Ladies and gentlemen, thank you for standing by, and welcome to Photronics' First Quarter and Fiscal Year 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star then one on your telephone. If you require any further assistance, please press star then zero. As a reminder, this conference call is being recorded Wednesday, March 4th, 2020. I would now like to turn the conference over to Troy Dewar, Vice President of Investor Relations.
Thank you, Sarah. Good morning, everyone. Welcome to our review of Photronics' 2020 first quarter financial results. Joining me this morning are Peter Kirlin, our CEO, John Jordan, our CFO, and Chris Progler, our CTO. The press release we issued earlier this morning, along with the presentation material which accompanies our remarks, is available on the Investor Relations section of our webpage. Comments made by any participants on today's call may include forward-looking statements that include such words as anticipate, believe, estimate, expect, forecast, and our view. These forward-looking statements are based upon a number of risks, uncertainties, and other factors that are difficult to predict. Actual results may differ materially from those expressed or implied, and we assume no obligation to update any forward-looking information.
Before I turn the call over to Peter, I'm pleased to announce that Photronics will host an Investor Day on May 29th, 2020, New York City. More details will be coming soon. At this time, I'll turn the call over to Peter.
Thank you, Troy, and good morning, everyone. We performed well in the first quarter, as solid design activity and our leading market position enabled us to deliver sequential growth in a quarter that is typically seasonally weaker. Design activity remained high during the quarter, and revenue from our new China operations increased. Not only did we improve revenues compared with our previous quarter and the same quarter last year, but we achieved a record quarterly revenue for the second consecutive quarter, while delivering our 10th consecutive quarter of year-over-year revenue growth. Our technology portfolio, global operations, and market position enabled us to extend our streak of year-over-year revenue growth, further validating the value of our investment strategy. Moving down the income statement, operating income relative to Q4 was negatively impacted by ramping compensation expenses.
As it is several adjustments below the line, our earnings for the quarter were $0.16 per share. Cash flow from operations was good, and our cash balance increased during the quarter to $218 million. We are well positioned as we prepare for our next wave of investment targeting the FPD market. Before moving on, I would like to offer a few comments on the coronavirus. Obviously, our priority has been to take measures to protect the safety and health of our employees while maintaining the business. Our sites in China, Taiwan, and Korea have implemented policies to keep our employees safe while complying with all governmental regulations. We are actively managing our suppliers to minimize any impact to our operations. So far, we are moving along at our standard 7 by 24 pace, effectively business as usual.
As far as our customers are concerned, it is difficult to quantify the impact the virus is having on their operations, and the situation is very fluid. So far, we have seen some design releases push out in both our Asian IC and FPD businesses, and our second quarter guidance has been reduced to consider the associated impact. Shifting away from the virus and back to our business strategy, during the last several years, our investments have been focused on China. In 2016, we predicted that China would be a region of growth for both IC and FPD masks. The country was heavily investing in production capacity as part of their Made in China 2025 initiative, and technology development was advancing in logic, memory, and display that would enable Chinese companies to expand their market share globally.
In addition, many companies from other countries were establishing manufacturing presence there, effectively providing us with existing versus new customers in China. Based upon our assessment of the predicted growth, we followed two parallel strategic paths. First was to develop new business with the Chinese IC and display manufacturers. This required establishing a strong sales presence in the country and working hard to identify and partner with the domestic market leaders. The outcome of these efforts is obvious in our financial results. Our China revenues have grown significantly over the last several years, expanding at a 72% compounded annual growth rate since 2016, and now represent 37% of our total revenues. Our China business is comprised of a few large key customers, as well as many smaller developing companies, and split somewhat evenly between IC and FPD, creating a diverse revenue stream.
In summary, we are now enjoying the benefits of what has been a deliberate long-term initiative to develop a broad base of business across the country. The second part of our strategy was to build and equip two state-of-the-art manufacturing facilities. We now have an FPD facility in Hefei that is running at full capacity, enabling us to achieve a new enterprise record of $52.8 million in Q1, which was up 77% year-over-year, and an IC facility in Xiamen that is in the process of qualifying several customers and ramping productions. These plants are critical pieces of an integrated global network of 11 manufacturing facilities, enabling us to meet all of our customers' technical requirements and firmly establishing Photronics as the market and technology leader among the merchant photomask manufacturers.
We expect to finish the ramp in Xiamen by year-end, and in doing so, we will conclude the first phase of our expansion into China. Therefore, we are currently developing the next phase of our growth strategy, and the first step will be to build upon the momentum we have already established in FPD. The objectives of the second phase will be the same as the first: extend our market-leading position, ensure the right technologies in place to support our customers' product roadmap, align our operations with secular growth trends, and work with customers to secure long-term purchase agreements. If we do these things correctly, we should realize an improved return on capital, further enhancing shareholder value as part of our disciplined capital allocation strategy. We plan to be more specific with our long-term plans when we host our next Investor Day in May.
As our organization and the markets we serve have evolved over the last few years, one thing remains constant: the importance of lithography to electronics manufacturing process. No matter what happens with end-market trends or process development, lithography is the critical bridge from circuit design to advanced manufacturing. EUV, Deep UV, 8-inch, 12-inch, 14-inch, 5G, artificial intelligence, OLED, AMOLED, LCD, micro-LED, and advanced packaging, all of these require photomasks, and developers of these products need a trusted photomask partner that can deliver the right technology at the right time and to the right place, bridging the convergence of manufacturing and design. Combining operational excellence and technology leadership, delivered through outstanding customer service while being a low-cost producer, has been the foundation of our success. These competencies have carried us through our first 50 years, and I'm confident they will continue to do so in the future.
We have made a great start in 2020 with our 10th consecutive quarter of year-over-year revenue growth, another quarterly record for Photronics. We believe these results clearly demonstrate that our strategy is enabling us to outgrow the photomask market. I would like to thank all of our employees for their outstanding contributions in Q1, and while there are certainly some near-term challenges ahead, we are optimistic regarding the long-term potential of our business. At this time, I will turn the call over to John to provide commentary on our performance and outlook.
Thank you, Peter. Good morning, everyone. Despite typical first-quarter seasonal softness, we delivered record revenue this quarter, 2% better than the previous record last quarter, and 28% better than last year's first quarter. We continued to realize the benefits from our growth investment strategy that has allowed us to bring more capacity and capability to the market over the last year, especially in the important China market. Our performance during the first quarter of 2020 is a continuation of our strong 2019 results. Record FPD revenue was driven by demand for AMOLED and LTPS mobile displays, as well as G10.5+ for large-format TVs. Display technology remains a vital point of differentiation for many of our customers, and they rely upon us as a trusted partner to enable them to meet their specifications. The IC business achieved double-digit growth year-over-year but decreased sequentially in line with seasonal trends.
Lower gross margin due to costs of ramping the China businesses and increased compensation costs resulted in an operating margin of 10.2%, somewhat lower than the strong 13.7% margin in Q4. First-quarter results included $2.9 million operating loss in China, although we point out that our Hefei facility operated at a profit in the quarter. Other income of $3.7 million resulted from a foreign exchange gain from remeasurement of U.S. dollar-denominated assets and liabilities on the books of our foreign subsidiaries, offset somewhat by increased interest expense in China. The tax provision of $9.1 million resulted from the jurisdictional mix of profits and losses anticipated for the fiscal year together with tax holidays and investment credits in certain foreign jurisdictions and valuation allowances in a number of jurisdictions. The net income attributable to Photronics, Inc. shareholders was $10.3 million, or $0.16 per diluted share.
Cash flow generation was strong once again. We generated $31 million from operations, invested $14 million in capital expenditures, and returned $11 million to shareholders through repurchases of common stock. Cash balance at the end of the quarter was $218 million, and we have $54 million in debt. For the fiscal year 2020, we expect total CapEx to be approximately $100 million, which includes the previously discussed 2019 carryover, plus approximately $35 million of equipment that will be financed through a lease. Before I provide first-quarter guidance, I'll remind you that our visibility is always limited, as our backlog is typically only one to three weeks, and demand for some of our products is inherently uneven and difficult to predict.
Additionally, the ASPs for high-end mask sets are high, and as this segment of the business grows, a relatively low number of high-end orders can have a significant impact on our quarterly revenue and earnings. Lastly, I'll caution that any change in trade policy within the countries in which we operate could have an adverse impact on our industry and therefore our results. Given those caveats, we expect second-quarter revenue to be in the range of $145 million-$155 million. While the general end-market environment is healthy and we anticipate the longer-term trend to remain positive, our revenue expectation incorporates a wider range to account for uncertainty related to the coronavirus.
