Photronics, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended November 1, 2015 (52 weeks); comparisons are to the year ended November 2, 2014. Photronics manufactures photomasks used in semiconductor integrated circuits and flat-panel displays, operating nine facilities across the United States, Europe, Taiwan and Korea.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $524.2 million | $455.5 million |
| Gross profit / margin | $143.1 million / 27.3% | $100.3 million / 22.0% |
| Operating income / margin | $72.2 million / 13.8% | $28.8 million / 6.3% |
| Net income | $56.9 million | $32.0 million |
| Net income attributable to Photronics shareholders | $44.6 million | $26.0 million |
| Diluted EPS | $0.63 | $0.41 |
| Operating cash flow | $133.2 million | $96.4 million |
| Capital expenditures | $104.0 million | $91.1 million |
- Sales rose 15.1%; IC photomask sales increased 19.3% to $420.8 million, while FPD sales increased 0.5% to $103.4 million.
- Cash and cash equivalents were $205.9 million at year-end, including $102.9 million held by foreign subsidiaries. Working capital was $171.4 million, down from $197.4 million; the company attributed the decline mainly to reclassifying $57.5 million of convertible notes as current.
- Total borrowings were $132.6 million, including $57.5 million of 3.25% convertible notes due April 2016, $57.5 million of 3.25% notes due April 2019, and capital leases. The company had no credit-facility borrowings and $50 million available under its facility; it reported compliance with its covenants.
Changes, outlook and material items
- Revenue growth reflected the full-year contribution from the 2014 DPTT acquisition and stronger high-end IC demand. High-end IC sales rose $62.9 million to $166.9 million. Higher high-end sales and lower manufacturing costs helped lift gross margin.
- The 2014 DPTT acquisition included a $16.4 million non-cash gain, which did not recur in FY2015. FY2015 earnings also included $0.9 million of financing expenses associated with exchanging $57.5 million of convertible notes into notes maturing in 2019.
- Foreign-currency translation reduced net assets by $40.2 million in FY2015; transaction-related foreign-exchange movements produced a $2.5 million net gain in income.
- Management expected FY2016 capital expenditure payments of $50 million to $75 million, primarily for high-end IC manufacturing capability, and believed cash on hand, operating cash flow and available credit would cover requirements for the next 12 months. Management anticipated much of revenue growth would come from Asia, with potential North American growth supported by technology licensed from Micron. These are expectations, not guarantees.
- The MP Mask joint venture with Micron was set to end after May 5, 2016. Micron was to purchase Photronics’ interest based on its share of MP Mask’s net book value, approximately $93 million as of September 2015; management did not expect a significant gain or loss. A separate one-year supply agreement was to begin May 6, 2016, with Photronics as Micron’s majority outsource supplier, subject to mutually agreeable renewals.
- Key risks include customer concentration (the five largest customers represented 52% of FY2015 sales, and two customers represented 18% and 15%), semiconductor and display industry cyclicality, short order lead times and limited backlog, pricing and technology competition, capital intensity, foreign-currency and international operating risks, and reliance on a limited number of equipment and materials suppliers. No significant long-term customer purchase commitments were disclosed.
- In December 2015, after year-end, Photronics sold a minority investment for $8.8 million and expected to recognize an approximately $8.5 million gain in FY2016’s first quarter. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective controls.
Investor verification priorities
- Track whether FY2016 revenue and margin performance sustain FY2015’s high-end IC growth and improved utilization.
- Verify actual capital spending against the $50–$75 million outlook and monitor cash generation, working capital and near-term debt maturities.
- Confirm completion proceeds and accounting for the MP Mask exit, and assess continuity of Micron-related supply, technology transfer and customer business after the joint venture ends.
- Monitor exposure to the two largest customers, the rising top-five customer concentration, and renewal of short-term supply arrangements.
- Assess foreign-exchange effects, repatriation taxes on overseas cash and earnings, and any material changes in tax positions or deferred-tax valuation allowances.