Item 2.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Overview
Management's discussion and analysis ("MD&A") of the Company's financial condition, results of operations and outlook should be read in conjunction with its condensed consolidated financial statements and related notes. Various segments of this MD&A contain forward-looking statements, all of which are presented based on current expectations, which may be adversely affected by uncertainties and risk factors (presented throughout this filing and in the Company's Annual Report on Form 10-K for the fiscal 2018 year), that may cause actual results to materially differ from these expectations.
We sell substantially all of our photomasks to semiconductor and FPD designers and manufacturers. Photomask technology is also being applied to the fabrication of other higher-performance electronic products such as photonics, microelectronic mechanical systems and certain nanotechnology applications. Our selling cycle is tightly interwoven with the development and release of new semiconductor and FPD designs and applications, particularly as they relate to the microelectronic industry's migration to more advanced product innovation, design methodologies and fabrication processes. We believe that the demand for photomasks primarily depends on design activity rather than sales volumes from products manufactured using photomask technologies. Consequently, an increase in semiconductor or FPD sales does not necessarily result in a corresponding increase in photomask sales. However, the reduced use of customized ICs, reductions in design complexity, other changes in the technology or methods of manufacturing or designing semiconductors, or a slowdown in the introduction of new semiconductor or FPD designs could reduce demand for photomasks ‒ even if the demand for semiconductors and FPDs increases. Advances in semiconductor, FPD, and photomask design and semiconductor and FPD production methods that shift the burden of achieving device performance away from lithography could also reduce the demand for photomasks. Historically, the microelectronic industry has been volatile, experiencing periodic downturns and slowdowns in design activity. These downturns have been characterized by, among other things, diminished product demand, excess production capacity, and accelerated erosion of selling prices, with a concomitant effect on revenue and profitability.
We are typically required to fulfill customer orders within a short period of time after receipt of an order, sometimes within twenty-four hours. This results in a minimal level of backlog orders, typically one to two weeks of backlog for IC photomasks and two to three weeks of backlog for FPD photomasks.
The global semiconductor and FPD industries are driven by end markets which have been closely tied to consumer-driven applications of high-performance devices, including, but not limited to, mobile display devices, mobile communications, and computing solutions. While we cannot predict the timing of the industry's transition to volume production of next-generation technology nodes, or the timing of up and down cycles with precise accuracy, we believe that such transitions and cycles will continue into the future, beneficially and adversely affecting our business, financial condition, and operating results as they occur. We believe our ability to remain successful in these environments is dependent upon the achievement of our goals of being a service and technology leader and efficient solutions supplier, which we believe should enable us to continually reinvest in our global infrastructure.
In the fourth quarter of fiscal 2019, the Company’s board of directors authorized the repurchase of up to $100 million of its common stock, to be executed in accordance with a repurchase plan under rule 10b5-1 of the Securities Act of 1933 (as amended). The authorization does not obligate the Company to repurchase any dollar amount or number of shares of common stock, and the repurchase program may be suspended or discontinued at any time.
Effective the third quarter of fiscal 2019, the Company entered into a Master Lease Agreement (“MLA”) which enables us to request advance payments or other funds for equipment or enter into an equipment lease in the U.S. In connection with this MLA, we were approved for financing of $35 million for the purchase of equipment; as of July 28, 2019, we had no outstanding borrowings against this MLA. In the fourth quarter of fiscal 2019, the financing entity, upon our request, made an advance payment of $3.4 million to an equipment vendor on our behalf. Interest on this borrowing is payable monthly at thirty-day LIBOR plus 1%, and will continue to accrue until the borrowing is repaid or, as allowed under the MLA, we enter into a lease for the equipment. All borrowings under the MLA are secured by the equipment purchased or financed.
In the second quarter of fiscal 2019, we repaid, upon maturity, the entire $57.5 million principal amount of the convertible senior notes we issued in April 2016.
In the second quarter of fiscal 2019, PDMC, the Company’s majority-owned IC subsidiary in Taiwan, declared a dividend of which 49.99%, or approximately $18.8 million, will be paid to noncontrolling interests in the fourth quarter of fiscal 2019.
In the first quarter of fiscal 2019, PDMC paid a dividend, of which 49.99%, or approximately $26.1 million, was paid to noncontrolling interests.
In the first quarter of fiscal 2019, PDMCX was approved for credit of $50 million, subject to certain limitations related to PDMCX registered capital at the time of the initial approval, pursuant to which PDMCX has and will enter into separate loan agreements (“the Project Loans”) for intermittent borrowings. The Project Loans, which are denominated in Chinese renminbi (RMB), are being used to finance certain capital expenditures in China. PDMCX granted liens on its land, building, and certain equipment as collateral for the Project Loans. As of July 28, 2019, PDMCX had borrowed 243.4 million RMB ($35.4 million) against this approval, which includes $9.6 million borrowed during the three-month period ended July 28, 2019. See Note 5 of the condensed consolidated financial statements for additional information on these loans.
In the first quarter of fiscal 2019, PDMCX received approval for unsecured credit of $25.0 million, pursuant to which PDMCX may enter into separate loan agreements. Under this credit agreement (the “Working Capital Loan”), PDMCX can borrow up to 140.0 million RMB, or approximately $20.4 million, to pay value-added taxes (“VAT”) and up to 60.0 million RMB ($8.7 million) to fund operations; combined total borrowings are limited to $25.0 million. During the quarter ended July 28, 2019, PDMCX borrowed 11.4 million RMB ($3.9 million) to fund operations, with repayments due one year from their borrowing dates. Through July 28, 2019, PDMCX borrowed 68.0 million RMB ($9.9 million) to pay VAT, and repaid $0.1 million as of that date. Payments on these borrowings are due semiannually, at an increasing rate, through January 2022. See Note 5 of the condensed consolidated financial statements for additional information on these loans.
In the fourth quarter of fiscal 2018, we entered into a five year amended and restated credit agreement (“the credit agreement”), which has a $50 million borrowing limit, with an expansion capacity to $100 million. The credit agreement is secured by substantially all of our assets located in the United States and common stock we own in certain foreign subsidiaries. The credit agreement includes minimum interest coverage ratio, total leverage ratio, and minimum unrestricted cash balance covenants (all of which we were in compliance with at July 28, 2019), and limits the amount of dividends, distributions, and redemptions we can pay on our stock to an aggregate amount of $100 million. We had no outstanding borrowings against the credit agreement at July 28, 2019, and $50 million was available for borrowing. The interest rate on the credit agreement (2.5% at July 28, 2019) is based on our total leverage ratio at LIBOR plus a spread, as defined in the credit agreement.
In the fourth quarter of fiscal 2018, the Company’s board of directors authorized the repurchase of up to $25 million of its common stock, to have been executed in open-market transactions or in accordance with a repurchase plan under rule 10b5-1 of the Securities Act of 1933 (as amended). The share repurchase program commenced, under rule 10b5-1, on October 22, 2018, and expired on February 1, 2019. In total, we repurchased 1.5 million shares at a cost of $13.8 million (an average of $9.41 per share) under this program.
In the third quarter of fiscal 2018, the Company’s board of directors authorized the repurchase of up to $20 million of its common stock, which was effectuated in open-market transactions or in accordance with a repurchase plan under rule 10b5-1 of the Securities Act of 1933 (as amended). The share repurchase program commenced on July 10, 2018, and ended in October 2018. In total, under this program, we repurchased 2.2 million shares at a cost of $20 million (an average of $8.97 per share).
In the first quarter of fiscal 2018, we announced the successful closing of the China joint venture agreement with Dai Nippon Printing Co., Ltd. (“DNP”), which we had agreed to enter into and announced in the third quarter of fiscal 2017. Under the agreement, our wholly owned Singapore subsidiary owns 50.01% of the joint venture, which is named Xiamen American Japan Photronics Mask Co., Ltd. (PDMCX), and a subsidiary of DNP owns the remaining 49.99%. The financial results of the joint venture are included in the Photronics, Inc. consolidated financial statements. See Note 4 of the condensed consolidated financial statements for additional information on the joint venture.
