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
On December 12, 2001 the Company sold $200 million of 4.75% Convertible
Subordinated Notes due 2006 ("Notes") in a private offering pursuant to SEC Rule
144A. The Notes are convertible into the Company's common stock at a conversion
price of $37.00 per share. Net proceeds from the issuance amounted to
approximately $193.4 million. Concurrent with the issuance of the Notes, on
December 12, 2001 the Company repaid all of the outstanding borrowings under its
former Revolving Credit Agreement which amounted to $57.7 million and terminated
the agreement.
In July 2002, the Company entered into a credit agreement with a group of
financial institutions that provides for a three-year, revolving credit facility
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(the "credit facility") with an aggregate commitment of $100 million. The credit
facility, which allows for borrowings in various currencies, includes a
provision for an increase in the aggregate commitment up to $125 million upon
the conversion of at least 50% of the Company's $103 million, 6% outstanding
convertible notes. The applicable interest rate spread and facility fee varies
dependent upon the Company's senior leverage ratio. As of July 31, 2002, $100
million was available under the facility. The Company is subject to compliance
with and maintenance of certain financial and other covenants. The credit
facility is secured by a pledge of the Company's stock in certain of its
subsidiaries.
The Company's working capital at July 31, 2002 increased to $206.4 million
compared to $48.7 million at October 31, 2001, primarily as a result of the net
proceeds received from the convertible debt offering. Cash equivalents and
short-term investments at July 31, 2002 were $149.0 million compared to $34.7
million at October 31, 2001. Cash provided by operating activities for the nine
months ended July 31, 2002 decreased to $69.6 million compared to $89.3 million
for the nine months ended July 31, 2001, primarily as a result of reduced income
from operations excluding restructuring and related charges. Cash used in
investing activities of $105.1 million consisted principally of capital
equipment purchases of $89.0 million and an increase in short-term investments
of $15.0 million. The Company expects capital expenditures for fiscal 2002 to be
approximately $115 million, which will be used primarily to expand the Company's
high-end technical capability. Cash flows provided by financing activities of
$129.5 million consisted primarily of the net proceeds from the $200 million
convertible note issuance, offset by the repayment of the Company's previous
revolving credit agreement.
Photronics' commitments represent investments in additional manufacturing
capacity as well as advanced equipment for the production of high-end
photomasks. At July 31, 2002, Photronics had commitments outstanding for capital
expenditures of approximately $50.0 million. Additional commitments for capital
expenditures are expected to be incurred during the remainder of fiscal 2002.
Photronics will continue to use its working capital to finance its capital
expenditures. Photronics believes that its currently available resources,
together with its capacity for growth and its access to other debt and equity
financing sources, are sufficient to satisfy its currently planned capital
expenditures, as well as its anticipated working capital requirements for the
foreseeable future.
EFFECT OF NEW ACCOUNTING STANDARDS
Effective November 1, 2001 the Company adopted "SFAS" No. 142, "Goodwill
and Other Intangible Assets." The standard changes the accounting for goodwill
and intangible assets with an indefinite life whereby such assets will no longer
be amortized; however, the standard does require evaluation for impairment and a
corresponding writedown, if appropriate. SFAS No. 142 requires an initial
evaluation of impairment upon adoption. Such evaluation was performed as of
November 1, 2001 resulting in no impairment in the value of the Company's
goodwill and other intangible assets.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 supersedes previous guidance for financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset.
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In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes previous
guidance for financial accounting and reporting for the impairment or disposal
of long-lived assets.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds certain guidance for reporting
extinguishments of debt and provides guidance to determine if the transactions
are part of recurring operations or if they meet the criteria for classification
as an extraordinary item. Additionally, SFAS No. 145 requires that certain lease
modifications be accounted for in the same manner as sale-leaseback
transactions.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146,
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)."
SFAS No.'s 143, 144, 145 and 146 become effective for the Company's
financial statements for fiscal year 2003. The Company does not expect the
adoption of these statements to have a material impact on its consolidated
financial position, consolidated results of operations or consolidated cash
flows.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies are as follows:
CONSOLIDATION - The condensed consolidated financial statements presented
herein include the accounts of Photronics, Inc. and its majority-owned
subsidiaries in which the Company exercises control. All significant
intercompany transactions and accounts have been eliminated.
ESTIMATES AND ASSUMPTIONS - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make certain estimates and assumptions, including
collectibility of accounts receivable, depreciable lives and recoverability of
property, plant and equipment, intangible assets and certain accrued
liabilities. Actual results may differ from such estimates.
LONG-LIVED ASSETS - Property, plant and equipment are recorded at cost less
accumulated depreciation. Repairs and maintenance as well as renewals and
replacements of a routine nature are charged to operations as incurred, while
those which improve or extend the lives of existing assets are capitalized. Upon
sale or other disposition, the cost of the asset and accumulated depreciation
are eliminated from the accounts, and any resulting gain or loss is reflected in
income.
For financial reporting purposes, depreciation and amortization are
computed on the straight-line method over the estimated useful lives of the
related assets. Buildings and improvements are depreciated over 15 to 40 years,
machinery and equipment over 3 to 10 years and furniture, fixtures and office
equipment over 3 to 5 years. Leasehold improvements are amortized over the life
of the lease or the estimated useful life of the improvement, whichever is less.
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INTANGIBLE ASSETS - Intangible assets consist primarily of goodwill and
other acquisition-related intangibles, and software development costs. These
assets are stated at fair value as of the date incurred less accumulated
amortization. Amortization is calculated on a straight-line basis over estimated
useful lives of acquisition-related assets, and over five years for software
development costs. The future economic benefit of the carrying value of all
intangible assets is reviewed periodically and any diminution in useful life or
impairment in value is based on a fair value test and would be recorded in the
period so determined.
INCOME TAXES - The provision (benefit) for income taxes is computed on the
basis of consolidated financial statement income. Deferred income taxes reflect
the tax effects of differences between the carrying amounts of assets and
liabilities for financial reporting and the amounts used for income tax
purposes.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company records derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives are reported in the Statement of Operations or
as Accumulated Other Comprehensive Income (Loss), 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, the
derivative must be highly effective in achieving offsetting changes in fair
value or cash flows of the hedged items during the term of the hedge. In
general, the types of risks hedged are those relating to the variability of
future cash flows caused by movements in foreign currency exchange rates and
changes in the fair value of the Company's fixed rate debt obligation due to
fluctuations in interest rates. The Company documents its risk management
strategy and hedge effectiveness at the inception of and during the term of each
hedge.
In fiscal year 2001, the Company entered into forward currency contracts to
hedge transactions to purchase equipment to be settled in Japanese yen. Such
derivatives were designated and qualified as cash flow hedging instruments and
were reported at fair value. These transactions were settled during 2002
resulting in a loss of $1.1 million, which was recorded in other comprehensive
loss, as these hedges were highly effective and the forecasted purchase of
equipment occurred. Therefore, the losses on the contracts are included in
Accumulated Other Comprehensive Income (Loss) and will be amortized as a charge
to earnings over the estimated useful life of the related equipment.
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, gross margins and shareholder's equity. The Company
attempts to minimize currency exposure risk by producing its products in the
same country or region in which the products are generally sold and thereby
generating revenues and incurring expenses in the same currency and by managing
its working capital; there can be no assurance that this approach will be
successful, especially in the event of a significant and sudden decline in the
value of any of the international currencies of the Company's worldwide
operations. The Company does not engage in purchasing forward exchange contracts
for speculative purposes.
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INTEREST RATE RISK
The majority of the Company's borrowings are in the form of its convertible
subordinated notes, which bear interest rates at 4.75% and 6.0% and certain
foreign secured notes payable which bear interest between approximately 4.5% and
7.3%.
FORWARD LOOKING INFORMATION
Certain statements in this report are considered "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All forward looking statements involve risks and uncertainties. For a
description of the factors that could cause the actual results of the Company to
be materially different from those projected, please review the Company's SEC
reports that detail these risks and uncertainties and the section captioned
"Forward Looking Information" contained in the Company's Annual Report on Form
10-K for the year ended October 31, 2001. Any forward looking statements should
be considered in light of these factors.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - see Exhibits Index
(b) During the quarter for which this report is filed, the Company
filed:
i) a Form 8-K dated July 17, 2002 reporting information under
Item 5 of Part II
ii) a Form 8-K dated July 19, 2002 reporting information under
Item 5 of Part II
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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
Vice President,
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Date: September 12, 2002
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CERTIFICATIONS
I, Daniel Del Rosario, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Photronics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 12, 2002 /S/ DANIEL DEL ROSARIO
----------------------
Daniel Del Rosario
Chief Executive Officer
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I, Sean T. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Photronics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 12, 2002 /S/ SEAN T. SMITH
--------------------
Sean T. Smith
Vice President,
Chief Financial Officer
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EXHIBIT INDEX
CREDIT FACILITY
10.1 Credit Agreement dated as of July 12, 2002 among Photronics, Inc., JP
Morgan Chase Bank, HSBC Bank USA, The Bank of New York, Fleet National
Bank and Citizens Bank of Massachusetts
99.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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