Based on this revenue expectation and our current operating model, we estimate earnings for the first quarter to be in the range of $0.11-$0.17 per diluted share, the second quarter to be in the range of $0.11-$0.17. We are pleased with our first-quarter performance and believe we have made a good start to meeting our full-year objectives. The near-term challenges related to the coronavirus have the potential to impact our business and are being actively managed. Long-term, we believe the impact will be minimal, and we are focused on executing our plan. I'll now turn the call over to the operator for your questions.
Thank you. As a reminder to ask a question, you will need to press star then one on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Tom Diffely with D.A. Davidson. Your line is now open.
Yes. Good morning. First, just a quick question on the coronavirus. Is there any way you can quantify how much of the impact on your first-quarter or second-quarter guide was? It sounds like from the text that both the IC and the flat panel businesses are pretty stable to strong right now. So I'm curious how much of a haircut are you taking?
Yeah. Tom, normally, if you look at our business rates seasonally, we would guide up, flat up in the second quarter. So we have $10 million+ of downdraft baked into the midpoint of our guidance for the impact of the coronavirus on our business.
Okay. That's very helpful. And then when you look at what's driving that impact, it's my impression that most of your key components come from outside of China, so I wouldn't think that supply would be the big issue. Is it just the uncertainty of the customers at this point, the fact that a lot of turns business during the quarter?
If you're sitting right in our shoes, we have four key constituencies to manage as we go through the trajectory of this particular event. We have suppliers, we have our employees, we have our customers, and of course, we have our shareholders. So there's four communities that we need to take care of. As far as our employees go, we continue to operate, we always do, through Chinese New Year's. The regulations in different places have evolved. Our employees, as they walk through the front door of our facilities, get their temperature taken, and they're provided with masks. We've isolated critical groups in our facility so that if someone ends up sick, we don't end up with a key group that would otherwise be decimated. It's operations as normal with some wrinkles so far.
As far as the suppliers are concerned, particularly from regions of the globe we view as unreliable, we've raised our inventory levels. So our materials are all in good shape, and we have more than enough to continue to run our factories. As far as the equipment goes, not every supplier is on the job supporting our toolset. Some of them are cowering. Having said that, we as a company do a lot of self-maintenance, and we've developed, in order to do that, centers of excellence in video technology that allows service engineers in one location to guide service actions in another. So we have deployed those actions with the suppliers who can't seem to get up the hooks to show up when there's a major problem with one of their tools.
And as I sit here right now, there is not a single tool in our manufacturing network anywhere in the world that is down because a supplier cannot get to it to fix it because we're fixing it for them when we need to. So as far as the suppliers go, it's not been as smooth as we'd like, but we've taken care of it. Now, moving on to the customer base, as I mentioned in my remarks, we see projects being actively pushed out for new product releases. Now, we're very aggressive in the marketplace. We're shouting from the highest mountaintop that we're operating, we're in business, we're taking orders. We've gone to the extent, for example, we've actually delivered FPD reticles into Wuhan.
Happens to be that the person who drove the truck when they came back has to be in quarantine for 14 days, but we've gotten the job done. So we're moving right along, but there's no doubt that particularly what I would call high-complexity jobs, some of them are pushing, and therefore our guidance is pushing with them. Right? So that kind of, I think, covers three of the four publics, and of course, we're on the phone with the investor public today letting you guys know where we are. But this company is full of people that are accustomed to adversity, and the first answer always is, "It can be done, it will be done." And so far, the first answer has been the answer that has stuck. So far, so good.
Okay. No, that's very helpful. And then finally, a long-term question. When we start to look at what a second phase in FPD looks like for the Gen 10.5 facility, roughly what type of capital is that going to require? How long is it going to take to install? What do you think the payback period is?
For me anyways, right, you were having a little conversation here amongst us before the call started. Three years ago, what we said to you guys was when Hefei is ramped, FPD revenues would exceed $200 million, right, and we'd expect that the number of the revenues in China would reach the $20 million a quarter level. Guess what? Right? You look in the slides, you'll see that the revenues in China reached the $20 million level, and our FPD business is clipping along at almost a $210 million rate. Kind of remarkable that we're sitting here now, three years later, and it's not exactly what we thought, but you know what? It's pretty darn close, and I'm very proud of all the work the team had to do to make that result happen.
So I would begin by answering your question by saying what we told you we would do three years ago. I think it's unequivocally clear that we have done that, and we have a good head of steam up, and the next wave of investment in Hefei is going to be focused on the AMOLED market. We're in a very good position in mobile displays. China is likewise being very aggressive, and we will aspire to do the same thing. Again, as I said in my remarks, we're right now acting aggressively, working to get contracts with customers, and depending on how successful we are with that activity, it will moderate or govern the investment we're willing to make.
By the time we have the shareholders meeting in May, I think we'll be wrapped up with the business development effort with the customers, and at that time, we'll tell you exactly what the capital investment looks like.
Okay. Well, thank you, and good job in a tough environment.
Thank you.
Thank you, Tom.
Thank you. Our next question comes from the line of Gus Richard with Northland Securities. Your line is now open.
Yes. Thanks for taking the questions. Could you give me a little bit of color on the push-out you see? Is that FPD, IC, is it Wuhan, is it Korea? Just any color you can provide.
Yeah. So it's both FPD and IC. In the case of our FPD business, or we were, I think, very confident we'll be able to keep all our factories full. But what will happen during the quarter is we'll see a shift in the business mix, and of course, that affects the top line, particularly G10.5 pushing out affects our top line in FPD because of the value of a single reticle set. So in FPD, factories will be full, but the mix won't be ideal. In IC, we've seen business impacted in China, Taiwan, and Korea, all three. And we expect that through the quarter, at least, there'll be less tape-outs in those three markets. We're seeing it actively right now. No effect outside of those three countries, but certainly an effect within all three of them.
But as I said, what we see is most definitely baked into the guidance that we have given.
Got it. And then you mentioned that the driver that had to be quarantined for 14 days after driving into Wuhan or Hubei Province. Is the coronavirus impacting your costs? Is it adding to costs in any material way?
It's only a couple of comments. There is some good news. I've seen some of what you've written on the coronavirus, Gus. It's not all gloom and doom. If we look in Xiamen within the last two weeks, at least up until last night when I went home, I haven't checked this morning, there's not been a single new case of the coronavirus diagnosed in Xiamen. In Hefei, in the past 14 days, there's been one. The actions of the government in China seem to, in the locations we're operating anyways, be bearing fruit. It looks to us tentatively like the situation in China is starting to improve, and we're sort of kind of sitting up with some of our customers at the present time too.
But where it's affected, that's affected us on the cost line, is only really inefficiencies in repairing some of our tools, and it's really not material. So yeah, not much of an effect, just more aggravation, really, operational aggravation.
Got it. And then the last one for me, if you could just give me a little color on qualification of the new IC fab in Xiamen, China. Sort of, where are you, and when do you expect that to start getting close to profitability?
Yeah. So as we said, I think we shipped the first reticles out of there in July for the startup of the facility. So we said nine to 12 months, right? I think we're proceeding along that trajectory more or less as we expected. We ought to be seeing material revenue in the second half of the year, but we expect it to come on strong at the end of the year, right? Kind of like the FPD factory did, revenue coming on at the end of the year, maybe reaching full production with the installed toolset Q1 of next year. That's the path we're on. So far, I think we don't see any reason to change our view of how quickly we're going to go.
Got it. Thanks. Excellent execution in what is a very challenging environment.
Yep, well, like I said, I'm very proud of our team. We have a lot of new employees in China, but we have some old ones there, and the old ones that are there are very accustomed to managing adversity, and our new employees, with the leadership of the old, I'm very pleased with how they have responded. Yep.
Thank you. As a reminder to ask a question, you will need to press star then one on your telephone. Our next question comes from the line of Patrick Ho with Stifel. Your line is now open.
Thank you very much. Peter, maybe first off, looking at the coronavirus situation, but on the other side of it, when things get back to normal, how do you feel in terms of the overall operations on a potential snapback that once the situation gets resolved, stuff starts getting pulled in, and the demand obviously starts picking up again? How's your ability to ramp up in that phase, particularly given that you do have two relatively new facilities? Both are still in the process of ramping. Obviously, Hefei is up and running right now. How do you feel about that scenario whenever it comes?
