Business context and reporting period
Photronics, Inc. manufactures photomasks used in semiconductor integrated circuits and flat-panel displays. This Form 10-K covers the fiscal year ended November 3, 2013, a 53-week year; fiscal 2012 had 52 weeks. The company operated eight manufacturing facilities and generated about 70% of sales internationally.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $422.2 million | $450.4 million |
| Gross margin | $99.6 million; 23.6% | $111.9 million; 24.9% |
| Operating income | $30.7 million; 7.3% of sales | $44.4 million; 9.9% of sales |
| Net income attributable to Photronics shareholders | $18.0 million; diluted EPS $0.29 | $27.9 million; diluted EPS $0.44 |
| Cash from operating activities | $99.4 million | $132.5 million |
| Capital expenditure payments | $63.8 million | $97.0 million |
At year-end, cash and cash equivalents were $215.6 million, working capital was $213.9 million, and total assets were $885.9 million. Borrowings, including current and long-term portions and capital leases, totaled approximately $194.0 million. The company reported $182.2 million of long-term borrowings and $11.8 million current; cash exceeded this reported debt by approximately $21.6 million.
Fourth-quarter fiscal 2013 sales were $106.0 million, gross margin $26.7 million, net income $4.9 million, and net income attributable to Photronics shareholders $4.8 million. Basic and diluted EPS were each $0.08.
Material changes versus the prior comparable period
- Annual sales declined 6.3%; IC sales fell 8.4% to $320.6 million, while FPD sales rose 1.3% to $101.6 million.
- Management attributed lower sales mainly to a $30 million decline in high-end IC sales, including lost qualification at an Asian foundry following a technology-node migration, and lower average selling prices. High-end FPD sales increased by $6 million.
- Gross margin declined 1.3 percentage points, reflecting lower sales in a high-fixed-cost business. Operating income fell about 31%, and shareholder-attributable net income fell about 36%.
- Operating cash flow decreased $33.1 million. Cash declined $2.4 million year over year; financing cash use included $32.4 million to acquire additional PSMC shares.
- Photronics increased its PSMC ownership to 98.63%. Noncontrolling interests consequently declined substantially.
Outlook, commentary, and risks
- Management forecast fiscal 2014 capital expenditure payments of $70–$90 million, primarily for high-end IC manufacturing capability. At November 3, 2013, purchase commitments were $47.5 million, including $42 million related to capital expenditures.
- Management expected most revenue growth to come from Asia, with potential North American growth from advanced technology available under its Micron license. It said cash on hand, operating cash flow, and credit availability should meet cash requirements for the next 12 months, while noting that financing availability and cash needs depend on market conditions.
- In November 2013, after fiscal year-end, the company agreed to combine PSMC with DNP’s Taiwan photomask subsidiary into a joint venture. Photronics would own 50.01% and consolidate the venture; completion was expected in the first half of fiscal 2014, subject to approvals and closing conditions.
- In December 2013, the company amended its credit facility to a five-year $50 million facility, expandable to $75 million, and repaid its $21.3 million term loan. It also intended to repay its remaining $22.1 million of 5.5% convertible notes using the facility.
- Key risks include semiconductor and display industry cyclicality, limited backlog and quarterly volatility, customer concentration (Samsung represented 18% of sales), pricing pressure, high fixed costs and investment needs, equipment and material supplier constraints, technology change, foreign currency exposure, and debt covenants. A 10% adverse move in specified currencies was estimated to cause a $3.1 million pretax loss.
- The company paid no cash dividends and said none were anticipated in the foreseeable future; its credit facility restricted dividends. No material effect from ordinary-course legal claims or identified environmental liabilities was reported. Deloitte issued an unqualified audit opinion and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether high-end IC sales and overall demand recover, particularly after the foundry customer qualification loss, and how pricing and utilization affect margins.
- Actual fiscal 2014 capital spending, cash generation, and debt repayment relative to the $70–$90 million capex outlook and management’s liquidity assessment.
- Completion, terms, operating performance, and capital-funding obligations of the PSMC–DNP joint venture, as well as its effect on consolidated results.
- Customer concentration and international exposure, including the effect of currency movements, supply interruptions, and regional disruption risks.