PHOTRONICS INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP (PCAOB ID 34 ) 36 Consolidated Balance Sheets 38 Consolidated Statements of Income 39 Consolidated Statements of Comprehensive (Loss) Income 40 Consolidated Statements of Equity 41 Consolidated Statements of Cash Flows 42 Notes to Consolidated Financial Statements 43 35 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Photronics, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Photronics, Inc. (the “Company”) as of October 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended October 31, 2022, and the related notes (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, 2022 and October 31, 2021, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2022, 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, 2022, 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 December 23, 2022, expressed an unqualified opinion on the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that 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 opinion. 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 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 7 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, including 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, 2022 was $15.8 million. 36 Table of Contents We identified the determination of revenue recognized over time for in-process productions orders as of October 31, 2022 as 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, 2022. 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, 2022 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 tested the accuracy and completeness of the in-process orders report by performing physical observation. - We selected a sample of in-process production orders as of October 31, 2022, and performed the following procedures for each selection: - Obtained and read the contract. - Tested management’s identification of significant contract terms and resulting revenue recognition for the in-process production order. - Tested management’s 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 Boston, Massachusetts December 23, 2022 We have served as the Company’s auditor since 1991. 37 Table of Contents PHOTRONICS, INC. Consolidated Balance Sheets (in thousands, except per share amounts) October 31 , 2022 October 31 , 2021 ASSETS Current assets: Cash and cash equivalents $ 319,680 $ 276,670 Short-term investments 38,820 - Accounts receivable, net of allowance of $ 1,002 in 2022 and $ 1,218 in 2021 198,147 174,447 Inventories 50,753 55,249 Other current assets 37,252 44,250 Total current assets 644,652 550,616 Property, plant and equipment, net 643,873 696,553 Deferred income taxes 19,816 24,353 Other assets 7,489 22,680 Total assets $ 1,315,830 $ 1,294,202 LIABILITIES AND EQUITY Current liabilities: Current portion of long-term debt $ 10,024 $ 22,248 Accounts payable 79,566 81,534 Accrued liabilities 104,207 72,366 Total current liabilities 193,797 176,148 Long-term debt 32,310 89,446 Other liabilities 27,634 28,046 Total liabilities 253,741 293,640 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, 60,791 shares issued and outstanding at October 31, 2022 , and 60,024 shares issued and outstanding at October 31, 2021 608 600 Additional paid-in capital 493,741 484,672 Retained earnings 435,634 317,849 Accumulated other comprehensive (loss) income ( 98,456 ) 20,571 Total Photronics, Inc. shareholders’ equity 831,527 823,692 Noncontrolling interests 230,562 176,870 Total equity 1,062,089 1,000,562 Total liabilities and equity $ 1,315,830 $ 1,294,202 See accompanying notes to consolidated financial statements. 38 Table of Contents PHOTRONICS, INC. Consolidated Statements of Income (in thousands, except per share amounts) Year Ended October 31 , 2022 October 31 , 2021 October 31 , 2020 Revenue $ 824,549 $ 663,761 $ 609,691 Cost of goods sold 530,336 496,717 475,037 Gross profit 294,213 167,044 134,654 Operating expenses: Selling, general and administrative 63,989 57,525 53,582 Research and development 18,341 18,490 17,144 Total operating expenses 82,330 76,015 70,726 Other operating (loss) income, net ( 17 ) 3,525 - Operating income 211,866 94,554 63,928 Non-operating income (expense): Foreign currency transactions’ impacts, net 27,344 7,972 ( 501 ) Interest expense, net of subsidies ( 1,857 ) ( 1,685 ) ( 2,367 ) Interest income and other income, net 1,680 1,165 541 Income before income tax provision 239,033 102,006 61,601 Income tax provision 59,791 23,190 21,258 Net income 179,242 78,816 40,343 Net income attributable to noncontrolling interests 60,456 23,367 6,523 Net income attributable to Photronics, Inc. shareholders $ 118,786 $ 55,449 $ 33,820 Earnings per share: Basic $ 1.96 $ 0.90 $ 0.52 Diluted $ 1.94 $ 0.89 $ 0.52 Weighted-average number of common shares outstanding: Basic 60,559 61,407 64,866 Diluted 61,189 61,999 65,470 See accompanying notes to consolidated financial statements. 39 Table of Contents PHOTRONICS, INC. Consolidated Statements of Comprehensive (Loss) Income (in thousands) Year Ended October 31, 2022 October 31, 2021 October 31, 2020 Net income $ 179,242 $ 78,816 $ 40,343 Other comprehensive (loss) income, net of tax of $ 0 : Foreign currency translation adjustments ( 151,209 ) 8,478 36,381 Other 423 ( 69 ) ( 390 ) Net other comprehensive (loss) income ( 150,786 ) 8,409 35,991 Comprehensive income 28,456 87,225 76,334 Less: comprehensive income attributable to noncontrolling interests 28,697 29,163 15,551 Comprehensive (loss) income attributable to Photronics, Inc. shareholders $ ( 241 ) $ 58,062 $ 60,783 See accompanying notes to consolidated financial statements. 40 Table of Contents PHOTRONICS, INC. Consolidated Statements of Equity Years Ended October 31, 2022, 2021 and 2020 (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 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 Shares issued under equity plans 737 7 3,492 - - - - 3,499 Share-based compensation expense - - 4,927 - - - - 4,927 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 Net income - - - 55,449 - - 23,367 78,816 Other comprehensive income - - - - - 2,613 5,796 8,409 Shares issued under equity plans 805 8 3,561 - - - - 3,569 Share-based compensation expense - - 5,348 - - - - 5,348 Dividends to noncontrolling interest - - - - - - ( 9,597 ) ( 9,597 ) Purchases of treasury stock - - - - ( 48,249 ) - - ( 48,249 ) Retirement of treasury stock ( 3,919 ) ( 39 ) ( 31,573 ) ( 16,637 ) 48,249 - - - Balance at October 31, 2021 60,024 600 484,672 317,849 - 20,571 176,870 1,000,562 Net income - - - 118,786 - - 60,456 179,242 Other comprehensive loss - - - - - ( 119,027 ) ( 31,759 ) ( 150,786 ) Shares issued under equity plans 954 10 4,280 - - - - 4,290 Share-based compensation expense - - 6,308 - - - - 6,308 Contribution from noncontrolling interest - - - - - - 24,995 24,995 Purchases of treasury stock - - - - ( 2,522 ) - - ( 2,522 ) Retirement of treasury stock ( 187 ) ( 2 ) ( 1,519 ) ( 1,001 ) 2,522 - - - Balance at October 31, 2022 60,791 $ 608 $ 493,741 $ 435,634 $ - $ ( 98,456 ) $ 230,562 $ 1,062,089 See accompanying notes to consolidated financial statements. 41 Table of Contents PHOTRONICS, INC. Cons olidated Statements of Cash Flows (in thousands) Year Ended October 31, 2022 October 31, 2021 October 31, 2020 Cash flows from operating activities: Net income $ 179,242 $ 78,816 $ 40,343 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property, plant and equipment 79,971 87,535 89,171 Amortization of intangible assets 359 2,861 4,643 Share-based compensation 6,308 5,348 4,927 Deferred income taxes 809 ( 2,110 ) ( 444 ) Changes in assets, liabilities, and other: Accounts receivable ( 51,233 ) ( 36,620 ) 6,986 Inventories ( 2,039 ) 2,987 ( 6,938 ) Other current assets 1,204 ( 13,472 ) 7,849 Accounts payable, accrued liabilities and other 60,566 25,427 ( 3,491 ) Net cash provided by operating activities 275,187 150,772 143,046 Cash flows from investing activities: Purchases of property, plant and equipment ( 112,338 ) ( 109,099 ) ( 70,815 ) Purchases of available-for-sale debt securities ( 38,854 ) - - Government incentives 3,615 5,775 5,263 Purchases of intangible assets ( 205 ) ( 170 ) ( 159 ) Other 25 - - Net cash used in investing activities ( 147,757 ) ( 103,494 ) ( 65,711 ) Cash flows from financing activities: Repayments of debt ( 65,440 ) ( 20,352 ) ( 7,392 ) Purchases of treasury stock ( 2,522 ) ( 48,249 ) ( 34,394 ) Contributions from noncontrolling interests 24,995 - 17,596 Dividends paid to noncontrolling interests - ( 9,597 ) ( 16,151 ) Proceeds from share-based arrangements 5,749 3,874 4,239 Proceeds from long-term debt - 20,858 20,340 Net settlements of restricted stock awards ( 1,471 ) ( 437 ) ( 248 ) Net cash used in financing activities ( 38,689 ) ( 53,903 ) ( 16,010 ) Effects of exchange rate changes on cash, cash equivalents, and restricted cash ( 46,012 ) 4,703 10,986 Net increase (decrease) in cash, cash equivalents, and restricted cash 42,729 ( 1,922 ) 72,311 Cash, cash equivalents, and restricted cash at beginning of year 279,680 281,602 209,291 Cash, cash equivalents, and restricted cash at end of year 322,409 279,680 281,602 Less: Ending restricted cash 2,729 3,010 2,937 Cash and cash equivalents at end of year $ 319,680 $ 276,670 $ 278,665 Supplemental disclosure of non-cash information: Accruals for property, plant and equipment purchased during year $ 3,266 $ 7,794 $ 13,062 See accompanying notes to consolidated financial statements. 42 Table of Contents PHOTRONICS, INC. Notes to Consolidated Financial Statements Years Ended October 31, 2022, October 31, 2021 and October 31, 2020 (in thousands, except share amounts) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Photronics, Inc. (“Photronics”, “the Company”, “we”, “our”, or “us”) is one of the world’s leading manufacturers of photomasks, which are high-precision photographic quartz or glass plates containing microscopic images of electronic circuits. Photomasks are a key element in the manufacture of ICs and FPDs, and are used as masters to transfer circuit patterns onto semiconductor wafers and FPD substrates during the fabrication of integrated circuits, a variety of FPDs and, to a lesser extent, other types of electrical and optical components. We currently have eleven manufacturing facilities, located in Taiwan ( 3 ), China ( 2 ), Korea , the United States ( 3 ), and Europe ( 2 ). 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 U.S.GAAP requires us to make estimates and assumptions that affect amounts reported in them. Our estimates are based on historical experience and on various assumptions that are believed to be reasonable, including estimates of the impact of COVID 19, 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 Certain immaterial prior periods amounts in the consolidated financial statements and notes thereto have been reclassified to conform 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. Investments Investments consist of U. S. government securities and are classified as available-for-sale. We classify available-for-sale securities on our consolidated balance sheet as follows: - Maturing within three months or less from the date of purchase Cash and cash equivalents - Maturing, as of the date of purchase, more than three months, but with remaining maturities of less than one year, from the balance sheet date Short-term investments - Maturing one year or more from the balance sheet date Long-term marketable investments As of October 31, 2022, all of our available-for-sale securities had remaining maturities of more than three months, but less than one year, and have been classified as Short-term investments . As of October 31, 2021, we did no t hold any investments. Available-for-sale debt investments are reported at fair value, with unrealized gains or losses (net of tax) reported in Accumulated other comprehensive (loss) income . The fair values of our available-for-sale securities are Level 1 measurements, based on quoted prices from active markets for identical assets. In the event of a sale of an available-for-sale debt investment, we would determine the cost of the investment sold at the specific individual security level, and would include any gain or loss in Interest income and other income, net, where we also report periodic interest earned and the amortization (accretion) of discounts (premiums) related to these investments. The table below provides information on our available-for-sale debt securities. October 31, 2022 October 31, 2021 Amortized Cost Unrealized Gains Unrealized Losses Carrying Value Amortized Cost Unrealized Gains Unrealized Losses Carrying Value Government securities $ 38,911 $ - $ ( 91 ) $ 38,820 $ - $ - $ - $ - Periodically, at the individual security level, we review our investments to determine if they are impaired. An investment would be impaired if its amortized cost exceeds its fair value. In the event that an investment’s amortized cost exceeds its fair value, we would determine whether the impairment is temporary or other than temporary. Factors indicating that an other than temporary impairment had occurred that we would consider in our determination include whether we have decided to sell the security and whether it is more likely than not that we may be required to sell the security before its amortized cost basis is recovered. In addition, for certain types of securities, we would assess whether the discounted cash flows we expect to collect on an investment are less than its amortized cost and, under such a circumstance, recognize the existing credit loss as an impairment. Accounts Receivable and Allowance for Credit Losses 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 reporting period. To the extent that we believe a loss on the collection of a customer invoice is probable, we record the loss and credit an allowance for credit losses. In the event that an amount is determined to be uncollectible, we charge the allowance for credit losses and derecognize the related receivable. Refer to our revenue recognition policy, below, for additional information on our accounting for accounts receivable. 