Photronics, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended October 31, 2018; the filing also reports the fourth quarter ended October 31, 2018. Amounts are in U.S. dollars unless stated otherwise.
Business context
Photronics manufactures photomasks used to produce integrated circuits (ICs) and flat-panel displays (FPDs). It reported nine operating manufacturing facilities across the U.S., Europe, Taiwan and Korea, with two China facilities under construction and production expected to begin in the first half of fiscal 2019. The company operates in a cyclical, capital-intensive industry and typically has only one to three weeks of backlog.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $535.3 million | $450.7 million | +18.8% |
| Gross profit / margin | $131.5 million / 24.6% | $91.3 million / 20.3% | Margin +4.3 percentage points |
| Operating income / margin | $65.6 million / 12.3% | $31.9 million / 7.1% | Operating income +106% |
| Net income | $61.2 million | $21.3 million | +187% |
| Net income attributable to Photronics shareholders | $42.1 million | $13.1 million | +220% |
| Diluted EPS | $0.59 | $0.19 | Up $0.40 |
| Operating cash flow | $130.6 million | $96.8 million | +$33.7 million |
| Capital expenditures paid | $92.6 million | $92.0 million | Approximately flat |
FY2018 revenue growth reflected a 18.8% increase in IC revenue to $416.1 million, led by high-end IC growth of 61.9%, and an 18.7% increase in FPD revenue to $119.2 million. Higher revenue and utilization lifted gross profit and margins; SG&A rose 17.9% to $51.4 million, partly reflecting China expansion costs, while R&D declined to $14.5 million.
Q4 FY2018: Revenue was $144.7 million, up 6.1% sequentially and 19.6% year over year. Gross profit was $35.4 million and gross margin was 24.5%, down from 26.1% in Q3, largely due to materials and equipment-maintenance costs. Net income was $16.8 million; income attributable to Photronics shareholders was $12.5 million, or $0.18 per basic and diluted share. High-end FPD revenue increased sequentially, supported by mobile AMOLED demand; high-end IC revenue declined sequentially.
Liquidity, debt and capital allocation
Cash and cash equivalents were $329.3 million at year-end, up from $308.0 million. Working capital was $311.7 million, down from $367.3 million, primarily because the $57.5 million convertible notes due April 1, 2019 were reclassified as current. Total debt was $57.5 million. The company reported $50 million available under its amended credit facility, which has a $50 million limit and an additional $50 million expansion capacity, expires in September 2023, and had no borrowings outstanding at year-end. It was in compliance with its financial covenants.
Cash from operations increased to $130.6 million. Investing activities used $90.7 million, principally for capital spending. Financing activities used $13.8 million, including $23.1 million for repurchases of 2.6 million shares and $8.2 million in dividends to noncontrolling shareholders, partly offset by $18.0 million contributed by the China joint-venture partner. The company had $244.5 million of cash held by foreign subsidiaries. Management said cash, operating cash flow and borrowing availability should meet requirements for the next 12 months.
Material changes, outlook and risks
- Revenue rebounded from FY2017’s 6.8% decline. FY2018 growth came from both IC and FPD markets, with Taiwan and Korea together contributing most revenue.
- The company and Dai Nippon Printing formed a 50.01%-owned China IC-mask joint venture. Photronics’ remaining stated funding commitment was approximately $62 million. It also planned a further $70 million investment in the Hefei FPD facility during the first half of FY2019.
- FY2019 capital expenditure payments were forecast at approximately $210 million; $30 million of this amount was already included in accounts payable at year-end. Capital commitments outstanding were approximately $130 million; purchase commitments totaled $144 million, including $126 million related to China facilities.
- Management described its FY2019 outlook as cautiously optimistic, while expecting a greater-than-normal seasonal impact in Q1 and continued softness in high-end IC demand. Growth beyond Q1 was described as dependent on market conditions and the effectiveness and timing of the China-facility ramp. No numerical revenue or earnings guidance was provided.
- FY2018 included benefits from U.S. tax reform, including a $3.7 million benefit from refundable alternative minimum tax credits; the company reported a 10.7% effective tax rate versus 19.9% in FY2017. Foreign-currency translation reduced net assets by $16.7 million, although transaction effects produced a $0.4 million gain in income.
- Key exposures include semiconductor and display-market cyclicality, high fixed costs and capacity utilization, customer concentration (the two largest customers represented 31% of FY2018 revenue; the five largest represented 47%), China project execution and funding, foreign exchange, supply constraints, and technology shifts. The filing also identifies cybersecurity, regulatory, geopolitical, environmental and litigation risks. Ordinary-course claims were not expected to have a material effect.
- The auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of October 31, 2018.
Most important facts for investors to verify
- Whether the $57.5 million convertible notes were repaid, converted or refinanced at their April 2019 maturity, and the resulting dilution or cash impact.
- China facility construction, customer demand, production ramp timing, remaining capital needs and the availability and terms of local project financing.
- Whether FY2018 margin and cash-flow improvements persist as seasonal demand, high-end IC softness and market-cycle conditions evolve.
- Customer concentration, especially any changes in orders from Samsung and United Microelectronics, and the quality and collectability of receivables.
- Cash availability across jurisdictions, compliance with credit-facility covenants, and the effect of foreign-exchange movements on earnings and equity.