In the fourth quarter of fiscal 2017, we announced that Photronics UK, Ltd., a wholly owned subsidiary of ours, signed an investment agreement with Hefei State Hi-tech Industry Development Zone to establish a manufacturing facility in Hefei, China. Under the terms of the agreement, through our subsidiary, we agreed to invest a minimum of $160 million to build and operate a research and development and manufacturing facility for high-end and mainstream FPD photomasks. As of April 28, 2019, we had met the minimum investment requirement and satisfied the terms of the agreement. Hefei State Hi-tech Industry Development Zone is providing certain investment incentives and support for this facility, which has the capability to produce up to G10.5+ large area masks and AMOLED products. Construction of this facility was completed in late 2018, and production commenced in the second quarter of 2019.
Material Changes in Results of Operations
Three and Nine Months ended July 28, 2019
The following table presents selected operating information expressed as a percentage of revenue.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 28,
2019
|
|
|
April 28,
2019
|
|
|
July 29,
2018
|
|
|
July 28,
2019
|
|
|
July 29,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
77.9
|
|
|
|
80.2
|
|
|
|
73.9
|
|
|
|
79.0
|
|
|
|
75.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
22.1
|
|
|
|
19.8
|
|
|
|
26.1
|
|
|
|
21.0
|
|
|
|
24.6
|
|
Selling, general and administrative expenses
|
|
|
9.5
|
|
|
|
10.1
|
|
|
|
9.2
|
|
|
|
10.2
|
|
|
|
9.7
|
|
Research and development expenses
|
|
|
2.9
|
|
|
|
2.7
|
|
|
|
1.9
|
|
|
|
3.0
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
9.7
|
|
|
|
7.0
|
|
|
|
15.0
|
|
|
|
7.8
|
|
|
|
12.2
|
|
Other (expense) income, net
|
|
|
(0.2
|
)
|
|
|
3.0
|
|
|
|
1.0
|
|
|
|
1.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
9.5
|
|
|
|
10.0
|
|
|
|
16.0
|
|
|
|
9.0
|
|
|
|
12.4
|
|
Income tax provision
|
|
|
2.4
|
|
|
|
2.5
|
|
|
|
1.5
|
|
|
|
2.0
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
7.1
|
|
|
|
7.5
|
|
|
|
14.5
|
|
|
|
7.0
|
|
|
|
11.4
|
|
Net income attributable to noncontrolling interests
|
|
|
2.5
|
|
|
|
1.1
|
|
|
|
5.0
|
|
|
|
1.9
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Photronics, Inc. shareholders
|
|
|
4.6
|
%
|
|
|
6.4
|
%
|
|
|
9.5
|
%
|
|
|
5.1
|
%
|
|
|
7.6
|
%
|
Note: All of the following tabular comparisons, unless otherwise indicated, are for the three months ended July 28, 2019 (Q3 FY19), April 28, 2019 (Q2 FY19) and July 29, 2018 (Q3 FY18), and for the nine months ended July 28, 2019 (YTD FY19) and July 29, 2018 (YTD FY18), in millions of dollars.
Revenue
The following tables present revenue changes by product type and geographic areas. Columns may not total due to rounding.
|
|
Q3 FY19 from Q2 FY19
|
|
|
Q3 FY19 from Q3 FY18
|
|
|
YTD FY19 from YTD FY18
|
|
|
|
Revenue in
Q3 FY19
|
|
|
Increase
(Decrease)
|
|
|
Percent
Change
|
|
|
Increase
(Decrease)
|
|
|
Percent
Change
|
|
|
Revenue in
YTD FY19
|
|
|
Increase
(Decrease)
|
|
|
Percent
