Summary Business: Semiconductor photo mask manufacturer Headquarters: Burbank CEO: Constantine S. Macricostas Market Cap: $704.9 million Dividend Yield: N/A* Total Liabilities: $51.6 million P/E: 36.94 Long-Term Debt: $202.8 million *Photronics does not pay dividends The smaller they get, the harder they are to make. And that’s good news for Photronics Inc., which manufactures glass photomasks for mass production of semiconductors or microchips at its facility in Burbank. But things are changing quickly. Even though the semiconductor industry took a beating in 2000, Photronics, which changes the design of its products to suit the needs of the marketplace, is reporting record earnings for its second quarter ended April 30. Net income for the quarter increased 71 percent to $9.9 million, or 32 cents per share, compared to a loss of $5.3 for the same quarter in 2000. Revenues were $98.5 million in the recent quarter ended April 30, or a 29 percent increase over the same quarter the previous year at $76.4 million. The company’s stock price over the last year has remained relatively flat, considering the market downturn, trading at between $24 and $27 a share. The stock closed at $27.43 on Friday, June 8. According to Mark Fitzgerald, an analyst with San Francisco-based Banc of America Securities who has covered Photronics for the last decade, the company has managed to retain a leading position in the reticle industry. But it hasn’t been easy. Because of rapid advancement in computer design applications, the reticle production industry was in saturation mode until the late 1980s and early 1990s. “In the late 1980s, computer design tools dramatically changed and consequently those changes affected the industry,” said Fitzgerald. “So we suffered from huge excess; demand wasn’t growing with the number of the masks being produced. So companies like Photronics used to have to scrap a lot of bad product.” But today, there are only four companies in the business operating on a global scale, according to Fitzgerald, with Photronics now leading the pack. Fitzgerald said roughly 60 percent of the semiconductor manufacturers in business globally rely on those four companies. The other 40 percent manufacture their own products in house. Photronics’ revenue for the last fiscal year was $331 million. Fitzgerald said Photronics may be looking at a flat period over the next few quarters, but will recover. “The positive aspect of what is coming is the photomask technology is getting so complicated the prices are going to increase dramatically and that is going to boost annual revenues for the company,” Fitzgerald said. Its June 2000 merger with Los Angeles-based Align-Rite International resulted in a reduction of its global workforce by roughly 10 percent and a decrease in net revenues over 1999. But, the acquisition did help boost the company’s market share considerably. In August, the company also increased its holdings in the Netherlands-based Precision Semiconductor Mask Corp. from 33 percent to 51 percent. “Photronics has managed to weather a rough period because of its focus on newer products, but it has also come forward through its line of acquisitions over the last year or so,” said Aric Ng, an analyst with the San Francisco based firm SG Cowen Securities Corp. Ng agreed with Fitzgerald that Photronics would likely experience a slight downturn in the third quarter as the semiconductor industry slowly makes a comeback. But again, sales from new products with higher price tags will be key. “Looking ahead, I think their forecasts will be down slightly because of a slowdown in demand,” said Ng. “But we are still forecasting this company to grow by about 19 percent, given the state of the industry and how chip makers are coming out with these more complicated and more costly components.” Although demand for newer, high-end products has resulted in increased revenues for companies like Photronics, the market downturn for the semiconductor industry has also forced the company to look for ways to cut labor and operating costs. Consequently, Photronics will shut down its Burbank-based manufacturing facility Oct. 31 and move it to a new facility in Phoenix, where the demand for semiconductors and the high-end products is said to be greater. “Some 40 percent of the microchips processed in North America are now done in the Southwest,” said Michael McCarthy, a spokesman for Photronics. “From a manufacturing standpoint, we are seeing a lot movement into the Southwest, where there is also a growing demand for more mature components as well as cheaper land and operating costs.” Photronics is reducing its entire manufacturing system, cutting three of its 13 facilities in Burbank, Florida and Germany.