PHOTRONICS INC [PLAB] Filings

10-Q 1 brhc20058464_10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 30, 2023

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission file number 001-39063

PHOTRONICS, INC.

(Exact name of registrant as specified in its charter)

Connecticut		06-0854886
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

15 Secor Road, Brookfield, Connecticut		06804
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code

(203) 775-9000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
COMMON	PLAB	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

The registrant had 62,548,494 shares of common stock outstanding as of August 31, 2023.

PHOTRONICS, INC.

QUARTERLY REPORT ON FORM 10-Q

July 30, 2023

TABLE OF CONTENTS

Glossary of Terms and Acronyms		3

Forward-Looking Statements		4

PART I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (unaudited)	5

	Condensed Consolidated Balance Sheets	5

	Condensed Consolidated Statements of Income	6

	Condensed Consolidated Statements of Comprehensive Income	7

	Condensed Consolidated Statements of Equity	8

	Condensed Consolidated Statements of Cash Flows	10

	Notes to Condensed Consolidated Financial Statements	11

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36

Item 4.	Controls and Procedures	36

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 3.	Defaults Upon Senior Securities	37

Item 4.	Mine Safety Disclosures	37

Item 5.	Rule 10b-5-1 Trading Arrangements	37

Item 6.	Exhibits	38

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Glossary of Terms and Acronyms

Definitions of certain terms and acronyms that may appear in this report are provided below.

AMOLED	Active-matrix organic light-emitting diode. A technology used in mobile devices.
Application-specific IC	An integrated circuit customized for a particular use, rather than intended for general-purpose use
ASC	Accounting Standards Codification
ASP	Average Selling Price
ASU	Accounting Standards Update
Chip stacking	Placement of an integrated circuit on top of another integrated circuit, resulting in the reduction of the distance between the chips in a circuit board
COVID-19	Covid virus 2019, an infectious disease that was declared a pandemic by the World Health Organization in March 2020
DNP	Dai Nippon Printing Co., Ltd.
EUV	A wafer lithography technology using the industry standard extreme ultraviolet (EUV) wavelength. EUV photomasks function by selectively reflecting or blocking light, in contrast to conventional photomasks which function by selectively transmitting or blocking light
Exchange Act	The Securities Exchange Act of 1934 (as amended)
FASB	Financial Accounting Standards Board
Form 10-K	Annual Report on Form 10-K
Form 10-Q	Quarterly Report on Form 10-Q
FPDs	Flat-panel displays, or “displays”
Generation	In reference to flat-panel displays, refers to the size range of the underlying substrate to which a photomask is applied. Higher generation (or “G”) numbers represent larger substrates
High-end (photomasks)	For IC, photomasks that are 28nm or smaller; for FPD, AMOLED, G10.5+, and LTPS photomasks
ICs	Integrated circuits, or semiconductors
LIBOR	London Inter-Bank Offered Rate
LTPS	Low-Temperature Poly Silicon, a polycrystalline silicon synthesized at relatively low temperatures; polycrystalline silicon in thin-film transistors (TFTs) are used in liquid-crystal display (LCD) flat panels and to drive organic light-emitting diode (OLED) displays
MLA	Master Lease Agreement
Optical proximity correction	A photolithography enhancement technique applied to compensate for the limitations of light to maintain the edge placement integrity of an original design, imaged onto a silicon wafer, for further processing to an etched pattern.
PDMCX	Xiamen American Japan Photronics Mask Co., Ltd., a joint venture of Photronics and DNP
Phase-shift photomasks	Photomasks that take advantage of the interference generated by phase differences to improve image resolution in photolithography
Pure-play foundry	A company that does not produce a significant volume of IC products of its own design, but rather operates IC fabrication plants dedicated to producing ICs for other companies
RMB	Chinese renminbi
ROU (assets)	Right-of-use asset
SEC	Securities and Exchange Commission
Securities Act	The Securities Act of 1933 (as amended)
Sputtering	The bombardment of a material with energetic particles to cause microscopic particles of the material to eject from its surface.
U.S. GAAP	Accounting principles generally accepted in the United States of America
Wafer	A wafer, or silicon wafer, is a thin slice of semiconductor material that, in the fabrication of microelectronics, serves as the substrate for microelectronic devices built in and upon the wafer

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Forward-Looking Statements

This Form 10-Q contains forward-looking statements, as defined by the SEC. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by us, or on our behalf. Forward-looking statements are statements other than statements of historical fact, including, without limitation, those statements that include such words as “anticipates”, “believes”, “estimates”, “expects”, “intends”, “may”, “plans”, “predicts”, and similar expressions, and, without limitation, may address our future plans, objectives, goals, strategies, events, or performance, as well as underlying assumptions and other statements that are other than statements of historical facts. On occasion, in other documents filed with the SEC, press releases, conferences, or by other means, we may discuss, publish, disseminate, or otherwise make available, forward-looking statements, including statements contained within Part I, Item 2 – “Management’s Discussion & Analysis of Financial Condition and Results of Operations” of this Form 10-Q.

Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. Our expectations, beliefs, and projections are expressed in good faith and are believed by us to have a reasonable basis, including, without limitation, management’s examination of historical operating trends, information contained in our records, and information we’ve obtained from other parties. However, we can offer no assurance that our expectations, beliefs, or projections will be realized, accomplished, or achieved.

Forward-looking statements within this Form 10-Q speak only as of the date of its filing, and we undertake no obligation to update any such statements to reflect changes in events or circumstances that may subsequently occur. Users of this Form 10-Q are cautioned that various factors may cause actual results to differ materially from those contained in any forward-looking statements found within this Form 10-Q and that they should not place undue reliance on any forward-looking statement. In addition, all forward-looking statements, whether written or oral and whether made by us or on our behalf, are expressly qualified by the risk factors provided in Part I, Item 1A “Risk Factors” of our Form 10-K, as well as any additional risk factors we may provide in Part II, Item 1A of our Quarterly Reports on Form 10-Q.

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PART I.

FINANCIAL INFORMATION

Item 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PHOTRONICS, INC.

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

(unaudited)

	July 30, 2023			October 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	448,479		$	319,680
Short-term investments		27,325			38,820
Accounts receivable, net of allowance of $1,199 in 2023 and $1,002 in 2022		206,128			198,147
Inventories		55,379			50,753
Other current assets		34,900			37,252
Total current assets		772,211			644,652

Property, plant and equipment, net		701,459			643,873
Deferred income taxes		18,585			19,816
Other assets		11,088			7,489
Total assets	$	1,503,343		$	1,315,830

LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt	$	6,589		$	10,024
Accounts payable		101,525			79,566
Accrued liabilities		82,538			104,207
Total current liabilities		190,652			193,797

Long-term debt		20,121			32,310
Other liabilities		40,694			27,634
Total liabilities		251,467			253,741

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, 61,284 shares issued and outstanding at July 30, 2023, and 60,791 shares issued and outstanding at October 31, 2022		613			608
Additional paid-in capital		499,886			493,741
Retained earnings		516,508			435,634
Accumulated other comprehensive loss		(55,795	)		(98,456	)
Total Photronics, Inc. shareholders’ equity		961,212			831,527
Noncontrolling interests		290,664			230,562
Total equity		1,251,876			1,062,089
Total liabilities and equity	$	1,503,343		$	1,315,830

See accompanying notes to condensed consolidated financial statements.

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PHOTRONICS, INC.

Condensed Consolidated Statements of Income

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended						Nine Months Ended
	July 30, 2023			July 31, 2022			July 30, 2023			July 31, 2022
Revenue	$	224,206		$	219,948		$	664,603		$	614,283
Cost of goods sold		137,405			136,085			413,323			400,338
Gross profit		86,801			83,863			251,280			213,945

Operating expenses:
Selling, general, and administrative		18,032			15,960			52,728			48,306
Research and development		3,505			4,151			10,287			14,297
Total operating expenses		21,537			20,111			63,015			62,603

Other operating (loss), net		-			(23	)		-			(17	)
Operating income		65,264			63,729			188,265			151,325

Other income (expense):
Foreign currency transactions impact, net		(4,543	)		3,862			(10,769	)		16,974
Interest income and other income, net		3,758			401			9,329			898
Interest expense		(126	)		(622	)		(324	)		(1,502	)
Income before income tax provision		64,353			67,370			186,501			167,695

Income tax provision		16,098			18,146			50,023			43,717

Net income		48,255			49,224			136,478			123,978

Net income attributable to noncontrolling interests		21,296			17,994			55,604			42,252

Net income attributable to Photronics, Inc. shareholders	$	26,959		$	31,230		$	80,874		$	81,726

Earnings per share:
Basic	$	0.44		$	0.51		$	1.32		$	1.35
Diluted	$	0.44		$	0.51		$	1.31		$	1.34

Weighted-average number of common shares outstanding:
Basic		61,233			60,701			61,089			60,488
Diluted		61,974			61,299			61,650			61,127

See accompanying notes to condensed consolidated financial statements.

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PHOTRONICS, INC.

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

	Three Months Ended						Nine Months Ended
	July 30, 2023			July 31, 2022			July 30, 2023		July 31, 2022
Net income	$	48,255		$	49,224		$	136,478	$	123,978

Other comprehensive (loss) income, net of tax of $0:
Foreign currency translation adjustments		(3,639	)		(22,136	)		47,068		(76,086	)
Other		80			61			91		229
Net other comprehensive (loss) income		(3,559	)		(22,075	)		47,159		(75,857	)

Comprehensive income		44,696			27,149			183,637		48,121

Less: comprehensive income attributable to noncontrolling interests		14,027			13,809			60,102		27,775

Comprehensive income attributable to Photronics, Inc. shareholders	$	30,669		$	13,340		$	123,535	$	20,346

See accompanying notes to condensed consolidated financial statements.

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PHOTRONICS, INC.

Condensed Consolidated Statements of Equity

(in thousands)

(unaudited)

	Three Months Ended July 30, 2023
	Photronics, Inc. Shareholders
					Additional Paid-in Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)			Non- controlling Interests			Total Equity

	Common Stock
	Shares		Amount

Balance at April 30, 2023		61,185	$	612	$	497,391	$	489,549	$	-	$	(59,505	)	$	276,637		$	1,204,684

Net income		-		-		-		26,959		-		-			21,296			48,255
Other comprehensive loss		-		-		-		-		-		3,710			(7,269	)		(3,559	)
Shares issued under equity plans		99		1		452		-		-		-			-			453
Share-based compensation expense		-		-		2,043		-		-		-			-			2,043

Balance at July 30, 2023		61,284	$	613	$	499,886	$	516,508	$	-	$	(55,795	)	$	290,664		$	1,251,876

	Three Months Ended July 31, 2022
	Photronics, Inc. Shareholders
	Common Stock				Additional Paid-in		Retained		Treasury		Accumulated Other Comprehensive			Non- controlling			Total
	Shares		Amount		Capital		Earnings		Stock		Loss			Interests			Equity

Balance at May 1, 2022		60,637	$	606	$	489,368	$	367,344	$	-	$	(22,919	)	$	215,831		$	1,050,230

Net income		-		-		-		31,230		-		-			17,994			49,224
Other comprehensive loss		-		-		-		-		-		(17,890	)		(4,185	)		(22,075	)
Shares issued under equity plans		117		2		996		-		-		-			-			998
Share-based compensation expense		-		-		1,581		-		-		-			-			1,581

Balance at July 31, 2022		60,754	$	608	$	491,945	$	398,574	$	-	$	(40,809	)	$	229,640		$	1,079,958

See accompanying notes to condensed consolidated financial statements.

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	Nine Months Ended July 30, 2023
	Photronics, Inc. Shareholders
					Additional Paid-in Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)			Non- controlling Interests		Total Equity

	Common Stock
	Shares		Amount

Balance at October 31, 2022		60,791	$	608	$	493,741	$	435,634	$	-	$	(98,456	)	$	230,562	$	1,062,089

Net income		-		-		-		80,874		-		-			55,604		136,478
Other comprehensive Income		-		-		-		-		-		42,661			4,498		47,159
Shares issued under equity plans		493		5		271		-		-		-			-		276
Share-based compensation expense		-		-		5,874		-		-		-			-		5,874

Balance at July 30, 2023		61,284	$	613	$	499,886	$	516,508	$	-	$	(55,795	)	$	290,664	$	1,251,876

	Nine Months Ended July 31, 2022
	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, 2021		60,024		$	600		$	484,672		$	317,849		$	-		$	20,571		$	176,870		$	1,000,562

Net income		-			-			-			81,726			-			-			42,252			123,978
Other comprehensive loss		-			-			-			-			-			(61,380	)		(14,477	)		(75,857	)
Shares issued under equity plans		917			9			4,170			-			-			-			-			4,179
Share-based compensation expense		-			-			4,623			-			-			-			-			4,623
Contribution from noncontrolling interest		-			-			-			-			-			-			24,995			24,995
Purchase of treasury stock		-			-			-			-			(2,522	)		-			-			(2,522	)
Retirement of treasury stock		(187	)		(1	)		(1,520	)		(1,001	)		2,522			-			-			-

Balance at July 31, 2022		60,754		$	608		$	491,945		$	398,574		$	-		$	(40,809	)	$	229,640		$	1,079,958

See accompanying notes to condensed consolidated financial statements.

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PHOTRONICS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Nine Months Ended
	July 30, 2023			July 31, 2022

Cash flows from operating activities:
Net income	$	136,478		$	123,978
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		59,523			61,210
Share-based compensation		5,874			4,623
Changes in assets and liabilities:
Accounts receivable		(1,482	)		(45,199	)
Inventories		(2,693	)		1,570
Other current assets		4,053			661
Accounts payable, accrued liabilities, and other		(6,197	)		49,078

Net cash provided by operating activities		195,556			195,921

Cash flows from investing activities:
Purchases of property, plant and equipment		(78,813	)		(46,337	)
Purchases of available-for-sale debt securities		(9,837	)		-
Proceeds from maturities of available-for-sale debt securities		22,500			-
Government incentives		2,033			1,394
Other		(116	)		(179	)

Net cash used in investing activities		(64,233	)		(45,122	)

Cash flows from financing activities:
Repayments of debt		(16,351	)		(51,917	)
Purchases of treasury stock		-			(2,522	)
Contribution from noncontrolling interest		-			24,995
Proceeds from share-based arrangements		1,241			5,505
Net settlements of restricted stock awards		(1,292	)		(1,463	)

Net cash used in financing activities		(16,402	)		(25,402	)

Effects of exchange rate changes on cash, cash equivalents, and restricted cash		13,813			(21,308	)

Net increase in cash, cash equivalents, and restricted cash		128,734			104,089
Cash, cash equivalents, and restricted cash at beginning of period		322,409			279,680

Cash, cash equivalents, and restricted cash at end of period		451,143			383,769

Less: Ending restricted cash		2,664			2,936

Cash and cash equivalents at end of period	$	448,479		$	380,833

Supplemental disclosure of non-cash information:

Accruals for property, plant and equipment purchased during the period	$	22,578		$	5,558

See accompanying notes to condensed consolidated financial statements.

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PHOTRONICS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(in thousands, except share amounts and per share data)

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

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 ICs, a variety of FPDs and, to a lesser extent, other types of electrical and optical components. We operate eleven manufacturing facilities, which are located in Taiwan (3), Korea, China (2), the United States (3), and Europe (2).

The accompanying unaudited condensed consolidated financial statements (“the financial statements”) have been prepared in accordance with U.S. GAAP for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of management, adjustments, all of which are of a normal recurring nature, considered necessary for a fair presentation have been included. The financial statements include the accounts of Photronics, its wholly owned subsidiaries, and the majority-owned subsidiaries, which it controls. All intercompany balances and transactions have been eliminated in consolidation. These financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Form 10-K for the fiscal year ended October 31, 2022, where we discuss and provide additional information about our accounting policies and the methods and assumptions used in our estimates.

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, including those on the impact of COVID-19, are based on historical experience and on various assumptions that we believe to be reasonable under the facts and circumstances 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.

Our business is typically impacted during the first quarter of our fiscal year by the North American, European, and Asian holiday periods, as some customers reduce their development and buying activities during this period. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2023.

NOTE 2 - SHORT-TERM INVESTMENTS

Short-term 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 July 30, 2023, all of our available-for-sale securities had, at their dates of purchase, remaining maturities of more than three months, but less than one year, and have been classified as Short-term investments.

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Available-for-sale debt investments are reported at fair value, with unrealized gains or losses (net of tax) reported in Accumulated other comprehensive 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.

	July 30, 2023									October 31, 2022
	Amortized Cost		Unrealized Gains		Unrealized Losses			Carrying Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Carrying Value
Government securities	$	27,354	$	-	$	(29	)	$	27,325	$	38,911	$	-	$	(91	)	$	38,820

NOTE 3 - INVENTORIES

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

	July 30, 2023		October 31, 2022
Raw materials	$	53,875	$	49,326
Work in process		1,501		1,408
Finished goods		3		19
	$	55,379	$	50,753

NOTE 4 - PROPERTY, PLANT, AND EQUIPMENT, NET

Presented below are the components of Property, plant, and equipment, net at the balance sheet dates.

	July 30, 2023			October 31, 2022
Land	$	11,684		$	11,134
Buildings and improvements		188,950			168,024
Machinery and equipment		1,942,524			1,769,478
Leasehold improvements		19,460			18,802
Furniture, fixtures, and office equipment		16,284			14,355
Construction in progress		56,985			90,846
		2,235,887			2,072,639
Accumulated depreciation and amortization		(1,534,428	)		(1,428,766	)
	$	701,459		$	643,873

Information on ROU assets resulting from finance leases, at the balance sheet dates, is presented below.

	July 30, 2023			October 31, 2022
Machinery and equipment	$	42,820		$	42,760
Accumulated amortization		(6,922	)		(4,784	)
	$	35,898		$	37,976

The following table presents depreciation expense (including the amortization of ROU assets) related to property, plant, and equipment incurred during the reporting periods.

	Three Months Ended						Nine Months Ended
	July 30, 2023			July 31, 2022			July 30, 2023		July 31, 2022
Depreciation Expense		$	20,346		$	19,710	$	59,255	$	60,939

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NOTE 5 - 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 and were paid off during fiscal year 2023. These liens had an October 31, 2022, total carrying value of $70.7 million, as collateral for the loans.

Under the Agreement, DNP is afforded, under certain circumstances, the right to put its interest in PDMCX to Photronics. These circumstances include disputes regarding the strategic direction of PDMCX that may arise after the initial two-year term of the Agreement and cannot be resolved between the two parties. As of the date of issuance of these financial statements, DNP had not indicated its intention to exercise this right. In addition, both Photronics and DNP have the option to purchase, or put, their interest from, or to, the other party, should their ownership interest fall below twenty percent for a period of more than six consecutive months. Under all such circumstances, the sales of ownership interests would be at the exiting party’s ownership percentage of the joint venture’s net book value, with closing to take place within three business days of obtaining required approvals and clearance.

The following table presents net income we recorded from the operations of PDMCX during the reporting periods.

	Three Months Ended						Nine Months Ended
	July 30, 2023			July 31, 2022			July 30, 2023		July 31, 2022
Net income from PDMCX		$	7,130		$	5,356	$	19,700	$	12,129

As required by the guidance in Topic 810 - “Consolidation” of the Accounting Standards Codification (“ASC”), we evaluated our involvement in PDMCX for the purpose of determining whether we should consolidate its results in our financial statements. The initial step of our evaluation was to determine whether PDMCX was a variable interest entity (“VIE”). Due to its lack of sufficient equity at risk to finance its activities without additional subordinated financial support, we determined that it was a VIE. Having made this determination, we then assessed whether we were the primary beneficiary of the VIE and concluded that we were the primary beneficiary during the current and prior year reporting periods; thus, as required, the PDMCX financial results have been consolidated with Photronics. Our conclusion was based on the facts 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 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 reporting 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.

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The following table presents the carrying amounts of PDMCX assets and liabilities included in our condensed 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.

	July 30, 2023				October 31, 2022
Classification	Carrying Amount		Photronics Interest		Carrying Amount		Photronics Interest
Current assets	$	133,729	$	66,878	$	127,542	$	63,784
Noncurrent assets		142,718		71,373		119,392		59,708
Total assets		276,447		138,251		246,934		123,492

Current liabilities		46,517		23,263		51,274		25,643
Noncurrent liabilities		1,468		734		9,161		4,581
Total liabilities		47,985		23,997		60,435		30,224

Net assets	$	228,462	$	114,254	$	186,499	$	93,268

NOTE 6 - DEBT

Due to the Q2 FY23 payoff of the Xiamen Project loans, as of July 30, 2023, the Current portion of long-term debt and the Long-term debt balances were comprised of finance leases as described below:

As of July 30, 2023	Xiamen Project Loans		Finance Leases			Total
Principal due:
Next 12 months	$	-	$	6,589			6,589
Months 13 – 24	$	-	$	20,090			20,090
Months 25 – 36		-		13			13
Months 37 – 48		-		13			13
Months 49 – 60		-		5			5
Long-term debt		-		20,121			20,121
Total debt	$	-	$	26,710			26,710

Interest rate at balance sheet date		N/A%		N/A
Basis spread on interest rates		0.00		N/A
Interest rate reset	Quarterly			N/A
Maturity date	December 2025			N/A
Periodic payment amount	Varies as loans mature⁽¹⁾		Varies as Lease mature
Periodic payment frequency	Semiannual, on individual loans		Monthly
Loan collateral (carrying amount)	$	N/A	$	35,898	⁽²⁾

⁽¹⁾

During Q2 FY23, we repaid the entire balance of 26.4 million RMB (approximately $3.9 million) remaining on the loan, of which, 2.0 million RMB was due to be paid in June 2025 and 24.4 million RMB was due to be paid in December 2025.

⁽²⁾

Represents the carrying amount at the balance sheet date of the related ROU assets, in which the lessors have secured interests.

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The table below provides information on our long-term debt as of October 31, 2022.