Photronics, Inc. — Q2 2013 Form 10-Q
Business context and period: Photronics manufactures photomasks used in semiconductor integrated circuits and flat-panel displays. This unaudited quarterly report covers the three and six months ended April 28, 2013; comparisons are with the periods ended April 29, 2012. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $106.7 million | $117.5 million | $206.5 million | $229.6 million |
| Gross margin | 23.2% | 25.4% | 22.2% | 24.1% |
| Operating income | $8.1 million | $13.2 million | $13.3 million | $21.7 million |
| Net income | $5.4 million | $9.5 million | $8.3 million | $14.4 million |
| Net income attributable to Photronics shareholders | $4.9 million | $8.8 million | $7.2 million | $13.1 million |
| Diluted EPS | $0.08 | $0.14 | $0.12 | $0.21 |
- Sales declined 9.2% in Q2 and 10.1% for the first half. Management attributed the decrease primarily to semiconductor industry softness. Q2 integrated-circuit sales fell 7.8% and flat-panel-display sales fell 13.5% year over year.
- High-end product revenue was $39.9 million in Q2, down from $50.6 million, and $75.1 million for the first half, down from $93.4 million.
- Gross margin contracted as lower sales and utilization affected the company’s high-fixed-cost manufacturing base. Q2 operating income also declined; restructuring charges were zero in 2013, compared with $1.2 million for the first half of 2012.
- Six-month operating cash flow was $35.9 million, versus $62.4 million. Investing cash outflow was $34.7 million, including $31.9 million of property and equipment purchases. Financing cash outflow was $7.0 million.
Financial position and liquidity
- At April 28, 2013, cash and equivalents were $210.6 million, total current assets $321.4 million, and working capital $207.0 million. Working capital was $234.3 million at October 28, 2012; management attributed the decrease primarily to higher accounts payable for capital equipment.
- Total borrowings, including current maturities, were $179.8 million: $10.5 million current and $169.3 million long term. The company had no credit-facility borrowings, with $30 million available, and reported compliance with its facility covenants.
- Capital expenditure commitments were approximately $58 million. A five-year lease for a high-end lithography tool was estimated at approximately $27 million, with final principal and interest terms dependent on exchange rates and acceptance of the tool.
- Total assets were $880.9 million and total equity was $587.4 million. Property, plant and equipment, net, increased to $410.8 million from $380.8 million.
Outlook, commentary and risks
- No quantified revenue or earnings guidance is provided. Management expects most revenue growth to continue coming from Asia and anticipates additional North American growth using technology available through its Micron license.
- Management said current resources and financing access should meet planned capital spending and anticipated working-capital needs for the next twelve months, while warning that financing may not be available on favorable terms if needs exceed available resources.
- Demand depends substantially on photomask design activity, technology transitions, customer orders and utilization—not simply end-market semiconductor or display sales. The business is cyclical and seasonal, and order visibility is short: typically one to two weeks for IC masks and two to three weeks for FPD masks.
- On April 30, 2013, after quarter-end, the company began a tender offer for remaining PSMC shares at NTD16.30 per share, expected to conclude June 18. Cost could reach approximately $30 million if substantially all remaining shares are tendered. PSMC delisting approval was obtained in April.
- The company’s maximum exposure to loss in the unconsolidated MP Mask joint venture was $93.1 million. Additional contributions may be requested under the joint-venture agreement; declining a request could reduce Photronics’ ownership percentage.
- A 10% adverse move in the identified foreign currencies would have produced an estimated $2.0 million pretax unrealized loss. Management noted risks from industry cyclicality, competition, currency movements, technology changes, utilization, financing availability and potential future facility or workforce actions. Ordinary-course claims were not expected to have a material financial-statement effect.
- Management concluded disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether semiconductor and display demand, high-end product sales and factory utilization recover, and how these affect gross margins.
- The outcome and funding of the PSMC tender offer, including actual shares acquired and cost.
- Timing, final lease economics and execution of the lithography-tool purchase, alongside the $58 million capital commitment.
- Operating cash generation relative to capital spending, debt repayments and liquidity needs.
- Any additional MP Mask funding requirements and the potential effect on Photronics’ ownership.
- Potential dilution and conversion terms of outstanding convertible notes; the filing excludes 15.4 million potential shares from diluted EPS for 2013 periods as anti-dilutive.