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 September 30, 2022
OR
| 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: 001-34775
____________________________
(Exact name of registrant as specified in its charter)
____________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of principal executive offices)
(Zip Code)
+66 2 -524-9600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
____________________________
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 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x 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 such files). Yes x 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.
| x | 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 x No
As of October 28, 2022, the registrant had 36,587,471 ordinary shares, $0.01 par value, outstanding.
1
FABRINET
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2022
Table of Contents
| Page No. | |||||
2
RISK FACTORS SUMMARY
You should carefully consider the information set forth below under the heading “Risk Factors” in Part II, Item 1A before deciding whether to invest in our securities. Below is a summary of the principal risks associated with an investment in our securities.
•Our sales depend on a small number of customers. A reduction in orders from any of these customers, the loss of any of these customers, or a customer exerting significant pricing and margin pressures on us could harm our business, financial condition and operating results.
•Consolidation in the markets we serve could harm our business, financial condition and operating results.
•If the optical communications market does not expand as we expect, our business may not grow as fast as we expect.
•Our quarterly revenues, gross profit margins and operating results have fluctuated significantly and may continue to do so in the future, which may cause the market price of our ordinary shares to decline or be volatile.
•If we are unable to continue diversifying our precision optical and electro-mechanical manufacturing services across other markets within the optics industry, or if these markets do not grow as fast as we expect, our business may not grow as fast as we expect.
•If we are unable to compete successfully against our current and future competitors, our business, financial condition and operating results could be harmed.
•Cancellations, delays or reductions of customer orders and the relatively short-term nature of the commitments of our customers could harm our business, financial condition and operating results.
•Our exposure to financially troubled customers or suppliers could harm our business, financial condition and operating results.
•We purchase some of the critical materials used in certain of our products from a single source or a limited number of suppliers. Supply shortages have in the past, and could in the future, impair the quality, reduce the availability or increase the cost of materials, which could harm our revenues, profitability and customer relations.
•Managing our inventory is complex and may require write-downs due to excess or obsolete inventory, which could cause our operating results to decrease significantly in a given fiscal period.
•If we fail to adequately expand our manufacturing capacity, we will not be able to grow our business, which would harm our business, financial condition and operating results. Conversely, if we expand too much or too rapidly, we may experience excess capacity, which would harm our business, financial condition and operating results.
•We may experience manufacturing yields that are lower than expected, potentially resulting in increased costs, which could harm our business, operating results and customer relations.
•If the products that we manufacture contain defects, we could incur significant correction costs, demand for our services may decline and we may be exposed to product liability and product warranty claims, which could harm our business, financial condition, operating results and customer relations.
•If we fail to attract additional skilled employees or retain key personnel, our business, financial condition and operating results could suffer.
•Fluctuations in foreign currency exchange rates and changes in governmental policies regarding foreign currencies could increase our operating costs, which would adversely affect our operating results.
•We conduct operations in a number of countries, which creates logistical and communications challenges for us and exposes us to other risks and challenges that could harm our business, financial condition and operating results.
•We are subject to governmental export and import controls in several jurisdictions that subject us to a variety of risks, including liability, impairment of our ability to compete in international markets, and decreased sales and customer orders.
•We are subject to risks related to the ongoing U.S.-China trade dispute, including increased tariffs on materials that we use in manufacturing, which could adversely affect our business, financial condition and operating results.
•Political unrest and demonstrations, as well as changes in the political, social, business or economic conditions in Thailand, could harm our business, financial condition and operating results.
3
•We expect to continue to invest in our manufacturing operations in the People's Republic of China ("PRC"), which will continue to expose us to risks inherent in doing business in the PRC, any of which risks could harm our business, financial condition and operating results.
•Natural disasters, epidemics (including COVID-19), acts of terrorism and political and economic developments could harm our business, financial condition and operating results.
•Unfavorable worldwide economic conditions (including inflation and supply chain disruptions), may negatively affect our business, financial condition and operating results.
•The loan agreements for our long-term debt obligations and other credit facilities contain financial ratio covenants that may impair our ability to conduct our business.
