PHOTRONICS INC quarterly report, Q1 FY2023

Photronics, Inc. — Q1 FY2023 Form 10-Q

Reporting period: Three months ended January 29, 2023. Unless otherwise noted, financial amounts are U.S. dollars in millions. Photronics manufactures photomasks used in semiconductor integrated circuits (ICs) and flat-panel displays (FPDs).

Financial results

IC revenue was $156.6 million, up 20.7% year over year, led by mainstream IC growth; FPD revenue was $54.5 million, down 9.3%, primarily reflecting weaker mainstream and G10.5+ demand. Compared with Q4 FY22, revenue increased 0.4%, while gross margin declined 2.2 percentage points to 36.0%, which management attributed mainly to product mix and lower customer expedite premiums.

Operating income improved year over year, but a $16.9 million foreign-currency transaction loss (versus a $5.3 million gain in Q1 FY22) weighed on pretax income. The effective tax rate was 30.3%, compared with 26.1%. Noncontrolling interests received $15.0 million of Q1 net income, leaving $14.0 million attributable to Photronics shareholders.

Cash flow, liquidity and debt

• Operating cash flow was $27.7 million, versus $59.1 million a year earlier. Capital expenditures were $31.1 million; company-defined free cash flow was negative $2.4 million, versus positive $39.9 million.
• Cash and cash equivalents were $334.8 million and short-term investments were $39.2 million at quarter-end. Net cash, a non-GAAP measure, was $340.2 million, up from $316.2 million at October 31, 2022. $315.7 million of cash and equivalents was held by foreign subsidiaries.
• Total debt was approximately $33.9 million, including finance leases; no borrowings were outstanding under the corporate credit agreement. The company reported compliance with debt covenants. It repaid the remaining approximately $3.9 million Xiamen project-loan balance in February 2023.
• Q1 FY23 capital expenditures were part of a planned approximately $130 million for FY23. At quarter-end, capital expenditure commitments were approximately $132 million, with another approximately $14.9 million in recognized equipment-purchase liabilities; management estimated funding $61 million of the combined $147 million over the next twelve months.

Material changes, outlook and risks

• Management cited strong Asian IC demand, including high-end products, and sustained mainstream demand and pricing. It noted lower expedite premiums and some softness in mainstream demand compared with the prior quarter. First-quarter seasonal holidays typically reduce customer activity.
• Management said its current business outlook and guidance were provided in the Q1 earnings release, presentation and conference call, which are not incorporated into this filing. This filing does not provide clear quantitative revenue or earnings guidance.
• Management stated liquidity should be sufficient for the next twelve months and beyond. It plans investment in IC capacity and efficiency; spending, tool delivery and installation timing may vary.
• Foreign-exchange exposure is material: a 10% adverse currency movement was estimated to cause a $42.1 million unrealized pretax loss at January 29, 2023. Foreign-currency translation produced $90.5 million of other comprehensive income in the quarter, distinct from the transaction loss in earnings.
• Other risks include semiconductor and display industry cyclicality, reliance on design activity, technology and customer-demand shifts, and potential supply-chain disruptions. Management reported no material change to previously disclosed risk factors and concluded disclosure controls were effective.
• A China customs audit was settled in November 2022; the company reversed $1.0 million of a previously recorded $2.2 million accrual. Unrecognized tax benefits were $6.3 million; approximately $0.4 million may be resolved within twelve months. DNP has certain conditional rights relating to its interest in the China joint venture, but had not indicated an intent to exercise them.

Important facts for investors to verify

• Whether the sharp decline in shareholder-attributable earnings versus the prior year persists or was principally driven by currency movements and noncontrolling-interest allocation.
• How foreign-exchange movements affect future reported earnings and whether the disclosed $42.1 million sensitivity changes.
• Whether IC demand and pricing remain strong, and whether FPD weakness or lower expedite premiums pressure margins.
• Actual FY23 capital spending and timing of the $147 million in capital commitments and recognized equipment-purchase liabilities.
• The earnings release and presentation for quantitative guidance, which this 10-Q references but does not reproduce.
• Developments in tax exposures, the China joint venture’s put/purchase provisions, and the distribution or accessibility of cash held overseas.