43 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. The components of Inventories at the balance sheet dates are presented below. October 31, 2022 October 31, 2021 Raw materials $ 49,326 $ 54,019 Work in process 1,408 1,121 Finished goods 19 109 $ 50,753 $ 55,249 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 lessor of the life of the lease or the estimated useful life of the improvement. We employ judgment when making assumptions about the estimated useful lives and depreciation periods we assign to property, plant and equipment, and when events or changes in circumstances such as a significant industry downturn, plant closures, technological obsolescence, or other occurrences 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. 44 Table of Contents Intangible Assets Intangible 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 changes in 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 changes in 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. Restricted Cash Restricted cash in the amounts of $ 2.7 million and $ 3.0 million are included in Other assets on our October 31, 2022 and October 31, 2021, 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 are 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 was resolved. 45 Table of Contents 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 to customers. 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. We did no t impair any contract assets or accounts receivable in 2022, 2021, or 2020 . The following table provides information about our contract balances at the balance sheet dates. Classification October 31, 2022 October 31, 2021 Contract Assets Other current assets $ 15,752 $ 9,859 Contract Liabilities Accrued liabilities $ 18,872 $ 14,717 Other liabilities 4,989 5,197 $ 23,861 $ 19,914 The following table presents revenue recognized from contract liabilities that existed at the beginning of the reporting periods. Year Ended October 31, 2022 October 31, 2021 October 31, 2020 Revenue recognized from beginning liability $ 8,934 $ 5,300 $ 2,823 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 procure on our behalf. 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. However, the demand for some IC photomasks has expanded beyond the industry’s capacity to supply them within the traditional time period; thus the backlog, in some individual cases, can expand to as long as two to three months . As allowed under Topic 606, we have elected not to disclose our remaining performance obligations, which represent the costs associated with the completion of the manufacturing process of in-process photomasks related to contracts that have an original duration of one year or less. Product Warranties 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 any photomasks that fail to do so. The warranties do not represent separate performance obligations in our revenue contracts. Historically, customer claims under warranties have been immaterial . 46 Table of Contents Leases Our involvement in lease arrangements has typically been as a lessee. We determine if an agreement is, or contains, a lease on the earlier of the date of the agreement or the date on which we commit to entering the agreement. 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 having the right to control an 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. As allowed under ASC Topic 842 – “Leases” (“Topic 842”), we have elected to 1) not to apply the recognition requirements to leases that, at their commencement dates, have lease terms of twelve months or less and do not include options to purchase their underlying assets that we are reasonably certain to exercise and 2) for all classes of assets, the practical expedient to not separate lease components of a contract from nonlease components of a contract . 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 rights to use the underlying assets, and lease liabilities which represent our obligation to make payments for such rights. The present value of lease payments over the term 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 (at which they are measured on their commencement dates), are not included in the measurement of ROU assets and their related lease liabilities. Lease terms include extension periods if the lease agreement includes an option to extend the lease that we are reasonably certain to exercise. The initial measurement process for finance leases and operating leases is the same, except that, for operating leases, we generally apply our incremental borrowing rates for collateralized borrowings over terms similar to those of the leases to determine the lease liability while, for finance leases, we use the interest rates implicit in the leases. The initial measurement of ROU assets may require further adjustments for lease prepayments and initial direct costs we incur. 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 expenses are included in the consolidated statement of income in Cost of goods sold . 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 is included in Interest expense on the consolidated statements of income. Cash paid for operating leases and interest paid for finance leases are included in the consolidated statement of cash flows as operating activities in Accounts payable, accrued liabilities and other ; cash paid for finance lease principal is included in Repayments of debt in the financing activities section of the consolidated statement of cash flows. Share-Based Compensation We recognize share-based compensation expense over the service period during which 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. 47 Table of Contents 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, which are their functional 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 (loss) income , a component of equity on our consolidated balance sheets. 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 income or loss before income taxes for each entity in its respective tax jurisdiction. 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 employ judgment and make assumptions when establishing valuation allowances for deferred income tax assets, if their realization is not deemed to be 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 are eligible for investment tax credits in U.S. and non-U.S. tax jurisdictions. We account for investment tax credits under the “flow-through” method of accounting. As permitted in ASC 740 “Income Taxes”, under the flow-through method of accounting, the tax benefit from an investment tax credit is recorded as a reduction of income taxes in the period in which the credit is generated. 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, which are presented on our consolidated balance sheets, and deferred tax liabilities, which are included in Other liabilities on 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 were exercised or earned. 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. An 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. 