Photronics, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended August 1, 2021. Amounts are in U.S. dollars; financial statement amounts are in thousands unless noted. Photronics manufactures photomasks used in integrated circuits (ICs) and flat-panel displays (FPDs).
Financial performance
| Metric | Q3 FY2021 | Comparison | Nine months FY2021 | Comparison |
|---|---|---|---|---|
| Revenue | $170.6 million | +8.1% year over year; +6.8% sequentially | $482.5 million | +4.8% year over year |
| Gross profit / margin | $45.3 million / 26.6% | Margin +2.7 percentage points year over year | $115.1 million / 23.9% | Margin +1.6 percentage points year over year |
| Operating income | $28.5 million | Includes $3.5 million tool trade-in gain | $61.0 million | Includes the same $3.5 million gain |
| Net income attributable to Photronics shareholders | $17.1 million; diluted EPS $0.28 | Prior-year quarter: $10.8 million; $0.17 diluted EPS | $35.6 million; diluted EPS $0.57 | Prior-year period: $27.4 million; $0.42 diluted EPS |
| Operating cash flow | Not separately presented for the quarter | $113.1 million | Prior-year period: $78.3 million | |
| Capital expenditures | Not separately presented for the quarter | $92.3 million | Prior-year period: $36.7 million |
- Revenue mix: Q3 IC revenue was $117.8 million, up 8.4% year over year; FPD revenue was $52.9 million, up 7.4%. For the nine months, IC revenue rose 7.1%, while FPD revenue was essentially flat.
- Cash and liquidity: Cash and cash equivalents were $283.2 million at August 1, 2021, including $217.2 million held by foreign subsidiaries. Current assets were $530.5 million and current liabilities $167.6 million. Management stated liquidity was sufficient for the next 12 months and foreseeable future.
- Debt: Balance-sheet debt was approximately $117.9 million, including $25.2 million current and $92.7 million long-term; the total includes finance lease liabilities. The company had no borrowings under its U.S. corporate credit agreement, which has a $50 million limit and expansion capacity to $100 million. Covenant compliance was reported at period end.
- Cash movement: Cash, cash equivalents and restricted cash increased $4.6 million in the nine-month period to $286.2 million. Investing used $86.7 million and financing used $26.4 million.
Changes and management commentary
- Management attributed revenue growth to robust design activity and demand across IC and FPD markets. IC growth reflected mainstream demand and node migrations, high-end logic demand, and increased outsourcing as captive photomask capacity shifted toward EUV production.
- China revenue increased 22.5% for the nine months, led by IC growth; FPD revenue in China declined 9.8% year over year for the period. Taiwan and the United States were approximately flat year to date.
- Gross margin improved with higher revenue and pricing for certain mainstream IC nodes, alongside lower material and overhead costs as a percentage of revenue. The business has high fixed costs, so changes in revenue and capacity utilization can materially affect margins.
- Nine-month net income attributable to shareholders improved despite lower tax expense: the effective tax rate was 22.4%, versus 35.9% in the prior-year period. Management cited jurisdictional earnings mix, foreign investment credits and a prior-year valuation allowance.
- Q3 other operating income included a $3.5 million gain from trading in a lithography tool. Foreign currency movements also benefited Q3 non-operating results; reported currency gains can fluctuate.
- Photronics repurchased 2.983 million shares for $35.75 million in the nine months under its $100 million authorization; approximately $46.8 million remained authorized at August 1. Subsequent to quarter end, outstanding shares fell by a net 0.6 million, primarily due to repurchases.
Outlook, risks and contingencies
- Management expected favorable IC trends, including mainstream demand and high-end logic demand, to continue through Q4 and possibly beyond. It expected FPD growth from recent capacity expansions and mobile demand for AMOLED displays; next-generation premium TV technologies were described as potential future growth drivers.
- Estimated Q4 FY2021 capital expenditures were approximately $28 million. At period end, capital expenditure commitments were $56.9 million; together with recognized equipment-purchase liabilities, the company estimated funding $54 million of approximately $66 million over the next 12 months.
- Outlook is subject to a short backlog—typically one to two weeks for IC and two to three weeks for FPD—and significant sensitivity to high-end orders. Industry cycles, design activity, technology changes, customer demand, government actions and trade policies may affect results.
- A 10% adverse currency movement was estimated to produce a $36.0 million unrealized pre-tax loss; principal exposures included the RMB, Korean won and New Taiwan dollar. Management said a 10% adverse change in interest rates on variable-rate borrowings would not have had a material effect.
- Photronics consolidates the PDMCX China joint venture as its primary beneficiary, despite DNP’s 49.99% ownership. DNP has certain put rights; exercise could result in a loss depending on the fair and book values of the joint venture. Photronics reported a maximum exposure to loss of $60.9 million.
- Control weakness: Disclosure controls were deemed ineffective due to an unremediated material weakness concerning the accuracy and completeness of information used to monitor debt covenant compliance. Management stated the financial statements were fairly presented and that remediation efforts were underway.
- The South Korean tax-filing litigation resulted in the appellate court deciding on August 26, 2021 not to impose the $0.03 million fine. The company also reported ordinary-course claims it did not expect to have a material effect.
Important facts for investors to verify
- Whether operating momentum and improved gross margins persist after adjusting for the one-time $3.5 million equipment trade-in gain and currency impacts.
- How planned equipment investment, capital commitments and share repurchases affect cash, debt and capacity utilization.
- Progress in remediating the material weakness in debt-covenant compliance controls.
- Performance and financing needs of the China operations and PDMCX, including any developments regarding DNP’s put rights.
- Exposure to foreign exchange movements, variable-rate debt, short order backlogs and changes in semiconductor and display design demand.