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| PLAB > SEC Filings for PLAB > Form 10-Q on 11-Jun-2009 | All Recent SEC Filings |
11-Jun-2009
Quarterly Report
Overview
Management's discussion and analysis ("MD&A") of the Company's financial condition, business results and outlook should be read in conjunction with its condensed consolidated financial statements and related notes. Various segments of this MD&A contain forward-looking statements, all of which are presented based on current expectations and may be adversely affected by uncertainties and risk factors (presented throughout this filing and in the Company's Annual Report on Form 10-K for the fiscal 2008 year), that may cause actual results to materially differ from these expectations.
The Company sells substantially all of its photomasks to semiconductor designers and manufacturers, and manufacturers of flat panel displays ("FPD"). 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. 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 produced using photomask technologies. Consequently, an increase in semiconductor or FPD sales does not necessarily result in a corresponding increase in photomask sales. In addition, the reduced use of customized integrated circuits ("IC"), reductions in design complexity or other changes in the technology or methods of manufacturing semiconductors, or a slowdown in the introduction of new semiconductor or FPD designs could reduce demand for photomasks. Such a reduction in demand could occur even if demand for semiconductors and FPD increases. Advances in semiconductor and photomask design and semiconductor 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.
The semiconductor industry is currently experiencing a severe downturn due to a significant oversupply of products, which has been further negatively impacted by worsening global economic conditions. These conditions have resulted in reduced average selling prices ("ASP") and gross margins for the Company and others in the semiconductor industry. In response to these market conditions, in January 2009 the Company ceased production of photomasks at its Manchester, U.K. facility. The Company has also undertaken additional cost saving measures to increase its competitiveness, including reductions in executive and employee salaries, continued hiring freezes, and reductions of other discretionary costs such as outside services, travel and overtime. Continued unfavorable changes in global economic conditions, including those in Asia, the U.S. or other geographic areas in which the Company does business, may have the effect of reducing the demand for photomasks and further reducing the Company's ASP and gross margin. For example, continued unfavorable
changes in global economic conditions may lead to a decrease in demand for end products whose manufacturing processes involve the use of photomasks. This may result in a reduction in new product design and development by semiconductor manufacturers, which could adversely affect the Company's operations and cash flows.
The effects of the worsening global economy and the tightening credit market are also making it increasingly difficult for the Company and others in the semiconductor industry to obtain external sources of financing to fund their operations. The Company is further pursuing alternatives to increase its capital, and is delaying capital expenditures and implementing further cost-cutting initiatives.
The Company's ability to comply with the financial and other covenants in its debt agreements may be affected by worsening economic or business conditions, or other events. Should the Company be unable to meet one or more of these covenants its lenders may require the Company to repay its outstanding balances prior to the expiration date of the agreements. The Company cannot assure that additional sources of financing would be available to the Company to pay off the Company's long-term borrowings to avoid default. Should the Company default on any of its long-term borrowings, a cross default would occur on its other long-term borrowings, unless amended or waived. As of May 3, 2009, the Company was in compliance with its debt covenants.
Material Changes in Results of Operations
Three and Six Months ended May 3, 2009 and April 27, 2008
The following table represents selected operating information expressed as a
percentage of net sales.
Three Months Ended Six Months Ended
------------------------- ---------------------------
May 3, April 27, May 3, April 27,
2009 2008 2009 2008
---------- ----------- ----------- ------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales (86.3) (81.6) (87.2) (80.9)
---------- ----------- ----------- ------------
Gross margin 13.7 18.4 12.8 19.1
Selling, general and
administrative expenses (12.8) (12.3) (12.3) (14.0)
Research and development
expenses (5.0) (4.2) (4.6) (4.1)
Consolidation,
restructuring and related (0.5) - (1.2) -
charges
Impairment of long-lived (1.7) - (0.8) -
assets
---------- ----------- ----------- ------------
Operating (loss) income (6.3) 1.9 (6.1) 1.0
Other income (expense), net (6.0) (2.9) (5.0) (1.8)
---------- ----------- ----------- ------------
Loss before income taxes
and minority interest (12.3) (1.0) (11.1) (0.8)
Income tax benefit
(provision) 0.1 (0.9) (0.7) (1.3)
Minority interest in
operations of
consolidated subsidiaries 0.1 - (0.1) (0.4)
---------- ----------- ----------- ------------
Net loss (12.1)% (1.9)% (11.9)% (2.5)%
---------- ----------- ----------- ------------
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All of the following tabular comparisons, unless otherwise indicated, are for the three months ended May 3, 2009 (Q2-09) and April 27, 2008 (Q2-08) and for the six months ended May 3, 2009 (YTD-09) and April 27, 2008 (YTD-08) in millions of dollars.
