Photronics(PLAB) - 2021 Q3 - Quarterly Report

Financial Information Condensed Consolidated Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for the quarter ended August 1, 2021, including balance sheets, income, comprehensive income, equity, and cash flows, with detailed notes Condensed Consolidated Balance Sheets As of August 1, 2021, total assets increased to $1.28 billion from $1.19 billion at fiscal year-end 2020, with total equity rising to $994.5 million and total liabilities to $287.3 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | August 1, 2021 | October 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $530,464 | $500,139 | | Total Assets | $1,281,757 | $1,188,182 | | Total Current Liabilities | $167,617 | $142,939 | | Total Liabilities | $287,296 | $225,916 | | Total Equity | $994,461 | $962,266 | Condensed Consolidated Statements of Income Q3 2021 revenue increased to $170.6 million from $157.9 million year-over-year, with net income attributable to shareholders rising to $17.1 million, while nine-month revenue grew to $482.5 million with net income at $35.6 million Income Statement Summary (in thousands, except per share data) | Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $170,643 | $157,895 | $482,473 | $460,405 | | Gross Profit | $45,325 | $37,734 | $115,103 | $102,769 | | Operating Income | $28,462 | $19,936 | $61,035 | $48,943 | | Net Income to Photronics, Inc. | $17,076 | $10,776 | $35,638 | $27,360 | | Diluted EPS | $0.28 | $0.17 | $0.57 | $0.42 | Condensed Consolidated Statements of Comprehensive Income Comprehensive income attributable to shareholders significantly decreased to $6.8 million in Q3 2021 from $19.5 million in Q3 2020, primarily due to a $10.5 million loss from foreign currency translation adjustments - Foreign currency translation adjustments resulted in a loss of $(10,482) thousand in Q3 2021, compared to a gain of $10,659 thousand in Q3 2020, significantly impacting comprehensive income[22] Condensed Consolidated Statements of Equity Total equity increased to $994.5 million by August 1, 2021, from $962.3 million at October 31, 2020, driven by $50.2 million in net income, partially offset by $35.8 million in treasury stock purchases - Key changes in equity for the nine months ended August 1, 2021, include $50.2 million in net income and $35.8 million used for treasury stock purchases[26] Condensed Consolidated Statements of Cash Flows For the first nine months of fiscal 2021, net cash from operating activities increased to $113.1 million, while cash used in investing activities rose to $86.7 million, and financing activities used $26.4 million for share repurchases Cash Flow Summary (Nine Months Ended, in thousands) | Cash Flow Activity | August 1, 2021 | August 2, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $113,096 | $78,264 | | Net cash used in investing activities | $(86,696) | $(31,569) | | Net cash (used in) provided by financing activities | $(26,355) | $4,093 | Notes to Condensed Consolidated Financial Statements The notes detail key accounting policies and events, including the company's role as a leading photomask manufacturer, the consolidation of the PDMCX joint venture, revenue recognition, new finance leases, and the share repurchase program - The company is a leading global manufacturer of photomasks, essential for integrated circuits (ICs) and flat-panel displays (FPDs), operating eleven manufacturing facilities worldwide[30] - The PDMCX joint venture in Xiamen, China, is identified as a Variable Interest Entity (VIE) for which Photronics is the primary beneficiary, necessitating consolidation of its financial results[46] Revenue by Geography (Nine Months Ended, in thousands) | Geography | 2021 | 2020 | | :--- | :--- | :--- | | Taiwan | $179,441 | $182,463 | | Korea | $118,597 | $116,485 | | United States | $78,447 | $78,276 | | China | $77,391 | $58,374 | | Europe | $27,269 | $23,562 | - In fiscal 2021, the company entered into two major finance leases for high-end equipment, including a $7.2 million lease for an inspection tool and a $35.5 million lease for a lithography tool[76][77] - Under a $100 million share repurchase program authorized in September 2020, the company has repurchased 4.7 million shares for $53.3 million since inception[107][108] Management's Discussion and Analysis of Financial Condition and Results of Operations Management reports strong Q3 2021 results with an 8.1% year-over-year revenue increase to $170.6 million, improved gross margin to 26.6%, and a solid liquidity position of $283.2 million in cash, with a positive business outlook