Photronics, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Three and nine months ended July 29, 2018; comparisons are primarily with the periods ended July 30, 2017. Figures are in millions of dollars except per-share data. Photronics manufactures photomasks used in semiconductor and flat-panel display production.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | YTD FY2018 | YTD FY2017 |
|---|---|---|---|---|
| Revenue | $136.4 | $111.6 | $390.6 | $329.7 |
| Gross profit / margin | $35.6 / 26.1% | $21.7 / 19.5% | $96.1 / 24.6% | $64.9 / 19.7% |
| Operating income / margin | $20.4 / 15.0% | $5.3 / 4.7% | $47.6 / 12.2% | $19.4 / 5.9% |
| Net income attributable to Photronics shareholders | $13.0 | $4.0 | $29.6 | $7.7 |
| Diluted EPS | $0.18 | $0.06 | $0.41 | $0.11 |
| Operating cash flow | Nine-month period: $87.0 | Prior-year nine-month period: $73.8 |
Q3 revenue increased 22.2% year over year, led by high-end IC photomasks, whose revenue nearly doubled. YTD revenue rose 18.5%, with high-end IC revenue up 76.3%. Taiwan revenue increased 41.1% year over year in Q3; Europe declined 4.2%. Higher volume and improved utilization contributed to margin expansion. Q3 SG&A was $12.5 million; R&D was $2.7 million.
Cash, debt and capital resources
- Cash and cash equivalents were $332.7 million at July 29, 2018, up $24.7 million from October 29, 2017. Working capital was $346.1 million.
- YTD operating cash flow of $87.0 million was offset in part by $63.9 million of investing outflows, including $64.4 million of property and equipment purchases. YTD financing cash flow was positive $2.6 million.
- Total debt was $57.9 million, classified as current, principally $57.4 million of 3.25% convertible notes due April 2019. The company had no revolver borrowings and $50 million available under its $50 million credit facility, which expires in December 2018. It reported compliance with facility covenants.
- Capital expenditure commitments were approximately $181 million, nearly all related to the China facilities. Management said cash, operating cash generation and available borrowing capacity should cover requirements for the next 12 months, while noting financing availability and longer-term liquidity are not assured.
Material developments, outlook and risks
- China expansion: The company expects its Xiamen IC and Hefei FPD facilities to begin production in the first half of 2019. The Xiamen facility is operated through a joint venture in which Photronics owns 50.01% and DNP owns 49.99%; Photronics consolidates it as the primary beneficiary of a variable interest entity. Each party had invested about $18 million by quarter-end. The filing estimates additional contributions of $62 million each over the next several years under the joint venture arrangements. Photronics also reported $26 million invested in Hefei and expects to invest a further $134 million there.
- Demand outlook: Management expected favorable demand to continue through Q4, with growth across most high-end IC and mainstream markets and revenue at least at current levels for high-end IC. No numerical full-year guidance was provided. Management expects a majority of revenue growth to come from Asia, particularly China.
- Share repurchases: A program authorized up to $20 million began July 10, 2018. By quarter-end, 0.8 million shares had been repurchased for $6.8 million, at an average $8.72 per share; $13.2 million remained authorized.
- Taxes and unusual items: The Q3 effective tax rate was 9.4%; the YTD rate was 7.8%, versus 6.5% and 20.7%, respectively, in the prior-year periods. U.S. tax reform and other items included a $3.7 million net benefit from reversal of an AMT-credit valuation allowance; Q3 also benefited from tax settlement, statute-expiration and Taiwan tax-holiday items. Some tax-reform accounting remained preliminary.
- Currency and comprehensive income: Q3 foreign-currency translation losses were $24.6 million, contributing to a $4.7 million consolidated comprehensive loss despite net income of $19.8 million. Management estimated a $6.0 million pretax loss under a 10% adverse currency movement at quarter-end.
- Principal risks and contingencies: Results depend on cyclical semiconductor and display industries, customer design activity, orders, utilization, pricing and product mix. Risks also include foreign exchange, execution and funding of China projects, financing availability, and technology and competitive changes. The filing added GDPR compliance as a risk. The company disclosed ordinary-course claims it did not expect to be material, and joint-venture put/buyout provisions that could result in a loss depending on asset values and circumstances.
Important facts for investors to verify
- Whether strong high-end IC demand and margin improvement persist, particularly given the industries’ cyclicality and short order backlog.
- China facility construction, production start dates, required funding and customer demand; reconcile project-level funding estimates with the $181 million capital commitment.
- The April 2019 convertible-note maturity and December 2018 credit-facility expiration, including refinancing or repayment plans.
- The sustainability of the low effective tax rate, including the effect of preliminary tax-reform accounting and jurisdictional earnings mix.
- Foreign-exchange exposure, joint-venture obligations and put rights, and remaining authorization and cash use under the share-repurchase program.