PHOTRONICS INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 37 Consolidated Balance Sheets 40 Consolidated Statements of Income 41 Consolidated Statements of Comprehensive Income 42 Consolidated Statements of Equity 43 Consolidated Statements of Cash Flows 44 Notes to Consolidated Financial Statements 45 36 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 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. 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. 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. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. 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. We believe that our audits provide a reasonable basis for our opinions. Critical Audit Matter 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 — Contracts with Customers— Refer to Note 1 to the financial statements Critical Audit Matter Description The Company recognizes revenue over time for in-process production orders that have not shipped for contracts with customers for which it has an enforceable right to bill and collect consideration, inclusive of a reasonable profit, in the event the in-process orders are cancelled by the customers. This results in the Company recording a corresponding contract asset as of period end for these contracts. Significant judgment is exercised by the Company in determining the amount of revenue to recognize for these contracts and the corresponding contract asset, specifically in estimating the point within the production cycle at which the production orders stand in relation to the Company’s enforceable right within the contract. Pursuant to these contracts, revenue recognized over time and the associated contract asset as of October 31, 2020 was $6.3 million. 37 Table of Contents We identified the determination of revenue recognized over time for in-process productions orders as of October 31, 2020 a critical auditing matter because of the significant estimates and assumptions management makes in determining the amount of revenue to recognize for these contracts. This required a high degree of audit judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s determination of the progress point of in-process orders and the amount of revenue recognized over time and the corresponding contract asset as of October 31, 2020. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the Company’s determination of the progress point of in-process orders and resulting revenue recognized over time and corresponding contract asset as of October 31, 2020 included the following: - We tested the operating effectiveness of controls over management’s determination of the point in the production process and correlation to stated contractual rights. - We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the consolidated financial statements. - We selected a sample of in-process production orders as of October 31, 2020 and performed the following procedures for each selection: - Obtained and read the contract. - Physically observed existence of the in-process production order. - Tested management’s identification of significant contract terms and resulting revenue recognition for the in-process production order. - Tested management estimate of the production point for the in-process order and corresponding revenue recognition and contract asset based on the Company’s enforceable right within the contract. /s/ Deloitte & Touche LLP Hartford, Connecticut January 14, 2021 We have served as the Company’s auditor since 1991. 38 Table of Contents PHOTRONICS, INC. Consolidated Balance Sheets (in thousands, except per share amounts) October 31, 2020 October 31, 2019 ASSETS Current assets: Cash and cash equivalents $ 278,665 $ 206,530 Accounts receivable, net of allowance of $ 1,324 in 2020 and $ 1,334 in 2019 134,470 134,454 Inventories 57,269 48,155 Other current assets 29,735 38,388 Total current assets 500,139 427,527 Property, plant and equipment, net 631,475 632,441 Intangible assets, net 3,437 7,870 Deferred income taxes 22,070 20,779 Other assets 31,061 30,048 Total assets $ 1,188,182 $ 1,118,665 LIABILITIES AND EQUITY Current liabilities: Short-term debt $ 4,708 $ 8,731 Current portion of long-term debt 8,970 2,142 Accounts payable 75,378 91,379 Accrued liabilities 53,883 49,702 Total current liabilities 142,939 151,954 Long-term debt 54,980 41,887 Other liabilities 27,997 13,732 Total liabilities 225,916 207,573 Commitments and contingencies Equity: 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 631 656 Additional paid-in capital 507,336 524,319 Retained earnings 279,037 253,922 Accumulated other comprehensive (loss) income 17,958 ( 9,005 ) Total Photronics, Inc. shareholders’ equity 804,962 769,892 Noncontrolling interests 157,304 141,200 Total equity 962,266 911,092 Total liabilities and equity $ 1,188,182 $ 1,118,665 See accompanying notes to consolidated financial statements. 39 Table of Contents PHOTRONICS, INC. Consolidated Statements of Income (in thousands, except per share amounts) Year Ended October 31, 2020 October 31, 2019 October 31, 2018 Revenue $ 609,691 $ 550,660 $ 535,276 Cost of goods sold 475,037 429,819 403,773 Gross profit 134,654 120,841 131,503 Operating expenses: Selling, general and administrative 53,582 52,326 51,395 Research and development 17,144 16,394 14,481 Total operating expenses 70,726 68,720 65,876 Operating income 63,928 52,121 65,627 Other income (expense): Interest expense ( 2,367 ) ( 1,425 ) ( 2,262 ) Interest income and other income (expense), net 541 1,271 4,829 Foreign currency transaction (losses) gains, net ( 501 ) ( 1,266 ) 377 Income before income tax provision 61,601 50,701 68,571 Income tax provision 21,258 10,210 7,335 Net income 40,343 40,491 61,236 Net income attributable to noncontrolling interests 6,523 10,698 19,181 Net income attributable to Photronics, Inc. shareholders $ 33,820 $ 29,793 $ 42,055 Earnings per share: Basic $ 0.52 $ 0.45 $ 0.61 Diluted $ 0.52 $ 0.44 $ 0.59 Weighted-average number of common shares outstanding: Basic 64,866 66,347 68,829 Diluted 65,470 69,155 74,821 See accompanying notes to consolidated financial statements. 