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High-end
|
|
$
|
38.5
|
|
|
$
|
0.0
|
|
|
|
0.1
|
%
|
|
$
|
(7.6
|
)
|
|
|
(16.5
|
)%
|
|
$
|
111.5
|
|
|
$
|
(9.5
|
)
|
|
|
(7.8
|
)%
|
Mainstream
|
|
|
61.7
|
|
|
|
1.6
|
|
|
|
2.6
|
%
|
|
|
0.6
|
|
|
|
0.9
|
%
|
|
|
182.2
|
|
|
|
(2.1
|
)
|
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total IC
|
|
$
|
100.2
|
|
|
$
|
1.6
|
|
|
|
1.6
|
%
|
|
$
|
(7.1
|
)
|
|
|
(6.6
|
)%
|
|
$
|
293.7
|
|
|
$
|
(11.5
|
)
|
|
|
(3.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FPD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High-end
|
|
$
|
25.9
|
|
|
$
|
3.0
|
|
|
|
13.0
|
%
|
|
$
|
8.9
|
|
|
|
52.0
|
%
|
|
$
|
70.4
|
|
|
$
|
16.3
|
|
|
|
30.1
|
%
|
Mainstream
|
|
|
12.0
|
|
|
|
2.0
|
|
|
|
19.4
|
%
|
|
|
(0.1
|
)
|
|
|
(0.7
|
)%
|
|
|
30.4
|
|
|
|
(1.0
|
)
|
|
|
(3.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FPD
|
|
$
|
37.9
|
|
|
$
|
4.9
|
|
|
|
15.0
|
%
|
|
$
|
8.8
|
|
|
|
30.1
|
%
|
|
$
|
100.8
|
|
|
$
|
15.3
|
|
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
138.1
|
|
|
$
|
6.5
|
|
|
|
5.0
|
%
|
|
$
|
1.7
|
|
|
|
1.3
|
%
|
|
$
|
394.4
|
|
|
$
|
3.8
|
|
|
|
1.0
|
%
|
|
|
Q3 FY19 from Q2 FY19
|
|
|
Q3 FY19 from Q3 FY18
|
|
|
YTD FY19 from YTD FY18
|
|
|
|
Revenue in
Q3 FY19
|
|
|
Increase
(Decrease)
|
|
|
Percent
Change
|
|
|
Increase
(Decrease)
|
|
|
Percent
Change
|
|
|
Revenue in
YTD FY19
|
|
|
Increase
(Decrease)
|
|
|
Percent
Change
|
|
Taiwan
|
|
$
|
61.3
|
|
|
$
|
4.8
|
|
|
|
8.5
|
%
|
|
$
|
(0.8
|
)
|
|
|
(1.3
|
)%
|
|
$
|
175.5
|
|
|
$
|
0.7
|
|
|
|
0.4
|
%
|
Korea
|
|
|
37.1
|
|
|
|
(0.9
|
)
|
|
|
(2.4
|
)%
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)%
|
|
|
110.4
|
|
|
|
4.1
|
|
|
|
3.8
|
%
|
United States
|
|
|
25.4
|
|
|
|
(1.4
|
)
|
|
|
(5.2
|
)%
|
|
|
(2.4
|
)
|
|
|
(8.5
|
)%
|
|
|
74.6
|
|
|
|
(7.4
|
)
|
|
|
(9.0
|
)%
|
Europe
|
|
|
7.9
|
|
|
|
(0.5
|
)
|
|
|
(5.9
|
)%
|
|
|
(0.6
|
)
|
|
|
(7.0
|
)%
|
|
|
24.7
|
|
|
|
(1.0
|
)
|
|
|
(4.0
|
)%
|
China
|
|
|
6.0
|
|
|
|
4.5
|
|
|
|
306.4
|
%
|
|
|
5.7
|
|
|
|
2,225.3
|
%
|
|
|
7.7
|
|
|
|
7.2
|
|
|
|
1,363.0
|
%
|
Other
|
|
|
0.5
|
|
|
|
0.0
|
|
|
|
6.2
|
%
|
|
|
(0.1
|
)
|
|
|
(17.4
|
)%
|
|
|
1.5
|
|
|
|
0.2
|
|
|
|
14.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
138.1
|
|
|
$
|
6.5
|
|
|
|
5.0
|
%
|
|
$
|
1.7
|
|
|
|
1.3
|
%
|
|
$
|
394.4
|
|
|
$
|
3.8
|
|
|
|
1.0
|
%
|
Our quarterly revenues can be affected by the seasonal purchasing tendencies of our customers. As a result, demand for our products is typically negatively impacted during the first, and sometimes the second, quarters of our fiscal year, by the North American, European, and Asian holiday periods, as some of our customers reduce their development and, consequently, their buying activities during those periods. High-end photomask applications include mask sets for 28 nanometer and smaller products for IC, and G8 and above and active matrix organic light-emitting diode (AMOLED) display technologies for FPD products. High-end photomasks typically have higher selling prices (ASPs) than mainstream products.