•The phase-out of the London Interbank Offered Rate ("LIBOR") could affect interest rates under our existing credit facility agreement, as well as our ability to seek future debt financing.
•We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our shareholders.
•Our investment portfolio may become impaired by deterioration of the capital markets.
•We are not fully insured against all potential losses. Natural disasters or other catastrophes could adversely affect our business, financial condition and operating results.
•There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with U.S. GAAP. Any changes in estimates, judgments and assumptions could have a material adverse effect on our business, financial condition and operating results.
•Our business and operations would be adversely impacted in the event of a failure of our information technology infrastructure and/or cyber security attacks.
•Intellectual property infringement claims against our customers or us could harm our business, financial condition and operating results.
•Any failure to protect our customers’ intellectual property that we use in the products we manufacture for them could harm our customer relationships and subject us to liability.
•We are subject to the risk of increased income taxes, which could harm our business, financial condition and operating results.
•We have incurred and will continue to incur significant increased costs as a result of operating as a public company, and our management will be required to continue to devote substantial resources to various compliance initiatives.
•Failure to comply with applicable environmental laws and regulations could have a material adverse effect on our business, financial condition and operating results.
•If we are unable to meet regulatory quality standards applicable to our manufacturing and quality processes for the products we manufacture, our business, financial condition and operating results could be harmed.
•Our share price may be volatile due to fluctuations in our operating results and other factors, including the activities and operating results of our customers or competitors, any of which could cause our share price to decline.
•If securities or industry analysts do not publish research or if they publish misleading or unfavorable research about our business, the market price and trading volume of our ordinary shares could decline.
•We may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors.
•Our business and share price could be negatively affected as a result of activist shareholders.
•Certain provisions in our constitutional documents may discourage our acquisition by a third party, which could limit our shareholders' opportunity to sell shares at a premium.
•Our shareholders may face difficulties in protecting their interests because we are incorporated under Cayman Islands law.
•Certain judgments obtained against us by our shareholders may not be enforceable.
•Energy price volatility may negatively impact our business, financial condition and operating results.
4
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FABRINET
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
| (in thousands of U.S. dollars, except share data and par value) | September 30, 2022 | June 24, 2022 | |||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term restricted cash | |||||||||||
| Short-term investments | |||||||||||
Trade accounts receivable, net of allowance for doubtful accounts of $ | |||||||||||
| Contract assets | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Non-current assets | |||||||||||
| Long-term restricted cash | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Intangibles, net | |||||||||||
| Operating right-of-use assets | |||||||||||
| Deferred tax assets | |||||||||||
| Other non-current assets | |||||||||||
| Total non-current assets | |||||||||||
| Total Assets | $ | $ | |||||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Current liabilities | |||||||||||
| Long-term borrowings, current portion, net | $ | $ | |||||||||
| Trade accounts payable | |||||||||||
| Fixed assets payable | |||||||||||
| Contract liabilities | |||||||||||
| Finance lease liability, current portion | |||||||||||
| Operating lease liabilities, current portion | |||||||||||
| Income tax payable | |||||||||||
| Accrued payroll, bonus and related expenses | |||||||||||
| Accrued expenses | |||||||||||
| Other payables | |||||||||||
| Total current liabilities | |||||||||||
| Non-current liabilities | |||||||||||
| Long-term borrowings, non-current portion, net | |||||||||||
| Deferred tax liability | |||||||||||
| Finance lease liability, non-current portion | |||||||||||
| Operating lease liability, non-current portion | |||||||||||
| Severance liabilities | |||||||||||
| Other non-current liabilities | |||||||||||
| Total non-current liabilities | |||||||||||
| Total Liabilities | |||||||||||
| Commitments and contingencies (Note 15) | |||||||||||
| Shareholders’ equity | |||||||||||
Preferred shares ( | |||||||||||
Ordinary shares ( | |||||||||||
| Additional paid-in capital | |||||||||||
Less: Treasury shares ( | ( | ( | |||||||||
| Accumulated other comprehensive income (loss) | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Total Shareholders’ Equity | |||||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
FABRINET
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (unaudited)
| Three Months Ended | |||||||||||
| (in thousands of U.S. dollars, except per share data) | September 30, 2022 | September 24, 2021 | |||||||||
| Revenues | $ | $ | |||||||||
| Cost of revenues | ( | ( | |||||||||
| Gross profit | |||||||||||
| Selling, general and administrative expenses | ( | ( | |||||||||
| Operating income | |||||||||||
| Interest income | |||||||||||
| Interest expense | ( | ( | |||||||||
| Foreign exchange gain (loss), net | |||||||||||
| Other income (expense), net | ( | ( | |||||||||
| Income before income taxes | |||||||||||
| Income tax expense | ( | ( | |||||||||
