Photronics, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended April 28, 2019. Photronics manufactures photomasks for semiconductor integrated circuits (IC) and flat panel displays (FPD). Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $131.6 | $130.8 | $256.3 | $254.2 |
| Gross profit / margin | $26.0 / 19.8% | $32.8 / 25.1% | $52.1 / 20.3% | $60.5 / 23.8% |
| Operating income | $9.2 | $15.4 | $17.2 | $27.2 |
| Net income | $9.9 | $15.2 | $17.6 | $24.7 |
| Net income attributable to Photronics shareholders | $8.5 | $10.7 | $13.7 | $16.6 |
| Diluted EPS | $0.13 | $0.15 | $0.20 | $0.23 |
- Q2 revenue increased 0.6% year over year and 5.5% sequentially. FPD revenue rose 15.7% year over year, led by high-end display masks; IC revenue declined 3.6% year over year. For the six-month period, revenue rose 0.8%, with FPD growth offsetting weaker IC demand.
- Q2 gross margin fell to 19.8% from 25.1% a year earlier. Management attributed the decline chiefly to $2.3 million of increased losses at the two China facilities, along with higher service-contract expenses. Six-month margin declined to 20.3%; management cited $5.6 million of increased China-facility losses as the largest factor.
- Six-month operating cash flow was negative $2.3 million, compared with positive $37.9 million in the prior-year period. Investing cash outflow was $134.8 million, including $140.4 million of property and equipment purchases. The company attributed much of the operating cash-flow deterioration to a $37.3 million increase in prepaid value-added taxes at its China facilities.
- Cash and cash equivalents were $167.1 million at April 28, 2019, versus $329.3 million at October 31, 2018. Working capital was $232.7 million, down from $311.7 million. Cash used in financing activities was $28.0 million for the six months.
- Debt was $36.4 million at quarter end: $57.5 million of convertible notes matured and were repaid in April, while China joint-venture borrowings were added. The company had no borrowings on its $50 million U.S. credit facility, with $50 million available; it reported compliance with its covenants.
Material changes, outlook and risks
- China capacity investments are a major use of cash. The Hefei FPD facility began production in Q2; the Xiamen IC joint-venture facility was expected to begin production later in 2019. Management expects depreciation to rise as production ramps up. Capital expenditure commitments were approximately $37 million, with about $13 million of Photronics’ remaining Xiamen joint-venture investment to be funded over the following quarters.
- Management expected mobile demand to remain strong and high-end large-area FPD shipments to increase, and described overall photomask demand as stable to improving. It cited purchase agreements with China-based IC and FPD customers, while noting uncertainty in U.S.–China trade relations. No quantified earnings or revenue guidance was provided.
- Other income benefited from foreign-exchange gains: $4.3 million of interest and other income in Q2 included a $2.9 million sequential increase in currency gains. For the six months, the comparable line was $5.9 million, versus $0.4 million a year earlier. This helped offset lower operating income.
- Currency exposure increased: the filing estimates a $34.1 million pretax loss from a 10% adverse currency movement, up $20.9 million from October 31, 2018. The company also identifies semiconductor and FPD cyclicality, customer design activity, China trade uncertainty, facility ramp-up, and access to financing as risks.
- The 3.25% convertible notes were repaid at maturity. The share repurchase program ended February 1, 2019, after repurchasing approximately 1.5 million shares for $13.8 million. A $18.8 million dividend to noncontrolling interests was declared by the Taiwan subsidiary in Q2 and was payable at quarter end.
- Photronics adopted the new revenue-recognition standard in FY2019. The filing reports that adoption increased six-month revenue by $2.5 million and shareholder-attributable income by $1.0 million compared with the amounts that would have been reported under the prior method.
Important facts for investors to verify
- Whether China facility utilization and customer demand improve enough to absorb startup losses and increased depreciation.
- Whether operating cash flow recovers while the company completes committed China capital spending.
- The terms, outstanding balances and government incentive reimbursements for the China joint-venture loans, including post-quarter borrowing.
- The durability of reported earnings after separating operating performance from foreign-exchange gains and revenue-standard transition effects.
- Exposure to China–U.S. trade developments, currency movements, and potential funding needs; management’s liquidity sufficiency statement is an expectation, not a guarantee.