Fabrinet - Quarter Report: 2019 December (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated
filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 27, 2019

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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)

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

☒

☐

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

☒

☐

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.

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

☒

As of January 24, 2020, the registrant had 37,052,502 ordinary shares, $0.01 par value, outstanding.

Table of Contents

FABRINET

FORM

10-Q

QUARTER ENDED DECEMBER 27, 2019

Table of Contents


	Page No.
PART I. FINANCIAL INFORMATION		3

Item 1. Financial Statements		3

Condensed Consolidated Balance Sheets as of December 27, 2019 (unaudited) and June 28, 2019		3

Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended December 27, 2019 and December 28, 2018 (unaudited)		4

Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended December 27, 2019 and December 28, 2018 (unaudited)		5

Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 27, 2019 and December 28, 2018 (unaudited)		7

Notes to Condensed Consolidated Financial Statements (unaudited)		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		33

Item 3. Quantitative and Qualitative Disclosures About Market Risk		44

Item 4. Controls and Procedures		45

PART II. OTHER INFORMATION		46

Item 1. Legal Proceedings		46

Item 1A. Risk Factors		46

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		62

Item 6. Exhibits		63

Signature		64

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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)	December 27, 2019			June 28, 2019
Assets
Current assets
Cash and cash equivalents	$	220,031		$	180,839
Short-term restricted cash		272			—
Short-term investments		222,805			256,493
Trade accounts receivable, net		285,579			260,602
Contract assets		11,114			12,447
Inventor ies		294,380			293,612
Other receivable		24,310			—
Prepaid expenses		4,919			8,827
Other current assets		7,416			11,015

Total current assets		1,070,826			1,023,835

Non-current assets
Long-term restricted cash		7,402			7,402
Property, plant and equipment, net		217,038			210,686
Intangibles, net		4,038			3,887
Operating right-of-use assets		7,558			—
Goodwill		3,798			3,705
Deferred tax assets		4,115			5,679
Other non-current assets		253			124

Total non-current assets		244,202			231,483

Total Assets	$	1,315,028		$	1,255,318

Liabilities and Shareholders’ Equity
Current liabilities
Long-term borrowings, current portion, net	$	12,156		$	3,250
Trade accounts payable		234,929			257,617
Contract liabilities		2,360			2,239
Capital lease liability, current portion		311			398
Operating lease liability, current portion		1,823			—
Income tax payable		3,137			1,801
Accrued payroll, bonus and related expenses		15,942			16,510
Accrued expenses		11,338			8,997
Other payables		31,384			22,236

Total current liabilities		313,380			313,048

Non-current liabilities
Long-term borrowings, non-current portion, net		45,592			57,688
Deferred tax liability		3,543			3,561
Capital lease liability, non-current portion		—			102
Operating lease liabilit ies , non-current portion		5,728			—
Severance liabilities		16,735			15,209
Other non-current liabilities		1,723			2,611

Total non-current liabilities		73,321			79,171

Total Liabilities		386,701			392,219

Commitments and contingencies (Note 1 9 )
Shareholders’ equity
Preferred shares (5,000,000 shares authorized, $0.01 par value; no shares issued and outstanding as of December 27, 2019 and June 28, 2019)		—			—
Ordinary shares (500,000,000 shares authorized, $0.01 par value; 38,408,890 shares and 38,230,753 shares issued at December 27, 2019 and June 28, 2019, respectively; and 37,019,787 shares and 36,841,650 shares outstanding at December 27, 2019 and June 28, 2019, respectively)		384			382
Additional paid-in capital		166,103			158,299
Less: Treasury shares , at c ost (1,389,103 shares and 1,389,103 shares as of December 27, 2019 and June 28, 2019, respectively)		(47,779	)		(47,779	)
Accumulated other comprehensive loss		(2,152	)		(2,386	)
Retained earnings		811,771			754,583

Total Shareholders’ Equity		928,327			863,099

Total Liabilities and Shareholders’ Equity	$	1,315,028		$	1,255,318

The

accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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FABRINET

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (unaudited)


(in thousands of U.S. dollars, except per share data)	Three Months Ended						Six Months Ended
(in thousands of U.S. dollars, except per share data)	December 27, 2019			December 28, 2018			December 27, 2019			December 28, 2018
Revenues	$	426,217		$	403,080		$	825,513		$	780,257
Cost of revenues		(377,059	)		(357,516	)		(730,368	)		(694,417	)

Gross profit		49,158			45,564			95,145			85,840
Selling, general and administrative expenses		(17,078	)		(12,727	)		(33,078	)		(27,164	)
Expenses related to reduction in workforce		(16	)		(319	)		(16	)		(404	)

Operating income		32,064			32,518			62,051			58,272
Interest income		1,940			1,182			4,038			2,626
Interest expense		(181	)		(1,616	)		(2,574	)		(2,250	)
Foreign exchange ( loss ) gain , net		(988	)		(421	)		(2,941	)		2,647
Other income, net		397			562			774			639

Income before income taxes		33,232			32,225			61,348			61,934
Income tax expense		(2,001	)		(712	)		(4,160	)		(2,571	)

Net income		31,231			31,513			57,188			59,363

Other comprehensive income (loss), net of tax:
Change in net unrealized (loss) gain on available-for-sale securities		(82	)		598			(47	)		886
Change in net unrealized loss on derivative instruments		(189	)		—			(150	)		(1	)
Change in net retirement benefits plan – prior service cost		101			—			184			—
Change in foreign currency translation adjustment		616			(505	)		247			(705	)

Total other comprehensive income, net of tax		446			93			234			180

Net comprehensive income	$	31,677		$	31,606		$	57,422		$	59,543

Earnings per share
Basic	$	0.84		$	0.86		$	1.55		$	1.62
Diluted	$	0.83		$	0.84		$	1.52		$	1.59
Weighted-average number of ordinary shares outstanding (thousands of shares)
Basic		37,011			36,841			36,962			36,733
Diluted		37,763			37,471			37,646			37,305

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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FABRINET

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

For the Three Months Ended December 27, 2019


	Ordinary Shares				Additional Paid-in			Treasury			Accumulated Other Comprehensive			Retained
(in thousands of U.S. dollars, except share data)	Shares		Amount		Capital			Shares			(Loss) Income			Earnings		Total
Balances at September 27, 2019		38,389,128		384		160,148			(47,779	)		(2,598	)		780,540		890,695
Net income		—		—		—			—			—			31,231		31,231
Other comprehensive income		—		—		—			—			446			—		446
Share-based compensation		—		—		6,188			—			—			—		6,188
Issuance of ordinary shares		19,762		—		—			—			—			—		—
Tax withholdings related to net share settlement of restricted share units		—		—		(233	)		—			—			—		(233	)

Balances at December 27, 2019		38,408,890		384		166,103			(47,779	)		(2,152	)		811,771		928,327

For the Six Months Ended December 27, 2019


	Ordinary Shares				Additional Paid-in			Treasury			Accumulated Other Comprehensive			Retained
(in thousands of U.S. dollars, except share data)	Shares		Amount		Capital			Shares			(Loss) Income			Earnings		Total
Balances at June 28, 2019		38,230,753		382		158,299			(47,779	)		(2,386	)		754,583		863,099
Net income		—		—		—			—			—			57,188		57,188
Other comprehensive income		—		—		—			—			234			—		234
Share-based compensation		—		—		12,183			—			—			—		12,183
Issuance of ordinary shares		178,137		2		(2	)		—			—			—		—
Tax withholdings related to net share settlement of restricted share units		—		—		(4,377	)		—			—			—		(4,377	)

Balances at December 27, 2019		38,408,890		384		166,103			(47,779	)		(2,152	)		811,771		928,327

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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FABRINET

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited) (Continued)

For the Three Months Ended December 28, 2018


	Ordinary Shares				Additional Paid-in			Treasury			Accumulated Other Comprehensive			Retained
(in thousands of U.S. dollars, except share data)	Shares		Amount		Capital			Shares			(Loss) Income			Earnings		Total
Balances at September 29, 2018		38,118,609		381		147,869			(42,401	)		(1,170	)		661,478		766,157
Net income		—		—		—			—			—			31,513		31,513
Other comprehensive income		—		—		—			—			93			—		93
Share-based compensation		—		—		3,969			—			—			—		3,969
Issuance of ordinary shares		19,550		—		—			—			—			—		—
Tax withholdings related to net share settlement of restricted share units		—		—		(199	)		—			—			—		(199	)

Balances at December 28, 2018		38,138,159		381		151,639			(42,401	)		(1,077	)		692,991		801,533

For the Six Months Ended December 28, 2018


	Ordinary Share				Additional Paid-in			Treasury			Accumulated Other Comprehensive			Retained
(in thousands of U.S. dollars, except share data)	Shares		Amount		Capital			Shares			(Loss) Income			Earnings		Total
Balances at June 29, 2018		37,723,733		377		151,797			(42,401	)		(1,257	)		632,423		740,939
Net income		—		—		—			—			—			59,363		59,363
Other comprehensive income		—		—		—			—			180			—		180
Cumulative effect adjustment from adoption of ASC 606		—		—		—			—			—			1,205		1,205
Share-based compensation		—		—		8,949			—			—			—		8,949
Issuance of ordinary shares		414,426		4		(4	)		—			—			—		—
Tax withholdings related to net share settlement of restricted share units		—		—		(9,103	)		—			—			—		(9,103	)

Balances at December 28, 2018		38,138,159		381		151,639			(42,401	)		(1,077	)		692,991		801,533

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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FABRINET

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Six Months Ended
(in thousands of U.S. dollars)	December 27, 2019			December 28, 2018
Cash flows from operating activities
Net income for the period	$	57,188		$	59,363
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		15,279			15,000
Loss on disposal of property, plant and equipment		242			528
Loss on disposal of intangibles		—			149
(Gain) loss from sales and maturities of available-for-sale securities		(79	)		1,060
Amortization of investment discount (premium)		117			(533	)
Amortization of deferred debt issuance costs		10			—
Allowance for doubtful accounts		6			—
Unrealized loss (gain) on exchange rate and fair value of foreign currency forward contracts		1,205			(5,775	)
Unrealized loss (gain) on fair value of interest rate swaps		1,672			849
Amortization of interest rate swaps’ fair value at hedge inception		(433	)		—
Share-based compensation		12,183			8,949
Deferred income tax		1,543			481
Severance liabilities		2,015			1,339
Other non-cash expenses		(851	)		(759	)
Changes in operating assets and liabilities
Trade accounts receivable		(24,970	)		(14,381	)
Contract assets		1,333			(3,459	)
Inventor ies		(767	)		(28,880	)
Other current assets and non-current assets		7,471			2,128
Trade accounts payable		(22,816	)		29,276
Contract liabilities		121			—
Income tax payable		1,336			1,859
Other current liabilities and non-current liabilities		805			2,104

Net cash provided by operating activities		52,610			69,298

Cash flows from investing activities
Purchase of short-term investments		(101,727	)		(82,141	)
Proceeds from sales of short-term investments		72,664			70,472
Proceeds from maturities of short-term investments		62,666			34,788
Other receivable provided to customer (Note 9)		(24,310	)		—
Purchase of property, plant and equipment		(15,411	)		(9,732	)
Purchase of intangibles		(808	)		(251	)
Proceeds from disposal of property, plant and equipment		1,195			5

Net cash (used in) provided by investing activities		(5,731	)		13,141

Cash flows from financing activities
Payment of debt issuance costs		(153	)		—
Proceeds from long-term borrowings		60,938			—
Repayment of long-term borrowings		(63,985	)		(813	)
Repayment of capital lease liability		(189	)		(255	)
Release of restricted cash held in connection with business acquisition		—			(3,478	)
Withholding tax related to net share settlement of restricted share units		(4,377	)		(9,103	)

Net cash used in financing activities		(7,766	)		(13,649	)

Net increase in cash, cash equivalents and restricted cash		39,113			68,790

Movement in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period		188,241			161,433
Increase in cash, cash equivalents and restricted cash		39,113			68,790
Effect of exchange rate on cash, cash equivalents and restricted cash		351			773

Cash, cash equivalents and restricted cash at end of period	$	227,705		$	230,996

Non-cash investing and financing activities
Construction, software and equipment-related payables	$	14,307		$	2,888

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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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 December 27, 2019		As of December 28, 2018
Cash and cash equivalents	$	220,031	$	230,996
Restricted cash		7,674		—

Cash, cash equivalents and restricted cash	$	227,705	$	230,996

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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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 December 27, 2019 and for the three and six months ended December 27, 2019 and December 28, 2018 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 28, 2019.

The balance sheet as of June 28, 2019 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 and six months ended December 27, 2019 may not be indicative of results for the year ending June 26, 2020 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, 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.

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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 December 27, 2019 and December 28, 2018 each consisted of 13 weeks. The six months ended December 27, 2019 and December 28, 2018 each consisted of 26 weeks. Fiscal year 2020 will be comprised of 52 weeks and will end on June 26, 2020.

Changes in Accounting Policies

Except for the adoption of the new lease accounting standard and the derivatives and hedging standard described below, the Company has consistently applied the accounting policies to all periods presented in these unaudited condensed consolidated financial statements.

Adoption of New Accounting Standards

On June 29, 2019, the Company adopted the new lease accounting standard, Accounting Standards Codification Topic 842 (“ASC 842”), which provides guidance for the recognition and disclosure of lease arrangements. The Company adopted ASC 842 using the modified retrospective transition approach. Accordingly, the Company’s comparative financial statements as of June 28, 2019 have not been adjusted. ASC 842 also provides practical expedients for the Company’s ongoing accounting. The Company elected the short-term lease recognition exemption for its operating leases with a term of less than 12 months, which will not require recognition of right of use (“ROU”) assets or lease liabilities for these leases.

For periods prior to adoption of ASC 842, the Company is required to present disclosures in accordance with ASC Topic 840.

uture minimum lease payments due under

non-cancelable

operating leases as of June 28, 2019 were as follows:


(amount in thousands)
2020	$	1,746
2021		1,342
2022		1,219
2023		1,172
Thereafter		230

Total future minimum operating lease payments	$	5,709

The most significant impact of the adoption of ASC 842 was the recognition of ROU assets and lease liabilities for operating leases with a term of greater than 12 months, while the accounting for finance leases will remain substantially unchanged. See Note 10 for further details.

On June 29, 2019, the Company also adopted Accounting Standards Update (“ASU”)

2017-12,

Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU

2017-12

simplifies existing hedge accounting guidance in order to better portray in financial statements the economic impact of risk management activities in the financial statements, including eliminating the separate measurement and presentation of hedge ineffectiveness. Prior to the adoption of ASU

2017-12,

the Company was required to separately measure and reflect the amount by which the hedging instrument did not offset the changes in the fair value or cash flows of hedged items, and to record the ineffective portion as earnings. Upon the adoption of ASU

2017-12,

the Company no longer recognizes hedge ineffectiveness as earnings, but instead records the entire changes in the fair value of the hedged instruments as other comprehensive income. Amounts recorded as other comprehensive income are subsequently reclassified to earnings in the same income statement line item that is used to present the earnings effect of the hedged item when the hedged item affects earnings. See Note 6 for further details.

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.

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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 Financial Accounting Standards Board (“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 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 2022. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this update on its condensed consolidated financial statements.

In May 2019,

the

FASB issued ASU

2019-05,

“Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief

” The amendments in ASU

2019-05

provide entities that have certain instruments within the scope of Subtopic

326-20

(“Financial Instruments—Credit Losses—Measured at Amortized Cost”) with an option to irrevocably elect the fair value option in Subtopic

825-10

(“Financial Instruments—Overall”), applied on an

instrument-by-instrument

basis for eligible instruments, upon adoption of Topic 326. The fair value option election does not apply to

held-to-maturity

debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics

820-10

(“Fair Value Measurement—Overall”) and

825-10.

For public business entities, this update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This ASU will be effective for the Company in the first quarter of fiscal 2021. Early adoption is permitted. The Company

is currently evaluating the i

mpact of the adoption of

this update

its condensed consolidated financial statements.

In April 2019,

the

FASB issued ASU

2019-04,

“Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” The amendments in ASU

2019-04

apply to all reporting entities within the scope of the affected accounting guidance. For public business entities, this update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This ASU will be effective for the Company in the first quarter of fiscal 2021. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this update on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU

2018-13,

“Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” ASU

2018-13

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. This update is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, beginning after December 15, 2019. This ASU will be effective for the Company in the first quarter of fiscal 2021. The Company is currently evaluating the impact of the adoption of this update on its condensed consolidated financial statements.

In January 2017, the FASB issued ASU

2017-04,

“Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU

2017-04

modified the concept of impairment assessment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Public companies that are SEC filers should adopt the amendment for annual and any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. This ASU will be effective for the Company in the first quarter of fiscal 2021. The Company does not expect this update will impact its condensed consolidated financial statements.

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3.	Revenues from contracts with customers

The Company derives total revenues primarily from the assembly of products under supply agreements with its customers and the fabrication of customized optics and glass. The Company recognizes revenue relating to contracts with customers that depicts the transfer of promised goods or services to customers in an amount reflecting the consideration to which the Company expects to be entitled in exchange for such goods or services. In order to meet this requirement, the Company applies the following five steps: (1) identify the contract with a customer, (2) identify the performance obligations under the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations under the contract, and (5) recognize revenue when a performance obligation is satisfied. Revenue is recognized net of any taxes collected from customers, which is subsequently remitted to governmental authorities.

A performance obligation is a contractual promise to transfer a distinct good or service to the customer. In contracts with multiple performance obligations, the Company identifies each performance obligation and evaluates whether the performance obligation is distinct within the context of the contract at contract inception. The majority of the Company’s contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises under the contracts and, therefore, is not distinct.

The Company manufactures products that are customized to customers’ specifications, however, control of the products is typically transferred to the customer at the point in time the product is either shipped or delivered, depending on the terms of the arrangement, as the criteria for recognizing revenue over time are not met. On the evaluation of the contracts the Company determined that it did not have contractual rights to bill profit for work in progress in the event of a contract termination, an event which is expected to be infrequent. Further, in limited circumstances, substantive acceptance by the customer will result in the deferral of revenue until acceptance is formally received from the customer. Judgment may be required in determining if the acceptance clause provides for substantive acceptance.

Certain customers may request the Company to store finished products purchased by them at the Company’s warehouse. In these instances, the Company receives a written request from the customer asking the Company to hold the inventory at the Company’s warehouse and the ordered goods cannot be used to fulfill other customer orders. In these situations, revenue is only recognized when the goods are completed and ready for shipment and transferred to the Company’s warehouse.

Our customers generally are obligated to purchase finished goods that we have manufactured according to their demand requirements. Materials that are not consumed by our customers within a specified period of time, or that are no longer required due to a product’s cancellation or

end-of-life,

are typically designated as excess or obsolete inventory under our contracts. After materials are designated as either excess or obsolete inventory, our customers are typically required to purchase such inventory from us even if they have chosen to cancel production of the related products. The excess or obsolete inventory is shipped to the customer and revenue is recognized upon shipment.

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. The Company generally does not grant return privileges other than for defective products during the warranty period. The Company generally provides a warranty of between one to five years on the product.

Warranty provision

Provisions for estimated expenses relating to product warranties are made at the time the products are sold using historical experience. Generally, this warranty is limited to workmanship and the Company’s liability is capped at the price of the product. The provisions will be adjusted when experience indicates an expected settlement will differ from initial estimates.

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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. During the six months ended December 27, 2019, the Company had no impairment for contract assets recognized.

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

six

month

ended December 27, 2019:


(amount in thousands)	Contract Assets
Beginning balance, June 28, 2019	$	12,447
Revenue recognized		39,093
Amounts collected or invoiced		(40,426	)

Ending balance, December 27, 2019	$	11,114


(amount in thousands)	Contract Liabilities
Beginning balance, June 28, 2019	$	2,239
A dvance payment received during the period		3,336
Revenue recognized		(3,215	)

Ending balance, December 27, 2019	$	2,360

Contract Costs

Consistent with the guidance in ASC

340-40-25-1,

the incremental costs of obtaining a contract with a customer are recognized as an asset (not expensed as incurred) if such costs are expected to be recovered. Incremental costs of obtaining a contract are costs that the Company would not have incurred if the contract had not been obtained (e.g., sales commissions or similar incentive payments linked directly to new or modified customer contracts). Costs that would have been incurred regardless of whether a customer contract was obtained (e.g., costs of pursuing the contact, legal advice, etc.) are expensed as incurred, unless such costs are explicitly chargeable to the customer. During the

six

month

ended December 27, 2019, the Company did not have any incremental costs of obtaining a contract.

Shipping and Handling

Shipping costs billed to customers are recorded as revenue. Shipping and handling expense related to costs incurred to deliver product are recognized within cost of goods sold. The Company accounts for shipping and handling activities that occur after control has transferred as a fulfillment cost as opposed to a separate performance obligation, and the costs of shipping and handling are recognized concurrently with the related revenue.

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Revenue by Geographic Area

Total 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

present total revenues by geographic region:


(amount in thousands, except percentages)	Three Months Ended December 27, 2019		As a % of Total Revenues			Six Months Ended December 27, 2019		As a % of Total Revenues
North America	$	223,398		52.4	%	$	424,345		51.4	%
Asia-Pacific		141,147		33.1			259,570		31.4
Europe		61,672		14.5			141,598		17.2

Total	$	426,217		100.0	%	$	825,513		100.0	%


(amount in thousands, except percentages)	Three Months Ended December 28, 2018		As a % of Total Revenues			Six Months Ended December 28, 2018		As a % of Total Revenues
North America	$	182,698		45.3	%	$	362,524		46.5	%
Asia-Pacific		166,711		41.4			318,658		40.8
Europe		53,671		13.3			99,075		12.7

Total	$	403,080		100.0	%	$	780,257		100.0	%

The following table

set forth our revenues by end market


(amount in thousands, except percentages)	Three Months Ended December 27, 2019		As a % of Total Revenues			Six Months Ended December 27, 2019		As a % of Total Revenues
Optical communications	$	322,068		75.6	%	$	624,447		75.6	%
Lasers, sensors and other		104,149		24.4			201,066		24.4

Total	$	426,217		100.0	%	$	825,513		100.0	%


(amount in thousands, except percentages)	Three Months Ended December 28, 2018		As a % of Total Revenues			Six Months Ended December 28, 2018		As a % of Total Revenues
Optical communications	$	305,547		75.8	%	$	586,315		75.1	%
Lasers, sensors and other		97,533		24.2			193,942		24.9

Total	$	403,080		100.0	%	$	780,257		100.0	%

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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				Six Months Ended
(amount in thousands except per share amounts)	December 27, 2019		December 28, 2018		December 27, 2019		December 28, 2018
Net income attributable to shareholders	$	31,231	$	31,513	$	57,188	$	59,363

Weighted-average number of ordinary shares outstanding (thousands of shares)		37,011		36,841		36,962		36,733
Incremental shares arising from the assumed vesting of restricted share units and performance share units (thousands of shares)		752		630		684		572

Weighted-average number of ordinary shares for diluted earnings per ordinary share (thousands of shares)		37,763		37,471		37,646		37,305

Basic earnings per ordinary share	$	0.84	$	0.86	$	1.55	$	1.62
Diluted earnings per ordinary share	$	0.83	$	0.84	$	1.52	$	1.59
Outstanding performance share units excluded from the computation of diluted earnings per ordinary share (thousands of shares) (1)		50		401		50		401

(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 can be analyzed as follows:


					Fair Value
(amount in thousands)	Carrying Cost		Unrealized Gain/(Loss)		Cash and Cash Equivalents		Marketable Securities		Other Investments
As of December 27, 2019
Cash	$	217,721	$	—	$	217,721	$	—	$	—
Cash equivalents		2,310		—		2,310		—		—
Liquidity funds		20,837		—		—		—		20,837
Certificates of deposit and time deposits		20,000		—		—		—		20,000
Corporate bonds and commercial papers		102,735		261		—		102,996		—
U.S. agency and U.S. T reasury securities		78,840		132		—		78,972		—

Total	$	442,443	$	393	$	220,031	$	181,968	$	40,837

As of June 28, 2019
Cash	$	178,019	$	—	$	178,019	$	—	$	—
Cash equivalents		2,820		—		2,820		—		—
Liquidity funds		20,552		—		—		—		20,552
Certificates of deposit and time deposits		35,028		—		—		—		35,028
Corporate bonds and commercial papers		130,959		297		—		131,256		—
U.S. agency and U.S. T reasury securities		69,552		105		—		69,657		—

Total	$	436,930	$	402	$	180,839	$	200,913	$	55,580

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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 Company’s short-term investments consist of U.S. Treasuries and fixed income securities and have been classified and accounted for as

available-for-sale.

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 December 27, 2019:


	December 27, 2019				June 2 8 , 201 9
(amount in thousands)	Carrying Cost		Fair Value		Carrying Cost		Fair Value
Due within one year	$	51,938	$	51,971	$	69,746	$	69,830
Due between one to five years		129,637		129,997		130,765		131,083

Total	$	181,575	$	181,968	$	200,511	$	200,913

During the six months ended December 27, 2019, the Company recognized a realized gain of $79 thousand from sales and maturities of

available-for-sale

securities.

As of December 27, 2019, the Company considered the

decline

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. The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments generally to be investment grade, with the primary objective of minimizing the potential risk of principal loss. Fair values were determined for each individual security in the investment portfolio. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s cost basis. No impairment losses were recorded for the six months ended December 27, 2019.

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 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.

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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 December 27, 2019
Assets
Cash equivalents	$	—	$	2,310		$	—	$	2,310
Liquidity funds		—		20,837			—		20,837
Certificates of deposit and time deposits		—		20,000			—		20,000
Corporate bonds and commercial papers		—		102,996			—		102,996
U.S. agency and U.S. T reasury securities		—		78,972			—		78,972
Derivative assets		—		325	(1)		—		325

Total	$	—	$	225,440		$	—	$	225,440

Liabilities
Derivative liabilities	$	—	$	3,980	(2)	$	—	$	3,980

Total	$	—	$	3,980		$	—	$	3,980


	Fair Value Measurements at Reporting Date Using
(amount in thousands)	Level 1		Level 2			Level 3		Total
As of June 28, 2019
Assets
Cash equivalents	$	—	$	2,820		$	—	$	2,820
Liquidity funds		—		20,552			—		20,552
Certificates of deposit and time deposits		—		35,028			—		35,028
Corporate bonds and commercial papers		—		131,256			—		131,256
U.S. agency and U.S. T reasury securities		—		69,657			—		69,657
Derivative assets		—		2,201	(3)		—		2,201

Total	$	—	$	261,514		$	—	$	261,514

Liabilities
Derivative liabilities	$	—	$	2,591	(4)	$	—	$	2,591

Total	$	—	$	2,591		$	—	$	2,591

(1)	Foreign currency forward contracts with a notional amount of $126.0 million and Canadian dollars 0.4 million.

(2)	Two interest rate swap agreements with an aggregate notional amount of $125.1 million.

(3)	Foreign currency forward contracts with notional amount of $72.0 million and Canadian dollars 0.6 million.

(4)	Interest rate swap agreement with a notional amount of $64.2 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 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 also fluctuate. The Company uses foreign currency contracts to manage the foreign exchange risk associated with certain foreign currency denominated assets and liabilities and other foreign currency transactions.

The Company enters into foreign currency forward contracts to hedge fluctuations in the U.S. dollar value of forecasted transactions denominated in Thai baht and Canadian dollars.

As of December 27, 2019, the Company had

117

outstanding

U.S. dollars foreign currency

forward contracts with an aggregate notional amount of

126.0

million

and two outstanding Canadia

n dollars foreign currency forward contracts with an aggregate notional amo

nt o

f $

0.4

million

with maturity dates from January 2020 through July 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

and Canadian dollars

. During the six months ended December 27, 2019, the Company recorded an unrealized

loss

1.9

million from changes in the fair value of foreign currency

forward

contracts in earnings as foreign exchange

(

loss

)

gain, net in the unaudited condensed consolidated statements of operations and comprehensive income.

As of December 28, 2018, the Company had

four

outstanding U.S. dollars foreign currency forward contracts with an aggregate notional amount of $

8.0

million,

three

outstanding U.S. dollars foreign currency option contracts with an aggregate notional amount of $

15.0

million and one outstanding Canadian dollars forward contract with a notional amount of $

0.4

million with maturity dates from January through

April 2019

. These foreign currency forward contracts and option 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 and Canadian dollars. During the six months ended December 28, 2018, the Company recorded an unrealized gain of $

2.6

million from changes in the fair value of foreign currency forward contracts in earnings as foreign exchange (loss) gain, 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 December 27, 2019, the Company had

two

outstanding interest rate swap agreements with an aggregate notional amount of $125.1 million. As of December 28, 2018, the Company had one outstanding interest rate swap agreement with a notional amount of $64.2 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 1

). 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 1

) and on September 10, 2019, repaid in full the outstanding term loan under the Bank of America Credit Facility (see Note 1

). 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,

with

a portion

reclassified

from accumulated other comprehensive income into earnings at each reporting period based on either the accrued interest amount or the interest payment.

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The following table provides a summary of the impacts of derivative gain (loss) of our cash flow hedges on the unaudited condensed consolidated statements of operations and other comprehensive income:


			Three Months Ended					Six Months Ended
(amount in thousands)	Financial statements line item		December 27, 2019			December 28, 2018		December 27, 2019			December 28, 2018
Derivatives gain (loss) recognized in other comprehensive income:
Interest rate swaps		Other comprehensive income	$	243		$	—	$	282		$	—
Derivatives gain (loss) reclassified from other comprehensive income into earnings:
Interest rate swaps		Interest expense		(432	)		—		(432	)		—

During the six months ended December 27, 2019, there was an amortization of the fair value of interest rate swaps as of hedge inception date in the amount of $

0.4

million due to the application of hedge accounting which results in interest expense reduction.

As of December 27, 2019,

the

amount in accumulated other comprehensive income which is expected to be reclassified

into earnings

within 12 months w

$0.7 million.

Prior to September 27, 2019, these interest rate swaps were not designated as cash flow hedges. All changes in the fair value of these interest rate swaps w

ere

reflected in earnings. During the six months ended December 27, 2019 and December 28, 2018, the Company recorded unrealized loss of $1.7 million and unrealized

loss

of $0.8 million, respectively, 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.

Fair Value

The following table provides the fair values of our derivative financial instruments for the periods presented:


	December 27, 2019						June 28, 2019
(amount in thousands)	Derivative Assets			Derivative Liabilities			Derivative Assets		Derivative Liabilities
Derivatives not designated as hedging instruments
Foreign currency forward contracts	$	338		$	(13	)	$	2,201	$	—
Interest rate swaps		—			—			—		(2,591	)
Derivatives designated as hedging instruments
Interest rate swaps		—			(3,980	)		—		—

Gross amounts of derivatives		338			(3,993	)	$	2,201	$	(2,591	)
Gross amounts of derivatives offset in the balance sheet		(13	)		13		$	—	$	—

Net amounts of derivatives	$	325		$	(3,980	)	$	2,201	$	(2,591	)

The Company presents its derivatives at gross fair values in the unaudited condensed consolidated balance sheets. However, the Company’s netting arrangements allow net settlements under certain conditions. Our derivative instruments are typically settled monthly or quarterly.

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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

7.	Trade accounts receivable, net


(amount in thousands)	As of December 27, 2019			As of June 28, 2019
Trade accounts receivable	$	285,680		$	260,698
Less: allowance for doubtful account		(101	)		(96	)

Trade accounts receivable, net	$	285,579		$	260,602

8.	Inventor ies


(amount in thousands)	As of December 27, 2019		As of June 28, 2019
Raw materials	$	126,599	$	113,321
Work-in-progress		138,542		141,730
Finished goods		20,583		24,916
Goods in transit		8,656		13,645
Inventor ies	$	294,380	$	293,612

9.	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. The customer has agreed to repay this amount by September 30, 2020. This receivable is reflected within investing activities in the statement of cash flows.

10 .	Restricted cash

As of December 27, 2019 and June 28, 2019, the Company had two outstanding standby letters of credit

in the aggregate amount

of 6.2 million Euros and one outstanding standby letter of credit of 6.0 million Euros, respectively, 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 December 27, 2019 and June 28, 2019, the standby letters of credit were backed by cash collateral of $7.7 million and $7.4 million, respectively.

11.

Leases

The Company leases facilities under

non-cancelable

operating lease agreements. The Company leases a portion of its capital equipment and vehicle, certain land and buildings for its facilities in Thailand, the Cayman Islands, China, the United States, the United Kingdom 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. All leases agreements have no term conditions of residual value guarantee provided by lessee. The Company also has one intercompany lease transaction which is a lease of office and manufacturing space between Fabritek and Fabrinet West.

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Operating leases

The Company determines if an arrangement contains a lease at inception. The Company applies the guidance in ASC 842 to determine whether a contract is, or contains, a lease. A contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Operating leases are included in operating lease ROU assets and operating lease liabilities within the Company’s unaudited condensed consolidated balance sheets. The Company rents certain real estate under agreements that are classified as operating leases.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Variable lease payments are expensed as incurred and are not included within the ROU asset and lease liability calculation. Variable lease payments primarily include reimbursements of costs incurred by lessors for common area maintenance and utilities. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company does not account for lease components (e.g., fixed payments including rent) separately from the

non-lease

components (e.g., common-area maintenance costs).

The following table shows the impact of adoption of ASC 842 on the adoption date of June 29, 2019 on the consolidated balance sheets:

Consolidated Balance Sheets


	Impact of Adopting ASC 842
(amount in thousands)	Balance at June 28, 2019		Adjustment		Balance at June 29, 2019
Assets
Operating lease ROU assets	$	—	$	5,370	$	5,370
Liabilities and Shareholders’ Equity
Operating lease liabilities, current	$	—	$	1,601	$	1,601
Operating lease liabilities, non-current	$	—	$	3,769	$	3,769

As of December 27, 2019, the maturities of the Company’s operating lease liabilities

were

as follows:


(amount in thousands)
2020 (remaining six months)	$	979
2021		2,140
2022		2,007
2023		1,896
2024		846
Thereafter		294

Total undiscounted lease payments		8,162
Less Imputed interest		(611	)
Total present value of lease liabilities	$	7,551	(1)

(1)	Included current portion of operating lease liabilities of $1.8 million.

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 six months ended December 27, 2019 was $1.0 million. Rental expense for short-term leases for the six months ended December 27, 2019 was $40

thousand

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Capital leases

In connection with the acquisition of Fabrinet UK, the Company assumed the capital lease commitments of several machines and equipment, with various expiration dates through September 2020. The equipment can be purchased at the determined prices upon expiration of such contracts.

As of December 27, 2019, the Company had capital lease liabilities of $0.3 million, which were recorded under current liabilities in the unaudited condensed consolidated balance sheets.

As of December 27, 2019, the future minimum lease payments under

non-cancelable

capital leases during each fiscal year were as follows:


(amount in thousands)
2020 (remaining six months)	$	211
2021		105
Total minimum capital lease payments		316
Less: Future finance charge on capital leases		(5	)

Present value of capital lease	$	311

Representing capital lease liabilities


Current	$	311
Non-current		—

Total capital lease liabilities	$	311

As of December 27, 2019, the present value of capital leases during each fiscal year was as follows:


(amount in thousands)
2020 (remaining six months)	$	206
2021		105

Present value of capital lease	$	311

The following summarizes additional information related to the Company’s operating leases and capital leases:


	As of December 27, 2019
Weighted-average remaining lease term (in years)
Operating leases		4.0
Capital leases		0.8
Weighted-average discount rate
Operating leases		3.8	%
Capital leases		4.1	%

The following information represents supplemental disclosure for the statement of cash flows related to operating and capital leases for the six months ended December 27, 2019:


(amount in thousands)	Six Months Ended December 27, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	1,024
Financing cash flows from capital leases	$	189
ROU assets obtained in exchange for lease liabilities	$	7,558
Capital lease assets	$	251

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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 December 27, 2019
Software	$	7,319	$	(5,205	)	$	—		$	2,114
Customer relationships		4,373		(2,405	)		(44	)		1,924
Backlog		119		(119	)		—			—

Total intangibles	$	11,811	$	(7,729	)	$	(44	)	$	4,038


(amount in thousands)	Gross Carrying Amount		Accumulated Amortization			Foreign Currency Translation Adjustment			Net
As of June 28, 2019
Software	$	6,582	$	(4,868	)	$	—		$	1,714
Customer relationships		4,373		(2,096	)		(104	)		2,173
Backlog		119		(119	)		—			—

Total intangibles	$	11,074	$	(7,083	)	$	(104	)	$	3,887

The Company recorded amortization expense relating to intangibles of $0.3 million and $0.3 million for the three months ended December 27, 2019 and December 28, 2018, respectively, and $0.6 million and $0.6 million for the six months ended December 27, 2019 and December 28, 2018, respectively.

