Photronics, Inc. — Q1 FY2018 10-Q
Reporting period: Three months ended January 28, 2018; comparative quarter ended January 29, 2017. Unaudited consolidated results. Photronics manufactures photomasks for semiconductor and flat-panel-display (FPD) production. Figures below are in millions of U.S. dollars except per-share data and percentages.
Key financial results
| Metric | Q1 FY2018 | Q1 FY2017 | Change / note |
|---|---|---|---|
| Revenue | $123.4 | $109.8 | Up 12.4% |
| Gross profit / margin | $27.7 / 22.4% | $23.0 / 20.9% | Margin up 1.5 percentage points |
| Operating income / margin | $11.8 / 9.6% | $8.6 / 7.9% | Improved |
| Net income | $9.5 | $4.5 | Consolidated, including noncontrolling interests |
| Net income attributable to Photronics shareholders | $5.9 | $1.9 | Up from prior year |
| Diluted EPS | $0.09 | $0.03 | |
| Operating cash flow | $30.9 | $31.5 | Down $0.7 |
| Capital expenditures | $11.0 | $9.6 | Purchases of property and equipment |
Gross-margin improvement reflected higher revenue and lower labor and overhead costs, partly offset by higher material costs. Operating expenses rose: SG&A was $11.8 million and R&D was $4.1 million. Other expense was $4.1 million, primarily due to significant foreign-currency losses. The income-tax line was a $1.8 million benefit, versus a $2.1 million provision in the prior-year quarter; the resulting effective tax rate was negative 23.1%.
Balance sheet, debt and liquidity
- Cash and equivalents were $348.6 million at January 28, 2018, up from $308.0 million at October 29, 2017. Working capital was $404.3 million.
- Total borrowings were $60.6 million: $57.4 million of 3.25% convertible notes due April 2019 and $3.3 million current capital-lease obligations. The $50 million credit facility, expandable to $75 million, had no borrowings and was fully available; the company reported compliance with its covenants.
- Investing activities used $11.1 million; financing activities provided $11.2 million, including a $12.0 million contribution from the China joint venture partner. Foreign-exchange movements added $9.7 million to reported cash.
- Capital-equipment commitments were approximately $190 million. Management said cash, operating cash flow and available borrowing should cover requirements for the next 12 months, while noting that longer-term funding depends on markets, operating cash flows and capital-spending timing.
Performance changes and outlook
- Year-over-year growth was led by high-end IC photomasks and FPD masks. IC revenue rose 10.7% overall, including 50.6% growth in high-end IC, while mainstream IC declined 3.0%. FPD revenue increased 18.5%.
- Management said revenue momentum from late 2017 continued into 2018 and expected most high-end markets to grow in Q2 FY2018, with a possible pause in high-end logic after recent strength. No specific revenue or earnings guidance was provided.
- Photronics formed PDMCX with Dai Nippon Printing (DNP), which owns 49.99%; Photronics retains 50.01% and consolidates the venture. The venture is developing an advanced-IC photomask facility in Xiamen, with production anticipated in 2019. Each partner had contributed about $12 million and was expected to contribute a further $43 million, alongside local borrowing. Photronics’ stated remaining funding commitment was approximately $68 million.
- The company is also building an FPD facility in Hefei, China, with a planned $160 million investment; production is anticipated in 2019. Management expects much of future revenue growth to come from Asia, particularly China.
- Results are subject to holiday-related seasonal weakness and cyclical, design-activity-driven demand. Management also cited potential future facility changes, asset redeployment, impairments or workforce reductions as business conditions evolve.
Unusual items, contingencies and risks
- U.S. tax reform generated a $3.9 million benefit from reversal of a valuation allowance on alternative-minimum-tax credits; Taiwan tax-rate changes added a $0.2 million benefit. The company’s preliminary estimated $28.4 million transition tax on deemed foreign-earnings repatriation was expected to be offset by credits and loss carryforwards, for a provisional net-zero impact. Some tax accounting remained preliminary.
- PDMCX is a variable-interest entity consolidated by Photronics. Photronics reported a first-quarter venture loss of about $0.5 million and maximum exposure to loss of $11.6 million. The agreement includes conditional put/buyout rights that could require a transaction at the venture’s net book value.
- A 10% adverse movement in relevant foreign currencies was estimated to produce a $16.0 million unrealized pretax loss. Interest-rate sensitivity was reported as immaterial for the quarter.
- Ordinary-course claims were not expected by management to have a material effect. The filing reported no material change to previously disclosed risk factors.
- Photronics adopted new revenue-recognition guidance in fiscal 2019 and expected it to accelerate recognition for some work-in-process amounts; the financial impact was not yet quantifiable.
Important facts for investors to verify
- Whether high-end IC and FPD demand sustains growth, and whether high-end logic pauses as management anticipated.
- Execution, timing, total funding needs and partner obligations for the Xiamen and Hefei projects, including the substantial capital commitments.
- How foreign-exchange movements affect earnings and cash, given the quarter’s currency losses and disclosed sensitivity.
- Final accounting effects of U.S. tax reform and the adoption impact of the new revenue-recognition standard.
- Convertible-note repayment or conversion plans ahead of the April 2019 maturity, and renewal or replacement of the credit facility expiring in December 2018.