Results of Operations Q3 2021 revenue grew 8.1% year-over-year to $170.6 million, driven by 8.4% IC revenue growth and 7.4% FPD revenue growth, with gross margin expanding to 26.6% and operating income boosted by a $3.5 million gain Revenue Change by Product Type (Q3 FY21 vs Q3 FY20) | Product Type | Revenue in Q3 FY21 (M) | Increase (M) | Percent Change | | :--- | :--- | :--- | :--- | | Total IC | $117.8 | $9.1 | 8.4% | | Total FPD | $52.9 | $3.6 | 7.4% | | Total Revenue | $170.6 | $12.7 | 8.1% | - IC revenue growth was primarily driven by strong demand from node migrations and increased outsourcing of non-EUV production from captive suppliers[131] - FPD revenue increased due to strong demand for high-end AMOLED displays in mobile applications and new designs for G10.5+ panels[132] - Gross margin increased by 2.7 percentage points in Q3 FY21 compared to Q3 FY20, primarily due to higher revenue and improved pricing for certain mainstream IC nodes[134] Liquidity and Capital Resources The company maintained a strong liquidity position in Q3 2021 with $283.2 million in cash, access to a $50 million credit facility, $22.9 million in China borrowing capacity, and $56.9 million in capital expenditure commitments - As of August 1, 2021, cash and cash equivalents totaled $283.2 million, with $217.2 million held by foreign subsidiaries[149] - Capital expenditure commitments for high-end and mainstream tools totaled approximately $56.9 million[151] - The share repurchase program authorized in September 2020 had approximately $46.8 million remaining under its authorization as of August 1, 2021[152] Business Outlook Management anticipates continued strength in IC design activity and FPD market growth, driven by increased capital spending from semiconductor and panel makers and broader AMOLED adoption - The company anticipates favorable trends in IC, including strong high-end logic and mainstream demand, to continue through Q4 and potentially beyond[157] - FPD growth is expected from recent capacity expansions and increased mobile demand as more devices adopt high-value AMOLED technology[157] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are foreign currency exchange rate fluctuations and interest rate changes, with a hypothetical 10% adverse currency movement potentially resulting in a $36.0 million pre-tax loss - The company's financial performance may be affected by fluctuations in the exchange rates of several major international currencies[159] - As of August 1, 2021, a hypothetical 10% adverse currency movement would have resulted in a net unrealized pre-tax loss of $36.0 million, with significant exposures to the Chinese renminbi, South Korean won, and New Taiwan Dollar[161] Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of August 1, 2021, due to an un-remediated material weakness in internal control over financial reporting related to debt covenant compliance monitoring - Management concluded that disclosure controls and procedures were not effective as of August 1, 2021, due to a material weakness in internal control over financial reporting[164] - The un-remediated material weakness pertains to the accuracy and completeness of information used for monitoring compliance with debt agreement covenants[165] - Despite the material weakness, management concluded that the financial statements in the Form 10-Q are fairly presented in all material respects[166] Other Information Legal Proceedings The company reported a favorable appellate court decision in South Korea regarding a 2016 tax filing, with other ongoing legal claims deemed immaterial to financial statements - An appellate court in South Korea decided on August 26, 2021, not to impose a $0.03 million fine related to a 2016 tax filing dispute[111] Issuer Purchases of Equity Securities This section details the company's common stock repurchases during Q3 2021, including 1.0 million shares repurchased at an average price of $12.97 per share under its publicly announced program Share Repurchase Activity (Q3 2021) | Period | Total Shares Purchased (millions) | Average Price Paid Per Share | Dollar Value Remaining (millions) | | :--- | :--- | :--- | :--- | | May 3 – May 30, 2021 | 0.8 | $12.86 | $49.3 | | May 31 – June 27, 2021 | 0.2 | $13.43 | $46.8 | | Total | 1.0 | $12.97 | - | Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications under Sarbanes-Oxley Act Sections 302 and 906, and Inline XBRL financial data files - The exhibits filed with this report include CEO and CFO certifications pursuant to Sarbanes-Oxley Act Sections 302 and 906, along with Inline XBRL documents[173]