The weighted-average remaining life of customer relationships was:


(years)	As of December 27, 2019		As of June 28, 2019
Customer relationships		5.0		5.4

Based on the carrying amount of intangibles as of December 27, 2019, and assuming no future impairment of the underlying assets, the estimated future amortization during each fiscal year was as follows:


(amount in thousands)
2020 (remaining six months)	$	646
2021		1,164
2022		921
2023		651
2024		419
Thereafter		237

Total	$	4,038

Goodwill

The changes in the carrying amount of goodwill from the acquisition of Fabrinet UK were as follows:


(amount in thousands)	Goodwill
Balance as of June 28, 2019	$	3,705
Foreign currency translation adjustment		93

Balance as of December 27, 2019	$	3,798

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(amount in thousands)	Goodwill
Balance as of June 29, 2018	$	3,828
Foreign currency translation adjustment		(130	)

Balance as of December 28, 2018	$	3,698

Goodwill is not deductible for tax purposes. Goodwill is reviewed annually for impairment or more frequently whenever changes or circumstances indicate the carrying amount of goodwill may not be recoverable.

Borrowings

The Company’s total borrowings, including current and

non-current

portions of long-term borrowings, consisted of the following:

(

amount in thousands

)

Rate	Conditions		Maturity		As of December 27, 2019			As of June 28, 2019
Long-term borrowings, current portion, net:
Long-term borrowings, current portion					$	12,188		$	3,250
Less: Unamortized debt issuance costs – current portion						(32	)		—

Long-term borrowings, current portion, net					$	12,156			3,250

Long-term borrowings, non-current portion, net:
Term loan borrowings:
1-month LIBOR +1.50% per annum (1)		Repayable in quarterly installments		June 2023	$	—		$	60,938
3-month LIBOR +1.35% per annum (1)		Repayable in quarterly installments		June 2024		57,891			—
Less: Current portion						(12,188	)		(3,250	)
Less: Unamortized debt issuance costs – non-current portion						(111	)		—

Long-term borrowings, non-current portion, net					$	45,592		$	57,688

(1)	We have entered into interest rate swaps that effectively fix a series of our future interest payments on our term loans. Refer to Note 6.

The movements of long-term borrowings for the six months ended December 27, 2019 and December 28, 2018 were as follows:


	Six Months Ended
(amount in thousands)	December 27, 2019			December 28, 2018
Opening balance	$	60,938		$	64,188
Borrowings during the period		60,938			—
Repayments during the period		(63,985	)		(813	)

Closing balance	$	57,891		$	63,375

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As of December 27, 2019, future maturities of long-term borrowings during each fiscal year were as follows:


(amount in thousands)
2020 (remaining six months)	$	6,093
2021		12,188
2022		15,234
2023		12,188
2024		12,188

Total	$	57,891

Credit facility agreements:

Bank of Ayudhya Public Company Limited

On August 20, 2019, Fabrinet Thailand (the “Borrower”), and

Bank of Ayudhya Public Company Limited (

the

“

Bank

”)

entered into a Credit Facility Agreement (the “Credit Facility Agreement”). The Credit Facility Agreement provides for a facility of 110.0 million Thai Baht (approximately $3.6 million based on the applicable exchange rate as of September 27, 2019) and $160.9 million which may be used for, among other things, an overdraft facility, short-term loans against promissory notes, a letter of guarantee facility, a term loan facility and foreign exchange facilities. The Bank may approve any request for extension of credit under the Credit Facility Agreement and may increase or decrease any facility amount in its sole discretion.

Under the Credit Facility Agreement, on August 20, 2019, the Borrower and the Bank entered into a Term Loan Agreement pursuant to which the Borrower drew down on September 3, 2019 a term loan in the original principal amount of $60.9 million. The proceeds from the term loan, together with cash on hand, were used to repay outstanding obligations under the Company’s

pre-existing

credit facility agreement between the Company and Bank of America, N.A.

The term loan accrues interest at

3-month LIBOR plus 1.35% and is repayable in quarterly installments of $

3.0 million, commencing on September 30, 2019. The term loan

will

mature on June 30, 2024. The Borrower may prepay the term loan in whole or in part at any time without premium or penalty. Any portion of the term loan repaid or prepaid may not be

re-borrowed.

During the six months ended December 27, 2019, the Company recorded $0.6 million of interest expense in connection with this term loan.

Any borrowings under the Credit Facility Agreement, including those borrowings under the Term Loan Agreement

are guaranteed by Fabrinet and secured by land and buildings owned by the Borrower in the Pathumthani and Chonburi Provinces in Thailand.

The Term Loan Agreement contains affirmative and negative covenants applicable to the Borrower, including delivery of financial statements and other information, compliance with laws, maintenance of insurance, restrictions on granting security interests or liens on its assets, disposing of its assets, incurring indebtedness and making acquisitions. While the term loan is outstanding, the Borrower is required to maintain a loan to value of the mortgaged real property ratio of not greater than 65%. If the loan to value ratio is not maintained, the Borrower will be required to provide additional security or prepay a portion of the term loan in order to restore the required ratio. The Company is also required to maintain a debt service coverage ratio of at least 1.25 times and a debt to equity ratio less than or equal to 1.0 times. In the case of any payment of a dividend by the Company, its debt service coverage ratio must be at least 1.50 times. At December 27, 2019, the Company was in compliance with all of its covenants under the Term Loan Agreement.

The events of default in the Term Loan Agreement include failure to pay amounts due under the Term Loan Agreement or the related finance documents when due, failure to comply with the covenants under the Term Loan Agreement or the related finance documents, cross default with other indebtedness of the Borrower, events of bankruptcy or insolvency in respect of the Borrower, and the occurrence of any event or series of events that in the opinion of the Bank has or is reasonably likely to have a material adverse effect.

At December 27, 2019, there was $57.9 million outstanding under the term loan.

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Bank of America, N.A.

On May 22, 2014, the Company and

consortium of banks entered into a syndicated senior credit facility agreement led by Bank of America (the “Bank of America Facility Agreement”). The Bank of America Facility Agreement provided for a $200.0 million credit line, comprised of a $150.0 million revolving loan facility and a $50.0 million delayed draw term loan facility.

From time to time, we amended the Bank of America Facility Agreement, before repaying all outstanding amounts under the agreement and terminating such agreement on September 10, 2019.

The most recent amendment on June 4, 2018 (i) reduced the revolving commitments thereunder from $150.0 million to $25.0 million, (ii) refinanced the outstanding amounts under the revolving loan and term loan facilities into a $65.0 million term loan which was to be repaid in quarterly installments through the maturity date of June 4, 2023

and (iii) reduced the interest rate margins and commitment fees. The term loan bore interest, at the Company’s option, at a rate per annum equal to a LIBOR rate plus a spread of 1.50% to 2.25%, or a base rate plus a spread of 0.50% to 1.25%. During the six months ended December 27, 2019 and December 28, 2018, the Company recorded $0.5 million and $1.2 million, respectively, of interest expense in connection with this term loan.

On September 10, 2019, the Company fully repaid $61.0 million in principal, accrued interest and other fees under the agreement. The early termination of this agreement did not trigger any early termination fees. At December 27, 2019, there were no amounts outstanding under the Bank of America Facility Agreement. At June 28, 2019, there was $60.9 million outstanding under the Bank of America Facility Agreement, related to the term loan.

Income taxes

As of December 27, 2019 and June 28, 2019, the liability for uncertain tax positions including accrued interest and penalties was $1.2 million and $2.1 million, respectively. The Company expects the estimated amount of liability associated with its uncertain tax positions to decrease within the next 12 months due to the lapse of the applicable statute of limitations in foreign tax jurisdictions.

The Company files income tax returns in the United States and foreign tax jurisdictions. The tax years from 2013 to 2018 remain open to examination by U.S. federal and state, and foreign tax authorities. The Company’s income tax is recognized based on the best estimate of the expected annual effective tax rate for the full financial year of each entity in the Company, adjusted for discrete items arising in that quarter. If the Company’s estimated annual effective tax rate changes, the Company makes a cumulative adjustment in that quarter.

The Company’s effective tax rate for the three months ended December 27, 2019 and December 28, 2018 was

4.9

% and

4.2

%, respectively, of net income. The increase was primarily due to the fact that the Company had higher income subject to tax during the three months ended December 27, 2019, compared with the three months ended December 28, 2018.

The Company’s effective tax rate for the six months ended December 27, 2019 and December 28, 2018 was

5.0

% and

5.1

%, respectively, of net income. The decrease was primarily due to the fact that the Company had lower income subject to tax during the six months ended December 27, 2019 as compared to the six months ended December 28, 2018.

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Share-based compensation

The grant date fair value of restricted share units and performance share units is based on the market value of our ordinary shares on the date of grant.

The effect of recording share-based compensation expense for the three and six months ended December 27, 2019 and December 28, 2018 was as follows:


	Three Months Ended				Six Months Ended
(amount in thousands)	December 27, 2019		December 28, 2018		December 27, 2019		December 28, 2018
Share-based compensation expense by type of award:
Restricted share units		4,186		3,344		8,584		8,029
Performance share units		2,002		625		3,599		920

Total share-based compensation expense		6,188		3,969		12,183		8,949
Tax effect on share-based compensation expense		—		—		—		—

Net effect on share-based compensation expense	$	6,188	$	3,969	$	12,183	$	8,949

Share-based compensation expense was recorded in the unaudited condensed consolidated statements of operations and comprehensive income as follows:


	Three Months E nded				Six Months Ended
(amount in thousands)	December 27, 2019		December 28, 2018		December 27, 2019		December 28, 2018
Cost of revenue	$	1,591	$	1,300	$	3,311	$	3,147
Selling, general and administrative expense		4,597		2,669		8,872		5,802

Total share-based compensation expense	$	6,188	$	3,969	$	12,183	$	8,949

The Company did not capitalize any share-based compensation expense as part of any asset costs during the three and six months ended December 27, 2019 and December 28, 2018.

Share-based award activity

On December 12, 2019,

he Company’s shareholders approved Fabrinet’s 2020 Equity Incentive Plan (the “2020 Plan”). Upon the approval of the 2020 Plan, Fabrinet’s Amended and Restated 2010 Performance Incentive Plan (the “2010 Plan”) was simultaneously terminated. The 2020 Plan provides for the grant of equity awards thereunder with respect to (i) 1,700,000 ordinary shares, plus (ii) up to 1,300,000 ordinary shares that, as of immediately prior to the termination of the 2010 Plan, had been reserved but not issued pursuant to any awards granted under the 2010

Plan and are not subject to any awards thereunder.

Upon termination of the 2010 Plan,

1,281,619

ordinary shares were reserved for issuance under the 2020 Plan pursuant to clause (ii) of the preceding sentence. As of December 27, 2019, there were

19,044

restricted share units outstanding and an aggregate of

2,962,575

ordinary shares available for future grant under the 2020 Plan.

As of December 27, 2019, there were an aggregate of

801,150

restricted share units and

436,304

performance share units outstanding.

ordinary shares are available for future grant under the 2010 Plan.

On November 2, 2017, the Company adopted the 2017 Inducement Equity Incentive Plan (the “2017 Inducement Plan”) with a reserve of

160,000

ordinary shares authorized for future issuance solely for the granting of inducement share options and equity awards to new employees. The 2017 Inducement Plan was adopted without shareholder approval in reliance on the “employment inducement exemption” provided under the New York Stock Exchange Listed Company Manual. As of December 27, 2019, there were an aggregate of

24,327

restricted share units outstanding and 111,347 ordinary shares available for future grant under the 2017 Inducement Plan.

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The 2010 Plan, 2017 Inducement Plan, and 2020 Plan are collectively referred to as the “Equity Incentive Plans.”

Restricted share units and performance share units

Restricted share units and performance share units have been granted under the 2010 Plan

the 2017 Inducement Plan

, and the 2020 Plan

Restricted share units granted to employees generally vest in equal installments over three or four years on each anniversary of the vesting commencement date. Restricted share units granted to

non-employee

directors generally cliff vest 100% on the first of January, approximately one year from the grant date, provided the director continues to serve through such date.

Performance share units granted to executives will vest, if at all, at the end of a

two-year

performance period based on the Company’s achievement of

pre-defined

performance criteria, which consist of revenue and

non-GAAP

gross margin

of non-

GAAP operating margin

targets. The actual number of performance share units that may vest at the end of the performance period ranges from 0% to 100% of the award grant.

The following table summarizes restricted share unit activity under the Equity Incentive Plans:


	Number of Shares			Weighted- Average Grant Date Fair Value Per Share
Balance as of June 28, 2019		800,751		$	42.48
Granted		331,900		$	49.78
Issued		(264,275	)	$	39.60
Forfeited		(23,855	)	$	42.09

Balance as of December 27, 2019		844,521		$	46.26


	Number of Shares			Weighted- Average Grant Date Fair Value Per Share
Balance as of June 29, 2018		1,073,580		$	35.19
Granted		305,836		$	48.33
Issued		(393,142	)	$	34.40
Forfeited		(69,075	)	$	38.53

Balance as of December 28, 2018		917,799		$	39.65

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The following table summarizes performance share unit activity under the Equity Incentive Plans:


	Number of Shares			Weighted- Average Grant Date Fair Value Per Share
Balance as of June 28, 2019		548,500		$	40.97
Granted		238,474		$	48.39
Issued		—			—
Forfeited		(350,670	)	$	36.99

Balance as of December 27, 2019		436,304		$	48.22


	Number of Shares			Weighted- Average Grant Date Fair Value Per Share
Balance as of June 29, 2018		605,892		$	38.41
Granted		201,994		$	48.02
Issued		(227,268	)	$	40.48
Forfeited		(27,954	)	$	39.35

Balance as of December 28, 2018		552,664		$	41.02

The fair value of restricted share units and performance share units is based on the market value of our ordinary shares on the date of grant.

As of December 27, 2019, there was $18.3 million and $9.3 million of unrecognized share-based compensation expense related to restricted share units and performance share units, respectively, under the Equity Incentive Plans that is expected to be recorded over a weighted-average period of 2.7 years and 1.5 years, respectively.

For the six months ended December 27, 2019 and December 28, 2018, the Company withheld an aggregate of 86,138 shares and 205,984 shares, respectively, upon the vesting of restricted share units, based upon the closing share price on the vesting date to settle the employees’ minimum statutory obligation for the applicable income and other employment taxes. For the six months ended December 27, 2019 and December 28, 2018, the Company then remitted cash of $4.4 million and $9.1 million, respectively, to the appropriate taxing authorities, and presented it as a financing activity within the unaudited condensed consolidated statements of cash flows. The payment was recorded as a reduction of additional

paid-in

capital.

Shareholders’ equity

Share capital

The Company’s

authorized share capital is 500,000,000 ordinary shares, par value of $0.01 per ordinary share, and 5,000,000 preferred shares, par value of $0.01 per preferred share.

For the three

and six

months ended December 27, 2019,

the Company

issued 19,762

and 178,137

ordinary shares

, respectively

upon the vesting of restricted share units, net of shares withheld

For the three

and six

months ended December 28, 2018,

the Company

issued 19,278

and

414,426

ordinary shares, respectively,

upon the vesting of restricted share units, net of shares withheld

All such issued shares are fully paid.

Treasury shares

In August 2017, the Company’s board of directors approved a share repurchase program to permit the Company to repurchase up to $

30.0

million worth of its issued and outstanding ordinary shares in the open market in accordance with applicable rules and regulations. In February 2018 and May 2019, the Company’s board of directors approved an increase of $

30.0

million and $

million, respectively, to the original share repurchase authorization, bringing

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the aggregate authorization to $110.0 million. During the three and six months ended December 27, 2019, no shares were repurchased under the program. As of December 27, 2019, the Company had a remaining authorization to purchase up to $62.2 million worth of its ordinary shares under the share repurchase program. Shares repurchased under the share repurchase program are held as treasury shar

Accumulated other comprehensive income (loss) (“AOCI”)

The changes in AOCI for the six months ended December 27, 2019 and December 28, 2018 were as follows:


(amount in thousands)	Unrealized net (Losses)/Gains on Available-for-sale Securities			Unrealized net (Losses)/Gains on Derivative Instruments			Retirement benefit plan - Prior service cost			Foreign Currency Translation Adjustment			Total
Balance as of June 28, 2019	$	952		$	32			(2,537	)	$	(833	)	$	(2,386	)
Other comprehensive income before reclassification adjustment		(126	)		(150	)		184			247			155
Amounts reclassified out of AOCI to foreign exchange loss in the unaudited condensed consolidated statements of operations and comprehensive income		79			—			—			—			79
Tax effects		—			—			—			—			—

Other comprehensive income (loss)	$	(47	)	$	(150	)		184		$	247		$	234

Balance as of December 27, 2019	$	905		$	(118	)		(2,353	)	$	(586	)	$	(2,152	)


(amount in thousands)	Unrealized net (Losses)/Gains on Available-for-sale Securities			Unrealized net (Losses)/Gains on Derivative Instruments			Retirement benefit plan - Prior service cost			Foreign Currency Translation Adjustment			Total
Balance as of June 29, 2018	$	(1,091	)	$	33			—		$	(199	)	$	(1,257	)
Other comprehensive income before reclassification adjustment		1,947			—			—			(705	)		1,242
Amounts reclassified out of AOCI to foreign exchange loss in the unaudited condensed consolidated statements of operations and comprehensive income		(1,061	)		(1	)		—			—			(1,062	)
Tax effects		—			—			—			—			—

Other comprehensive income (loss)	$	886		$	(1	)		—		$	(705	)	$	180

Balance as of December 28, 2018	$	(205	)	$	32			—		$	(904	)	$	(1,077	)

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Commitments and contingencies

Letter of credit and Bank guarantees

As of December 27, 2019

and

June 28, 2019,

the Company had two outstanding standby letters of credit

in the aggregate amount

of 6.2 million Euros

and

one outstanding standby letter of credit of 6.0 million Euros

, respectively,

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 December 27, 2019 and June 28, 2019, these

standby letter

of credit w

ere

backed by cash collateral

in the aggregate amount

7.7

million and $

7.4

million, respectively.

As of December 27, 2019 and June 28, 2019, there were outstanding bank guarantees given by a bank on behalf of our subsidiary in Thailand for electricity usage and other normal business amounting to $1.7 million and $1.6 million, respectively, and there were other bank guarantees given by a bank on behalf of our subsidiaries in China and the United Kingdom to support their operations of $0.1

million

and $26 thousand, respectively.

