Photronics(PLAB) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (unaudited) Unaudited financial statements for the periods ended April 30, 2023, show the company's financial position and performance Condensed Consolidated Balance Sheets Total assets reached $1.45 billion and total equity grew to $1.20 billion, reflecting strong retained earnings growth Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | April 30, 2023 | October 31, 2022 | | :--- | :--- | :--- | | Total current assets | $720,116 | $644,652 | | Total assets | $1,451,025 | $1,315,830 | | Total current liabilities | $185,168 | $193,797 | | Total liabilities | $246,341 | $253,741 | | Total equity | $1,204,684 | $1,062,089 | Condensed Consolidated Statements of Income Quarterly revenue rose 12.1% to $229.3 million, driving a 45.5% increase in net income and a diluted EPS of $0.65 Three Months Ended Financial Performance (in thousands, except EPS) | Metric | April 30, 2023 | May 1, 2022 | | :--- | :--- | :--- | | Revenue | $229,306 | $204,509 | | Gross Profit | $88,402 | $70,220 | | Operating Income | $67,045 | $49,401 | | Net Income Attributable to Photronics, Inc. | $39,929 | $27,432 | | Diluted EPS | $0.65 | $0.45 | Six Months Ended Financial Performance (in thousands, except EPS) | Metric | April 30, 2023 | May 1, 2022 | | :--- | :--- | :--- | | Revenue | $440,397 | $394,336 | | Gross Profit | $164,479 | $130,083 | | Operating Income | $123,002 | $87,598 | | Net Income Attributable to Photronics, Inc. | $53,915 | $50,496 | | Diluted EPS | $0.88 | $0.83 | Condensed Consolidated Statements of Cash Flows Operating activities generated $109.7 million in cash, while capital expenditures drove higher cash use in investing Six Months Ended Cash Flow Summary (in thousands) | Activity | April 30, 2023 | May 1, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $109,677 | $103,289 | | Net cash used in investing activities | ($62,260) | ($33,614) | | Net cash used in financing activities | ($15,242) | ($2,166) | | Net increase in cash | $47,796 | $52,592 | Notes to Condensed Consolidated Financial Statements Notes detail key accounting policies, VIE consolidation, debt repayment, and significant capital expenditure commitments - The company is a leading manufacturer of photomasks, a key element in the production of integrated circuits (ICs) and flat-panel displays (FPDs), operating eleven manufacturing facilities worldwide[29] - The PDMCX joint venture with DNP is consolidated as a Variable Interest Entity (VIE) because Photronics is the primary beneficiary, holding a controlling financial interest[47] - In Q2 FY23, the company repaid the entire remaining balance of its Xiamen Project Loans, totaling 26.4 million RMB (approx $3.9 million), leaving only finance leases as outstanding debt[51][57] - Revenue is primarily recognized 'over time' as the company performs work on custom photomasks, using a cost-based input method to measure progress[62] - As of April 30, 2023, the company had outstanding capital expenditure commitments of approximately $113.1 million, mainly for high-end equipment[95] - The share repurchase program authorized in September 2020 has $31.7 million remaining for future repurchases as of April 30, 2023[104] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Record Q2 revenue of $229.3 million was driven by strong IC and FPD demand, improving gross margin to 38.6% Results of Operations Revenue grew 12.1% year-over-year to $229.3 million, driven by strong IC and FPD demand that expanded margins Revenue by Product Type - Q2 FY23 vs. Q2 FY22 (in millions) | Product Type | Q2 FY23 Revenue | Change vs Q2 FY22 | % Change | | :--- | :--- | :--- | :--- | | Total IC | $167.0 | $21.3 | +14.6% | | Total FPD | $62.3 | $3.5 | +6.0% | | Total Revenue | $229.3 | $24.8 | +12.1% | - IC revenue increases were driven by strong demand in Asia for mainstream products used in consumer goods, IoT, 5G, and cryptocurrency mining, leading to a favorable pricing environment[123][124] - FPD revenue growth was driven by strong high-end demand for AMOLED panels used in advanced mobile displays[125] - Gross margin for Q2 FY23 increased by 4.3 percentage points year-over-year to 38.6%, primarily due to higher revenue and favorable product mix[127] - Non-operating income was significantly impacted by foreign currency fluctuations, with a net gain of $10.7 million in Q2 FY23, primarily from favorable movements of the South Korean won and New Taiwan dollar against the USD[133] Liquidity and Capital Resources The company maintains strong liquidity with $367.5 million in cash and plans capital expenditures of $130.0 million for FY23 - Cash and cash equivalents were $367.5 million as of April 30, 2023, with $352.4 million held by foreign subsidiaries[142] - Estimated capital expenditures for the full fiscal year 2023 are approximately $130.0 million to support customer demand[144] - As of April 30, 2023, the company had outstanding capital commitments of $113.1 million[144] - The share repurchase program has approximately $31.7 million remaining under its authorization[145] Non-GAAP Financial Measures Non-GAAP measures are used to clarify performance, with Net Cash increasing to $339.1 million as of April 30, 2023 Reconciliation of GAAP to Non-GAAP EPS (Q2 FY23) | Metric | Amount | | :--- | :--- | | GAAP diluted earnings per share | $0.65 | | Effects of adjustments (FX, tax, NCI) | ($0.11) | | Non-GAAP diluted earnings per share | $0.54 | Net Cash Calculation (in millions) | Component | April 30, 2023 | October 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $367.5 | $319.7 | | Current portion of Long-term debt | ($7.0) | ($10.0) | | Long-term debt | ($21.3) | ($32.3) | | Net cash | $339.1 | $277.3 | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is foreign currency exposure, with a potential $48.0 million pre-tax loss from a 10% adverse shift - The company's primary market risk is foreign currency exchange rate risk, with functional currencies including the South Korean won, New Taiwan dollar, RMB, Singapore dollar, British pound, and euro[162] - As of April 30, 2023, a hypothetical 10% adverse movement in foreign currency exchange rates would result in a net unrealized pre-tax loss of $48.0 million[164] - The most significant currency exposures at quarter-end were the South Korean won, RMB, and New Taiwan Dollar against the U.S. dollar[164] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[167] - No changes in internal control over financial reporting occurred during the second fiscal quarter that materially affected, or are reasonably likely to materially affect, internal controls[168] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company reports no material legal proceedings beyond those arising in the ordinary course of business - For information on legal proceedings, the report refers to Note 11 in Item 1[170] - Note 11 details a customs audit in China, for which a $2.2 million contingent loss was recorded in May 2022 and a $1.0 million reversal was made upon settlement in November 2022[96] Item 1A. Risk Factors There have been no material changes to the risk factors disclosed in the 2022 Annual Report on Form 10-K - No material changes have been made to the risk factors previously disclosed in the 2022 Form 10-K[171] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased under the public program in Q2 2023, leaving $31.7 million available under the authorization - The company's board authorized a $100 million share repurchase program in September 2020[172] - No shares were repurchased under the publicly announced program during the second quarter of 2023, with a remaining authorized amount of $31.7 million[173] Item 6. Exhibits This section lists all exhibits filed with the report, including Sarbanes-Oxley certifications and XBRL data - Exhibits filed include CEO and CFO certifications under Sarbanes-Oxley Sections 302 (Exhibit 31.1, 31.2) and 906 (Exhibit 32.1, 32.2)[175] - The filing includes Inline XBRL Instance, Schema, Calculation, Definition, Label, and Presentation documents as required[175]