Photronics, Inc. — Q1 FY2013 Form 10-Q
Reporting period: Three months ended January 27, 2013; comparisons are with the three months ended January 29, 2012. Photronics manufactures photomasks used in semiconductor and flat-panel-display (FPD) production. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $99.8 million | $112.2 million |
| Gross profit / margin | $21.1 million / 21.1% | $25.5 million / 22.7% |
| Operating income / margin | $5.2 million / 5.2% | $8.6 million / 7.6% |
| Net income | $2.9 million | $4.8 million |
| Net income attributable to Photronics shareholders | $2.3 million; $0.04 per diluted share | $4.3 million; $0.07 per diluted share |
| Cash from operations | $18.7 million | $34.0 million |
| Capital expenditure payments | $15.5 million | $18.1 million |
- Cash and cash equivalents were $217.8 million at January 27, 2013, nearly unchanged from $218.0 million at October 28, 2012. Working capital was $225.6 million, down from $234.3 million.
- Cash used in investing was $16.6 million and cash used in financing was $5.6 million; the latter primarily reflected $4.2 million of subsidiary share repurchases and debt repayments. The quarter’s net cash decrease was $0.3 million.
- Total borrowings were $174.9 million, including $7.6 million current and $167.3 million long-term. Cash exceeded borrowings by approximately $42.9 million. The company had no credit-facility borrowings and $30 million available; it was in compliance with facility covenants.
- The current ratio was approximately 3.3, based on current assets of $322.4 million and current liabilities of $96.9 million.
Material changes versus the prior comparable period
- Sales fell 11.0%, primarily because of weaker demand for IC photomasks, particularly leading-edge products. IC sales decreased 14.3% to $74.4 million; FPD sales were essentially flat at $25.4 million.
- Gross margin declined 1.6 percentage points, which management attributed primarily to lower sales in a high-fixed-cost business. Operating margin fell 2.4 percentage points.
- Research and development expense rose 8.9% to $4.8 million, mainly reflecting increased advanced-node IC photomask development. SG&A declined slightly to $11.1 million.
- There were no restructuring charges in Q1 FY2013, compared with $1.1 million in Q1 FY2012 related to the Singapore facility closure. Despite that comparison, lower sales and margins contributed to lower operating and net income.
- Operating cash flow declined to $18.7 million from $34.0 million, mainly due to lower accounts payable unrelated to capital expenditures and reduced non-cash expenses. Foreign currency translation added $8.1 million to other comprehensive income, versus a $1.2 million loss in the prior-year quarter.
Outlook, commentary and risks
- No specific numerical revenue or earnings guidance is provided. Management expects much of future revenue growth to come from Asia and anticipates additional North American growth, including potential benefit from technology licensed through the Micron relationship.
- Management cited semiconductor-industry softness and the cyclical, seasonal nature of semiconductor and FPD markets. The first fiscal quarter can be affected by North American and European holidays and, in some years, Asian New Year holidays. Customer order visibility is limited: typical backlog is one to two weeks for IC photomasks and two to three weeks for FPD photomasks.
- The business has high fixed costs; revenue and facility utilization can materially affect margins and cash generation. Other disclosed risks include technology and design changes, competition, foreign-exchange movements, customer demand, equipment deployment, financing availability, and the ability to achieve yields, pricing and product mix.
- Capital expenditure commitments outstanding were approximately $100 million. Management believes available resources should cover planned spending and 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.
- Subsequent to quarter-end, Photronics entered a five-year capital lease for a high-end lithography tool, estimated at approximately $30 million; the final principal depends on yen exchange rates and the interest rate will be fixed upon tool acceptance. PSMC approved pursuing delisting from Taiwan’s GTSM, after which Photronics intends a tender offer for remaining shares. The transaction is subject to approvals and is estimated to cost $25–$30 million; Photronics owned 75.11% of PSMC at quarter-end.
- Photronics’ maximum stated exposure to loss from the unconsolidated MP Mask joint venture was its $93.1 million investment. Further capital contributions may be requested under the joint-venture agreement; declining a request could reduce Photronics’ ownership percentage.
- Management reported disclosure controls were effective at a reasonable assurance level and no material change in internal control over financial reporting. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether IC photomask demand and utilization recover, and whether FPD strength in higher-end products offsets weakness in mature products.
- Execution, timing and funding of the approximately $100 million capital commitments and the new lithography-tool lease.
- Approvals, cost and financing implications of the proposed PSMC delisting and tender offer.
- Debt maturities and refinancing needs, particularly the convertible notes due in 2014 and 2016, and continued compliance with credit-facility covenants.
- Cash-flow sensitivity to customer demand, working-capital movements, capital spending, foreign exchange and potential MP Mask funding needs.