Purchase obligations

Purchase obligations represent legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet operational requirements. Although open purchase orders are considered enforceable and legally binding, their terms generally give the Company the option to cancel, reschedule and/or adjust its requirements based on its business needs prior to the delivery of goods or performance of services. Obligations to purchase inventory and other commitments are generally expected to be fulfilled within one year.

As of December 27, 2019, the Company had an outstanding commitment to third parties of $10.1 million.

Indemnification of directors and officers

Cayman Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of directors and officers, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Fabrinet’s amended and restated memorandum and articles of association provide for indemnification of directors and officers for actions, costs, charges, losses, damages and expenses incurred in their capacities as such, except that such indemnification does not extend to any matter in respect of any fraud or dishonesty that may attach to any of them.

In accordance with Fabrinet’s form of indemnification agreement for its directors and officers, Fabrinet has agreed to indemnify its directors and officers against certain liabilities and expenses incurred by such persons in connection with claims by reason of their being such a director or officer. Fabrinet maintains a director and officer liability insurance policy that may enable it to recover a portion of any future amounts paid under the indemnification agreements.

20 .	Business segments and geographic information

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is Fabrinet’s Chief Executive Officer. As of December 27, 2019, the Company operated and internally managed a single operating segment. Accordingly, the Company does not accumulate discrete information with respect to separate product lines and does not have separate reportable segments.

Total 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.

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The following table presents total revenues by geographic region:


	Three Months Ended				Six Months Ended
(amount in thousands)	December 27, 2019		December 28, 2018		December 27, 2019		December 28, 2018
North America	$	223,398	$	182,698	$	424,345	$	362,524
Asia-Pacific		141,147		166,711		259,570		318,658
Europe		61,672		53,671		141,598		99,075

	$	426,217	$	403,080	$	825,513	$	780,257

As of December 27, 2019 and December 28, 2018, the Company had approximately $30.0 million and $32.3 million, respectively, of long-lived assets based in North America, with the substantial remainder of assets based in Asia-Pacific and Europe.

Significant customers

The Company had three

and

two

customers that

individually

contributed 10% or more of its total trade accounts receivable as of

December 27, 2019 and June 28, 2019, respectively.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to historical information, this Quarterly Report on Form

10-Q

contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

•

our goals and strategies;

•

our and our customers’ estimates regarding future revenues, operating results, expenses, capital requirements and liquidity;

•

our belief that we will be able to maintain favorable pricing on our services;

•

our expectation that the portion of our revenues attributable to customers in regions outside of North America for the remainder of fiscal year 2020 will be in line with the portion of those revenues for the six months ended December 27, 2019;

•

our expectation that we will incur incremental costs of revenue as a result of our planned expansion of our business into new geographic markets;

•

our expectation that our fiscal year 2020 selling, general and administrative (“SG&A”) expenses will increase as a percentage of revenue compared to fiscal year 2019 SG&A expenses;

•

our expectation that our employee costs will increase in Thailand and the People’s Republic of China (“PRC”);

•

our future capital expenditures and our needs for additional financing;

•

the expansion of our manufacturing capacity, including into new geographies;

•

the growth rates of our existing markets and potential new markets;

•

our ability, and the ability of our customers and suppliers, to respond successfully to technological or industry developments;

•

our suppliers’ estimates regarding future costs;

•

our ability to increase our penetration of existing markets and to penetrate new markets;

•

our plans to diversify our sources of revenues;

•

our plans to execute acquisitions;

•

trends in the optical communications, industrial lasers, and sensors markets, including trends to outsource the production of components used in those markets;

•

our ability to attract and retain a qualified management team and other qualified personnel and advisors; and

•

competition in our existing and new markets.

These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form

10-Q,

in particular, the risks discussed under the heading “Risk Factors” in Part II, Item 1A as well as those discussed in other documents we file with the Securities and Exchange Commission. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. “We,” “us” or “our” collectively refer to Fabrinet and its subsidiaries.

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Overview

We provide 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. We offer 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. Although we focus primarily on

low-volume

production of a wide variety of high complexity products, which we refer to as

“low-volume,

high-mix,”

we also have the capability to accommodate high-volume production. Based on our experience with, and positive feedback we have received from our customers, we believe we are a global leader in providing these services to the optical communications, industrial lasers and automotive markets.

Our customer base includes companies in complex industries that require advanced precision manufacturing capabilities such as optical communications, industrial lasers, automotive and sensors. The products that we manufacture for our OEM customers include selective switching products; tunable transponders and transceivers; active optical cables; solid state, diode-pumped, gas and fiber lasers; and sensors. In many cases, we are the sole outsourced manufacturing partner used by our customers for the products that we produce for them.

We also design and fabricate application-specific crystals, lenses, prisms, mirrors, laser components, and substrates (collectively referred to as “customized optics”) and other custom and standard borosilicate, clear fused quartz, and synthetic fused silica glass products (collectively referred to as “customized glass”). We incorporate our customized optics and glass into many of the products we manufacture for our OEM customers, and we also sell customized optics and glass in the merchant market.

Recent Events

Coronavirus

In December 2019, a strain of Coronavirus surfaced in Wuhan, China, home to numerous high-tech component suppliers, including telecommunications components, and an important transportation hub in China. As a result, there have been numerous factory closures in Wuhan and surrounding areas, and a decrease in traffic in China. As the virus spreads across China, there is uncertainty about whether factories and businesses in other parts of China will be affected. While many factories were closed for a few days because of China’s Lunar New Year holiday (LNY Holiday), the Chinese government has ordered that businesses in various areas extend the LNY Holiday. For example, the Chinese government initially ordered our Casix facility in Fuzhou, China, which manufactures custom optics components, to not resume operations until February 3, 2020, and has subsequently ordered we not resume operations in this facility until after February 9. As a result of this disruption, our revenues for the quarter ending March 27, 2020, will be negatively affected. Moreover, because of the current restrictions on travel in China, our employees may be affected and we may have labor shortages. Also, there can be no assurances the Chinese government will not further extend these closures. Some of our suppliers and customers in China have similarly been affected and currently are experiencing closures and risks of labor shortages. If these suppliers remain closed, we could have difficulty sourcing materials necessary to fulfill production requirements and meet scheduled shipments, which also would negatively affect our revenues. Even if we are able to find alternate sources for such materials, they may cost more, which could affect our profitability. With respect to our customers in China that are experiencing closures, if they are not able to accept orders or if they delay or cancel such orders, our revenues will be negatively affected. At this point in time, there is significant uncertainty relating to the potential effect of the Coronavirus on our business. Infections may become more widespread and factory closures may be extended for longer periods of time and to other parts of China, all of which would have a negative impact on our business, financial condition and operating results.

New CFO

On February 1, 2020, Toh-Seng Ng, Executive Vice President, Chief Financial Officer of the Company, notified the Company that he would retire on February 1, 2021 (the “Retirement Date”). Effective February 17, 2020, Mr. Ng will step down as Chief Financial Officer and transition to Executive Vice President, Special Projects until his Retirement Date. On February 3, 2020, the Company announced that Csaba Sverha was appointed Executive Vice President, Chief Financial Officer of the Company, effective February 17, 2020.

Revenues

We believe our ability to expand our relationships with existing customers and attract new customers is due to a number of factors, including our broad range of complex engineering and manufacturing service offerings, flexible

low-cost

manufacturing platform, process optimization capabilities, advanced supply chain management, excellent customer service, and experienced management team. Although we expect the prices we charge for our manufactured products to decrease over time (partly as a result of competitive market forces), we still believe we will be able to maintain favorable pricing for our services because of our ability to reduce cycle time, adjust our product mix by focusing on more complicated products, improve product quality and yields, and reduce material costs for the products we manufacture. We believe these capabilities have enabled us to help our OEM customers reduce their manufacturing costs while maintaining or improving the design, quality, reliability, and delivery times for their products.

Revenues by Geography

We generate revenues from three geographic regions: North America, Asia-Pacific and Europe. Revenues are attributed to a particular geographic area based on the

bill-to

location of our customers, notwithstanding that our customers may ultimately ship their products to end customers in a different geographic region. The majority of our revenues are derived from our manufacturing facilities in Asia-Pacific.

The percentage of our revenues generated from a

bill-to

location outside of North America decreased from 54.7% in the three months ended December 28, 2018 to 47.6% in the three months ended December 27, 2019 and from 53.5% in the six months ended December 28, 2018 to 48.6% in the six months ended December 27, 2019, primarily because the increase in sales to our customers in North America was higher than the increase in sales to our customers outside of North America. Based on the short and medium-term indications and forecasts from our customers, we expect that the portion of our future revenues attributable to customers in regions outside North America for the remainder of fiscal year 2020 will be in line with the portion of total revenues attributable to such customers during the six months ended December 27, 2019.

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The following table presents percentages of total revenues by geographic region:


	Three Months Ended						Six Months Ended
	December 27, 2019			December 28, 2018			December 27, 2019			December 28, 2018
North America		52.4	%		45.3	%		51.4	%		46.5	%
Asia-Pacific		33.1			41.4			31.4			40.8
Europe		14.5			13.3			17.2			12.7

		100.0	%		100.0	%		100.0	%		100.0	%

Our Contracts

We enter into supply agreements with our customers which generally have an initial term of up to three years, subject to automatic renewals for subsequent

one-year

terms unless expressly terminated. Although there are no minimum purchase requirements in our supply agreements, our customers provide us with rolling forecasts of their demand requirements. Our supply agreements generally include provisions for pricing and periodic review of pricing, consignment of our customer’s unique production equipment to us, and the sharing of benefits from cost-savings derived from our efforts. We are generally required to purchase materials, which may include long lead-time materials and materials that are subject to minimum order quantities and/or

non-cancelable

non-returnable

terms, to meet the stated demands of our customers. After procuring materials, we manufacture products for our customers based on purchase orders that contain terms regarding product quantities, delivery locations and delivery dates. Our customers generally are obligated to purchase finished goods that we have manufactured according to their demand requirements. Materials that are not consumed by our customers within a specified period of time, or are no longer required due to a product’s cancellation or

end-of-life,

are typically designated as excess or obsolete inventory under our contracts. Once materials are designated as either excess or obsolete inventory, our customers are typically required to purchase such inventory from us even if they have chosen to cancel production of the related products. The excess or obsolete inventory is shipped to the customer and revenue is recognized upon shipment.

Cost of Revenues

The key components of our cost of revenues are material costs, employee costs, and infrastructure-related costs. Material costs generally represent the majority of our cost of revenues. Several of the materials we require to manufacture products for our customers are customized for their products and often sourced from a single supplier or in some cases, our own subsidiaries. Shortages from sole-source suppliers due to yield loss, quality concerns and capacity constraints, among other factors, may increase our expenses and negatively impact our gross profit margin or total revenues in a given quarter. Material costs include scrap material. Historically, scrap rate diminishes during a product’s life cycle due to process, fixturing and test improvement and optimization.

A second significant element of our cost of revenues is employee costs, including indirect employee costs related to design, configuration and optimization of manufacturing processes for our customers, quality testing, materials testing and other engineering services; and direct costs related to our manufacturing employees. Direct employee costs include employee salaries, insurance and benefits, merit-based bonuses, recruitment, training and retention. Historically, our employee costs have increased primarily due to increases in the number of employees necessary to support our growth and, to a lesser extent, costs to recruit, train and retain employees. Our cost of revenues is significantly impacted by salary levels in Thailand, the PRC and the United Kingdom, the fluctuation of the Thai baht, Chinese Renminbi (“RMB”) and Pound Sterling (“GBP”) against our functional currency, the U.S. dollar, and our ability to retain our employees. We expect our employee costs to increase as wages continue to increase in Thailand and the PRC. Wage increases may impact our ability to sustain our competitive advantage and may reduce our profit margin. We seek to mitigate these cost increases through improvements in employee productivity, employee retention and asset utilization.

Our infrastructure costs are comprised of depreciation, utilities, facilities management and overhead costs. Most of our facility leases are long-term agreements. Our depreciation costs include buildings and fixed assets, primarily at our Pinehurst and Chonburi campuses in Thailand, and capital equipment located at each of our manufacturing locations.

We expect to incur incremental costs of revenue as a result of our planned expansion into new geographic markets, though we are not able to determine the amount of these incremental expenses.

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Selling, General and Administrative Expenses

Our SG&A expenses primarily consist of corporate employee costs for sales and marketing, general and administrative and other support personnel, including research and development expenses related to the design of customized optics and glass, travel expenses, legal and other professional fees, share-based compensation expense and other general expenses not related to cost of revenues. In fiscal year 2020, we expect our SG&A expenses will increase as a percentage of revenue compared with our fiscal year 2019 SG&A expenses.

The compensation committee of our board of directors approved a fiscal year 2020 executive incentive plan with quantitative objectives that are based solely on achieving certain revenue targets and

non-GAAP

operating margin targets for our fiscal year ending June 26, 2020. Bonuses under the fiscal year 2020 executive incentive plan are payable after the end of fiscal year 2020. In fiscal year 2019, the compensation committee of our board of directors approved a fiscal year 2019 executive incentive plan with quantitative objectives based solely on achieving certain revenue targets and

non-GAAP

gross margin targets for fiscal year 2019.

Additional Financial Disclosures

Foreign Exchange

As a result of our international operations, we are exposed to foreign exchange risk arising from various currency exposures primarily with respect to the Thai baht. Although a majority of our total revenues is denominated in U.S. dollars, a substantial portion of our payroll plus certain other operating expenses are incurred and paid in Thai baht. The exchange rate between the Thai baht and the U.S. dollar has fluctuated substantially in recent years and may continue to fluctuate substantially in the future. We report our financial results in U.S. dollars and our results of operations have been and could in the future be negatively impacted if the Thai baht appreciates against the U.S. dollar. Smaller portions of our expenses are incurred in a variety of other currencies, including RMB, GBP, Canadian dollars, Euros, and Japanese yen, the appreciation of which may also negatively impact our financial results.

In order to manage the risks arising from fluctuations in foreign currency exchange rates, we use derivative instruments. We may enter into exchange currency forward or put option contracts to manage foreign currency exposures associated with certain assets and liabilities and other forecasted foreign currency transactions and may designate these instruments as hedging instruments. The forward and put option contracts generally have maturities of up to 12 months. All foreign currency exchange contracts are recognized in the unaudited condensed consolidated balance sheets at fair value. Gain or loss on our forward and put option contracts generally offset the assets, liabilities, and transactions economically hedged.

We had foreign currency denominated assets and liabilities in Thai baht, RMB and GBP as follows:


	As of December 27, 2019						As of June 28, 2019
(amount in thousands, except percentages)	Currency		$		%		Currency		$		%
Assets
Thai baht		707,872	$	23,463		54.0		664,860	$	21,628		60.0
RMB		87,453		12,515		28.8		53,393		7,767		21.5
GBP		5,751		7,474		17.2		5,270		6,682		18.5

Total			$	43,452		100.0			$	36,077		100.0

Liabilities
Thai baht		1,862,509	$	61,734		85.9		1,961,972	$	63,825		90.0
RMB		53,890		7,712		10.8		26,373		3,836		5.4
GBP		1,841		2,392		3.3		2,598		3,294		4.6

Total			$	71,838		100.0			$	70,955		100.0

The Thai baht assets represent cash and cash equivalents, trade accounts receivable, deposits and other current assets. The Thai baht liabilities represent trade accounts payable, accrued expenses, income tax payable and other payables. We manage our exposure to fluctuations in foreign exchange rates by the use of foreign currency contracts and offsetting assets and liabilities denominated in the same currency in accordance with management’s policy. As of December 27, 2019 there was $126.0 million of foreign currency forward contracts outstanding on the Thai baht payables. As of June 28, 2019, there was $72.0 million of foreign currency forward contracts outstanding on the Thai baht payables.

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The RMB assets represent cash and cash equivalents, trade accounts receivable and other current assets. The RMB liabilities represent trade accounts payable, accrued expenses, income tax payable and other payables. As of December 27, 2019 and June 28, 2019, we did not have any derivative contracts denominated in RMB.

The GBP assets represent cash, trade accounts receivable, and other current assets. The GBP liabilities represent trade accounts payable and other payables. As of December 27, 2019 and June 28, 2019, we did not have any derivative contracts denominated in GBP.

For the six months ended December 27, 2019 and December 28, 2018, we recorded realized gain of $0.8 million and $0.3 million, respectively, related to derivatives that are not designated as hedging instruments in the unaudited condensed consolidated statements of operations and comprehensive income.

Currency Regulation and Dividend Distribution

Foreign exchange regulation in the PRC is primarily governed by the following rules:

•

Foreign Currency Administration Rules, as amended on August 5, 2008, or the Exchange Rules;

•

Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules; and

•

Notice on Perfecting Practices Concerning Foreign Exchange Settlement Regarding the Capital Contribution by Foreign-invested Enterprises, as promulgated by the State Administration of Foreign Exchange (“SAFE”), on August 29, 2008, or Circular 142.

Under the Exchange Rules, RMB is freely convertible into foreign currencies for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. However, conversion of RMB for capital account items, such as direct investments, loans, security investments and repatriation of investments, is still subject to the approval of SAFE.

Under the Administration Rules, foreign-invested enterprises may only buy, sell, or remit foreign currencies at banks authorized to conduct foreign exchange business after providing valid commercial documents and relevant supporting documents and, in the case of capital account item transactions, obtaining approval from SAFE. Capital investments by foreign-invested enterprises outside of the PRC are also subject to limitations, which include approvals by the Ministry of Commerce, SAFE and the State Development and Reform Commission.

Circular 142 regulates the conversion by a foreign-invested company of foreign currency into RMB by restricting how the converted RMB may be used. Circular 142 requires that the registered capital of a foreign-invested enterprise settled in RMB converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the registered capital of foreign-invested enterprises settled in RMB converted from foreign currencies. The use of such RMB capital may not be changed without SAFE’s approval and may not be used to repay RMB loans if the proceeds of such loans have not been used.

On January 5, 2007, SAFE promulgated the Detailed Rules for Implementing the Measures for the Administration on Individual Foreign Exchange, or the Implementation Rules. Under the Implementation Rules, PRC citizens who are granted share options by an overseas publicly-listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly-listed company, to register with SAFE and complete certain other procedures.

