Photronics, Inc. — Q1 FY2014 10-Q
Business and period: Photronics manufactures photomasks used in semiconductor integrated circuits and flat-panel displays. This unaudited quarter ended February 2, 2014; comparisons are with the three months ended January 27, 2013. Figures below are in millions of dollars except per-share data.
Financial performance
| Metric | Q1 FY2014 | Prior-year quarter |
|---|---|---|
| Revenue | $101.5 | $99.8 |
| Gross margin | $22.9; 22.5% | $21.1; 21.1% |
| Operating income | $5.6; 5.5% | $5.2; 5.2% |
| Income before taxes | $4.8 | $4.6 |
| Net income | $2.0 | $2.9 |
| Net income attributable to Photronics shareholders | $2.0; $0.03 diluted EPS | $2.3; $0.04 diluted EPS |
| Operating cash flow | $14.2 | $18.7 |
| Capital expenditures paid | $12.2 | $15.5 |
Liquidity and debt: Cash and cash equivalents were $189.2 at February 2, down from $215.6 at November 3, 2013. Working capital was $176.9, compared with $213.9. Total borrowings were $170.5, including $9.4 current; the company repaid its $21.3 term-loan balance in December. It had no borrowings under its amended credit facility and $50 available (with expansion capacity to $75); the company reported compliance with its covenants. Cash held by foreign subsidiaries was $165.0, with repatriation potentially subject to tax. Capital equipment commitments were approximately $85.
Changes and notable items
- Revenue rose 1.7%, mainly on increased mainstream IC sales. IC revenue increased 2.4% to $76.2; FPD revenue was essentially flat at $25.3. High-end product revenue declined $3.1 to $32.2.
- Gross margin improved 1.4 percentage points, which management primarily attributed to increased sales in a high-fixed-cost business. SG&A increased 10.9% to $12.3, including $0.4 of pending-merger transaction costs and higher compensation. R&D increased 2.8% to $5.0.
- Despite higher operating income, shareholder net income fell as the income-tax provision increased to $2.7 from $1.7; the effective tax rate was 57.1% versus 37.9%. Management cited income generated in jurisdictions where losses elsewhere did not produce corresponding tax benefits, in part because of valuation allowances.
- Foreign-currency translation losses were $8.5, contributing to a comprehensive loss of $6.5, versus comprehensive income of $11.0 in the prior-year quarter.
- In January, Photronics acquired the remaining 3.0 million PSMC shares for $1.7, bringing its ownership to 100%. A previously announced, noncash merger of PSMC with DNP’s Taiwan photomask subsidiary was pending regulatory approval and customary conditions; it was expected to close in the first half of FY2014. Photronics expected to own 50.01% of the resulting joint venture and consolidate its results.
Outlook, risks and contingencies
Management expects much of revenue growth to come from Asia and anticipates additional North American growth supported by technology licensed from Micron. No specific financial guidance was provided. Management said current resources were expected to cover planned capital expenditures and working capital for the next 12 months, but cautioned that market conditions, sales, cash conversion, and capital-spending timing could affect liquidity and external financing may not be available on favorable terms. The company operates with short order backlogs and exposure to semiconductor and display industry cycles, customer design activity, utilization, pricing, product mix, technology changes, and foreign exchange. A 10% adverse move in its principal foreign currencies was estimated to cause a $5.6 pretax loss. The company also noted possible future facility closures, asset redeployments, impairments, workforce reductions, or added capacity as conditions warrant. Ordinary-course claims were not expected to have a material effect. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the PSMC–DNP merger received approvals and closed on expected terms and timing, and its resulting financial and cash-flow effects.
- How the $85 million equipment commitment will be funded and the timing of related capital spending and accrued equipment purchases.
- The planned repayment or refinancing of the $22.1 million 5.50% convertible notes due October 2014, including availability and terms under the credit facility.
- Whether margins and cash generation are sustainable given weaker high-end revenue, elevated taxes, and industry utilization and demand cycles.
- Potential effects of foreign-currency movements, restricted or tax-costly repatriation of overseas cash, and any additional contributions required by joint ventures.