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Item 7. Management’s Discussion and Analysis

2024-12-19 compared with 2023-12-26 · 190 added, 235 removed, 138 unchanged (75% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following should be read in conjunction with “Cautionary Statement Regarding Forward Looking Statements” and our combined consolidated financial statements and notes thereto included in Item 8

of this Annual Report on Form 10-K.

For a comparison of results of operations for the fiscal years ended October 31, 2023 and 2022, see Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of

Operations of Photronics Inc.’s Annual Report on Form 10-K for the fiscal year ended October 31, 2023, filed with the SEC on December 26, 2023.

We sell substantially all of our photomasks to semiconductor designers and manufacturers, and manufacturers of FPDs.

Photomask technology is also being applied to the fabrication of other higher-performance electronic

products such as virtual reality/augmented reality advanced IC packages, photonics, micro-electronic mechanical systems, and certain nanotechnology applications.

Our selling cycle is tightly interwoven with the development and release of new

semiconductor and display designs and applications, particularly as they relate to the semiconductor industry's migration to more advanced product innovation, design methodologies, and fabrication processes.

The demand for photomasks primarily

depends on design activity rather than sales volumes from products manufactured using semiconductor manufacturing technologies.

Consequently, an increase in semiconductor or display sales does not necessarily result in a corresponding increase in

photomask sales.

However, the reduced use of application-specific ICs, reductions in design complexities, other changes in the technology or methods of manufacturing or designing semiconductors, or a slowdown in the introduction of new

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

Photomask technology is also being applied to the fabrication of other higher-performance

electronic products such as virtual reality/augmented reality advanced IC packages, photonics, micro-electronic mechanical systems, and certain nanotechnology applications.

Our selling cycle is tightly interwoven with the development and release

of new semiconductor and display designs and applications, particularly as they relate to the semiconductor industry’s migration to more advanced product innovation, design methodologies, and fabrication processes.

The demand for photomasks

primarily depends on design activity rather than sales volumes from products manufactured using semiconductor manufacturing technologies.

Consequently, an increase in semiconductor or display sales does not necessarily result in a corresponding

increase in photomask sales.

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

Advances in semiconductor, display, and photomask design and production methods that shift the burden of achieving

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

At these geometries and various high-end nodes, we

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

We expect advanced-generation designs to continue to move to production throughout fiscal 2024, and we believe we

are well positioned to service an increasing volume of this business as a result of our investments in manufacturing processes and technology in the regions where our customers are located.

At these geometries and various high-end nodes,

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

We expect advanced-generation designs to continue to move to production throughout fiscal 2025, and we

believe we are well positioned to service an increasing volume of this business as a result of our investments in manufacturing processes and technology in the regions where our customers are located.

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

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Additionally, demand for photomasks has been, and could in the future be, adversely affected by changes in high-performance electronics

fabrication methods that affect the type or quantity of photomasks used, such as changes in semiconductor demand that favor field-programmable gate arrays and other semiconductor designs that replace application-specific ICs, or the use of certain

chip-stacking methodologies that lessen the emphasis on conventional lithography technology.

Furthermore, increased market acceptance of alternative methods of transferring circuit designs onto semiconductor wafers could reduce or eliminate the

need for photomasks in the production of semiconductors.

As of the end of 2023, one alternative method, direct-write lithography, has not been proven to be a commercially viable alternative to photomasks, as it is considered to be too slow for

high-volume semiconductor wafer production, and we have not experienced a significant loss of revenue as a result of this or other alternative semiconductor design methodologies.

However, should direct-write lithography or any other alternative

method of transferring IC designs to semiconductor wafers without the use of photomasks achieve market acceptance, and we do not anticipate, respond to, or utilize these or other changing technologies due to resource, technological, or other

constraints, our business and results of operations could be materially adversely affected.

certain chip-stacking methodologies that lessen the emphasis on conventional lithography technology.

Furthermore, increased market acceptance of alternative methods of transferring circuit designs onto semiconductor wafers could reduce or

eliminate the need for photomasks in the production of semiconductors.

As of the end of 2024, one alternative method, direct-write lithography, has not been proven to be a commercially viable alternative to photomasks, as it is considered to be

too slow for high-volume semiconductor wafer production, and we have not experienced a significant loss of revenue as a result of this or other alternative semiconductor design methodologies.

However, should direct-write lithography or any other

alternative method of transferring IC designs to semiconductor wafers without the use of photomasks achieve market acceptance, and we do not anticipate, respond to, or utilize these or other changing technologies due to resource, technological,

or other constraints, our business and results of operations could be materially adversely affected.

Our revenues have benefitted, and our costs, including depreciation, have been affected by the increased demand for high-end-technology photomasks that require more advanced manufacturing capabilities, but generally

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The manufacture of photomasks for use in fabricating ICs, FPDs, and other related products built using comparable photomask-based process technologies has been, and continues to be, capital intensive.

