Photronics, Inc. — Q2 FY2017 Form 10-Q
Reporting period: Three and six months ended April 30, 2017; comparisons are to the periods ended May 1, 2016. Photronics manufactures photomasks for semiconductor integrated circuits (ICs), flat-panel displays (FPDs), and related applications. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Net sales | $108.3 | $122.9 | $218.1 | $252.9 |
| Gross profit / margin | $20.2 / 18.6% | $31.3 / 25.5% | $43.2 / 19.8% | $66.7 / 26.4% |
| Operating income | $5.5 | $14.8 | $14.2 | $32.4 |
| Net income | $1.5 | $14.2 | $6.0 | $37.7 |
| Net income attributable to Photronics shareholders | $1.8 | $11.9 | $3.7 | $32.9 |
| Basic / diluted EPS | $0.03 / $0.03 | $0.18 / $0.16 | $0.05 / $0.05 | $0.49 / $0.44 |
| Operating cash flow | Not separately reported | Not separately reported | $46.9 | $65.1 |
- Q2 sales declined 11.9%; first-half sales declined 13.7%. IC sales fell 9.1% in Q2 and 11.3% year to date; FPD sales fell 19.9% and 21.1%, respectively.
- Management attributed the sales and margin declines chiefly to weaker demand for high-end IC and FPD photomasks and a lower high-end product mix. High-end sales were $38.7 million in Q2 versus $58.1 million a year earlier.
- At April 30, cash and equivalents were $345.7 million, total current assets $472.5 million, current liabilities $92.0 million, and working capital $380.5 million. Cash increased $31.7 million from October 30, 2016.
- Six-month investing cash outflow was $19.8 million, including $14.2 million of property and equipment purchases and $5.4 million paid for a business acquisition. Financing cash outflow was $0.4 million. Capital equipment commitments outstanding were approximately $62 million.
- Borrowings totaled $64.7 million: $57.3 million of 3.25% convertible notes due April 2019 and $7.4 million of capital lease obligations. The company had no credit-facility borrowings and $50 million available under its facility; it reported compliance with financial covenants. Cash exceeded borrowings by approximately $281 million.
Changes, outlook, and risks
- Q2 operating income and shareholder-attributable earnings were substantially lower year over year. The prior-year first half included an $8.8 million gain on sale of an investment; the prior-year Q2 also included tax benefits from deferred tax asset recognition and reversal of a foreign undistributed-earnings tax liability. These items affect comparability.
- Foreign-currency transaction results were more unfavorable, reducing other income. The filing estimates a 10% adverse move in specified currencies would produce a $13.9 million net unrealized pretax loss. The company had no variable-rate borrowings at quarter end.
- Management said demand improved across the business during Q2 and expected positive trends to continue into the second half, but provided no quantified revenue or earnings guidance. It cited potential growth in high-end memory and logic photomasks, while noting the timing of benefits from a customer’s planned 28-nanometer production in China is uncertain.
- FPD facilities were near full capacity at quarter end. Management anticipated near-full operation over the next several quarters while two new writing tools are installed and qualified; AMOLED smartphone-display transitions were identified as a demand driver.
- In May 2017, Photronics and DNP agreed to form PDMCX in Xiamen, China, with Photronics’ subsidiary holding 50.01%. The planned $160 million IC facility is under construction; production is anticipated by late 2018. The partners expect to fund the equity portion over five years, with possible local borrowing by the joint venture. Completion was subject to regulatory approvals and customary conditions, and the credit facility was amended to add related covenants.
- Management believed available cash, operating cash flow, and the credit facility would fund operations for at least 12 months, while cautioning that cash needs depend on sales, working-capital conversion, and capital spending, and that additional financing might not be available on favorable terms. Much of foreign-subsidiary cash is considered indefinitely reinvested; repatriation could trigger taxes.
- Other key exposures include semiconductor and FPD cyclicality, short order backlogs, customer concentration and order timing, high fixed costs, foreign exchange, and the possibility of facility changes, impairments, or workforce reductions. The company said there were no material changes to previously disclosed risk factors and that disclosure controls were effective.
Investor verification priorities
- Track whether the reported improvement in demand translates into stronger sales, high-end product mix, utilization, and gross margins in coming quarters.
- Verify the PDMCX approvals, funding schedule, construction progress, production start timing, and any local borrowing or additional commitments.
- Assess execution of the $62 million capital-equipment commitments alongside cash generation, the credit-facility covenants, and 2019 convertible-note maturity.
- Monitor the May 2017 expiration of the one-year Micron supply agreement and its potential effect on customer demand and revenue; the filing does not quantify the impact.
- Review foreign-currency exposure, foreign cash repatriation implications, and resolution of uncertain tax positions, including up to $0.8 million that could be resolved over the next 12 months.