Revenue increased 5.0% in Q3 FY19, compared with Q2 FY19, as a result of overall FPD and IC growth. FPD revenue increased 15% due to increased demand for AMOLED products, as our customers in Korea and China continued to release new designs, and we benefited from an increase in capacity as we ramp production in China, including for G10.5+ photomasks. IC revenue increased 1.6% due to increased demand from Asian foundries for mainstream nodes.
Revenue increased 1.3% in Q3 FY19, compared with Q3 FY18, as increased FPD revenues offset a decline in IC. FPD revenues increased 30.1% primarily due to significantly increased demand for AMOLED products. We also ramped production of G10.5+ photomasks at our new facility in China. IC revenue decreased 6.6% from the prior year quarter, due in part to the geopolitical conditions in Asia tempering growth in that region.
Revenue increased 1.0% in YTD FY19, compared with YTD FY18, as increased demand for AMOLED products offset a moderate decline in IC demand and a more substantial decrease in demand for other high-end FPD products (excluding G10.5+ masks). Demand for IC was notably strong from both foundries and customers with captive mask shops in YTD FY18.
Looking forward, we expect demand for both AMOLED and large format FPD masks (i.e. G10.5+) to increase, as more panel fabrication facilities begin production and new design releases occur at both new and existing facilities. High-end IC is expected to be stable to improving, but growth may be temporarily forestalled in Asia due to the effects of the current state of U.S. – China trade relations, as well as rising tensions between Japan and Korea, which may present supply-chain challenges for some of our customers. Despite these issues, we believe that the IC and FPD markets in Asia represent long-term growth opportunities.
Gross Margin
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Q3 FY19
|
|
|
Q2 FY19
|
|
|
Percent
Change
|
|
|
Q3 FY18
|
|
|
Percent
Change
|
|
|
YTD FY19
|
|
|
YTD FY18
|
|
|
Percent
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
30.6
|
|
|
$
|
26.0
|
|
|
|
17.5
|
%
|
|
$
|
35.6
|
|
|
|
(14.1
|
)%
|
|
$
|
82.7
|
|
|
$
|
96.1
|
|
|
|
(13.9
|
)%
|
Gross margin
|
|
|
22.1
|
%
|
|
|
19.8
|
%
|
|
|
|
|
|
|
26.1
|
%
|
|
|
|
|
|
|
21.0
|
%
|
|
|
24.6
|
%
|
|
|
|
|
Gross margin increased 2.3% from Q2 FY19, primarily as a result of the $6.5 million increase in revenue discussed above. Reduced compensation and related expenses of $0.3 million, and an increase of $0.6 million of overhead costs transferred to research and development expense, also favorably impacted gross margin. Somewhat offsetting these favorable impacts, depreciation expense increased $2.2 million in Q3 FY19, as we recognized a full quarter of depreciation for assets placed in service at our China FPD plant and commenced depreciation on a significant number of assets at our China IC plant. In addition, equipment costs, primarily related to tool relocations to our China facilities, increased $0.6 million from the prior quarter. On a consolidated basis, material costs, as a percentage of revenue, sequentially increased 1.7%, primarily due to changes in product mix.
Gross margin decreased 4.0% in Q3 FY19 from Q3 FY18, despite a 1.3% increase in revenue from the prior year quarter. The decrease was, in significant part, due to increased losses at our two China facilities of $6.3 million, both of which recently commenced manufacturing operations. The increased losses at the China facilities were, to a great degree, caused by increased depreciation expense of $2.8 million, as depreciation commenced on equipment when it achieved customer qualification, which precedes revenue generation. Compensation and related expenses at the China facilities increased by $0.9 million from the prior year quarter, reflecting the increased staffing required for qualification and production.