| Net income | |||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Change in net unrealized gain (loss) on available-for-sale securities | ( | ( | |||||||||
| Change in net unrealized gain (loss) on derivative instruments | ( | ( | |||||||||
| Change in net retirement benefits plan – prior service cost | |||||||||||
| Change in foreign currency translation adjustment | ( | ||||||||||
| Total other comprehensive income (loss), net of tax | ( | ( | |||||||||
| Net comprehensive income | $ | $ | |||||||||
| Earnings per share | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
| Weighted-average number of ordinary shares outstanding (thousands of shares) | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
FABRINET
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
For the Three Months Ended September 30, 2022
| Ordinary Share | Additional Paid-in Capital | Treasury Shares | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total | ||||||||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars, except share data) | Shares | Amount | |||||||||||||||||||||||||||||||||||||||
| Balances at June 24, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares | ( | — | — | — | |||||||||||||||||||||||||||||||||||||
Repurchase of | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Tax withholdings related to net share settlement of restricted share units | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
Balances at September 30, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
For the Three Months Ended September 24, 2021
| Ordinary Share | Additional Paid-in Capital | Treasury Shares | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total | ||||||||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars, except share data) | Shares | Amount | |||||||||||||||||||||||||||||||||||||||
| Balances at June 25, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares | ( | — | — | — | |||||||||||||||||||||||||||||||||||||
| Tax withholdings related to net share settlement of restricted share units | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
Balances at September 24, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
FABRINET
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
| Three Months Ended | |||||||||||
| (in thousands of U.S. dollars) | September 30, 2022 | September 24, 2021 | |||||||||
| Cash flows from operating activities | |||||||||||
| Net income for the period | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||
| Depreciation and amortization | |||||||||||
| (Gain) loss on disposal and impairment of property, plant and equipment | ( | ( | |||||||||
| (Gain) loss from sales and maturities of available-for-sale securities | ( | ||||||||||
| Amortization of discount (premium) of short-term investment | |||||||||||
| Amortization of deferred debt issuance costs | |||||||||||
| (Reversal of) allowance for doubtful accounts | ( | ( | |||||||||
| Unrealized loss (gain) on exchange rate and fair value of foreign currency forward contracts | ( | ( | |||||||||
| Amortization of fair value at hedge inception of interest rate swaps | ( | ( | |||||||||
| Share-based compensation | |||||||||||
| Deferred income tax | ( | ( | |||||||||
| Other non-cash expenses | ( | ||||||||||
| Changes in operating assets and liabilities | |||||||||||
| Trade accounts receivable | ( | ( | |||||||||
| Contract assets | ( | ( | |||||||||
| Inventories | ( | ||||||||||
| Other current assets and non-current assets | ( | ( | |||||||||
| Trade accounts payable | ( | ||||||||||
| Contract liabilities | |||||||||||
| Income tax payable | ( | ( | |||||||||
| Severance liabilities | |||||||||||
| Other current liabilities and non-current liabilities | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities | |||||||||||
| Purchase of short-term investments | ( | ( | |||||||||
| Proceeds from sales of short-term investments | |||||||||||
| Proceeds from maturities of short-term investments | |||||||||||
| Purchase of property, plant and equipment | ( | ( | |||||||||
| Purchase of intangibles | ( | ( | |||||||||
| Proceeds from disposal of property, plant and equipment | |||||||||||
| Net cash used in investing activities | ( | ||||||||||
| Cash flows from financing activities | |||||||||||
| Repayment of long-term borrowings | ( | ( | |||||||||
| Repayment of finance lease liability | ( | ||||||||||
| Repurchase of ordinary shares | ( | ||||||||||
| Withholding tax related to net share settlement of restricted share units | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | $ | ( | ||||||||
| Movement in cash, cash equivalents and restricted cash | |||||||||||
| Cash, cash equivalents and restricted cash at the beginning of period | $ | $ | |||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||
| Effect of exchange rate on cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash at the end of period | $ | $ | |||||||||
| Non-cash investing and financing activities | |||||||||||
| Construction, software and equipment-related payables | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
FABRINET
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Continued)
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the total of the same amounts shown in the unaudited condensed consolidated statements of cash flows:
| (in thousands of U.S. dollars) | As of September 30, 2022 | As of September 24, 2021 | |||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Cash, cash equivalents and restricted cash | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
FABRINET
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands of U.S. dollars unless otherwise noted)
1. Business and organization
General
Fabrinet (“Fabrinet” or the “Parent Company”) was incorporated on August 12, 1999, and commenced operations on January 1, 2000. The Parent Company is an exempted company incorporated in the Cayman Islands, British West Indies. The “Company” refers to Fabrinet and its subsidiaries as a group.
The Company provides advanced optical packaging and precision optical, electro-mechanical and electronic manufacturing services to original equipment manufacturers (“OEMs”) of complex products, such as optical communication components, modules and sub-systems, industrial lasers, automotive components, medical devices and sensors. The Company offers a broad range of advanced optical and electro-mechanical capabilities across the entire manufacturing process, including process design and engineering, supply chain management, manufacturing, complex printed circuit board assembly, advanced packaging, integration, final assembly and testing. The Company focuses primarily on the production of low-volume, high-mix products. The principal subsidiaries of Fabrinet include Fabrinet Co., Ltd. (“Fabrinet Thailand”), Casix, Inc. (“Casix”), Fabrinet West, Inc. (“Fabrinet West”), Fabrinet UK Limited (“Fabrinet UK”) and Fabrinet Israel Ltd. (“Fabrinet Israel”).
2. Accounting policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements for Fabrinet as of September 30, 2022 and for the three months ended September 30, 2022 and September 24, 2021 include normal recurring adjustments necessary for a fair statement of the financial statements set forth herein, in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or "GAAP") for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such information does not include all of the information and footnotes required by U.S. GAAP for annual financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in Fabrinet’s Annual Report on Form 10-K for the year ended June 24, 2022.
The balance sheet as of June 24, 2022 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
The results for the three months ended September 30, 2022 may not be indicative of results for the year ending June 30, 2023 or any future periods.
Use of Estimates
The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amount of total revenues and expenses during the year. The Company bases estimates on historical experience and various assumptions about the future that are believed to be reasonable based on available information. The Company’s reported financial position or results of operations may be materially different under different conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies, which are discussed below. Significant assumptions are used in accounting for share-based compensation, allowance for doubtful accounts, allowance for expected credit losses, income taxes, inventory obsolescence, goodwill and valuation of intangible assets related to business acquisition, among others. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates. In the event that the Company's estimates or assumptions prove to be different from actual results, adjustments will be made in subsequent periods to reflect more current information. Additionally, the extent to which the evolving COVID-19 pandemic impacts the Company’s unaudited condensed consolidated financial statements will depend on a number of factors, including the magnitude and duration of the pandemic. These estimates may change, as new events occur and additional information is obtained, or based upon the occurrence of other factors related to the COVID-19 pandemic that could result in material impacts to the Company's unaudited condensed consolidated financial statements in future reporting periods.
10
Fiscal years
The Company utilizes a 52-53 week fiscal year ending on the Friday in June closest to June 30. The three months ended September 30, 2022 and September 24, 2021 consisted of 14 weeks and 13 weeks, respectively. Fiscal year 2023 will comprise 53 weeks and will end on June 30, 2023.
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3. Revenues from contracts with customers
Revenue by Geographic Area and End Market
Revenues are attributed to a particular geographic area based on the bill-to-location of the Company’s customers. The Company operates in three geographic regions: North America; Asia-Pacific and others; and Europe.
The following table presents total revenues by geographic region:
| (in thousands, except percentages) | Three Months Ended September 30, 2022 | As a % of Total Revenues | Three Months Ended September 24, 2021 | As a % of Total Revenues | |||||||||||||||||||
| North America | |||||||||||||||||||||||
| U.S. | $ | $ | |||||||||||||||||||||
Others (1) | |||||||||||||||||||||||
| Total revenue in North America | % | % | |||||||||||||||||||||
| Asia-Pacific and others | |||||||||||||||||||||||
| India | |||||||||||||||||||||||
| Malaysia | |||||||||||||||||||||||
| Israel | |||||||||||||||||||||||
| Hong Kong | |||||||||||||||||||||||
| China | |||||||||||||||||||||||
| Thailand | |||||||||||||||||||||||
| Japan | |||||||||||||||||||||||
| Others | |||||||||||||||||||||||
| Total revenue in Asia-Pacific and others | % | % | |||||||||||||||||||||
| Europe | |||||||||||||||||||||||
| U.K. | |||||||||||||||||||||||
| Germany | |||||||||||||||||||||||
Ireland (2) | |||||||||||||||||||||||
| Others | |||||||||||||||||||||||
| Total revenue in Europe | $ | % | $ | % | |||||||||||||||||||
| Total revenue | $ | % | $ | % | |||||||||||||||||||
(1)Others includes revenues from external customers based in our country of domicile, the Cayman Islands, which for each year presented is $0
(2)Due to change in bill-to-location for a certain customer.
The following table presents revenues by end market:
| (in thousands, except percentages) | Three Months Ended September 30, 2022 | As a % of Total Revenues | Three Months Ended September 24, 2021 | As a % of Total Revenues | |||||||||||||||||||
| Optical communications | $ | % | $ | % | |||||||||||||||||||
| Lasers, sensors and other | % | % | |||||||||||||||||||||
| Total | $ | % | $ | % | |||||||||||||||||||
12
Contract Assets and Liabilities
A contract asset is recognized when the Company has recognized revenues prior to generating an invoice for payment. Contract assets are classified separately within the unaudited condensed consolidated balance sheets and transferred to accounts receivable when rights to payment become unconditional.
A contract liability is recognized when the Company has advance payment arrangements with customers. The contract liabilities balance is normally recognized as revenue within six months.
The following tables summarize the activity in the Company’s contract assets and contract liabilities during the three months ended September 30, 2022:
| (in thousands) | Contract Assets | ||||
Beginning balance, June 24, 2022 | $ | ||||
| Revenue recognized | |||||
| Amounts collected or invoiced | ( | ||||
Ending balance, September 30, 2022 | $ | ||||
| (in thousands) | Contract Liabilities | ||||
Beginning balance, June 24, 2022 | $ | ||||
| Advance payment received during the period | |||||
| Revenue recognized | ( | ||||
Ending balance, September 30, 2022 | $ | ||||
4. Earnings per ordinary share
Basic earnings per ordinary share is computed by dividing reported net income by the weighted-average number of ordinary shares outstanding during each period. Diluted earnings per ordinary share is computed by calculating the effect of potential dilutive ordinary shares outstanding during the period using the treasury stock method. Dilutive ordinary equivalent shares consist of restricted share units and performance share units.
Earnings per ordinary share was calculated as follows:
| Three Months Ended | |||||||||||
| (in thousands, except per share data) | September 30, 2022 | September 24, 2021 | |||||||||
| Net income attributable to shareholders | $ | $ | |||||||||
| Weighted-average number of ordinary shares outstanding | |||||||||||
| Incremental shares arising from the assumed vesting of restricted share units and performance share units | |||||||||||
| Weighted-average number of ordinary shares for diluted earnings per ordinary share | |||||||||||
| Basic earnings per ordinary share | $ | $ | |||||||||
| Diluted earnings per ordinary share | $ | $ | |||||||||
13
5. Cash, cash equivalents and short-term investments
The Company’s cash, cash equivalents, and short-term investments are as follows:
| Fair Value | |||||||||||||||||||||||||||||
| (in thousands) | Carrying Cost | Unrealized Gain/ (Loss) | Cash and Cash Equivalents | Marketable Securities | Other Investments | ||||||||||||||||||||||||
As of September 30, 2022 | |||||||||||||||||||||||||||||
| Cash | $ | $ | — | $ | $ | — | $ | — | |||||||||||||||||||||
| Cash equivalents | ( | — | — | ||||||||||||||||||||||||||
| Corporate debt securities | ( | — | — | ||||||||||||||||||||||||||
| U.S. agency and U.S. treasury securities | ( | — | — | ||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||
As of June 24, 2022 | |||||||||||||||||||||||||||||
| Cash | $ | $ | — | $ | $ | — | $ | — | |||||||||||||||||||||
| Cash equivalents | ( | — | — | ||||||||||||||||||||||||||
| Liquidity funds | — | — | |||||||||||||||||||||||||||
| Corporate debt securities | ( | — | — | ||||||||||||||||||||||||||
| U.S. agency and U.S. treasury securities | ( | — | — | ||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||
All highly liquid investments with original maturities of three months or less at the date of purchase are classified as cash equivalents. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the designations at each balance sheet date. The Company may sell certain of its short-term investments prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. The maturities of the Company’s short-term investments generally range from three months to three years .
The following table summarizes the cost and estimated fair value of short-term investments classified as available-for-sale securities based on stated effective maturities as of September 30, 2022 and June 24, 2022:
| September 30, 2022 | June 24, 2022 | ||||||||||||||||||||||
| (in thousands) | Carrying Cost | Fair Value | Carrying Cost | Fair Value | |||||||||||||||||||
| Due within one year | $ | $ | $ | $ | |||||||||||||||||||
| Due between one to five years | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
6. Fair value of financial instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is established, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs for the valuation of an asset or liability as of the measurement date. The three levels of inputs that may be used to measure fair value are defined as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for assets or liabilities, either directly or indirectly. If the assets or liabilities have a specified (contractual) term, Level 2 inputs must be observable for substantially the full term of assets or liabilities.
Level 3 inputs are unobservable inputs for assets or liabilities, which require the reporting entity to develop its own valuation techniques and assumptions.
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The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The following table provides details of the financial instruments measured at fair value on a recurring basis, including:
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||
As of September 30, 2022 | ||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Cash equivalents | $ | $ | $ | $ | ||||||||||||||||||||||
| Corporate debt securities | ||||||||||||||||||||||||||
| U.S. agency and U.S. treasury securities | ||||||||||||||||||||||||||
| Derivative assets – current portion | (1) | |||||||||||||||||||||||||
| Derivative assets – non-current portion | (2) | |||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Derivative liabilities – current portion | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Total | $ | $ | ( | (3) | $ | $ | ( | |||||||||||||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||
As of June 24, 2022 | ||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Cash equivalents | $ | $ | $ | $ | ||||||||||||||||||||||
| Liquidity funds | ||||||||||||||||||||||||||
| Corporate debt securities | ||||||||||||||||||||||||||
| U.S. agency and U.S. treasury securities | ||||||||||||||||||||||||||
| Derivative assets – current portion | (4) | |||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Derivative liabilities – current portion | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Derivative liabilities – non-current portion | ( | ( | ||||||||||||||||||||||||
| Total | $ | $ | ( | (5) | $ | $ | ( | |||||||||||||||||||
(1)Foreign currency forward contracts with an aggregate notional amount of $4.0 million and an interest rate swap agreement with a notional amount of $64.2 million.
(2)Interest rate swap agreement with notional amount of $60.9 million.
(3)Foreign currency forward contracts with an aggregate notional amount of $142.0 million and 0.6 million Canadian dollars and an interest rate swap agreement with a notional amount of $60.9 million.
(4)Interest rate swap agreement with a notional amount of $64.2 million.
(5)Foreign currency forward contracts with an aggregate notional amount of $135.0 million and 0.5 million Canadian dollars and an interest rate swap agreement with a notional amount of $60.9 million.
Derivative Financial Instruments
The Company utilizes derivative financial instruments to hedge (i) foreign exchange risk associated with certain foreign currency denominated assets and liabilities and other foreign currency transactions, and (ii) interest rate risk associated with its long-term debt.
The Company minimizes the credit risk associated with its derivative instruments by limiting the exposure to any single counterparty and by entering into derivative instruments only with counterparties that meet the Company’s minimum credit quality standard.
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Foreign currency forward and option contracts
As a result of foreign currency rate fluctuations, the U.S. dollar equivalent values of the Company’s foreign currency denominated assets and liabilities fluctuate. The Company uses foreign currency forward and option contracts to manage the foreign exchange risk associated with a portion of its foreign currency denominated assets and liabilities and other foreign currency transactions. The Company enters into foreign currency forward and option contracts to hedge fluctuations in the U.S. dollar value of forecasted transactions denominated in Thai baht and Canadian dollars with counterparties that meet the Company’s minimum credit quality standard.
The Company may enter into foreign currency forward contracts with maturities of up to 12 months to hedge fluctuations in the U.S. dollar value of forecasted transactions denominated in Thai baht, including inventory purchases, payroll and other operating expenses. The Company considers these forward contracts as dual-purpose hedges, that hedge both the foreign exchange fluctuation (i) from inception through the forecasted expenditure, and (ii) any subsequent revaluation of the account payable or accrual. The Company may designate the forward contracts that hedge the foreign exchange fluctuation from inception through the forecasted expenditure as cash flow hedges. The gain or loss on a derivative instrument designated and qualified as a cash flow hedging instrument is recorded as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The reclassified amounts are presented in the same income statement line item as the earnings effect of the hedged item. Once the forecasted transactions are recorded, the Company will discontinue the hedging relationship by de-designating the derivative instrument and recording subsequent changes in fair value through contract maturity to foreign exchange gain (loss), net in the unaudited condensed consolidated statements of operations and comprehensive income as a natural hedge against the Thai baht denominated assets and liabilities.
The Company may also enter into non-designated foreign currency forward and option contracts to provide an offset to the re-measurement of foreign currency denominated assets and liabilities and to hedge certain forecasted exposures. Changes in the fair value of these non-designated derivatives are recorded as foreign exchange gain (loss), net in the unaudited condensed consolidated statements of operations and comprehensive income.
As of September 30, 2022, the Company had 146 outstanding U.S. dollar foreign currency forward contracts against Thai baht, with an aggregate notional amount of $146.0 million and maturity dates ranging from October 2022 through April 2023 and one outstanding Canadian dollar foreign currency forward contract with an aggregate notional amount of 0.6 million Canadian dollars and a maturity date in December 2022.
As of June 24, 2022, the Company had 135 outstanding U.S. dollar foreign currency forward contracts against Thai baht with an aggregate notional amount of $135.0 million and maturity dates ranging from July 2022 through January 2023, and one foreign currency contract with a notional amount of 0.5 million Canadian dollars and with a maturity date in September 2022.
As of September 30, 2022, the hedging relationship over foreign currency forward contracts that were designated for hedge accounting was determined to be highly effective based on the performance of retrospective and prospective regression testing. As of September 30, 2022, the amount in accumulated other comprehensive income (“AOCI”) that is expected to be reclassified into earnings within 12 months was a loss of $6.3 million.
As of June 24, 2022, the hedging relationship over foreign currency forward contracts that were designated for hedge accounting had been tested to be highly effective based on the performance of retrospective and prospective regression testing. As of June 24, 2022, the amount in AOCI that is expected to be reclassified into earnings within 12 months was a loss of $4.8 million.
During the three months ended September 30, 2022 and September 24, 2021, the Company included an unrealized loss of $0.2 million and $0.6 million, respectively, from changes in the fair value of a foreign currency forward contract that was not designated for hedge accounting in earnings as foreign exchange gain (loss), net in the unaudited condensed consolidated statements of operations and comprehensive income.
Interest Rate Swap Agreements
The Company entered into interest rate swap agreements to mitigate interest rate risk and improve the interest rate profile of the Company’s debt obligations. As of September 30, 2022 and June 24, 2022, the Company had two 125.1
On July 25, 2018, Fabrinet Thailand entered into an interest rate swap agreement to effectively convert the floating interest rate of its term loan under a credit facility agreement with Bank of America to a fixed interest rate of 2.86 % per annum
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through the scheduled maturity of the term loan in June 2023 (see Note 10). The Company did not designate this interest rate swap for hedge accounting.
On September 3, 2019, Fabrinet Thailand entered into a term loan agreement under a credit facility agreement with the Bank of Ayudhya Public Company Limited (the “Bank”) (see Note 10) and on September 10, 2019, the Company repaid in full the outstanding term loan under the Bank of America Credit Facility Agreement (see Note 10). In conjunction with the funding of the new term loan, the Company entered into a second interest rate swap agreement. The combination of both of these interest rate swaps effectively converts the floating interest rate of the Company’s term loan with the Bank to a fixed interest rate of 4.36 % per annum through the maturity of the term loan in June 2024.
On September 27, 2019, the Company designated these two interest rate swaps as a cash flow hedge for the Company’s term loan under the credit facility agreement with the Bank. The combination of these two interest rate swaps qualified for hedge accounting because the hedges are highly effective, and the Company has designated and documented contemporaneously the hedging relationships involving these interest rate swaps. While the Company intends to continue to meet the conditions for hedge accounting, if hedges do not qualify as highly effective, the changes in the fair value of the derivatives used as hedges would be reflected in earnings. From September 27, 2019, any gains or losses related to these interest rate swaps are recorded in AOCI in the unaudited condensed consolidated balance sheets. The Company reclassifies a portion of the gains or losses from AOCI into earnings at each reporting period based on either the accrued interest amount or the interest payment.
As of September 30, 2022, the amount in AOCI that is expected to be reclassified into earnings within 12 months was a loss of $0.2 million.
As of June 24, 2022, the amount in AOCI that is expected to be reclassified into earnings within 12 months was a loss of $0.5 million.
The following table provides a summary of the impact of derivative gain (loss) of the Company’s foreign currency forward contracts and interest rate swaps which were designated as cash flow hedges on the unaudited condensed consolidated statements of operations and other comprehensive income:
| Three Months Ended | |||||||||||||||||
| (in thousands) | Financial statements line item | September 30, 2022 | September 24, 2021 | ||||||||||||||
| Derivatives gain (loss) recognized in other comprehensive income (loss): | |||||||||||||||||
| Foreign currency forward contracts | Other comprehensive income | $ | ( | $ | ( | ||||||||||||
| Interest rate swaps | Other comprehensive income | ||||||||||||||||
| Total derivatives gain (loss) recognized in other comprehensive income (loss) | $ | ( | $ | ( | |||||||||||||
| Derivatives (gain) loss reclassified from accumulated other comprehensive income (loss) into earnings: | |||||||||||||||||
| Foreign currency forward contracts | Cost of revenues | $ | $ | ||||||||||||||
| Foreign currency forward contracts | SG&A | ||||||||||||||||
| Foreign currency forward contracts | Foreign exchange loss, net | ( | ( | ||||||||||||||
| Interest rate swaps | Interest expense | ( | ( | ||||||||||||||
| Total derivatives (gain) loss reclassified from accumulated other comprehensive income (loss) into earnings | $ | $ | |||||||||||||||
| Change in net unrealized gain (loss) on derivatives instruments | $ | ( | $ | ( | |||||||||||||
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Fair Value of derivatives
The following table provides the fair values of the Company’s derivative financial instruments for the periods presented:
| September 30, 2022 | June 24, 2022 | ||||||||||||||||||||||
| (in thousands) | Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | |||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||
| Foreign currency forward and option contracts | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||||||||
| Foreign currency forward contracts | ( | ( | |||||||||||||||||||||
| Interest rate swaps | ( | ( | |||||||||||||||||||||
| Derivatives, gross balances | $ | $ | ( | $ | $ | ( | |||||||||||||||||
The Company recorded the fair value of derivative financial instruments in the unaudited condensed consolidated balance sheets as follows: