|
PHOTRONICS INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) Results of Operations for the Years Ended October 28, 2012, October 30, 2011 and
October 31, 2010
Overview
The Company sells substantially all of its photomasks to semiconductor designers
and manufacturers, and manufacturers of FPDs. Photomask technology is also being
applied to the fabrication of other higher performance electronic products such
as photonics, micro-electronic mechanical systems and certain nanotechnology
applications. Thus, the Company's selling cycle is tightly interwoven with the
development and release of new semiconductor designs and flat panel
applications, particularly as it relates to the semiconductor industry's
migration to more advanced design methodologies and fabrication processes. The
Company believes that the demand for photomasks primarily depends on design
activity rather than sales volumes from products manufactured using photomask
technologies. Consequently, an increase in semiconductor or FPD sales does not
necessarily result in a corresponding increase in photomask sales. However, the
reduced use of customized ICs, reductions in design complexity, other changes in
the technology or methods of manufacturing or designing semiconductors, or a
slowdown in the introduction of new semiconductor or FPD designs could reduce
demand for photomasks even if demand for semiconductors and FPDs increases.
Advances in semiconductor, FPD and photomask design and semiconductor and FPD
production methods could also reduce the demand for photomasks. Historically,
the semiconductor industry has been volatile, with sharp periodic downturns and
slowdowns. These downturns have been characterized by, among other things,
diminished product demand, excess production capacity and accelerated erosion of
selling prices.
17
--------------------------------------------------------------------------------
The global semiconductor industry, including mobile display devices, is driven
by end markets which have been closely tied to consumer driven applications of
high performance semiconductor devices including, but not limited to, mobile
communications and computing solutions. The Company is typically required to
fulfill its customer orders within a short period of time, sometimes within 24
hours. This results in the Company having a minimal level of backlog orders,
typically one to two weeks for IC photomasks and two to three weeks for FPD
photomasks. The Company cannot predict the timing of the industry's transition
to volume production of next generation technology nodes or the timing of up and
down cycles with precise accuracy, but believes that such transitions and cycles
will continue into the future, beneficially and adversely affecting its
business, financial condition and operating results in the near term. The
Company believes its ability to remain successful in these environments is
dependent upon its achieving its goals of being a service and technology leader
and efficient solutions supplier, which it believes should enable it to
continually reinvest in its global infrastructure.
The Company is focused on improving its competitiveness by advancing its
technology and reducing costs and, in connection therewith, has invested in
manufacturing equipment to serve the high-end market. The Company, in order to
lower its operating costs and increase its manufacturing efficiencies, ceased
the manufacture of photomasks at its Singapore facility in December 2011.
As the Company continues to face challenges in the current and near term that
require it to continue to make significant improvements in its competitiveness,
it continues to evaluate further cost reduction initiatives.
As of December 2012 state-of-the-art production for semiconductor masks is
considered to be 45 nanometer and lower for ICs and Generation 8 and above and
AMOLED display based process technologies for FPDs. However, 65 nanometer and
above geometries for semiconductors and Generation 7 and below, excluding
AMOLED, process technologies for FPDs constitute the majority of designs
currently being fabricated in volume. At these geometries, the Company can
produce full lines of photomasks and there is no significant technology employed
by the Company's competitors that is not available to the Company. The Company
expects 45 nanometer designs to continue to move to wafer fabrication throughout
fiscal 2013, and believes it is well positioned to service an increasing volume
of this business as a result of its investments in manufacturing processes and
technology in the global regions where its customers are located.
The photomask industry has been, and is expected to continue to be,
characterized by technological change and evolving industry standards. In order
to remain competitive, the Company will be required to continually anticipate,
respond to, and utilize changing technologies. In particular, the Company
believes that, as semiconductor geometries continue to become smaller, it will
be required to manufacture even more complex optically-enhanced reticles,
including optical proximity correction and phase-shift photomasks. Additionally,
demand for photomasks has been, and could in the future be, adversely affected
by changes in semiconductor and high performance electronics fabrication methods
that affect the type or quantity of photomasks used, such as changes in
semiconductor demand that favor field-programmable gate arrays and other
semiconductor designs that replace application-specific ICs. Furthermore,
increased market acceptance of alternative methods of transferring circuit
designs onto semiconductor wafers could reduce or eliminate the need for
photomasks in the production of semiconductors. As of the end of fiscal 2012,
one alternative method, direct-write lithography, has not been proven to be a
commercially viable alternative to photomasks, as it is considered too slow for
high volume semiconductor wafer production, and the Company has not experienced
a significant loss of revenue as a result of this or other alternative
semiconductor design methodologies. However, should direct-write or any other
alternative method of transferring IC designs to semiconductor wafers without
the use of photomasks achieve market acceptance, and the Company does not
anticipate, respond to, or utilize these or other changing technologies due to
resource, technological or other constraints, its business and results of
operations could be materially adversely affected.
Both revenues and costs have been affected by the increased demand for high-end
technology photomasks that require more advanced manufacturing capabilities, but
generally command higher average selling prices ("ASPs"). The Company's capital
expenditure payments aggregated approximately $250 million for the three fiscal
years ended October 28, 2012, resulting in significant increases in operating
expenses. The Company intends to continue to make the required investments to
support the technological demands of its customers and position itself for
future growth, and expects capital expenditure payments to be between $70
million and $90 million in fiscal 2013.
18
--------------------------------------------------------------------------------
The manufacture of photomasks for use in fabricating ICs and other related
products built using comparable photomask-based process technologies has been,
and continues to be, capital intensive. The Company's integrated global
manufacturing network, which consists of eight manufacturing sites, and its
employees represent a significant portion of its fixed operating cost base.
Should sales volumes decrease as a result of a decrease in design releases from
the Company's customers, the Company may have excess or underutilized production
capacity that could significantly impact operating margins, or result in
write-offs from asset impairments.
In the second quarter of fiscal 2012 the Company paid $35 million to Micron in
connection with its purchase of the U.S. nanoFab facility, which it had been
leasing from Micron under an operating lease that was to end in December 2014.
The purchase of the facility resulted in the Company's outstanding operating
lease commitments being reduced by a total of $15 million for fiscal years 2013
and 2014.
In the second quarter of fiscal 2012 the Company, in connection with its
purchase of the U.S. nanoFab facility, amended its credit facility ("the credit
facility") to include the addition of a $25 million term loan maturing in March
2017 with minimum quarterly principal payments of $0.6 million (quarterly
payments commenced in June 2012 and are based on a ten year repayment period).
The amendment also included a twenty-five basis point reduction in the interest
rate charged on any borrowings under the credit facility. The credit facility
bears interest (2.5% at October 28, 2012), based on the Company's total leverage
ratio, at LIBOR plus a spread, as defined in the credit facility.
In the first quarter of fiscal 2012 the Company ceased the manufacture of
photomasks at its Singapore facility. This action, which was substantially
completed in fiscal 2012, resulted in the Company recording restructuring
charges of $1.4 million in fiscal 2012.
In 2012 the board of directors of PSMC authorized PSMC to repurchase additional
shares of its outstanding common stock for retirement. These repurchase programs
resulted in 35.9 million shares being purchased for $15.6 million in the fiscal
year ended October 28, 2012. PSMC's repurchase of these shares increased the
Company's ownership percentage in PSMC from 62.25% at October 30, 2011 to 72.09%
as of October 28, 2012. Subsequent to fiscal year 2012, PSMC completed its most
recent share repurchase program in November 2012 with the repurchase of an
additional 9.2 million shares for $4.2 million, which increased the Company's
ownership in PSMC to 75.11%.
In 2011 the board of directors of PSMC authorized PSMC to repurchase shares of
its outstanding common stock for retirement. These repurchase programs resulted
in 21.6 million shares being purchased for $9.9 million. PSMC's repurchase of
these shares increased the Company's ownership percentage in PSMC from 57.53% at
October 31, 2010 to 62.25% as of October 30, 2011.
In the second quarter of fiscal 2011 the Company issued, through a private
offering pursuant to Rule 144A under the Securities Act of 1933, as amended,
$115 million aggregate principal amount of 3.25% convertible senior notes. The
notes mature on April 1, 2016, and note holders may convert each $1,000
principal amount of notes to 96.3879 shares of common stock (equivalent to an
initial conversion price of $10.37 per share of common stock) at any time prior
to the close of business on the second scheduled trading day immediately
preceding April 1, 2016. The conversion rate is subject to adjustment upon the
occurrence of certain events, which are described in the indenture dated March
28, 2011. The Company is not required to redeem the notes prior to their
maturity date. Interest on the notes accrues in arrears, and is paid
semiannually through the notes' maturity date. Interest payments on the notes
commenced on October 1, 2011. The net proceeds of the notes were approximately
$110.7 million, which were used, in part, to repurchase $35.4 million of the
Company's 5.5% convertible senior notes, which were to mature in October 2014,
and to pay, in full, its then outstanding obligations under capital leases of
$19.8 million.
In the second and third quarters of fiscal 2011 the Company, in two separate
transactions, acquired $35.4 million of its 5.5% convertible senior notes in
exchange for 5.2 million shares of its common stock, with a fair value of $45.7
million, and cash of $22.9 million (the note holders received 147.529 shares and
cash of $647 for each $1,000 note). The Company, in connection with these
transactions, recorded extinguishment losses of $35.1 million, which included
the write-off of deferred financing fees of $2.0 million. The losses are
included in other income (expense) in the Company's consolidated statements of
income.
19
--------------------------------------------------------------------------------
Results of Operations
The following table presents selected operating information expressed as a
percentage of net sales:
Year Ended
October 28, October 30, October 31,
2012 2011 2010
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales (75.1 ) (73.4 ) (78.4 )
Gross margin 24.9 26.6 21.6
Selling, general and administrative
expenses (10.4 ) (8.9 ) (10.0 )
Research and development expenses (4.3 ) (3.0 ) (3.5 )
Consolidation, restructuring and related
(charges) credits (0.3 ) - 1.2
Operating income 9.9 14.7 9.3
Interest expense (1.7 ) (1.4 ) (2.3 )
Interest and other income (expense), net 0.8 0.6 0.6
Debt extinguishment loss - (6.9 ) -
Income before income tax provision 9.0 7.0 7.6
Income tax provision (2.4 ) (3.1 ) (1.7 )
Net income 6.6 3.9 5.9
Net income attributable to noncontrolling
interests (0.4 ) (0.8 ) (0.3 )
Net income attributable to Photronics, Inc.
shareholders 6.2 % 3.1 % 5.6 %
Note: All the following tabular comparisons, unless otherwise indicated, are for
the fiscal years ended October 28, 2012 (2012), October 30, 2011 (2011) and
October 31, 2010 (2010), in millions of dollars.