Our employees and

our integrated global manufacturing network represent a significant portion of our fixed operating cost base.

Our employees

and our integrated global manufacturing network represent a significant portion of our fixed operating cost base.

Should our revenue decrease as a result of a decrease in design releases from our customers, we may have excess or underutilized

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Operating income

Non-operating income (expense), net

Non-operating (expense) income, net

Income before income tax provision

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Research and development expenses

Other operating income, net

Operating income

Non-operating income (expense), net

Non-operating income

Income before income tax provision

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All the following tabular comparisons, unless otherwise indicated, are for the three months ended October 31, 2024 (Q4 FY24), July 28, 2024 (Q3 FY24) and October 31,

(Q4 FY22), and for the fiscal years ended October 31, 2023 (YTD FY23) and October 31, 2022 (YTD FY22).

Please refer to Part II, Item 7 of our 2022 Form 10-K for comparative discussion of our fiscal years ended October 31, 2022, and October 31,

2023 (Q4 FY23), and for the fiscal years ended October 31, 2024 (YTD FY24), October 31, 2023 (YTD FY23), and October 31, 2022 (YTD FY22).

Please refer to Part II, Item 7 of our 2023 Form 10-K for comparative discussion of our fiscal years ended

October 31, 2023, and October 31, 2022.

The tables in this item may not foot due to rounding.

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

As a result, demand for our products is typically reduced during the first quarter of our fiscal year by the North American,

European, and Asian holiday periods, as some of our customers reduce their development and, consequently, their buying activities during those periods.

As a result, demand for our products is typically reduced during the first quarter of our fiscal year by the North

American, European, and Asian holiday periods, as some of our customers reduce their development and, consequently, their buying activities during those periods.

The following tables present changes in revenue disaggregated by product type and geographic origin, in Q4 FY24 and YTD FY24 from revenue in prior reporting periods.

Quarterly Changes in Revenue by Product Type

Quarterly Changes in Revenue by Product Type ($ in millions)

Q4 FY24 compared with Q3 FY24

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* High-end photomasks typically have higher ASPs than mainstream products.

Quarterly Changes in Revenue by Geographic Origin**

Quarterly Changes in Revenue by Geographic Origin ($ in millions) **

Q4 FY24 compared with Q3 FY24

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** This table disaggregates revenue by the location in which it was earned.

Revenue in Q4 FY23 of $227.5 million represented an increase of 1.5% compared with Q3 FY23, and an increase of 8.2% from Q4 FY22.

Overall IC revenue increased 0.8 % from Q3 FY23, and increased 5.3% from Q4 FY22 due to stronger high-end foundry and logic demand in Asia.

IC mainstream decreased in Q4 FY23 by 9.3% from Q3 FY23, and 4.5% from Q4 FY22

primarily the result of reduced mainstream demand in Asia.

FPD revenue increased 3.1% and 16.5% in Q4 FY23, compared, respectively, with Q3 FY23 and Q4 FY22.

The increases were caused by continued strong AMOLED demand in mobile display during Q4 FY23.

Revenue from mainstream

products decreased 12.5% from Q3 FY23 as more production capacity was dedicated to meet strong high-end demand.

Year-over-Year Changes in Revenue by Product Type

Revenue in Q4 FY24 of $222.6 million represented an increase of 5.5% compared with Q3 FY24, and a decrease of 2.1% from Q4 FY23.

Overall IC revenue increased $7.8 million or 5.0% in Q4 FY24 from Q3 FY24 due to stronger high-end foundry and logic demand in Asia.

Overall IC revenue decreased $0.8 million or 0.5% in Q4 FY24 from Q4 FY23.

mainstream decreased in Q4 FY24 by $2.8 million or 2.5% from Q3 FY24, and $3.2 million or 2.9% from Q4 FY23 primarily the result of reduced mainstream demand in Asia.

FPD revenue increased $3.8 million or 6.9% in Q4 FY24 from Q3 FY24 due to stronger demand for mainstream products.

FPD revenue decreased $4.1 million or 6.5% in Q4 FY24 from Q4 FY23 due to slower demand in

high-end products.

Revenue from mainstream products increased $3.8 million or 56.6% in Q4 FY24 from Q3 FY24 as more production capacity was dedicated to meet strong demand.

Year-over-Year Changes in Revenue by Product Type ($ in millions)

YTD FY24 compared with YTD FY23

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* High-end photomasks typically have higher ASPs than mainstream photomasks.

Year-over-Year Changes in Revenue by Geographic Origin**

Year-over-Year Changes in Revenue by Geographic Origin ($ in millions)**

YTD FY24 compared with YTD FY23

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** This table disaggregates revenue by the location in which it was earned.