Net Sales
Three Months Ended Six Months Ended
------------------------ -------------------------
Percent Percent
Q2-09 Q2-08 Change YTD-09 YTD-08 Change
----- ------ ------- ------ ------ -------
IC $63.8 $ 80.0 (20.3)% $127.4 $160.4 (20.6)%
FPD 19.4 30.3 (36.0)% 43.9 53.1 (17.3)%
----- ------ ------ ------
Total net sales $83.2 $110.3 (24.6)% $171.3 $213.5 (19.8)%
----- ------ ------- ------ ------ -------
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Net sales for Q2-09 decreased 24.6% to $83.2 million as compared to $110.3 million for Q2-08. Sales of IC photomasks decreased $16.2 million, primarily due to reduced units and average selling prices ("ASP") for mainstream photomasks. Sales of FPD photomasks decreased $10.9 million due to reduced ASP for both mainstream and high-end photomasks. Net sales in Q2-09 as compared to Q2-08 decreased also as a result of many of the Company's customers placing their fabs on extended shutdowns. Revenues attributable to high-end products were $15.9 million in Q2-09 and $23.5 million in Q2-08. High-end photomask applications, which typically have higher ASP, include mask sets for FPD products using G7 and above technologies and IC products using 65 nanometer and below technologies. By geographic area, net sales in Q2-09 as compared to Q2-08 decreased by $15.2 million or 23.0% in Asia, decreased by $3.2 million or 12.2% in North America, and decreased by $8.7 million or 48.3% in Europe.As a percent of total sales in Q2-09, net sales were 61% in Asia, 28% in North America, and 11% in Europe; and net sales in Q2-08 in Asia were 60%, North America 24%, and Europe 16%.
Net sales for YTD-09 decreased 19.8% to $171.3 million as compared to $213.5 million for YTD-08. The decrease was caused by lower sales of both IC and FPD photomasks. IC photomask sales decreased $33.0 million primarily due to reduced units and ASP for mainstream products. FPD photomask sales decreased $9.2 million, primarily as a result of lower ASP for both mainstream and high-end products. The Company's quarterly revenues can be affected by the seasonal purchasing of its customers. The Company is typically impacted during the first six months of its fiscal year by the North American, European and Asian holiday periods as some customers reduce their effective workdays and orders during this period. This seasonality was experienced to a greater than normal extent during YTD-09 as many of the Company's customers placed their fabs on extended shutdowns.
Gross Margin
Three Months Ended Six Months Ended
------------------------------- -------------------------------
Q2-09 Q2-08 Percent YTD-09 YTD-08 Percent
Change Change
------- ------- ------- ------- ------- -------
Gross margin $11.4 $20.3 (43.8)% $22.0 $40.9 (46.2)%
Percentage of net 13.7% 18.4% 12.8% 19.1%
sales
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Gross margin decreased to 13.7% in Q2-09 from 18.4% in Q2-08 primarily due to reduced sales volume of 24.6% and increased manufacturing costs associated with the U.S. Nanofab which commenced operations in the second quarter of 2008. Gross margin decreased to 12.8% in YTD-09 from 19.1% in YTD-08 primarily due to reduced sales volume of 19.8% and increased manufacturing costs associated with the U.S. Nanofab. 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.
Selling, General and Administrative Expenses
Three Months Ended Six Months Ended
---------------------------- -----------------------------
Q2-09 Q2-08 Percent YTD-09 YTD-08 Percent
Change Change
------- ------- ------- ------- ------- -------
Selling, general and
administrative expenses $10.6 $13.6 (21.7)% $21.0 $29.9 (29.6)%
Percentage of net sales 12.8% 12.3% 12.3% 14.0%
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Selling, general and administrative expenses decreased $3.0 million to $10.6 million in Q2-09, compared with $13.6 million in Q2-08, primarily as a result of headcount and salary reductions and other cost reduction programs. Selling, general and administrative expenses were $21.0 million and $29.9 million in YTD-09 and YTD-08, respectively. The decrease was primarily related to certain U.S. Naonfab costs reported in selling, general and administrative expenses (prior to it commencing production in Q2-08), reduced compensation costs due in part to reduced employee headcount, and cost reduction programs.
Research and Development
Three Months Ended Six Months Ended
----------------------------- -----------------------------
Q2-09 Q2-08 Percent YTD-09 YTD-08 Percent
Change Change
------ ------ ------- ------ ------ -------
Research and development $4.2 $4.6 (9.5)% $7.8 $8.9 (11.9)%
Percentage of net sales 5.0% 4.2% 4.6% 4.1%
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Research and development expenses consist primarily of global development efforts relating to high-end process technologies for advanced sub-wavelength reticle solutions for IC and FPD technologies. Research and development expenses decreased by $0.4 million to $4.2 million in Q2-09, as compared to $4.6 million in Q2-08. On a YTD basis, research and development expenses decreased $1.1 million to $7.8 million in YTD-09, as compared to $8.9 million in YTD-08. The reduction in research and development expenses in Q2-09 and YTD-09 as compared to the same periods in the prior year were primarily due to reduced expenditures in Asia.