In addition, the General Administration of Taxation has issued circulars concerning employee share options. Under these circulars, our employees working in the PRC who exercise share options will be subject to PRC individual income tax. Our PRC subsidiary has obligations to file documents related to employee share options with relevant tax authorities and withhold individual income taxes of those employees who exercise their share options.

Furthermore, our transfer of funds to our subsidiaries in Thailand and the PRC are each subject to approval by governmental authorities in case of an increase in registered capital, or subject to registration with governmental authorities in case of a shareholder loan. These limitations on the flow of funds between our subsidiaries and us could restrict our ability to act in response to changing market conditions.

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Income Tax

Our effective tax rate is a function of the mix of tax rates in the various jurisdictions in which we do business. We are domiciled in the Cayman Islands. Under the current laws of the Cayman Islands, we are not subject to tax in the Cayman Islands on income or capital gains until March 6, 2039.

Throughout the period of our operations in Thailand, we have generally received income tax and other incentives from the Thailand Board of Investment. Preferential tax treatment from the Thai government in the form of a corporate tax exemption is currently available to us through June 2020 and June 2026 on income generated from projects to manufacture certain products at our Pinehurst campus and Chonburi campus, respectively. Such preferential tax treatment is contingent on various factors, including the export of our customers’ products out of Thailand and our agreement not to move our manufacturing facilities out of our current province in Thailand for at least 15 years from the date on which preferential tax treatment was granted (i.e., at least until June 2020 in the case of our Pinehurst campus and until June 2026 in the case of our Chonburi campus). Currently, the corporate income tax rate for our Thai subsidiary is 20%.

The Tax Cuts and Jobs Act (“Tax Reform Act”) was enacted on December 22, 2017 and provided for significant changes to U.S. tax law. Among other provisions, the Tax Reform Act reduced the U.S. corporate income tax rate to 21%, which is the current rate for our U.S. subsidiaries.

Critical Accounting Policies and Use of Estimates

We prepare our unaudited condensed consolidated financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities on the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the financial reporting period. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Because the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our unaudited condensed consolidated financial statements, as their application places the most significant demands on our management’s judgment.

Our critical accounting policies are disclosed in our Annual Report on Form

10-K

for the fiscal year ended June 28, 2019. The adoption of new accounting policies and accounting standards are disclosed in Note 2 to the unaudited condensed consolidated financial statements. There were no changes to our accounting policies other than the adoption of Leases (Topic 842) and Derivatives and Hedging (Topic 815), which resulted from Accounting Standards Codification Topic 842 (“ASC 842”) and Accounting Standards Codification Topic 815 (“ASC 815”), respectively.

We adopted ASC 842 using the modified retrospective transition approach, effective on June 29, 2019. Accordingly, our comparative financial statements as of June 28, 2019 will not be adjusted. ASC 842 also provides practical expedients for our ongoing accounting. We plan to elect the short-term lease recognition exemption for our operating leases with terms of less than 12 months, which will not require recognition of right of use assets or lease liabilities for these leases.

The most significant impact of the adoption of ASC 842 is expected to be the recognition of right of use assets and lease liabilities for the operating leases with terms of greater than 12 months, while the accounting for finance leases will remain substantially unchanged.

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Results of Operations

The following table sets forth a summary of our unaudited condensed consolidated statements of operations and comprehensive income. Note that

period-to-period

comparisons of operating results should not be relied upon as indicative of future performance.


(amount in thousands)	Three Months Ended						Six Months Ended
(amount in thousands)	December 27, 2019			December 28, 2018			December 27, 2019			December 28, 2018
Revenues	$	426,217		$	403,080		$	825,513		$	780,257
Cost of revenues		(377,059	)		(357,516	)		(730,368	)		(694,417	)

Gross profit		49,158			45,564			95,145			85,840
Selling, general and administrative expenses		(17,078	)		(12,727	)		(33,078	)		(27,164	)
Expenses related to reduction in workforce		(16	)		(319	)		(16	)		(404	)

Operating income		32,064			32,518			62,051			58,272
Interest income		1,940			1,182			4,038			2,626
Interest expense		(181	)		(1,616	)		(2,574	)		(2,250	)
Foreign exchange (loss) gain, net		(988	)		(421	)		(2,941	)		2,647
Other income, net		397			562			774			639

Income before income taxes		33,232			32,225			61,348			61,934
Income tax expense		(2,001	)		(712	)		(4,160	)		(2,571	)

Net income		31,231			31,513			57,188			59,363
Other comprehensive income, net of tax		446			93			234			180

Net comprehensive income	$	31,677		$	31,606		$	57,422		$	59,543

The following table sets forth a summary of our unaudited condensed consolidated statements of operations and comprehensive income as a percentage of total revenues for the periods indicated.


	Three Months Ended						Six Months Ended
	December 27, 2019			December 28, 2018			December 27, 2019			December 28, 2018
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenues		(88.5	)		(88.7	)		(88.5	)		(89.0	)

Gross profit		11.5			11.3			11.5			11.0
Selling, general and administrative expenses		(4.0	)		(3.2	)		(4.0	)		(3.5	)
Expenses related to reduction in workforce		—			(0.0	)		—			(0.0	)

Operating income		7.5			8.1			7.5			7.5
Interest income		0.4			0.3			0.5			0.3
Interest expense		(0.0	)		(0.4	)		(0.3	)		(0.3	)
Foreign exchange (loss) gain, net		(0.2	)		(0.1	)		(0.4	)		0.3
Other income, net		0.1			0.1			0.1			0.1

Income before income taxes		7.8			8.0			7.4			7.9
Income tax expense		(0.5	)		(0.2	)		(0.5	)		(0.3	)

Net income		7.3			7.8			6.9			7.6
Other comprehensive income, net of tax		0.1			0.0			0.0			0.0

Net comprehensive income		7.4	%		7.8	%		6.9	%		7.6	%

The following table sets forth our revenues by end market for the periods indicated.


	Three Months Ended				Six Months Ended
(amount in thousands)	December 27, 2019		December 28, 2018		December 27, 2019		December 28, 2018
Optical communications	$	322,068	$	305,547	$	624,447	$	586,315
Lasers, sensors and other		104,149		97,533		201,066		193,942

Total	$	426,217	$	403,080	$	825,513	$	780,257

We operate and internally manage a single operating segment. As such, discrete information with respect to separate product lines and segments is not accumulated.

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Comparison of Three and Six Months Ended December 27, 2019 with Three and Six Months Ended December 28, 2018

Total revenues

Our total revenues increased by $23.1 million, or 5.7%, to $426.2 million for the three months ended December 27, 2019, compared with $403.1 million for the three months ended December 28, 2018. This increase was primarily due to an increase in our customers’ demand for both optical and

non-optical

communications manufacturing services during the three months ended December 27, 2019. Revenues from optical and

non-optical

communications products increased by $16.5 million and $6.6 million, or 5.4% and 6.8%, respectively, for the three months ended December 27, 2019.

Our total revenues increased by $45.3 million, or 5.8%, to $825.5 million for the six months ended December 27, 2019, compared with $780.3 million for the six months ended December 28, 2018. This increase was primarily due to an increase in our customers’ demand for both optical and

non-optical

communications manufacturing services during the six months ended December 27, 2019. Revenues from optical and

non-optical

communications products increased by $38.1 million and $7.1 million, or 6.5% and 3.7%, respectively, for the six months ended December 27, 2019.

Cost of revenues

Our cost of revenues increased by $19.5 million, or 5.5%, to $377.1 million, or 88.5% of total revenues, for the three months ended December 27, 2019, compared with $357.5 million, or 88.7% of total revenues, for the three months ended December 28, 2018. This increase in cost of revenues on an absolute dollar basis was in line with the increase in sales volume.

Our cost of revenues increased by $36.0 million, or 5.2%, to $730.4 million, or 88.5% of total revenues, for the six months ended December 27, 2019, compared with $694.4 million, or 89.0% of total revenues, for the six months ended December 28, 2018. This increase in cost of revenues on an absolute dollar basis was in line with the increase in sales volume.

Gross profit

Our gross profit increased by $3.6 million, or 7.9%, to $49.2 million, or 11.5% of total revenues, for the three months ended December 27, 2019, compared with $45.6 million, or 11.3% of total revenues, for the three months ended December 28, 2018. The increase was primarily due to an increase in revenues and effective cost controls.

Our gross profit increased by $9.3 million, or 10.8%, to $95.1 million, or 11.5% of total revenues, for the six months ended December 27, 2019, compared with $85.8 million, or 11.0% of total revenues, for the six months ended December 28, 2018. The increase was primarily due to an increase in revenues and effective cost controls.

SG&A expenses

Our SG&A expenses increased by $4.4 million, or 34.3%, to $17.1 million, or 4.0% of total revenues, for the three months ended December 27, 2019, compared with $12.7 million, or 3.2% of total revenues, for the three months ended December 28, 2018. The increase was primarily due to (1) an increase in share-based compensation expenses of $1.9 million; (2) an increase in executive and management expenses of $1.2 million; (3) an increase in severance liabilities of $0.3 million; and (4) an increase in new business

start-up

costs of $0.5 million.

Our SG&A expenses increased by $5.9 million, or 21.8%, to $33.1 million, or 4.0% of total revenues, for the six months ended December 27, 2019, compared with $27.2 million, or 3.5% of total revenues, for the six months ended December 28, 2018. The increase was primarily due to (1) an increase in share-based compensation expenses of $3.1 million; (2) an increase in executive and management expenses of $1.8 million; (3) an increase in severance liabilities of $0.6 million; and (4) an increase in new business

start-up

costs of $0.5 million.

Operating income.

Our operating income decreased by $0.5 million to $32.1 million, or 7.5% of total revenues, for the three months ended December 27, 2019, compared with $32.5 million, or 8.1% of total revenues, for the three months ended December 28, 2018. The decrease was primarily due to an increase in SG&A expenses.

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Our operating income increased by $3.8 million to $62.1 million, or 7.5% of total revenues, for the six months ended December 27, 2019, compared with $58.3 million, or 7.5% of total revenues, for the six months ended December 28, 2018. The increase was primarily due to an increase in revenues.

Interest income

Our interest income increased by $0.8 million, or 64.1%, to $1.9 million, or 0.5% of total revenues, for the three months ended December 27, 2019, compared with $1.2 million, or 0.3% of total revenues, for the three months ended December 28, 2018. The increase was primarily due to the higher weighted average interest rate and an increase in the average balance of our outstanding cash compared to the same period in the previous year.

Our interest income increased by $1.4 million, or 53.8%, to $4.0 million, or 0.5% of total revenues, for the six months ended December 27, 2019, compared with $2.6 million, or 0.3% of total revenues, for the six months ended December 28, 2018. The increase was primarily due to the higher weighted average interest rate and an increase in the average balance of our outstanding cash compared to the same period in the previous year.

Interest expense

Our interest expense decreased by $1.4 million to $0.2 million for the three months ended December 27, 2019, compared with $1.6 million for the three months ended December 28, 2018. The decrease was due to the implementation of cash flow hedge on interest rate swaps at September 27, 2019 which resulted in (1) the reduction of interest expense of $0.9 million from the recognition of unrealized loss from mark-to-market of interest rate swaps in other comprehensive income instead of in interest expense; and (2) the amortization of the fair value of interest rate swaps as of hedge inception date of $0.4 million during the three months ended December 27, 2019 in relation to applying hedge accounting which results in the decrease in interest expense.

Our interest expense increased by $0.3 million to $2.6 million for the six months ended December 27, 2019, compared with $2.3 million for the six months ended December 28, 2018. The increase was primarily due to an unrealized loss from mark-to-market of interest rate swaps of $1.7 million for the three months ended September 27, 2019, before applying cash flow hedge, as compared to an unrealized loss of $0.8 million for the six months ended December 28, 2018; offset by the amortization of the fair value of interest rate swaps as of hedge inception date of $0.4 million during the three months ended December 27, 2019 in relation to applying hedge accounting which results in the decrease in interest expense.

Foreign exchange gain (loss), net.

We recorded foreign exchange loss, net of $1.0 million for the three months ended December 27, 2019, compared with $0.4 million loss for the three months ended December 28, 2018. During the three months ended December 27, 2019, foreign exchange loss mainly came from realized loss from payments and receipts of $1.5 million, compared to the three months ended December 28, 2018, foreign exchange loss mainly came from unrealized loss from revaluation of outstanding Thai Baht assets and liabilities of $0.8 million.

We recorded foreign exchange loss, net of $2.9 million for the six months ended December 27, 2019, compared with $2.6 million gain for the six months ended December 28, 2018. During the six months ended December 27, 2019, foreign exchange loss mainly came from unrealized loss of $1.9 million from

mark-to-market

of forward contracts and realized loss from payments and receipts of $1.0 million, compared to the six months ended December 28, 2018, foreign exchange gain mainly came from unrealized gain of $2.6 million from

mark-to-market

of forward contracts and realized gain from payments and receipts of $1.5 million.

Income before income taxes

We recorded income before income taxes of $33.2 million and $61.3 million for the three and six months ended December 27, 2019, respectively, compared with $32.2 million and $61.9 million for the three and six months ended December 28, 2018, respectively.

Income tax expense.

Our provision for income tax reflects an effective tax rate of 4.9% and 4.2% for the three months ended December 27, 2019 and December 28, 2018, respectively. The increase was primarily due to the fact that we had higher income subject to tax during the three months ended December 27, 2019 as compared to the same period in fiscal year 2019.

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Our provision for income tax reflects an effective tax rate of 5.0% and 5.1% for the six months ended December 27, 2019 and December 28, 2018, respectively. The decrease was primarily due to the fact that we had lower income subject to tax during the six months ended December 27, 2019 as compared to the same period in fiscal year 2019.

Net income

We recorded net income of $31.2 million, or 7.3% of total revenues, for the three months ended December 27, 2019, compared with $31.5 million, or 7.8% of total revenues, for the three months ended December 28, 2018. The decrease was primarily due to (1) a net increase in SG&A expenses of $4.4 million; (2) an increase in income tax expenses of $1.3 million due to the valuation allowance for deferred tax assets; and (3) a net increase in foreign exchange loss of $0.6 million; partially offset by (1) an increase in gross profit of $3.6 million due to increased revenues and effective cost control; (2) a net change in interest income and expense of $2.2 million; and (3) a decrease in expenses related to reduction in workforce of $0.3 million.

We recorded net income of $57.2 million, or 6.9% of total revenues, for the six months ended December 27, 2019, compared with $59.4 million, or 7.6% of total revenues, for the six months ended December 28, 2018. The decrease was primarily due to (1) a net increase in SG&A expenses of $5.9 million; (2) a net change in foreign exchange gain (loss) of $5.6 million; and (3) an increase in income tax expenses of $1.6 million primarily due to the valuation allowance for deferred tax assets; partially offset by (1) an increase in gross profit of $9.3 million due to increased revenues and effective cost control; (2) a net change in interest income and expense of $1.1 million; and (3) a decrease in expenses related to reduction in workforce of $0.4 million.

Other comprehensive income.

We recorded other comprehensive income of $0.4 million, or 0.1% of total revenues, for the three months ended December 27, 2019, compared with other comprehensive income of $93 thousand, or 0.0% of total revenues, for the three months ended December 28, 2018.

We recorded other comprehensive income of $0.2 million, or 0.0% of total revenues, for the six months ended December 27, 2019, compared with other comprehensive income of $0.2 million, or 0.0% of total revenues, for the six months ended December 28, 2018.

Liquidity and Capital Resources

Cash Flows and Working Capital

We primarily finance our operations through cash flow from operations. As of December 27, 2019 and December 28, 2018, we had cash, cash equivalents, and short-term investments of $442.8 million and $382.5 million, respectively, and outstanding debt of $57.9 million and $63.4 million, respectively.

Our cash and cash equivalents, which primarily consist of cash on hand, demand deposits, and liquid investments with original maturities of three months or less, are placed with banks and other financial institutions. The weighted-average interest rate on our cash and cash equivalents for each of the three and six months ended December 27, 2019 was 2.0% and for the three and six months ended December 28, 2018 was 1.4% and 1.6%, respectively.

Our cash investments are made in accordance with an investment policy approved by the audit committee of our board of directors. In general, our investment policy requires that securities purchased be rated A1,

P-1,

F1 or better. No security may have an effective maturity that exceeds three years. Our investments in fixed income securities are primarily classified as

available-for-sale

and are recorded at fair value. The cost of securities sold is based on the specific identification method. Unrealized gains and losses on these securities are recorded as other comprehensive income (loss) and are reported as a separate component of shareholders’ equity.

During the six months ended December 27, 2019, we paid off an existing term loan of $60.9 million under our previous Bank of America Facility Agreement, our subsidiaries in Thailand drew down a new term loan of $60.9 million under a new Credit Facility Agreement with the Bank of Ayudhya Public Company Limited and we repaid $3.0 million of the new term loan. As a result, as of December 27, 2019, we had a long-term borrowing of $57.9 million under our new Credit Facility Agreement. (See Note 14 for further details.) We anticipate that our internally generated working capital, along with our cash and cash equivalents will be adequate to repay these obligations. To better manage our cash on hand, we held short-term investments of $222.8 million as of December 27, 2019.

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We believe that our current cash and cash equivalents, marketable securities, cash flow from operations, and funds available through our credit facility will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our ability to sustain our working capital position is subject to a number of risks that we discuss in Part II, Item 1A of this Quarterly Report on Form

10-Q.

We also believe that our current manufacturing capacity is sufficient to meet our anticipated production requirements for at least the next few quarters.

The following table shows our cash flows for the periods indicated:


	Six Months Ended
(amount in thousands)	December 27, 2019			December 28, 2018
Net cash provided by operating activities	$	52,610		$	69,298
Net cash (used in) provided by investing activities	$	(5,731	)	$	13,141
Net cash used in financing activities	$	(7,766	)	$	(13,649	)
Net increase in cash, cash equivalents and restricted cash	$	39,113		$	68,790

Operating Activities

Net cash provided by operating activities decreased by $16.7 million, or 24.1%, to $52.6 million for the six months ended December 27, 2019, compared with net cash provided by operating activities of $69.3 million for the six months ended December 28, 2018. This decrease was primarily due to (1) an increase of $52.1 million in payments to trade accounts payable; and (2) a decrease in accounts receivable of $10.6 million. These increases were offset by (1) an increase of $28.1 million in inventory; (2) an increase in unrealized loss on exchange rate and fair value of derivative instruments of $7.0 million; (3) an increase of $5.3 million in other current assets and

non-current

assets; and (4) an increase in contract assets of $4.8 million.

