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Item 7. Management’s Discussion and Analysis

2021-01-15 compared with 2019-12-23 · 211 added, 178 removed, 169 unchanged (70% of the section changed)

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Photomask technology is also being applied to the fabrication of other higher-performance electronic products such as photonics, micro-electronic 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 semiconductor 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.

Our selling cycle is tightly interwoven with the development and release of new semiconductor and display designs and applications, particularly as they relate to the semiconductor industry's migration to more advanced product innovation, design methodologies, and fabrication processes.

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 display 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 display designs could reduce demand for photomasks ‒ even if the demand for semiconductors and FPDs increases.

Advances in semiconductor, display, and photomask design and 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.

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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 industry is 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.

The global microelectronics industry is 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.

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As we face challenges in the current and near term that require us to make significant improvements in our competitiveness, we continue to evaluate further cost reduction initiatives.

State-of-the-art production for semiconductor masks is considered to be 28 nanometer and smaller for ICs and Generation 8 and above and AMOLED display-based process technologies for FPDs.

However, 32 nanometer and above geometries for semiconductors and Generation 7 and below, excluding AMOLED, process technologies for FPDs constitute the majority of designs currently being fabricated in volume.

State-of-the-art production for semiconductor masks is considered to be 28 nanometer and smaller for ICs and Generation 10.5+ and AMOLED and LTPS display-based process technologies for FPDs.

However, 32 nanometer and above geometries for semiconductors and Generation 8 and below (excluding AMOLED and LTPS) process technologies for displays constitute the majority of designs currently being fabricated in volume.

At these geometries, we can produce full lines of photomasks, and there is no significant technology employed by our competitors that is not available to us.

We expect 28 nanometer and below designs to continue to move to wafer fabrication throughout fiscal 2020, and we believe we are well positioned to service an increasing volume of this business as a result of our investments in manufacturing processes and technology in the regions where our customers are located.

We expect advanced-generation designs to continue to move to production throughout fiscal 2021, and we believe we are well positioned to service an increasing volume of this business as a result of our investments in manufacturing processes and technology in the regions where our customers are located.

The photomask industry has been, and is expected to continue to be, characterized by technological change and evolving industry standards.

In order to remain competitive, we will be required to continually anticipate, respond to, and utilize changing technologies.

In particular, we believe that, as semiconductor geometries continue to become smaller, and FPD designs become larger or otherwise more advanced, we will be required to manufacture even more complex optically-enhanced reticles, including optical proximity correction and phase-shift photomasks.

Additionally, demand for photomasks has been, and could in the future be, adversely affected by changes in semiconductor and high-performance electronics fabrication methods that affect the type or quantity of photomasks used, such as changes in semiconductor demand that favor field-programmable gate arrays and other semiconductor designs that replace application-specific ICs, or the use of certain chip-stacking methodologies that lessen the emphasis on conventional lithography technology.

In particular, we believe that, as semiconductor geometries continue to become smaller, and display designs become larger or otherwise more advanced, we will be required to manufacture even more complex optically-enhanced reticles, including optical proximity correction and phase-shift photomasks.

Additionally, demand for photomasks has been, and could in the future be, adversely affected by changes in high-performance electronics fabrication methods that affect the type or quantity of photomasks used, such as changes in semiconductor demand that favor field-programmable gate arrays and other semiconductor designs that replace application-specific ICs, or the use of certain chip-stacking methodologies that lessen the emphasis on conventional lithography technology.

Furthermore, increased market acceptance of alternative methods of transferring circuit designs onto semiconductor wafers could reduce or eliminate the need for photomasks in the production of semiconductors.

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Recent Developments

During the fourth quarter of fiscal 2020, we entered into a Master Lease Agreement with a financing entity for the lease of an inspection tool with a maximum value of $10 million.

The tool was delivered during the fourth quarter of fiscal year 2020, and the financing entity made a progress payment to the vendor of $6.5 million in the first quarter of fiscal year 2021.

The progress payment will accrue interest at 1.56% payable monthly until the final payment for the tool is made, at which time the lease will begin.

In the fourth quarter of fiscal 2020, we were approved to borrow 200 million Chinese renminbi (RMB) (approximately $29.8 million, at the balance sheet date) from the China Construction Bank Corporation.

We received initial proceeds of 41 million RMB (approximately $6.2 million) against this approval in November 2020.

Loan proceeds have been, and will be, used for the purchase of two lithography tools at our facility in Hefei, China.

Interest rate on the loan is variable and based on the RMB Loan Prime Rate of the National Interbank Funding Center less 0.45% (adjusted annually), and is to be repaid semiannually, over five years, commencing on March 5, 2022.

The interest rate on the loan was 4.2% at the borrowing date.

The first five semiannual loan repayments will each be for 7.5 percent of the approved 200 million RMB loan principal;

the last five installments will each be for 12.5 percent of the approved loan principal, with the final installment due on September 30, 2026.

Semiannual repayments of the initial $6.2 million borrowed will commence on March 5, 2022, with a repayment of $2.3 million;

subsequent semiannual repayments will be in the amounts of $2.3 million and $1.6 million.

The borrowings are secured by the Hefei facility, its related land use right, and certain manufacturing equipment, which had a combined carrying value of $87.8 million as of October 31, 2020.

In the fourth quarter of fiscal 2020, the Company’s board of directors authorized the repurchase of up to $100 million of its common stock, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Act of 1933 (as amended) (“the Securities Act”).

We repurchased 1.7 million shares at a cost of $17.5 million (an average price of $10.11 per share) under this authorization.

All shares repurchased were retired in fiscal 2020.

In the fourth quarter of fiscal 2020, PDMC, the Company’s majority-owned IC subsidiary in Taiwan, paid a dividend of which 49.99%, or approximately $16.2 million, was paid to noncontrolling interests.

In the first quarter of fiscal 2020, we acquired the remaining 0.2% of noncontrolling interests in PK, Ltd.

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we elected to apply the guidance at the beginning of the period of adoption, and recognized right-of-use leased assets of approximately $6.5 million, and corresponding lease liabilities, which were discounted at our incremental borrowing rates, on our November 1, 2019, consolidated balance sheet to reflect our adoption of the guidance.

We do not expect our adoption of Topic 842 to affect our cash flows or our ability to comply with covenants under our credit agreements.

Our adoption of Topic 842 did not affect our cash flows or our ability to comply with covenants under our credit agreements.

In the fourth quarter of fiscal 2019, our board of directors declared a dividend of one preferred stock purchase right (a “Right”), payable on or about October 1, 2019, for each share of common stock, par value $0.01 per share, of the Company outstanding on September 30, 2019, to the stockholders of record on that date.

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The Rights, which are described in the Company’s Current Report on Form 8-K filed on September 24, 2019, are in all respects subject to and governed by the provisions of the Rights Agreement.

The Rights will expire at the earliest to occur of (i) the close of business on the day following the certification of the voting results of the Company’s 2020 annual meeting of stockholders, if at that meeting, or any other meeting of stockholders of the Company duly held prior to September 22, 2020, a proposal to approve this Rights Agreement is not passed by the affirmative vote of the majority of the voting interests;

(ii) the date on which our board of directors determines, in its sole discretion, that the Rights Agreement is no longer necessary for the preservation of material valuable tax attributes, or the tax attributes have been fully utilized and may no longer be carried forward, and (iii) the close of business on September 22, 2022.

The Rights will expire at the earliest to occur of (i) the date on which our board of directors determines, in its sole discretion, that the Rights Agreement is no longer necessary for the preservation of material valuable tax attributes, or the tax attributes have been fully utilized and may no longer be carried forward, and (ii) the close of business on September 22, 2022.

In the fourth quarter of fiscal 2019, PDMC, the Company’s majority-owned IC subsidiary in Taiwan, paid a dividend of which 49.99%, or approximately $18.9 million, was paid to noncontrolling interests.

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In connection with this MLA, we have been approved for financing of $35 million for the purchase of a high-end lithography tool.

Interest on this borrowing is payable monthly at thirty-day LIBOR plus 1% (2.76% at October 31, 2019), and will continue to accrue until the borrowing is repaid or, as allowed under the MLA, we enter into a lease for the equipment.

We intend to enter into a lease agreement for the related equipment in fiscal year 2020.

Interest on this borrowing is variable and payable monthly at thirty-day LIBOR plus 1% (1.15% at October 31, 2020), and will continue to accrue until the borrowing is repaid or, as allowed under the MLA, we enter into a lease for the equipment.

During the first quarter of fiscal 2021, this financing entity made an additional payment of $28 million to the equipment vendor on our behalf.

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, pursuant to a repurchase plan under Rule 10b5-1 of the Securities Act of 1933 (as amended).

As of October 31, 2019, we had repurchased 1.0 million shares at a cost of $11.0 million (an average price of $11.05 per share).

The repurchase program may be suspended or discontinued at any time.

We repurchased 2.5 million shares at a cost of $27.9 million (an average price of $11.34 per share) under this authorization.

The repurchase program was terminated on March 20, 2020.

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 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.

In the first quarter of fiscal 2019, PDMCX was approved for credit of 345.0 million RMB (approximately $51.4 million, at the balance sheet date), 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 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 October 31, 2019, PDMCX had borrowed 243.4 million RMB ($34.5 million) against this approval.

Payments on these borrowings are due semi-annually through December 2025;

the initial payment is scheduled for June 2020.

See Note 6 of the financial statements for additional information on these loans.

As of October 31, 2020, PDMCX had outstanding 336.0 million RMB ($50.1 million) against this approval.

Payments on these borrowings are due semiannually through December 2025.

See Note 7 of the 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 Loans”), PDMCX can borrow up to 140.0 million RMB to pay value-added taxes (“VAT”) and up to 60.0 million RMB to fund operations;

combined total borrowings are limited to $25.0 million.

combined total borrowings are limited to the equivalent of $25.0 million.

As of October 31, 2020, PDMCX had outstanding 8.0 million RMB ($1.2 million) to fund operations, with repayments due one year from the borrowing dates of the separate loan agreements.

As of October 31, 2020, PDMCX had outstanding 93.2 million RMB ($13.9 million) borrowed to pay VAT.

Payments on these borrowings are due semiannually, at an increasing rate, through January 2022.

Payments on these borrowings are due semiannually, in increasing amounts, through July 2023.

See Note 7 of the 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”), with JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Bank of America, N.A., as Syndication Agent, each of JPMorgan Chase Bank, N.A.

and Merrill, Lynch, Pierce, Fenner & Smith Incorporated as joint bookrunners and joint lead arrangers, and each of JPMorgan Chase Bank, N.A., Bank of America, N.A., Citizens Bank, N.A., and TD Bank, N.A.

as lenders from time to time party thereto.

The Credit Agreement has a $50 million borrowing limit, with an expansion capacity to $100 million, and 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 October 31, 2019), and limits the amount of dividends, distributions, and redemptions we can pay on our common stock to an aggregate amount in 2019 of $100 million and $50 million annually thereafter.

We had no outstanding borrowings against the Credit Agreement at October 31, 2019, and $50 million was available for borrowing.

The interest rate on the Credit Agreement (2.78% at October 31, 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).

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Net income attributable to Photronics, Inc.

All the following tabular comparisons, unless otherwise indicated, are for the three months ended October 31, 2019 (Q4 FY19), July 28, 2019 (Q3 FY19) and October 31, 2018 (Q4 FY18), and for the fiscal years ended October 31, 2019 (FY19) and October 31, 2018 (FY18).