49 Table of Contents NOTE 2 - OTHER CURRENT ASSETS Presented below are the components of Other current assets at the balance sheet dates. October 31, 2022 October 31, 2021 Contract assets $ 15,752 $ 9,859 Prepaid and refundable income taxes 9,709 1,550 Prepaid expenses 8,263 7,999 Recoverable value added taxes 2,714 24,213 Other 814 629 $ 37,252 $ 44,250 NOTE 3 - PROPERTY, PLANT AND EQUIPMENT, NET Presented below are the components of Property, plant and equipment, net at the balance sheet dates. October 31, 2022 October 31, 2021 Land $ 11,134 $ 12,442 Buildings and improvements 168,024 181,922 Machinery and equipment 1,769,478 1,961,474 Leasehold improvements 18,802 21,751 Furniture, fixtures and office equipment 14,355 15,534 Construction in progress 90,846 35,009 2,072,639 2,228,132 Accumulated depreciation and amortization ( 1,428,766 ) ( 1,531,579 ) $ 643,873 $ 696,553 Information on ROU assets resulting from finance leases, at the balance sheet dates, is presented below. October 31, 2022 October 31, 2021 Machinery and equipment $ 42,760 $ 42,760 Accumulated amortization ( 4,784 ) ( 1,933 ) $ 37,976 $ 40,827 The following table presents depreciation expense (including the amortization of ROU assets) related to property, plant and equipment incurred during the reporting periods. Year Ended October 31, 2022 October 31, 2021 October 31, 2020 Depreciation expense $ 79,971 $ 87,535 $ 89,171 In the third quarter of 2021, we recorded a $ 3.5 million gain on the trade-in of a lithography tool with a tool vendor as partial compensation for a more advanced tool. NOTE 4 - PDMCX JOINT VENTURE In January 2018, Photronics, Inc. through its wholly owned Singapore subsidiary (hereinafter, within this Note “we”, “Photronics”, “ us ”, or “our”), and DNP, through its wholly owned subsidiary “DNP Asia Pacific PTE, Ltd.” entered into a joint venture under which DNP obtained a 49.99 % interest in our IC business in Xiamen, China. The joint venture, which we refer to as “PDMCX”, was established to develop and manufacture photomasks for 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 . In 2020, in combination with local financing obtained by PDMCX, Photronics and DNP fulfilled their investment obligations under the PDMCX operating agreement ( “ the Agreement ” ). As discussed in Note 6, liens were granted to the local financing entity on property, plant and equipment with an October 31, 2022, and October 31, 2021, total carrying value of $ 70.7 and $ 90.1 million, respectively, 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 that 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. The following table presents net income or loss we recorded from the operations of PDMCX during the reporting periods. Year Ended October 31, 2022 October 31, 2021 October 31, 2020 Net income (loss) from PDMCX $ 16,714 $ 6,425 $ ( 4,684 ) As required by the guidance in ASC Topic 810 - “Consolidation”, 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 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. 50 Table of Contents The following table presents the carrying amounts of PDMCX assets and liabilities included in our consolidated balance sheets. General creditors of PDMCX do not have recourse to the assets of Photronics (other than the net assets of PDMCX); therefore, our maximum exposure to loss from PDMCX is our interest in the carrying amount of the net assets of the joint venture. October 31, 2022 October 31, 2021 Classification Carrying Amount Photronics Interest Carrying Amount Photronics Interest Current assets $ 127,542 $ 63,784 $ 59,745 $ 29,879 Noncurrent assets 119,392 59,708 137,799 68,913 Total assets 246,934 123,492 197,544 98,792 Current liabilities 51,274 25,643 26,559 13,282 Noncurrent liabilities 9,161 4,581 42,917 21,463 Total liabilities 60,435 30,224 69,476 34,745 Net assets $ 186,499 $ 93,268 $ 128,068 $ 64,047 NOTE 5 - ACCRUED LIABILITIES Presented below are the components of Accrued liabilities at the balance sheet dates. October 31, 2022 October 31, 2021 Compensation related expenses $ 33,061 $ 22,632 Income taxes 37,595 15,596 Contract liabilities 18,872 14,717 Property, plant, and equipment 2,989 3,331 Value added and other taxes 2,923 2,540 Operating leases 1,354 2,273 Telecommunications and utilities 1,111 1,067 Other 6,302 10,210 Accrued liabilities $ 104,207 $ 72,366 51 Table of Contents NOTE 6 - DEBT The tables below provide information on our long-term debt. As of October 31, 2022 Xiamen Project Loans Xiamen Working Capital Loans Hefei Equipment Loan Finance Leases Total Principal due: Next 12 months $ - $ 3,512 $ - $ 6,512 $ 10,024 Months 13 – 24 $ - $ - $ - $ 6,610 $ 6,610 Months 25 – 36 1,098 - - 17,961 19,059 Months 37 – 48 6,641 - - - 6,641 Long-term debt $ 7,739 $ - $ - $ 24,571 $ 32,310 Interest rate at balance sheet date 4.30 % - 4.45 % 4.46 % N/A (2) Basis spread on interest rates 0.00 76.00 N/A N/A Interest rate reset Quarterly Monthly/Annually N/A N/A Maturity date December 2025 July 2023 Paid July 2022 (2) Periodic payment amount Varies as loans mature (1) Increases as loans mature N/A (2) Periodic payment frequency Semiannual, on individual loans Semiannual, on individual loans N/A Monthly Loan collateral (carrying amount) $ 70,705 N/A N/A $ 37,976 (3) (1) During the three month period ended October 31, 2022, we repaid 81,000,000 RMB (approximately $ 11.5 million) that had contractual maturity dates ranging from December 2023 through June 2025. (2) See Note 8 for interest rates on lease liabilities, maturity dates, and periodic payment amounts. (3) Represents the carrying amount at the balance sheet date of the related ROU assets, in which the lessors have secured interests. As of October 31, 2021 Xiamen Project Loans Xiamen Working Capital Loans Hefei Equipment Loan Finance Leases Total Principal due: Next 12 months $ 2,068 $ 8,197 $ 4,694 $ 7,289 $ 22,248 Months 13 – 24 $ 10,071 $ 4,005 $ 4,693 $ 6,512 $ 25,281 Months 25 – 36 10,278 - 6,257 6,610 23,145 Months 37 – 48 9,902 - 5,585 17,961 33,448 Months 49 – 60 7,572 - - - 7,572 Long-term debt $ 37,823 $ 4,005 $ 16,535 $ 31,083 $ 89,446 Interest rate at balance sheet date 4.65 % 4.53 % - 4.61 % 4.20 % (3) Basis spread on interest rates 0.00 67.75 - 76.00 ( 45.00 ) N/A Interest rate reset Quarterly Monthly/Annually Annually N/A Maturity date December 2025 July 2023 September 2025 (3) Periodic payment amount Varies as loans mature Increases as loans mature Varies (1) (3) Periodic payment frequency Semiannual, on individual loans Semiannual, on individual loans Semiannual (2) Monthly Loan collateral (carrying amount) $ 90,096 N/A 86,487 $ 40,826 (4) (1) First five loan repayments were scheduled to be for 7.5 percent of the approved 200 million RMB loan principal; last five installments were scheduled to be for 12.5 percent of the approved loan principal. (2) Semiannual repayments commence in March 2022; remaining outstanding amount paid in July 2022. (3) See Note 8 for interest rates on lease liabilities, maturity dates, and periodic payment amounts. (4) Represents