Yeah, so as I said, Hefei basically was full capacity all quarter long. It's really normal. Hefei is in a mode now that I would describe as normal operations. It may not be quite as strong a team yet as some of our other factories, but it's really, with all the challenges the local team has had to face, it's being tested. As far as Xiamen is concerned, we're moving along the qualification ramp, and the speed at which Xiamen can respond to a snapback in the business is really going to be gated, in my mind, by the number of processes that we have qualified when that snapback takes place. Now, there'll be some bumps in the road. I think you heard in my remarks and John's remarks that Hefei was profitable, but our gross margin this quarter wasn't what we expected it or hoped it would be.
And the reason for that is we had qualification expenses. We had some material scrap. So it's not at 100% quite yet, but progress, I think, is outstanding. So if the snapback's in a quarter or two, I'm pretty confident we're going to be able to manage it with not a lot of problems. I think also, I would finally just say that you may recall that we've been kind of the FPD operation. We built that as quick as humanly possible. The IC plant, our road there was a little more gated, and it was one of the reasons we could gate it was there's been a lot of cross-qualification done between our Asian manufacturing network and our China customer base.
So, even if there's some struggles in Xiamen, which I don't expect, but you never know, our Chinese customers are more broadly qualified across our manufacturing network in our IC business than any other geography in the globe. So, I think we'll know when we're there, and I hope we're there sooner rather than later, but I think we're in good shape.
Great. Thank you. Maybe as my follow-up question, you noted in your prepared remarks that the supply chain isn't impacted from China specifically, but you do procure supplies from a lot of other regions within Asia itself, and there's some disruption there. How are you mitigating that issue in terms of both alternative suppliers, secondary suppliers? How are you handling and building the inventory, I guess, during this more challenging period?
Yeah. Yeah. Yeah. The cross-qualification of suppliers is something that we do every day as a normal course of business activity. So we really not. There's nothing extraordinary going on where we have a single point of failure and we have a fire drill. But what we have done is we have a strong balance sheet, and we've leveraged it to ensure that we have more than typical inventory levels where we think there's any threat of a potential disruption. That's what we have done. There's. We created a global team, and that team meets weekly, and I think we have a good grasp of all the critical materials that we need, and we have more than enough.
Great. Thank you very much.
Yep.
Thank you. We do have a follow-up question from the line of Tom Diffely with D.A. Davidson. Your line is now open.
Yeah. Good morning. Just a quick follow-up here on the Xiamen ramp. So how much of the business in Xiamen is going to be for new customers versus just replacing some business you had through your Taiwan facility into China? And then with the facility actually in China, does that eliminate all potential tariff impacts?
Tom, this quarter, right, Q1, we shipped $58.6 million of sales into China. In 2016, right, our entire year in China didn't equal our first quarter of 2019. We're almost at a $240 million run rate of shipments into China. Now, off the top of my head, I can't quantify for you how much of that is new versus old, but the lion's share of it clearly is new over the last three years, and some of it is new, which is more with customers we already have, but the majority of it is completely new business. That's the best way I can quantify it for you off the top of my head. We probably have $200 million on a run rate basis of incremental business in China relative to 2016.
Okay. And then just on that same topic, any impacts that you've seen through from HiSilicon and any tariff impacts you've seen?
I think, right, everybody knows that they're one of the largest customers of TSMC, right? Their product line is broadening pretty extensively. It's broadening extensively because of the, A, their own internal initiatives, but B, the trade war, if you want to use that vernacular, has accelerated their efforts to diversify their product line to support fully the domestic manufacturing base. This is kind of floating all boats in both China and Taiwan. To the extent that more of that happens, there's even more business. To the extent there's a slowdown, it sort of cuts both ways. Long term, it's clearly a positive trend for us.
Okay. Thank you.
Thank you. Ladies and gentlemen, there are no further questions at this time. I would now like to turn the call over to Peter Kirlin for closing comments.
Thank you for joining us this morning. We made a great start in 2020 and remain on track to hit our objectives this year. I look forward to updating you as we progress.
Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your line.