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Item 8. Financial Statements and Supplementary Data

2021-01-15 compared with 2019-12-23 · 365 added, 391 removed, 493 unchanged (61% of the section changed)

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Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at October 31, 2019 and October 31, 2018

Consolidated Statements of Income for the years ended October 31, 2019, October 31, 2018 and October 29, 2017

Consolidated Statements of Comprehensive Income for the years ended October 31, 2019, October 31, 2018 and October 29, 2017

Consolidated Statements of Equity for the years ended October 31, 2019, October 31, 2018 and October 29, 2017

Consolidated Statements of Cash Flows for the years ended October 31, 2019, October 31, 2018 and October 29, 2017

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Consolidated Statements of Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Shareholders and the Board of Directors of Photronics, Inc.

Brookfield, Connecticut

Opinions on the Financial Statements and Internal Control over Financial Reporting

To the Shareholders and the Board of Directors of Photronics, Inc.

Opinions on the Financial Statements

We have audited the accompanying consolidated balance sheets of Photronics, Inc.

and subsidiaries (the "Company") as of October 31, 2019 and 2018, the related consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of equity, and consolidated statements of cash flows, for each of the three years in the period ended October 31, 2019, the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”).

We also have audited the Company's internal control over financial reporting as of October 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of October 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2019, based on the criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

and subsidiaries (the "Company") as of October 31, 2020 and October 31, 2019, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended October 31, 2020, the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2020 and October 31, 2019, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of October 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 14, 2021, expressed an adverse opinion on the Company's internal control over financial reporting because of a material weakness.

Basis for Opinions

The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting in Item 9A.

Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

The Company's management is responsible for these financial statements.

Our responsibility is to express an opinion on these financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks.

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Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audits also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment.

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue Recognition on In-Process Production Orders — Refer to Note 7 to the consolidated financial statements

Revenue — Contracts with Customers— Refer to Note 1 to the financial statements

Critical Audit Matter Description

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Hartford, Connecticut

December 20, 2019

January 14, 2021

We have served as the Company’s auditor since 1991.

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Cash and cash equivalents

Accounts receivable, net of allowance of $ 1,334 in 2019 and $ 1,526 in 2018

Accounts receivable, net of allowance of $ 1,324 in 2020

and $ 1,334 in 2019

Other current assets

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Commitments and contingencies

Preferred stock, $ 0.01 par value, 2,000 shares authorized, none issued and outstanding

Preferred stock, $ 0.01 par value,

2,000 shares authorized, none issued and outstanding

Common stock, $ 0.01 par value, 150,000 shares authorized, 63,138 shares issued and outstanding at October 31, 2020, and 65,595 shares issued and outstanding at October 31, 2019

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Retained earnings

Treasury stock, 0 shares at October 31, 2019 and 2,558 shares at October 31, 2018

Accumulated other comprehensive loss

Accumulated other comprehensive (loss) income

Total Photronics, Inc.

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Other income (expense):

Interest income and other income (expense), net

Interest expense

Interest income and other income (expense), net

Foreign currency transaction (losses) gains, net

Income before income tax provision

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(in thousands)

Other comprehensive (loss) income, net of tax:

Other comprehensive income (loss), net of tax:

Foreign currency translation adjustments

Amortization of cash flow hedge

Net other comprehensive (loss) income

Net other comprehensive income (loss)

Comprehensive income

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Comprehensive

(Loss) Income

Balance at October 30, 2016

Other comprehensive income

Sales of common stock through employee stock option and purchase plan

Restricted stock awards vesting and expense

Share-based compensation expense

Dividends to noncontrolling interests

Income (Loss)

Balance at October 29, 2017

Other comprehensive income

Other comprehensive loss

Sales of common stock through employee stock option and purchase plan

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Balance at October 31, 2019

Other comprehensive income

Sale of common stock through employee stock option and purchase plans

Restricted stock awards vesting and expense

Share-based compensation expense

Contribution from noncontrolling interest

Dividends to noncontrolling interest

Repurchase of common stock of subsidiary

Purchases of treasury stock

Retirement of treasury stock

Balance at October 31, 2020

See accompanying notes to consolidated financial statements.

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Purchases of intangible assets

Proceeds from sales of investments

Acquisition of business

Net cash used in investing activities

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Proceeds from debt

Contribution from noncontrolling interests

Repayments of debt

Dividends paid to noncontrolling interests

Contributions from noncontrolling interests

Purchases of treasury stock

Dividends paid to noncontrolling interests

Repayments of deb t

Proceeds from share-based arrangements

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Effects of exchange rate changes on cash, cash equivalents, and restricted cash

Net (decrease) increase in cash, cash equivalents, and restricted cash

Net increase (decrease) in cash, cash equivalents, and restricted cash

Cash, cash equivalents, and restricted cash at beginning of year

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Accrual for property, plant and equipment purchased during year

* Amount has been modified to reflect the adoption of ASU 2016-18 (see Note 22).

See accompanying notes to consolidated financial statements.

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Photronics, Inc.

("Photronics", "the Company", "we", “our”, or "us") is one of the world's leading manufacturers of photomasks, which are high-precision photographic quartz or glass plates containing microscopic images of electronic circuits.

Photomasks are a key element in the manufacture of semiconductors and flat-panel displays ("FPDs"), and are used as masters to transfer circuit patterns onto semiconductor wafers and FPD substrates during the fabrication of integrated circuits ("ICs" or “semiconductors”) and a variety of FPDs and, to a lesser extent, other types of electrical and optical components.

(“Photronics”, “the Company”, “we”, “our”, or “us”) is the world’s leading manufacturer of photomasks, which are high-precision photographic quartz or glass plates containing microscopic images of electronic circuits.

Photomasks are a key element in the manufacture of semiconductors and flat-panel displays (“FPDs”), and are used as masters to transfer circuit patterns onto semiconductor wafers and FPD substrates during the fabrication of integrated circuits (“ICs” or “semiconductors”), a variety of FPDs and, to a lesser extent, other types of electrical and optical components.

We currently have eleven manufacturing facilities, which are located in Taiwan ( 3 ), Korea, the United States ( 3 ), Europe ( 2 ), and two recently constructed facilities in China.

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Our estimates are based on the facts and circumstances available at the time they are made.

Actual results we report may differ from such estimates.

Subsequent actual results may differ from such estimates.

We review these estimates periodically and reflect any effects of revisions in the period in which they are determined.

Commencing with our 2018 fiscal year, our fiscal year ends on October 31.

In prior years, our fiscal years ended on the Sunday closest to October 31.

Prior year results in this Form 10-K have not been restated to reflect year-end dates of October 31.

Reclassifications

During fiscal 2020, we modified our consolidated statements of income to present foreign currency transaction (losses) gain, net as a separate line item.

Previously, the results of our foreign currency transactions were included in Interest income and other income (expense), net.

In addition, we modified our classifications of certain accrued liabilities presented in Note 6;

prior period amounts have been conformed to the current period presentation.

Cash and Cash Equivalents

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We generally record our accounts receivable at their billed amounts.

All outstanding past due customer invoices are reviewed for collectibility during, and at the end of, every period.

All outstanding past due customer invoices are reviewed for collectability during, and at the end of, every period.

To the extent that we believe a loss on the collection of a customer invoice is probable, we record the loss and credit the allowance for doubtful accounts.

In the event that an amount is determined to be uncollectible, we charge the allowance for doubtful accounts and eliminate the related receivable.

On November 1, 2020, we adopted Accounting Standards Update 2016-13 – “Measurement of Credit Losses” (“ASU 2016-13) which replaced the incurred loss model (which was required to be used to measure credit losses under previous accounting guidance) with an expected credit loss model.

Our adoption of ASU 2016-13 did not have a material effect on our financial statements.

Inventories are stated at the lower of cost, determined under the first-in, first-out (“FIFO”) method, or net realizable value.

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Upon sale or other disposition, the cost of the asset and its related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in earnings.

Depreciation and amortization, essentially all of which are included in cost of goods sold, are computed using the straight-line method over the estimated useful lives of the related assets.

Depreciation and amortization, essentially all of which are included in Cost of goods sold in our consolidated statements of income, are computed using the straight-line method over the estimated useful lives of the related assets.

Buildings and improvements are depreciated over 10 to 39 years, machinery and equipment over 5 to 15 years, and furniture, fixtures, and office equipment over 3 to 5 years.

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We employ judgment and assumptions when we establish estimated useful lives and depreciation periods, as well as 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.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

Determinations of recoverability are based upon our judgment and estimates of undiscounted future cash flows resulting from the use of the assets and their eventual disposition.

Measurement of an impairment loss for long-lived assets that we expect to hold and use is based on the fair value of the assets, determined using a market or income approach, compared with the carrying value of the asset.

The carrying values of assets determined to be impaired would be reduced to their estimated fair values.

Intangible Assets

Intangible assets consist primarily of a technology license agreement and acquisition-related intangibles.

These assets, except as explained below, are stated at fair value as of the date acquired, less accumulated amortization.

These assets are stated at fair value as of the date acquired, less accumulated amortization.

Amortization is calculated based on the estimated useful lives of the assets, which range from 3 to 15 years, using the straight-line method or another method that more fairly represents the utilization of the assets.

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An impairment loss, the recorded amount of which would be based on the fair value of the intangible asset at the measurement date, would be recorded in the period in which the impairment determination was made.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

Determinations of recoverability are based upon our judgment and estimates of undiscounted future cash flows resulting from the use of the assets and their eventual disposition.

