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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 25, 2020
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
 
 
FABRINET
(Exact name of registrant as specified in its charter)
 
 
 
Cayman Islands
  
98-1228572
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
 
c/o Intertrust Corporate Services (Cayman) Limited
190 Elgin Avenue
George Town
Grand Cayman
Cayman Islands
  
KY1-9005
(Address of principal executive offices)
  
(Zip Code)
+66
2-524-9600
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading
 
Symbol(s)
Name of each exchange
 
on which registered
Ordinary Shares, $0.01 par value
  
FN
  
New York Stock Exchange
 

 
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  ☒    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  ☒    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.
 
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
As
of
 October 23, 2020, the registrant had 36,938,451 ordinary shares, $0.01 par value, outstanding.
 
 
 
FABRINET
FORM
10-Q
QUARTER ENDED SEPTEMBER 25, 2020
Table of Contents
 
 
  
Page No.
 
  
 
3
 
   
  
 
3
 
   
  
 
3
 
   
  
 
4
 
   
  
 
5
 
   
  
 
6
 
   
  
 
8
 
   
  
 
30
 
   
  
 
41
 
   
  
 
42
 
   
  
 
43
 
   
  
 
43
 
   
  
 
43
 
   
  
 
59
 
   
  
 
60
 
   
  
 
61
 
 
2
 
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 25,

2020
    
June 26,

2020
  
Assets
    
Current assets
    
Cash and cash equivalents
   $
189,201
     $ 225,430  
Short-term restricted cash
  
7,402
     7,402  
Short-term investments
  
307,238
     262,693  
Trade accounts receivable, net
 of allowance for doubtful accounts of $186 and $336
,
respectively
  
289,162
     272,665  
Contract assets
  
11,757
     13,256  
Inventories
  
339,429
     309,786  
Other receivable
  
24,310
     24,310  
Prepaid expenses
  
4,095
     5,399  
Other current assets
  
7,827
     14,508  
 
 
 
    
 
 
  
Total current assets
  
1,180,421
     1,135,449  
 
 
 
    
 
 
  
Non-current
assets
    
Property, plant and equipment, net
  
227,623
     228,274  
Intangibles, net
  
4,147
     4,312  
Operating
right-of-use
assets
  
7,228
     8,068  
Deferred tax assets
  
5,766
     5,675  
Other
non-current
assets
  
221
     202  
 
 
 
    
 
 
  
Total
non-current
assets
  
244,985
     246,531  
 
 
 
    
 
 
  
Total Assets
   $
1,425,406
     $ 1,381,980  
 
 
 
    
 
 
  
Liabilities and Shareholders’ Equity
    
Current liabilities
    
Long-term borrowings, current portion, net
   $
12,156
     $ 12,156  
Trade accounts payable
  
284,173
     251,603  
Fixed assets payable
  
9,616
     15,127  
Contract liabilities
  
966
     1,556  
Operating lease liabilities, current portion
  
2,098
     1,979  
Income tax payable
  
2,940
     2,242  
Accrued payroll, bonus and related expenses
  
18,881
     19,265  
Accrued expenses
  
10,077
     8,979  
Other payables
  
14,542
     21,514  
 
 
 
    
 
 
  
Total current liabilities
  
355,449
     334,421  
 
 
 
    
 
 
  
Non-current
liabilities
    
Long-term borrowings,
non-current
portion, net
  
36,475
     39,514  
Deferred tax liability
  
4,927
     4,729  
Operating lease liability,
non-current
portion
  
4,906
     5,873  
Severance liabilities
  
17,609
     17,379  
Other
non-current
liabilities
  
5,337
     5,655  
 
 
 
    
 
 
  
Total
non-current
 
liabilities
  
69,254
     73,150  
 
 
 
    
 
 
  
Total Liabilities
  
424,703
     407,571  
 
 
 
    
 
 
  
Commitments and contingencies (Note 1
7
)
Shareholders’ equity
    
Preferred shares (5,000,000 shares authorized, $0.01 par value; no shares issued and outstanding as
 
of
 September 25,
2020 and June 26, 2020)
  
—
     —    
Ordinary shares (500,000,000 shares authorized, $0.01 par value; 38,680,659 shares and 38,471,967 shares issued at September 25, 2020 and June 26, 2020, respectively; and 36,936,556 shares and 36,727,864 shares outstanding at September 25, 2020 and June 26, 2020, respectively)
  
387
     385  
Additional
paid-in
capital
  
171,715
     175,610  
Less: Treasury shares (1,744,103 shares and 1,744,103 shares as
of
 September 25, 2020 and June 26, 2020, respectively)
  
(68,501
 )      (68,501 ) 
Accumulated other comprehensive loss
  
(3,904
 )      (1,147 ) 
Retained earnings
  
901,006
     868,062  
 
 
 
    
 
 
  
Total Shareholders’ Equity
  
1,000,703
     974,409  
 
 
 
    
 
 
  
Total Liabilities and Shareholders’ Equity
   $ 1,425,406     $ 1,381,980  
 
 
 
    
 
 
  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
3
FABRINET
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (unaudited)
 
    
Three Months Ended
  
(in thousands of U.S. dollars, except per share data)
   
September 25,

2020
    
September 27,

2019
  
 
 