Net Sales
Percent Change
2011 to 2010 to
2012 2011 2010 2012 2011
IC $ 350.1 $ 391.2 $ 329.8 (10.5 )% 18.6 %
FPD 100.3 120.8 95.8 (17.0 ) 26.2
Total net sales $ 450.4 $ 512.0 $ 425.6 (12.0 )% 20.3 %
Net sales for 2012 decreased 12.0% to $450.4 million as compared to $512.0
million for 2011, primarily due to reduced photomask demand as a result of a
general slowdown in the semiconductor industry, although high-end IC unit
demand and revenues increased. Revenues attributable to high-end products
increased by $12 million to $173 million, as high-end revenues for IC increased
by $15 million to $110 million, which were partially offset by a $3 million
reduction in high-end FPD revenues to $63 million. Mainstream IC and FPD
revenues decreased in 2012 as compared to 2011 as a result of decreases in both
unit demand and average selling prices (ASPs). High-end photomask applications,
which typically have higher ASPs, include photomask sets for IC products using
45 nanometer and below technologies, and for FPD products using Generation 8 and
above and AMOLED technologies. By geographic area, net sales in 2012 as compared
to 2011 decreased by $32.8 million or 10.7% in Asia, decreased by $22.8 million
or 14.5% in North America, and decreased by $6.0 million or 12.8% in Europe. As
a percent of total sales in 2012, sales were 61% in Asia, 30% in North America
and 9% in Europe.
20
--------------------------------------------------------------------------------
Net sales for 2011 increased 20.3% to $512.0 million as compared to $425.6
million for 2010. The increase was primarily related to increased high-end IC
and FPD sales, mainly resulting from increased unit demand and ASPs for both
high-end ICs and FPDs. FPD sales increased primarily as a result of increased
unit demand for high-end products. Sales of high-end IC photomasks increased to
$95 million in 2011 as compared to $37 million in 2010, and sales of high-end
FPD photomasks increased to $67 million in 2011 as compared to $37 million in
2010. By geographic area, net sales in 2011 as compared to 2010 increased by
$47.4 million or 18.3% in Asia, increased by $34.3 million or 27.7% in North
America, and increased by $4.8 million or 11.4% in Europe. As a percent of total
sales in 2011, sales were 60% in Asia, 31% in North America and 9% in Europe.
Gross Margin
Percent Change
2011 to 2010 to
2012 2011 2010 2012 2011
Gross margin $ 111.9 $ 136.2 $ 91.8 (17.8 )% 48.4 %
Gross margin % 24.9 % 26.6 % 21.6 % - -
Gross margin percentage decreased to 24.9% in 2012 from 26.6% in 2011, primarily
due to a decrease in sales in 2012 as compared to 2011. The Company operates in
a high fixed cost environment and, to the extent that the Company's revenues and
utilization increase or decrease, gross margin will generally be positively or
negatively impacted. Gross margin percentage increased to 26.6% in 2011 from
21.6% in 2010. This increase was primarily due to increased sales volume,
including high-end photomasks which typically have higher ASPs.
Selling, General and Administrative Expenses
Percent Change
2011 to 2010 to
2012 2011 2010 2012 2011
S,G&A expenses $ 46.7 $ 45.2 $ 42.4 3.2 % 6.7 %
% of net sales 10.4 % 8.9 % 10.0 % - -
Selling, general and administrative expenses increased by $1.5 million to $46.7
million in 2012, as compared to 2011, and increased by $2.8 million to $45.2
million in 2011 as compared to 2010. These increases were primarily related to
increased employee compensation and selling-related expenses.
Research and Development
Percent Change
2011 to 2010 to
2012 2011 2010 2012 2011
R&D expense $ 19.4 $ 15.5 $ 14.9 24.9 % 3.9 %
% of net sales 4.3 % 3.0 % 3.5 % - -
Research and development expenses consist primarily of global development
efforts related to high-end process technologies for advanced sub-wavelength
reticle solutions for IC technologies. Research and development expenses
increased by $3.9 million to $19.4 million in 2012, as compared to 2011,
primarily due to increased activities at advanced nanometer technology nodes for
IC and FPD photomasks. Research and development expenses did not change
significantly in 2011 as compared to 2010.
21
--------------------------------------------------------------------------------
Consolidation, Restructuring and Related Charges (Credits)
2012 2011 2010
Employee terminations and other $ 1.1 $ - $ 0.2
Asset write-downs
0.3 - -
Net gain on sales of assets - - (5.2 )
Total consolidation, restructuring
and related charges (credits) $ 1.4 $ - $ (5.0 )
Singapore Facility
In the first quarter of fiscal 2012 the Company ceased the manufacture of
photomasks at its Singapore facility and, in connection therewith, recorded
charges of $1.4 million during fiscal 2012. This restructuring, which was
comprised primarily of employee termination costs, was substantially completed
in fiscal 2012.
Shanghai, China, Facility
Net restructuring credits of $5.0 million in 2010 primarily relate to the sale
of the Company's Shanghai, China, manufacturing facility. In 2009 the carrying
value of this facility was written down to its estimated fair value at that
time, and in 2010 the facility was sold for net proceeds of $12.9 million, which
exceeded its carrying value and resulted in a gain of $5.4 million that was
recorded as a credit to the restructuring reserve.