Investing Activities

Net cash used in investing activities increased by $18.8 million, or 143.6%, to $5.7 million for the six months ended December 27, 2019, compared with net cash provided by investing activities of $13.1 million for the six months ended December 28, 2018. This increase was primarily due to (1) funds provided to our customer of $24.3 million to support the customer’s transfer of certain manufacturing operations from Berlin, German to the Company’s facilities in Thailand, which the customer has agreed to repay by September 30, 2020; and (2) an increase in investments in property, plant and equipment and intangibles of $6.2 million, offset by net cash received from short-term investments of $10.5 million.

Financing Activities

Net cash used in financing activities decreased by $5.8 million, or 43.1%, to $7.8 million for the six months ended December 27, 2019, compared with net cash used in financing activities of $13.6 million for the six months ended December 28, 2018. This decrease was primarily due to (1) a decrease in withholding tax related to net share settlement of restricted share units of $4.7 million; and (2) the release of restricted cash in connection with business acquisition of $3.5 million. These decreases were offset by an increase of $2.3 million in repayments of loans from bank.

Off-Balance

Sheet Commitments and Arrangements

As of December 27, 2019, we had two outstanding standby letters of credit in the aggregate amount of 6.2 million Euros, related to our support of a customer’s transfer of certain manufacturing operations from Berlin, Germany to our facilities in Thailand. As of December 27, 2019, the standby letters of credit were backed by cash collateral of in the aggregate amount of $7.7 million.

Recent Accounting Pronouncements

See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements for recent accounting pronouncements that could have an effect on us.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We had cash, cash equivalents, and short-term investments totaling $442.8 million and $437.3 million as of December 27, 2019 and June 28, 2019, respectively. We have interest rate risk exposure relating to the interest income generated by excess cash invested in highly liquid investments with maturities of three months or less from the original dates of purchase. The cash, cash equivalents, and short-term investments are held for working capital purposes. We have not used derivative financial instruments in our investment portfolio. We have not been exposed nor do we anticipate being exposed to material risks due to changes in market interest rates. Declines in interest rates, however, will reduce future investment income. If overall interest rates had declined by 10 basis points during the six months ended December 27, 2019 and December 28, 2018, our interest income would have decreased by approximately $0.2 million in each of the respective periods, assuming consistent investment levels.

We also have interest rate risk exposure in movements in interest rates associated with our interest bearing liabilities. The interest bearing liabilities are denominated in U.S. dollars and the interest expense is based on the London Inter-Bank Offered Rate (“LIBOR”), plus an additional margin, depending on the lending institution. If the LIBOR had increased by 100 basis points during the six months ended December 27, 2019 and December 28, 2018, our interest expense would have increased by approximately $0.1 million and $0.2 million, respectively, assuming consistent borrowing levels.

We therefore entered into interest rate swap agreements (the “Swap Agreements”) to manage this risk and increase the profile of the Company’s debt obligation. The terms of the Swap Agreements allow the Company to effectively convert the floating interest rate to a fixed interest rate. This locks the variable in interest expenses associated with our floating rate borrowings and results in fixed interest expenses which is unsusceptible from market rate increase. We designated the Swap Agreements as a cash flow hedge, and they qualify for hedge accounting because the hedges are highly effective. 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 outstanding interest rate swaps will be recorded in accumulated other comprehensive income in the unaudited condensed consolidated balance sheets, with subsequent reclassification to interest expense when settled.

We maintain an investment portfolio in a variety of financial instruments, including, but not limited to, U.S. government and agency bonds, corporate obligations, money market funds, asset-backed securities, and other investment-grade securities. The majority of these investments pay a fixed rate of interest. The securities in the investment portfolio are subject to market price risk due to changes in interest rates, perceived issuer creditworthiness, marketability, and other factors. These investments are generally classified as

available-for-sale

and, consequently, are recorded on our unaudited condensed consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of shareholders’ equity.

Investments in both fixed-rate and floating-rate interest earning instruments carry a degree of interest rate risk. The fair market values of our fixed-rate securities decline if interest rates rise, while floating-rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may be less than we expect because of changes in interest rates or we may suffer losses in principal if forced to sell securities that have experienced a decline in market value because of changes in interest rates.

Foreign Currency Risk

As a result of our foreign operations, we have significant expenses, assets and liabilities that are denominated in foreign currencies. Substantially all of our employees and most of our facilities are located in Thailand, the PRC and the United Kingdom. Therefore, a substantial portion of our payroll as well as certain other operating expenses are paid in Thai baht, RMB and GBP. The significant majority of our revenues are denominated in U.S. dollars because our customer contracts generally provide that our customers will pay us in U.S. dollars.

As a consequence, our gross profit margins, operating results, profitability and cash flows are adversely impacted when the dollar depreciates relative to the Thai baht, the GBP or the RMB. We have a particularly significant currency rate exposure to changes in the exchange rate between the Thai baht, the GBP, the RMB and the U.S. dollar. We must translate foreign currency-denominated results of operations, assets and liabilities for our foreign subsidiaries to U.S. dollars in our unaudited condensed consolidated financial statements. Consequently, increases and decreases in the value of the U.S. dollar compared with such foreign currencies will affect our reported results of operations and the value of our assets and liabilities on our unaudited condensed consolidated balance sheets, even if our results of operations or the value of those assets and liabilities has not changed in its original currency. These transactions could significantly affect the comparability of our results between financial periods or result in significant changes to the carrying value of our assets, liabilities and shareholders’ equity.

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We attempt to hedge against these exchange rate risks by entering into derivative instruments that are typically one to eighteen months in duration, leaving us exposed to longer term changes in exchange rates. We recorded unrealized loss of $1.9 million and unrealized gain of $2.6 million related to derivatives that are not designated as hedging instruments, for the six months ended December 27, 2019 and December 28, 2018, respectively. As foreign currency exchange rates fluctuate relative to the U.S. dollar, we expect to incur foreign currency translation adjustments and may incur foreign currency exchange losses. For example, a 10% weakening in the U.S. dollar against the Thai baht, the RMB and the GBP would have resulted in a decrease in our net dollar position of approximately $3.1 million and $0.4 million as of December 27, 2019 and June 28, 2019, respectively. We cannot give any assurance as to the effect that future changes in foreign currency rates will have on our unaudited condensed consolidated financial position, operating results or cash flows.

Credit Risk

Credit risk refers to our exposures to financial institutions, suppliers and customers that have in the past and may in the future experience financial difficulty, particularly in light of recent conditions in the credit markets and the global economy. As of December 27, 2019, our cash and cash equivalents were held in deposits and highly liquid investment products with maturities of three months or less with banks and other financial institutions having credit ratings of A minus or above. Our short-term investments as of December 27, 2019 are held in various financial institutions with a maturity limit not to exceed three years, and all securities are rated A1,

P-1,

F1 or better. We continue to monitor our surplus cash and consider investment in corporate and U.S. government debt as well as certain available-for-sale securities in accordance with our investment policy. We generally monitor the financial performance of our suppliers and customers, as well as other factors that may affect their access to capital and liquidity. Presently, we believe that we will not incur material losses due to our exposures to such credit risk.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule

13a-15(e)

and

15d-15(e)

under the Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form

10-Q.

Based on that evaluation, our chief executive officer and chief financial officer concluded that as of the end of the period covered by this Quarterly Report on Form

10-Q,

our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that the information required to be disclosed by us in such reports is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Management’s assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended December 27, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting other than those related to adoption of Leases (Topic 842) that we adopted on June 29, 2019.

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PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims arising in the ordinary course of our business. There are currently no material claims or actions pending or threatened against us.

ITEM 1A. RISK FACTORS

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the following risks, as well as the other information contained in this Quarterly Report on Form

10-Q,

including our unaudited condensed consolidated financial statements and the related notes, before investing in our ordinary shares. The risks and uncertainties described below are not the only ones that we may face. Additional risks and uncertainties of which we are unaware, or that we currently deem immaterial, also may become important factors that affect us or our ordinary shares. If any of the following risks actually occur, they may harm our business, financial condition and operating results. In this event, the market price of our ordinary shares could decline and you could lose some or all of your investment.

Risks Related to Our Business

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.

We have depended, and will continue to depend, upon a small number of customers for a significant percentage of our total revenues. During each of the three months ended December 27, 2019 and December 28, 2018, we had one customer that accounted for 15.3% and 18.6%, respectively, of our total revenues. During each of the six months ended December 27, 2019 and December 28, 2018, we had one customer that accounted for 16.4% and 18.1%, respectively, of our total revenues. Dependence on a small number of customers means that a reduction in orders from, a loss of, or other adverse actions by any one of these customers would reduce our revenues and could have a material adverse effect on our business, financial condition and operating results.

Further, our customer concentration increases the concentration of our accounts receivable and our exposure to payment default by any of our key customers. Many of our existing and potential customers have substantial debt burdens, have experienced financial distress or have static or declining revenues, all of which may be exacerbated by adverse conditions in the credit markets, continual uncertainty in global economies, the impact of the U.S.-China trade dispute, and the impact of Brexit. Certain of our customers have gone out of business, declared bankruptcy, been acquired, or announced their withdrawal from segments of the optics market. We generate significant accounts payable and inventory for the services that we provide to our customers, which could expose us to substantial and potentially unrecoverable costs if we do not receive payment from our customers.

Our reliance on a small number of customers gives our customers substantial purchasing power and leverage in negotiating contracts with us. In addition, although we enter into master supply agreements with our customers, the level of business to be transacted under those agreements is not guaranteed. Instead, we are awarded business under those agreements on a

project-by-project

basis. Some of our customers have at times significantly reduced or delayed the volume of manufacturing services that they order from us. If we are unable to maintain our relationships with our existing significant customers, our business, financial condition and operating results could be harmed.

Consolidation in the markets we serve could harm our business, financial condition and operating results.

Consolidation in the markets we serve has resulted in a reduction in the number of potential customers for our services. For example,

II-VI

Incorporated completed its acquisition of Finisar Corporation in September 2019, Cisco entered into an agreement in July 2019 to acquire Acacia Communications, and Lumentum Holdings Inc. completed its acquisition of Oclaro, Inc. in December 2018. In some cases, consolidation among our customers has led to a reduction in demand for our services as customers acquired the capacity to manufacture products

in-house.

Consolidation among our customers and their customers will continue to adversely affect our business, financial condition and operating results in several ways. Consolidation among our customers and their customers may result in a smaller number of large customers whose size and purchasing power give them increased leverage that may result in,

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among other things, decreases in our average selling prices. In addition to pricing pressures, this consolidation may also reduce overall demand for our manufacturing services if customers obtain new capacity to manufacture products

in-house

or discontinue duplicate or competing product lines in order to streamline operations. If demand for our manufacturing services decreases, our business, financial condition and operating results could be harmed.

If the optical communications market does not expand as we expect, our business may not grow as fast as we expect, which could adversely impact our business, financial condition and operating results.

Revenues from the optical communications end market represented 75.6% and 75.1% of our total revenues for the six months ended December 27, 2019 and December 28, 2018, respectively. Our future success as a provider of precision optical, electro-mechanical and electronic manufacturing services for the optical communications market depends on the continued growth of the optics industry and, in particular, the continued expansion of global information networks, particularly those directly or indirectly dependent upon a fiber optic infrastructure. As part of that growth, we anticipate that demand for voice, video, and other data services delivered over high-speed connections (both wired and wireless) will continue to increase. Without network and bandwidth growth, the need for enhanced communications products would be jeopardized. Currently, demand for network services and for high-speed broadband access, in particular, is increasing but growth may be limited by several factors, including, among others: (1) relative strength or weakness of the global economy or certain countries or regions, (2) an uncertain regulatory environment, and (3) uncertainty regarding long-term sustainable business models as multiple industries, such as the cable, traditional telecommunications, wireless and satellite industries, offer competing content delivery solutions. The optical communications market also has experienced periods of overcapacity, some of which have occurred even during periods of relatively high network usage and bandwidth demands. If the factors described above were to slow, stop or reverse the expansion in the optical communications market, our business, financial condition and operating results would be negatively affected.

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.

Our quarterly revenues, gross profit margins, and operating results have fluctuated significantly and may continue to fluctuate significantly in the future. For example, any of the risks described in this “Risk Factors” section and, in particular, the following factors, could cause our quarterly and annual revenues, gross profit margins, and operating results to fluctuate from period to period:

•

our ability to acquire new customers and retain our existing customers by delivering superior quality and customer service;

•

the cyclicality of the optical communications market, as well as the industrial lasers, medical and sensors markets;

•

competition;

•

our ability to achieve favorable pricing for our services;

•

the effect of fluctuations in foreign currency exchange rates;

•

our ability to manage our headcount and other costs; and

•

changes in the relative mix in our revenues.

Therefore, we believe that

quarter-to-quarter

comparisons of our operating results may not be useful in predicting our future operating results. You should not rely on our results for one quarter as any indication of our future performance. Quarterly variations in our operations could result in significant volatility in the market price of our ordinary shares.

If we are unable to continue diversifying our precision optical and electro-mechanical manufacturing services across other markets within the optics industry, such as the semiconductor processing, biotechnology, metrology and material processing markets, or if these markets do not grow as fast as we expect, our business may not grow as fast as we expect, which could adversely impact our business, financial condition and operating results.

We intend to continue diversifying across other markets within the optics industry, such as the semiconductor processing, biotechnology, metrology, and material processing markets, to reduce our dependence on the optical communications market and to grow our business. Currently, the optical communications market contributes the significant majority of our revenues. There can be no assurance that our efforts to further expand and diversify into other markets

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within the optics industry will prove successful or that these markets will continue to grow as fast as we expect. In the event that the opportunities presented by these markets prove to be less than anticipated, if we are less successful than expected in diversifying into these markets, or if our margins in these markets prove to be less than expected, our growth may slow or stall, and we may incur costs that are not offset by revenues in these markets, all of which could harm our business, financial condition and operating results.

We face significant competition in our business. If we are unable to compete successfully against our current and future competitors, our business, financial condition and operating results could be harmed.

Our current and prospective customers tend to evaluate our capabilities against the merits of their internal manufacturing as well as the capabilities of other third-party manufacturers. We believe the internal manufacturing capabilities of current and prospective customers are our primary competition. This competition is particularly strong when our customers have excess manufacturing capacity, as was the case when the markets that we serve experienced a significant downturn in 2008 and 2009 that resulted in underutilized capacity. Should our existing and potential customers have excess manufacturing capacity at their facilities, it could adversely affect our business. In addition, as a result of the 2011 flooding in Thailand, some of our customers began manufacturing products internally or using other third-party manufacturers that were not affected by the flooding. If our customers choose to manufacture products internally rather than to outsource production to us, or choose to outsource to a third-party manufacturer, our business, financial condition and operating results could be harmed.

Competitors in the market for optical manufacturing services include Benchmark Electronics, Inc., Celestica Inc.,

Sanmina-SCI

Corporation, Jabil Circuit, Inc., and Venture Corporation Limited. Our customized optics and glass operations face competition from companies such as Browave Corporation, Fujian Castech Crystals, Inc., Photop Technologies, Inc., and Research Electro-Optic, Inc. Our UK competitors for printed circuit board assemblies include STI Limited and Axiom Manufacturing Services Limited. Other existing contract manufacturing companies, original design manufacturers or outsourced semiconductor assembly and test companies could also enter our target markets. In addition, we may face more competitors as we attempt to penetrate new markets.

Many of our customers and potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater resources than we have. These advantages may allow them to devote greater resources than we can to the development and promotion of service offerings that are similar or superior to our service offerings. These competitors may also engage in more extensive research and development, undertake more

far-reaching

marketing campaigns, adopt more aggressive pricing policies or offer services that achieve greater market acceptance than ours. These competitors may also compete with us by making more attractive offers to our existing and potential employees, suppliers, and strategic partners. Further, consolidation in the optics industry could lead to larger and more geographically diverse competitors. New and increased competition could result in price reductions for our services, reduced gross profit margins or loss of market share. We may not be able to compete successfully against our current and future competitors, and the competitive pressures we face may harm our business, financial condition and operating results.

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.

We do not typically obtain firm purchase orders or commitments from our customers that extend beyond 13 weeks. While we work closely with our customers to develop forecasts for periods of up to one year, these forecasts are not binding and may be unreliable. Customers may cancel their orders, change production quantities from forecasted volumes or delay production for a number of reasons beyond our control. Any material delay, cancellation or reduction of orders could cause our revenues to decline significantly and could cause us to hold excess materials. Many of our costs and operating expenses are fixed. As a result, a reduction in customer demand could decrease our gross profit and harm our business, financial condition and operating results.

In addition, we make significant decisions, including production schedules, material procurement commitments, personnel needs and other resource requirements, based on our estimate of our customers’ requirements. The short-term nature of our customers’ commitments and the possibility of rapid changes in demand for their products reduce our ability to accurately estimate the future requirements of our customers. Inability to forecast the level of customer orders with certainty makes it difficult to allocate resources to specific customers, order appropriate levels of materials and maximize the use of our manufacturing capacity. This could also lead to an inability to meet a spike in production demand, all of which could harm our business, financial condition and operating results.

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Our exposure to financially troubled customers or suppliers could harm our business, financial condition and operating results.

We provide manufacturing services to companies, and rely on suppliers, that have in the past and may in the future experience financial difficulty, particularly in light of uncertainty in the credit markets and the overall economy that affected access to capital and liquidity. As a result, we devote significant resources to monitor receivables and inventory balances with certain of our customers. If our customers experience financial difficulty, we could have difficulty recovering amounts owed to us from these customers, or demand for our services from these customers could decline. For example, in July 2014, one of our customers filed for bankruptcy protection under the Local Trade Court in France; although the bankruptcy of this customer did not have a significant effect on our consolidated financial statements, the same may not be the case if a significant customer were to file for bankruptcy protection in the future. If our suppliers experience financial difficulty, we could have trouble sourcing materials necessary to fulfill production requirements and meet scheduled shipments. Any such financial difficulty could adversely affect our operating results and financial condition by resulting in a reduction in our revenues, a charge for inventory write-offs, a provision for doubtful accounts, and larger working capital requirements due to increased days in inventory and days in accounts receivable.

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.

Volatility in the functional and

non-functional

currencies of our entities and the U.S. dollar could seriously harm our business, financial condition, and operating results. The primary impact of currency exchange fluctuations is on our cash, receivables, and payables of our operating entities. We may experience significant unexpected gain or losses from fluctuations in exchange rates. For example, in the three months ended December 27, 2019, we experienced a $1.0 million foreign exchange loss, which negatively affected our net income per share by $0.03.