All the following tabular comparisons, unless otherwise indicated, are for the three months ended October 31, 2020 (Q4 FY20), August 2, 2020 (Q3 FY20) and October 31, 2019 (Q4 FY19), and for the fiscal years ended October 31, 2020 (FY20) and October 31, 2019 (FY19).

Please refer to the MD&A in our 2019 Annual Report on Form 10-K for comparative discussion of our fiscal years ended October 31, 2019 and October 31, 2018.

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.

Our quarterly revenues can be affected by the seasonal purchasing practices of our customers.

As a result, demand for our products is typically reduced 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.

At the beginning of fiscal year 2020, we changed the threshold for the definition of high-end FPD, from G8 and above and active matrix organic light-emitting diode (AMOLED) display screens, to G10.5 + , AMOLED, and low-temperature polysilicon (LTPS) display screens, to reflect the overall advancement of technology in the FPD industry.

Our definition of high-end IC products remains as 28 nanometer or smaller.

High-end photomasks typically have higher selling prices (ASPs) than mainstream products.

The following tables present changes in disaggregated revenue in Q4 FY19 and FY 19 from revenue in prior reporting periods.

Columns many not total due to rounding.

The following tables present changes in revenue disaggregated by product type and geographic origin, in Q4 FY20 and FY20 from revenue in prior reporting periods.

Columns may not total due to rounding.

Quarterly Changes in Revenue by Product Type

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Q4 FY20 from Q4 FY19

Revenue in Q4 FY20

Increase (Decrease)

Total Revenue

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Total revenue

Revenue increased 13.1% in Q4 FY19, compared with Q3 FY19, as both mainstream and high-end revenue increased.

The largest increases in percentages were in FPD mainstream and IC high-end masks, which increased 27.2% and 16.9%, respectively.

Revenues from China-based customers represented 33% of our total revenues in Q4 FY19.

While some of the China-based revenue reflected a 77.5% increase in revenue at our FPD plant in China, much of the increase was due to increased shipments into China from IC facilities in Taiwan and Korea, both of which operated at full capacity during Q4 FY19.

Our IC facility in China was, and is expected to be for a significant part of fiscal 2020, in the qualification stage with many of its customers;

however, revenues increased significantly from Q3 FY19.

Revenue increased 8.0% in Q4 FY19, compared with Q4 FY18, primarily as a result of increased mainstream and high-end FPD growth, both of which increased over twenty-nine percent from the prior year quarter.

High-end IC revenue also contributed to the increase, growing at 14.0%.

Our expansion into China, as a ship-to destination from our Taiwan and Korea facilities, and from local production was a significant driver of the increase.

Revenue decreased 5.5% in Q4 FY20, compared with Q3 FY20, as FPD demand fell 11.9% due, in significant part, to U.S.

trade sanctions placed on Huawei Technologies Co., Ltd.

which negatively impacted their ability to release new mobile devices, thereby decreasing demand for new display panels and, ultimately, new FPD photomasks;

consequentially, our mobile display panel revenue declined 21% from Q3 FY20.

In addition, high prices and unit demand for current products resulted in panel producers extending production runs of current designs and delaying design changes, which led to decreased demand of masks used for production of LCD displays on G10.5+, and smaller substrates.

FPD revenue attributable to China decreased 12% from Q3 FY20, while representing 56% of our total FPD revenue in Q4 FY20.

IC revenue decreased from the prior quarter by 2.5%, as improvement at some logic foundries in the U.S.

and Asia somewhat mitigated weakened demand for memory photomasks.

IC revenue attributable to China increased 14% from Q3 FY20, and accounted for a quarter of our IC revenue in the current quarter.

Revenue decreased 4.5% in Q4 FY20, compared with Q4 FY19;

IC demand declined 5.9%, due to weakened demand for memory photomasks, while FPD demand fell less than 1%, despite the disruptions to the China supply chain discussed above.

Year-over-Year Changes in Revenue by Product Type

FY20 from FY19

Increase (Decrease)

Total Revenue

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Total Revenue

Revenue increased 2.9% in FY19, compared with FY18, to a record high of $550.7 million.

A 29.9% increase in high-end FPD sales was primarily responsible for the increase, with strong demand for mobile displays driving much of the increase.

Our China FPD facility, which commenced production late in the second quarter, contributed 11.4% of our total FPD revenue.

Overall IC revenues decreased from FY18 by 2.4%, as both mainstream and high-end IC revenues fell between 2 to 3%.

The decrease was geographically broad-based, with our Taiwan IC facility being a notable exception, as its revenue grew 3.8%.

We anticipate a softening of the demand for G10.5+ FPD photomasks, which we expect to be offset to some extent by a strengthening of the demand for AMOLED photomasks.

We expect our customers to continue to focus on improving mobile displays, including the development of foldable smartphones.

Should demand increase sufficiently, we will be ready to increase our capacity to meet customer demands by expanding the production capacity of our FPD facility in China.

We currently have two lithography tools on order that will enable us to expand our Asian capacity for mainstream photomasks, which are often used for certain layers of high-end applications.

We anticipate that IC demand will be stable to improving.

As ASPs for high-end masks are high, a relatively small shift in the timing of their demand can have an out-sized effect on the timing of our revenues.

The impact, if any, on our business of changing geopolitical conditions, such as U.S.-China trade relations, tensions between the Republic of South Korea and Japan, and the effects of the United Kingdom potentially exiting the European Union cannot be predicted.

Revenue increased 10.7% in FY20, compared with FY19, to a record high of $609.7 million, eclipsing our previous record set in FY19.

FPD revenue increased 32.4%, on strong demand for high-end products, despite the disruptions to the China FPD supply chain encountered in Q4 FY20.

IC revenue increased 3.0%, year-over-year;

the increase was driven by higher demand for mainstream logic masks in Asia and the U.S.

The outbreak of the COVID 19 pandemic in FY20 tempered revenue growth for both IC and FPD, as supply chains were, at least temporarily, disrupted and travel restrictions were imposed, resulting in delays to equipment installations and customer design team projects.

Percent Change

Gross margin increased 2.3% from Q3 FY19 to 24.4%, primarily as a result of the $18.2 million increase in revenue discussed above.

Contribution margin from our high operating leverage, 1.9% decrease in compensation and related expenses as a percent of revenue, offset increased overhead costs which were primarily driven by increased equipment costs of $2.4 million and outside processing costs of $0.5 million.

Material costs, as a percent of revenue, decreased by 0.4% from the prior quarter.

Gross margin decreased by 0.1% from Q4 FY18, primarily due to a 11.3% increase in overhead costs as a percent of revenue.

Significant increases from the prior year quarter included depreciation expense of $3.6 million and service contract expense of $1.2 million, both of which resulted from our increased installed tool base in China.

Increases in other non-equipment related overhead costs of $1.4 million were incurred at our two China-based manufacturing facilities, in which production commenced, but had not yet reached capacity, in fiscal 2019.

On a consolidated basis, both material and compensation-related expenses, as a percentage of revenue, did not change significantly from the prior year quarter.

Gross margin decreased by 2.5 percentage points in Q4 FY20, from Q3 FY20, primarily as a result of the above mentioned 5.5% decrease in revenue from the prior quarter.

Gross margins decreased in Taiwan, Korea, and the U.S., primarily as a result of decreased revenue;

gross margins at our China-based operations increased, overall, primarily due to lower glass blank costs.

Total cost of goods sold decreased $2.7 million, or 2.3%, from the prior quarter, primarily due to a 6.1% decrease in material costs, which were essentially flat as a percentage of revenue.

Labor costs decreased 1.9%, but were essentially flat as a percentage of revenue, while overhead costs increased $0.5 million, and 2.3 percentage points, as a percentage of revenue.

Gross margin decreased by 3.0 percentage points in Q4 FY20, from Q4 FY19, primarily as a result of the 4.5% decrease in revenue in the current year quarter.

Gross margins at our China-based IC and FPD operations increased as they continue to ramp up to full production.

Gross margins decreased in Taiwan, and the U.S., primarily as a result of decreased revenue.

Total cost of goods sold decreased $0.7 million, or 0.6%, from the prior year quarter, with $1.9 million of the decrease resulting from lower materials costs, which fell 4.1%, but were essentially flat as a percentage of revenue.

Labor costs increased 9.5%, up 1.5 percentage points of revenue, while overhead costs were essentially flat, and up 1.4 percentage points of revenue.

Percent Change

FY19 from FY18

On a year-to-date basis, gross margin decreased 2.7%;

increased losses 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.

Gross margin increased by 0.2 percentage points in YTD FY20, from YTD FY19, primarily as a result of the 10.7% increase in revenue from the prior year period.

Gross margins at our China-based IC and FPD operations increased as these facilities continue to ramp up to full production.

Gross margins decreased in Taiwan primarily due to lower revenue, and in the U.S due to overhead costs increasing, while revenue was, essentially, unchanged.

Total cost of goods sold increased $45.2 million, or 10.5%, from the prior year period, with $19.6 million of the increase resulting from greater materials costs, which were up 12.0% from YTD FY19, and increased 0.4%, as a percentage of revenue.

Labor costs increased 4.9%, but were down 0.6 percentage points against revenue, while overhead costs increased 11.2%, with increased equipment costs (which reflected our expanded installed tool base) comprising the majority of this increase.

As we operate in a high fixed cost environment, increases or decreases in our revenues and capacity utilization will generally positively or negatively impact our gross margin.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $1.0 million, or 7.5%, to $12.1 million in Q4 FY19, from $13.1 million in Q3 FY19, and by $1.4 million, or 10.1%, from $13.5 million in Q4 FY18, primarily due to decreased compensation and related expenses of $1.0 and $1.3 million from the respective comparative periods.

On a full-year basis, selling, general and administrative expenses increased $0.9 million, or 1.8%, in FY19 to $52.3 million, from $51.4 million in FY18, primarily due to a reduction in bad debt recoveries of $0.8 million in FY19, as compared with FY18.

Selling, general and administrative expenses were $12.8 million in Q4 FY20, compared with $13.3 million in Q3 FY20, and $12.1 million in Q4 FY19.

The decrease from Q3 FY20 was primarily the result of decreased compensation and related expenses of $0.8 million, and the increase from the prior year quarter was primarily the result of increased compensation and related expenses of $1.2 million, which were partially offset by decreased travel costs of $0.6 million.

Selling, general and administrative expenses increased $1.3 million, or 2.4%, in YTD FY20, from YTD FY19, primarily as a result of increased compensation and related expenses and professional fees of $2.7 million and $0.8 million, respectively, partially offset by decreased travel expenses of $1.7 million.

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 to $4.5 million in Q4 FY19, or 12.2%, from Q3 FY19, primarily as a result of increased development costs of $0.9 million at our China facilities.

A decrease from the prior quarter in research and development expense of $0.8 million in the U.S.

was somewhat offset by increased expenses of $0.4 million at our other Asia-based facilities.

Research and development expenses increased $0.6 million, or 16.3%, in Q4 FY19 over Q4 FY18.

The increase was due to $1.1 million of expense incurred at our China-based facilities, both of which commenced operations in FY19;

decreased expense in the U.S.

of $0.8 million was partially offset by increased spending of $0.3 million at our other Asia-based facilities.

On a full-year basis, research and development expenses increased $1.9 million in FY19, or 13.2%, to $16.4 million.

The increase is largely attributable to spending of $1.6 million at our China-based facilities, which commenced operations in FY19.

The remainder of the increase is primarily attributable to increased development spending at our IC facility in Taiwan.

Research and development expenses consist of development efforts related to high-end process technologies for high-end IC and FPD applications.

Research and development expenses were $4.1 million in Q4 FY20, compared with $4.5 million in both Q3 FY20 and Q4 FY19.

The decrease from Q3 FY20 was primarily the result of decreased development activities in the U.S., which were partially offset by increased activities in China, and the decrease from the prior year quarter was the result of decreased activities in China and Taiwan.

Research and development expenses increased $0.8 million, or 4.6%, in YTD FY20 from YTD FY19, primarily due to increased development activities in China, which were partially offset by reduced activities in the U.S.

Other Income (Expense), net

Interest income and other income (expense), net

Foreign currency transactions (losses) gains, net

Interest expense

Total other income (expense)

Interest income and other income (expense), net decreased by $5.9 million in Q4 FY19, compared with Q3 FY19, primarily as a result of increased foreign currency transaction losses of $6.2 million.

Interest expense, which is related to our China-based debt, decreased $0.2 million in Q4 FY19 from Q3 FY19;

interest on our China-based debt is partially subsidized by a local authority.

Interest income and other income (expense), net decreased by $8.9 million in Q4 FY19, compared with Q4 FY18, primarily as a result of unrealized foreign currency remeasurement effect of $7.9 million.

Also contributing to the decrease was a reduction in interest income of $0.5 million, which resulted from our lower average cash balances during the current year quarter, and the absence, in Q4 FY19, of $0.4 million of gains realized on the sales of assets in Q4 FY18.

Interest expense decreased $0.4 million in Q4 FY19 from Q4 FY18.

The decrease is attributable to the repayment of our $57.5 million of 3.25% convertible senior notes in April 2019, the impact of which was somewhat offset by interest incurred on our China-based loans.

Interest income and other income (expense), net

Total other income (expense)

The unfavorable change in Other income (expense), net of $0.8 million, from a loss of $2.1 million in Q3 FY20, to a loss of $2.9 million in Q4 FY20, was primarily due to increased foreign currency exchange losses of $0.7 million, and increased interest expense on our China-based debt.

The majority of the interest on our China-based debt is eligible for reimbursements through subsidies, which we recognize upon receipt.

Other income (expense), net increased $3.2 million from Q4 FY19, primarily due to less unfavorable foreign currency transaction results of $4.0 million, which were partially offset by increased interest expense of $0.6 million on our China-based debt;

the increased interest expense reflected the higher average debt balance in the current year quarter.

Interest expense

Interest income and other income (expense), net

Foreign currency transactions (losses) gains, net

Total other income (expense)

Interest income and other income (expense), net decreased by $5.2 million on a full-year basis in FY19, compared with FY18, primarily as a result of:

unrealized foreign currency remeasurement effects of $1.6 million;

decreased interest income of $1.5 million (due to our lower average cash balances);

a reduction, in the current year, of $1.0 million of gains realized on the sales of assets;

and a decrease in subsidy income in China of $0.7 million.

Interest expense decreased $0.9 million in FY19 from FY18.

The unfavorable year-to-date change in Other income (expense), net of $0.9 million was primarily due to increased interest expense of $1 million on our China-based debt, and decreased interest income of $0.6 million.

The effects of these decreases were partially offset by decreased foreign currency exchange losses of $0.8 million.

Income Tax Provision

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As a fiscal year U.S.

taxpayer, these provisions were applied to our fiscal year 2019, including the elimination of the domestic manufacturing deduction, which created new taxes on certain foreign sourced income, and introduced new limitations on certain business deductions.

taxpayer, these provisions were applied to our fiscal year 2019, including the elimination of the domestic manufacturing deduction, creating new taxes on certain foreign sourced income, and introducing new limitations on certain business deductions.

Income tax provision

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The effective income tax rate is sensitive to the jurisdictional mix of our earnings, due, in part, to the non-recognition of tax provisions and benefits on losses in jurisdictions with valuation allowances.

The effective income tax rate decreased in Q4 FY19, compared with Q3 FY19, primarily due to the non-recognition of tax provisions in Q4 FY19 on U.S.

quarterly income, compared with the non-recognition of tax benefits in Q3 FY19 on losses in the U.S.;

the non-recognition of tax provisions and benefits in both quarters was a result of valuation allowances applying to those provisions and benefits.

The effective income tax rate decreased in Q4 FY19 from Q4 FY18, for the same reasons;

however, the effective income tax rate decrease was somewhat reduced by a decrease in the benefit of $0.9 million from a tax holiday in Taiwan.

The effective income tax rate increased in Q4 FY20, compared with Q3 FY20, due to the non-recognition of more tax benefits in Q4 FY20 on losses in the U.S.

and in a non-U.S.

jurisdiction;

non-recognized tax benefits in both quarters were a result of valuation allowances applying to those provisions and benefits.

The effective income tax rate increased in Q4 FY20, from Q4 FY19, due to the non-recognition of tax benefits in a non-U.S.

jurisdiction during FY20;

the non-recognized tax benefits in both quarters were a result of valuation allowances applying to those benefits.

However, in Q4 FY19, tax benefits not recognized on U.S.

quarterly income were somewhat reduced by the benefit of $0.9 million from a tax holiday in Taiwan.

Income tax provision

Effective income tax rate

The increase in the effective income tax rate on a full-year basis in FY19, compared with FY18, was primarily due to FY18 recognition of a tax benefit related to $3.7 million of alternative minimum tax credits that became fully refundable under U.S.

tax reform, and an FY19 decrease of $1.1 million in the recognition of previously unrecognized tax benefits;

the change in unrecognized tax benefits resulted from the differences in audit settlements and expirations of assessment period statutes of limitations between the two periods.

The increase in the effective income tax rate on a full-year basis in FY20, compared with FY19, is primarily due to the net increase in non-recognition of tax benefits in the US and in a non-U.S.

jurisdiction during FY20;

the non-recognition is the result of valuation allowances applying to those benefits, the $1.5 million post-settlements increase in the provision for unrecognized tax benefits, and a $1.9 million decrease in the benefit related to the FY20 tax holiday in Taiwan, which expired at the end of December 2019.

We consider all available evidence when evaluating the potential future realization of deferred tax assets, and when, based on the weight of all available evidence, we determine that it is more likely than not that some portion or all of our deferred tax assets will not be realized, we reduce our deferred tax assets by a valuation allowance.

We also regularly assess the potential outcomes of ongoing and future tax examinations and, accordingly, have recorded accruals for such contingencies.

Included in the balance of unrecognized tax benefits as of both October 31, 2019 and October 31, 2018, are $1.9 million, recorded in Other liabilities in the consolidated balance sheets that, if recognized, would impact the effective tax rates.

Included in the balance of unrecognized tax benefits as of October 31, 2020 and October 31, 2019, are $2.0 million and $1.9 million respectively, recorded in Other liabilities in the consolidated balance sheets that, if recognized, would impact the effective tax rates.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interest

The changes, for all comparative periods, in net income attributable to noncontrolling interests 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.

Net income attributable to noncontrolling interests

Net income attributable to noncontrolling interests was $2.1 million in Q4 FY20, unchanged from Q3 FY20, and was the result of net income realized at our China-based IC facility in Q4 FY20, which realized a net loss in Q3 FY20, and decreased net income at our Taiwan-based IC facility.

Net income attributable to noncontrolling interests decreased $1.2 million in Q4 FY20 from $3.3 million in Q4 FY19;

decreased income at our Taiwan-based IC facility exceeded the favorable effect of our China-based IC facility income in the current year quarter, and a net loss in the prior year quarter.

On a year-to-date basis, net income attributable to noncontrolling interests decreased $4.2 million;

the decrease was the result of decreased net income at our Taiwan-based IC facility, the effect of which was somewhat mitigated by a decreased net loss at our China-based IC facility.

We hold 50.01% ownership interests in both the China-based and Taiwan-based IC facilities.

Liquidity and Capital Resources

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Net cash used in financing activities

We had cash and cash equivalents of $206.5 million at the end of 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 senior notes;

- $178.4 million used to purchase capital assets (the preponderance of which related to equipping our China-based facilities);

- $21.7 million used to repurchase our common stock;

- $15.7 million dividends, net of contributions, paid to noncontrolling interests

- $54.6 million received from borrowings in China;

- $27.0 million received from government incentives in China and the U.S.,

We had cash and cash equivalents of $278.7 million at the end of Q4 FY20, compared with $206.5 million at the end of fiscal 2019.

The net increase of $72.2 million was primarily attributable to:

- $143.0 million provided by operating activities;

As of October 31, 2019, our working capital was $275.6 million, compared with $311.7 million at the end of fiscal 2018.

The $36.1 million net decrease is primarily attributable to:

- Decreased cash and cash equivalents of $65.2 million (net of $57.5 million used to repay our convertible senior notes, which had no impact on working capital);

- Increased inventories of $19.0 million, the predominance of which was to supply our China FPD facility and;

- Receivables for investment subsidies in China of $3.2 million at the end of FY19,

- Increased value added tax prepayments at our China-based facilities of $3.7 million.

The net cash provided by operating activities of $68.4 million in FY19 decreased $62.2 million, from $130.6 million provided in FY18.

The net decrease was due primarily to:

- Lower net income of $20.7 million in YTD FY19;

- Increased trade accounts receivable of $13.7 million, primarily attributable to our $11.6 million increase in revenue in Q4 FY19, compared with Q4 FY18.

- A greater increase in the change in inventories balances of $11.4 million in FY19 (primarily attributable to the stocking of our FPD facility in China) and;

- An increase in value added tax prepayments related to our China facilities of $15.7 million in FY19.

These prepayments are recoverable through future sales transactions of the facilities.

Net cash used in investing activities was $151.4 million in FY19, an increase of $60.5 million from $90.9 million used in FY18.

The net increase was primarily attributable to increased capital expenditures of $85.8 million, the predominance of which related to the building and equipping of our China facilities.

The increased capital expenditures were partially offset by $27.0 million received in China and the U.S.

from investment incentives in FY19.

Net cash flows from financing activities increased from funds used of $13.8 million in FY18 to $42.1 million of funds used in FY19.

Significant components of the net decrease were:

- $57.5 million used to repay (upon their maturity) our convertible senior notes;

- $45.1 million used to pay dividends to DNP (related to their 49.99% interest in our IC facility in Taiwan);

- $21.7 million used to acquire our common stock under share repurchase programs;

- $54.6 million received from borrowings in China and,

- $29.4 million contributed by DNP for their investment in our IC joint venture in China.

Foreign currency exchange rates contributed $2.4 million to our reported cash balance at October 31, 2019.

- $17.6 million contributed to our China-based IC joint venture by noncontrolling interests;

- $5.3 million government incentives received in China;

- $4.2 million received from exercises of employee stock options;

- $20.3 million received from borrowings in China;

- $(70.8) million paid for property, plant, and equipment;

- $(34.4) million used to repurchase our common stock;

- $(16.2) million dividend paid to noncontrolling interest

- $(7.4) million used to repay debt;

- $11.0 million favorable effects of currency exchange rate changes on cash

Our working capital at the end of Q4 FY20 was $357.2 million, compared with $275.6 million at the end of fiscal 2019.

The increase is primarily attributable to the following increases (decreases) in working capital:

- Increased cash and cash equivalents of $72.2 million;

- Increased inventories of $9.1 million, mainly acquired to protect against potential COVID-19 related supply chain disruptions;

- Increased compensation and related expenses accrual of ($2.1) million;

- Increased contract liabilities of $(3.7) million;

- Increased current debt of $(2.8) million;

- Increased current portion of operating leases of $(2.3) million, reflecting our adoption of ASC 842 at November 1, 2019.

The net cash provided by operating activities of $143.0 million in YTD FY20 was a $74.6 million increase from $68.4 million provided in YTD FY19.

The net increase in YTD FY20 was primarily due to:

- Increased non-cash add backs to net income, including depreciation, amortization, share-based compensation, and deferred income taxes of $14.4 million;

- A comparative decrease in accounts receivable of $19.3 million;

- A comparative decrease in the build-up of inventories of $16.2 million, which was primarily the result of our initially supplying our China-based FPD facility in YTD FY19;

- A comparative increase in other current assets of $16.5 million, mostly related to increases in refundable income tax of $4.6 million, contract assets of $8.9 million and recoverable VAT of $2.2 million.

- A comparative increase in accounts payable, accrued liabilities and other of $8.5 million, mostly related to the net of the following comparative changes:

an increase in noncurrent recoverable VAT of $28.3 million related to our China facilities, increase in contract liability of $5.3 million, decrease in accounts payable and accruals of $(24.5) million, and a decrease in income tax payable of $(3.2) million.

Net cash used in investing activities was $65.7 million in YTD FY20, a decrease of $85.7 million from $151.4 million used in YTD FY19.

The net decrease in cash used was primarily attributable to decreased capital expenditures of $107.6 million;

this was the result of a reduction in payments to equip our China-based facilities, which were in the start-up phase in the first half of fiscal year 2019.

A reduction in investment incentives of $21.7 million in YTD FY20, from YTD FY19, also reduced net cash flows used in investing activities.

Net cash flows from financing activities changed from $42.1 million used in YTD FY19 to $16.0 million used in YTD FY20.

Significant components of the $26.0 million net change were:

- Repayments of debt were $53.9 million less in YTD FY20 than in YTD FY19;

the primary cause of the decrease was repayment (upon their maturity) of our convertible senior notes in YTD FY19;

- Dividends to DNP (related to their 49.99% interest in our IC facility in Taiwan) were $28.9 million less in YTD FY20;

- $(34.3) million less debt was incurred in YTD FY20 than in YTD FY19;

- $(11.8) million less contributed by DNP to maintain their proportionate ownership interest in our IC joint venture in China in YTD FY20 than in YTD FY19;

- $(12.7) million more paid in YTD FY20, than in YTD FY19, to acquire our common stock.

As of October 31, 2020 and October 31, 2019, our total cash and cash equivalents included $218.0 million and $147.2 million, respectively, held by our foreign subsidiaries.

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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.

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.

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 sectors.

Since we operate in a high fixed cost environment, our liquidity is highly dependent on our revenue, cash conversion cycle, and the timing of our capital expenditures (which can vary significantly from period to period).

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.

However, depending on conditions in the semiconductor and display 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.

Please also refer to Financing Related Risk Factors.

As of October 31, 2020, we had outstanding capital commitments of approximately $112 million.

We intend to finance our capital expenditures with our working capital, contributions from our joint venture partners, cash generated from operations and, if necessary, additional borrowings.

Our remaining funding commitment for our IC facility in China, which commenced production in the third quarter of fiscal 2019, was approximately $7 million as of October 31, 2019;

we will fulfill this commitment over the next several quarters.

As of the end of fiscal 2020, we had no unfulfilled commitments to fund our IC facility in China.

Cash Requirements

Our cash requirements in fiscal 2020 will primarily be for funding our operations, capital spending, (including the completion of our two facilities in China, and the acquisition of additional high-end equipment at other sites), and debt repayments.

Our cash requirements in fiscal 2021 will primarily be for funding our operations, capital spending, and debt repayments.

At our option, should we deem it to be an optimal use of our cash, we may repurchase some of our common stock.

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.

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Other noncurrent liabilities

(1) Included above, in the less-than-one-year amounts of Debt and Purchase Obligations, are $3.5 million and $30.8 million, respectively, which we intend to finance under a multi-year capital lease in fiscal 2020.

As discussed in Note 6 of the consolidated financial statements, we have been approved for a lease to finance the purchase of a high-end lithography tool under an agreement entered into in fiscal 2019.

As of October 31, 2020, the Company had recorded accruals for uncertain tax positions and related interest and penalties of $2.7 million;

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Off-Balance Sheet Arrangements

In January 2018, the Company, 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 “Xiamen American Japan Photronics Mask Co., Ltd.” (“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 the Company.

In January 2018, Photronics, through its wholly owned Singapore subsidiary, entered into the PDMCX joint venture with DNP, through its wholly owned subsidiary “DNP Asia Pacific PTE, Ltd.” under which DNP obtained a 49.99% interest in our IC business in Xiamen, China.

The joint venture was established to develop and manufacture photomasks for leading edge and advanced generation semiconductors.

Under the joint venture’s operating 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 the Company 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.

As of the date of issuance of this report, DNP had not indicated its intention to exercise this right.

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 twenty percent 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 October 31, 2019, the Company and DNP each had net investments in PDMCX of approximately $39.6 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.

See Note 8 to the consolidated financial statements for additional information on these operating leases.

As of October 31, 2020, Photronics and DNP each had net investments in PDMCX of $54.8 million.

We lease certain office facilities and equipment under leases with terms of one year or less that may require us to pay taxes, insurance and maintenance expenses related to the properties.

See Note 9 to the consolidated financial statements for additional information on these short-term leases.

In concurrence with our November 1, 2019, adoption of Accounting Standards Codification Topic 842 – “Leases”, we recognized right-of-use leased assets of approximately $6.5 million and corresponding lease liabilities, which were discounted at our incremental borrowing rates.

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Business Outlook

The majority of our revenue growth is expected to continue to come from the Asia region, with significant portion in China – in the forms of both shipments into China and masks produced in China.

We are anticipating short-term seasonal softness, with growth in FPD potentially alleviating some portion of the seasonality.

We are in the process of expanding our tool base to allow us to meet increased demand across all technology nodes, and, if warranted by market demand, are prepared to expand our production.

Production at our China-based IC facility should begin to significantly increase during fiscal 2020.

However, the timing of the increase is dependent on customer qualifications.

Overall, in terms of IC business, we see opportunities for growth, either through the ramp-up of the China facility, or through a recovery in the memory market, which we believe to not be an unlikely scenario, sometime during the calendar year 2020.

While we, as always, caution that our outlook, due to our short back-log (which typically does not exceed two weeks) is limited, we expect revenue to increase, as a percentage of FY20 revenue, in the high single digits.

We are also anticipating operating profit to grow at a rate similar to the 23% increase we experienced in FY20.

The bases of our expectations include growth for both IC and FPD in FY2021.

IC growth drivers include added capacity across our global operations including the completion of Phase 1 of our China IC facility ramp, growing demand for semiconductor masks in China, and increased demand in the IC memory space.

For FPD, mobile displays are once again expected to be a sector of growth with additional demand coming from new large-screen TV technology, such as OLED, which will be supported by the implementation of the next phase of investment at our Asia-based FPD facilities.

We are also encouraged by the impending distribution of recently developed coronavirus vaccines, as we think this supports a reasonable expectation that supply chain disruptions and travel restrictions will be eased, thereby reducing the impediments to growth they represented in FY20.

However, we believe the impending change in leadership in the U.S.

may lead to an improvement in its trade relationship with China, including the possible removal of sanctions on some Chinese enterprises, as well as a reduction in the likelihood of the impositions of additional sanctions.

We believe that a majority of the growth in the IC and FPD markets will come from the Asia region, predominantly in China.

We expect to meet these demands both through the utilization of our facilities in China and by importing photomasks into China from our other facilities.

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 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 have been discussed, a number of other unforeseen factors could cause actual results to differ materially from our expectations.

Our future results of operations and the other forward-looking statements contained in this filing involve a number of risks and uncertainties, some of which are discussed in Part1, Item 1A of this report;

a number of other unforeseeable factors could cause actual results to differ materially from our expectations.

Critical Accounting Estimates

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We believe the following to be the more critical areas that require judgment when applying our accounting policies:

the determination of whether revenues related to our revenue contracts should be recognized over time or at a point in time, as these determinations impact the timing of our reported revenues and net income;

the estimation of the point in the manufacturing process at which we are entitled to receive payment as we perform;

the determination of the useful lives of our property, plant, and equipment and the timing of when depreciation should begin on such assets, as these determinations can significantly impact our gross margin and research and development expenses;

the evaluation of the recoverability of our long-lived assets and definite-lived intangible assets, which requires us to forecast the future cash flows related to these assets;

Revenue Recognition :

Application of GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates.

Specifically, t he determination of whether revenues related to our revenue contracts should be recognized over time or at a point in time, as these determinations impact the timing and amount of our reported revenues and net income.

Other significant judgments include the estimation of the point in the manufacturing process at which we are entitled to receive payment, as well as the progress of the job order to completion in order to determine the amount of arrangement consideration earned for contractual revenue recognized over time.

Property, Plant and Equipment :

Significant judgment and assumptions are employed when we establish estimated useful lives, depreciation periods and when depreciation should begin on such assets as this evaluation can significantly impact our gross margin and research and development expenses.

Significant judgement is also required when we periodically review property, plant and equipment for any potential impairment in carrying values, whenever events such as a significant industry downturn, plant closures, technological obsolescence, or other change in circumstances indicate that their carrying amounts may not be recoverable as the recoverability assessment requires us to forecast future cash flows related to these assets;

this evaluation can significantly impact our gross margin and operating expense.

the estimation of the collectability of our accounts receivable which impacts our gross margin and operating expenses;

the recognition and measurement of current and deferred income taxes, including the measurement of uncertain tax positions, which impacts our provision for income taxes and our tax-related asset and liability balances.

Significant judgement is applied in the determination of whether an arrangement is, or contains, a lease and, in certain instances, whether the lease should be classified as an operating lease or a finance lease, which can impact the timing and classification of lease costs.

Contingencies :

We are subject to the possibility of losses from various contingencies.

Significant judgment is necessary to estimate the probability and amount of a loss, if any, from such contingencies.

An accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated.

In accounting for the resolution of contingencies, significant judgment may be necessary to estimate amounts pertaining to periods prior to the resolution that are charged to operations in the period of resolution and amounts related to future periods.

Income Taxes :

Our annual tax rate is determined based on our income and the jurisdictions where it is earned, statutory tax rates, and the tax impacts of items treated differently for tax purposes than for financial reporting purposes.

Also inherent in determining our annual tax rate are judgments and assumptions regarding the recoverability of certain deferred tax balances, and our ability to uphold certain tax positions.

We are subject to complex tax laws, in the U.S.

and numerous foreign jurisdictions and the manner in which they apply can be open to interpretation.

Realization of deferred tax assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction in future periods, which involves business plans, planning opportunities, and expectations about future outcomes.

Our assessment relies on estimates and assumptions, and may involve a series of complex judgments about future events.

Because there are a number of estimates and assumptions inherent in calculating the various components of our tax provision, future events such as changes in tax legislation, geographic mix of earnings, completion of tax audits or earnings repatriation plans could have an impact on those estimates and our effective tax rate.

Please refer to Notes 1, 8, 9, 12, and 14 to our consolidated financial statements for additional information related to these critical accounting estimates and our other significant accounting policies.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis