PHOTRONICS, INC.

PHOTRONICS, INC.

Three Months Ended January 28, 201827, 2019 and January 29, 201728, 2018

(unaudited)

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

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

Photronics, Inc. and its subsidiaries ("Photronics", "the Company", "we", “our”, or "us") is one of the world's leading manufacturers of photomasks, which are high precision photographic quartz or glass plates containing microscopic images of electronic circuits. Photomasks are a key element in the manufacture of semiconductors and flat panel displays ("FPDs"), and are used as masters to transfer circuit patterns onto semiconductor wafers and flat panel display substrates during the fabrication of integrated circuits ("ICs" or “semiconductors”) and,  a variety of FPDs and, to a lesser extent, other types of electrical and optical components. We currently operate principally from nine manufacturing facilities,facilities; two of which are located in Europe, three in Taiwan, one in Korea, and three in the United States. WeStates; and we have commencedcompleted construction of two manufacturing facilities in China and anticipate production to begin at these facilities in 2019.China.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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. Our business is typically impacted during the first, and sometimes the second, quarter of our fiscal year by the North American, European, and Asian holiday periods, as some customers reduce their development and buying activities during those periods. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending October 28, 2018.31, 2019. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended October 29, 2017.31, 2018.

NOTE 2 - CHANGES IN EQUITYINVENTORIES

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

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

Depreciation and amortization expense for property, plant and equipment was $21.1$17.6 million and $19.7$21.1 million for the three month periods ended January 28, 201827, 2019 and January 29, 2017, respectively.

NOTE 54 – PDMCX JOINT VENTURE

In January 2018, Photronics, through its wholly-owned Singapore subsidiary (hereinafter, within this Note “we”, or “Photronics”), and Dai Nippon Printing Co., Ltd., through its wholly-owned subsidiary “DNP Asia Pacific PTE, Ltd.” (hereinafter, within this Note, “DNP”) entered into a joint venture under which DNP obtained a 49.99% interest in our recently-established IC business in Xiamen, China, which includes thea facility currently under construction. The joint venture, known as “Photronics DNP Mask Corporation Xiamen” (hereinafter, “PDMCX”), was established to develop and manufacture photomasks for leading edge and advanced generation semiconductors. We entered into this joint venture to enable us to compete more effectively for the merchant photomask business in China and to benefit from the additional resources and investment that DNP will provide to enable us to offer advanced-process technology to our customers. No gain or loss was recorded upon the formation of this joint venture.

As of January 28, 2018,27, 2019, Photronics and DNP havehad each contributed cash of approximately $12$48 million to the joint venture. We estimate that, over the next several years, and per the PDMCX operating agreement (the Agreement), DNP and Photronics will each contribute an additional $43$32 million of cash, and additionala portion of which will be financed through local borrowings.

Under the PDMCX joint venture operating agreement (“the Agreement”),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. 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 20% for a period of more than six consecutive months. Under all such circumstances, the sales of ownership interests would be at the exiting party’s ownership percentage of the joint venture’s net book value, with closing to take place within three business days of obtaining required approvals and clearance.

We recorded a net losslosses from the operations of the PDMCX joint venture of approximately $1.3 million, and $0.5 million induring the first quarter of fiscal year 2018. No gain or loss was recorded upon the formation of the joint venture.three month periods ended January 27, 2019 and January 28, 2018, respectively. General creditors of PDMCX do not have recourse to the assets of Photronics, Inc., and our maximum exposure to loss from PDMCX at January 28, 2018,27, 2019, was $11.6$44.9 million.

As required by the guidance in Topic 810 - “Consolidation” of the Accounting Standards Codification, Standards, we evaluated our involvement in PDMCX for the purpose of determining whether we should consolidate its results in our financial statements. The initial step of our evaluation was to determine whether PDMCX was a variable interest entity (“VIE”). Due to its lack of sufficient equity at risk to finance its activities without additional subordinated financial support, we determined that it 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 period;periods; thus, as required, the PDMCX financial results should behave been consolidated with Photronics, Inc. Our conclusion was based on the factfacts that we held a controlling financial interest in PDMCX which(which resulted from our having the power to direct the activities that most significantly impacted its economic performance,performance), had the obligation to absorb losses, and the right to receive benefits that could potentially be significant to PDMCX. Our conclusionconclusions that we had the power to direct the activities that most significantly affected the economic performance of PDMCX during the current periodand prior year reporting periods was 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’sPDMCX 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 period,and prior year periods, we had the obligation to absorb losses and the right to receive benefits that could potentially be significant to PDMCX.

NOTE 65 - LONG-TERM BORROWINGSDEBT

Long-term borrowings consistDebt consists of the following: