Photronics, Inc. — Q1 FY2015 10-Q
Reporting period: Three months ended February 1, 2015; comparative period ended February 2, 2014. Unless otherwise noted, financial amounts below are in U.S. dollars. Photronics manufactures photomasks used primarily in semiconductor and flat-panel-display production.
Financial results and position
| Metric | Q1 FY2015 | Q1 FY2014 | Change / context |
|---|---|---|---|
| Net sales | $123.5 million | $101.5 million | Up 21.6% |
| Gross profit / margin | $28.2 million / 22.8% | $22.9 million / 22.5% | Margin improved 0.3 percentage points |
| Operating income / margin | $11.6 million / 9.4% | $5.6 million / 5.5% | Operating income more than doubled |
| Net income | $7.1 million | $2.0 million | Includes income attributable to noncontrolling interests of $3.3 million versus $0.05 million |
| Net income attributable to Photronics shareholders | $3.8 million; $0.06 per diluted share | $2.0 million; $0.03 per diluted share | Shareholder earnings increased |
| Operating cash flow | $22.3 million | $14.2 million | Higher net income and increases in payables and other liabilities contributed |
| Capital expenditures paid | $40.4 million | $12.2 million | Cash outflow for investing was $40.3 million |
Cash and cash equivalents were $168.6 million at February 1, 2015, down from $192.9 million at November 2, 2014. Working capital was $143.6 million, compared with $197.4 million. Total borrowings were $139.8 million, including $10.5 million current; cash exceeded borrowings by approximately $28.8 million. The company had no credit-facility borrowings and $50 million available under its facility. It reported compliance with the facility’s financial covenants.
Material changes and drivers
- Integrated-circuit photomask sales rose 33.1% to $101.5 million, primarily on higher high-end IC sales in Taiwan. Flat-panel-display sales fell 13.0% to $22.0 million, primarily reflecting lower mainstream FPD sales.
- High-end product revenue increased to $51.7 million from $32.2 million. Management attributed the gross-margin improvement primarily to the larger high-end revenue mix.
- Selling, general and administrative expense declined 2.7% to $11.9 million, partly because the prior-year quarter included DPTT acquisition transaction costs. Research and development expense decreased 5.9% to $4.7 million, primarily due to reduced activity at advanced IC technology nodes.
- Net income attributable to noncontrolling interests increased following the 2014 combination of the Taiwan IC operations into PDMC, which Photronics consolidates while owning 50.01%; DNP owns 49.99%. This affects comparability of shareholder-attributable earnings.
- Foreign currency translation losses were $20.1 million, contributing to a $20.0 million other comprehensive loss. Total comprehensive loss was $12.9 million despite positive net income.
Outlook, risks, and unusual items
- Management expects most revenue growth to continue to come from Asia, with additional North American growth potentially benefiting from advanced technology available under its Micron license. The filing provides no numerical revenue or earnings guidance.
- Management said available cash, operating cash generation, and credit-facility capacity should fund operations for at least the next 12 months. It cautioned that liquidity depends on sales, the cash-conversion cycle, and capital-spending timing, and that additional financing may not be available on favorable terms if needed.
- The company exchanged $57.5 million of 3.25% convertible notes due in 2016 for the same principal amount of 3.25% notes due in 2019, extending maturity without reducing principal. The new notes retain a $10.37 conversion price, subject to adjustment.
- Capital equipment commitments were approximately $16 million at quarter-end. Cash capital-equipment purchases were substantial, and property, plant and equipment purchases accrued during the quarter were $54.5 million.
- Photronics identified industry cyclicality, customer design activity, high fixed costs, foreign exchange, competition, technology changes, and financing availability as risks. A 10% adverse movement in its principal foreign currencies would have produced an estimated $3.1 million pretax unrealized loss. Management noted possible future facility closures, asset redeployments, impairments, workforce reductions, or added capacity as it reviews manufacturing strategy.
- The company reported no material change in its previously disclosed risk factors, no material change in internal control over financial reporting, and effective disclosure controls. Ordinary-course claims were not expected to have a material effect. The company also disclosed $5.2 million of unrecognized tax benefits, with no significant change expected over the next 12 months.
Important facts for investors to verify
- Whether high-end IC demand, particularly in Taiwan, can sustain sales growth and the improved operating margin, given the decline in FPD sales and the industry’s cyclical, design-driven demand.
- How planned capital spending and equipment commitments affect cash, working capital, and returns on new manufacturing capacity.
- The cash-generation and capital requirements of PDMC, including the impact of its 49.99% noncontrolling interest on earnings attributable to Photronics shareholders.
- Potential currency effects, especially given the quarter’s substantial translation loss and foreign-held cash of $89.9 million, some of which could incur tax upon repatriation.
- Debt maturities, convertible-note dilution potential, and continued compliance with credit-facility covenants.