Photronics, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended January 27, 2019. Photronics manufactures photomasks used in semiconductor and flat-panel display production. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 FY2019 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $124.7 | $123.4 | +1.0% |
| Gross profit / margin | $26.1 / 20.9% | $27.7 / 22.4% | Gross profit down 5.6% |
| Operating income | $8.0 | $11.8 | Down $3.8 |
| Net income | $7.8 | $9.5 | Down $1.7 |
| Net income attributable to Photronics shareholders | $5.3 | $5.9 | Down 10.7% |
| Diluted EPS | $0.08 | $0.09 | Down $0.01 |
| Cash from operating activities | $(19.3) | $30.9 | Decrease of $50.1 |
| Capital expenditures | $106.9 | $11.0 | Increased $95.9 |
Revenue was down 13.8% sequentially from Q4 FY2018, reflecting seasonal softness, six fewer days in the quarter, and macroeconomic uncertainty. Year over year, high-end FPD and IC revenue increased, partly offset by declines in mainstream IC and FPD. Revenue comparisons are affected by adoption of Topic 606 in Q1 FY2019; the prior-year period was not restated. Under the old method, current-quarter revenue would have been $122.5 million, versus $124.7 million reported.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $232.4 million at January 27, 2019, down from $329.3 million at October 31, 2018. Cash, cash equivalents and restricted cash totaled $235.2 million.
- Working capital was $258.5 million, compared with $311.7 million at fiscal year-end. Total assets were $1.146 billion and total equity was $913.2 million.
- Total debt was $86.1 million: $57.5 million of 3.25% convertible notes due April 2019, $14.8 million of PDMCX project loans, $10.1 million of working-capital loans and $3.7 million of short-term borrowing. The short-term loans were repaid in Q2 FY2019.
- The company had no borrowings under its $50 million revolving credit facility and reported the full $50 million available; it was in compliance with its financial covenants.
- Operating cash outflow and substantial capital spending reflected, among other factors, increased receivables and recoverable China VAT, construction spending, and equipment purchases. Financing cash flow included DNP’s $29.4 million contribution to PDMCX, borrowings, dividends to noncontrolling interests and share repurchases.
Outlook, risks and notable items
- Management expected FPD revenue to increase in Q2, primarily on stronger mobile-display demand. It expected a pickup in memory demand, did not expect material deterioration in logic, and said a logic recovery might occur after Q2. These are expectations, not guaranteed results.
- China expansion remains a major investment and execution priority. The Hefei FPD facility was completed, with production anticipated in the first half of 2019; the Xiamen IC facility was expected to begin production in the second half of 2019. Capital commitments outstanding were approximately $38 million, nearly all related to China facilities.
- PDMCX had a maximum reported exposure to loss of $44.9 million. Its agreements provide certain put or purchase rights between Photronics and DNP; exercising these rights could result in a loss depending on the relationship between fair value and book value.
- Management said cash on hand, operating cash generation and available borrowing capacity should cover requirements for the next 12 months, while cautioning that market conditions, cash conversion, capital spending and financing availability could constrain liquidity.
- A 10% adverse currency movement was estimated to produce a $29.0 million net unrealized pretax loss, primarily reflecting exposure to the renminbi and Korean won. The company also cited industry cyclicality, design activity, customer order timing, competition and technology shifts as business risks.
- The $25 million share-repurchase program ended February 1, 2019. By January 27, the company had repurchased approximately 1.47 million shares for $13.8 million, at an average $9.41 per share.
- Topic 606 adoption increased Q1 reported revenue by $2.2 million compared with the amount under the former method. The company also recorded a $1.1 million transition adjustment to beginning retained earnings for adoption of the intra-entity transfer tax standard.
Key facts for investors to verify
- Whether Q2 demand improves as management expected, particularly in FPD/mobile displays and memory.
- Progress, utilization and remaining funding needs for the Hefei and Xiamen China facilities, including the effect of their ramp on margins and cash flow.
- Repayment or conversion of the $57.5 million notes due April 2019 and the terms, balances and incentives associated with PDMCX borrowing.
- Cash-flow recovery, collection of receivables and China VAT, and ability to fund capital commitments while maintaining liquidity.
- Revenue comparability following Topic 606 adoption and the sensitivity of earnings and reported balances to foreign-exchange movements.