On a year-to-date basis, gross margin decreased 3.6%, with increased losses totaling $9.8 million at our two China-based facilities constituting the most significant causes; our FPD facility in China commenced production late in Q2 FY19, and our IC facility commenced production in Q3 FY19.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $0.1 million, or 1.1%, to $13.1 million in Q3 FY19, from $13.3 million in Q2 FY19, primarily due to decreased general and administrative expenses of $0.3 million, partially offset by increased selling expenses in China. Selling, general and administrative expenses increased in Q3 FY19 $0.6 million, or 5.0%, to $13.1 million from $12.5 million in Q3 FY18. Selling general and administrative expenses incurred in China increased $0.7 million from the prior year quarter, reflecting the completion of construction and commencement of operations at our two China facilities. On a year-to-date basis, selling, general and administrative expenses increased $2.3 million, or 6.1%, to $40.2 million from $37.9 million. Expenses related to our expansion into China accounted for $2.0 million of this increase; increased compensation and related expenses at other sites comprised an additional $0.2 million of the total increase.
Research and Development Expenses
Research and development expenses consist of development efforts related to high-end process technologies for 28nm and smaller IC nodes. In Asia, in addition to the focus on high-end IC process technology nodes, G8 and above FPDs and AMOLED applications are also under development.
Research and development expenses increased $0.5 million, or 14.2%, from Q2 FY19, reflecting an increase in IC related qualification activities somewhat offset by decreased qualification activities in FPD (except China). Research and development expenses increased $1.4 million in Q3 FY19, or 52.5% from Q3 FY18; increased IC related qualification activities accounted for the preponderance of the change, with most of the remainder being attributable to qualification activities at our China FPD facility. On a year-to-date basis, research and development expenses increased $1.3 million, or 12.1%, as qualification related expenses increased for both IC and FPD products.
Other Income (Expense), net
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Q3 FY19
|
|
|
Q2 FY19
|
|
|
Q3 FY18
|
|
|
YTD FY19
|
|
|
YTD FY18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other income (expense), net
|
|
$
|
-
|
|
|
$
|
4.3
|
|
|
$
|
2.0
|
|
|
$
|
6.0
|
|
|
$
|
2.3
|
|
Interest expense
|
|
|
(0.4
|
)
|
|
|
(0.4
|
)
|
|
|
(0.6
|
)
|
|
|
(1.3
|
)
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
(0.4
|
)
|
|
$
|
3.9
|
|
|
$
|
1.4
|
|
|
$
|
4.7
|
|
|
$
|
0.6
|
|
Interest income and other income (expense), net decreased from Q2 FY19 by $4.3 million, primarily due to a $4.0 million negative change in foreign currency exchange results. Interest income and other income (expense), net decreased from Q3 FY18 by $2.0 million, primarily because of a $1.2 million negative change in foreign currency exchange results and decreased interest income of $0.4 million, which was due to our lower average cash balance in the current year period. On a year-to-date basis, Interest income and other income (expense), net, increased $3.7 million, primarily because of the impact of $6.2 million from foreign currency exchange gains in YTD FY19, in contrast to losses incurred in YTD FY18. The effect of the foreign exchange gains was somewhat offset by government incentives of $0.8 million received, a $0.6 million gain on the sale of certain assets recognized in YTD FY18, and reduced interest income of $1.1 million, due to the lower average cash balance in the current year period.
Interest expense was $0.4 million in Q3 FY19, unchanged from Q2 FY19. Interest expense decreased $0.2 million in Q3 FY19 from Q3 FY18, and $0.4 million in YTD FY19 from YTD FY18, primarily due to the repayment of our $57.5 million convertible senior notes in April 2019; interest incurred on our loans in China partially offset these reductions.
Income Tax Provision
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Q3 FY19
|
|
|
Q2 FY19
|
|
|
Q3 FY18
|
|
|
YTD FY19
|
|
|
YTD FY18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
3.2
|
|
|
$
|
3.3
|
|
|
$
|
2.1
|
|
|
$
|
7.9
|
|
|
$
|
3.8
|
|
Effective income tax rate
|
|
|
24.7
|
%
|
|
|
25.0
|
%
|
|
|
9.4
|
%
|
|
|
22.3
|
%
|
|
|
7.8
|
%
|
The effective income tax rate is sensitive to the jurisdictional mix of earnings, due, in part, to the non-recognition of tax benefits on losses in jurisdictions with valuation allowances.
The effective income tax rate decreased in Q3 FY19, compared with Q2 FY19, primarily due to changes in the jurisdictional mix of earnings. The effective income tax rate increased in Q3 FY19, compared with Q3 FY18, due to changes in the jurisdictional mix of earnings and nonrecurring tax benefits related to a settlement with a taxing authority and a statute of limitations expiration in Q3 FY18.