Revenue in YTD FY23 of $892.1 million surpassed our prior record revenue set in YTD FY22 by $67.5 million, or 8.2%.

IC revenue increased by 9.8%, due to strong demand for mainstream products

earlier in the year.

FPD revenue increased by 4.0%, driven by a 7.4% increase in revenue from high-end products due to increased AMOLED demand in mobile displays, which offset decreased mainstream resulting from shifting capacity to meet strong

high-end demand.

We believe that strong demand for AMOLED photomasks will continue, as expected technology advances drives increasing overall demand for higher-value masks.

Gross margin was 37.3% for Q4 FY23, representing a slight decrease from the Q3 FY23 gross margin of 38.7%, as increase in revenue of 1.5% was offset by increased material costs of 4.2%, or 69 basis points as a

Overall revenue decreased $25.2 million or 2.8% in YTD FY24 from YTD FY23.

IC revenue decreased $13.2 million or 2.0% in YTD FY24 from YTD FY23 due to less demand for mainstream products earlier in the year which

was partially offset by strong demand for high-end products.

FPD revenue decreased by $12.0 million or 5.0%, driven by a $6.5 million or 16.3% decrease in revenue from mainstream products due to a decrease in G8 products.

Gross margin increased by 140 basis points in Q4 FY24 as compared to Q3 FY24, primarily as a result of the increase in revenue.

The gross margin favorable impact

resulting from the increase in revenue in Q4 FY24 compared to Q3 FY24 was partially offset by increased material costs of 5.2%, or 6 basis points as a percentage of revenue.

Labor costs increased 1.3%, or 45 basis points as a percentage of

Equipment and other overhead costs increased 2.7% from Q3 FY24 or 77 basis points as a percentage of revenue, mainly due to higher equipment cost in US high-end location.

Gross margin decreased by 30 basis points in Q4 FY24, from Q4 FY23, primarily as a result of the decrease in revenue of 2.1% and increased equipment and other

overhead costs of 4.6%, or 185 basis points as a percentage of revenue.

This was partially offset by a decrease in material cost of 5.2%, or 77 basis points as a percentage of revenue, and labor costs of 8.5%, or 74 basis points as a

percentage of revenue.

Labor costs increased 4.5%, or 30 basis points as a percentage of revenue, due to increased costs in some locations.

Equipment and other overhead costs increased 3.0%, or 41 basis points as a percentage of revenue, with

increased equipment maintenance costs, partially offset by lower outsourced manufacturing costs, most significantly contributing to the net cost increase.

Gross margin decreased by 0.9 percentage points in Q4 FY23, from Q4 FY22, primarily as a result of the increase in material costs as a percentage of revenue from the prior year quarter.

Equipment and other overhead

costs increased 9.7%, or 37 basis points, as a percentage of revenue.

Increased depreciation expense, utilities expenses, and outsourced manufacturing costs, which were partially offset by decreased equipment maintenance costs, were the primary

contributors to the overall increase.

Gross margin increased by 2.0 percentage points in YTD FY23, from YTD FY22, primarily as a result of the increase in revenue from the prior year period, offset somewhat by the

following net cost increases:

Material costs increased 2.8% from the prior year period, but decreased 129 basis points as a percentage of revenue.

Labor costs increased 10.3% from the prior year, and increased 30 basis points as a percentage of

revenue, primarily due to increased labor costs in Asia.

Equipment and other overhead costs increased by 4.5% but decreased 95 basis points as a percentage of revenue, with increased utilities, equipment

service contract costs, and less transfer of research and development cost from cost of goods sold to research and development expense, as well as increases in computer software costs, offset by decreased importation costs most significantly

contributing to the overall cost increase.

Gross margin decreased by 130 basis points in YTD FY24, from YTD FY23, primarily as a result of the decrease in revenue of 2.8% and increased equipment and other overhead costs of 2.5%, or 148 basis points as a

percentage of revenue.

This was partially offset by a decrease in material cost of 3.8%, or 24 basis points as a percentage of revenue, and labor costs of 2.8%, but remained flat as a percentage of revenue.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $21.0 million in Q4 FY24, compared with $19.4 million in Q3 FY24, and $16.7 million in Q4 FY23.

The decrease from Q3 FY23 was primarily the result of decreased

compensation and related expenses of $1.5 million offset partially by increased insurance expenses and outside services of $0.1 million and $0.1 million, respectively.

The increase from the prior year quarter was primarily the result of increased

compensation and related expenses of $1.0 million and increased insurance expenses of $0.2 million.

Selling, general and administrative expenses increased $5.5 million to $69.5 million in YTD FY23, from $64.0 million in YTD FY22, primarily due to

an increase in compensation and related expenses, professional fees, travel and entertainment and insurance expenses in the respective amounts of $4.1 million, $1.2 million, $0.4 million and $0.3 million.