40 Table of Contents PHOTRONICS, INC. Consolidated Statements of Comprehensive Income (in thousands) Year Ended October 31, 2020 October 31, 2019 October 31, 2018 Net income $ 40,343 $ 40,491 $ 61,236 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 36,381 ( 2,877 ) ( 16,672 ) Amortization of cash flow hedge - - 48 Other ( 390 ) ( 74 ) 101 Net other comprehensive income (loss) 35,991 ( 2,951 ) ( 16,523 ) Comprehensive income 76,334 37,540 44,713 Less: comprehensive income attributable to noncontrolling interests 15,551 11,786 14,515 Comprehensive income attributable to Photronics, Inc. shareholders $ 60,783 $ 25,754 $ 30,198 See accompanying notes to consolidated financial statements. 41 Table of Contents PHOTRONICS, INC. Consolidated Statements of Equity Years Ended October 31, 2020, October 31, 2019 and October 29, 2018 (in thousands) Photronics, Inc. Shareholders Common Stock Additional Paid-In Retained Treasury Accumulated Other Comprehensive Non- Controlling Total Shares Amount Capital Earnings Stock Income (Loss) Interests Equity Balance at October 29, 2017 68,666 $ 687 $ 547,596 $ 189,390 $ - $ 6,891 $ 120,731 $ 865,295 Net income - - - 42,055 - - 19,181 61,236 Other comprehensive loss - - - - - ( 11,857 ) ( 4,666 ) ( 16,523 ) Sales of common stock through employee stock option and purchase plan 870 9 4,683 - - - - 4,692 Restricted stock awards vesting and expense 164 1 1,747 - - - - 1,748 Share-based compensation expense - - 1,432 - - - - 1,432 Contribution from noncontrolling interests - - 148 - - - 17,848 17,996 Dividends to noncontrolling interests - - - - - - ( 8,196 ) ( 8,196 ) Purchases of treasury stock - - - - ( 23,111 ) - - ( 23,111 ) Balance at October 31, 2018 69,700 697 555,606 231,445 ( 23,111 ) ( 4,966 ) 144,898 904,569 Adoption of ASU 2014-09 - - - 1,083 - - 121 1,204 Adoption of ASU 2016-16 - - - ( 1,130 ) - - ( 3 ) ( 1,133 ) Net income - - - 29,793 - - 10,698 40,491 Other comprehensive (loss) income - - - - - ( 4,039 ) 1,088 ( 2,951 ) Sale of common stock through employee stock option and purchase plans 390 4 2,524 - - - - 2,528 Restricted stock awards vesting and expense 196 2 2,497 - - - - 2,499 Share-based compensation expense - - 1,183 - - - - 1,183 Contribution from noncontrolling interest - - - - - - 29,394 29,394 Dividends to noncontrolling interest - - - - - - ( 44,939 ) ( 44,939 ) Repurchase of common stock of subsidiary - - - - - - ( 57 ) ( 57 ) Purchases of treasury stock - - - - ( 21,696 ) - - ( 21,696 ) Retirement of treasury stock ( 4,691 ) ( 47 ) ( 37,491 ) ( 7,269 ) 44,807 - - - Balance at October 31, 2019 65,595 656 524,319 253,922 - ( 9,005 ) 141,200 911,092 Net income - - - 33,820 - - 6,523 40,343 Other comprehensive income - - - - - 26,963 9,028 35,991 Sale of common stock through employee stock option and purchase plans 482 5 3,742 - - - - 3,747 Restricted stock awards vesting and expense 255 2 3,890 - - - - 3,892 Share-based compensation expense - - 787 - - - - 787 Contribution from noncontrolling interest - - - - - - 17,596 17,596 Dividends to noncontrolling interest - - - - - - ( 16,151 ) ( 16,151 ) Repurchase of common stock of subsidiary - - 255 - - - ( 892 ) ( 637 ) Purchases of treasury stock - - - - ( 34,394 ) - - ( 34,394 ) Retirement of treasury stock ( 3,194 ) ( 32 ) ( 25,657 ) ( 8,705 ) 34,394 - - - Balance at October 31, 2020 63,138 $ 631 $ 507,336 $ 279,037 $ - $ 17,958 $ 157,304 $ 962,266 See accompanying notes to consolidated financial statements. 42 Table of Contents PHOTRONICS, INC. Consolidated Statements of Cash Flows (in thousands) Year Ended October 31, 2020 October 31, 2019 October 31, 2018 Cash flows from operating activities: Net income $ 40,343 $ 40,491 $ 61,236 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property, plant and equipment 89,171 79,238 79,536 Amortization of intangible assets 4,643 4,641 4,797 Share-based compensation 4,927 3,680 3,180 Deferred income taxes ( 445 ) ( 3,662 ) ( 273 ) Changes in assets, liabilities, and other: Accounts receivable 6,986 ( 12,321 ) ( 18,553 ) Inventories ( 6,938 ) ( 23,088 ) ( 6,162 ) Other current assets 7,849 ( 8,631 ) ( 11,731 ) Accounts payable, accrued liabilities and other ( 3,490 ) ( 11,962 ) 18,537 Net cash provided by operating activities 143,046 68,386 130,567 Cash flows from investing activities: Purchases of property, plant and equipment ( 70,815 ) ( 178,375 ) ( 92,585 ) Government incentives 5,263 27,003 1,005 Purchases of intangible assets ( 159 ) ( 95 ) ( 218 ) Other - 61 929 Net cash used in investing activities ( 65,711 ) ( 151,406 ) ( 90,869 ) Cash flows from financing activities: Proceeds from debt 20,340 54,633 - Contributions from noncontrolling interests 17,596 29,394 17,996 Purchases of treasury stock ( 34,394 ) ( 21,696 ) ( 23,111 ) Dividends paid to noncontrolling interests ( 16,151 ) ( 45,050 ) ( 8,166 ) Repayments of deb t ( 7,392 ) ( 61,319 ) ( 4,639 ) Proceeds from share-based arrangements 4,239 2,071 4,634 Other ( 248 ) ( 92 ) ( 519 ) Net cash used in financing activities ( 16,010 ) ( 42,059 ) ( 13,805 ) Effects of exchange rate changes on cash, cash equivalents, and restricted cash 10,986 2,381 ( 4,840 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 72,311 ( 122,698 ) 21,053 Cash, cash equivalents, and restricted cash at beginning of year 209,291 331,989 310,936 Cash, cash equivalents, and restricted cash at end of year $ 281,602 $ 209,291 $ 331,989 Supplemental disclosure of non-cash information: Accrual for property, plant and equipment purchased during year $ 13,062 $ 13,671 $ 29,602 See accompanying notes to consolidated financial statements. 