Red flags found at Photronics (NASDAQ: PLAB)
As the board continues to earn significant compensation, Photronics stock continues to underperform the SOXX index.
Photronics (NASDAQ: PLAB) has been underperforming the SOXX index for the last five and ten years. In this post, I try to highlight potential issues from a governance perspective that can help explain Photronics underperformance.
This analysis is not complete and should not be taken as investment advice. Rather it should be a starting point for your own analysis. Please grab me on Twitter @CFRJacobsson with any thoughts or feedback.
Weak board
The board consists of seven directors. Serving on the board is Constantine Macricostas who founded Photronics in 1969. His son George Macirocostas and CEO Peter Kirlinserved also serve on the board. Neither of the aforementioned three meets NASDAQ’s definition of an independent director, leaving the board with only four independent directors.
Of the remaining four directors, Mr. Fiederowicz is arguably the most powerful: he has been on the board since 1984 and acts as the lead independent director. Mr. Fiederowicz is also chairman of the compensation committee - where he has been a member since at least 1999 - and vice chairman of both the audit and nomination committees.
The median compensation among the board’s directors was $265,800 in 2020 with the lead independent director Mr. Fiederowicz earning $300,000 during that year (p.33). Considering the size of the company, at $800m market cap and $550m in revenue, the directors seem to be well compensated. According to this report, the median director compensation for small-cap companies, defined as less than $1B, is $163,500.
The average tenure of directors is 18.4 years, and excluding Mr. Constantine Macirocostas reduces the average to 13.7 years. A long tenure is usually a red flag as the board can lack fresh perspectives. It can, especially when combined with high compensation, make the directors complaisant and less likely to hold management accountable.
Another red flag is that most committees only have two members, with cybersecurity consisting of only the chairman and his son both of which are not independent directors.
Related party
In 2002, Photronics entered an agreement with RagingWire Data Centers, Inc, a company founded by George Macritcostas, current director at Photronics and son of its founder (p.30). In 2014, 80% of RagingWire was sold to NTT with the remainder being acquired in 2018. According to related party disclosures, RagingWire provided approximately $1.8m in services during 2011-2013, with this value declining after the company was sold to NTT.
In 2018, the company entered into consulting agreements with DEMA associates which is registered to Mr. Constantine Macricostas (source). Under the agreement, Mr. Macricostas makes himself available for a maximum of forty (40) hours a month for consulting services. For these services, Mr. Macricostas is compensated $400,000 a year (p.35). In comparison, Photronics CEO Peter Kirlin earned a total of $2.1M in 2020, including his stock awards and a salary of $630,000.
Aside from the generous transactions with the Macricostas family, there is also the potential issue of executive Dr. Frank Lee being related to an individual in a position of authority at one of Photronics’ largest customers (p.35). This customer accounted for $96.4m, $87m, and $78.4m in 2020, 2019, and 2018 respectively, around 16% of revenue.
The red flags highlighted here are potential explanations for Photronics underperformance.