Measurement of an impairment loss for long-lived assets that we expect to hold and use is based on the fair value of the assets determined using a market or income approach compared with the carrying value of the asset.

The carrying values of assets determined to be impaired would be reduced to their estimated fair values.

Restricted Cash

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The restrictions on these amounts are primarily related to land lease agreements and customs requirements.

Business Combinations

When acquiring other businesses, or participating in mergers or joint ventures in which we are deemed to be the acquirer, we generally recognize identifiable assets acquired, liabilities assumed and any noncontrolling interests at their acquisition date fair values, separately from any goodwill that may be required to be recognized.

Goodwill, when recognizable, would be measured as the excess amount of any consideration transferred, which is generally measured at fair value, over the acquisition date fair values of the identifiable assets acquired and liabilities assumed.

Accounting for such transactions requires us to make significant assumptions and estimates and, although we believe any estimates and assumptions we make to be reasonable and appropriate at the time they are made, unanticipated events and circumstances may arise that affect their accuracy, which may cause actual results to differ from those we estimated.

When required, we will adjust the values of the assets acquired and liabilities assumed against the acquisition gain or goodwill, as initially recorded, for a period of up to one year after the transaction.

Costs incurred to effect a merger or acquisition, such as legal, accounting, valuation and other third-party costs, as well as internal general and administrative costs incurred are charged to expense in the periods incurred.

Costs incurred to issue any debt and equity securities are recognized in accordance with other applicable generally accepted accounting principles.

Investments in Joint Ventures

The financial results of investments in joint ventures in which we have a controlling financial interest are included in our consolidated financial statements.

Investments in joint ventures over which we have the ability to exercise significant influence and that, in general, are at least twenty percent owned are accounted for under the equity method.

An impairment loss would be recognized whenever a decrease in the fair value of such an investment below its carrying amount is determined to be other than temporary.

In judging "other than temporary," we would consider the length of time and the extent to which the fair value of the investment has been less than its carrying amount, the near-term and longer-term operating and financial prospects of the investee, and our longer-term intent of retaining our investment in the investee.

Variable Interest Entities

We account for the investments we make in certain legal entities in which equity investors do not have 1) sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support or, 2) as a group, the holders of the equity investment at risk do not have either the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impact the entity’s economic performance or, 3) the obligation to absorb the expected losses of the legal entity or the right to receive expected residual returns of the legal entity as “variable interest entities”, or “VIEs”.

We consolidate the results of any such entity in which we have determined that we have a controlling financial interest.

We would have a “controlling financial interest” (and thus be considered the “primary beneficiary” of the entity) in such an entity when we have both the power to direct the activities that most significantly affect the VIE’s economic performance and the obligation to absorb the losses of, or right to receive the benefits from, the VIE that could be potentially significant to the VIE.

On a quarterly basis, we reassess whether we have a controlling financial interest in any investments we have in these entities.

We account for investments we make in VIEs in which we have determined that we do not have a controlling financial interest but have a significant influence over, and hold at least a twenty percent ownership interest in, using the equity method.

Any such investment not meeting the parameters to be accounted for under the equity method would be accounted for using the cost method, unless the investment had a readily determinable fair value, at which value it would then be reported.

The income tax provision is computed on the basis of the various tax jurisdictions' income or loss before income taxes.

Deferred income taxes reflect the tax effects of differences between the carrying amounts of assets and liabilities for financial reporting purposes and their amounts used for income tax purposes, as well as the tax effects of net operating losses and tax credit carryforwards.

We use judgment and make assumptions to determine if valuation allowances for deferred income tax assets are required, if their realization is not more likely than not, by considering future market growth, operating forecasts, future taxable income, and the mix of earnings among the tax jurisdictions in which we operate.

Accordingly, income taxes charged against earnings may have been impacted by changes in the valuation allowances.

We consider income taxes in each of the tax jurisdictions in which we operate in order to determine our effective income tax rate.

Our current income tax expense is thus identified, and temporary differences resulting from differing treatments of items for tax and financial reporting purposes are assessed.

These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets.

We account for uncertain tax positions by recording a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to be taken, in our tax returns.

We include any applicable interest and penalties related to uncertain tax positions in our income tax provision.

Treasury Stock

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Gains and losses on subsequent reissuances would be credited or charged to additional paid-in capital, and we would employ the average cost method (with average cost being determined separately for each share repurchase program), in the event that we subsequently reissue shares.

Earnings Per Share

Basic earnings per share ("EPS") is based on the weighted-average number of common shares outstanding for the period, excluding any dilutive common share equivalents.

Diluted EPS reflects the potential dilution that could occur if certain share-based payment awards or financial instruments were exercised, earned or converted.

Revenue Recognition

We recognize revenue when, or as, control of a good or service transfers to a customer, in an amount that reflects the consideration to which we expect to be entitled in exchange for transferring those goods or services.

We account for an arrangement as a revenue contract when each party has approved and is committed to perform under the contract, the rights of the contracting parties regarding the goods or services to be transferred and the payment terms are identifiable, the arrangement has commercial substance, and collection of consideration is probable.

Substantially all of our revenue comes from the sales of photomasks.

We typically contract with our customers to sell sets of photomasks, which are comprised of multiple layers, the predominance of which we invoice as they ship to customers.

As the photomasks are manufactured to customer specifications, they have no alternative use to us and, as our contracts generally provide us with the right to payment for work completed to date, we recognize revenue as we perform, or “over time,” on most of our contracts.

We measure our performance to date using an input method, which is based on our estimated costs to complete the various manufacturing phases of a photomask.

At the end of a reporting period, there will be a number of uncompleted revenue contracts on which we have performed;

for any such contracts under which we are entitled to be compensated for our costs incurred plus a reasonable profit, we recognize revenue and a corresponding contract asset for such performance.

We account for shipping and handling activities that we perform after a customer obtains control of a good as being activities to fulfill our promise to transfer the good to the customer, rather than as promised services, or performance obligations, under the contract.

We report our revenue net of any sales or similar taxes we collect on behalf of governmental entities.

As stated above, photomasks are manufactured to customer specifications in accordance with their proprietary designs;

thus, they are individually unique.

Due to their uniqueness and other factors, their transaction prices are individually established through negotiations with customers;

consequently, our photomasks do not have standard or “list” prices.

The transaction prices of the vast majority of our revenue contracts include only fixed amounts of consideration.

In certain instances, such as when we offer a customer an early payment discount, an estimate of variable consideration would be included in the transaction price, but only to the extent that a significant reversal of revenue would not occur when the uncertainty related to the variability is resolved.

Contract Assets, Contract Liabilities, and Accounts Receivable

We recognize a contract asset when our performance under a contract precedes our receipt of consideration from a customer, or before payment is due, and our receipt of consideration is conditional upon factors other than the passage of time.

Contract assets reflect our transfer of control to customers of photomasks that are in process or completed but not yet shipped.

A receivable is recognized when we have an unconditional right to payment for our performance, which generally occurs when we ship the photomasks.

Our contract assets primarily consist of a significant amount of our in-process production orders and fully manufactured photomasks which have not yet shipped, for which we have an enforceable right to collect consideration (including a reasonable profit) in the event the in-process orders are cancelled by customers.

On an individual contract basis, we net contract assets with contract liabilities (deferred revenue) for financial reporting purposes .

Contract assets of $ 6.3 million are included in Other current assets , and contract liabilities of $ 8.0 million and $ 5.2 million are included in Accrued liabilities and Other liabilities , respectively, in our October 31, 2020 consolidated balance sheet.

Our October 31, 2019 condensed consolidated balance sheet includes contract assets of $ 7.6 million, included in Other current assets , and contract liabilities of $ 11.5 million, included in Accrued liabilities .

We did no t impair any contract assets in fiscal years 2020 or 2019 .

In fiscal 2020 and 2019 , we recognized revenue of $ 2.8 million and $ 1.3 million, respectively, from the settlement of contract liabilities that existed at the beginning of those years.

Our invoice terms generally range from net thirty to ninety days , depending on both the geographic market in which the transaction occurs and our payment agreements with specific customers.

In the event that our evaluation of a customer’s business prospects and financial condition indicate that the customer presents a collectability risk, we modify terms of sale, which may require payment in advance of performance.

At the time of adoption, we elected the practical expedient allowed under ASC Topic 606 “Revenue from Contracts with Customers” (“Topic 606”) that permits us not to adjust a contract’s promised amount of consideration to reflect a financing component when the period between when we transfer control of goods or services to customers and when we are paid is one year or less.

In instances when we are paid in advance of our performance, we record a contract liability and, as allowed under the practical expedient in Topic 606, recognize interest expense only if the period between when we receive payment from the customer and the date when we expect to be entitled to the payment is greater than one year.

Historically, advance payments we’ve received from customers have generally not preceded the completion of our performance obligations by more than one year.

Contract Costs

We pay commissions to third-party sales agents for certain sales that they obtain for us.

However, the bases of the commissions are the transaction prices of the sales, which are completed in less than one year;

thus, no relationship is established with a customer that will result in future business.

Therefore, we would not recognize any portion of these sales commissions as costs of obtaining a contract, nor do we currently foresee other circumstances under which we would recognize such assets.

Remaining Performance Obligations

As we are typically required to fulfill customer orders within a short time period, our backlog of orders is generally not in excess of one to two weeks for IC photomasks and two to three weeks for FPD photomasks.

As allowed under Topic 606, we elected not to disclose our remaining performance obligations, which represent the costs associated with the completion of the manufacturing process of in-process photomasks related to contracts that have an original duration of one year or less.

Product Warranty

Our photomasks are sold under warranties that generally range from one to twenty-four months .

We warrant that our photomasks conform to customer specifications and we will typically repair, replace, or issue a refund for, at our option, any photomasks that fail to do so.

The warranties do not represent separate performance obligations in our revenue contracts.

Historically, customer claims under warranty have been immaterial .

Share-Based Compensation

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Foreign Currency Translation

Our non-US subsidiaries maintain their accounts in their respective local currencies.

subsidiaries maintain their accounts in their respective local currencies.

Assets and liabilities of such subsidiaries are translated to U.S.

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Foreign currency translation adjustments are accumulated and reported in accumulated other comprehensive income, a component of equity.

The effects of changes in exchange rates on foreign currency transactions, which are included in Interest income and other income (expense) net, were a net (loss)/gain of $( 1.3 ) million, $ 0.4 million and $( 5.2 ) million in fiscal years 2019, 2018 and 2017, respectively.

Noncontrolling Interests

Substantially all of Noncontrolling interests represents the minority shareholders' proportionate share in the equity of two of the Company's majority-owned subsidiaries:

Photronics DNP Mask Corporation (“PDMC”) in Taiwan, and Xiamen American Japan Photronics Mask Co., Ltd ("PDMCX") in China, of which noncontrolling interests owned 49.99 % as of October 31, 2019 and October 31, 2018.

In addition, noncontrolling shareholders owned approximately 0.2 % of PK Ltd.

(“PKL”) in Korea as of October 31, 2019 and October 31, 2018.

In November 2019, we acquired the remaining noncontrolling interests’ shares of PKL for approximately $ 0.6 million

Derivative Instruments and Hedging Activities

We record derivatives in the consolidated balance sheets as assets or liabilities, measured at fair value.

We do not engage in derivative instruments for speculative purposes.

Gains or losses resulting from changes in the values of derivatives are reflected in earnings, or as accumulated other comprehensive income or loss, a separate component of equity, depending on the use of the derivatives and whether they qualify for hedge accounting.

In order to qualify for hedge accounting, among other criteria, a derivative must be a hedge of an interest rate, price, foreign currency exchange rate, or credit risk that is expected to be highly effective at the inception of the hedge, be highly effective in achieving offsetting changes in the fair value or cash flows of the hedged item during the term of the hedge and formally documented at the inception of the hedge.

In general, the types of risks we would hedge are those related to the variability of future cash flows caused by movements in foreign currency exchange and interest rates.

We would document our risk management strategy and hedge effectiveness at the inception of, and during the term of, each hedge.

Revenue Recognition

We adopted Accounting Standards Update 2014-09 and all subsequent amendments which are collectively codified in Accounting Standards Codification Topic 606 - “Revenue from Contracts with Customers” (“Topic 606”) - on November 1, 2018, under the modified retrospective transition method, only with respect to contracts that were not complete as of the date of adoption.

This approach required prospective application of the guidance with a cumulative effect adjustment to retained earnings to reflect the impact of the adoption on contracts that were not complete as of the date of the adoption.

In accordance with the modified retrospective transition method, the results of the prior year period presented have not been adjusted for the effects of Topic 606.

Please see Note 7 for a detailed discussion of our revenue recognition and related accounting policies.

Product Warranty

Our photomasks are sold under warranties that generally range from one to twenty-four months .

We warrant that our photomasks conform to customer specifications, and will typically repair, replace, or issue a refund, at our option, any photomasks that fail to do so.

The warranties do not represent separate performance obligations in our revenue contracts.

Historically, customer claims under warranty have been immaterial.

Government Grants

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Funds we receive that cannot be attributed to specific assets or expenses would be recognized as other income, and included in Interest income and other income (expense), net in the consolidated statements of income.

Funds we receive from government grants are classified in our Consolidated Statement of Cash Flows as either cash flows from operating activities or cash flows from investing activities, in accordance with how we expend the funds.

NOTE 2 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

Funds we receive from government grants are classified in our consolidated statements of cash flows as either cash flows from operating activities or cash flows from investing activities, in accordance with how we expend the funds.

The income tax provision is computed on the basis of the various tax jurisdictions’ income or loss before income taxes.

Accordingly, income taxes charged against earnings may have been impacted by changes in the valuation allowances.

We consider income taxes in each of the tax jurisdictions in which we operate in order to determine our effective income tax rate.

Our current income tax expense is thus identified, and temporary differences resulting from differing treatments of items for tax and financial reporting purposes are assessed.

These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets.

We account for uncertain tax positions by recording a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to be taken, in our tax returns.

We include any applicable interest and penalties related to uncertain tax positions in our income tax provision.

Earnings Per Share

Basic earnings per share (“EPS”) is based on the weighted-average number of common shares outstanding for the period, excluding any dilutive common share equivalents.

Diluted EPS reflects the potential dilution that could occur if certain share-based payment awards or financial instruments were exercised, earned or converted.

Variable Interest Entities

We consolidate the results of any such entity in which we have determined that we have a controlling financial interest.

On a quarterly basis, we reassess whether we have a controlling financial interest in any investments we have in these entities.

We adopted ASU 2016-02 - “Leases (Topic 842 )” (“ASU 2016-02 ”) on November 1, 2019 .

As allowed by the guidance, we elected to adopt ASU 2016-02 using the modified retrospective method at the beginning of the period of adoption;

our adoption resulted in our recognition of $ 6.5 million of right-of-use (“ROU”) assets and $ 6.5 million of lease liabilities on our opening fiscal 2020 balance sheet.

At the time of transition, we elected a number of practical expedients offered by the guidance, which are described in Notes 9 and 23 .

The following discussion is germane to our accounting for leases under Topic 842 .

We determine if an arrangement is, or contains a lease, at the inception of the arrangement.

An arrangement is determined to be a lease when it conveys to us the right to control the use of an identified asset for a period of time in exchange for consideration.

Our determination as to whether we have the right to control the use of an identified asset centers on whether the arrangement conveys to us the rights to 1) obtain substantially all of the economic benefits of the identified asset and 2) direct the use of the identified asset.

If an arrangement is determined to be, or include, a lease, we then apply the classification criteria in Topic 842 to determine whether the lease is a finance lease or an operating lease.

For both types of leases, at their commencement dates (which are the dates on which a lessor makes an underlying asset available for our use), we recognize ROU assets, which represent our use of the underlying assets, and lease liabilities which represent our obligation to make payments for our right to use the related assets.

The initial measurement of both types of leases are the same and, in most cases, are determined by applying our incremental borrowing rate for collateralized borrowings over terms similar to the leases terms.

The initial measurement of ROU assets may require further adjustments for lease prepayments and initial direct costs we incur.

As allowed under Topic 842, we elected to not recognize short-term leases, which are defined as leases that have a term (at their commencement dates) of twelve months or less and do not include an option to purchase the underlying asset that we are reasonably certain to exercise.

Operating leases are expensed on a straight-line basis over the terms of the leases, and are included in the consolidated statement of income in Cost of goods sold, Selling, general and administrative, or Research and development expense in accordance with the use of the underlying asset.

Finance lease ROU assets are amortized over the estimated useful life of the underlying asset;

the expense is included in the consolidated statement of income on the line item associated with the underlying asset (similar to operating lease expenses).

Finance lease liabilities are subsequently remeasured by increasing the liability to reflect interest accrued during a period and decreasing the liability to reflect payments made during the period.

Interest expense incurred on finance leases are included in Interest expense on the consolidated statements of income.

Operating lease ROU assets are included in the fiscal year 2020 consolidated balance sheet in Other assets.

Operating lease liabilities due within one year are predominantly included in the consolidated balance sheets in Accrued liabilities;

noncurrent operating lease liabilities are included in Other liabilities.

Finance lease ROU assets are included in the consolidated balance sheets in Property, plant and equipment.

Finance lease liabilities are included in the fiscal year 2020 consolidated balance sheet in Current portion of long-term debt or Long-term debt, in accordance with the timing of their related lease payments.

NOTE 2 – OTHER CURRENT ASSETS

Other current assets consists of the following:

Recoverable value added taxes

Contract assets

Prepaid expenses

Prepaid and refundable income taxes

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consists of the following:

Buildings and improvements

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Accumulated depreciation and amortization

In January 2017, we entered into a noncash transaction with a customer which resulted in the acquisition of equipment with a fair value of approximately $ 6.7 million in fiscal year 2018.

NOTE 4 - INTANGIBLE ASSETS

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Software and other

The weighted-average amortization period of intangible assets acquired in fiscal year 2019, which is comprised of software, is three years .

The weighted-average amortization period of intangible assets acquired in fiscal year 2018 was three years ;

these intangible assets were comprised of software.

Intangible asset amortization over the next five years is estimated to be as follows:

The weighted-average amortization periods of intangible assets acquired in fiscal years 2020 and 2019 , which are comprised of software, is three years .

Intangible asset amortization over the next five years and thereafter is estimated to be as follows:

Fiscal Years:

NOTE 5 - PDMCX JOINT VENTURE

In January 2018, Photronics, through its wholly-owned Singapore subsidiary (hereinafter, within this Note “we”, or “Photronics”), and Dai Nippon Printing Co., Ltd., through its wholly owned subsidiary “DNP Asia Pacific PTE, Ltd.” (hereinafter, within this Note “DNP”) entered into a joint venture under which DNP obtained a 49.99 % interest in our recently established IC business in Xiamen, China.