The Company continues to assess its global manufacturing strategy. This ongoing
assessment could result in future facility closures, asset redeployments,
workforce reductions, and the addition of increased manufacturing facilities,
all of which would be predicated on market conditions and customer requirements.
Other Income (Expense)
2012 2011 2010
Interest expense $ (7.5 ) $ (7.2 ) $ (9.5 )
Interest and other income (expense), net 3.7 2.9 2.6
Debt extinguishment loss - (35.3 ) -
Total other expense, net $ (3.8 ) $ (39.6 ) $ (6.9 )
Interest expense increased slightly in 2012, as compared to 2011, primarily as a
result of the term loan entered into in the second quarter of 2012. Interest and
other income (expense), net increased in 2012 as compared to 2011, primarily as
a result of increased interest income on the Company's higher cash balances in
2012.
Interest expense decreased in 2011, as compared to 2010, primarily as a result
of higher interest rate debt being replaced with the 3.25% convertible senior
notes issued by the Company in March 2011. In addition, in 2010, the Company
wrote off $1.0 million of deferred financing fees, that was charged to interest
expense, in connection with refinancing its credit facility. Interest and other
income (expense), net, increased in 2011 as compared to 2010 primarily due to
increased investment earnings on the Company's higher cash balances in 2011,
lower non-cash losses related to changes in the fair value of certain of the
Company's common stock warrants and increased earnings on its equity method
investment, all of which were largely offset by less favorable foreign currency
transaction results.
22
--------------------------------------------------------------------------------
In the second and third quarters of fiscal 2011, the Company acquired $35.4
million aggregate principal amount of its 5.5% convertible senior notes by
delivering $22.9 million in cash and 5.2 million shares of its common stock,
with a fair value of $45.7 million. In connection with these 2011 acquisitions
the Company recorded total debt extinguishment losses of $35.1 million, which
included the write-off of $2.0 million of deferred financing fees. A portion of
the net proceeds of the Company's March 28, 2011, 3.25% convertible senior notes
offering was used to repurchase these notes.
Income Tax Provision
2012 2011 2010
Income tax provision $ 10.8 $ 15.7 $ 7.5
Effective income tax rate 26.6 % 43.7 % 23.0 %
The effective tax rate differs from the U.S. statutory rate of 35% in fiscal
year 2012 primarily due to a higher level of earnings being taxed at lower
statutory rates in foreign jurisdictions combined with the benefit of various
investment credits in the foreign jurisdictions.
The effective tax rate differs from the U.S. statutory rate of 35% in fiscal
year 2011 primarily due to the impact of the non-deductible debt extinguishment
losses and the impact of a foreign subsidiary tax settlement offset by a higher
level of earnings taxed at lower statutory rates in foreign jurisdictions.
Further, in Korea and in Taiwan, various investment tax credits have been
earned, which also reduced the Company's effective income tax rate in 2011.
The effective income tax rate differs from the U.S. statutory rate of 35% in
2010 primarily due to tax rates being lower than the U.S. rate in other
countries where the Company's income is taxed. The Company, in 2010, also
benefitted from the utilization of various investment tax credits in Korea and
Taiwan.
The Company considers all available evidence when evaluating the potential
future realization of its deferred tax assets and, when based on the weight of
all available evidence, it determines that it is more likely than not that some
portion or all of its deferred tax assets will not be realized, reduces its
deferred tax assets by a valuation allowance. As a result of these evaluations,
the valuation allowance was increased (decreased) by $2.5 million, $(8.2)
million and $10.9 million in 2012, 2011 and 2010, respectively. The Company also
regularly assesses the potential outcomes of ongoing and future examinations
and, accordingly, has recorded accruals for such contingencies.
PKLT, the Company's FPD manufacturing facility in Taiwan, has been accorded a
tax holiday which commenced in 2012 and expires in 2017. In addition, the
Company was accorded a tax holiday in China which expired in 2011. The
availability of these tax holidays did not have a significant impact on the
Company's decision to increase its Asian presence, which was in response to
fundamental changes that took place in the semiconductor industry that the
Company serves. These tax holidays had no dollar or per share effect on the
2012, 2011 or 2010 fiscal years.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests decreased to $2.0 million in
2012 as compared to $4.0 million in 2011, primarily as a result of decreased net
income at PSMC, the Company's non-wholly owned subsidiary in Taiwan, and to a
lesser extent, due to PSMC's share repurchase program (discussed below). Net
income attributable to noncontrolling interests increased to $4.0 million in
2011 as compared to $1.2 million in 2010, primarily as a result of increased net
income in 2012 at PSMC.
In 2012 and 2011 the board of directors of PSMC authorized PSMC to repurchase
shares of its outstanding common stock for retirement. These repurchase programs
resulted in 35.9 million shares being purchased for $15.6 million in 2012, and
21.6 million shares being purchased for $9.9 million in 2011. PSMC's repurchase
of these shares increased the Company's ownership percentage in PSMC from 57.53%
at October 31, 2010, to 62.25% as of October 30, 2011, and to 72.09% at October
28, 2012. See Note 15 of the consolidated financial statements for more
information. The Company's ownership percentage in its subsidiary in Korea was
99.7% throughout fiscal 2010 to fiscal 2012.
