Photronics, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended October 29, 2017; fiscal fourth quarter ended October 29, 2017. Unless stated otherwise, financial amounts are in U.S. dollars.
Business context
Photronics manufactures photomasks used to transfer circuit patterns onto semiconductor wafers and flat-panel display (FPD) substrates. It operates nine manufacturing facilities and serves customers worldwide; 77% of FY2017 revenue came from non-U.S. operations. The company reports as one operating segment.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $450.7 million | $483.5 million |
| Gross profit / margin | $91.3 million / 20.3% | $118.7 million / 24.6% |
| Operating income / margin | $31.9 million / 7.1% | $52.5 million / 10.9% |
| Net income | $21.3 million | $55.7 million |
| Net income attributable to Photronics shareholders | $13.1 million | $46.2 million |
| Diluted EPS | $0.19 | $0.64 |
| Cash provided by operating activities | $96.8 million | $122.1 million |
| Capital expenditure payments | $92.0 million | $50.1 million |
- Revenue fell 6.8% year over year: IC revenue declined 3.9% to $350.3 million and FPD revenue declined 15.6% to $100.4 million.
- Cash and cash equivalents were $308.0 million, working capital was $367.3 million, and total borrowings were $62.0 million at year-end. Cash included $190.0 million held by foreign subsidiaries.
- The $57.5 million principal amount of 3.25% convertible senior notes is due in April 2019; the carrying value was $57.3 million. The company also had $4.6 million of current capital-lease obligations.
- The $50 million credit facility, expandable to $75 million, had no borrowings and $50 million available at year-end; it expires in December 2018. Photronics reported compliance with its financial covenants.
Material changes and unusual items
- High-end IC revenue decreased 18.3% to $106.5 million, primarily because of lower average selling prices. Mainstream IC revenue increased 4.1% to $243.8 million.
- High-end FPD revenue fell 21.6%, reflecting lower prices and volume; mainstream FPD revenue was essentially flat.
- Profitability weakened as lower revenue and selling prices weighed on margins in a high-fixed-cost business. Operating cash flow fell $25.3 million, primarily in connection with lower net income.
- FY2017 included a $5.2 million foreign-currency transaction loss in other income and expense. FY2016 benefited from $8.9 million of investment-sale gains and significant tax benefits, making the year-over-year decline in reported earnings larger than the underlying operating-income decline alone.
- The Micron supply agreement that began with the 2016 sale of Photronics’ MP Mask investment expired in May 2017. Photronics says it retains unlimited rights to use technology under its prior license.
Outlook, commitments, and risks
- Management expected FY2018 revenue to increase, including growth in high-end IC and FPD products; no numeric revenue guidance was provided. The forecast cited expected customer demand at advanced IC nodes and for AMOLED products.
- FY2018 capital expenditure payments were expected to be approximately $250 million. At year-end, purchase commitments totaled $168 million, including $162 million for capital expenditures. Management said cash, operating cash generation, and available borrowing were expected to meet cash needs for the next 12 months.
- Photronics is building an IC facility in Xiamen through a 50.01%-owned joint venture with DNP. The project’s stated investment is $160 million, with Photronics’ funding commitment approximately $80 million through cash and transferred capital over several years. A separate Hefei FPD facility entails a minimum $160 million investment by Photronics. Production at both sites was anticipated to begin in early 2019.
- Principal risks include semiconductor and display industry cyclicality, low order backlog, customer concentration, pricing pressure, underutilized capacity, technology shifts, equipment and materials supply constraints, foreign-exchange exposure, and execution, funding, regulatory, and intellectual-property risks related to expansion in China. The two largest customers each represented about 16% of FY2017 revenue; the five largest together represented 43%.
- A 10% adverse currency movement across the company’s principal exposures was estimated to result in a $13.0 million unrealized pretax loss. Ordinary-course legal claims were not expected by management to have a material effect. Deloitte issued an unqualified audit opinion and concluded internal control over financial reporting was effective as of year-end.
Fourth-quarter snapshot
FY2017 fourth-quarter revenue was $121.0 million, gross profit was $26.4 million, net income was $10.5 million, and net income attributable to Photronics shareholders was $5.4 million; diluted EPS was $0.08. In the prior-year fourth quarter, revenue was $107.4 million, gross profit was $20.5 million, net income was $6.6 million, attributable net income was $5.3 million, and diluted EPS was $0.08.
Important facts for investors to verify
- Whether FY2018 revenue growth materialized and whether demand and pricing improved in high-end IC and FPD products.
- How the planned $250 million of FY2018 capital expenditures and China investments are funded, and their effect on cash, debt, and returns.
- Progress, customer commitments, ownership economics, and production timing for the Xiamen and Hefei facilities.
- Exposure to major customers, including the effects of customer concentration and the expiry of the Micron supply agreement.
- Foreign-exchange performance, debt refinancing or repayment plans, and compliance with credit-facility covenants as the December 2018 facility expiry approaches.