Our customer contracts generally require that our customers pay us in U.S. dollars. However, the majority of our payroll and other operating expenses are paid in Thai baht. As a result of these arrangements, we have significant exposure to changes in the exchange rate between the Thai baht and the U.S. dollar, and our operating results are adversely impacted when the U.S. dollar depreciates relative to the Thai baht and other currencies. We have experienced such depreciation in the U.S. dollar as compared with the Thai baht, and our results have been adversely impacted by this fluctuation in exchange rates. As of December 27, 2019, the U.S. dollar had depreciated approximately 7.7% against the Thai baht since December 29, 2017. Further, while we attempt to hedge against certain exchange rate risks, we typically enter into hedging contracts with maturities of up to 12 months, leaving us exposed to longer term changes in exchange rates.

Also, we have significant exposure to changes in the exchange rate between the Chinese Renminbi (“RMB”) and pound sterling (“GBP”) and the U.S. dollar. The expenses of our subsidiaries located in the PRC and the United Kingdom are denominated in RMB and GBP, respectively. Currently, RMB are convertible in connection with trade- and service-related foreign exchange transactions, foreign debt service, and payment of dividends. The PRC government may at its discretion restrict access in the future to foreign currencies for current account transactions. If this occurs, our PRC subsidiary may not be able to pay us dividends in U.S. dollars without prior approval from the PRC State Administration of Foreign Exchange. In addition, conversion of RMB for most capital account items, including direct investments, is still subject to government approval in the PRC. This restriction may limit our ability to invest the earnings of our PRC subsidiary. As of December 27, 2019, the U.S. dollar had appreciated approximately 7.4% against the RMB since December 29, 2017. There remains significant international pressure on the PRC government to adopt a substantially more liberalized currency policy. GBP are convertible in connection with trade- and service-related foreign exchange transactions and foreign debt service. As of December 27, 2019, the U.S. dollar had appreciated approximately 3.6% against the GBP since December 29, 2017. Any appreciation in the value of the RMB and GBP against the U.S. dollar could negatively impact our 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.

We rely on a single source or a limited number of suppliers for critical materials used in a significant number of the products we manufacture. We generally purchase these single or limited source materials through standard purchase orders and do not maintain long-term supply agreements with our suppliers. We generally use a rolling 12 month forecast based on anticipated product orders, customer forecasts, product order history, backlog, and warranty and service demand to determine our materials requirements. Lead times for the parts and components that we order vary significantly and depend on factors such as manufacturing cycle times, manufacturing yields, and the availability of raw materials used to produce the parts or components. Historically, we have experienced supply shortages resulting from various causes, including reduced yields by our suppliers, which prevented us from manufacturing products for our customers in a timely manner.

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Our revenues, profitability and customer relations could be harmed by a stoppage or delay of supply, a substitution of more expensive or less reliable parts, the receipt of defective parts or contaminated materials, an increase in the price of supplies, or an inability to obtain reductions in price from our suppliers in response to competitive pressures.

We continue to undertake programs to strengthen our supply chain. Nevertheless, we are experiencing, and expect for the foreseeable future to continue to experience, strain on our supply chain, and periodic supplier problems. We have incurred, and expect to continue to incur for the foreseeable future, costs to address these problems.

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.

Managing our inventory is complex. We are generally required to procure material based upon the anticipated demand of our customers. The inaccuracy of these forecasts or estimates could result in excess supply or shortages of certain materials. Inventory that is not used or expected to be used as and when planned may become excess or obsolete. Generally, we are unable to use most of the materials purchased for one of our customers to manufacture products for any of our other customers. Additionally, we could experience reduced or delayed product shipments or incur additional inventory write-downs and cancellation charges or penalties, which would increase costs and could harm our business, financial condition and operating results. While our agreements with customers are structured to mitigate our risks related to excess or obsolete inventory, enforcement of these provisions may result in material expense, and delay in payment for inventory. If any of our significant customers becomes unable or unwilling to purchase inventory or does not agree to such contractual provisions in the future, our business, financial condition and operating results may be harmed.

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.

The vast majority of our operations, including manufacturing and customer support, are located primarily in the Asia-Pacific region. The distances between Thailand, the PRC and our customers and suppliers globally, create a number of logistical and communications challenges for us, including managing operations across multiple time zones, directing the manufacture and delivery of products across significant distances, coordinating the procurement of raw materials and their delivery to multiple locations and coordinating the activities and decisions of our management team, the members of which are based in different countries.

Our customers are located throughout the world, and our principal manufacturing facilities are located in Thailand. Total revenues from the

bill-to-location

of customers outside of North America accounted for 47.6% and 54.7% of our total revenues for the three months ended December 27, 2019 and December 28, 2018, respectively. We expect that total revenues from the

bill-to-location

of customers outside of North America will continue to account for a significant portion of our total revenues. Our customers also depend on international sales, which further exposes us to the risks associated with international operations. Conducting business outside the United States subjects us to a number of additional risks and challenges, including:

•

compliance with a variety of domestic and foreign laws and regulations, including trade regulatory requirements;

•

periodic changes in a specific country’s or region’s economic conditions, such as recession;

•

unanticipated restrictions on our ability to sell to foreign customers where sales of products and the provision of services may require export licenses or are prohibited by government action (for example, in early 2018, the U.S. Department of Commerce prohibited the export and sale of a broad category of U.S. products, as well as the provision of services, to ZTE Corporation, and in 2019, to Huawei, both of which are customers of certain of our customers);

•

fluctuations in currency exchange rates;

•

inadequate protection of intellectual property rights in some countries; and

•

potential political, legal and economic instability, foreign conflicts, and the impact of regional and global infectious illnesses in the countries in which we and our customers and suppliers are located.

Our failure to manage the risks and challenges associated with our international operations could have a material adverse effect on our business.

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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 governmental export and import controls in Thailand, the PRC, the United Kingdom and the United States that may limit our business opportunities. Various countries regulate the import of certain technologies and have enacted laws or taken actions that could limit (1) our ability to export or sell the products we manufacture and (2) our customers’ ability to export or sell products that we manufacture for them. The export of certain technologies from the United States, the United Kingdom and other nations to the PRC is barred by applicable export controls, and similar prohibitions could be extended to Thailand, thereby limiting our ability to manufacture certain products. Any change in export or import regulations or related legislation, shift in approach to the enforcement of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could limit our ability to offer our manufacturing services to existing or potential customers, which could harm our business, financial condition and operating results.

For example, in May 2019, the U.S. Commerce Department’s Bureau of Industry and Security (BIS) added Huawei and certain affiliates to the BIS Entity List. This action denied Huawei the ability to purchase products, software and technology that are subject to U.S. Export Administration Regulations (EAR). Although we do not sell directly to Huawei, some of our customers do sell to Huawei directly. To ensure compliance, some of our customers immediately suspended shipments to Huawei in order to begin assessments of the products they sold to Huawei (and its affiliates), to determine whether these products were subject to the restrictions resulting from the ban. This had an immediate impact on our customer orders in the fourth quarter of fiscal year 2019, which affected our revenue for the quarter. We expect this ban to continue to adversely affect orders from our customers for the foreseeable future.

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 result.

The U.S. Presidential Administration recently imposed tariffs on a wide-range of products and goods manufactured in China that are directly or indirectly imported into the U.S., and it is likely that the Administration will impose additional tariffs on products and goods manufactured in China. In response, various countries and economic regions have announced plans or intentions to impose retaliatory tariffs on a wide-range of products they import from the U.S. These newly imposed, announced and threatened U.S. tariffs and retaliatory tariffs could have the effect of increasing the cost of materials we use to manufacture certain products, which could result in lower margins. The tariffs could also result in disruptions to our supply chain, as suppliers struggle to fill orders from companies trying to purchase goods in bulk ahead of announced tariffs. The institution of trade tariffs both globally and between the U.S. and China specifically could also cause a decrease in the sales of our customers’ products to end users located in China, which could directly impact our revenues in the form of reduced orders. If existing tariffs are raised further or if new tariffs are imposed on additional categories of components used in our manufacturing activities, and if we are unable to pass the costs of such tariffs on to our customers, our operating results would be harmed.

Our business and operations would be adversely impacted in the event of a failure of our information technology infrastructure and/or cyber security attacks.

We rely upon the capacity, availability and security of our information technology hardware and software infrastructure. For instance, we use a combination of standard and customized software platforms to manage, record, and report all aspects of our operations and, in many instances, enable our customers to remotely access certain areas of our databases to monitor yields, inventory positions,

work-in-progress

status and vendor quality data. We are constantly expanding and updating our information technology infrastructure in response to our changing needs. Any failure to manage, expand and update our information technology infrastructure or any failure in the operation of this infrastructure could harm our business.

Despite our implementation of security measures, our systems are vulnerable to damage caused by computer viruses, natural disasters, unauthorized access and other similar disruptions. Any system failure, accident or security breach could result in disruptions to our operations. To the extent that any disruptions, cyber-attack or other security breach results in a loss or damage to our data, or inappropriate disclosure of confidential information, our business could suffer harm. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

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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 not be able to pursue many large customer orders or sustain our historical growth rates if we do not have sufficient manufacturing capacity to enable us to commit to provide customers with specified quantities of products. If our customers do not believe that we have sufficient manufacturing capacity, they may: (1) outsource all of their production to another source that they believe can fulfill all of their production requirements; (2) look to a second source for the manufacture of additional quantities of the products that we currently manufacture for them; (3) manufacture the products themselves; or (4) otherwise decide against using our services for their new products.

Most recently, we expanded our manufacturing capacity by building a new facility in Chonburi, Thailand, which was completed in March 2017. We may continue to devote significant resources to the expansion of our manufacturing capacity, and any such expansion will be expensive, will require management’s time and may disrupt our operations. In the event we are unsuccessful in our attempts to expand our manufacturing capacity, our business, financial condition and operating results could be harmed.

However, if we expand our manufacturing capacity and are unable to promptly utilize the additional space due to reduced demand for our services or an inability to win new projects, new customers or penetrate new markets, or if the optics industry does not grow as we expect, we may experience periods of excess capacity, which could harm 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.

The majority of our assets and manufacturing operations are located in Thailand. Therefore, political, social, business and economic conditions in Thailand have a significant effect on our business. In March 2019, Thailand was assessed as a medium-high political risk by AON Political Risk, a risk management, insurance and consulting firm. Any changes to tax regimes, laws, exchange controls or political action in Thailand may harm our business, financial condition and operating results.

Thailand has a history of political unrest that includes the involvement of the military as an active participant in the ruling government. In recent years, political unrest in the country has sparked political demonstrations and, in some instances, violence. In March 2019, Thailand held its first general election since the Thai military took over the government in a coup in May 2014. In June 2019, General Prayut

Chan-o-cha

was elected as Prime Minister, and in July 2019, the new Prime Minister’s nominees for cabinet ministers were appointed. Any future political instability in the Kingdom of Thailand could prevent shipments from entering or leaving the country, disrupt our ability to manufacture products in Thailand, and force us to transfer our operations to more stable, and potentially more costly, regions.

Further, the Thai government may raise the minimum wage standards for labor and could repeal certain promotional certificates that we have received or tax holidays for certain export and value added taxes that we enjoy, either preventing us from engaging in our current or anticipated activities or subjecting us to higher tax rates. A new regime could nationalize our business or otherwise seize our assets and any other future political instability could harm our business, financial condition and operating results.

We expect to continue to invest in our manufacturing operations in the 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.

We anticipate that we will continue to invest in our customized optics manufacturing facilities located in Fuzhou, China. Because these operations are located in the PRC, they are subject to greater political, legal and economic risks than the geographies in which the facilities of many of our competitors and customers are located. In particular, the political and economic climate in the PRC (both at national and regional levels) is fluid and unpredictable. In March 2019, AON Political Risk assessed the PRC as a medium political risk. A large part of the PRC’s economy is still being operated under varying degrees of control by the PRC government. By imposing industrial policies and other economic measures, such as control of foreign exchange, taxation, import and export tariffs, environmental regulations, land use rights, intellectual property and restrictions on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect influence on the development of the PRC economy. Many of the economic reforms carried out by the PRC government are unprecedented or experimental and are expected to change further. Any changes to the political, legal or economic climate in the PRC could harm our business, financial condition and operating results.

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Our PRC subsidiary is a “wholly foreign-owned enterprise” and is therefore subject to laws and regulations applicable to foreign investment in the PRC, in general, and laws and regulations applicable to wholly foreign-owned enterprises, in particular. The PRC has made significant progress in the promulgation of laws and regulations pertaining to economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, the promulgation of new laws, changes in existing laws and abrogation of local regulations by national laws may have a negative impact on our business and prospects. In addition, these laws and regulations are relatively new, and published cases are limited in volume and

non-binding.

Therefore, the interpretation and enforcement of these laws and regulations involve significant uncertainties. Laws may be changed with little or no prior notice, for political or other reasons. These uncertainties could limit the legal protections available to foreign investors. Furthermore, any litigation in the PRC may be protracted and result in substantial costs and diversion of resources and management’s attention.

Natural disasters (like the 2011 flooding in Thailand), epidemics, acts of terrorism and other political and economic developments could harm our business, financial condition and operating results.

Natural disasters, such as the 2011 flooding in Thailand, where most of our manufacturing operations are located, could severely disrupt our manufacturing operations and increase our supply chain costs. These events, over which we have little or no control, could cause a decrease in demand for our services, make it difficult or impossible for us to manufacture and deliver products and for our suppliers to deliver components allowing us to manufacture those products, require large expenditures to repair or replace our facilities, or create delays and inefficiencies in our supply chain. For example, the 2011 flooding in Thailand forced us to temporarily shut down all of our manufacturing facilities in Thailand and cease production permanently at our Chokchai facility, which adversely affected our ability to meet our customers’ demands during fiscal year 2012. In some countries in which we operate, including the PRC and Thailand, outbreaks of infectious diseases could disrupt our manufacturing operations, reduce demand for our customers’ products and increase our supply chain costs. Recently, a strain of Coronavirus has surfaced in Wuhan, China, home to numerous high-tech component suppliers, including telecommunications components, and an important transportation hub in China. As a result, there have been numerous factory closures in Wuhan and surrounding areas, and a decrease in traffic in China. As the virus spreads across China, there is uncertainty about whether factories and businesses in other parts of China will be affected. While many factories were closed for a few days because of China’s Lunar New Year holiday (LNY Holiday), the Chinese government has ordered that businesses in various areas extend the LNY Holiday. For example, the Chinese government initially ordered our Casix facility in Fuzhou, China, which manufactures custom optics components, to not resume operations until February 3, 2020, and has subsequently ordered we not resume operations in this facility until after February 9. As a result of this disruption, our revenues for the quarter ending March 27, 2020, will be negatively affected. Moreover, because of the current restrictions on travel in China, our employees may be affected and we may have labor shortages. Also, there can be no assurances the Chinese government will not further extend these closures. Some of our suppliers and customers in China have similarly been affected and currently are experiencing closures and risks of labor shortages. If these suppliers remain closed, we could have difficulty sourcing materials necessary to fulfill production requirements and meet scheduled shipments, which also would negatively affect our revenues. Even if we are able to find alternate sources for such materials, they may cost more, which could affect our profitability. With respect to our customers in China that are experiencing closures, if they are not able to accept orders or if they delay or cancel such orders, our revenues will be negatively affected. At this point in time, there is significant uncertainty relating to the potential effect of the Coronavirus on our business. Infections may become more widespread and factory closures may be extended for longer periods of time and to other parts of China, all of which would have a negative impact on our business, financial condition and operating results.

In addition, increased international political instability, evidenced by the threat or occurrence of terrorist attacks, enhanced national security measures, conflicts in the Middle East and Asia, strained international relations arising from these conflicts and the related decline in consumer confidence and economic weakness, may hinder our ability to do business. Any escalation in these events or similar future events may disrupt our operations and the operations of our customers and suppliers, and may affect the availability of materials needed for our manufacturing services. Such events may also disrupt the transportation of materials to our manufacturing facilities and finished products to our customers. These events have had, and may continue to have, an adverse impact on the U.S. and world economy in general, and customer confidence and spending in particular, which in turn could adversely affect our total revenues and operating results. The impact of these events on the volatility of the U.S. and world financial markets also could increase the volatility of the market price of our ordinary shares and may limit the capital resources available to us, our customers and our suppliers.

We are not fully insured against all potential losses. Natural disasters or other catastrophes could adversely affect our business, financial condition and operating results.

Our current property and casualty insurance covers loss or damage to our property and third-party property over which we have custody and control, as well as losses associated with business interruption, subject to specified exclusions and limitations such as coinsurance, facilities location

sub-limits

and other policy limitations and covenants. Even with insurance coverage, natural disasters or other catastrophic events, including acts of war, could cause us to suffer substantial losses in our operational capacity and could also lead to a loss of opportunity and to a potential adverse impact on our relationships with our existing customers resulting from our inability to produce products for them, for which we might not be compensated by existing insurance. This in turn could have a material adverse effect on our business, financial condition and operating results.

Unfavorable worldwide economic conditions may negatively affect our business, financial condition and operating results.

Volatility and disruption in the capital and credit markets, depressed consumer confidence, and negative global economic conditions have affected levels of business and consumer spending. Concerns about the potential default of various national bonds and debt backed by individual countries as well as the politics impacting these, could negatively impact the U.S. and global economies and adversely affect our financial results. In particular, Brexit and economic uncertainty in Europe has led to reduced demand in some of our customers’ optical communications product portfolios. Brexit could also lead to economic and legal uncertainty, including significant volatility in global stock markets and currency exchange rates, and increasingly divergent laws and regulations as the United Kingdom determines which European Union laws to replace or replicate. Any of these effects of Brexit, among others, could adversely affect our financial results.

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Uncertainty about worldwide economic conditions poses a risk as businesses may further reduce or postpone spending in response to reduced budgets, tight credit, negative financial news and declines in income or asset values, which could adversely affect our business, financial condition and operating results and increase the volatility of our share price. In addition, our ability to access capital markets may be restricted, which could have an impact on our ability to react to changing economic and business conditions and could also adversely affect 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.

Manufacturing yields depend on a number of factors, including the following:

•

the quality of input, materials and equipment;

•

the quality and feasibility of our customer’s design;

•

the repeatability and complexity of the manufacturing process;

•

the experience and quality of training of our manufacturing and engineering teams; and

•

the monitoring of the manufacturing environment.