43 Table of Contents PHOTRONICS, INC. Notes to Consolidated Financial Statements Years Ended October 31, 2020, October 31, 2019 and October 31, 2018 (in thousands, except share amounts) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Photronics, Inc. (“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. Our FPD facility in Hefei, China, commenced production in the second quarter of fiscal 2019, and our IC facility in Xiamen, China, commenced production in the third quarter of fiscal 2019. Consolidation The accompanying consolidated financial statements include the accounts of Photronics, Inc. , its wholly owned subsidiaries, and the majority-owned subsidiaries which it controls. All intercompany balances and transactions have been eliminated in consolidation. Estimates and Assumptions The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect amounts reported in them. Estimates are based on historical experience and on various assumptions that are believed to be reasonable under the circumstances. Our estimates are based on the facts and circumstances available at the time they are made. 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. 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 Cash and cash equivalents include cash and highly liquid investments with an original maturity of three months or less , readily convertible to known amounts of cash, and so near to their maturity that they present insignificant risk of changes in value because of changes in interest rates. The carrying values of cash equivalents approximate their fair values, due to the short-term maturities of these instruments. Accounts Receivable and Allowance for Doubtful Accounts We generally record our accounts receivable at their billed amounts. 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. 44 Table of Contents Inventories Inventories are stated at the lower of cost, determined under the first-in, first-out (“FIFO”) method, or net realizable value. Presented below are the components of inventory at the balance sheet dates: October 31 2020 October 31 2019 Raw materials $ 56,389 $ 46,027 Work in process 767 2,122 Finished goods 113 6 $ 57,269 $ 48,155 Property, Plant and Equipment Property, plant and equipment, except as explained below under “Impairment of Long-Lived Assets,” is stated at cost less accumulated depreciation and amortization. Repairs and maintenance, as well as renewals and replacements of a routine nature, are charged to operations as incurred, while those that improve or extend the lives of existing assets are capitalized. 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 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. Leasehold improvements are amortized over the life of the lease or the estimated useful life of the improvement, whichever is less. 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 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. We periodically evaluate the remaining useful lives of our intangible assets to determine whether events or circumstances warrant a revision to the remaining periods of amortization. In the event that the estimate of an intangible asset’s remaining useful life has changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life. If it is determined that an intangible asset has an indefinite useful life, that intangible asset would be subject to impairment testing annually or whenever events or circumstances indicate that its carrying value may not, based on future undiscounted cash flows or market factors, be recoverable. 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. 45 Table of Contents Restricted Cash Restricted cash in the amounts of $ 2.9 million and $ 2.8 million are included in Other assets on our October 31, 2020 and October 31, 2019, consolidated balance sheets, respectively. The restrictions on these amounts are primarily related to land lease agreements and customs requirements. Treasury Stock We record treasury stock purchases under the cost method, recording the entire cost of the acquired stock as treasury stock. 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. 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. 46 Table of Contents 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 . 