Consolidation, Restructuring and Related Charges
Three Months Ended Six Months Ended
---------------------- ------------------
Q2-09 Q2-08 YTD-09 YTD-08
--------- --------- -------- ------
Employee terminations $0.3 $ - $1.4 $ -
Asset write-downs and other 0.1 - 0.7 -
--------- --------- -------- ------
Total consolidation, restructuring $0.4 $ - $2.1 $ -
and related charges
--------- --------- -------- ------
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During the three months ended February 1, 2009, the Company ceased the manufacture of photomasks at its Manchester U.K. facility. This initiative began with the recording of a $0.5 million charge for the impairment of certain long-lived assets at the facility in the fourth quarter of fiscal 2008, and included an additional $2.1 million incurred in the first six months of fiscal 2009, primarily for employee termination costs and asset write-downs. Approximately 85 employees are expected to be affected by this plan. The Company expects the total after tax cost of this restructure to range between $2 million to $3 million through its expected completion at the end of fiscal 2009.
Impairment of Long-Lived Assets
During the three months ended May 3, 2009, the Company recorded an impairment charge of $1.5 million to reduce the carrying value of the Manchester facility to its estimated fair value, which was determined by management using a market approach.
Other Income (expense), net
Three Months Ended Six Months Ended
---------------------- ------------------
Q2-09 Q2-08 YTD-09 YTD-08
--------- --------- -------- ------
Interest expense $(4.4) $(2.8) $(9.1) $(5.0)
Investment and other
income (expense), net (0.6) (0.4) 0.5 1.2
--------- --------- -------- ------
Other income (expense), net $(5.0) $(3.2) $(8.6) $(3.8)
--------- --------- -------- ------
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Interest expense in Q2-09 and YTD-09 increased as compared to the same periods in the prior year, primarily as a result of the higher interest rates on the Company's outstanding debt obligations. Investment and other income (expense), net, for Q2-09 decreased as compared to Q2-08 and for YTD-09 as compared to YTD-08, primarily due to decreased investment income associated with lower cash balances and increased foreign currency exchange losses.
Income Tax Benefit (Provision)
Three Months Ended Six Months Ended
--------------------- ------------------
Q2-09 Q2-08 YTD-09 YTD-08
-------- --------- -------- ------
Income tax benefit (provision) $0.1 $(0.9) $(1.1) $(2.8)
-------- --------- -------- ------
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The effective tax rates for the periods presented differ from the amounts computed by applying the U.S. statutory rate of 35% to the income before taxes primarily because income tax provisions in jurisdictions where the Company generated income were, due to valuation allowances, not significantly offset by income tax benefits in jurisdictions where the Company incurred losses before income taxes.
The Company's operations have followed the migration of semiconductor industry fabrication to Asia, where the Company operates in countries in which it is accorded favorable tax treatment. PKLT, the Company's FPD manufacturing facility in Taiwan, is accorded a tax holiday, which is expected to expire in 2012. In addition, the Company has been accorded a tax holiday in China which is expected to expire in 2011. These tax holidays had no dollar or per share effect in the three and six months ended May 3, 2009 and April 27, 2008. In Korea and Taiwan, various investment tax credits have been utilized to reduce the Company's effective income tax rate.
As of May 3, 2009 the gross unrecognized tax benefits for income taxes associated with uncertain tax positions totaled approximately $1.8 million. If recognized, the benefits would favorably affect the Company's effective rate in future periods. During the three months ended May 3, 2009, the Company recognized approximately $1.0 million of tax benefits related to settlements of uncertain tax positions in the U.K. and Germany. Though the Company expects these remaining items may result in a net reduction of its unrecognized tax benefits, an estimate of the expected reduction and related income tax benefit within the next twelve months cannot be made at this time.
Currently, the statutes of limitations remain open subsequent to and including 2004 in the U.S., 2006 in the U.K., 2008 in Germany and 2004 in Korea.
Minority Interest in Consolidated Subsidiaries
Minority interest was income of $0.1 million in Q2-09 primarily due to a net loss incurred in Q2-09 at the Company's non-wholly owned subsidiary in Taiwan, as compared to a minor amount of expense in Q2-08. The Company's ownership in its subsidiary in Taiwan was approximately 58% at May 3, 2009 and November 2, 2008, and its ownership in its subsidiary in Korea was approximately 99.7% at May 3, 2009 and November 2, 2008.