23
--------------------------------------------------------------------------------
Liquidity and Capital Resources
October 28, October 30, October 31,
2012 2011 2010
(in millions) (in millions) (in millions)
Cash and cash equivalents $ 218.0 $ 189.9 $ 98.9
Net cash provided by operating activities $ 132.5 $ 136.6 $ 95.9
Net cash used in investing activities $ (111.9 ) $ (100.7 ) $ (58.2 )
Net cash provided by (used in) financing
activities $ 4.6 $ 54.5 $ (32.4 )
As of October 28, 2012, the Company had cash and cash equivalents of $218.0
million compared to $189.9 million as of October 30, 2011. The Company's working
capital increased $25.0 million to $234.3 million at October 28, 2012, as
compared to $209.3 million at October 30, 2011. The increase in working capital
was primarily the result of cash generated from operations. The Company may use
its cash available on hand for operations, capital expenditures, debt
repayments, strategic opportunities, stock repurchases or other corporate uses,
any of which may be material.
As of October 30, 2011, the Company had cash and cash equivalents of $189.9
million compared to $98.9 million as of October 31, 2010. The Company's working
capital increased $122.7 million to $209.3 million at October 30, 2011, as
compared to $86.6 million at October 31, 2010. The increase in working capital
was primarily the result of cash proceeds from the issuance of $115 million of
3.25% convertible senior notes (of which a portion of the proceeds was used to
repay higher interest rate debt) and increased cash generated from operating
activities.
Net cash provided by operating activities was $132.5 million in fiscal 2012, as
compared to $136.6 million in fiscal 2011. The decrease was the result of less
favorable, when adjusted for a significant non-cash debt extinguishment loss
charge, year-over-year operating results, which was partially offset by more
cash generated through reduced accounts receivable and inventory balances. Net
cash provided by operating activities was $136.6 million in fiscal 2011 as
compared to $95.9 million in fiscal 2010. The increase was the effect of
improved year-over-year operating results (excluding the effect of the non-cash
debt portion of the extinguishment loss) as a result of increased sales. Net
cash provided by operating activities increased to $95.9 million in fiscal 2010,
as compared to $68.1 million in fiscal 2009, due to improved operating results
in fiscal 2010 as a result of increased sales.
Net cash used in investing activities increased to $111.9 million in fiscal
2012, as compared to $100.7 million in fiscal 2011, due to increased purchases
of property, plant and equipment, which were partially offset by a decrease in
the amount of the Company's year-over-year investment in the MP Mask joint
venture. The investments in the joint venture were primarily the result of
capital calls made by the joint venture. Net cash used in investing activities
in fiscal 2011 increased to $100.7 million, as compared to $58.2 million in
2010, primarily due to increases in the Company's investment in MP Mask as a
result of capital calls, net proceeds from the sale of the Company's former
manufacturing facility in Shanghai, China, which reduced total net proceeds used
in investing activities in fiscal 2010, and increased capital expenditures in
2011. Capital expenditures for the 2012, 2011, and 2010 fiscal years were $97.0
million, $82.1 million, and $71.4 million, respectively. The Company expects
capital expenditure payments for fiscal 2013 to range between $70 million and
$90 million, primarily related to investment in high-end IC manufacturing
capability.
Net cash provided by financing activities was $4.6 million in fiscal 2012, as
compared to $54.5 million provided by financing activities in fiscal 2011 and,
in 2012, was primarily comprised of the proceeds of a $25 million term loan,
that was entered into by the Company in connection with its purchase of the US
nanoFab facility, which was partially offset by payments for the repurchase
common stock of PSMC from noncontrolling interests and repayments on long-term
borrowings. Net cash provided by financing activities was $54.5 million in
fiscal 2011 as compared to $32.4 million used in financing activities in fiscal
2010, and was primarily comprised of the net proceeds received from the March
2011 issuance of 3.25% convertible senior notes, partially offset by the
repayment of certain other higher interest rate long-term borrowings.
24
--------------------------------------------------------------------------------
In March 2011 the Company issued $115 million aggregate principal amount of
3.25% convertible senior notes. The Company realized net proceeds of $110.7
million from the issuance of the notes, which mature on April 1, 2016, and
commenced paying interest semiannually on October 1, 2011. During the three
month period ended May 1, 2011, the Company used $19.7 million of the net
proceeds of the 3.25% convertible senior notes and issued common stock to
repurchase approximately $30.4 million principal amount of its 5.5% convertible
senior notes, and used an additional $19.8 million of the net proceeds to repay
its outstanding obligations under capital leases. In June 2011 the Company
acquired an additional $5.0 million principal amount of its outstanding 5.5%
convertible senior notes for $3.2 million and common stock. The Company may use
a portion of the remaining net proceeds of its 3.25% convertible senior notes to
repurchase additional amounts of its outstanding 5.5% senior convertible notes
and for capital expenditure and working capital purposes.
In March 2011 the Company and its lenders amended its revolving credit
facility. Under the terms of the amended credit facility, the total amount
available to the Company to borrow was reduced from $65 million to $30
million. The credit facility bears interest (2.50% at October 28, 2012), based
on the Company's total leverage ratio, at LIBOR plus a spread, as defined in the
agreement. The credit facility is secured by substantially all of the Company's
assets located in the United States, as well as common stock the Company owns in
certain of its foreign subsidiaries, and is subject to financial covenants,
including the following, as defined in the agreement: minimum fixed charge
ratio, total leverage ratio and minimum unrestricted cash balance. In January
2011 a $10 million irrevocable stand-by letter of credit, which expired in July
2011, for the purchase of manufacturing equipment was issued under the credit
facility. As of October 28, 2012, the Company was in compliance with the
covenants of its credit facility, had no outstanding borrowings under the credit
facility and $30 million was available for borrowing.
In April 2011 the Company entered into a 5 year, $21.2 million capital lease of
manufacturing equipment. Payments under the lease, which bears interest at
3.09%, are $0.4 million per month through March 2016. As of October 28, 2012,
the total lease amount payable through the end of the lease term was $16.0
million, of which $15.2 million represented principal and $0.8 million
represented interest.
In February 2012 the Company paid $35 million to Micron in connection with the
purchase of the U.S. nanoFab facility. In connection therewith, the Company
amended its credit facility to include the addition of a $25 million term loan
maturing in March 2017, with minimum quarterly principal payments of $0.6
million and an outstanding balance of $23.8 million at October 28, 2012. The
amendment also included a twenty-five basis point reduction in the interest rate
charged on any borrowings under the credit facility. As a result of the purchase
of the U.S. nanoFab facility, the Company's lease agreement with Micron for the
U.S. nanoFab facility was cancelled, which reduced the Company's related
outstanding operating lease commitments by a combined total of $15 million for
fiscal years 2013 and 2014.
In 2012 and 2011 the board of directors of PSMC authorized PSMC to repurchase
shares of its outstanding common stock for retirement. These repurchase programs
resulted in 35.9 million shares being repurchased for $15.6 million in 2012 and
21.6 million shares being purchased for $9.9 million in 2011.
The Company's liquidity is highly dependent on its sales volume, cash conversion
cycle, and the timing of its capital expenditures (which can vary significantly
from period to period), as it operates in a high fixed cost environment.
Depending on conditions in the semiconductor and FPD markets, the Company's cash
flows from operations and current holdings of cash may not be adequate to meet
its current and long-term needs for capital expenditures, operations and debt
repayments. Historically, in certain years, the Company has used external
financing to fund these needs. Due to conditions in the credit markets, some
financing instruments used by the Company in the past may not be currently
available to it. The Company continues to evaluate further cost reduction
initiatives. However, the Company cannot assure that additional sources of
financing would be available to it on commercially favorable terms, should its
cash requirements exceed cash available from operations, existing cash, and cash
available under its credit facility.
At October 28, 2012, the Company had outstanding purchase commitments of $100
million, which included $91 million related to capital expenditures, primarily
for investment in high-end IC photomask manufacturing capability. The Company
intends to finance its capital expenditures with its working capital, cash
generated from operations, and, if necessary, with additional borrowings.
25
--------------------------------------------------------------------------------
Cash Requirements
The Company's cash requirements in fiscal 2013 will be primarily to fund its
operations, including capital spending, and to service its debt. The Company
believes that its cash on hand, cash generated from operations and amounts
available under its credit facility will be sufficient to meet its cash
requirements for the next twelve months. The Company regularly reviews the
availability and terms on which it might issue additional equity or debt
securities in the public or private markets. However, the Company cannot assure
that additional sources of financing would be available to the Company on
commercially favorable terms, should the Company's cash requirements exceed its
cash available from operations, existing cash, and cash available under its
credit facility.
Contractual Obligations
The following table presents the Company's contractual obligations as of October
28, 2012:
Payment due by period
Less More
Than 1 - 3 3 - 5 Than
Contractual Obligations Total 1 Year Years Years 5 Years
Long-term borrowings $ 160,804 $ 2,500 $ 27,054 $ 131,250 $ -
Operating leases 4,397 1,608 1,389 844 556
Capital leases 15,175 4,523 8,759 1,893 -
Unconditional purchase
obligations 99,477 86,314 13,163 - -
Interest 18,296 6,079 10,121 2,096 -
Other noncurrent
liabilities 6,823 - 605 - 6,218
Total $ 304,972 $ 101,024 $ 61,091 $ 136,083 $ 6,774
As of October 28, 2012, the Company had an outstanding balance of $0.8 million
for a loan from a customer which was not included in the above table. The
proceeds of the loan were used to purchase manufacturing equipment. This loan is
expected to be repaid with product supplied to the customer, typically on a
monthly basis, and the Company estimates that the loan will be fully repaid in
fiscal 2013.
As of October 28, 2012, the Company had recorded accruals for uncertain tax
positions of $1.9 million which was not included in the above table due to the
high degree of uncertainty regarding the timing of future payments related to
such liabilities.
Off-Balance Sheet Arrangements
Under the MP Mask joint venture operating agreement, in order to maintain its
49.99% ownership interest, the Company may be required to make additional
capital contributions to the joint venture up to the maximum amount defined in
the operating agreement. Cumulatively, through October 28, 2012, the Company has
contributed $32.5 million to the joint venture, and has received distributions
from the joint venture totaling $10.0 million. During fiscal 2012, the Company
contributed $13.0 million to MP Mask. The Company received no distributions from
MP Mask during fiscal 2012.
The Company leases certain office facilities and equipment under operating
leases that may require it to pay taxes, insurance and maintenance expenses
related to the properties. Certain of these leases contain renewal or purchase
options exercisable at the end of the lease terms. See Note 9 to the
consolidated financial statements for additional information on these operating
leases.
26
--------------------------------------------------------------------------------
Business Outlook
A majority of the Company's revenue growth is expected to continue to come from
the Asian region as customers increase their use of manufacturing foundries
located outside of North America and Europe. Additional revenue growth is also
anticipated in North America, as the Company expects to benefit from advanced
technology it may utilize under its technology license with Micron. The
Company's Korean and Taiwanese operations are non-wholly owned subsidiaries and,
therefore, a portion of earnings generated at each location is allocated to the
noncontrolling interests.
The Company continues to assess its global manufacturing strategy and monitor
its market capitalization, sales volume and related cash flows from operations.
This ongoing assessment could result in future facility closures, asset
redeployments, additional impairments of intangible or long-lived assets,
workforce reductions, or the addition of increased manufacturing facilities, all
of which would be based on market conditions and customer requirements.
The Company's future results of operations and the other forward-looking
statements contained in this filing involve a number of risks and uncertainties.
While various risks and uncertainties have been discussed, a number of other
unforeseen factors could cause actual results to differ materially from the
Company's expectations.
Critical Accounting Estimates
The Company's consolidated financial statements are based on the selection and
application of accounting policies, which require management to make significant
estimates and assumptions. The Company believes that the following are some of
the more critical judgment areas in the application of the Company's accounting
policies that affect its financial condition and results of operations.
Estimates and Assumptions
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect amounts
reported in them. Management bases its estimates on historical experience and on
various assumptions that are believed to be reasonable under the circumstances.
The Company's estimates are based on the facts and circumstances available at
the time they are made. Changes in accounting estimates used are likely to occur
from period to period, which may have a material impact on the presentation of
the Company's financial condition and results of operations. Actual results
reported by the Company may differ from such estimates. The Company reviews
these estimates periodically and reflects the effect of revisions in the period
in which they are determined.
Fair Value of Financial Instruments
The fair values of the Company's 3.25% and 5.5% convertible senior notes are
estimated by management based upon reference to quoted market prices and other
available market information. The fair values of the Company's cash and cash
equivalents, accounts receivable, accounts payable, certain other current assets
and current liabilities, and variable rate borrowings approximate their carrying
value due to their short-term maturities.
Property, Plant and Equipment
Property, plant and equipment, except as explained below under "Impairment of
Long-Lived Assets," are stated at cost less accumulated depreciation and
amortization. Repairs and maintenance, as well as renewals and replacements of a
routine nature, are charged to operations as incurred, while those that improve
or extend the lives of existing assets are capitalized. Upon sale or other
disposition, the cost of the asset and accumulated depreciation are removed from
the accounts, and any resulting gain or loss is reflected in earnings.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the related assets. Buildings and improvements are
depreciated over 15 to 40 years, machinery and equipment over 3 to 10 years and
furniture, fixtures and office equipment over 3 to 5 years. Leasehold
improvements are amortized over the life of the lease or the estimated useful
life of the improvement, whichever is less. Judgment and assumptions are used in
establishing estimated useful lives and depreciation periods. The Company also
uses judgment and assumptions as it periodically reviews property, plant and
equipment for any potential impairment in carrying values whenever events such
as a significant industry downturn, plant closures, technological obsolescence
or other changes in circumstances indicate that their carrying amounts may not
be recoverable.
27
--------------------------------------------------------------------------------
Intangible Assets
Intangible assets consist primarily of a technology license agreement, a supply
agreement and acquisition-related intangibles. These assets, except as explained
below, are stated at fair value as of the date acquired less accumulated
amortization. Amortization is calculated based on the estimated useful lives of
the assets, which range from 3 to 15 years, using the straight-line method or
another method that more fairly represents the utilization of the assets.
The Company periodically evaluates the remaining useful lives of its intangible
assets to determine whether events or circumstances warrant a revision to the
remaining periods of amortization. In the event that the estimate of an
intangible asset's remaining useful life has changed, the remaining carrying
amount of the intangible asset is amortized prospectively over that revised
remaining useful life. If it is determined that an intangible asset has an
indefinite useful life, that intangible asset would be subject to impairment
testing annually or whenever events or circumstances indicate that the carrying
value may not, based on future undiscounted cash flows or market factors, be
recoverable, and an impairment loss would be recorded in the period so
determined. The measurement of the impairment loss would be based on the fair
value of the intangible asset.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Determination of recoverability is based on the Company's judgment
and estimates of undiscounted future cash flows resulting from the use of the
assets and their eventual disposition. Measurement of an impairment loss for
long-lived assets that management expects to hold and use is based on the fair
value of the assets. The carrying values of assets determined to be impaired are
reduced to their estimated fair values. Fair values of the impaired assets would
generally be determined using a market or income approach.
Investments in Joint Ventures
Investments in joint ventures over which the Company has the ability to exercise
significant influence and that, in general, are at least 20 percent owned are
accounted for under the equity method. An impairment loss would be recognized
whenever a decrease in the value of such an investment below its carrying amount
is determined to be other than temporary. In judging "other than temporary," the
Company would consider the length of time and the extent to which the fair value
of the investment has been less than the carrying amount of the investment, the
near-term and longer-term operating and financial prospects of the investee, and
the Company's longer-term intent of retaining its investment in the investee.
Variable Interest Entities
The Company accounts for the investments it makes in certain legal entities in
which equity investors do not have 1) sufficient equity at risk for the legal
entity to finance its activities without additional subordinated financial
support or, 2) as a group, the holders of the equity investment at risk do not
have either the power, through voting or similar rights, to direct the
activities of the legal entity that most significantly impact the entity's
economic performance or, 3) the obligation to absorb the expected losses of the
legal entity or the right to receive expected residual returns of the legal
entity. These certain legal entities are referred to as "variable interest
entities", or "VIEs".
The Company would consolidate the results of any such entity in which it
determined that it had a controlling financial interest. The Company would have
a "controlling financial interest" in such an entity if the Company had both the
power to direct the activities that most significantly affect the VIE's economic
performance and the obligation to absorb the losses of, or right to receive
benefits from, the VIE that could be potentially significant to the VIE. On a
quarterly basis, the Company reassesses whether it has a controlling financial
interest in any investments it has in these certain legal entities.
Income Taxes
The income tax provision is computed on the basis of the various tax
jurisdictions' income or loss before income taxes. Deferred income taxes reflect
the tax effects of differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, as well as the tax effects of net operating losses and tax credit
carryforwards. The Company uses judgment and assumptions to determine if
valuation allowances for deferred income tax assets are required, if their
realization is not more likely than not, by considering future market growth,
forecasted operations, future taxable income, and the amounts of earnings in the
tax jurisdictions in which it operates.
28
--------------------------------------------------------------------------------
The Company considers income taxes in each of the tax jurisdictions in which it
operates in order to determine its effective income tax rate. Current income tax
exposure is identified and temporary differences resulting from differing
treatments of items for tax and financial reporting purposes are assessed. These
differences result in deferred tax assets and liabilities, which are included in
the Company's consolidated balance sheets. Additionally, the Company evaluates
the potential realization of deferred income tax assets from future taxable
income and establishes valuation allowances if their realization is deemed not
more likely than not. Accordingly, income taxes charged against earnings may
have been impacted by changes in the valuation allowances. Significant
management estimates and judgment are required in determining any valuation
allowances recorded against net deferred tax assets.
The Company accounts for uncertain tax positions by recording a liability for
unrecognized tax benefits resulting from uncertain tax positions taken, or
expected to be taken, in its tax returns. The Company includes any applicable
interest and penalties related to uncertain tax positions in its income tax
provision.
Revenue Recognition
The Company recognizes revenue when there is persuasive evidence that an
arrangement exists, delivery has occurred, the sales price is fixed or
determinable, and collectability is reasonably assured. Delivery is determined
by the shipping terms of the individual sales transactions. For sales with FOB
destination shipping terms, delivery occurs when the Company's product reaches
its destination and is received by the customer. For sales with FOB shipping
point terms, delivery occurs when the Company's product is received by the
common carrier. The Company uses judgment when estimating the effect on revenue
of discounts and product warranty obligations, both of which are accrued when
the related revenue is recognized.
Warranties and Other Post Shipment Obligations - For a 30-day period, the
Company warrants that items sold will conform to customer specifications.
However, the Company's liability is limited to the repair or replacement of the
photomasks at its sole option. The Company inspects photomasks for conformity to
customer specifications prior to shipment. Accordingly, customer returns of
items under warranty have historically been insignificant. However, the Company
records a liability for the insignificant amount of estimated warranty returns
based on historical experience. The Company's specific return policies include
accepting returns of products with defects, or products that have not been
produced to precise customer specifications. At the time of revenue recognition,
a liability is established for these items.
Share-based Compensation
The Company recognizes share-based compensation expense over the service period
that the awards are expected to vest. Share-based compensation expense includes
the estimated effects of forfeitures, which are adjusted over the requisite
service period to the extent actual forfeitures differ, or are expected to
differ, from such estimates. Changes in estimated forfeitures are recognized in
the period of change and will also impact the amount of expense to be recognized
in future periods. Determining the appropriate option pricing model, calculating
the grant date fair value of share-based awards and estimating forfeiture rates
requires considerable judgment, including the estimations of stock price
volatility and the expected term of options granted.
The Company uses the Black-Scholes option pricing model to value employee stock
options. The Company estimates stock price volatility based on daily averages of
its historical volatility over a term approximately equal to the estimated time
period the grant will remain outstanding. The expected term of options and
forfeiture rate assumptions are derived from historical data.
Effect of Recent Accounting Pronouncements
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive
Income ("ASU 2011-05"). ASU 2011-05 requires companies to present the components
of net income and other comprehensive income either as one continuous statement
or as two consecutive statements. It eliminates the option to present components
of other comprehensive income as part of the statement of changes in
stockholders' equity. ASU 2011-05 is effective for interim and annual periods
beginning after December 15, 2011 and is applied retrospectively. The Company
has adopted this update and presented the Consolidated Statements of
Comprehensive Income immediately following the Consolidated Statements of
Income.
There have been no recent accounting pronouncements whose adoption would affect
the Company's financial statements or related disclosures.
29
--------------------------------------------------------------------------------
[ Back To Contact Center Solutions Homepage's Homepage ]
|
MetricNet Publishes 4 New Australian Benchmarks for IT Support, Contact Centres 
Part 1: Home Agents: The Big Game Changer [white paper]
