Photronics, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended February 2, 2020; year-over-year comparisons are to the three months ended January 27, 2019. Balance-sheet comparisons are to October 31, 2019. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context
Photronics manufactures photomasks used in semiconductor and flat-panel display (FPD) production. Substantially all revenue comes from photomask sales. The company operates 11 manufacturing facilities, including two recently constructed facilities in China. Results are affected by customer design activity, industry cycles, seasonality and capacity utilization.
Key financial results
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $159.7 | $124.7 |
| Gross profit / margin | $34.6 / 21.7% | $26.1 / 20.9% |
| Operating income / margin | $16.3 / 10.2% | $8.0 / 6.5% |
| Net income | $10.9 | $7.8 |
| Net income attributable to Photronics shareholders | $10.3 | $5.3 |
| Basic and diluted EPS | $0.16 | $0.08 |
| Operating cash flow | $30.8 | $(19.3) |
| Capital expenditures | $13.8 | $106.9 |
Cash and cash equivalents were $218.3 at February 2, 2020, versus $206.5 at fiscal year-end. Working capital was $283.3. Reported debt totaled approximately $54.4, comprising short-term debt and current and long-term debt. The company had no borrowings under its $50 million revolving credit agreement, with $50 million available; it reported compliance with the agreement’s financial covenants.
Material changes versus comparable periods
- Revenue rose 28.1% year over year and 2.2% from Q4 FY2019. Year-over-year growth was led by FPD revenue, up 76.9%, and IC revenue, up 12.8%.
- High-end FPD revenue increased 159.1% year over year, reflecting the ramp of the China FPD facility and stronger demand for AMOLED, LTPS and large-format display masks. China-origin revenue was $19.9, compared with $0.3 a year earlier.
- Gross margin improved year over year with higher revenue, but declined from 24.4% in Q4 FY2019 to 21.7%, which management attributed mainly to higher glass blank and pellicle costs and compensation expenses.
- Operating cash flow improved by $50.1 year over year, while investing cash outflow fell substantially as China-facility equipment spending moderated from the prior-year build-out period.
- The effective tax rate was 45.4%, versus 15.2% a year earlier. The increase reflected valuation allowances, the expiration of a Taiwan tax holiday and other period-specific tax factors.
Outlook, commentary and risks
- No numerical revenue or earnings guidance is provided. Management expects much of IC and FPD market growth to come from Asia, particularly China, and expects to serve demand using its China facilities and imports from other facilities.
- Management said coronavirus-related design-release delays had occurred in Asia IC and FPD businesses and could affect Q2 FY2020 results. All facilities were operating when the filing was prepared, but workforce, supply-chain and customer-operation disruption remained a risk.
- The company reported $113.6 of outstanding capital expenditure commitments, primarily for high-end IC equipment. It expected to meet these needs with operating cash, working capital, joint-venture contributions and financing, including equipment financing.
- Foreign currency gains of $4.7 contributed to Q1 other income; management cautions that currency movements can materially affect reported results. A 10% adverse currency movement was estimated to produce a $33.9 net unrealized pre-tax loss.
- The Xiamen China joint venture recorded a $3.7 net loss. Photronics disclosed maximum exposure to loss of $36.6 and certain circumstances under which its partner, DNP, could put its interest to Photronics.
- The $100 million share repurchase authorization had been used for $22.0 of repurchases through February 2, 2020; $11.0 was spent during the quarter. The program may be suspended or discontinued.
- Management noted the business’s seasonal and cyclical demand, short order backlog, high fixed-cost structure and the possibility of future facility changes, impairments or workforce reductions based on market conditions.
Important facts for investors to verify
- Whether coronavirus-related customer delays, supply constraints or workforce effects materially affected subsequent-quarter results and operations.
- Whether China facility utilization and demand support the reported high-end FPD growth, and how the facilities affect margins and cash generation.
- Funding, timing and returns on the $113.6 capital commitments, including the remaining China joint-venture funding commitment.
- Debt maturities, collateral and covenants, and the company’s ability to fund investment and operations while maintaining liquidity.
- The sustainability of earnings given the elevated effective tax rate, foreign-exchange gains and the China joint venture’s losses and put-right provisions.