47 Table of Contents Share-Based Compensation We recognize share-based compensation expense over the service period that the awards are expected to vest. Share-based compensation expense includes the estimated effects of forfeitures, which are adjusted over the requisite service period to the extent actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized in the period of change, and will impact the amount of expense to be recognized in future periods. Determining the appropriate option pricing model, calculating the grant date fair value of share-based awards, and estimating forfeiture rates requires considerable judgment, including estimations of stock price volatility and the expected term of options granted. We use the Black-Scholes option pricing model to value employee stock options. We estimate stock price volatility based on daily averages of our common stock’s historical volatility over a term approximately equal to the estimated time period the grant will remain outstanding. The expected term of options and forfeiture rate assumptions are derived from historical data. Research and Development Research and development costs are expensed as incurred and consist primarily of development efforts related to high-end process technologies for advanced subwavelength reticle solutions for IC and FPD photomask technologies. Foreign Currency Translation Our non-U.S. subsidiaries maintain their accounts in their respective local currencies. Assets and liabilities of such subsidiaries are translated to U.S. dollars at year-end exchange rates. Income and expenses are translated at average rates of exchange prevailing during the year. Foreign currency translation adjustments are accumulated and reported in accumulated other comprehensive income, a component of equity. Government Grants We account for funds we receive from government grants by reducing the costs of the assets or expenses to which we apply the funds. 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 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. Income Taxes 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. 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. 48 Table of Contents 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. Leases 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. 49 Table of Contents NOTE 2 – OTHER CURRENT ASSETS Other current assets consists of the following: October 31, 2020 October 31, 2019 Recoverable value added taxes $ 16,539 $ 16,494 Contract assets 6,313 7,596 Prepaid expenses 6,153 6,506 Prepaid and refundable income taxes 122 2,642 Other 608 5,150 $ 29,735 $ 38,388 NOTE 3 - PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, net consists of the following: October 31, 2020 October 31, 2019 Land $ 12,422 $ 12,085 Buildings and improvements 179,162 172,340 Machinery and equipment 1,812,791 1,748,483 Leasehold improvements 21,157 19,921 Furniture, fixtures and office equipment 15,665 14,404 Construction in progress 70,915 28,135 2,112,112 1,995,368 Accumulated depreciation and amortization ( 1,480,637 ) ( 1,362,927 ) $ 631,475 $ 632,441 NOTE 4 - INTANGIBLE ASSETS Amortization expense of the Company’s finite-lived intangible assets was $ 4.6 million, $ 4.6 million and $ 4.8 million in fiscal years 2020, 2019 and 2018, respectively. Intangible assets consist of: As of October 31, 2020 Gross Amount Accumulated Amortization Net Amount Technology license agreement $ 59,616 $ ( 57,298 ) $ 2,318 Customer relationships 2,060 ( 1,245 ) 815 Software and other 6,496 ( 6,192 ) 304 $ 68,172 $ ( 64,735 ) $ 3,437 As of October 31, 2019 Technology license agreement $ 59,616 $ ( 53,323 ) $ 6,293 Customer relationships 9,174 ( 8,186 ) 988 Software and other 6,537 ( 5,948 ) 589 $ 75,327 $ ( 67,457 ) $ 7,870 50 Table of Contents 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: 2021 $ 2,839 2022 $ 131 2023 $ 129 2024 $ 128 2025 $ 128 Thereafter $ 82 NOTE 5 - PDMCX JOINT VENTURE 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 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, 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 $ 4.7 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. The initial step of our evaluation was to determine whether PDMCX was a variable interest entity (“VIE”). 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 years reporting periods; 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. Our conclusions that we had the power to direct the activities that most significantly affected the economic performance of PDMCX during the current and prior year periods were based on our right to appoint the majority of its board of directors, which has, among others, the powers to manage the business (through its rights to appoint and evaluate PDMCX’s management), incur indebtedness, enter into agreements and commitments, and acquire and dispose of PDMCX’s assets. In addition, as a result of the 50.01 % variable interest we held during the current and prior year periods, we had the obligation to absorb losses, and the right to receive benefits, that could potentially be significant to PDMCX. 51 Table of Contents The carrying amounts of PDMCX assets and liabilities included in our consolidated balance sheets are presented in the following table, together with our maximum exposures to loss related to these assets and liabilities. October 31, 2020 October 31, 2019 Classification Carrying Amount Photronics Interest Carrying Amount Photronics Interest Current assets $ 56,095 $ 28,053 $ 24,142 $ 12,074 Noncurrent assets 141,097 70,562 114,015 57,019 Total assets 197,192 98,615 138,157 69,093 Current liabilities 31,922 15,964 16,889 8,446 Noncurrent liabilities 55,676 27,844 42,094 21,051 Total liabilities 87,598 43,808 58,983 29,497 Net assets $ 109,594 $ 54,807 $ 79,174 $ 39,596 NOTE 6 - ACCRUED LIABILITIES Accrued liabilities consist of the following: October 31, 2020 October 31, 2019 Compensation related expenses $ 16,405 $ 14,011 Income taxes 11,432 13,227 Contract liabilities 8,024 11,542 Property, plant, and equipment 2,355 288 Operating leases 2,175 - Value added and other taxes 1,925 3,761 Contract manufacturing 1,275 422 Professional fees 1,254 537 Inventory 1,026 224 Telecommunications and utilities 1,006 710 Other 7,006 4,980 Accrued liabilities $ 53,883 $ 49,702 52 Table of Contents NOTE 7 - LONG-TERM DEBT Long-term debt consists of the following: October 31, 2020 October 31, 2019 Project Loans $ 50,063 $ 34,490 Working Capital Loans (value added tax component) 13,887 9,539 63,950 44,029 Current portion of long-term debt ( 8,970 ) ( 2,142 ) Long-term debt $ 54,980 $ 41,887 At October 31, 2020, maturities of our long-term debt over the next five fiscal years and thereafter were as follows: 2021 $ 8,970 2022 15,142 2023 13,406 2024 9,789 2025 9,432 Thereafter 7,211 $ 63,950 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. dollars, the timing of future payments against the borrowings. Fiscal Year 2021 2022 2023 2024 2025 2026 Principal payments $ 6,705 $ 7,334 $ 9,592 $ 9,789 $ 9,432 $ 7,211 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 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, in increasing amounts, through July 2023 . The table below presents, in U.S. dollars, the timing of future payments against these borrowings. 53 Table of Contents Fiscal Year 2021 2022 2023 Principal payments $ 2,265 $ 7,808 $ 3,814 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; 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. U.S. Equipment Loan #1 Effective July 2019, the Company entered into a Master Lease Agreement (“MLA”) which enables us to request advance payments or other funds to finance equipment to be leased or purchased in the U.S. In connection with this MLA, we were approved for financing of $ 35 million for the purchase of a high-end lithography tool. 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 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 short-term debt. All borrowings under the MLA are secured by the equipment to be leased or purchased. During the first quarter of fiscal 2021 , this financing entity made an additional payment of $ 28 million to the equipment vendor on our behalf. U.S. 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 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 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 . In April 2019, the entire $ 57.5 million principal amount was repaid upon maturity. 54 Table of Contents NOTE 8 - REVENUE 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 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 years ended October 31, 2020 and October 31, 2019, disaggregated by product type, geographic origin, and timing of recognition. Year Ended Year Ended Revenue by Product Type October 31, 2020 October 31, 2019 IC High-end $ 156,129 $ 156,418 Mainstream 262,281 249,773 Total IC $ 418,410 $ 406,191 FPD High-end $ 139,558 $ 98,832 Mainstream 51,723 45,637 Total FPD $ 191,281 $ 144,469 $ 609,691 $ 550,660 Revenue by Geographic Origin Taiwan $ 239,101 $ 244,377 Korea 153,052 147,734 United States 104,949 105,045 China 79,374 19,010 Europe 31,501 32,585 All other Asia 1,714 1,909 $ 609,691 $ 550,660 Revenue by Timing of Recognition Over time $ 535,071 $ 497,942 At a point in time 74,620 52,718 $ 609,691 $ 550,660 55 Table of Contents 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 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. Fiscal Year Total Lease Imputed 2021 2022 2023 2024 2025 Thereafter Payments Interest* Total Lease payments $ 2,275 $ 2,157 $ 1,205 $ 756 $ 618 $ 524 $ 7,535 $ 352 $ 7,183 * 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. 56 Table of Contents The following table presents lease costs for the year ended October 31, 2020. Year Ended October 31, 2020 Operating lease costs $ 3,076 Short-term lease costs $ 359 Variable lease costs $ 378 Presented below is other information related to our operating leases. Supplemental cash flows information: Year Ended October 31, 2020 Operating cash flows used for operating leases $ 3,584 ROU assets obtained in exchange for operating lease obligations $ 2,681 As of October 31, 2020 Weighted-average remaining lease term 4.1 years Weighted-average discount rate 2.37 % 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. 2020 $ 1,885 2021 1,613 2022 1,535 2023 742 2024 424 Thereafter 377 $ 6,576 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), or a combination thereof. The maximum number of shares of common stock approved that may be issued under the Plan is four million shares. Awards may be granted to officers, employees, directors, consultants, advisors, and independent contractors of Photronics or its subsidiaries. In the event of a change in control (as defined in the Plan), the vesting of awards may be accelerated. The Plan, aspects of which are more fully described below, prohibits further awards from being issued under prior plans. 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 $ 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. 57 Table of Contents 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 Shares Weighted-Average Fair Value at Grant Date Outstanding at October 31, 2019 640,113 $ 9.70 Granted 538,000 $ 15.08 Vested ( 271,347 ) $ 10.90 Cancelled ( 94,450 ) $ 12.41 Outstanding at October 31, 2020 812,316 $ 12.55 Expected to vest as of October 31, 2020 770,778 $ 12.48 Stock Options Option awards generally vest in one to four years , and have a ten-year contractual term. All incentive and non-qualified stock option grants must have an exercise price no less than the market value of the underlying common stock on the date of grant. The grant-date fair values of options are based on closing prices of our common stock on the dates of grant and are calculated using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of our common stock. We use historical option exercise behavior and employee termination data to estimate expected term, which represents the period of time that options granted are expected to remain outstanding. The risk-free rate of return for the estimated term of an option is based on the U.S. Treasury yield curve in effect at the date of grant. 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: Year Ended October 31, 2019 October 31, 2018 Expected volatility 33.1 % 31.7 % Risk-free rate of return 2.5 – 2.9 % 2.2 – 2.8 % Dividend yield 0.0 % 0.0 % Expected term 5.1 years 5.0 years 58 Table of Contents The table below presents a summary of stock options activity during fiscal year 2020 and information on stock options outstanding at October 31, 2020. Options Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Life Aggregate Intrinsic Value Outstanding at October 31, 2019 2,170,767 $ 9.00 Granted - - Exercised ( 493,450 ) $ 7.94 Cancelled and forfeited ( 56,200 ) $ 10.33 Outstanding at October 31, 2020 1,621,117 $ 9.27 4.6 years $ 1,778 Exercisable at October 31, 2020 1,366,864 $ 9.21 4.2 years $ 1,651 Vested and expected to vest as of October 31, 2020 246,055 $ 9.61 7.3 years $ 123 The weighted-average grant date fair value of options granted during fiscal years 2019 and 2018 were $ 3.31 and $ 2.76 , respectively. The total intrinsic value of options exercised during fiscal years 2020, 2019 and 2018 was $ 3.2 million, $ 1.3 million and $ 2.5 million, respectively. We received cash from option exercises of $ 3.7 million, $ 2.1 million and $ 4.3 million in fiscal years 2020, 2019 and 2018, respectively. As of October 31, 2020, the total unrecognized compensation cost of unvested option awards was approximately $ 0.4 million. That cost is expected to be recognized over a weighted-average amortization period of 1.7 years. Employee Stock Purchase Plan Our Employee Stock Purchase Plan (“ESPP”) permits employees to purchase Photronics, Inc. common shares at 85 % of the lower of the closing market price at the commencement or ending date of the Plan year (which is approximately one year ). We recognize the ESPP expense during that same period. 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. As of October 31, 2020, 0.1 million shares were subject to outstanding subscriptions. NOTE 11 - EMPLOYEE RETIREMENT PLANS We maintain a 401(k) Savings and Profit Sharing Plan (“401(k) Plan”) which covers all full and certain part time U.S. employees who have completed three months of service and are 18 years of age or older. Under the terms of the 401(k) Plan, employees may contribute up to 50 % of their salary, subject to certain maximum amounts, which will be matched by the Company at 50 % of the employee’s contributions that are not in excess of 4 % of the employee’s compensation. Employee and employer contributions vest immediately upon contribution. The total employer contributions for all of our defined contribution plans were $ 0.7 million, $ 0.7 million and $ 0.7 million in fiscal years 2020, 2019 and 2018, respectively. 59 Table of Contents NOTE 12 - INCOME TAXES Income before the income tax provisions consists of the following: Year Ended October 31, 2020 October 31, 2019 October 31, 2018 United States $ ( 10,672 ) $ ( 8,379 ) $ ( 9,859 ) Foreign 72,273 59,080 78,430 $ 61,601 $ 50,701 $ 68,571 60 Table of Contents The income tax provisions consist of the following: Year Ended October 31, 2020 October 31, 2019 October 31, 2018 Current: Federal $ - $ ( 3,916 ) $ ( 30 ) State 4 11 - Foreign 21,698 17,777 11,584 Deferred: Federal - 3,673 ( 3,673 ) State 8 10 ( 24 ) Foreign ( 452 ) ( 7,345 ) ( 522 ) Total $ 21,258 $ 10,210 $ 7,335 The income tax provisions differ from the amount computed by applying the statutory U.S. federal income tax rate to income before income taxes as a result of the following: Year Ended October 31, 2020 October 31, 2019 October 31, 2018 U.S. federal income tax at statutory rate $ 12,936 $ 10,647 $ 16,059 Changes in valuation allowances 6,942 2,673 4,554 Foreign tax rate differentials 1,718 218 ( 2,078 ) Tax credits ( 1,562 ) ( 1,268 ) ( 1,530 ) Uncertain tax positions, including reserves, settlements and resolutions 1,637 134 ( 1,791 ) Employee stock option - - ( 1,433 ) Income tax holiday ( 318 ) ( 2,234 ) ( 2,648 ) Tax reform - - ( 3,736 ) Distributions from foreign subsidiaries - - - Tax on foreign subsidiary earnings - - - Other, net ( 95 ) 40 ( 62 ) $ 21,258 $ 10,210 $ 7,335 Effective tax rate 34.5 % 20.1 % 10.7 % 61 Table of Contents 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. The fiscal year 2018 effective tax rate differs from the U.S. federal blended rate of 23.42 % primarily due to the impact of the U.S. 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. 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. Tax Cuts and Jobs Act (the “Act”), was signed into law, enacting significant changes to the United States Internal Revenue Code of 1986, as amended. Based on the enactment date, we accounted for the Act in our interim period ended January 28, 2018. In December 2017, the Securities and Exchange Commission released Staff Accounting Bulletin No. 118 (“SAB 118”) to address situations in which the accounting under Accounting Standards Codification Topic 740 – “Income Taxes” is incomplete for certain income tax effects of the Act. We adopted SAB 118 in our first quarter of fiscal year 2018, and finalized its effects in our fourth quarter of fiscal 2018. In the period ended January 28, 2018, we recognized the following effects in our provision for income taxes: • The Act repealed the corporate alternative minimum tax (“AMT”) for tax years beginning after December 31, 2017, and provided that existing AMT credit carryforwards are fully refundable. We recognized a $ 3.9 million benefit on AMT credit carryforwards that we previously determined were not more likely than not going to be realized and reversed the previously recorded valuation allowance. • As of January 1, 2018, the Act reduced the corporate income tax rate from a maximum 35 % to a flat 21 %, requiring us to revalue our deferred tax assets and liabilities utilizing the rate applicable to the period when a temporary difference will reverse. Our net deferred tax asset is fully offset by a valuation allowance, and the revaluation of the deferred tax assets and liabilities resulted in a net-zero impact for the period. • The Act imposed a transition tax for a one-time deemed repatriation of the accumulated earnings of foreign subsidiaries. The entire amount of transition tax was fully offset by tax credits (including carryforwards) that resulted in a provisional net-zero impact on the period. On January 18, 2018, the Taiwan Legislature Yuan approved amendments to the Income Tax Act, enacting an increase in the corporate tax rate from 17 % to 20 %, which required us to revalue our deferred tax assets and liabilities utilizing the rate applicable to the period when a temporary difference will reverse. Accordingly, a net benefit of $ 0.2 million is reflected in our tax provision in fiscal year 2018. 62 Table of Contents The net deferred income tax assets consist of the following: As of October 31, 2020 October 31, 2019 Deferred income tax assets : Net operating losses $ 34,457 $ 32,229 Reserves not currently deductible 6,287 5,013 Tax credit carryforwards 9,481 9,164 Share-based compensation 1,306 860 Property, plant and equipment 3,887 - Other 398 434 55,816 47,700 Valuation allowances ( 33,973 ) ( 27,032 ) 21,843 20,668 Deferred income tax liabilities: Property, plant and equipment - ( 251 ) Other - - - ( 251 ) Net deferred income tax assets $ 21,843 $ 20,417 Reported as: Deferred income tax assets $ 22,070 $ 20,779 Deferred income tax liabilities ( 227 ) ( 362 ) $ 21,843 $ 20,417 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 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. deferred taxes were no longer provided on the undistributed earnings of non-U.S. subsidiaries. Our policy to indefinitely reinvest these earnings in non-U.S. operations remains unchanged for the purpose of determining deferred tax liabilities for U.S. state and foreign withholding taxes. Therefore, should we elect in the future to repatriate the remaining foreign earnings deemed to be indefinitely reinvested, we may incur additional state and withholding tax expense on those foreign earnings, the amount of which is not practicable to compute. 63 Table of Contents The following tables present our available operating loss and credit carryforwards as of October 31, 2020, and their related expiration periods: Operating Loss Carryforwards Amount Expiration Periods Federal $ 90,125 2028 -Indefinite State 205,649 2020 - 2040 Foreign 14,895 2022 - 2030 64 Table of Contents Tax Credit Carryforwards Amount Expiration Period Federal research and development $ 4,796 2024 - 2040 State 5,928 2020 - 2034 In September 2019, we entered into a Section 382 Rights Agreement with Computershare Trust Company, N.A., a federally chartered trust company, as rights agent. 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, 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: Year Ended October 31, 2020 October 31, 2019 October 31, 2018 Balance at beginning of year $ 1,758 $ 1,775 $ 3,384 Additions (reductions) for tax positions in prior years 227 ( 466 ) ( 44 ) Additions based on current year tax positions 1,576 1,286 498 Settlements ( 992 ) ( 204 ) ( 56 ) Lapses of statutes of limitations ( 19 ) ( 633 ) ( 2,007 ) Balance at end of year $ 2,550 $ 1,758 $ 1,775 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. audits. 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 $ 0.4 million. 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 $ 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. 65 Table of Contents NOTE 13 - EARNINGS PER SHARE The calculation of basic and diluted earnings per share is presented as follows: Year Ended October 31, 2020 October 31, 2019 October 31, 2018 Net income attributable to Photronics, Inc. shareholders $ 33,820 $ 29,793 $ 42,055 Effect of dilutive securities: Interest expense on convertible notes, net of tax - 845 1,999 Earnings used for diluted earnings per share $ 33,820 $ 30,638 $ 44,054 Weighted-average common shares computations: Weighted-average common shares used for basic earnings per share 64,866 66,347 68,829 Effect of dilutive securities: Share-based payment awards 604 448 450 Convertible notes - 2,360 5,542 Potentially dilutive common shares 604 2,808 5,992 Weighted-average common shares used for diluted earnings per share 65,470 69,155 74,821 Basic earnings per share $ 0.52 $ 0.45 $ 0.61 Diluted earnings per share $ 0.52 $ 0.44 $ 0.59 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. Year Ended October 31, 2020 October 31, 2019 October 31, 2018 Share based payment awards 795 1,250 1,627 Total potentially dilutive shares excluded 795 1,250 1,627 Subsequent to October 31, 2020, we repurchased 0.1 million shares of our common stock. See Note 20 for information on our share repurchase programs. NOTE 14 - COMMITMENTS AND CONTINGENCIES As of October 31, 2020, we had outstanding purchase commitments of $ 130 million, $ 112 million of which was for capital equipment. As of October 31, 2020, we had recorded liabilities for the purchase of equipment of $ 15 million. 66 Table of Contents 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. We believe such claims, individually and in the aggregate, will not have a material effect on our consolidated financial statements. NOTE 15 - GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION 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 fiscal 2020, 2019 and 2018 revenue by geographic origin and by IC and FPD products are presented below. Year Ended October 31, 2020 October 31, 2019 October 31, 2018 Net revenue Taiwan $ 239,101 $ 244,377 $ 237,039 Korea 153,052 147,734 147,066 United States 104,949 105,045 112,648 China 79,374 19,010 1,157 Europe 31,501 32,585 35,540 All other Asia 1,714 1,909 1,826 $ 609,691 $ 550,660 $ 535,276 IC $ 418,410 $ 406,191 $ 416,064 FPD 191,281 144,469 119,212 $ 609,691 $ 550,660 $ 535,276 67 Table of Contents Our 2020 and 2019 long-lived assets by geographic area are presented below. As of October 31, 2020 October 31, 2019 Long-lived assets China $ 262,800 $ 232,394 Taiwan 123,979 146,467 United States 130,164 130,935 Korea 110,815 117,755 Europe 3,717 4,890 $ 631,475 $ 632,441 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 The following tables set forth the changes in our accumulated other comprehensive income by component (net of tax of $ 0 ) for the years ended October 31, 2020 and October 31, 2019: Year Ended October 31, 2020 Foreign Currency Translation Adjustments Other Total Balance at October 31, 2019 $ ( 8,331 ) $ ( 674 ) $ ( 9,005 ) Other comprehensive income (loss) 36,381 ( 390 ) 35,991 Less: other comprehensive income (loss) attributable to noncontrolling interests 9,222 ( 194 ) 9,028 Balance at October 31, 2020 $ 18,828 $ ( 870 ) $ 17,958 Year Ended October 31, 2019 Foreign Currency Translation Adjustments Other Total Balance at October 31, 2018 $ ( 4,328 ) $ ( 638 ) $ ( 4,966 ) Other comprehensive loss ( 2,877 ) ( 74 ) ( 2,951 ) Less: other comprehensive income (loss) attributable to noncontrolling interests 1,126 ( 38 ) 1,088 Balance at October 31, 2019 $ ( 8,331 ) $ ( 674 ) $ ( 9,005 ) NOTE 17 – CONCENTRATIONS OF CREDIT RISK 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. We believe that the concentration of credit risk in our trade receivables is substantially mitigated by our ongoing credit evaluation process and relatively short collection terms. We do not generally require collateral from customers. We establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. 68 Table of Contents Our cash and cash equivalents are deposited in several financial institutions, including institutions located within all of the countries in which we manufacture photomasks. Portions of deposits in some of these institutions may exceed the amount of insurance available for such deposits at these institutions. As these deposits are generally redeemable upon demand and are held by high quality, reputable institutions, we consider them to bear minimal credit risk. 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, 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, 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. 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. We recorded revenue from this customer of $ 96.4 million, $ 87.0 million and $ 78.4 million, in fiscal years 2020, 2019 and 2018, respectively. 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 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. NOTE 19 - FAIR VALUE MEASUREMENTS The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers, as follows: Level 1, defined as quoted market prices (unadjusted) in active markets for identical securities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly; and Level 3, defined as unobservable inputs that are not corroborated by market data. 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 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 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 . 69 Table of Contents 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 . 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. 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. 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 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. Fiscal Year 2020 Purchases Fiscal Year 2019 Purchases Fiscal Year 2018 Purchases Total Purchases Under Programs Number of shares repurchased 3,194 2,133 2,558 7,885 Cost of shares repurchased $ 34,394 $ 21,696 $ 23,111 $ 79,201 Average price paid per share $ 10.77 $ 10.17 $ 9.04 $ 10.04 NOTE 21 – SUBSIDIARY DIVIDEND 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) The following table sets forth certain unaudited quarterly financial data: First Second Third Fourth Year Fiscal 2020: Revenue $ 159,736 $ 142,774 $ 157,895 $ 149,286 $ 609,691 Gross profit 34,602 30,433 37,734 31,885 134,654 Net income 10,928 7,972 12,864 8,579 40,343 Net income attributable to Photronics, Inc. shareholders 10,300 6,284 10,776 6,460 33,820 Earnings per share: Basic $ 0.16 $ 0.10 $ 0.17 $ 0.10 $ 0.52 Diluted $ 0.16 $ 0.10 $ 0.17 $ 0.10 $ 0.52 First Second Third Fourth Year Fiscal 2019: Revenue $ 124,712 $ 131,580 $ 138,112 $ 156,256 $ 550,660 Gross profit 26,102 26,010 30,570 38,159 120,841 Net income 7,768 9,852 9,834 13,037 40,491 Net income attributable to Photronics, Inc. shareholders 5,267 8,479 6,347 9,700 29,793 Earnings per share: Basic $ 0.08 $ 0.13 $ 0.10 $ 0.15 $ 0.45 Diluted $ 0.08 $ 0.13 $ 0.10 $ 0.15 $ 0.44 70 Table of Contents NOTE 23 - RECENT ACCOUNTING PRONOUNCEMENTS Accounting Standards Updates Implemented 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. 71 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.