 
 
 
 
 
Revenues
    $ 436,639     $ 399,296  
Cost of revenues
      (386,159 )      (353,309 ) 
  
 
 
    
 
 
  
Gross profit
      50,480       45,987  
Selling, general and administrative expenses
      (16,863 )      (16,000 ) 
  
 
 
    
 
 
  
Operating income
      33,617       29,987  
Interest income
      1,104       2,098  
Interest expense
      (251 )      (2,393 ) 
Foreign exchange gain (loss), net
      128       (1,953 ) 
Other income (expense), net
      121       377  
  
 
 
    
 
 
  
Income before income taxes
      34,719       28,116  
Income tax expense
      (1,668 )      (2,159 ) 
  
 
 
    
 
 
  
Net income
      33,051       25,957  
  
 
 
    
 
 
  
Other comprehensive income (loss), net of tax:
     
Change in net unrealized gain (loss) on
available-for-sale
securities
      (325 )      35  
Change in net unrealized gain (loss) on derivative instruments
      (3,208 )      39  
Change in net retirement benefits plan – prior service cost
      173       83  
Change in foreign currency translation adjustment
      603       (369 ) 
  
 
 
    
 
 
  
Total other comprehensive income (loss), net of tax
      (2,757 )      (212 ) 
  
 
 
    
 
 
  
Net comprehensive income
    $ 30,294     $ 25,745  
  
 
 
    
 
 
  
 
 
 
Earnings per share
     
Basic
    $ 0.90     $ 0.70  
Diluted
    $ 0.88     $ 0.69  
Weighted-average number of ordinary shares outstanding
(thousands of shares)
 
Basic
      36,818       36,913  
Diluted
      37,383       37,529  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
4
FABRINET
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
For the three months ended September 25, 2020
 
 
  
Ordinary Share
 
  
Additional
Paid-in

Capital
 
 
Treasury

Shares
 
 
Accumulated
Other
Comprehensive
(Loss) Income
 
 
Retained
Earnings
 
 
Total
 
(in thousands of U.S. dollars, except share data)
  
Shares
 
  
Amount
 
               
Balances at June 26, 2020
      38,471,967        385        175,610       (68,501 )      (1,147 )      868,062        974,409  
Net income
      —          —          —         —         —         33,051        33,051  
Other comprehensive income
      —          —          —         —         (2,757 )      —          (2,757 ) 
Cumulative effect adjustment from adoption of ASC 326
      —          —          —         —         —         (107 )       (107 ) 
Share-based compensation
      —          —          6,027       —         —         —          6,027  
Issuance of ordinary shares
      208,692        2        (2 )      —         —         —          —    
Tax withholdings related to net share settlement of restricted share units
      —          —          (9,920 )      —         —         —          (9,920 ) 
  
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at September 25, 2020
      38,680,659        387        171,715       (68,501 )      (3,904 )      901,006        1,000,703  
  
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
 
For the three months ended September 27, 2019
 
 
  
Ordinary Share
 
  
Additional
Paid-in

Capital
 
 
Treasury

Shares
 
 
Accumulated
Other
Comprehensive
(Loss) Income
 
 
Retained
Earnings
 
  
Total
 
(in thousands of U.S. dollars, except share data)
  
Shares
 
  
Amount
 
               
Balances at June 28, 2019
      38,230,753        382        158,299       (47,779 )      (2,386 )      754,583        863,099  
Net income
      —          —          —         —         —         25,957        25,957  
Other comprehensive income
      —          —          —         —         (212 )      —          (212 ) 
Share-based compensation
      —          —          5,995       —         —         —          5,995  
Issuance of ordinary shares
      158,375        2        (2 )      —         —         —          —    
Tax withholdings related to net share settlement of restricted share units
      —          —          (4,144 )      —         —         —          (4,144 ) 
  
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at September 27, 2019
      38,389,128        384        160,148       (47,779 )      (2,598 )      780,540        890,695  
  
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
5
FABRINET
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
    
Three Months Ended
  
(in thousands of U.S. dollars)
   
September 25,

2020
    
September 27,

2019
  
 
 
 
 
 
 
 
Cash flows from operating activities
     
Net income for the period
    $ 33,051     $ 25,957  
Adjustments to reconcile net income to net cash provided by operating activities
     
Depreciation and amortization
      8,570       7,465  
(Gain) loss
 on disposal of property, plant and equipment
      (19 )      8  
(Gain) loss from sales and maturities of
available-for-sale
securities
      —       (67 ) 
Amortization of investment discount 
      481       65  
Amortization of deferred debt issuance costs
      8       2  
(Reversal of) allowance for doubtful accounts
      (257 )      (5 ) 
Unrealized (gain) loss on exchange rate and fair value of foreign currency forward contracts
      (890 )      1,479  
Unrealized loss (gain) on fair value of interest rate swaps
      —       1,671  
Amortization of fair value at hedge inception of interest rate swaps
      (359 )      —    
Share-based compensation
      6,027       5,995  
Deferred income tax
      56       705  
Other
non-cash
expenses
      96       53  
Changes in operating assets and liabilities
     
Trade accounts receivable
      (16,497 )      (12,967 ) 
Contract assets
      1,499       827  
Inventories
      (29,643 )      (27,898 ) 
Other current assets and
non-current
assets
      7,812       4,225  
Trade accounts payable
      33,546       (5,263 ) 
Contract liabilities
      (590 )      27  
Income tax payable
      871       733  
Severance liabilities
      745       811  
Other current liabilities and
non-current
liabilities
      (10,001 )      (1,176 ) 
  
 
 
    
 
 
  
Net cash provided by operating activities
      34,506       2,647  
  
 
 
    
 
 
  
 
 
 
 
 
 
 
 
Cash flows from investing activities
     
Purchase of short-term investments
      (79,103 )      (62,880 ) 
Proceeds from sales of short-term investments
      —       49,472  
Proceeds from maturities of short-term investments
      33,750       31,673  
Purchase of property, plant and equipment
      (12,572 )      (6,343 ) 
Purchase of intangibles
      (530 )      (246 ) 
Proceeds from disposal of property, plant and equipment
      21       —    
  
 
 
    
 
 
  
Net cash
 (used in)
provided by investing activities
      (58,434 )      11,676  
  
 
 
    
 
 
  
 
 
 
 
 
 
 
 
Cash flows from financing activities
     
Payment of debt issuance costs
      —       (153 ) 
Proceeds from long-term borrowings
      —       60,938  
Repayment of long-term borrowings
      (3,047 )      (60,938 ) 
Repayment of finance lease liability
      (100 )      (109 ) 
Withholding tax related to net share settlement of restricted share units
      (9,920 )      (4,144 ) 
  
 
 
    
 
 
  
Net cash used in financing activities
      (13,067 )      (4,406 ) 
  
 
 
    
 
 
  
Net
 (decrease)
 
increase
in cash, cash equivalents and restricted cash
      (36,995 )      9,917  
  
 
 
    
 
 
  
 
 
 
 
 
 
 
 
Movement in cash, cash equivalents and restricted cash
     
Cash, cash equivalents and restricted cash
at
the
beginning of period
      232,832       188,241  
(Decrease) increase
 in cash, cash equivalents and restricted cash
      (36,995 )      9,917  
Effect of exchange rate on cash, cash equivalents and restricted cash
      766       (41 ) 
  
 
 
    
 
 
  
Cash, cash equivalents and restricted cash at
the
end of period
    $ 196,603     $ 198,117  
  
 
 
    
 
 
  
 
 
 
 
 
 
 
 
Non-cash
investing and financing activities
     
Construction, software and equipment-related payables
    $ 9,616     $ 9,816  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
6
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:
 
(amount in thousands)
   
As 
of

September 25,
2020
     
As 
of

September 27,
2019
  
 
 
 
 
 
 
 
Cash and cash equivalents
    $ 189,201      $ 168,535  
Restricted cash
      7,402        29,582  
  
 
 
     
 
 
  
Cash, cash equivalents and restricted cash
    $ 196,603      $ 198,117  
  
 
 
     
 
 
  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
7
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”) and Fabrinet UK Limited (“Fabrinet UK”).
 
2.
Accounting policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements for Fabrinet as
of
 September 25, 2020 and for the three months ended September 25, 2020 and September 27, 2019 includes 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”) 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 26, 2020.
The balance sheet as
of
 June 26, 2020 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 25, 2020 may not be indicative of results for the year ending June 25, 2021 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 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, as well as other factors related to the
COVID-19
pandemic that could result in material impacts to our unaudited condensed consolidated financial statements in future reporting periods.
 
8
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 25, 2020 and September 27, 2019 each consisted of 13 weeks. Fiscal year
2021
will be comprised of 52 weeks and will end on June 25, 2021.
Reclassifications
For presentation purposes, certain prior period amounts have been reclassified to conform to the current period presentation.
As of June 26, 2020, the derivative assets and liabilities were measured at fair value and recognized by offsetting the fair value amounts under master netting arrangements. Also, the Company chose not to separate a derivative into current and
non-current
portions as follows:
 
 
(i)
A derivative for which the fair value is a net liability is classified in total as a current liability.
 
 
(ii)
A derivative for which the fair value is a net asset and the current portion is an asset is classified in total as a
non-current
asset. If the current portion is a liability, it is presented as a current liability.
As of September 25, 2020, the derivative assets and liabilities were measured at fair value, but the gross fair value amount is presented in the unaudited condensed consolidated balance sheets. Additionally, a classification of current and
non-current
portion is determined by the maturity date of that derivative (e.g., a derivative that matures within one year is classified as current).
The reclassifications have been made to the consolidated balance sheet as of June 26, 2020 as shown in the following table:
 
 
  
June 26, 2020
 
(amount in thousands)
  
As previously
reported
 
  
Reclassification
 
  
After

reclassification
 
       
Consolidated Balance Sheet
  
      
  
      
  
      
Current assets
  
      
  
      
  
      
Other current assets
  
$
13,915
 
  
$
593
 
  
$
14,508
 
Current liabilities
  
      
  
      
  
      
Accrued expenses
  
$
12,104
 
  
$
(3,125
) 
  
$
8,979
 
Non-current
liabilities
  
      
  
      
  
      
Other
non-current
liabilities
  
$
1,937
 
  
$
3,718
 
  
$
5,655
 
Adoption of New Accounting Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-13,
“Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. The standard replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. The new standard also expands the required quantitative and qualitative disclosures surrounding expected credit losses.
On June 27, 2020, the Company adopted Accounting Standards Codification (“ASC”) 326 using the modified retrospective transition approach. The modified retrospective method requires the Company to recognize the cumulative effect of the adoption of ASC 326, to the opening accumulated retained earnings. Accordingly, the Company’s comparative financial statements as of June 26, 2020 have not been adjusted. The Company implemented internal controls to enable the preparation of financial information upon adoption.
Management estimates the expected credit losses of financial assets using relevant available information from internal and external sources relating to historical credit loss experience, current conditions and reasonable forecasts over a financial asset’s contractual term. Adjustments to historical loss information are made from qualitative and quantitative factors if economic conditions on the reporting date reflect stronger or weaker economic performance than the historical data implies based on management’s expectations of economic conditions on certain indicators of the Company, industry and economy. The Company reviews factors such as past collection experience, age of the accounts receivable and contract assets balance, significant trends in current balances, internal operations and macroeconomic conditions. In addition, the Company modified its impairment model to the Current Expected Credit Losses (“CECL”) model for
available-for-sale
(“AFS”) debt securities and discontinued using the concept of “other than temporary” impairment on these AFS debt securities. CECL on the AFS debt securities are recognized in interest income and other income (expense), net on the Company’s unaudited condensed consolidated statements of operations and comprehensive income, and any remaining unrealized losses, are included in accumulated other comprehensive loss (“AOCI”) in the unaudited condensed consolidated balance sheet.
 
9
As of June 27, 2020, the Company recorded a cumulative adjustment from CECL in the amount of $0.1 million, net of tax impact, to accumulated retained earnings in the unaudited condensed consolidated balance sheet.
On June 27, 2020, the Company also adopted ASC 820, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This standard is intended to improve the effectiveness of disclosures in the notes to the financial statements, including (1) the development of a framework that promotes consistent decisions by the FASB about disclosure requirements and (2) the appropriate exercise of discretion by reporting entities. The amendment modifies the disclosure requirements on transferring between level 1 and level 2 and valuation processes of level 3 fair value measurements. The Company adopted this standard with no impact on its unaudited condensed consolidated financial statements.
Changes in Accounting Policies
Except for the adoption of ASC 326, the Company has consistently applied the accounting policies to all periods presented in these unaudited condensed consolidated financial statements.
Short-term investments
Management determines the appropriate classification of its investments at the time of purchase and
re-evaluates
the designations at each balance sheet date. The Company may sell certain of the Company’s 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 Company’s short-term investments, which consist of investments in U.S. Treasury, fixed income securities, liquidity funds that invest in short-term debt securities and certificates of deposit and time deposits, have been classified and accounted for as AFS. The AFS investments are carried at estimated fair value with any unrealized gains and losses, included in AOCI in the Company’s unaudited condensed consolidated balance sheet. The Company determines realized gains or losses on sale of marketable securities on a specific identification method and records such gains or losses as interest income and other income (expense), net in the unaudited condensed consolidated statements of operations and comprehensive income.
AFS debt securities are required to be individually evaluated for impairment. A security is considered impaired if the fair value of the security is less than its amortized cost basis.
An impairment is considered other than temporary if (i) the Company has the intent to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of the entire amortized cost basis, or (iii) the Company does not expect to recover the entire amortized cost basis of the security.
If an impairment is considered other than temporary based on condition (i) or (ii), the entire difference between the amortized cost and the fair value of the debt security is recognized as interest income and other income (expense), net in the unaudited condensed consolidated statements of operations and comprehensive income.
If an impairment is considered other than temporary based on condition (iii), the amount representing credit losses (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security) is recognized in interest and other income (expense), net in the unaudited condensed consolidated statements of operations and comprehensive income, and any remaining unrealized losses are included in AOCI in the unaudited condensed consolidated balance sheet.
Trade accounts receivable
Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. The Company makes estimates of expected credit losses for the allowance for doubtful accounts based upon its assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of its customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect the Company’s ability to collect from customers. The estimated credit loss allowance is recorded as selling, general and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income.
 
10
 
Contract assets
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. The Company makes estimates of expected credit losses for the allowance for contract assets based upon its assessment of various factors, including historical experience, the age of the contract assets balances, credit quality of its customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect the Company’s ability to collect from customers. The estimated credit loss allowance is recorded as selling, general and administrative expenses in its unaudited condensed consolidated statements of operations and comprehensive income.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, short-term investments, derivatives, accounts receivable and contract assets.
Cash, cash equivalents and short-term investments are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The Company seeks to mitigate its credit risks by spreading such risks across multiple counterparties and monitoring the risk profiles of these counterparties. The Company limits its short-term investments in marketable securities to securities with a maturity not in excess of three years and securities that are rated A1,
P-1,
F1, or better.
The Company enters into derivative contracts with financial institutions with reputable credit and monitors the credit profiles of these counterparties.
The Company performs ongoing credit evaluations for credit worthiness of its customers and usually does not require collateral from its customers. Management has implemented a program to closely monitor near term cash collection and credit exposures to mitigate any material losses.
New Accounting Pronouncements – not yet adopted by the Company
In December 2019, the FASB issued ASU
2019-12,
“Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. This ASU will be effective for the Company in the first quarter of fiscal year 2022. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this update on its unaudited condensed consolidated financial statements.
 
1
1
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 Europe.
The following table presents total revenues by geographic region:
 
(amount in thousands, except percentages)
   
Three Months
Ended

September 25,

2020
     
As a % of Total
Revenues
  
 
 
 
 
 
 
 
North America
    $ 207,402        47.5 % 
Asia-Pacific
      145,646        33.4  
Europe
      83,591        19.1  
  
 
 
     
 
 
  
   $ 436,639        100.0 % 
  
 
 
     
 
 
  
 
(amount in thousands, except percentages)
   
Three Months
Ended

September 27,

2019
     
As a % of Total
Revenues
  
 
 
 
 
 
 
 
North America
    $ 200,947        50.3 % 
Asia-Pacific
      118,423        29.7  
Europe
      79,926        20.0  
  
 
 
     
 
 
  
   $ 399,296        100.0 % 
  
 
 
     
 
 
  
 
The following table presents revenues by end market.
(amount in thousands, except percentages)
   
Three Months
Ended

September 25,

2020
     
As a % of Total
Revenues
  
 
 
 
 
 
 
 
Optical communications
    $ 343,917        78.8 % 
Lasers, sensors and other
      92,722        21.2  
  
 
 
     
 
 
  
Total
    $ 436,639        100.0 % 
  
 
 
     
 
 
  
 
(amount in thousands, except percentages)
   
Three Months
Ended

September 27,

2019
     
As a % of Total
Revenues
  
 
 
 
 
 
 
 
Optical communications
    $ 302,379        75.7 % 
Lasers, sensors and other
      96,917        24.3  
  
 
 
     
 
 
  
Total
    $ 399,296        100.0 % 
  
 
 
     
 
 
  
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 25, 2020:
 
(amount in thousands)
  
Contract
Assets
 
Beginning balance, June 26, 2020
  
$
13,256
 
Revenue recognized
  
 
17,444
 
Amounts collected or invoiced
  
 
(18,943
) 
 
  
 
 
 
Ending balance, September 25, 2020
  
$
11,757
 
 
  
 
 
 
 
(amount in thousands)
  
Contract
Liabilities
 
Beginning balance, June 26, 2020
  
$
1,556
 
Additions advance payment received during the period
  
 
4,308
 
Revenue recognized
  
 
(4,898
) 
 
  
 
 
 
Ending balance, September 25, 2020
  
$
966
 
 
  
 
 
 
 
13
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
  
(amount in thousands except per share amounts)
   
September 25,

2020
     
September 27,

2019
  
 
 
 
 
 
 
 
Net income attributable to shareholders
    $ 33,051      $ 25,957  
  
 
 
     
 
 
  
Weighted-average number of ordinary shares outstanding (thousands of shares)
      36,818        36,913  
Incremental shares arising from the assumed vesting of restricted share units and performance share units (thousands of shares)
      565        616  
  
 
 
     
 
 
  
Weighted-average number of ordinary shares for diluted earnings per
ordinary share (thousands of shares)
      37,383        37,529  
  
 
 
     
 
 
  
 
 
 
 
 
 
 
 
Basic earnings per ordinary share
    $ 0.90      $ 0.70  
Diluted earnings per ordinary share
    $ 0.88      $ 0.69  
Outstanding performance share units excluded from the computation of diluted earnings per ordinary share (thousands of shares)
(1)
      61        50  
 
(1)
 
These performance share units were not included in the computation of diluted earnings per ordinary share because they are not expected to vest based on the Company’s current assessment of the related performance obligations.
 
5.
Cash, cash equivalents and short-term investments
The Company’s cash, cash equivalents, and short-term investments are as follows:
 
           
Fair Value
  
(amount in thousands)
   
Carrying

Cost
     
Unrealized
Gain/
(Loss)
     
Cash and
Cash
Equivalents
     
Marketable
Securities
     
Other
Investments
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As
of
 September 25, 2020
               
Cash
    $ 175,550      $ —        $ 175,550      $ —        $ —    
Cash equivalents
      13,651        —          13,651        —          —    
Liquidity funds
      41,151        —          —          —          41,151  
Certificates of deposit and time deposits
      22,300        —          —          —          22,300  
Corporate debt securities
      192,509        739        —          193,248        —    
U.S. agency and U.S. treasury securities
      50,113        426        —          50,539        —    
Total
    $ 495,274      $ 1,165      $ 189,201      $ 243,787      $ 63,451  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
As
of
 June 26, 2020
               
Cash
    $ 218,117      $ —        $ 218,117      $ —        $ —    
Cash equivalents
      7,313        —          7,313        —          —    
Liquidity funds
      41,051        —          —          —          41,051  
Certificates of deposit and time deposits
      11,800        —          —          —          11,800  
Corporate debt securities
      159,220        948        —          160,168        —    
U.S. agency and U.S. treasury securities
      49,130        544        —          49,674        —    
Total
    $ 486,631      $ 1,492      $ 225,430      $ 209,842      $ 52,851  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
14
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
re-evaluates
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 25, 2020:
 
    
September 25, 2020
     
June 26, 2020
  
(amount in thousands)
   
Carrying 
Cost
     
Fair Value
     
Carrying
Cost
     
Fair Value
  
Due within one year
    $ 104,723      $ 104,756      $ 76,127      $ 76,196  
Due between one to five years
      137,899        139,031        132,223        133,646  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 242,622      $ 243,787      $ 208,350      $ 209,842  
  
 
 
     
 
 
     
 
 
     
 
 
  
As of September 25, 2020, the Company considered the declines in market value of its short-term investments portfolio to be temporary in nature and did not consider any of its securities other-than-temporarily impaired.
 
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.
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.
 
1
5
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
  
(amount in thousands)
   
Level 1
     
Level 2
    
Level 3
     
Total
  
As
of
 September 25, 202
0
           
Assets
           
Cash equivalents
    $
 
 
 —        $
 
 13,651     $
 
 —        $
 
 13,651  
Liquidity funds
      —          41,151       —          41,151  
Certificates of deposit and time deposits
      —          22,300       —          22,300  
Corporate debt securities
      —          193,248       —          193,248  
U.S. agency and U.S. treasury securities
      —          50,539       —          50,539  
Derivative assets
      —          694
(1)
 		     —          694  
  
 
 
     
 
 
    
 
 
     
 
 
  
Total
    $ —        $ 321,583     $ —        $
 
 321,583  
  
 
 
     
 
 
    
 
 
     
 
 
  
Liabilities
           
Derivative liabilities
 – current portion
    $ —        $ 2,426     $ —        $ 2,426  
Derivative liabilities – non-current portion
 
 
—  
 
 
 
3,305
 
 
 
—  
 
 
 
3,305
 
  
 
 
     
 
 
    
 
 
     
 
 
  
Total
    $ —        $ 5,731
(2)
 		   $ —        $ 5,731  
  
 
 
     
 
 
    
 
 
     
 
 
  
 
    
Fair Value Measurements at Reporting Date Using
  
(amount in thousands)
   
Level 1
     
Level 2
    
Level 3
     
Total
  
As
of
 June 26, 202
0
           
Assets
           
Cash equivalents
    $ —        $ 7,313     $ —        $ 7,313  
Liquidity funds
      —          41,051       —          41,051  
Certificates of deposit and time deposits
      —          11,800       —          11,800  
Corporate debt securities
      —          160,168       —          160,168  
U.S. agency and U.S. treasury securities
      —          49,674       —          49,674  
Derivative assets
      —          2,823
(3)
 		     —          2,823  
  
 
 
     
 
 
    
 
 
     
 
 
  
Total
    $ —        $  272,829     $ —        $
 
  272,829  
  
 
 
     
 
 
    
 
 
     
 
 
  
Liabilities
           
Derivative liabilities
 – current portion
    $ —        $ 2,148     $ —        $ 2,148  
Derivative liabilities – non-current portion
 
 
—  
 
 
 
3,718
 
 
 
—  
 
 
 
3,718
 
  
 
 
     
 
 
    
 
 
     
 
 
  
Total
    $ —        $ 5,866
(4)
 		   $ —        $ 5,866  
  
 
 
     
 
 
    
 
 
     
 
 
  
 
(1)
Foreign currency forward contracts with a notional amount of $130.0 
million and Canadian dollars of 0.8 million. 
(2)
 
Two interest rate swap agreements with an aggregate notional amount of $125.1 million.
(3)
Foreign currency forward contracts with a notional amount of $125.0 million and Canadian dollars of 0.6 million, and option contract with a notional amount of $1.0 million.
(4)
 
Interest rate swap agreements with an aggregate notional amount of $125.1 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.
16
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 through foreign exchange gain (loss), net in the unaudited condensed consolidated statements of operations and comprehensive income.
As of September 25, 2020, the Company had
 
130
outstanding U.S. dollar foreign currency forward contracts against Thai baht, with an aggregate notional amount of
$130.0 
million and maturity dates ranging from October 2020 through April 2021 and one outstanding Canadian dollar foreign currency forward contract with a notional amount of Canadian dollars of 0.8 million and a maturity date in December 2020.
As of September 25, 2020, 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 25, 2020, the amount in AOCI that is expected to be reclassified into earnings within 12 months was a loss
 of $0.5 million
.
 
During the three months ended September 25, 2020, the Company recorded an unrealized loss of $1.5
million from changes in the fair value of a foreign currency forward contract that was not designated for hedge accounting in earnings as foreign exchange loss, net in the unaudited condensed consolidated statements of operations and comprehensive income.
As
of
 September 27, 2019, the Company had 61 outstanding foreign currency forward contracts with an aggregate notional amount of $74.0 million
and
 maturity dates
 
ran
ging
 from October 2019 through January 2020. These foreign currency forward contracts were not designated for hedge accounting and were used to hedge fluctuations in the U.S. dollar value of forecasted transactions denominated in Thai baht. During the three months
 
ended September 27, 2019, the Company recorded unrealized loss of $1.9 million from changes in the fair value of foreign currency contracts in earnings as foreign exchange gain, net in the unaudited condensed consolidated statements of operations and comprehensive income.
17
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 25, 2020
 
and June 26, 2020
, the Company had two outstanding interest rate swap agreements with an aggregate notional amount of $125.1 million.
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 the Bank of America Credit Facility Agreement to a fixed interest rate of 2.86% per annum through the scheduled maturity of the term loan in June 2023 (see Note
12
). The Company did not designate this interest rate swap for hedge accounting.
On September 3, 2019, the Company entered into a new term loan agreement under a Credit Facility Agreement with the Bank of Ayudhya Public Company Limited (the “Bank”) (see Note
12
) and on September 10, 2019, repaid in full the outstanding term loan under the Bank of America Credit Facility (see Note 1
2
). 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 convert the floating interest rate of the Company’s new 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 we intend 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 our earnings. From September 27, 2019, any gains or losses related to these interest rate swaps will be recorded in accumulated other comprehensive income in the unaudited condensed consolidated balance sheets. The Company will reclassify a portion of the gains or losses from accumulated other comprehensive income into earnings at each reporting period based on either the accrued interest amount or the interest payment.
As
of
 September 25, 2020, the amount in accumulated other comprehensive income that is
expected to be reclassified into earnings within 12 months is
a ga
in of
$0.5 
million
.
Prior to September 27, 2019, these interest rate swaps were not designated as cash flow hedges and all changes in the fair value of these interest rate swaps were reflected in earnings. During the three months ended September 27, 2019, the Company recorded unrealized loss of $1.7 million from changes in the fair value of these interest rate swaps as interest expense in the unaudited condensed consolidated statements of operations and comprehensive income.
 
1
8
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
  
(amount in thousands)
   
Financial

statements

line item
     
September 25,

2020
     
September 27,

2019
  
Derivatives gain (loss)
recognized in other
comprehensive income:
         
Foreign currency forward contracts
   
 
Other
comprehensive
income
 
    $ (2,340 )     $ —    
Interest rate swaps
   
 
Other
comprehensive
income
 
      357        39  
  
 
   
 
 
     
 
 
  
Total derivatives
gain (loss)
recognized in other comprehensive income
   
 
    $ (1,983 )     $ 39  
  
 
   
 
 
     
 
 
  
Derivatives loss
 
(
gain
)
 reclassified from accumulated other comprehensive income into earnings:
   
 
      
Foreign currency forward contracts
   
 
 Cost of
 
revenues
 
    $ (2,057 )     $ —    
Foreign currency forward contracts
   
 
 SG&A
 
      (87 )       —    
Foreign currency forward contracts
   
 
 Foreign
 
exchange
 
loss,
 
net
 
      1,278        —    
Interest rate swaps
   
 
 Interest expense
 
      (359 )       —    
  
 
   
 
 
     
 
 
  
Total derivatives (gain) loss reclassified from accumulated other comprehensive income into earnings
   
 
    $ (1,225 )     $ —    
  
 
   
 
 
     
 
 
  
Change in net unrealized gain (loss) on derivatives instruments
   
 
    $ (3,208 )     $ —    
  
 
   
 
 
     
 
 
  
Fair Value of derivatives
The following table provides the fair values of the Company’s derivative financial instruments for the periods presented:
 
 
  
September 25,

2020
 
  
June 26,

2020
 
(amount in thousands)
  
Derivative
Assets
 
  
Derivative
Liabilities
 
  
Derivative
Assets
 
  
Derivative
Liabilities
 
Derivatives not designated as hedging instruments
  
      
  
      
  
      
  
      
Foreign currency forward and option contracts
  
$
447
 
  
$
(134
) 
  
$
9
 
  
$
(611
) 
Interest rate swaps
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments
  
      
  
      
  
      
  
      
Foreign currency forward contracts
  
 
247
 
  
 
(781
) 
  
 
2,814
 
  
 
(83
) 
Interest rate swaps
  
 
—  
 
  
 
(4,816
) 
  
 
—  
 
  
 
(5,172
) 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Derivatives, gross balances
  
 
694
 
  
 
(5,731
) 
  
 
2,823
 
  
 
(5,866
) 
The Company presents its derivatives at net fair values in the unaudited condensed consolidated balance sheets.
The Company’s netting arrangements allow net settlements under certain conditions. The Company’s derivative instruments are typically settled monthly or quarterly.
 
1
9
The Company recorded the fair value of derivative financial instruments in the unaudited condensed consolidated balance sheets as follows:
 
 
  
Derivative Financial Instruments
  
Balance Sheet line item
     
 
  
Fair Value of Derivative Assets
  
Other current assets
 
  
Fair Value of Derivative Liabilities
  
Accrued expenses
 
  
Fair Value of Derivative Liabilities
  
Other
non-current
liabilities
 
7
.
Inventories 
 
(amount in thousands)
   
As 
of

September 25,

2020
     
As 
of

June 26,

2020
  
 
 
 
 
 
 
 
Raw materials
    $ 153,511      $ 141,522  
Work in progress
      149,441        136,344  
Finished goods
      21,619        17,950  
Goods in transit
      14,858        13,970  
  
 
 
     
 
 
  
Inventories
    $ 339,429      $ 309,786  
  
 
 
     
 
 
  
 
8
.
Other receivable
On October 1, 2019, the Company provided funds in the amount of $24.3 million to a customer to support the customer’s transfer of certain manufacturing operations from Berlin, Germany to the Company’s facilities in Thailand.
As
 
of
 September
 25, 2020, the Company recorded the $
24.3
 million funds as other receivable in the unaudited condensed consolidated balance
sheet. The Company entered into the Amendment on October 1, 2020 to extend the payment terms of this amount and accrued interest and amend certain terms and conditions. (See Note 19)
 
9
.
Restricted cash
As
of
 September 25, 2020 and June 26, 2020, the Company had one outstanding standby letter of credit of 6.0 million Euros, related to the Company’s support of a customer’s transfer of certain manufacturing operations from Berlin, Germany to the Company’s facilities in Thailand. As
of
 September 25, 2020 and June 26, 2020, the standby letter of credit w
as
 backed by cash collateral of $7.4 million
.
 
 
10
.
Leases
The Company leases facilities under
non-cancelable
operating lease agreements. The Company leases a portion of its capital equipment and vehicles, certain land and buildings for its facilities in Thailand, the Cayman Islands, China, the U.S., the U.K. and Israel under operating lease arrangements that expire at various dates through 2025. Certain of these lease arrangements provide the Company the ability to extend the lease from one to five years following the expiration of the current term. However, the Company has excluded all lease extension options from its ROU
 
assets and lease liabilities as the Company is not reasonably assured that it will exercise these options. None of the lease agreements contain residual value guarantees provided by the lessee. The Company also has one intercompany lease transaction
 in th
e form of
a lease of office and manufacturing space between Fabritek and Fabrinet West.
 
20
Operating leases
As
of
 Septe
m
ber 25, 2020, the m
a
turities of the Company’s operating lease liabilities w
e
re as follows:
 
(amount in thousands)
  
As of
September 25,
2020
 
2021
  
$
1,786
 
2022
  
 
2,381
 
2023
  
 
2,265
 
2024
  
 
990
 
2025
  
 
19
 
 
  
 
 
 
Total undiscounted lease payments
  
 
7,441
 
Less imputed interest
  
 
(437
) 
 
  
 
 
 
Total present value of lease liabilities
  
$
7,004
 (1)
 
 
  
 
 
 
 
(1)
Included current portion of operating lease liabilities for the period ended September 25, 2020
.
Rental expense related to the Company’s operating leases is recognized on a straight-line basis over the lease term. Rental expense for long-term leases for the three months ended September 25, 2020 and September 27, 2019 was $0.6 million and $0.5 million, respectively. Rental expense for short-term leases for the three months ended September 25, 2020 and September 27, 2019 w
as
 not material.
The following summarizes additional information related to the Company’s operating leases:
 
 
  
As 
of

September 25,
2020
 
 
As 
of

June 26,

2020
 
Weighted-average remaining lease term (in years)
  
 
3.3
 
 
 
3.3
 
Weighted-average discount rate
  
 
3.7
% 
 
 
3.7
% 
The following table presents supplemental disclosure for the unaudited condensed consolidated statement of cash flows related to operating and finance leases for the three months ended September 25, 2020 and September 27, 2019:
 
 
  
Three Months Ended
 
(amount in thousands)
  
September 25,
2020
 
  
September 27,

2019
 
Cash paid for amounts included in the measurement of lease liabilities
  
      
  
      
Operating cash flows from operating leases
  
$
594
 
  
$
458
 
Financing cash flows from finance leases
  
$
100
 
  
$
109
 
ROU assets obtained in exchange for lease liabilities
  
$
7,228
 
  
$
6,185
 
 
 
11
.
Intangibles
The following tables present details of the Company’s intangibles:
 
(amount in thousands)
   
Gross
Carrying
Amount
     
Accumulated
Amortization
     
Foreign
Currency
Translation
Adjustment
     
Net
  
As
of
 September 25, 2020
            
Software
    $ 8,486     
$
(5,826
) 
    $ —        $ 2,660  
Customer relationships
      4,373        (2,825 )       (61 )       1,487  
Backlog
      119        (119 )       —          —    
  
 
 
     
 
 
     
 
 
     
 
 
  
Total intangibles
    $ 12,978      $ (8,770 )     $ (61 )     $ 4,147  
  
 
 
     
 
 
     
 
 
     
 
 
  
 
2
1
(amount in thousands)
   
Gross
Carrying
Amount
     
Accumulated
Amortization
     
Foreign
Currency
Translation
Adjustment
     
Net
  
As
o
f
 June 26, 2020
            
Software
    $ 8,317      $ (5,577 )     $ —        $ 2,740  
Customer relationships
      4,373        (2,691 )       (110 )       1,572  
Backlog
      119        (119 )       —          —    
  
 
 
     
 
 
     
 
 
     
 
 
  
Total intangibles
    $
 
 12,809      $ (8,387 )     $ (110 )     $ 4,312  
  
 
 
     
 
 
     
 
 
     
 
 
  
The Company recorded amortization expense relating to intangibles of $0.2 million and $0.3 million for the three months ended September 25, 2020 and September 27, 2019, respectively.
The weighted-average remaining life of customer relationships was:
 
(years)
   
As 
of
 
September 25,
2020
     
As 
of
 
June 26,

2020