In January 2018, Photronics, through its wholly-owned Singapore subsidiary (hereinafter, within this Note “we”, “Photronics”, or “our”), and Dai Nippon Printing Co., Ltd., through its wholly owned subsidiary “DNP Asia Pacific PTE, Ltd.” (hereinafter, within this Note “DNP”) 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.” (hereinafter, “PDMCX”), was established to develop and manufacture photomasks for leading edge and advanced generation semiconductors.

We entered into this joint venture to enable us to compete more effectively for the merchant photomask business in China, and to benefit from the additional resources and investment that DNP will provide to enable us to offer advanced-process technology to our customers.

We entered into this joint venture to enable us to compete more effectively for the merchant photomask business in China, and to benefit from the additional resources and investment that DNP provides to enable us to offer advanced-process technology to our customers.

No gain or loss was recorded upon the formation of this joint venture.

The total investment per the PDMCX operating agreement (“the Agreement”) is $ 160 million.

As of October 31, 2019, Photronics and DNP had each contributed cash of approximately $ 48 million, and PDMCX obtained local financing of $ 34.5 million.

The remaining $ 29 million investment will be funded, over the next several quarters, with additional local financing of $ 15 million and approximately $ 14 million of cash contributions from Photronics and DNP.

As of October 31, 2020, Photronics and DNP had each contributed cash of approximately $ 65 million, and PDMCX obtained local financing of approximately $ 50 million;

thus both parties have fulfilled and exceeded their initial investment commitments under the Agreement.

As discussed in Note 7, liens were granted to the local financing entity on property, plant and equipment with a total carrying value of $ 94.5 million, as collateral for the loans.

Under the 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 and cannot be resolved between the two parties.

As of the date of issuance of these financial statements, 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.

We recorded net losses from the operations of PDMCX of approximately $ 4.9 million and $ 0.7 million in fiscal 2019 and 2018, respectively.

General creditors of PDMCX do not have recourse to the assets of Photronics, Inc., and our maximum exposure to loss respectively from PDMCX at October 31, 2019, was $ 39.6 million.

We recorded net losses from the operations of PDMCX of approximately $ 4.7 million, $ 4.9 million and $ 0.7 million in fiscal 2020, 2019 and 2018, respectively.

General creditors of PDMCX do not have recourse to the assets of Photronics (other than the assets of PDMCX), and our maximum exposure to loss respectively from PDMCX at October 31, 2020, was $ 54.8 million.

As required by the guidance in Topic 810 - “Consolidation” of the Accounting Codification Standards, we evaluated our involvement in PDMCX for the purpose of determining whether we should consolidate its results in our financial statements.

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Due to its lack of sufficient equity at risk to finance its activities without additional subordinated financial support, we determined that it is a VIE.

Having made this determination, we then assessed whether we were the primary beneficiary of the VIE, and concluded that we were the primary beneficiary during the current and prior year reporting periods;

thus, as required, the PDMCX financial results have been consolidated with Photronics, Inc.

thus, as required, the PDMCX financial results have been consolidated with Photronics.

Our conclusion was based on the fact that we held a controlling financial interest in PDMCX (which resulted from our having the power to direct the activities that most significantly impacted its economic performance) and had both the obligation to absorb losses and the right to receive benefits that could potentially be significant to PDMCX.

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Current assets

Non-current assets

Noncurrent assets

Current liabilities

Non-current liabilities

Noncurrent liabilities

Total liabilities

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Contract liabilities

Property, plant, and equipment

Operating leases

Value added and other taxes

Contract manufacturing

Professional fees

Telecommunications and utilities

Accrued liabilities

NOTE 7 - LONG-TERM DEBT

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Working Capital Loans (value added tax component)

3.25 % convertible senior notes matured April 2019

Current portion of long-term debt

Long-term debt

At October 31, 2019, maturities of our long-term debt over the next five years and thereafter were as follows:

As of October 31, 2019, the weighted-average interest rate of our short-term debt was 3.84 % .

Interest payments were $ 2.6 million, $ 1.9 million, and $ 2.1 million, in fiscal years 2019, 2018 and 2017, respectively.

Project Loans

In November 2018, 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.

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 .

At October 31, 2020, maturities of our long-term debt over the next five fiscal years and thereafter were as follows:

As of October 31, 2020 and October 31, 2019, the weighted-average interest rates of our short-term debt were 2.02 % and 3.84 % , respectively.

Interest payments, including capitalized interest of $ 0.1 million in fiscal 2020, were $ 2.6 million in fiscal 2020 and 2019, and $ 1.9 million in fiscal 2018.

Xiamen Project Loans

In November 2018, PDMCX was approved for credit of 345 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 interest in land, building, and certain equipment, which had a combined carrying value of $ 94.5 million as of October 31, 2020, as collateral for the Project Loans.

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

Payments on these borrowings are due semiannually through December 2025 ;

an initial payment of 9.0 million RMB ($ 1.3 million) was made in June 2020.

The table below presents, in U.S.

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Principal payments

The interest rates on the Project Loans are based on the benchmark lending rate of the People’s Bank of China ( 4.9 % at October 31, 2019).

Interest incurred on the loans will be reimbursed through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provide for such reimbursements up to a prescribed limit.

Working Capital Loans

In November 2018, PDMCX received approval for unsecured credit of $ 25.0 million, pursuant to which PDMCX may enter into separate loan agreements.

The interest rates on the Project Loans are variable and are based on the RMB Loan Prime Rate of the National Interbank Funding Center ( 4.9 % at October 31, 2020).

Interest incurred on the loans is eligible for reimbursement through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provide for such reimbursements up to a prescribed limit.

The Company has covenants and provisions in its Project loans, certain of which relate to the assets pledged as security for these agreements;

the Company was not in compliance with those provisions as of October 31, 2020.

The Company obtained waivers for all specified noncompliance.

Hefei Equipment Loan

In October 2020, we were approved to borrow 200 million RMB (approximately $ 29.8 million) 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.

The 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.

Xiamen Working Capital Loans

In November 2018, PDMCX received approval for unsecured credit of the equivalent 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 93.2 million RMB ($ 13.9 million) outstanding against the approval to pay VAT.

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

PDMCX made installment payments totaling $ 0.1 million during the year ended October 31, 2019.

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

The table below presents, in U.S.

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Principal payments

As of October 31, 2019, PDMCX had borrowed, in several transactions, 36.8 million RMB ($ 5.2 million) against the approval to fund operations, all of which was outstanding as of that date;

As of October 31, 2020, PDMCX had 8.0 million RMB ($ 1.2 million) outstanding against the approval to fund operations;

repayments are due one year from the borrowing dates;

In November 2019, PDMCX borrowed an additional 8.0 million RMB ($ 1.1 million) against this approval.

The interest rates on borrowings to fund operations are approximately 4.6 % and interest rates on borrowings to pay VAT are approximately 4.9 %;

both rates are based on the RMB Loan Prime Rate of the National Interbank Funding Center, plus spreads that range from 25.75 to 67.75 basis points.

Interest incurred on the loans will be reimbursed through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provide for such reimbursements up to a prescribed limit.

as such, we have classified this borrowing as short-term debt.

At October 31, 2020, the interest rate on the borrowing to fund operations is 4.6 %, and interest rates on borrowings to pay VAT are approximately 4.53 to 4.61 %;

both rates are variable and are based on the RMB Loan Prime Rate of the National Interbank Funding Center, plus spreads that range from 40.00 to 76.00 basis points.

Interest incurred on the VAT loans are eligible for reimbursement through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which provide for such reimbursements up to a prescribed limit.

Equipment Loan #1

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In the fourth quarter of fiscal 2019, the financing entity, upon our request, made an advance payment of $ 3.5 million to the equipment vendor on our behalf.

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.

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.

We intend to enter into a lease agreement for the related equipment in fiscal year 2021;

as such, we have classified this borrowing as current debt.

as such, we have classified this borrowing as short-term debt.

All borrowings under the MLA are secured by the equipment to be leased or purchased.

3.25% Convertible Senior Notes

In January 2015, we privately exchanged $ 57.5 million in aggregate principal amount of our 3.25 % convertible senior notes with a maturity date of April 1, 2016 , for new 3.25 % convertible senior notes with an aggregate principal amount of $ 57.5 million with a maturity date of April 1, 2019 .

The conversion rate of the new notes was the same as that of the exchanged notes, which were issued in March 2011 with a conversion rate of approximately 96 shares of common stock per $ 1,000 note principal, equivalent to a conversion price of $ 10.37 per share of common stock.

In April 2019, the entire $ 57.5 million principal amount was repaid upon maturity.

Credit Agreement

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

Equipment Loan #2

In October 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.

Corporate Credit Agreement

In September 2018, we entered into a five-year amended and restated credit agreement (the “Credit Agreement”), which has a $ 50 million borrowing limit, with an expansion capacity to $ 100 million.

The Credit Agreement 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 cash dividends, distributions, and redemptions we can pay on our common stock to an aggregate amount of $ 100 million in 2019 and $ 50 million annually thereafter.

The Credit Agreement includes covenants around minimum interest coverage ratio, total leverage ratio, and minimum unrestricted cash balance (all of which we were in compliance with at October 31, 2020), and limits the amount of cash dividends, distributions, and redemptions we can pay on our common stock to an aggregate annual amount of $ 50 million.

We had no outstanding borrowings against the Credit Agreement at October 31, 2020, and $ 50 million was available for borrowing.

The interest rate on the Credit Agreement ( 1.14 % at October 31, 2020) is based on our total leverage ratio at LIBOR plus a spread, as defined in the Credit Agreement.

3.25% Convertible Senior Notes

In April 2019, the entire $ 57.5 million principal amount was repaid upon maturity.

NOTE 8 - REVENUE

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In accordance with the modified retrospective transition method, the results of the prior year period presented have not been adjusted for the effects of Topic 606.

Under Topic 606, we recognize revenue when, or as, control of a good or service transfers to a customer, in an amount that reflects the consideration to which we expect to be entitled in exchange for transferring those goods or services, whereas, prior to our adoption of Topic 606, we recognized revenue when we shipped to customers or, under some arrangements, when the customers received the goods.

The following tables present the impacts of our adoption of Topic 606 on our consolidated balance sheet, and consolidated statements of income and cash flows for the year ended October 31, 2019.

Consolidated Balance Sheet

October 31, 2019

Balance without

Adoption of Topic 606

Accounts receivable

Other current assets

Deferred income taxes

Accrued liabilities

Photronics, Inc.

shareholders’ equity

Noncontrolling interests

Consolidated Statement of Income

Year Ended October 31, 2019

Balance without

Adoption of Topic 606

Cost of goods sold

Provision for taxes

Noncontrolling interests

Income attributable to Photronics, Inc.

Consolidated Statement of Cash Flows

Year Ended October 31, 2019

Balance without

Adoption of Topic 606

Changes in operating accounts:

Accounts receivable

Other current assets

Accounts payable, accrued liabilities, and other

Substantially all of our revenue comes from the sales of photomasks.

We typically contract with our customers to sell sets of photomasks (referred to as “mask sets”), which are comprised of multiple layers, the predominance of which we invoice as they ship to customers.

We measure our performance to date using an input method, which is based on our estimated costs to complete the various manufacturing phases of a photomask.

At the end of a reporting period, there will be a number of revenue contracts on which we have performed;

for any such contracts that we are entitled to be compensated for our costs incurred plus a reasonable profit, we recognize revenue and a corresponding contract asset for such performance.

As stated above, photomasks are manufactured in accordance with proprietary designs provided by our customers;

thus, they are individually unique.

Due to their uniqueness and other factors, their transaction prices are individually established through negotiations with customers;

consequently, our photomasks do not have standard or “list” prices.

The transaction prices of the vast majority of our revenue contracts include only fixed amounts of consideration.

Contract Assets, Contract Liabilities, and Accounts Receivable

Contract assets reflect our transfer of control to customers of photomasks that are in process or completed but not yet shipped.

A receivable is recognized when we have an unconditional right to payment for our performance, which generally occurs when we ship the photomasks.

On an individual contract basis, we net contract assets with contract liabilities (deferred revenue) for financial reporting purposes.

Our contract assets and liabilities are typically classified as current, as our production cycle and our lead times are both under one year.

Contract assets of $ 7.6 million are included in “Other” current assets, and contract liabilities of $ 11.5 million are included in Accrued liabilities in our October 31, 2019 consolidated balance sheet.

At November 1, 2018, our date of adoption of Topic 606, we had contract assets of $ 4.6 million and contract liabilities of $ 7.8 million.

We did not impair any contract assets during the year period ended October 31, 2019, and we recognized $ 1.3 million of revenue from the settlement of contract liabilities that existed at the beginning of the year.

We generally record our accounts receivable at their billed amounts.

All outstanding past due customer invoices are reviewed during, and at the end of, every period for collectibility.

To the extent we believe a loss on the collection of a customer invoice is probable, we record the loss and credit the allowance for doubtful accounts.

In the event that an amount is determined to be uncollectible, we charge the allowance for doubtful accounts and eliminate the related receivable.

Credit losses incurred on our accounts receivable during the year ended October 31, 2019, were immaterial.

Our invoice terms generally range from net thirty to ninety days, depending on both the geographic market in which the transaction occurs and our payment agreements with specific customers.

In the event that our evaluation of a customer’s business prospects and financial condition indicate that the customer presents a collectibility risk, we require payment in advance of performance.

We have elected the practical expedient allowed under Topic 606 that permits us not to adjust a contract’s promised amount of consideration to reflect a financing component when the period between when we transfer control of goods or services to customers and when we are paid is one year or less.

Historically, advance payments we’ve received from customers have not preceded the completion of our performance obligations by more than one year.

In accordance with the modified retrospective transition method, the results of fiscal 2018 presented have not been adjusted for the effects of Topic 606.

Please refer to Note 1 for information on our revenue recognition policies.

Disaggregation of Revenue

The following tables present our revenue for the year ended October 31, 2019, disaggregated by product type, geographic origin, and timing of recognition.

The following tables present our revenue for the years ended October 31, 2020 and October 31, 2019, disaggregated by product type, geographic origin, and timing of recognition.

Revenue by Product Type

October 31, 2020

October 31, 2019

Revenue by Geographic Origin

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At a point in time

Contract Costs

We pay commissions to third party sales agents for certain sales that they obtain for us.

However, the bases of the commissions are the transaction prices of the sales, which are completed in less than one year;

thus, no relationship is established with a customer that will result in future business.

Therefore, we would not recognize any portion of these sales commissions as costs of obtaining a contract, nor do we currently foresee other circumstances under which we would recognize such assets.

Remaining Performance Obligations

As allowed under Topic 606, we have elected not to disclose our remaining performance obligations, which represent the costs associated with the completion of the manufacturing process of in-process photomasks related to contracts that have an original duration of one year or less.

Sales and Similar Taxes

We report our revenue net of any sales or similar taxes we collect on behalf of governmental entities.

Product Warranty

Our photomasks are sold under warranties that generally range from one to twenty-four months .

We warrant that our photomasks conform to customer specifications, and will typically repair, replace, or issue a refund, at our option, any photomasks that fail to do so.

The warranties do not represent separate performance obligations in our revenue contracts.

Historically, customer claims under warranty have been immaterial.

NOTE 8 - OPERATING LEASES

We lease various real estate and equipment under non-cancelable operating leases, for which rent expense was $ 3.0 million, $ 2.9 million, and $ 3.0 million in fiscal 2019, 2018, and 2017, respectively.

At October 31, 2019, future minimum lease payments under non-cancelable operating leases with initial terms in excess of one year were as follows:

We adopted ASU 2016-02 and all subsequent amendments, collectively codified in ASC Topic 842 “Leases” (“Topic 842”), on November 1, 2019.

NOTE 9 - LEASES

We adopted Accounting Standards Update (“ASU”) 2016-02 and all subsequent amendments, collectively codified in ASC Topic 842 “Leases” (“Topic 842 ”), on November 1, 2019.

The guidance requires modified retrospective adoption, either at the beginning of the earliest period presented or at the beginning of the period of adoption.

we have elected to apply the guidance at the beginning of the period of adoption.

See Note 22 for further information on our adoption of Topic 842.

We elected to apply the guidance at the beginning of the period of adoption and recorded, as of November 1, 2019, right-of-use (ROU) leased assets of $ 6.5 million.

In conjunction with this, we recorded lease liabilities, which had been discounted at our incremental borrowing rates, of $ 6.5 million.

The impact of our adoption of Topic 842 on our current and deferred income taxes was immaterial.

The guidance allows a number of elections and practical expedients, of which we elected the following:

Election not to recognize short-term leases on the balance sheet.

Practical expedient to not separate lease and non-lease components in a contract.

Practical expedient “package” for transitioning to the new guidance:

Not reassessing whether any expired or existing contracts are, or contain, leases.

Not reassessing lease classification for any existing or expired leases.

Not reassessing initial direct costs for any existing leases.

Our involvement in lease arrangements has typically been as a lessee.

We determine if an agreement is or contains a lease on the date of the lease agreement or commitment, if earlier.

Our evaluation considers whether the arrangement includes an identified asset and whether it affords us the right to control the asset.

Our having the right to control the identified asset is determined by whether we are entitled to substantially all of its economic benefits and can direct its use.

We recognize leases on our consolidated balance sheet when a lessor makes an asset underlying a lease having a term in excess of twelve months available for our use.

The present value of lease payments over the term of the lease, which is determined using our incremental borrowing rate for collateralized loans at the commencement date of the lease, provides the basis for the initial measurement of ROU assets and their related lease liabilities.

Variable lease payments, other than those that are dependent on an index or on a rate, are not included in the measurement of ROU assets and their related lease liabilities.

Lease terms will include extension periods if the lease agreement includes an option to extend the lease that we are reasonably certain to exercise.

Please refer to Note 1 for additional information on our leases accounting policies.

ROU assets underlying our leases include the land and facilities of some of our operating facilities, other real property, and machinery and equipment.

As of October 31, 2020, we had ROU assets under operating leases of $ 7.7 million, included in Other Assets, and $ 2.2 million and $ 5.0 million of lease liabilities, included in Accrued liabilities and Other liabilities, respectively, on the consolidated balance sheet.

The following tables present lease payments under non-cancellable leases as of October 31, 2020.

Lease payments

* Imputed interest represents difference between undiscounted cash flows and discounted cash flows.

As of October 31, 2020, we had entered into operating leases, which had not yet commenced, with aggregate underlying ROU assets and corresponding lease liabilities of $ 0.1 million.

The following table presents lease costs for the year ended October 31, 2020.

October 31, 2020

Operating lease costs

Short-term lease costs

Variable lease costs

Presented below is other information related to our operating leases.

Supplemental cash flows information:

October 31, 2020

Operating cash flows used for operating leases

ROU assets obtained in exchange for operating lease obligations

October 31, 2020

Weighted-average remaining lease term

Weighted-average discount rate

Rent expense, as calculated under guidance in effect prior to our adoption of the new leases guidance, was $ 3.0 million in fiscal year 2019.

At October 31, 2019, future minimum lease payments under non-cancelable operating leases with initial terms in excess of one year were as presented in the table below.

The amounts are undiscounted and were calculated in accordance with guidance in effect prior to our adoption of the new leases guidance.

NOTE 10 – SHARE-BASED COMPENSATION

In March 2016, shareholders approved a new equity incentive compensation plan (“the Plan”), under which incentive stock options, non-qualified stock options, stock grants, stock-based awards, restricted stock, restricted stock units, stock appreciation rights, performance units, performance stock, and other stock or cash awards may be granted.

Shares to be issued under the Plan may be authorized and unissued shares, issued shares that have been reacquired by us (in the open-market or in private transactions), shares held in the treasury, or a combination thereof.

Shares to be issued under the Plan may be authorized and unissued shares, issued shares that have been reacquired by us (in the open-market or in private transactions), or a combination thereof.

The maximum number of shares of common stock approved that may be issued under the Plan is four million shares.

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We incurred total share-based compensation expenses of $ 4.9 million, $ 3.7 million, and $ 3.2 million in fiscal years 2020, 2019, and 2018, respectively.

No share-based compensation cost was capitalized as part of an asset and no related income tax benefits were recorded during the fiscal years presented.

No share-based compensation cost was capitalized as part of an asset, and $ 0.2 million of related income tax benefits were recorded during the fiscal years presented.

Restricted Stock

We periodically grant restricted stock awards, the restrictions on which typically lapse over a service period of one to four years .

The fair values of the awards are determined on the date of grant, based on the closing stock price of our common stock.

There were 538,000 , 435,000 , and 290,000 restricted stock awards granted during fiscal years, 2020, 2019 and 2018, respectively.

The weighted-average grant-date fair values of those awards were $ 15.08 , $ 9.80 and $ 8.62 .

The total fair value of awards for which restrictions lapsed was $ 3.0 million, $ 1.9 million and $ 1.4 million during fiscal years 2020, 2019 and 2018, respectively.

As of October 31, 2020, the total compensation cost for restricted stock awards not yet recognized was approximately $ 6.9 million.

That cost is expected to be recognized over a weighted-average amortization period of 2.8 years.

A summary of restricted stock award activity during fiscal year 2020 and the status of our outstanding restricted stock awards as of October 31, 2020, is presented below:

Restricted Stock

Weighted-Average

Fair Value at

Outstanding at October 31, 2019

Outstanding at October 31, 2020

Expected to vest as of October 31, 2020

Stock Options

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Treasury yield curve in effect at the date of grant.

The weighted-average inputs and risk-free rate of return ranges used to calculate the grant date fair value of options issued during fiscal years 2019, 2018 and 2017 are presented in the following table:

There were no stock option awards granted during fiscal year 2020.

The weighted-average inputs and risk-free rate of return ranges used to calculate the grant-date fair value of stock options granted during fiscal years 2019 and 2018 are presented in the following table:

Expected volatility

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That cost is expected to be recognized over a weighted-average amortization period of 1.7 years.

Restricted Stock

We periodically grant restricted stock awards, the restrictions on which typically lapse over a service period of one to four years.

The fair value of an award is the closing stock price of our common stock on the date of grant.

There were 435,000 , 290,000 , and 317,750 restricted stock awards granted during fiscal years, 2019, 2018 and 2017, respectively.

The weighted-average grant date fair values of those awards were $ 9.80 , $ 8.62 and $ 10.94 .

The total fair value of awards for which restrictions lapsed was $ 1.9 million, $ 1.4 million and $ 1.2 million during fiscal years 2019, 2018 and 2017, respectively.

As of October 31, 2019, the total compensation cost for restricted stock awards not yet recognized was approximately $ 4.3 million.

That cost is expected to be recognized over a weighted-average amortization period of 2.6 years.

A summary of restricted stock award activity during fiscal year 2019 and the status of our outstanding restricted stock awards as of October 31, 2019, is presented below:

Restricted Stock

Weighted-Average

Fair Value at

Outstanding at October 31, 2018

Outstanding at October 31, 2019

Expected to vest as of October 31, 2019

Employee Stock Purchase Plan

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As of October 31, 2020, the maximum number of shares of common stock approved by our shareholders to be purchased under the ESPP was 1.85 million shares, of which approximately 1.5 million shares had been issued through October 31, 2020.

No shares were subject to outstanding subscriptions as of October 31, 2019.

As of October 31, 2020, 0.1 million shares were subject to outstanding subscriptions.

NOTE 11 - EMPLOYEE RETIREMENT PLANS

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The fiscal year 2020 effective tax rate differs from the U.S.

statutory rate of 21 % primarily due to loss jurisdiction pre-tax losses not being benefited due to valuation allowances, non-U.S.

pre-tax income being taxed at higher statutory rates in the non-U.S.

jurisdictions (partially offset by the benefits of a tax holiday), and investment credits in foreign jurisdictions.

The fiscal year 2019 effective tax rate differs from the U.S.

statutory rate of 21 % due to the recognition of a benefit related to previously unrecognized tax positions, loss jurisdiction pre-tax losses being benefited at higher statutory rates than pre-tax income in income jurisdictions was taxed, changes in deferred tax asset valuation allowance, the benefits of a tax holiday, and investment credits in foreign jurisdictions.

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Tax Cuts and Jobs Act (discussed below) allowing for the refund of AMT credits that caused a corresponding reversal of the related valuation allowance, the recognition of a benefit related to previously unrecognized tax positions, earnings being taxed at lower statutory rates in foreign jurisdictions, the benefits of a tax holiday, and investment credits in foreign jurisdictions.

The fiscal year 2017 effective tax rate differs from the U.S.

statutory rate of 35 % primarily due to earnings being taxed at lower statutory rates in foreign jurisdictions, changes in deferred tax asset valuation allowances, including the reversals noted below, together with the benefit of various investment credits in a foreign jurisdiction.

We were granted two five -year tax holidays in Taiwan, one that expired unused in 2017 and the other that expires at the end of calendar year 2019 .

The latter tax holiday reduced foreign taxes by $ 2.2 million, $ 2.6 million and $ 0.7 million in fiscal years 2019, 2018 and 2017, respectively, with an $ 0.02 and $ 0.035 cents per share impact in fiscal 2019 and 2018, respectively, and a de minimis per share effect in the fiscal 2017.

We were granted a five-year tax holiday in Taiwan that expired on December 31, 2019 .

This tax holiday reduced foreign taxes by $ 0.1 million, $ 2.2 million and $ 2.6 million in fiscal years 2020, 2019 and 2018, respectively, with an $ 0.02 and $ 0.035 cents per share impact in fiscal 2019 and 2018, respectively, and an immaterial per share effect in fiscal 2020.

On December 22, 2017, the U.S.

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Share-based compensation

Alternative minimum tax credits

Property, plant and equipment

Valuation allowances

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We have established a valuation allowance for a portion of our deferred tax assets because we believe, based on the weight of all available evidence, that it is more likely than not that a portion of our net operating loss carryforwards will expire prior to utilization.

In fiscal year 2019, the valuation allowance increased as a result of increase in fully valued net operating losses.

During fiscal year 2018, the valuation allowance decrease primarily resulted from the reversal of the valuation allowance related to alternative minimum tax credits of $ ( 3.9 ) million (as a consequence of the Act), prior year additional NOL utilization of $ ( 1.8 ) million, credit utilizations of $ ( 1.3 ) million, changes in the deferred tax liability of $ 2.8 million, $ 1.8 million from the adoption of ASU 2016-09 related to stock compensation, $ 1.6 million from the corporate tax rate reduction, and other impacts of $ ( 0.4 ) million.

In fiscal 2020 the valuation allowance increased as a result of management’s determination that tax benefits on losses incurred in a non-U.S.

jurisdiction would not more likely than not be realized and, therefore, increased the valuation allowance to include these net operating losses.

In fiscal 2019, the valuation allowance increased as a result of an increase in fully valued net operating losses.

Due to the Act, as of fiscal year end 2018, U.S.

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The purpose of the Rights Agreement is to deter trading of our common stock that would result in a change in control (as defined in Internal Revenue Control Section 382), thereby preserving our future ability to use our historical federal net operating losses and other Tax Attributes (as defined in the Rights Agreement).

In connection with our entry into the Rights Agreement, our board of directors declared a dividend of one preferred stock purchase right, payable on or about October 1, 2019, for each share of common stock, par value $ 0.01 per share, of the Company’s outstanding on September 30, 2019, to the stockholders of record on that date.

In connection with our entry into the Rights Agreement, our board of directors declared a dividend of one preferred stock purchase right, for each share of the Company’s common stock, par value $ 0.01 per share, outstanding on September 30, 2019, to the stockholders of record on that date.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, is as follows:

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Balance at end of year

As of October 31, 2019, October 31, 2018 and October 29, 2017, the balance of unrecognized tax benefits, which are included in Other liabilities, includes $ 1.9 million, $ 1.9 million, and $ 3.4 million, respectively, that, if recognized, would impact the effective tax rates.

Included in each of these amounts were interest and penalties of $ 0.2 million, $ 0.1 million, and $ 0.1 million, at the end of fiscal year 2019, 2018, and 2017, respectively.

At October 31, 2020, October 31, 2019 and October 31, 2018, unrecognized tax benefits, which are included in Other liabilities, include $ 2.0 million $ 1.9 million, and $ 1.9 million, respectively, that, if recognized, would impact the effective tax rates.

Included in each of these amounts were interest and penalties of $ 0.1 million, $ 0.2 million, and $ 0.1 million, at the end of fiscal years 2020, 2019, and 2018, respectively.

We include any applicable interest and penalties related to uncertain tax positions in our income tax provision.

The amounts reflected in the table above include settlements of non-U.S.

Although the timing of the expirations of statutes of limitations may be uncertain, as they can be dependent upon the settlement of tax audits, the Company believes that the amount of uncertain tax positions (including accrued interest and penalties, and net of tax benefits) that may be resolved over the next twelve months is immaterial.

Resolution of these uncertain tax positions may result from either or both the lapses of statutes of limitations and tax settlements.

Resolution of these uncertain tax positions may result from either or both the lapses of statutes of limitations and/or tax settlements.

The Company is no longer subject to tax authority examinations in the U.S., major foreign, or state tax jurisdictions for years prior to fiscal year 2015.

Income tax payments were $ 15.9 million, $ 6.1 million and $ 9.3 million in fiscal years 2019, 2018 and 2017, respectively.

Cash received as refunds of income taxes paid in prior years amounted to $ 1.1 million and $ 0.1 million in fiscal years 2018 and 2017, respectively, with an immaterial amount being received in fiscal year 2019.

Adoption of New Accounting Standard

In the first quarter of 2019, the Company adopted Accounting Standards Update No.

2016-16 – “Intra-Entity Transfers Other Than Inventory”, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.

In connection therewith, we recorded a transition adjustment of $ 1.1 million that reduced prepaid income taxes (included in Other current assets in the consolidated balance sheets) against beginning retained earnings.

Income tax payments were $ 23.0 million, $ 15.9 million and $ 6.1 million in fiscal 2020, 2019 and 2018, respectively.

Cash received as refunds of income taxes paid in prior years amounted to $ 4.3 million in fiscal 2020, $ 1.1 million in fiscal 2018, and an immaterial amount in fiscal 2019.

NOTE 13 - EARNINGS PER SHARE

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Effect of dilutive securities:

Interest expense on convertible notes, net of related tax effects

Earnings for diluted earnings per share

Interest expense on convertible notes, net of tax

Earnings used for diluted earnings per share

Weighted-average common shares computations:

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Effect of dilutive securities:

Convertible notes

Share-based payment awards

Convertible notes

Potentially dilutive common shares

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Diluted earnings per share

The table below shows the outstanding weighted-average share-based payment awards that were excluded from the calculation of diluted earnings per share because their exercise price exceeded the average market value of the common shares for the period or, under application of the treasury stock method, they were otherwise determined to be antidilutive.

The table also shows convertible notes that, if converted, would have been antidilutive.

The table below illustrates the outstanding weighted-average share-based payment awards that were excluded from the calculation of diluted earnings per share because their exercise price exceeded the average market value of the common shares for the period or, under application of the treasury stock method, they were otherwise determined to be antidilutive.

Share based payment awards

Convertible notes

Total potentially dilutive shares excluded

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As of October 31, 2020, we had outstanding purchase commitments of $ 130 million, $ 112 million of which was for capital equipment.

Included in the latter amount is $ 30.8 million which we intend to finance under a capital lease.

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

See Note 8 for information on our operating lease commitments.

As of October 31, 2020, we had recorded liabilities for the purchase of equipment of $ 15 million.

The Company’s wholly owned subsidiary in South Korea has been involved in litigation regarding a 2016 informational tax filing for its non-South Korean bank accounts that was not timely made under a then recently issued presidential decree.

A fine (based solely on the amount in such accounts) in the amount of $ 2.2 million was assessed against our subsidiary.

Our subsidiary appealed the fine on the grounds that it was not required to make the tax filing, and such appeal was pursued up to the Supreme Court in South Korea.

Under South Korean law, the tax authorities were entitled to pursue the matter in both civil and criminal courts simultaneously, with the proviso that any criminal fine imposed would act to dismiss any civil fine.

The prosecutor recommended a fine of $ 0.03 million.

The civil matter has subsequently been dismissed.

Photronics was notified on March 12, 2020, that the Supreme Court rendered a decision against our subsidiary on the issue of whether our subsidiary was required to make the tax filing and remanded the case to the appellate court for determination of the fine.

We are awaiting a trial date from the appellate court.

Prior to the Supreme Court decision, our assessment was that the possibility of a fine was deemed remote, based on advice of local counsel and the subsequent judgments in the lower courts having been in our favor.

Our estimate of the possible range of loss is $ 0.03 million to $ 2.2 million with the most likely amount being $ 0.03 million (based on the prosecutor’s recommendation).

Accordingly, during the three-month period ended May 3, 2020, we accrued a contingent loss of $ 0.03 million with a charge to Selling, general and administrative expense in the consolidated statements of income.

It is reasonably possible that the estimated loss will change in the near term.

Our maximum exposure to loss in excess of amounts accrued is $ 2.17 million.

The imposition of the fine will not have a material impact on our financial position or financial performance.

We are subject to various claims that arise in the ordinary course of business.

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We operate as a single operating segment as a manufacturer of photomasks, which are high precision quartz or glass plates containing microscopic images of electronic circuits for use in the fabrication of IC’s and FPDs.

Our 2019, 2018 and 2017 revenue by geographic origin and by IC and FPD products are presented below.

Our fiscal 2020, 2019 and 2018 revenue by geographic origin and by IC and FPD products are presented below.

United States

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United States

One customer accounted for 16 % of our revenue in fiscal years 2019, 2018 and 2017, respectively, and another customer accounted for 15 %, 15 % and 16 % of our revenue in fiscal years 2019, 2018 and 2017, respectively.

One customer accounted for 16 %, 15 %, and 15 % of our revenue in fiscal years 2020, 2019 and 2018, respectively, and another customer accounted for 14 %, 16 % and 16 % of our revenue in fiscal years 2020, 2019 and 2018, respectively.

NOTE 16 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

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Balance at October 31, 2019

Other comprehensive loss

Other comprehensive income (loss)

other comprehensive income (loss) attributable to noncontrolling interests

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Balance at October 31, 2018

Other comprehensive income before reclassifications

Amounts reclassified from other accumulated comprehensive income

Net current period other comprehensive income

other comprehensive (loss) income attributable to noncontrolling interests

Other comprehensive loss

other comprehensive income (loss) attributable to noncontrolling interests

Balance at October 31, 2019

Amortization of the cash flow hedge is included in cost of goods sold in the 2018 and 2017 consolidated statements of income.

NOTE 17 – CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject us to credit risk principally consist of trade accounts receivables and short-term cash investments.

Financial instruments that potentially subject us to credit risk principally consist of trade accounts receivable and short-term cash investments.

We sell our products primarily to semiconductor and FPD manufacturers in Asia, North America, and Europe.

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We further mitigate credit risks related to our cash and cash equivalents by spreading such risk among a number of institutions.

As of October 31, 2019, one of our customers accounted for 17 % of our net accounts receivable.

As of October 31, 2018, two of our customers individually accounted for 20 % and 10 % of our net accounts receivable.

As of October 31, 2020 and October 31, 2019, one of our customers accounted for 24 % and 17 % of our net accounts receivable, respectively .

NOTE 18 - RELATED PARTY TRANSACTIONS

On January 20, 2018, Photronics, Inc.

entered into a four-year consulting agreement with DEMA Associates, LLC, for $ 0.4 million per year.

Two members of our board of directors, including the chairman, and a member of the chairman’s immediate family, are members of DEMA Associates, LLC.

On January 20, 2018, we entered into a four-year consulting agreement with DEMA Associates, LLC, of which the chairman of our board of directors is a member, for $ 0.4 million per year.

We incurred expenses for services provided by this entity of $ 0.4 million and $ 0.3 million in fiscal years 2019 and 2018, respectively.

In July 2016, we entered into a contract for information technology services with a parent entity for which members of our board of directors served as the executive chairman of the board and a director of a wholly owned subsidiary of that entity.

In fiscal year 2018, we incurred expenses for services provided by the parent entity of $ 0.1 million during the period in which our board members served on the board of directors of this entity and, in fiscal year 2017, we incurred expenses of $ 0.5 million with the parent entity.

Effective March 9, 2020, the agreement was amended to reduce the consideration under the contract to $ 0.1 million per year for its remaining term;

in fiscal 2020, we incurred expenses for services provided by this entity of $ 0.2 million.

An officer of our company is related to an individual in a position of authority at one of our largest customers.

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As of October 31, 2020 and October 31, 2019, we had accounts receivable of $ 32.7 million and $ 22.2 million, respectively, from this customer.

We purchase photomask blanks from an entity of which a former officer of ours is a significant shareholder.

The Company purchased $ 4.5 million of photomask blanks from this entity during the period in 2017 when the former officer was employed by us.

We believe that the terms of our transactions with the related parties described above were negotiated at arm’s length and were no less favorable to us than terms we could have obtained from unrelated third parties.

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The fair values of our cash and cash equivalents (Level 1 measurements), accounts receivable, accounts payable, and certain other current assets and current liabilities (Level 2 measurements) approximate their carrying values due to their short-term maturities.

The fair values of our variable rate debt instruments are a Level 2 measurement and approximates their carrying values due to the variable nature of the underlying interest rates.

The fair values of our convertible senior notes is a Level 2 measurement, as it was determined using inputs that were either observable market data, or could be derived from, or corroborated with, observable market data.

These inputs included our stock price and interest rates offered on debt issued by entities with credit ratings similar to ours.

We did not have any assets or liabilities measured at fair value, on a recurring or a nonrecurring basis, at October 31, 2019 or October 31, 2018.

Fair Value of Financial Instruments Not Recorded at Fair Value

The fair value of our convertible senior notes was a Level 2 measurement, as it was determined using inputs that were either observable market data or could be derived from or corroborated with observable market data.

These inputs included our stock price and interest rates offered on debt issued by entities with credit ratings similar to ours.

The table below presents the fair and carrying values of our convertible senior notes at October 31, 2018.

October 31, 2018

Carrying Value

3.25 % convertible senior notes matured 2019

The fair values of our variable rate debt instruments are a Level 2 measurement and approximate their carrying values due to the variable nature of the underlying interest rates.

We did no t have any assets or liabilities measured at fair value, on a recurring or a nonrecurring basis, at October 31, 2020 or October 31, 2019.

NOTE 20 – SHARE REPURCHASE PROGRAMS

In August 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).

In October 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).

In September 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”).

Repurchases under the program commenced on September 16, 2020 .

In August 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.

The share repurchase program commenced on September 25, 2019 , and was terminated on March 20, 2020 .

The share repurchase program commenced on October 22, 2018 , and was terminated on February 1, 2019 .

In July 2018, the Company’s Board of Directors authorized the repurchase of up to $ 20 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).

The share repurchase program commenced on July 10, 2018 , and was completed in October 2018 , when the authorized amount was exhausted.

All of the shares purchased under the above repurchase programs were retired in fiscal year 2019.

All of the shares purchased under the above repurchase programs in fiscal 2020 were retired prior to the end of the fiscal year.

All of the shares purchased under prior year repurchase programs were retired in fiscal year 2019.

The Table below presents information on the repurchase programs.

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Fiscal Year 2019

Fiscal Year 2018

Total Purchases

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NOTE 21 – SUBSIDIARY DIVIDEND

In fiscal years 2019 and 2018, PDMC, the Company’s majority owned subsidiary in Taiwan, paid dividends of which 49.99 %, or approximately $ 45.1 and $ 8.2 million, respectively, were paid to noncontrolling interests.

In fiscal years 2020, 2019 and 2018, PDMC, the Company’s majority owned subsidiary in Taiwan, paid dividends of which 49.99 %, or approximately $ 16.2 million , $ 45.1 million and $ 8.2 million , respectively, were paid to noncontrolling interests.

NOTE 22 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

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Earnings per share:

(a) Includes $ 0.6 million gain on sale of assets.

NOTE 23 - RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Updates to be Implemented

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13 “Measurement of Credit Losses”, the main objective of which is to provide more useful information about expected credit losses on financial instruments and other commitments of an entity to extend credit.

In support of this objective, the ASU replaces the incurred loss model, found in current GAAP, with an expected credit loss model;

the new model requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

This ASU requires a cumulative-effect adjustment as of the beginning of the first reporting period in which the guidance is adopted.

ASU 2016-13 is effective for Photronics, Inc.

in its first quarter of fiscal year 2021, with early adoption permitted.

We are currently evaluating the effect that this ASU will have on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)”, which requires lessees to recognize right-of-use assets and corresponding liabilities for all leases with an initial term in excess of twelve months.

We adopted ASU 2016-02 and all subsequent amendments, collectively codified in Topic 842, on November 1, 2019.

The guidance requires modified retrospective adoption, either at the beginning of the earliest period presented or at the beginning of the period of adoption.

We elected to apply the guidance at the beginning of the period of adoption, and recorded right-of-use (ROU) leased assets of approximately $ 6.7 million, and corresponding lease liabilities, which were discounted at our incremental borrowing rates.

The guidance allows a number of elections and practical expedients, of which we have elected to employ the following:

- Election not to recognize short-term leases on the balance sheet.

- Practical expedient to not separate lease and non-lease components in a contract.

- Practical expedient “package” for transitioning to the new guidance:

* Not reassessing whether any expired or existing contracts are or contain leases.

* Not reassessing lease classification for any existing or expired leases.

* Not reassessing initial direct costs for any existing leases.

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.

Accounting Standards Updates Implemented

In November 2016, the FASB issued ASU 2016-18 “Restricted Cash”, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.

Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.

ASU 2016-18 was effective for Photronics, Inc.

in its first quarter of fiscal year 2019 and was applied on a retrospective transition basis.

Our adoption of this Update did not materially impact our cash flows statement.

In October 2016, the FASB issued ASU 2016-16 “Intra-Entity Transfers of Assets Other Than Inventory”, which eliminates the exception of recognizing, at the time of transfer, current and deferred income taxes for intra-entity asset transfers other than inventory.

ASU 2016-16 was effective for us in our first quarter of fiscal year 2019 and applied on a modified retrospective transition basis.

Please see Note 11 for a discussion of the effects of adopting this guidance.

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers”, which superseded nearly all then existing revenue recognition guidance under accounting principles generally accepted in the United States.

The core principle of this ASU is that revenue should be recognized for the amount of consideration expected to be received for promised goods or services transferred to customers.

This ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments, and assets recognized for costs incurred to obtain or fulfill a contract.

In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 by one year and allowed entities to early adopt, but no earlier than the original effective date.

This update allowed for either full retrospective or modified retrospective adoption.

In April 2016, the FASB issued ASU 2016-10 “Identifying Performance Obligations and Licensing” which amended guidance previously issued on these matters in ASU 2014-09.

The effective date and transition requirements of ASU 2016-10 were the same as those for ASU 2014-09.

We adopted the new revenue and related guidance on November 1, 2018, using the modified retrospective approach, under which we increased our accounts receivable by $ 0.6 million, recognized contract assets of $ 4.6 million, reduced our inventories balance by $ 3.7 million, and recorded an accrual for income taxes of $ 0.3 million.

The recognition of, and adjustments to, these items were reflected in increases to our retained earnings and noncontrolling interest balances of $ 1.1 million and $ 0.1 million, respectively.

The most significant impact of the new guidance on our financial statements is its requirement for us to recognize revenue as we manufacture products for which, in the event that the customer cancels the contract, we are entitled to reasonable compensation for work we have completed prior to cancellation.

Prior to our adoption of Topic 606, we recognized revenue when we shipped to customers or, under some arrangements, when the customers received the goods.

The impact of the adoption of this guidance on our October 31, 2019 financial statements is presented in Note 7.

The guidance allows for a number of accounting policy elections and practical expedients.

In addition to our above-mentioned election to use the modified retrospective application method for adopting the guidance, those we have employed that are most significant to us are summarized below.

Shipping and handling activities performed after control of a good is transferred to a customer

We have elected to treat shipping and handling activities that occur after control of a good is transferred to a customer as activities to fulfill our promise to transfer goods to the customer.

Thus, such activities will not be considered to be separate performance obligations under contracts with our customers.

Non-recognition of financing component when we transfer goods to a customer and the period between when we transfer and when we are paid will be less than one year

We have elected the practical expedient that allows for the non-recognition, as a component of a customer contract, of a financing component when the period between when we transfer a good and when we are paid will be less than one year.

Exclusion of sales and similar taxes collected from customers in the transaction price

Consistent with our practice before adoption of the new guidance, we will not recognize sales and similar taxes we collect from customers as revenue.

Use of an “input method” to measure our progress towards the transfer of control of performance obligations to customers

As, in our judgment, an input method based on our efforts to satisfy our performance obligations will best serve to depict the transfer of control of our performance obligations to our customers, we have adopted an accounting policy to employ that method.

Our decision was based primarily on the facts that our photomasks are not physically transferred to customers until they are complete, and that we can employ our input-based cost accumulation systems and methods to measure our progress towards the transfer of control of our performance obligations to customers.

Non-disclosure of the transaction prices of unsatisfied or partially satisfied performance obligations

For contracts that have an original expected duration of one year or less, we have elected the practical expedient that allows us not to disclose the aggregate transaction prices of unsatisfied or partially satisfied performance obligations that exist at the end of a reporting period.

We adopted ASU 2016-02 and all subsequent amendments, collectively codified in ASC Topic 842 “Leases” (“Topic 842”), on November 1, 2019.

The guidance requires modified retrospective adoption, either at the beginning of the earliest period presented or at the beginning of the period of adoption.

We elected to apply the guidance at the beginning of the period of adoption and recorded, as of November 1, 2019, right-of-use (ROU) leased assets of $ 6.5 million.

In conjunction with this, we recorded lease liabilities, which had been discounted at our incremental borrowing rates, of $ 6.5 million.

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

Please see Note 9 for our leases disclosure.

Accounting Standards Updates to be Adopted

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, which provides optional expedients and exceptions to applying the guidance on contract modifications, hedge accounting, and other transactions, to simplify the accounting for transitioning from the London Interbank Offered Rate, and other interbank offered rates expected to be discontinued, to alternative reference rates.

The guidance in this Update was effective upon its issuance;

if elected, it is to be applied prospectively through December 31, 2022.

We are currently evaluating the effect the potential adoption of this ASU will have on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses”, the main objective of which is to provide more useful information about expected credit losses on financial instruments and other commitments of an entity to extend credit.

In support of this objective, the ASU replaces the incurred loss impairment methodology, found in current GAAP, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

This ASU requires a cumulative-effect adjustment as of the beginning of the first reporting period in which the guidance is adopted.

ASU 2016-13 was effective for Photronics in its first quarter of fiscal year 2021.

We adopted ASU 2016-13 on November 1, 2020;

the effect of the adoption was immaterial, and did not warrant our recording a cumulative-effect adjustment.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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 8. Financial Statements and Supplementary Data