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Overview
Management’s discussion and analysis (“MD&A”) of Photronics’ financial condition and results of operations should be read in conjunction with its condensed consolidated financial statements and related notes. The MD&A contains forward-looking statements that may be adversely affected by uncertainties and risk factors presented throughout this filing and in the Company’s Form 10-K for fiscal year 2024.
Photronics sells substantially all of its photomasks to semiconductor designers and manufacturers, and manufacturers of flat panel displays (FPDs). The demand for photomasks primarily depends on design activity rather than sales volumes from products manufactured using photomask technologies. Historically, the microelectronics industry has been volatile, experiencing periodic downturns and slowdowns in design activity.
Photronics typically has a minimal level of backlog, typically two to three weeks of backlog for FPD photomasks and one to two weeks for IC photomasks. However, the demand for some IC photomasks has in the past expanded beyond the industry’s capacity to supply them within the traditional time period.
The global semiconductor and FPD industries are driven by end markets which have been closely tied to consumer-driven applications of high-performance devices. Photronics believes its ability to remain successful is dependent upon being a service and technology leader and efficient solutions supplier.
Results of Operations
The following tables present selected operating information expressed as a percentage of revenue:
| Metric | Q1 FY25 | Q4 FY24 | Q1 FY24 |
|---|---|---|---|
| Revenue | 100.0% | 100.0% | 100.0% |
| Cost of goods sold | 64.4% | 63.0% | 63.4% |
| Gross profit | 35.6% | 37.0% | 36.6% |
| Selling, general, and administrative | 9.0% | 9.4% | 8.5% |
| Research and development | 2.0% | 2.4% | 1.6% |
| Operating income | 24.6% | 25.2% | 26.6% |
| Other income (expense), net | 11.8% | (0.5%) | (1.7%) |
| Income before income tax provision | 36.4% | 24.7% | 24.8% |
| Income tax provision | 8.9% | 6.5% | 6.8% |
| Net income | 27.5% | 18.2% | 18.1% |
| Net income attributable to noncontrolling interests | 7.3% | 2.9% | 6.0% |
| Net income attributable to Photronics, Inc. shareholders | 20.2% | 15.3% | 12.1% |
Revenue in Q1 FY25 of $212.1 million represented a decrease of 4.7% compared with Q4 FY24 and a decrease of 1.9% from Q1 FY24. The decreases were primarily due to seasonal softness and weakness in mainstream products in Asia and Europe.
Gross margin decreased by 140 basis points in Q1 FY25 compared to Q4 FY24, primarily due to the decrease in revenue, partially offset by decreases in material and other costs. Gross margin decreased by 100 basis points in Q1 FY25 compared to Q1 FY24, also primarily due to the decrease in revenue, partially offset by decreases in material and labor costs.
Selling, general and administrative expenses decreased $1.9 million in Q1 FY25 compared to Q4 FY24, primarily due to lower compensation and professional fees. Expenses increased $0.8 million compared to Q1 FY24, primarily due to higher professional fees.
Research and development expenses decreased $1.0 million in Q1 FY25 compared to Q4 FY24, primarily due to reduced qualification activities in Asia. Expenses increased $0.8 million compared to Q1 FY24, due to increased development activities in the U.S.
Other income (expense), net increased significantly in Q1 FY25 compared to prior periods, primarily due to favorable foreign currency impacts.
The effective income tax rate decreased in Q1 FY25 compared to prior periods, primarily due to changes in the jurisdictional mix of earnings and a decrease in foreign taxes.
Net income attributable to noncontrolling interests increased in Q1 FY25 compared to prior periods, as a result of increased net income at the Company’s Taiwan-based IC facilities.
Liquidity and Capital Resources
As of February 2, 2025, Photronics had $642.2 million in cash and cash equivalents, including $550.2 million held by foreign subsidiaries. The Company also has $27.7 million of borrowing capacity in China.
Photronics estimates capital expenditures for fiscal year 2025 will be approximately $200 million, mainly in Asia and the U.S. to increase operating capability and efficiency.
On August 28, 2024, the Board of Directors authorized an increase to the Company’s share repurchase program from $31.7 million to $100 million. During Q1 FY25, the Company repurchased 195,079 shares for $4.6 million.
Photronics’ primary sources of liquidity are cash on hand and cash generated from operations. The Company believes its liquidity is sufficient to meet its requirements through the next twelve months and thereafter for the foreseeable future.
Business Outlook
Photronics’ current business outlook and guidance was provided in the Q1 FY25 earnings release, presentation, and conference call, which can be accessed on the investor section of the Company’s website. The Company’s future results and forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from expectations.
Critical Accounting Estimates
There have been no changes to Photronics’ critical accounting estimates since the filing of its Form 10-K for the year ended October 31, 2024.
