Photronics, Inc. — Q2 FY2021 Form 10-Q
Business and period. Photronics manufactures photomasks used in integrated circuits (ICs) and flat-panel displays (FPDs). This unaudited report covers the three and six months ended May 2, 2021; comparisons are to the corresponding periods ended May 3, 2020 unless noted. Amounts below are in millions of U.S. dollars, except per-share data.
Financial performance and liquidity
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $159.8 | $142.8 | $311.8 | $302.5 |
| Gross profit / margin | $39.2 / 24.6% | $30.4 / 21.3% | $69.8 / 22.4% | $65.0 / 21.5% |
| Operating income | $20.8 | $12.7 | $32.6 | $29.0 |
| Net income | $16.3 | $8.0 | $25.8 | $18.9 |
| Net income attributable to Photronics shareholders | $10.5 | $6.3 | $18.6 | $16.6 |
| Diluted EPS | $0.17 | $0.10 | $0.30 | $0.25 |
| Cash from operating activities | — | — | $58.2 | $61.3 |
| Purchases of property, plant and equipment | — | — | $73.5 | $30.1 |
- Q2 revenue rose 11.9% year over year. IC revenue increased 15.6%; FPD revenue increased 4.0%, with high-end FPD growth partly offset by lower mainstream FPD sales.
- For the six months, revenue grew 3.1%. IC revenue increased 6.4%, while FPD revenue declined 3.9%. Management attributed growth chiefly to mainstream IC and high-end FPD demand.
- At May 2, cash and cash equivalents were $256.0 million, including $182.7 million held by foreign subsidiaries. Current assets were $495.6 million and current liabilities $159.3 million.
- Total debt, including current maturities and finance leases, was approximately $114.1 million, versus approximately $68.7 million at October 31, 2020. No borrowings were outstanding under the corporate credit agreement. The company reported compliance with applicable debt covenants.
- Six-month investing cash outflow was $67.9 million and financing cash outflow was $18.6 million. Cash, cash equivalents and restricted cash decreased $22.6 million to $259.0 million.
Material changes and notable items
- Q2 gross margin improved 3.3 percentage points year over year and 4.5 points from Q1 FY2021. Management cited increased revenue, lower overhead costs as a share of sales, and reduced outsourced manufacturing costs.
- Six-month net income attributable to Photronics shareholders increased 11.9% year over year. The effective tax rate fell to 20.5% from 40.5%, primarily reflecting jurisdictional earnings mix and the prior-year valuation allowance on a foreign loss carryforward.
- Capital spending increased substantially: equipment purchases were $73.5 million versus $30.1 million in the prior-year half. The company reported $31.9 million of outstanding capital commitments and estimated FY2021 capital expenditures of approximately $120 million.
- The company repurchased 2.019 million shares for $23.3 million in the first half under its $100 million authorization; $59.3 million remained available at May 2, 2021. Subsequent to quarter-end, outstanding shares declined by a net 0.7 million, primarily due to repurchases.
- New finance leases for high-end lithography and inspection tools contributed $41.8 million of finance lease liabilities at quarter-end.
Outlook, risks and contingencies
- Management described demand prospects for both IC and FPD as positive and expected sequential growth through the remainder of FY2021. It reaffirmed an expectation for FY2021 revenue growth in the high single digits versus FY2020 and operating profit growth at a rate similar to FY2020’s 23% increase. The filing cautions that the short order backlog limits visibility.
- Management expected margins to continue improving as revenue growth supports contribution-margin expansion and costs remain controlled. It said capital spending timing is intended to align with demand and customer commitments.
- Principal business risks include semiconductor and display design cycles, industry cyclicality, pricing and capacity utilization, seasonality, foreign-exchange movements, and technology or manufacturing changes that could reduce photomask demand. A 10% adverse currency movement was estimated to produce a $34.5 million net unrealized pretax loss; management said a 10% adverse interest-rate move would not have a material effect.
- Disclosure controls and procedures were assessed as ineffective because a material weakness in monitoring compliance with debt covenants had not been remediated. Management said the financial statements nevertheless fairly present the company’s financial position and results, and remediation efforts were underway.
- A South Korean subsidiary faces a tax-filing fine. The company accrued $0.03 million; the possible loss range is $0.03 million to $2.2 million, with $2.17 million of exposure above the accrual. The company said the matter is not expected to materially affect its financial position or performance.
- Photronics consolidates PDMCX, its Xiamen IC-mask joint venture with DNP, as its primary beneficiary. DNP has certain put rights; it had not indicated an intention to exercise them as of the filing. The company cited a maximum exposure to loss from PDMCX of $59.1 million.
Key facts for investors to verify
- Whether revenue and operating profit track management’s FY2021 growth expectations, given the short backlog and demand-cycle uncertainty.
- Returns and utilization from elevated equipment spending, and the funding needs associated with capital commitments, leases and scheduled debt repayments.
- Progress in remediating the material weakness concerning debt-covenant monitoring, and continuing covenant compliance.
- Effects of foreign-currency movements, particularly exposure to the Chinese renminbi and South Korean won, and any resulting earnings volatility.
- Developments in the South Korean fine proceeding and any change in DNP’s PDMCX rights or intentions.