The effective income tax rate increased in YTD FY19, compared with YTD FY18, primarily due to our recognition in YTD FY18 of nonrecurring tax benefits related to tax reform in the U.S. and Taiwan of $4.2 million, and a one-time audit settlement benefit of $1.9 million. The year-over-year increase in the effective tax rate was somewhat tempered by a one-time audit settlement benefit of $0.9 million in YTD FY19, as well as changes in the jurisdictional mix of earnings.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $3.5 million in Q3 FY19, which represented an increase of $2.1 million and a decrease $3.3 million from Q2 FY19 and Q3 FY18, respectively. Year-to-date, noncontrolling interests’ share decreased $7.5 million from YTD FY18. The changes for all comparative periods were due to changes in net income at our IC manufacturing facilities in Taiwan and China, in which noncontrolling interests hold 49.99% ownership interests.
Liquidity and Capital Resources
Our working capital at the end of Q3 FY19 was $261.2 million, compared with $311.7 million at the end of fiscal 2018. The $50.5 million net decrease is primarily attributable to:
- Decreased cash and cash equivalents of $74.5 million (net of $57.5 million used to repay our convertible senior notes, which had no impact on working capital);
- Increased inventories of $10.8 million, the predominance of which was to supply our China FPD facility and,
- Receivables for investment subsidies in China of $11.9 million at the end of Q3 FY19.
We had cash and cash equivalents of $197.2 million at the end of Q3 FY19, compared with $329.3 million at the end of fiscal 2018. The net decrease is primarily attributable to:
- $57.5 million used to repay our convertible notes;
- $160.1 million used to purchase capital assets (the preponderance of which related to equipping our China-based facilities);
- $10.7 million used to repurchase our common stock;
- $53.2 million received from borrowings in China;
- $17.7 million received from investment incentives in China and,
- $23.5 million provided by operating activities.
The net cash provided by operating activities of $23.5 million in YTD FY19 decreased $63.5 million, from $87.0 million provided in YTD FY18. The net decrease was due primarily to:
- Lower net income of $17.0 million in YTD FY19;
- A greater increase in the change in inventories balances of $6.7 million in YTD FY19 (primarily attributable to the stocking of our FPD facility in China) and,
- A comparative increase in value added tax prepayments related to our China facilities of $24.3 million in YTD FY19. These prepayments are recoverable through future sales transactions of the facilities.
The favorable effects of foreign currency exchange rates contributed $1.2 million to our reported cash balance at July 28, 2019.
Net cash used in investing activities was $142.5 million in YTD FY19, an increase of $78.4 million from the $64.1 million used in YTD FY18. The net increase was primarily attributable to increased capital expenditures of $95.8 million, the predominance of which related to the building and equipping of our China facilities. Partially offsetting the increased capital expenditures was $17.7 million received in China from investment incentives.
Net cash flows from financing activities decreased from funds provided of $2.6 million in YTD FY18 to $14.3 million of funds used in YTD FY19. Significant components of the net decrease were:
- $57.5 million used to repay (upon their maturity) our convertible senior notes;
- $26.1 million used to pay dividends to DNP (related to their 49.99% interest in our IC facility in Taiwan);
- $10.7 million used to acquire our common stock under a share repurchase program;
- $53.2 million received from borrowings in China and,
- $29.4 million contributed by DNP for their investment in our recently established IC joint venture in China.
As of July 28, 2019, and October 31, 2018, our total cash and cash equivalents included $153.9 million and $244.5 million, respectively, held by our foreign subsidiaries. The majority of earnings of our foreign subsidiaries are considered to be indefinitely reinvested. Repatriation of these funds to the U.S. may subject them to U.S. state income taxes and local country withholding taxes in certain jurisdictions. Furthermore, our foreign subsidiaries continue to grow through the reinvestment of earnings in additional manufacturing capacity and capability, particularly in the high-end IC and FPD areas.