the carrying amount at the balance sheet date of the related ROU assets, in which the lessors have secured interests. Xiamen Project Loans In November 2018, PDMCX obtained approval to borrow 345 million RMB from the Industrial and Commercial Bank of China. From November 2018 through July 2020, PDMCX entered into separate loan agreements (the “Project Loans”) for the entire approved amount and, as of October 31, 2022, 56.4 million RMB ($ 7.7 million) remained outstanding. The Project Loans were used to finance certain capital expenditures at the PDMCX facility, and are collateralized by liens granted on the land use right, building, and certain equipment located at the facility. The interest rates on the Project Loans are variable (based on the RMB Loan Prime Rate of the National Interbank Funding Center), and interest incurred on the loans was eligible for reimbursement through incentives provided by the Xiamen Torch Hi-Tech Industrial Development Zone, which afforded for such reimbursements up to a prescribed limit and duration. The Project Loans are subject to covenants and provisions, certain of which relate to the assets pledged as security for the loan, all of which we were in compliance with at October 31, 2022. Xiamen Working Capital Loans In November 2018, PDMCX obtained approval for revolving, unsecured credit of the equivalent of $ 25.0 million, pursuant to which PDMCX may enter into separate loan agreements with varying terms to maturity. This facility is subject to annual reviews and extension. Unless extended, this facility will expire in November 2023 . As of October 31, 2022, PDMCX had 25.6 million RMB ($ 3.5 million) outstanding against the approval. The interest rates are variable, based on the RMB Loan Prime Rate of the National Interbank Funding Center. 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 and duration. Hefei Equipment Loan In October 2020, our Hefei, China, facility was approved to borrow 200 million RMB from the China Construction Bank Corporation. In July 2022, we repaid our entire outstanding balance of 120.7 million RMB ($ 18.0 million). This credit facility was subject to annual reviews and extension; the most recent extension expired in August 2022 and we did not apply for an extension. The loan proceeds were used to fund purchases of two lithography tools at the Hefei facility. The interest rate on the loan was variable and based on the RMB Loan Prime Rate of the National Interbank Funding Center. The borrowings were secured by the Hefei facility, its related land use right, and certain manufacturing equipment. The Hefei Equipment Loan was subject to covenants and provisions, certain of which relate to the assets pledged as security for the loan, including covenants for the ratio of total liabilities to total assets and the ratio of current assets to current liabilities, all of which we were in compliance with at the time of repayment. Finance Leases In February 2021, under an MLA which we entered into effective October 2020, we entered into a five-year $ 7.2 million finance lease for a high-end inspection tool and, in December 2020, under an MLA which we entered into effective July 2019, we entered into a $ 35.5 million lease for a high-end lithography tool. See Note 8 for additional information on these leases. 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 certain of the 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, 2022), 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, 2022. The interest rate on the Credit Agreement ( 4.75 % at October 31, 2022) is based on our total leverage ratio at LIBOR plus a spread, as defined in the Credit Agreement. Interest Paid for Debt Interest payments, including capitalized interest of $ 0.1 million in both 2021 and 2020, were $ 2.8 million in 2022, $ 3.8 million in 2021, and $ 2.6 million in 2020. 52 Table of Contents NOTE 7 - REVENUE The following tables present our revenue for the years ended October 31, 2022, October 31, 2021, and October 31, 2020, disaggregated by product type, geographic origin, and timing of recognition. Year Ended Revenue by Product Type October 31, 2022 October 31, 2021 October 31, 2020 IC High-end $ 195,332 $ 162,973 $ 156,129 Mainstream 397,694 297,198 262,281 Total IC $ 593,026 $ 460,171 $ 418,410 FPD High-end $ 186,988 $ 155,670 $ 139,558 Mainstream 44,535 47,920 51,723 Total FPD $ 231,523 $ 203,590 $ 191,281 $ 824,549 $ 663,761 $ 609,691 Year Ended Revenue by Geographic Origin* October 31, 2022 October 31, 2021 October 31, 2020 Taiwan $ 291,342 $ 248,597 $ 239,101 China 212,598 115,732 79,374 Korea 156,139 156,391 153,052 United States 126,205 105,023 104,949 Europe 36,402 36,242 31,501 Other 1,863 1,776 1,714 $ 824,549 $ 663,761 $ 609,691 * This table disaggregates revenue by the location in which it was earned. Revenue by Timing of Recognition Over time $ 758,359 $ 606,332 $ 535,071 At a point in time 66,190 57,429 74,620 $ 824,549 $ 663,761 $ 609,691 NOTE 8 - LEASES In February 2021, we entered into a five-year $ 7.2 million finance lease for a high-end inspection tool. Monthly payments on the lease, which commenced in February 2021, are $ 0.1 million per month. Upon the payment of the fiftieth monthly payment and prior to payment of the fifty-first monthly payment, we may exercise an early buyout option to purchase the tool for $ 2.4 million. If we do not exercise the early buyout option, then at the end of the five-year lease term, the lease shall continue to renew on a month-to-month basis at the same rental terms; at our option, after the original term or any renewal periods, we may return the tool, elect to extend the lease, or purchase the tool at its fair market value. Since we are reasonably certain that we will exercise the early buyout option, our lease liability reflects such exercise and we have classified the lease as a finance lease. The interest rate implicit in the lease is 1.08 %. In December 2020, we entered into a five-year $ 35.5 million finance lease for a high-end lithography tool. Monthly payments on the lease, which commenced in January 2021, increased from $ 0.04 million during the first three months to $ 0.6 million for the following nine months, followed by forty-eight monthly payments of $ 0.5 million. As of the due date of the forty-eighth monthly payment, we may exercise an early buyout option to purchase the tool for $ 14.1 million. If we do not exercise the early buyout option, then at the end of the five-year lease term, at our option, we may return the tool, elect to extend the lease term for a period and a lease payment to be agreed with lessor at the time, or purchase the tool for its then-fair market value as determined by the lessor. Since we are reasonably certain that we will exercise the early buyout option, our lease liability reflects such exercise and we have classified the lease as a finance lease. The interest rate implicit in the lease is 1.58 %. The lease agreement incorporates the covenants included in our Corporate Credit Agreement, which are detailed in Note 6, and includes a cross-default provision for any agreement or instrument with an outstanding, committed balance greater than $ 5.0 million in which we are the indebted party. 53 Table of Contents The following table provides information on operating and finance leases included in our consolidated balance sheets. Classification October 31, 2022 October 31, 2021 ROU Assets – Operating Leases Other assets $ 3,341 $ 5,581 ROU Assets – Finance Leases Property, plant and equipment, net $ 37,976 $ 40,827 Lease Liabilities – Operating Leases Accrued liabilities $ 1,354 $ 2,273 Other liabilities 1,928 3,246 $ 3,282 $ 5,519 Lease Liabilities – Finance Leases Current portion of long-term debt $ 6,512 $ 7,289 Long-term debt 24,571 31,083 $ 31,083 $ 38,372 The following table presents future lease payments under noncancelable operating and finance leases as of October 31, 2022. Imputed interest represents the difference between undiscounted cash flows and discounted cash flows. Fiscal Year Operating Leases Finance Leases 2023 $ 1,398 $ 6,938 2024 913 6,938 2025 614 18,013 2026 346 - 2027 132 - Total lease payments 3,403 31,889 Imputed interest ( 121 ) ( 806 ) Lease liabilities $ 3,282 $ 31,083 The following table presents lease costs for 2022, 2021, and 2020. Year Ended October 31, 2022 October 31, 2021 October 31, 2020 Operating lease costs $ 2,253 $ 2,904 $ 3,076 Short-term lease costs $ 469 $ 232 $ 359 Variable lease costs $ 603 $ 498 $ 378 Interest on finance lease $ 522 $ 510 $ - Amortization of ROU assets $ 2,917 $ 1,867 $ - The following table presents statistical information related to our operating and finance leases. The information presented is as of the balance sheet dates. October 31, 2022 October 31, 2021 Classification Weighted-average remaining lease term (in years) Weighted-average discount rate Weighted-average remaining lease term (in years) Weighted-average discount rate Operating leases 3.1 2.3 % 3.5 2.4 % Finance leases 2.2 1.5 % 3.3 1.5 % The following table presents the effects of leases on our 2022, 2021, and 2020 consolidated statements of cash flows, and provides leases-related non-cash information for those years. Year Ended October 31, 2022 October 31, 2021 October 31, 2020 Operating cash flows used for operating leases $ 2,259 $ 2,442 $ 3,584 Operating cash flows used for finance leases $ 566 $ 464 $ - Financing cash flows used for finance leases $ 7,289 $ 4,323 $ - ROU assets obtained in exchange for operating lease obligations $ 513 $ 457 $ 2,681 ROU assets obtained in exchange for finance lease obligations $ - $ 42,672 $ - NOTE 9 - SHARE-BASED COMPENSATION In March 2016, shareholders approved our current 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. The table below presents information on our share-based compensation expenses for the three most recent fiscal years. Year Ended October 31, 2022 October 31, 2021 October 31, 2020 Expense reported in: Cost of goods sold $ 868 $ 446 $ 337 Selling, general and administrative 4,803 4,446 4,590 Research and development 637 456 - Total expense incurred $ 6,308 $ 5,348 $ 4,927 Expense by award type: Restricted stock awards $ 5,800 $ 4,920 $ 4,140 Stock options 298 218 649 Employee stock purchase plan 210 210 138 Total expense incurred $ 6,308 $ 5,348 $ 4,927 Income tax benefits of share-based compensation $ 449 $ 233 $ 168 Share-based compensation cost capitalized $ - $ - $ - 54 Table of Contents Restricted Stock Awards 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. A summary of restricted stock award activity during 2022 and the status of our restricted stock awards as of October 31, 2022, is presented below. Restricted Stock Shares Weighted-Average Fair Value at Grant Date Outstanding at October 31 , 2021 929,147 $ 12.08 Granted 654,224 $ 18.73 Vested ( 407,716 ) $ 12.78 Cancelled ( 281,951 ) $ 15.27 Outstanding at October 31 , 2022 893,704 $ 15.62 Expected to vest as of October 31, 2022 814,294 $ 15.52 The table below presents additional information on our restricted stock awards for the three most recent fiscal years. Year Ended October 31, 2022 October 31, 2021 October 31, 2020 Number of shares granted 654,224 564,800 538,000 Weighted-average grant-date fair value of awards (in dollars per share) $ 18.73 $ 11.20 $ 15.08 Compensation costs not yet recognized $ 8,949 $ 7,300 $ 6,933 Weighted-average amortization period (in years) 2.7 2.6 2.8 Fair value of awards for which restrictions lapsed $ 5,212 $ 4,491 $ 2,957 Shares outstanding at balance sheet date 893,704 929,147 812,316 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. 55 Table of Contents The table below presents a summary of stock options activity during 2022 and information on stock options outstanding at October 31, 2022. Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life Aggregate Intrinsic Value Outstanding at October 31 , 2021 1,173,103 $ 9.49 Granted - $ - Exercised ( 571,514 ) $ 9.23 Cancellations, forfeitures, and adjustments 12,412 $ 9.74 Outstanding at October 31 , 2022 614,001 $ 9.74 3.3 years $ 3,980 Exercisable at October 31 , 2022 590,275 $ 9.74 3.2 years $ 3,827 Expected to vest as of October 31 , 2022 23,559 $ 9.78 6.2 years $ 152 The table below presents additional information on stock option awards for the three most recent fiscal years. Year Ended October 31, 2022 October 31, 2021 October 31, 2020 Number of options granted in period - - - Total intrinsic value of options exercised $ 5,108 $ 1,910 $ 3,184 Cash received from option exercises $ 5,275 $ 3,441 $ 3,746 Compensation cost not yet recognized $ 13 $ 109 $ 378 Weighted-average amortization period for cost not yet recognized (in years) 0.2 1.1 1.7 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 from the commencement date) . We recognize the ESPP expense over that same period. As of October 31, 2022, 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 1.6 million shares had been issued through October 31, 2022. As of October 31, 2022, less than 0.1 million shares, with unrecognized compensation cost of less than $ 0.1 million (all of which will be recognized in fiscal 2023) were subject to outstanding subscriptions. NOTE 10 - 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, $ 0.8 million and $ 0.7 million in 2022, 2021, and 2020, respectively. 56 Table of Contents NOTE 11 - INCOME TAXES Income before the income tax provisions consists of the following: Year Ended October 31, 2022 October 31, 2021 October 31, 2020 United States $ 1,813 $ ( 19,447 ) $ ( 10,672 ) Foreign 237,220 121,453 72,273 $ 239,033 $ 102,006 $ 61,601 57 Table of Contents Income Tax Provision The components of our income tax provisions are presented below. Year Ended October 31, 2022 October 31, 2021 October 31, 2020 Current: Federal $ - $ - $ - State 1 4 4 Foreign 58,981 25,296 21,698 58,982 25,300 21,702 Deferred: Federal - - - State 10 103 8 Foreign 799 ( 2,213 ) ( 452 ) 809 ( 2,110 ) ( 444 ) Total $ 59,791 $ 23,190 $ 21,258 The table below presents a reconciliation of income taxes calculated by applying the statutory U.S. federal income tax rate to our income tax provisions of the reporting periods. Year Ended October 31, 2022 October 31, 2021 October 31, 2020 U.S. federal income tax at statutory rate $ 50,197 $ 21,421 $ 12,936 Changes in valuation allowances ( 1,462 ) 364 6,942 Foreign tax rate differentials 7,941 3,244 1,718 Tax credits ( 1,368 ) ( 3,942 ) ( 1,562 ) Uncertain tax positions, including reserves, settlements and resolutions 3,214 1,037 1,637 Income tax holiday - - ( 318 ) Other, net 1,269 1,066 ( 95 ) Income tax provision $ 59,791 $ 23,190 $ 21,258 Reporting Period U.S. Statutory Tax Rates Photronics Effective Tax Rates Primary Reasons for Differences 2022 21.0 % 25.0 % Non-U.S. pre-tax income being taxed at higher statutory rates in non-U.S. jurisdictions; and the establishment of uncertain tax positions in non-U.S. jurisdiction. 2021 21.0 % 22.7 % 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, and investment credits in foreign jurisdictions. 2020 21.0 % 34.5 % 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. 58 Table of Contents Deferred Income Tax Assets and Liabilities The net deferred income tax assets consist of the following: As of October 31, 2022 October 31, 2021 Deferred income tax assets Net operating losses $ 29,410 $ 31,657 Reserves not currently deductible 8,528 8,201 Tax credit carryforwards 9,660 9,877 Share-based compensation 1,560 1,500 Property, plant and equipment 6,591 7,566 Lease liabilities 7,367 9,134 Other - 157 63,116 68,092 Valuation allowances ( 32,895 ) ( 34,337 ) 30,221 33,755 Deferred income tax liabilities ROU assets ( 8,930 ) ( 9,698 ) Other ( 1,722 ) - ( 10,652 ) ( 9,698 ) Net deferred income tax assets $ 19,569 $ 24,057 Classification Deferred income tax assets $ 19,816 $ 24,353 Other liabilities ( 247 ) ( 296 ) $ 19,569 $ 24,057 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 deferred tax assets will expire prior to utilization. In 2022 the valuation allowance decreased as a result of management’s determination that tax benefits on deferred tax assets would more likely than not be realized and, therefore, decreased the valuation allowance to include these deferred tax assets. Due to the Tax Cuts and Jobs Act, which was signed into law in December 2017, 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 foreign withholding tax expense on those earnings, the amount of which is not practicable to compute. 59 Table of Contents Tax Credits and Carryforwards The following tables present our available operating loss and credit carryforwards as of October 31, 2022, and their related expiration periods. Operating Loss Carryforwards Amount Expiration Period Federal $ 95,822 2029 -Indefinite State $ 170,198 2023 -Indefinite Foreign $ 107 2024 - 2032 60 Table of Contents Tax Credit Carryforwards Amount Expiration Period Federal research and development $ 5,576 2024 - 2042 State $ 5,169 2023 - 2036 Uncertain Tax Positions We include unrecognized tax benefits in Other liabilities , and we include any applicable interest and penalties related to uncertain tax positions in our income tax provision. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is presented below. The amounts in the table include settlements of non-U.S. audits. Year Ended October 31, 2022 October 31, 2021 October 31, 2020 Balance at beginning of year before interest and penalties $ 3,534 $ 2,550 $ 1,758 (Reductions) additions of tax positions in prior years ( 355 ) 181 227 Additions based on current year tax positions 2,892 1,313 1,576 Settlements ( 848 ) ( 489 ) ( 992 ) Lapses of statutes of limitations ( 19 ) ( 21 ) ( 19 ) Balance at end of year before interest and penalties 5,204 3,534 2,550 Interest and penalties 395 223 131 Balance at end of year including interest and penalties $ 5,599 $ 3,757 $ 2,681 The following table presents additional information on our uncertain tax positions, as of the balance sheet dates. October 31, 2022 October 31, 2021 Unrecognized tax benefits that, if recognized, would impact the effective tax rate $ 5,599 $ 3,757 Accrued interest and penalties related to uncertain tax positions $ 395 $ 223 Although the timing of the reversal of uncertain tax positions may be uncertain, as they can be dependent upon the settlement of tax audits or expirations of statutes of limitations, 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 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 2017. Income Tax Payments and Refunds The table below presents income taxes paid and refunds of income taxes received during the reporting periods. Year Ended October 31, 2022 October 31, 2021 October 31, 2020 Income taxes paid $ 37,770 $ 22,684 $ 22,954 Income tax refunds received $ 388 $ 713 $ 4,258 61 Table of Contents NOTE 12 - EARNINGS PER SHARE The calculation of basic and diluted earnings per share is presented below. Year Ended October 31, 2022 October 31, 2021 October 31, 2020 Net income attributable to Photronics, Inc. shareholders $ 118,786 $ 55,449 $ 33,820 Effect of dilutive securities - - - Earnings used for diluted earnings per share $ 118,786 $ 55,449 $ 33,820 Weighted-average common shares computations: Weighted-average common shares used for basic earnings per share 60,559 61,407 64,866 Effect of dilutive securities: Share-based payment awards 630 592 604 Potentially dilutive common shares 630 592 604 Weighted-average common shares used for diluted earnings per share 61,189 61,999 65,470 Basic earnings per share $ 1.96 $ 0.90 $ 0.52 Diluted earnings per share $ 1.94 $ 0.89 $ 0.52 The table below sets forth 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, 2022 October 31, 2021 October 31, 2020 Share based payment awards 314 331 795 Total potentially dilutive shares excluded 314 331 795 NOTE 13 - COMMITMENTS AND CONTINGENCIES Presented below are our unrecognized commitments, as of October 31, 2022. Included in these amounts are commitments of $ 148 million for the purchase of capital equipment. The amounts below do not include our commitments under our debt and lease arrangements, which are presented in Notes 6 and 8, respectively. 62 Table of Contents Fiscal Year Unrecognized Commitments 2023 $ 124,653 2024 44,434 2025 22,640 2026 - 2027 - Thereafter - Total $ 191,727 We are subject to various claims that arise in the ordinary course of business. We believe that our potential liability under such claims, individually and in the aggregate, will not have a material effect on our consolidated financial statements. As of October 31, 2022, and October 31, 2021, we were not involved in environmental litigation to which a government was a party. NOTE 14 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME BY COMPONENT The following tables set forth the changes in our accumulated other comprehensive (loss) income by component (net of tax of $ 0 ) for the years ended October 31, 2022, and October 31, 2021. Year Ended October 31, 2022 Foreign Currency Translation Adjustments Other Total Balance at October 31, 2021 $ 21,476 $ ( 905 ) $ 20,571 Other comprehensive (loss) income ( 151,209 ) 423 ( 150,786 ) Other comprehensive loss (income) attributable to noncontrolling interests 31,943 ( 184 ) 31,759 Balance at October 31, 2022 $ ( 97,790 ) $ ( 666 ) $ ( 98,456 ) Year Ended October 31, 2021 Foreign Currency Translation Adjustments Other Total Balance at October 31, 2020 $ 18,828 $ ( 870 ) $ 17,958 Other comprehensive income (loss) 8,478 ( 69 ) 8,409 Other comprehensive (income) loss attributable to noncontrolling interests ( 5,830 ) 34 ( 5,796 ) Balance at October 31, 2021 $ 21,476 $ ( 905 ) $ 20,571 NOTE 15 - RISKS AND CONCENTRATIONS 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 credit losses based upon factors surrounding the credit risk of specific customers, historical trends, and other information. 63 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. The following table presents the percentages of our net accounts receivable attributable to customers that accounted for more than ten percent of the total balance as of the balance sheet dates. October 31, 2022 October 31, 2021 Customer A 16 % 20 % Customer B 16 % 12 % The following table presents the percentages of our revenue attributable to customers that accounted for more than ten percent of the total revenue during the reporting periods. Year Ended October 31, 2022 October 31, 2021 October 31, 2020 Customer A 15 % 17 % 16 % Customer B 11 % 12 % 14 % 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. As of the balance sheet dates, our long-lived assets and net assets were, by geographic area, as presented below. October 31, 2022 October 31, 2021 Long-lived Assets Net Assets Long-lived Assets Net Assets China $ 242,712 $ 257,855 $ 297,633 $ 210,437 Taiwan 155,690 393,795 134,174 341,291 United States 132,915 183,909 137,640 173,062 Korea 109,892 229,501 140,485 254,357 Europe and Other 6,758 ( 2,971 ) 5,627 21,415 $ 647,967 $ 1,062,089 $ 715,559 $ 1,000,562 NOTE 16 - RELATED PARTY TRANSACTIONS Our chief executive officer is related to an individual in a position of authority at one of our largest customers. We recorded revenue from this customer of $ 119.0 million, $ 111.0 million and $ 96.4 million, in 2022, 2021, and 2020, respectively. As of October 31, 2022, and October 31, 2021, we had accounts receivable of $ 32.4 million and $ 34.5 million, respectively, from this customer. We believe that the terms of the transaction described above was negotiated at arm’s length and were no less favorable to us than terms we could have obtained from unrelated third parties. NOTE 17 - 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 certain 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 Short-term investments are Level 1 measurements. (Please refer to “Investments” within Note 1 for additional fair value information on our Short-term investments .) The fair values of certain cash equivalents are Level 2 measurements that are provided by independent third-party pricing services or other independent entities, which may use matrix pricing, valuation models, or other methods which utilize observable market data. The fair values of our variable-rate debt instruments are Level 2 measurements and approximate their carrying values due to the variable nature of their underlying interest rates. Other than our Short-term investments, we did no t have any assets or liabilities measured at fair value, on a recurring or a nonrecurring basis, at October 31, 2022, or October 31, 2021. NOTE 18 - 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. The company commenced repurchasing shares under this authorization on September 16, 2020 . 64 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 . All of the shares purchased under the above repurchase programs were retired prior to the end of the fiscal year in which they were purchased. As of October 31, 2022, $ 31.7 million was available under this authorization for the purchase of additional shares. The table below presents information on the repurchase programs for the three most recent fiscal years . 2022 Purchases 2021 Purchases 2020 Purchases Number of shares repurchased 187 3,919 3,194 Cost of shares repurchased $ 2,522 $ 48,249 $ 34,394 Average price paid per share $ 13.43 $ 12.31 $ 10.77 NOTE 19 - SUBSIDIARY DIVIDENDS In 2021 and 2020, PDMC, the Company’s majority owned subsidiary in Taiwan, paid dividends of which 49.99 %, or approximately $ 9.6 million and $ 16.2 million , respectively, were paid to noncontrolling interests. 65 Table of Contents NOTE 20 - RECENT ACCOUNTING PRONOUNCEMENTS Accounting Standards Updates Adopted In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740, Income Taxes. The amendments also improve consistent application of and simplify US GAAP for other areas of ASC 740 by clarifying and amending existing guidance. We adopted ASU 2019-12 on November 1, 2021; the adoption of this guidance did not have a material impact on our consolidated financial statements and accompanying disclosures. Accounting Standards Updates to be Adopted In April 2022, the FASB issued ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”, which requires: 1) an entity to measure and record the lifetime expected credit losses of an asset that is within the scope of the Update upon origination or acquisition; as a result, credit losses from loans modified as troubled debt restructurings are to be incorporated into the allowance for credit losses and, 2) public business entities to disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, “Financial Instruments—Credit Losses—Measured at Amortized Cost”. The guidance in this Update will be effective for Photronics in its first quarter of fiscal 2024. The amendments are to be applied prospectively, with the exception of the transition method related to the recognition and measurement of troubled debt restructurings for which an entity has the option to apply a modified retrospective transition method. We are currently evaluating the effect the adoption of this ASU may have on our disclosures. In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance”, to increase the transparency of government assistance including the disclosure of the types of assistance an entity receives, an entity’s method of accounting for government assistance, and the effect of the assistance on an entity’s financial statements. The guidance in this Update will be effective for Photronics in its fiscal year 2023 Form 10-K, with early application of the amendments allowed. The amendments are to be applied prospectively to all transactions within the scope of the amendments that are reflected in financial statements at the date of initial application and new transactions that are entered into after the date of initial application or, retrospectively to those transactions. We are currently evaluating the effect the adoption of this ASU may have on our disclosures. 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 LIBOR, 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 from December 31, 2022. We do not expect the impact of this ASU to be material to our consolidated financial statements. 66 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.