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 ......August 2, 1998..........
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 period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ..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 August 2,1998
Common Stock, $.01 par value 24,417,377 Shares
<PAGE> PHOTRONICS, INC.
AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
at August 2, 1998 (unaudited) and
November 2, 1997 3-4
Condensed Consolidated Statement of
Earnings for the Three and Nine Months
Ended August 2, 1998 and August 3,
1997 (unaudited) 5
Condensed Consolidated Statement of
Cash Flows for the Nine Months Ended
August 2, 1998 and August 3, 1997
(unaudited) 6
Notes to Condensed Consolidated
Financial Statements (unaudited) 7-9
Item 2. Management's Discussion and Analysis
of Results of Operations and
Financial Condition 10-13
PART II. OTHER INFORMATION
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13-14
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE> PHOTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(in thousands)
ASSETS
<CAPTION>
August 2, November 2,
1998 1997
----------- -----------
(Unaudited)
<S>
Current assets:
Cash, cash equivalents and <C> <C>
short-term investments $ 36,399 $ 86,034
Accounts receivable (less allowance
for doubtful accounts of $235 in
1998 and 1997) 35,361 34,563
Inventories 15,019 11,302
Other current assets 7,956 7,038
-------- --------
Total current assets 94,735 138,937
Property, plant and equipment
(less accumulated depreciation of
$94,233 in 1998 and $71,900 in 1997) 257,178 203,813
Intangible assets (less accumulated
amortization of $5,467 in 1998
and $4,048 in 1997) 20,600 8,218
Investments and other assets 10,505 14,244
-------- --------
$383,018 $365,212
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE> PHOTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(dollars in thousands, except share and per share amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
August 2, November 2,
1998 1997
----------- -----------
<S> (Unaudited)
Current liabilities: <C> <C>
Current portion of long-term debt $ 2,030 $ 272
Accounts payable 43,152 34,173
Income taxes payable - 3,454
Accrued salaries and wages 5,585 7,423
Other accrued liabilities 12,840 12,217
-------- --------
Total current liabilities 63,607 57,539
Long-term debt 104,301 106,194
Deferred income taxes and other liabilities 14,275 15,504
-------- --------
Total liabilities 182,183 179,237
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value,
2,000,000 shares authorized,
none issued and outstanding - -
Common stock, $0.01 par value,
75,000,000 shares authorized,
24,417,377 shares issued in 1998
and 24,300,970 shares in 1997 244 243
Additional paid-in capital 87,187 85,129
Retained earnings 117,042 99,609
Unrealized gains on investments 1,212 3,251
Cumulative foreign currency
translation adjustment (4,689) (2,008)
Deferred compensation on restricted stock (161) (249)
-------- --------
Total shareholders' equity 200,835 185,975
-------- --------
$383,018 $365,212
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE> PHOTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Earnings
(in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- --------------------
August 2, August 3, August 2, August 3,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $57,681 $53,081 $169,920 $142,144
Costs and expenses:
Cost of sales 36,589 32,420 105,415 88,050
Selling, general and
administrative 7,448 6,671 21,699 17,950
Research and development 3,330 2,788 9,415 7,712
Non-recurring restructuring
charge - - 3,800 -
------- ------- -------- -------
Operating income 10,314 11,202 29,591 28,432
Interest and other income
(expense), net (870) (263) (1,458) 1,116
------- ------- -------- -------
Income before income taxes 9,444 10,939 28,133 29,548
Provision for income taxes 3,600 4,100 10,700 11,200
------- ------- -------- -------
Net income $ 5,844 $ 6,839 $ 17,433 $18,348
======= ======= ======== =======
Earnings per share - basic $ 0.24 $ 0.29 $ 0.72 $ 0.77
======= ======= ======== =======
Earnings per share - diluted $ 0.24 $ 0.27 $ 0.70 $ 0.73
======= ======= ======== =======
Weighted average number of common
shares outstanding-basic 24,412 23,853 24,356 23,844
======= ======= ======== =======