As of July 28, 2019, we had capital commitments outstanding of approximately $100 million, much of which related to building and equipping our China facilities (discussed below). We intend to finance our capital expenditures with our working capital, cash generated from operations and, if necessary, additional borrowings. We entered into a joint venture that constructed an IC facility in China with an estimated total joint investment of $160 million. Our remaining funding commitment for the joint venture is approximately $7 million which we will fulfill over the next several quarters. In Q2 FY19, we commenced production at our newly constructed FPD facility in China in which, as of July 28, 2019, we had invested $160 million. We believe that our cash on hand, cash generated from operations and amounts available to borrow will be sufficient to meet our cash requirements for the next twelve months. We regularly review the availability and terms at which we might issue additional equity or debt securities in the public or private markets. However, we cannot assure that additional sources of financing would be available to us on commercially favorable terms, should our requirements exceed our existing cash, cash generated by operations, and cash available under our credit agreement.
Our liquidity, as we operate in a high fixed cost environment, is highly dependent on our revenue, cash conversion cycle, and the timing of our capital expenditures (which can vary significantly from period to period). Depending on conditions in the semiconductor and FPD markets, our cash flows from operations and current holdings of cash may not be adequate to meet our current and long-term needs for capital expenditures, operations, and debt repayments. Historically, in certain years, we have used external financing to fund these needs. Due to conditions in the credit markets and covenant restrictions on our existing debt, some financing instruments we have used in the past may not be available to us when required. Consequently, we cannot assure that additional sources of financing would be available to us on commercially favorable terms, should our long-term cash requirements exceed our existing cash and cash available under our credit agreements.
Off-Balance Sheet Arrangements
In January 2018, Photronics, through its wholly owned Singapore subsidiary, and DNP, through its wholly owned subsidiary “DNP Asia Pacific PTE, Ltd.” entered into a joint venture under which DNP obtained a 49.99% interest in our IC business in Xiamen, China. The joint venture, known as “Photronics DNP Mask Corporation Xiamen” (“PDMCX”), was established to develop and manufacture photomasks for leading-edge and advanced-generation semiconductors. Under the Joint Venture Operating Agreement of PDMCX (“the Agreement”), DNP is afforded, under certain circumstances, the right to “put” its interest in PDMCX to Photronics. These circumstances include disputes regarding the strategic direction of PDMCX that may arise after the initial two-year term of the Agreement that cannot be resolved between the two parties. In addition, both Photronics and DNP have the option to purchase, or put, their interest from, or to, the other party, should their ownership interest fall below 20% for a period of more than six consecutive months. Under all such circumstances, the sales of ownership interests would be at the exiting party’s ownership percentage of the joint venture’s net book value, with closing to take place within three business days of obtaining required approvals and clearance. Should DNP exercise an option to put their, or purchase our, interest in PDMCX we may, depending on the relationship of the fair and book value of PDMCX’s net assets, incur a loss. As of July 28, 2019, Photronics and DNP each had net investments in PDMCX of approximately $42.5 million.
We lease certain office facilities and equipment under operating leases that may require us to pay taxes, insurance and maintenance expenses related to the properties. Certain of these leases contain renewal or purchase options exercisable at the end of the lease terms.
Business Outlook
A majority of our revenue growth is expected to continue to come from the Asia region, predominantly China. In response to this expectation, we have entered into a joint venture that completed the construction of an IC research and development and manufacturing facility in Xiamen, China, in late 2018; Production commenced at this facility in Q3 FY19. In addition, in August 2017, we entered into an investment agreement to construct an FPD manufacturing facility in Hefei, China. Construction of this facility was completed in late 2018, and production commenced in the second quarter of 2019.
We make continual assessments of our global manufacturing strategy and monitor our revenue and related cash flows from operations. These ongoing assessments could result in future facility closures, asset redeployments, impairments of intangible or long-lived assets, workforce reductions, or the addition of increased manufacturing facilities, all of which would be based on market conditions and customer requirements.
Our future results of operations and the other forward-looking statements contained in this filing involve a number of risks and uncertainties. While various risks and uncertainties were discussed in Part1, Item 1A in our Annual Report on Form 10-K for the year ended October 31, 2018, a number of other unforeseen factors could cause actual results to differ materially from our expectations.
Effect of Recent Accounting Pronouncements
See “Item 1. Condensed Consolidated Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 14 – Recent Accounting Pronouncements” for recent accounting pronouncements that may affect the Company’s financial reporting.