The $1.6 million increase from Q3 FY24 was primarily the result of

compensation and related expenses of $1.1 million.

The $4.3 million increase from Q4 FY23 was primarily the result of increased compensation and related compensation expenses of $2.1 million and increased professional fees of $1.4 million.

Selling, general and administrative expenses were $77.8 million in YTD FY24, compared with $69.5 million in YTD FY23.

The increase of $8.3 million is primarily due to an increase in compensation and related

expenses of $3.8 million and professional fees of $2.5 million.

Research and Development Expenses

Research and development expenses, which primarily consist of development and qualification efforts related to process technologies for high-end IC and FPD applications, decreased $0.1 million to

$3.4 million in Q4 FY23, from Q3 FY23;

the decrease was primarily caused by a decline in development activities in Asia.

Research and development expenses in Q4 FY23 decreased by $0.7 million from Q4 FY22 as a result of decreased development

Research and development expenses, which primarily consist of development and qualification efforts related to process technologies for high-end IC and FPD applications, increased $1.7 million

to $5.3 million in Q4 FY24, from Q3 FY24;

the increase was primarily caused by increased qualification activities.

Research and development expenses in Q4 FY24 increased by $1.9 million from Q4 FY23 as a result of increased development

activities in the U.S.

On a year-to-date basis, research and development expenses decreased $4.7 million, to $13.7 million, primarily due to decreased development activities in the U.S.

On a year-to-date basis, research and development expenses increased $2.9 million, to $16.6 million, primarily due to increased development activities in the U.S.

Non-Operating Income (Expense)

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Interest income and other income, net

Non-operating income (expense), net

Non-operating income (expense) increased in Q4 FY23 from Q3 FY23 by $19.6 million, primarily due to foreign currency impacts, driven by favorable movements of the South Korean

won, the New Taiwan dollar, RMB dollar against the U.S.

dollar offsetting unfavorable movements of the Singapore dollar against the U.S.

Non-operating income (expense) increased from Q4 FY22, by $7.9 million,

primarily due to higher interest and investment income earned on our cash balances, in addition to foreign currency transactions impact.

Non-operating (expense) income, net

Non-operating (expense) income decreased in Q4 FY24 from Q3 FY24 by $11.1 million and from Q4

FY23 by $19.7 million, primarily due to foreign currency impacts.

The foreign currency impacts were primarily driven by unfavorable movements of the New Taiwan dollar and the South Korean won, against the U.S.

dollar for both

Foreign currency transactions impact, net

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Interest income and other income, net

Non-operating income (expense), net

Non-operating income (expense) decreased $10.3 million in full year FY23, compared with full year FY22, due to foreign currency transactions, driven by unfavorable movements of the South Korean won, the New Taiwan

dollar, and the Singapore dollar offsetting favorable movements of the RMB against the U.S.

dollar, partially offset by increased interest income in the current year resulting from higher average cash, cash equivalents and short-term investments

balances in FY23, compared with FY22 and lower interest expense, net of subsidies, due to receiving a lower amount of interest subsidies on our China-based debt in FY23, the effect of which was partially mitigated by lower average interest-bearing

debt balance in FY23 than in the prior year.

The columns presented above may not foot due to rounding.

Non-operating income, net

Non-operating income (expense) increased $9.0 million in YTD FY24, compared with YTD FY23, due to increased interest income and other income of $9.2 million, resulting from higher average

cash, cash equivalents and short-term investments balances in FY24 as compared with FY23.

Income Tax Provision

On December 15, 2022, the European Union (EU) Member States formally adopted the EU’s Pillar Two Directive, which generally provides for a minimum

effective tax rate of 15%, as established by the Organization for Economic Co-operation and Development (OECD) Pillar Two Framework.

The EU effective dates are January 1, 2024, and January 1, 2025, for different aspects of the directive.

significant number of other countries are expected to also implement similar legislation with varying effective dates in the future.

The Company is continuing to evaluate the potential impact on future periods of the Pillar Two Framework, pending

legislative adoption by additional individual countries.

On December 15, 2022, the European Union (EU) Member States formally adopted the EU’s Pillar Two Directive, which generally provides for a

minimum effective tax rate of 15%, as established by the Organization for Economic Co-operation and Development (OECD) Pillar Two Framework.

The EU effective dates are January 1, 2024, and January 1, 2025, for different aspects of the

A significant number of other countries are expected to also implement similar legislation with varying effective dates.

The Company is currently not subject to Pillar Two but is continuously evaluating the potential impact of the Pillar Two Framework to ensure we are compliant in the future.

Income tax provision

Effective income tax rate

The effective income tax rates are sensitive to the jurisdictional mix of our earnings, due, in part, to the non-recognition of tax benefits on losses in jurisdictions with valuation allowances where the tax benefits

of losses are not available.

The effective income tax rate decreased slightly in Q4 FY23, compared with Q3 FY23, primarily due to changes in the period-to-period mix of jurisdictional earnings.

The effective income tax rate increase in Q4 FY23, as

compared with Q4 FY22, is primarily due to changes in the jurisdictional mix of earnings as well as an increase in foreign tax as compared to the prior year.

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

The effective income tax rate increased in Q4 FY24, compared with Q3 FY24, primarily due to changes in the period-to-period mix of jurisdictional earnings as well as an increase in foreign tax as compared to the

prior quarter.

The effective income tax rate increase in Q4 FY24, as compared with Q4 FY23, is primarily due to changes in the jurisdictional mix of earnings as well as an increase in foreign tax as compared to the prior year.

Income tax provision

Effective income tax rate

The increase in the effective income tax rate on a full-year basis in FY23, compared with FY22, is primarily due to an increase of unremitted earnings tax in a non-US jurisdiction, as well as changes in the

jurisdictional mix of earnings.

We consider all available evidence when evaluating the potential future realization of deferred tax assets, and when, based on the weight of all available evidence, we determine that it is more likely than not that

some portion or all of our deferred tax assets will not be realized, we reduce our deferred tax assets by a valuation allowance.

We also regularly assess the potential outcomes of ongoing and future tax examinations and, accordingly, have recorded

accruals for such contingencies.

Included in the balance of unrecognized tax benefits as of October 31, 2023 and October 31, 2022, are $8.9 million and $5.6 million respectively, recorded in Other liabilities

in the consolidated balance sheets that, if recognized, would impact the effective tax rates.

The decrease in the effective income tax rate on a full-year basis in FY24, compared with FY23, is primarily due to changes in the jurisdictional mix of earnings.

We consider all available evidence when

evaluating the potential future realization of deferred tax assets, and when, based on the weight of all available evidence, we determine that it is more likely than not that some portion or all of our deferred tax assets will not be

realized, we reduce our deferred tax assets by a valuation allowance.

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

Included in the

balance of unrecognized tax benefits as of October 31, 2024 and October 31, 2023, are $14.7 million and $8.9 million respectively, recorded in Other liabilities in the consolidated balance sheets

that, if recognized, would impact the effective tax rates.

The October 31, 2024 valuation allowance was reduced by $(2.0) million dollars which was offset by additional FIN 48 reserve of $5.8 million.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests was $6.4 million in Q4 FY24, compared with $13.8 million in Q3 FY24;

the decrease was the result of a net decrease in the net

incomes of our joint venture operations.

Net income attributable to noncontrolling interests increased by $0.3 million in Q4 FY23 from Q4 FY22, and by $13.7 million in

YTD FY23 from YTD FY22, as a result of increased net income at both our Taiwan-based and China-based IC facilities.

the decrease was the result of a net decrease in the net incomes of our joint venture

Net income attributable to noncontrolling interests decreased by $12.1 million in Q4 FY24 from Q4 FY23, and by $21.0 million in YTD FY24 from YTD FY23, as a result of decreased net income at both our Taiwan-based and China-based

IC facilities.

Liquidity and Capital Resources

Cash and cash equivalents was $598.5 million and $499.3 million as of October 31, 2024, and October 31, 2023, respectively.

As of the most recent balance sheet date, total cash

and cash equivalents included $473.2 million held by foreign subsidiaries.

Net Cash, a non-GAAP financial measure as defined and discussed in the Non-GAAP Financial Measures section below, was $474.7 million

and $277.3 million as of October 31, 2023, and October 31, 2022, respectively.

Our primary sources of liquidity are our cash on hand and cash we generate from operations.

As of October 31, 2024, total cash and cash equivalents included $562.1 million held

by foreign subsidiaries.

In addition, we currently have $42.2 million in short-term investments and RMB 200 million (approximately $28.1 million) of borrowing capacity in China to support local operations.

See Note 8 – Debt to the consolidated financial statements for additional information on our outstanding debt and currently available financing.

Our primary sources of liquidity are our cash on hand and cash we

generate from operations.

We continually evaluate alternatives for efficiently funding our capital expenditures and ongoing operations.

These reviews may result in our engagement in a variety of investing and financing transactions, in the

transfer of cash among subsidiaries, and/or the repatriation of cash to the U.S.

These reviews may result in our engagement in a variety of investing and financing transactions, in

the transfer of cash among subsidiaries, and/or the repatriation of cash to the U.S.

The transfer of funds among subsidiaries could be subject to foreign withholding taxes;

in certain jurisdictions, repatriation of these funds to the U.S.

may subject them to U.S.

state income taxes and/or local country withholding taxes.

We believe that our liquidity, including available financing, is sufficient to meet our requirements through the next twelve months and thereafter for the foreseeable future.

Through the utilization of our existing liquidity, cash we generate from operations and short-term investments, we plan to continue to invest in our business, with our investments targeted to align with our customers’ technology road maps.

addition, we stand ready to invest in mergers, acquisitions, or strategic partnerships, should a suitable opportunity arise.

We believe that our liquidity, including available financing, is sufficient to meet our requirements through the next twelve months and thereafter for the

foreseeable future.

technology road maps.

In addition, we stand ready to invest in mergers, acquisitions, or strategic partnerships, should a suitable opportunity arise.

We estimate capital expenditures for our fiscal year 2025 will be approximately $200 million;

these investments will be targeted towards high-end and mainstream “point” tools

that will increase our operating capacity and efficiency, and enable us to support our customers’ near-term demands.

As of October 31, 2023, we had outstanding capital commitments of approximately $106.8 million

and recognized liabilities related to capital equipment purchases of approximately $18.7 million.

Although payment timing could vary, primarily as a result of the timing of tool delivery, installation and

testing, we currently estimate that we will fund $88.6 million of our total $125.5 million committed and recognized obligations for capital expenditures over the next

twelve months.

Please refer to Notes 10 and 15 to our consolidated financial statements for additional information on our lease liabilities and unrecognized commitments, respectively.

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.

This authorization does

not obligate the Company to repurchase any dollar amount or number of shares of common stock.

As of October 31, 2023, there was approximately $31.7 million remaining under that authorization.

Depending on market conditions, we may utilize some or

the entire remaining approved amount to reacquire additional shares.

As discussed in Note 6 of our consolidated financial statements, DNP, the noncontrolling interest in our China-based joint venture has, under certain circumstances, the right to put its interest in the joint venture to

Photronics, or to purchase our interest in the joint venture.

Under all such circumstances, the sale of DNP’s interest would be at its 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.

these investments will be targeted towards high-end and mainstream “point” tools that will increase our operating

capacity and efficiency and enable us to support our customers’ near-term demands.

As of October 31, 2024, we had outstanding capital commitments of approximately $105.4 million and accrued liabilities related to capital equipment purchases

of approximately $6.7 million.

Although payment timing could vary, primarily as a result of the timing of tool delivery, installation and testing, we currently estimate that we will fund $98.1 million of our total $112.1 million committed

and recognized obligations for capital expenditures over the next twelve months.

Please refer to Notes 11 - Leases and 16 – Commitments and Contingencies to

our consolidated financial statements for additional information on our lease liabilities and unrecognized commitments, respectively.

On August 28, 2024, the Board of Directors authorized an increase to the Company’s existing share repurchase program from the remaining $31.7 million up to $100 million.

As of October 31, 2024, there was $100 million remaining under that authorization.

Depending on market conditions, we may utilize some or the entire remaining approved amount to reacquire additional shares.

As discussed in Note 6 – PDMCX Joint Venture of our consolidated financial statements, DNP, the noncontrolling interest in our China-based joint venture has, under

certain circumstances, the right to put its interest in the joint venture to Photronics, or to purchase our interest in the joint venture.

Under all such circumstances, the sale of DNP’s interest would be at its 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.

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

As of October 31, 2023, Photronics and DNP each had net investments in this joint venture of

approximately $117.1 million.

October 31, 2023

October 31, 2022

October 31, 2021

of October 31, 2024, Photronics and DNP each had net investments in this joint venture of approximately $140.6 million.

Net cash provided by operating activities

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Operating Activities :

Net cash provided by operating activities reflects net income adjusted for certain non-cash items, including depreciation and amortization,

share-based compensation, and the effects of changes in operating assets and liabilities.

Net cash provided by operating activities increased by $27.0 million in FY23, compared with FY22, primarily due to

increased net income and net cash-favorable changes in working capital, predominantly in Asia.

Free Cash Flow, which is a non-GAAP financial measure as discussed in the “Non-GAAP Financial Measures” section below, increased by $8.0 million in FY23, compared with FY22, and

$121.2 million in FY22, compared with FY21, primarily due to increases in net cash provided by operating activities.

Net cash provided by operating activities reflects net income adjusted for certain non-cash

items, including depreciation and amortization, share-based compensation, and the effects of changes in operating assets and liabilities.

Net cash provided by operating activities decreased by $40.8 million

in FY24, compared with FY23, primarily due to decreased net income and net cash-favorable changes in working capital, predominantly in Asia.

Investing Activities :

In FY23, net cash flows used in investing activities primarily consisted of purchases of $131.3 million

of property, plant and equipment.

Net cash flows used in investing activities decreased by $46.2 million in FY23, compared with FY22, primarily as a result of $47.5 million in proceeds from the maturity of

available-for-sale debt securities.

Net cash flows used in investing activities increased by $55.0 million in FY24, compared to FY23, primarily driven by an increase of

purchases of short-term investments of $80.4 million.

This was partially offset by an increase in proceeds from the maturity of short-term investments of $25.3 million.

Financing Activities :

In FY23, net cash flows used in financing activities primarily consisted of debt repayments of $18.5 million.

Net cash used in financing

activities decreased by $20.2 million in FY23, compared with FY22, primarily due to decreased repayments of debt of $47.0 million, offset by decreased contributions from noncontrolling interests of $25.0 million that occurred in FY22 but did not

repeat in FY23.

Our cash, cash equivalents, and restricted cash balances were negatively impacted by changes in foreign currency exchange rates in FY23 by $2.7 million.

Net cash used in financing activities decreased by $10.8 million in FY24, compared to FY23.

This was driven by a decrease in repayments

of debt of $11.8 million

Our cash, cash equivalents, and restricted cash balances were positively impacted by changes in foreign currency exchange rates in FY24 of $2.1 million.

Non-GAAP Financial Measures

Non-GAAP Non-operating (loss) income, Non-GAAP Income tax provision, Non-GAAP Noncontrolling interests, Non-GAAP Net Income attributable to Photronics, Inc.

shareholders and non-GAAP earnings per share, Free Cash Flow,

and Net Cash are "non-GAAP financial measures" as such term is defined by the Securities and Exchange Commission and may differ from similarly named non-GAAP financial measures used by other companies.

The financial tables below reconcile

Photronics, Inc.

Non-GAAP Net Income attributable to Photronics, Inc.

shareholders and non-GAAP diluted earnings per share are “non-GAAP financial measures” as such term is defined by Regulation G of the Securities and

Exchange Commission, and may differ from similarly named non-GAAP financial measures used by other companies.

The financial tables below reconcile Photronics, Inc.

financial results under GAAP to non-GAAP financial information.

We believe these non-GAAP financial measures that exclude certain items are useful for analysts and investors to evaluate our future on-going performance because they

enable a more meaningful comparison of our projected performance with our historical results.

These non-GAAP metrics are not intended to represent funds available for our discretionary use and are not intended to represent, or be used as a

substitute for, net income attributable to Photronics, Inc.

shareholders, diluted earnings per share, cash and cash equivalents, or cash flows from operations, as measured under GAAP.

The items excluded from these non-GAAP metrics but included in

the calculation of their closest GAAP equivalent, are significant components of the consolidated statements of income, consolidated balance sheets and statement of cash flows and must be considered in performing a comprehensive assessment of

overall financial performance.

The following table reconciles GAAP to Non-GAAP Income at the balance sheet dates.

these non-GAAP financial measures that exclude certain items are useful for analysts and investors to evaluate our on-going performance because they enable a more meaningful comparison of historical results of our core business.

non-GAAP metrics are not a measure of consolidated operating results under U.S.

GAAP and should not be considered as an alternative to Net income (loss), Net income (loss) per share, or any other measure of consolidated results under U.S.

The items excluded from these non-GAAP metrics, but included in the calculation of their closest GAAP equivalent, are significant components of the condensed consolidated statement of income and must be considered in performing a

comprehensive assessment of overall financial performance.

The following table reconciles GAAP to Non-GAAP Income for the indicated periods.

The columns may not foot due to rounding.

Three Months ended

Reconciliation of GAAP to Non-GAAP Non-operating (loss) Income:

GAAP Non-operating (loss) income, net

FX (gain) loss

Non-GAAP Non-operating (loss) income, net

Reconciliation of GAAP to Non-GAAP Income tax provision:

GAAP Income tax provision

Estimated tax effects of FX (gain) loss

Non-GAAP Income tax provision

Reconciliation of GAAP to Non-GAAP Noncontrolling interests:

GAAP Noncontrolling interests

Estimated noncontrolling interest effects of above

Non-GAAP Noncontrolling interests

Reconciliation of GAAP to Non-GAAP Net Income:

GAAP Net Income

FX (gain) loss

GAAP Net Income attributable to Photronics, Inc.

FX loss (gain)

Estimated tax effects of above

Estimated noncontrolling interest effects of above

Non-GAAP Net Income

Weighted-average number of common shares outstanding - Diluted

Non-GAAP Net Income attributable to Photronics, Inc.

Weighted-average number of common shares

outstanding - Diluted

Reconciliation of GAAP to Non-GAAP EPS:

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Non-GAAP diluted earnings per share

The following table reconciles Net cash provided by operating activities to Free Cash Flow for FY23, FY22, and FY21.

The columns may not foot due to rounding.

amounts in the non-GAAP disclosure below have been recast to eliminate government incentives to conform to current year presentation.

Free Cash Flow

Net cash provided by operating activities

Purchases of property, plant and equipment

Free cash flow

The following table reconciles Cash and cash equivalents to Net Cash at the balance sheet dates.

The increase in Net Cash was primarily driven by an increase in Net cash provided by

operating activities, as discussed above.

The columns may not foot due to rounding.

Cash, cash equivalents

Current portion of Long-term debt

Long-term debt

Business Outlook

Our current business outlook and guidance was provided in our Full Year and Fourth Quarter Fiscal 2024 Results earnings call, and related slide deck.

These can be accessed in the investor section of our website -

www.photronics.com.

Our future results of operations and the other forward-looking statements contained in this filing and in our “ Full Year and Fourth Quarter Fiscal 2023 Results ” earnings call

and presentation involve a number of risks and uncertainties, some of which are discussed in Part I, Item 1A of this report.

These can be accessed in the investor section of our

website - www.photronics.com.

Our future results of operations and the other forward-looking statements contained in this filing and in our “Full Year and Fourth Quarter Fiscal 2024 Results” earnings call and presentation involve a number

of risks and uncertainties, some of which are discussed in Part I, Item 1A of this report.

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

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Our consolidated financial statements are based on the selection and application of accounting policies, which require management to make significant estimates and assumptions.

We believe the following to be the more

critical areas that require judgment when applying our accounting policies:

We believe the following to be

the more critical areas that require judgment when applying our accounting policies:

Revenue Recognition :

The application of GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates, including the determination of whether we should recognize revenues as we perform or

upon the completion of our performance, as these determinations impact the timing and amount of our reported revenues and net income.

Other significant judgments include the estimation of the point in the manufacturing process at which we

are entitled to recognize revenue, as well as the measurement of our progress towards satisfying our performance obligations, which determine the amount of revenue we are entitled to recognize.

The application of GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates, including the determination of whether we should recognize revenue as we

perform or upon the completion of our performance, as these determinations impact the timing and amount of our reported revenue and net income.

Other significant judgments include the estimation of the point in the manufacturing

process at which we are entitled to recognize revenue, as well as the measurement of our progress towards satisfying our performance obligations, which determine the amount of revenue we are entitled to recognize.

Property, Plant and Equipment :

Significant judgment and assumptions are employed when we establish the estimated useful lives of asset classes, and determine when depreciation should commence for individual assets, as these

determinations can significantly impact our gross margin and research and development expenses.

Significant judgment would also be employed when events or changes in circumstances indicate that the carrying amount of a group of assets may

not be recoverable, as the recoverability assessment requires us to forecast future cash flows related to these assets;

Significant judgment and assumptions are employed when we establish the estimated useful lives of asset classes, and determine when depreciation should commence for individual assets, as

these determinations can significantly impact our gross margin and research and development expenses.

Significant judgment would also be employed when events or changes in circumstances indicate that the carrying amount of a group

of assets may not be recoverable, as the recoverability assessment requires us to forecast future cash flows related to these assets;

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

Significant judgment is applied in the determination of whether an arrangement is, or contains, a lease and, in certain instances, whether the lease should be classified as an operating lease or a finance lease, which can

impact the timing and classification of lease costs.

which can impact the timing and classification of lease costs.

Contingencies :

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

An accrual is made when

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

Changes in estimates related to, and resolutions of, contingencies may have a material impact on our

financial performance.

An accrual is

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

Changes in estimates related to, and resolutions of, contingencies may have a material

impact on our financial performance.

Income Taxes :

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

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

We are subject to complex tax laws, in

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

purposes than for financial reporting purposes.

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

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

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

Realization of deferred tax assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction in

future periods, which involves business plans, planning opportunities, and expectations about future outcomes.

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

Realization of deferred tax assets is dependent upon generating

sufficient taxable income in the appropriate jurisdiction in future periods, which involves business plans, planning opportunities, and expectations about future outcomes.

Our assessment relies on estimates and assumptions and may

involve a series of complex judgments about future events.

There are a number of estimates and assumptions inherent in calculating the various components of our tax provision.

Future events such as changes in tax legislation, geographic mix of earnings, findings in tax audits,

and earnings repatriation plans could have an impact on those estimates and our effective tax rate.

Please refer to Notes 1, 10, 13, and 15 to our consolidated financial statements for additional information related to these critical accounting estimates.

Future events such as changes in tax legislation, geographic mix of

earnings, findings in tax audits, and earnings repatriation plans could have an impact on those estimates and our effective tax rate.

Effect of Recent Accounting Pronouncements

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

What changed 10-K

Item 7. Management’s Discussion and Analysis