Liquidity and Capital Resources
The Company's working capital decreased $25.8 million to $40.7 million at May 3, 2009, as compared to $66.4 million at November 2, 2008, primarily as a result of an increase in the current portion of long-term borrowings related to its U.S. and China credit facilities that were previously reported as long-term. Cash, cash equivalents, and short-term investments decreased to $81.6 million at May 3, 2009 as compared to $85.1 million at November 2, 2008, primarily due to payments for capital expenditures and repayments of long-term borrowings. Cash provided by operating activities was $26.3 million for the six months ended May 3, 2009, as compared to $35.1 million for the same period last year, the decrease primarily due to the Company incurring a greater net loss as compared to the same prior year period. Cash used in investing activities for the six months ended May 3, 2009 was $14.4 million, which is comprised primarily of capital expenditure payments partially offset by a distribution received from the MP Mask joint venture. Cash used in financing activities of $13.1 million for the six months ended May 3, 2009 was primarily comprised of the repayments of long-term borrowings.
The Company's credit facility was most recently amended on May 15, 2009, and includes the following changes: the maturity date of the credit facility was extended from July 30, 2010 to January 31, 2011; the Company's borrowing limit was reduced from $135 million to $130 million and will be further reduced to $110 million on January 31, 2010 (as compared to $100 million in the prior agreement). As part of this amendment, and along with the amended foreign loans in China, the cash interest rate on the outstanding debt balance is the greater of LIBOR or two percent plus a spread, as defined. Effective with the amendment, payment-in-kind ("PIK") interest will also accrue on the following components of the outstanding debt balance: a) PIK interest of one-and-one-half percent, and increasing fifty basis points per quarter (commencing with the quarter beginning August 3, 2009), to a maximum of three-and-one-half percent on up to $50 million of the outstanding debt balance, and b) PIK interest of one-half percent increasing fifty basis points per quarter to a maximum of two-and-one-half percent on the remaining outstanding debt balance of the credit facility. The PIK interest can be paid during the term of the credit facility or at maturity. As a result of this amendment, $10 million has been reclassified on the May 3, 2009 balance sheet from current to long-term debt.
On May 19, 2009, the Company entered into a new lease agreement with Micron Technologies, Inc. (the lessor) for the U.S. NanoFab. Under the provisions of the new lease agreement, quarterly lease payments were reduced and, as compared to the prior lease agreement, will result in cash savings for the Company of $6.5 million over the remainder of fiscal 2009.
At May 3, 2009, the Company had capital commitments outstanding of approximately $39 million. The Company believes that its currently available resources, together with its capacity for growth, and its access to equity and other sources, will be sufficient to satisfy its currently planned capital expenditures, as well as its anticipated working capital requirements for the remainder of its 2009 fiscal year. However, the Company cannot assure that additional sources of financing would be available to the Company on commercially favorable terms should the Company's capital requirements exceed cash available from operations and existing cash, short-term investments and cash available under its credit facility.
Cash Requirements
The Company's cash requirements in fiscal 2009 will be primarily to fund operations, including capital spending and debt service. 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 remainder of the fiscal year. 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 capital requirements exceed cash available from operations and existing cash, and cash available under its credit facility.
Stock-Based Compensation
Total stock-based compensation expense for the three and six months ended May 3, 2009 was $0.6 million and $1.3 million, respectively, as compared to $0.7 million and $1.2 million, respectively, for the comparable prior year periods, substantially all of which is in selling, general and administrative expenses. No compensation cost was capitalized as part of inventory, and no income tax benefit has been recorded. As of May 3, 2009 total unrecognized compensation cost of $5.4 million is expected to be recognized over a weighted-average amortization period of 3.3 years.
Business Outlook
A majority of the Company's revenue growth is expected 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 from North America as a result of utilizing technology licensed under the Company's technology license with Micron. The Company's Korean and Taiwanese operations are non-wholly owned subsidiaries, therefore, a portion of earnings generated at each of these locations will be allocated to the minority shareholders for the remainder of fiscal 2009.
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 facilities 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, which could cause actual results to differ materially from the Company's expectations.
Off-Balance Sheet Arrangements
Under the Operating Agreement relating to the MP Mask joint venture, through May 5, 2010, the Company may be required to make additional capital contributions to the joint venture of up to a maximum amount as defined in the Operating Agreement. Cumulatively, to date, as of May 3, 2009, the Company has contributed $6.1 million to the joint venture, and has received distributions from the joint venture totaling $10.0 million. During the six months ended May 3, 2009, there were no contributions made to the joint venture by the Company, and a distribution of $5.0 million was received by the Company from the joint venture.
The Company leases certain office facilities and equipment under operating leases. Certain of these leases contain renewal or purchase options exercisable at the end of the lease terms. On May 19, 2009, the Company and Micron Technologies, Inc. entered into a new lease agreement for the U.S. Nanofab . . .
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