Business context and reporting period
Photronics, Inc. manufactures photomasks used in semiconductor integrated circuits (ICs) and flat panel displays (FPDs). This unaudited Form 10-Q covers the three and nine months ended July 28, 2013; comparisons are with the periods ended July 29, 2012. Dollar amounts below are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $109.7 | $116.6 | $316.2 | $346.2 |
| Gross margin | 24.7% | 27.7% | 23.1% | 25.3% |
| Operating income | $10.0 | $15.3 | $23.3 | $37.0 |
| Net income attributable to Photronics shareholders | $5.9 | $11.0 | $13.1 | $24.0 |
| Diluted EPS | $0.10 | $0.16 | $0.21 | $0.37 |
- Q3 sales fell 6.0%; operating income declined about 34% and shareholder-attributable income about 46% year over year. For the nine-month period, sales declined 8.7%, operating income about 37%, and attributable income about 45%.
- Q3 IC sales were $84.1 million, down 6.8%; FPD sales were $25.5 million, down 3.2%. Management attributed lower revenue mainly to general softness in the semiconductor industry. High-end product revenue declined to $39.6 million from $44.7 million in Q3 and to $114.8 million from $138.1 million year to date.
- Cash from operations was $67.6 million for nine months, versus $107.5 million. Capital expenditure payments were $47.3 million; investing cash outflow was $49.9 million. Financing cash outflow was $35.9 million, primarily reflecting PSMC share purchases and debt repayments. Cash declined to $197.3 million from $218.0 million at October 28, 2012.
- At July 28, 2013, current assets were $312.3 million and current liabilities $120.4 million; working capital was $191.9 million, down from $234.3 million at fiscal year-end. Borrowings totaled $193.9 million, including $10.7 million current; cash exceeded reported borrowings by approximately $3.4 million. The credit facility had no borrowings outstanding and $30 million available; the company reported covenant compliance.
- Total assets were $879.4 million and total equity $565.8 million. Capital expenditure commitments were approximately $35 million. A $26.4 million lithography-tool capital lease commenced in August 2013; $22.9 million in lessor progress payments was recorded as a lease obligation at quarter-end.
Material changes and unusual items
- Lower sales and utilization weighed on margins in a high-fixed-cost business. Q3 gross margin fell 3.0 percentage points and operating margin fell from 13.1% to 9.2%.
- In June, Photronics completed a $27.4 million tender offer for PSMC shares, raising its ownership to 98.13%. The purchase contributed to lower cash and working capital and reduced noncontrolling interests.
- There were no restructuring charges in the current nine-month period; the comparable prior-year period included $1.2 million of charges related primarily to the Singapore facility closure.
- Foreign currency translation reduced other comprehensive income by $6.6 million year to date. A 10% adverse move in the identified currencies was estimated to produce a $2.4 million unrealized pretax loss.
Outlook, commentary and risks
No quantified revenue or earnings guidance is provided. Management expects much of revenue growth to come from Asia, with additional North American growth potentially supported by technology licensed from Micron. Management stated that available resources and financing capacity should cover planned capital expenditures and anticipated working capital needs for the next 12 months, but cautioned that additional financing may not be available on favorable terms if needs exceed available resources.
Management continues to assess its global manufacturing strategy; possible future actions include facility closures, asset redeployment, impairments, workforce reductions, facility additions, acquisitions, divestitures or joint ventures. Key risks include semiconductor and FPD cyclicality, customer design activity and seasonal ordering, utilization and pricing pressure, foreign-exchange movements, financing availability, and the ability to place equipment in service and achieve desired yields. Photronics may be required to make further contributions to the MP Mask joint venture to maintain its ownership interest. The filing states that ordinary-course claims are not expected to have a material effect.
Important facts for investors to verify
- Whether semiconductor demand, especially for high-end IC photomasks, and facility utilization recover enough to stabilize margins.
- Cash conversion, capital spending, the $35 million commitment balance, and the effect of the new lithography-tool lease on future cash needs.
- Debt maturities, convertible-note terms, credit-facility covenants and availability, and financing needs under weaker market conditions.
- Consequences of the increased PSMC ownership, including subsidiary performance and the remaining noncontrolling interest.
- Potential future MP Mask capital calls and the extent of the company’s exposure to the joint venture.
- Foreign-exchange exposure, tax-rate variability, and progress or costs arising from the ongoing manufacturing-strategy review.