Weighted average number of common
shares outstanding-diluted 29,057 27,896 29,082 26,067
======= ======= ======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE> PHOTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(in thousands)
(Unaudited)
<CAPTION> Nine Months Ended
---------------------
August 2, August 3,
1998 1997
<S> --------- ---------
Cash flows from operating activities: <C> <C>
Net income $17,433 $18,348
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 23,904 15,142
Non-recurring restructuring charge 3,800 -
Gain on sale of investments (838) (1,308)
Other 594 724
Changes in assets and liabilities, net of
effects of acquisitions:
Accounts receivable (1,248) (9,008)
Inventories (3,412) (1,429)
Other current assets (939) 61
Accounts payable and other liabilities 1,085 (380)
------- -------
Net cash provided by operating activities 40,379 22,150
------- -------
Cash flows from investing activities:
Acquisition of photomask operations (32,455) (1,065)
Deposits on and purchases of property,
plant and equipment (61,395) (57,416)
Net change in short-term investments 18,016 (20,440)
Proceeds from sale of investments 932 1,658
Other 298 (875)
------- -------
Net cash used in investing activities (74,604) (78,138)
------- -------
Cash flows from financing activities:
Repayment of long-term debt (198) (28)
Issuance of subordinated notes,
net of deferred issuance costs - 99,697
Proceeds from issuance of common stock 2,059 2,873
------- -------
Net cash provided by financing activities 1,861 102,542
------- -------
Effect of exchange rate changes on cash flows 745 -
------- -------
Net increase (decrease) in cash (31,619) 46,554
and cash equivalents
Cash and cash equivalents at beginning of period 57,845 18,766
------- -------
Cash and cash equivalents at end of period $26,226 $65,320
======= =======
Cash paid during the period for:
Interest $ 6,305 $ 157
Income taxes $13,114 $ 6,981
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
PHOTRONICS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and Nine Months Ended August 2, 1998 and August 3, 1997
(Unaudited)
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles 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 generally
accepted accounting principles for complete 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 three and nine month periods ended
August 2, 1998 are not necessarily indicative of the results that may be
expected for the year ending November 1, 1998. For further information,
refer to the consolidated financial statements and footnotes thereto
included in Company's Annual Report on Form 10-K for the year ended
November 2, 1997.
NOTE 2 - EARNINGS PER SHARE
In the first quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share", which
establishes new standards for the computation and disclosure of earnings
per share ("EPS"). The new statement requires dual presentation of
"basic" EPS and "diluted" EPS. 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 August 2, 1998 and August 3, 1997 is as follows (in thousands,
except per share amounts):
Average
Net Shares Earnings
Income Outstanding Per Share
------- ----------- ---------
Three Months
- -----------
1998:
Basic $ 5,844 24,412 $ 0.24
Effect of potential dilution ======
from exercise of stock options
and conversion of notes 987 4,645
------- ------
Diluted $ 6,831 29,057 $ 0.24
======= ====== ======
<PAGE>
Average
Net Shares Earnings
Income Outstanding Per Share
------- ----------- ---------
1997:
Basic $ 6,839 23,853 $ 0.29
Effect of potential dilution ======
from exercise of stock options
and conversion of notes 780 4,043
------- ------
Diluted $ 7,619 27,896 $ 0.27
======= ====== ======
Nine Months
- -----------
1998:
Basic $17,433 24,356 $ 0.72
Effect of potential dilution ======
from exercise of stock options
and conversion of notes 3,011 4,726
------- ------
Diluted $20,444 29,082 $ 0.70
======= ====== ======
1997:
Basic $18,348 23,844 $ 0.77
Effect of potential dilution ======
from exercise of stock options
and conversion of notes 780 2,223
------- ------
Diluted $19,128 26,067 $ 0.73
======= ====== ======
All 1997 common share and per share data have been restated to give
effect to the 2-for-1 stock split of the Company's common stock paid to
shareholders of record on November 17, 1997.
NOTE 3 - ACQUISITION OF MOTOROLA'S PHOTOMASK OPERATIONS
In December 1997, the Company acquired the internal photomask
manufacturing operations of Motorola, Inc. ("Motorola") in Mesa, Arizona
for $29.1 million in cash. The assets acquired included modern
manufacturing systems capable of supporting a wide range of photomask
technologies. Additionally, the Company entered into a multi-year supply
agreement whereby it will supply the photomask requirements previously
provided by the acquired operations. The acquisition was accounted for
as a purchase and, accordingly, the acquisition price was allocated to
property, plant and equipment as well as certain intangible assets based
on relative fair value. The excess of purchase price over the fair value
of assets acquired is being amortized over fifteen (15) years. The
Condensed Consolidated Statement of Earnings includes the results of the
former Motorola photomask operations from December 31, 1997, the
effective date of the acquisition.
<PAGE>
NOTE 4 - NON-RECURRING RESTRUCTURING CHARGE
On March 13, 1998, the Company announced its plans to optimize its North
American manufacturing network by re-organizing its two California
operations. The Company will dedicate its Milpitas facility to the
production of high-end technology photomasks and dedicate its Sunnyvale
facility to the production of mature technology photomasks. In addition,
the Company announced its plans to consolidate its Colorado Springs,
Colorado photomask manufacturing operations into its other North American
manufacturing facilities. The Company also intends to sell its Large
Area Mask (LAM) Division. The Company has determined that the LAM
business, which is also located in Colorado Springs, does not represent
a long-term strategic fit with its core photomask business. The Company
will continue to maintain a sales office, photomask design center and
recertification operation in Colorado Springs. The Company recorded a
$3.8 million charge in the second quarter of 1998 for the restructuring.
<PAGE>
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition
Three and Nine Months ended August 2, 1998 versus August 3,
1997
A significant portion of the changes in Photronics, Inc.
("Photronics") results of operations for the three and nine months ended
August 2, 1998, as compared to the same periods during the last fiscal
year, were attributable to expansion of international operations in
Europe and Asia, together with the acquisition, on December 31, 1997, of
the internal photomask manufacturing operations of Motorola, Inc. in
Mesa, Arizona and the commencement of operations in its newly constructed
Austin, Texas facility in February 1998. Revenues and costs also have
been affected by the increased demand for higher technology photomasks
which require more advanced manufacturing capabilities and generally
command higher average selling prices. To meet this demand and position
the Company for future growth, the Company continues to make substantial
investments in high-end manufacturing technology and capability both at
existing and new facilities.
Net sales for the three and nine months ended August 2, 1998
increased 9% to $57.7 million and 20% to $169.9 million, respectively,
compared with $53.1 million and $142.1 million for the corresponding
prior year periods. The increase for the three months ended August 2,
1998 resulted primarily from new facilities in Mesa, Arizona and Austin,
Texas, as well as growth in Photronics' international operations. The
year-to-date increase resulted from the new facilities in Mesa and
Austin, continued growth from Photronics' international operations and
from increased shipments to customers from existing facilities due to
stronger high-end product demand and the availability of greater advanced
manufacturing capability, reflecting the implementation of the Company's
capacity expansion program.
The slow-down being experienced by the semiconductor industry has
impacted the release of new integrated circuit designs. This has
resulted in a current weakness in photomask demand and accentuated
competitive pressures in the industry. The company cannot predict the
duration of such industry conditions or the impact on its future
operating results.
Gross profit for the three and nine months ended August 2, 1998,
increased 2% to $21.1 million, and 19% to $64.5 million, respectively,
compared with $20.7 million and $54.1 million for the same periods in the
prior fiscal year. Gross margins decreased to 36.6% of sales in the
third quarter ended August 2, 1998, compared with 38.9% in the third
quarter of 1997. For the nine month period ended August 2, 1998 the
gross margin was 38.0% compared to 38.1% for the first nine months in the
prior year. The decrease in gross margins resulted principally from
higher depreciation and maintenance costs associated with the Company's
substantial investment in new facilities and equipment to manufacture
advanced photomasks. The Company anticipates that its increased fixed
operating costs resulting from its continuing expansion will, over time,
be offset by increases in net sales. In addition, the Company is
experiencing lower margins at the formally captive Mesa, Arizona
operation acquired earlier in the year.
<PAGE>
Selling, general and administrative expenses increased 12% to $7.4
million and 21% to $21.7 million, respectively, for the three and nine
months ended August 2, 1998, compared with $6.7 million and $18.0 million
for the same periods in the prior fiscal year. However, as a percentage
of net sales, selling, general and administrative expenses were
relatively constant at 12.9% for the three months ended August 2, 1998,
compared with 12.6% for the same period in the prior fiscal year.
Selling, general and administrative expenses were 12.8% of sales for the
nine month period ended August 2, 1998 and 12.6% for 1997. The increases
in costs resulted from the addition of the new operations in Austin and
Mesa, as well as increased staffing and other costs associated with the
Company's growth.
Research and development expenses for the three and nine months
ended August 2, 1998, increased 19% to $3.3 million and 22% to $9.4
million, respectively, compared with $2.8 million and $7.7 million for
the same periods in the prior fiscal year. These increases reflect
continued engineering on more complex photomasks, including phase shift,
optical proximity correction and deep ultra-violet technologies, as well
as on Beta Squared's development of PLASMAX. As a percentage of net
sales, research and development expenses were 5.8% and 5.5% for the three
and nine months ended August 2, 1998, respectively, compared with 5.3%
and 5.4% in the corresponding prior fiscal periods.
As previously announced, Photronics instituted a plan to optimize
its North American operations. The plan includes the transfer of the
photomask manufacturing operations in Colorado Springs to other sites
within the network and the disposition of the Large Area Mask business
unit which is also housed in Colorado Springs. In addition, the Company
reorganized its Silicon Valley operations by having the Milpitas facility
concentrate on advanced photomask applications, and the facility in
Sunnyvale focus on more mature technologies. A pretax restructuring
charge of $3.8 million ($2.4 million after tax or $0.08 per share on a
diluted basis) was recorded in the second quarter to cover the associated
costs.
Net other expenses increased $0.6 million and $2.6 million for the
three and nine months ended August 2, 1998, principally as a result of
interest expense on the newly issued convertible notes, partially offset
by interest income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments
decreased to $36.4 million from $86.0 million during the first nine
months of fiscal 1998, due primarily to the acquisition of the Motorola
photomask operations, as well as capital expenditures for facilities and
equipment in connection with the Company's expansion of its manufacturing
capacity. These expenditures, which aggregated $93.8 million were
partially offset by positive cash generated from operations of $40.4
million.
Accounts receivable increased 2% to $35.4 million as of August 2,
1998 from $34.6 million as of November 2, 1997, and inventories increased
$3.7 million, or 33% from November 2, 1997 to $15.0 million as of August
2, 1998, primarily as a result of higher order activity and the addition
of the new manufacturing locations in Austin and Mesa.
<PAGE>
Property, plant and equipment, net, increased to $257.2 million as
of August 2, 1998, from $203.8 million as of November 2, 1997. Deposits
on and purchases of equipment, construction in progress of new
facilities, and the acquisition of Motorola's photomask operation
aggregated $ 93.8 million during the nine months ended August 2, 1998.
These increases were offset by depreciation expense totaling $22.5
million in the first nine months of fiscal 1998. The increase in net
intangible assets to $20.6 million as of August 2, 1998 from $8.2
million as of November 2, 1997, was due primarily to the Motorola
acquisition.
Investments and other assets decreased to $10.5 million as of August
2, 1998 from $14.2 million as of November 2, 1997, due to the sale of
certain investment securities, the amortization of deferred issuance
costs and the valuation of investment securities at their market values.
Current liabilities, exclusive of current portion of long-term debt,
increased $4.3 million to $61.6 million as of August 2, 1998, primarily
due to the restructuring charge and an increase in accounts payable (due
primarily to timing).
The Company's commitments represent on-going investments in
additional manufacturing capacity, as well as advanced equipment for
research and development of the next generation of higher technology and
more complex photomasks. As of August 2 1998, the Company had
commitments outstanding for capital expenditures of approximately $50
million. Additional commitments are expected to be incurred during 1998.
The Company has a revolving credit facility that permits borrowings
of up to $30.0 million at any time through October 31, 1998. There have
been no amounts outstanding during 1998. Any amounts outstanding at
October 31, 1998 will be due and payable on such date. The Company
believes that its currently available resources, together with its
capacity for substantial growth and its accessibility to other debt and
equity financing sources, are sufficient to satisfy its cash requirements
for the foreseeable future.
EFFECT OF NEW ACCOUNTING STANDARDS
In June, 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." In April, 1998, the AICPA issued
SOP 98-5, "Reporting on the Costs of Start-Up Activities." Each of these
statements establishes new standards for financial statement reporting
and disclosure of certain information. The Company has evaluated these
standards and they are not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
<PAGE>
YEAR 2000 COSTS
The Company is currently implementing new worldwide computerized
manufacturing and information systems which will be completed in late
1998 and early 1999. Such systems have the ability to process
transactions with dates for the year 2000 and beyond at no incremental
cost and, accordingly, "Year 2000" issues are not expected to have any
material impact on the Company's future financial condition or results or
operations.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995:
Except for historical information, the matters discussed above may
be considered forward-looking statements and may be subject to certain
risks and uncertainties that could cause the actual results to differ
materially from those projected, including uncertainties in the market,
pricing, competition, procurement and manufacturing efficiencies, and
other risks.
Item 5. Other Information
Historically, the Company has separately itemized and discussed in
its Proxy Statements all matters that the Board of Directors knows will
be presented for consideration at a shareholder meeting. The Company has
also requested, and received, discretionary voting authority as to any
other matters that may properly come before the shareholders meeting.
Rule 14a-4 of the Securities and Exchange Commission's proxy rules allows
the Company to use this discretionary voting authority only if the
Company does not have notice of such other matter or matters at least 45
days before the first anniversary of the date on which the Company first
mailed its proxy materials for the prior year's annual meeting of
stockholders. This requirement is separate and apart from the Securities
and Exchange Commission's requirements that a stockholder must meet in
order to have a stockholder proposal included in the Company's proxy
statement under Rule 14a-8. Accordingly, for shareholder proposals to be
presented at the 1999 Annual Meeting of Shareholders, notice of such
proposal must be received by the Company no later than December 29, 1998
to prevent the Company from being able to exercise its discretionary
voting authority with respect to that proposal. Notice of the proposals
should be mailed to Photronics, Inc., to the attention of Jeffrey P.
Moonan, 1061 East Indiantown Road, Jupiter, Florida 33477.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter for which this report is filed, no
reports on Form 8-K were filed by the Company.
<PAGE>
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:______ROBERT J. BOLLO___________
Robert J. Bollo
Vice President/Finance
(Duly Authorized Officer and
Principal Financial Officer)
Date: September 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Earnings and the Consolidated Balance Sheet
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-01-1998
<PERIOD-END> AUG-02-1998
<CASH> 26,226
<SECURITIES> 10,173
<RECEIVABLES> 35,596
<ALLOWANCES> 235
<INVENTORY> 15,019
<CURRENT-ASSETS> 94,735
<PP&E> 351,411
<DEPRECIATION> 94,233
<TOTAL-ASSETS> 383,018
<CURRENT-LIABILITIES> 63,607
<BONDS> 104,301
0
0
<COMMON> 244
<OTHER-SE> 200,591
<TOTAL-LIABILITY-AND-EQUITY> 383,018
<SALES> 169,920
<TOTAL-REVENUES> 169,920
<CGS> 105,415
<TOTAL-COSTS> 105,415
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,457
<INCOME-PRETAX> 28,133
<INCOME-TAX> 10,700
<INCOME-CONTINUING> 17,433
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,433
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.70
</TABLE>