Lower volume production due to continually changing designs generally results in lower yields. Manufacturing yields and margins can also be lower if we receive or inadvertently use defective or contaminated materials from our suppliers. In addition, our customer contracts typically provide that we will supply products at a fixed price each quarter, which assumes specific production yields and quality metrics. If we do not meet the yield assumptions and quality metrics used in calculating the price of a product, we may not be able to recover the costs associated with our failure to do so. Consequently, our operating results and profitability may be harmed.

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.

We manufacture products to our customers’ specifications, and our manufacturing processes and facilities must comply with applicable statutory and regulatory requirements. In addition, our customers’ products and the manufacturing processes that we use to produce them are often complex. As a result, products that we manufacture may at times contain manufacturing or design defects, and our manufacturing processes may be subject to errors or fail to be in compliance with applicable statutory or regulatory requirements. Additionally, not all defects are immediately detectible. The testing procedures of our customers are generally limited to the evaluation of the products that we manufacture under likely and foreseeable failure scenarios. For various reasons (including, among others, the occurrence of performance problems that are unforeseeable at the time of testing or that are detected only when products are fully deployed and operated under peak stress conditions), these products may fail to perform as expected after their initial acceptance by a customer.

We generally provide a warranty of between one to five years on the products that we manufacture for our customers. This warranty typically guarantees that products will conform to our customers’ specifications and be free from defects in workmanship. Defects in the products we manufacture, whether caused by a design, engineering, manufacturing or component failure or by deficiencies in our manufacturing processes and whether during or after the warranty period, could result in product or component failures, which may damage our business reputation, whether or not we are indemnified for such failures. We could also incur significant costs to repair or replace defective products under warranty, particularly when such failures occur in installed systems. In some instances, we may also be required to incur costs to repair or replace defective products outside of the warranty period in the event that a recurring defect is discovered in a certain percentage of a customer’s products delivered over an agreed upon period of time. We have experienced product or component failures in the past and remain exposed to such failures, as the products that we manufacture are widely deployed throughout the world in multiple environments and applications. Further, due to the difficulty in determining whether a given defect resulted from our customer’s design of the product or our manufacturing process, we may be exposed to product liability or product warranty claims arising from defects that are not our fault. In addition, if the number or type of defects exceeds certain percentage limitations contained in our contractual arrangements, we may be required to conduct extensive failure analysis,

re-qualify

for production or cease production of the specified products.

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Product liability claims may include liability for personal injury or property damage. Product warranty claims may include liability to pay for a recall, repair or replacement of a product or component. Although liability for these claims is generally assigned to our customers in our contracts, even where they have assumed liability, our customers may not, or may not have the resources to, satisfy claims for costs or liabilities arising from a defective product. Additionally, under one of our contracts, in the event the products we manufacture do not meet the

end-customer’s

testing requirements or otherwise fail, we may be required to pay penalties to our customer, including a fee during the time period that the customer or

end-customer’s

production line is not operational as a result of the failure of the products that we manufacture, all of which could harm our business, operating results and customer relations. If we engineer or manufacture a product that is found to cause any personal injury or property damage or is otherwise found to be defective, we could incur significant costs to resolve the claim. While we maintain insurance for certain product liability claims, we do not maintain insurance for any recalls and, therefore, would be required to pay any associated costs that are determined to be our responsibility. A successful product liability or product warranty claim in excess of our insurance coverage or any material claim for which insurance coverage is denied, limited, is not available or has not been obtained could harm 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 or operating results could be harmed.

As a manufacturer of products for the optics industry, we are required to meet certain certification standards, including the following: ISO9001 for Manufacturing Quality Management Systems; ISO14001 for Environmental Management Systems; TL9000 for Telecommunications Industry Quality Certification; IATF16949 for Automotive Industry Quality Certification; ISO13485 for Medical Devices Industry Quality Certification; AS9100 for Aerospace Industry Quality Certification; NADCAP (National Aerospace and Defense Contractors Accreditation Program) for Quality Assurance throughout the Aerospace and Defense Industries; and OHSAS18001 for Occupational Health and Safety Management Systems. We also maintain compliance with various additional standards imposed by the U.S. Food and Drug Administration (“FDA”) with respect to the manufacture of medical devices.

Additionally, we are required to register with the FDA and other regulatory bodies and are subject to continual review and periodic inspection for compliance with various regulations, including testing, quality control and documentation procedures. We hold the following additional certifications: ANSI ESD S20.20 for facilities and manufacturing process control, in compliance with ESD standard; Transported Asset Protection Association, or TAPA, for Logistic Security Management System; and

CSR-DIW

for Corporate Social Responsibility in Thailand. In the European Union, we are required to maintain certain ISO certifications in order to sell our precision optical, electro-mechanical and electronic manufacturing services and we must undergo periodic inspections by regulatory bodies to obtain and maintain these certifications. If any regulatory inspection reveals that we are not in compliance with applicable standards, regulators may take action against us, including issuing a warning letter, imposing fines on us, requiring a recall of the products we manufactured for our customers, or closing our manufacturing facilities. If any of these actions were to occur, it could harm our reputation as well as our business, financial condition and operating results.

If we fail to attract additional skilled employees or retain key personnel, our business, financial condition and operating results could suffer.

Our future success depends, in part, upon our ability to attract additional skilled employees and retain our current key personnel. We have identified several areas where we intend to expand our hiring, including business development, finance, human resources, operations and supply chain management. We may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure. Our future also depends on the continued contributions of our executive management team and other key management and technical personnel, each of whom would be difficult to replace. Although we have key person life insurance policies on some of our executive officers, the loss of any of our executive officers or key personnel or the inability to continue to attract qualified personnel could harm our business, financial condition and operating results.

Failure to comply with applicable environmental laws and regulations could have a material adverse effect on our business, financial condition and operating results.

The sale and manufacturing of products in certain states and countries may subject us to environmental laws and regulations. In addition, rules adopted by the U.S. Securities and Exchange Commission (“SEC”) implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 impose diligence and disclosure requirements regarding the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries in the products we manufacture for our customers. Compliance with these rules has resulted in additional cost and expense, including for due diligence to determine and verify the sources of any conflict minerals used in the products we manufacture, and may result in additional costs of remediation and other changes to processes or sources of supply as a consequence of such verification activities. These rules may also affect the sourcing and availability of minerals used in the products we manufacture, as there may be only a limited number of suppliers offering “conflict free” metals that can be used in the products we manufacture for our customers.

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Although we do not anticipate any material adverse effects based on the nature of our operations and these laws and regulations, we will need to ensure that we and, in some cases, our suppliers comply with applicable laws and regulations. If we fail to timely comply with such laws and regulations, our customers may cease doing business with us, which would have a material adverse effect on our business, financial condition and operating results. In addition, if we were found to be in violation of these laws, we could be subject to governmental fines, liability to our customers and damage to our reputation, which would also have a material adverse effect on our business, financial condition and operating results.

We are subject to the risk of increased income taxes, which could harm our business, financial condition and operating results.

We are subject to income and other taxes in Thailand, the PRC, the United Kingdom and the United States. Our effective income tax rate, provision for income taxes and future tax liability could be adversely affected by numerous factors, including the results of tax audits and examinations, income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in income tax rates, changes in the valuation of deferred tax assets and liabilities, failure to meet obligations with respect to tax exemptions, and changes in tax laws and regulations. Our U.S. federal and state tax returns remain open to examination for the tax years 2014 through 2018. In addition, tax returns that remain open to examination in Thailand, the PRC and the United Kingdom range from the tax years 2013 through 2018. The results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures may have an adverse effect on our provision for income taxes and tax liability.

We base our tax position upon the anticipated nature and conduct of our business and upon our understanding of the tax laws of the various countries in which we have assets or conduct activities. However, our tax position is subject to review and possible challenge by tax authorities and to possible changes in law, which may have retroactive effect. Fabrinet (the “Cayman Islands Parent”) is an exempted company incorporated in the Cayman Islands. We maintain manufacturing operations in Thailand, the PRC, the United Kingdom and the U.S. We cannot determine in advance the extent to which some jurisdictions may require us to pay taxes or make payments in lieu of taxes. Under the current laws of the Cayman Islands, we are not subject to tax in the Cayman Islands on income or capital gains until March 6, 2039.

Preferential tax treatment from the Thai government in the form of a corporate tax exemption is also currently available to us through June 2020 and June 2026 on income generated from projects to manufacture certain products at our Pinehurst campus and Chonburi campus, respectively. Such preferential tax treatment is contingent on various factors, including the export of our customers’ products out of Thailand and our agreement not to move our manufacturing facilities out of our current province in Thailand for at least 15 years from the date on which preferential tax treatment was granted (i.e., at least until June 2020 in the case of our Pinehurst campus and until June 2026 in the case of our Chonburi campus). We will lose this favorable tax treatment in Thailand unless we comply with these restrictions, and as a result we may delay or forego certain strategic business decisions due to these tax considerations.

There is also a risk that Thailand or another jurisdiction in which we operate may treat the Cayman Islands Parent as having a permanent establishment in such jurisdiction and subject its income to tax. If we become subject to additional taxes in any jurisdiction or if any jurisdiction begins to treat the Cayman Islands Parent as having a permanent establishment, such tax treatment could materially and adversely affect our business, financial condition and operating results.

Certain of our subsidiaries provide products and services to, and may from time to time undertake certain significant transactions with, us and our other subsidiaries in different jurisdictions. For instance, we have intercompany agreements in place that provide for our California and Singapore subsidiaries to provide administrative services for the Cayman Islands Parent, and the Cayman Islands Parent has entered into manufacturing agreements with our Thai subsidiary. In general, related party transactions and, in particular, related party financing transactions, are subject to close review by tax authorities. Moreover, several jurisdictions in which we operate have tax laws with detailed transfer pricing rules that require all transactions with

non-resident

related parties to be priced using arm’s length pricing principles and require the existence of contemporaneous documentation to support such pricing. Tax authorities in various jurisdictions could challenge the validity of our related party transfer pricing policies. Such a challenge generally involves a complex area of taxation and a significant degree of judgment by management. If any taxation authorities are successful in challenging our financing or transfer pricing policies, our income tax expense may be adversely affected and we could become subject to interest and penalty charges, which may harm our business, financial condition and operating results.

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We may encounter difficulties completing or integrating acquisitions, asset purchases and other types of transactions that we may pursue in the future, which could disrupt our business, cause dilution to our shareholders and harm our business, financial condition and operating results.

We have grown and may continue to grow our business through acquisitions, asset purchases and other types of transactions, including the transfer of products from our customers and their suppliers. Most recently, we acquired Fabrinet UK in September 2016. Acquisitions and other strategic transactions typically involve many risks, including the following:

•

the integration of the acquired assets, information systems and facilities into our business may be difficult, time-consuming and costly, and may adversely impact our profitability;

•

we may lose key employees of the acquired companies or divisions;

•

we may issue additional ordinary shares, which would dilute our current shareholders’ percentage ownership in us;

•

we may incur indebtedness to pay for the transactions;

•

we may assume liabilities, some of which may be unknown at the time of the transactions;

•

we may record goodwill and

non-amortizable

intangible assets that will be subject to impairment testing and potential periodic impairment charges;

•

we may incur amortization expenses related to certain intangible assets;

•

we may devote significant resources to transactions that may not ultimately yield anticipated benefits;

•

we may incur greater than expected expenses or lower than expected revenues;

•

we may assume obligations with respect to regulatory requirements, including environmental regulations, which may prove more burdensome than expected; or

•

we may become subject to litigation.

Acquisitions are inherently risky, and we can provide no assurance that the acquisition of Fabrinet UK or any future acquisitions will be successful or will not harm our business, financial condition and operating results.

We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our shareholders.

We anticipate that our current cash and cash equivalents, together with cash provided by operating activities and funds available through our working capital and credit facilities, will be sufficient to meet our current and anticipated needs for general corporate purposes for at least the next 12 months. We operate in a market, however, that makes our prospects difficult to evaluate. It is possible that we may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. If this occurs, we may need additional financing to execute on our current or future business strategies.

Furthermore, if we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing shareholders. If adequate additional funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our manufacturing services, hire additional technical and other personnel, or otherwise respond to competitive pressures could be significantly limited.

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.

LIBOR is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rates on loans globally. We generally use LIBOR as a reference rate to calculate interest rates under our credit facility agreement. In 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The

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U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index, the Secured Overnight Financing Rate (“SOFR”), calculated using short-term repurchase agreements backed by Treasury securities. Whether or not SOFR or another alternative reference rate attains market traction as a LIBOR replacement tool remains in question. If LIBOR ceases to exist, we will need to agree upon a replacement index with the bank under our credit facility agreement, and certain of the interest rates under such agreement may change. The new rates may not be as favorable to us as those in effect prior to any LIBOR

phase-out.

In addition, the transition process may involve, among other things, increased volatility or illiquidity in markets for instruments that currently rely on LIBOR. The transition may also result in reductions in the value of certain instruments or the effectiveness of related transactions such as hedges, increased borrowing costs, uncertainty under applicable documentation, or difficult and costly consent processes. Any such effects of the transition away from LIBOR, as well as other unforeseen effects, may result in expenses, difficulties, complications or delays in connection with future financing efforts, which could have a material adverse impact on our business, financial condition and results of operations.

Intellectual property infringement claims against our customers or us could harm our business, financial condition and operating results.

Our services involve the creation and use of intellectual property rights, which subject us to the risk of intellectual property infringement claims from third parties and claims arising from the allocation of intellectual property rights among us and our customers.

Our customers may require that we indemnify them against the risk of intellectual property infringement arising out of our manufacturing processes. If any claims are brought against us or our customers for such infringement, whether or not these claims have merit, we could be required to expend significant resources in defense of such claims. In the event of an infringement claim, we may be required to spend a significant amount of time and money to develop

non-infringing

alternatives or obtain licenses. We may not be successful in developing such alternatives or obtaining such licenses on reasonable terms or at all, which 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 focus on manufacturing complex optical products for our customers. These products often contain our customers’ intellectual property, including trade secrets and

know-how.

Our success depends, in part, on our ability to protect our customers’ intellectual property. We may maintain separate and secure areas for customer proprietary manufacturing processes and materials and dedicate floor space, equipment, engineers and supply chain management to protect our customers’ proprietary drawings, materials and products. The steps we take to protect our customers’ intellectual property may not adequately prevent its disclosure or misappropriation. If we fail to protect our customers’ intellectual property, our customer relationships could be harmed and we may experience difficulty in establishing new customer relationships. In addition, our customers might pursue legal claims against us for any failure to protect their intellectual property, possibly resulting in harm to our reputation and 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 time to various compliance initiatives.

The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as other rules implemented by the SEC and the New York Stock Exchange (“NYSE”), impose various requirements on public companies, including requiring changes in corporate governance practices. These and proposed corporate governance laws and regulations under consideration may further increase our compliance costs. If compliance with these various legal and regulatory requirements diverts our management’s attention from other business concerns, it could have a material adverse effect on our business, financial condition and operating results. The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and disclosure controls and procedures quarterly. While we are able to assert in our Annual Report on Form

10-K

that our internal control over financial reporting was effective as of June 28, 2019, we cannot predict the outcome of our testing in future periods. If we are unable to assert in any future reporting periods that our internal control over financial reporting is effective (or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our share price.

Given the nature and complexity of our business and the fact that some members of our management team are located in Thailand while others are located in the U.S., control deficiencies may periodically occur. For example, following an internal investigation by the audit committee of our board of directors in September 2014 concerning various accounting

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issues, we identified certain significant deficiencies in our internal control over financial reporting, which have been remediated. While we have ongoing measures and procedures to prevent and remedy control deficiencies, if they occur there can be no assurance that we will be successful or that we will be able to prevent material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Moreover, if we identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses in future periods, the market price of our ordinary shares could decline and we could be subject to potential delisting by the NYSE and review by the NYSE, the SEC, or other regulatory authorities, which would require the expenditure by us of additional financial and management resources. As a result, our shareholders could lose confidence in our financial reporting, which would harm our business and the market price of our ordinary shares.

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.

The preparation of financial statements in accordance with U.S. GAAP involves making estimates, judgments and assumptions that affect reported amounts of assets (including intangible assets), liabilities and related reserves, revenues, expenses and income. Estimates, judgments and assumptions are inherently subject to change in the future, and any such changes could result in corresponding changes to the amounts of assets, liabilities, revenues, expenses and income. Any such changes could have a material adverse effect on 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 loan agreements for our long-term and short-term debt obligations contain financial ratio covenants that may limit management’s discretion with respect to certain business matters. These covenants require us to maintain a specified maximum total leverage ratio, minimum debt service coverage ratio (earnings before interest and depreciation and amortization plus cash on hand minus short-term debt), a minimum tangible net worth and a minimum quick ratio, which may restrict our ability to incur additional indebtedness and limit our ability to use our cash. In the event of our default on these loans or a breach of a covenant, the lenders may immediately cancel the loan agreement, deem the full amount of the outstanding indebtedness immediately due and payable, charge us interest on a monthly basis on the full amount of the outstanding indebtedness and, if we cannot repay all of our outstanding obligations, sell the assets pledged as collateral for the loan in order to fulfill our obligation. We may also be held responsible for any damages and related expenses incurred by the lender as a result of any default. Any failure by us or our subsidiaries to comply with these agreements could harm our business, financial condition and operating results.

Our business could be negatively affected as a result of activist shareholders.

If an activist investor takes an ownership position in our ordinary shares, responding to actions by such activist shareholder could be costly and time-consuming, disrupt our operations and divert the attention of management and our employees. Additionally, perceived uncertainties as to our future direction as a result of shareholder activism or changes to the composition of our board of directors may lead to the perception of a change in the direction of our business or other instability, which may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel. If customers choose to delay, defer or reduce transactions with us or do business with our competitors instead of us because of any such issues, then our business, financial condition and operating results would be adversely affected. In addition, our share price could experience periods of increased volatility as a result of shareholder activism.

Our investment portfolio may become impaired by deterioration of the capital markets.

We use professional investment management firms to manage our excess cash and cash equivalents. Our short-term investments as of December 27, 2019 are primarily investments in a fixed income portfolio, including certificates of deposit, time deposits, corporate bonds and commercial papers, U.S. agency and U.S. Treasury securities, and sovereign and municipal securities. Our investment portfolio may become impaired by deterioration of the capital markets. We follow an established investment policy and set of guidelines to monitor and help mitigate our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes. The policy also provides that we may not invest in short-term investments with a maturity in excess of three years.

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We regularly review our investment portfolio to determine if any security is other-than-temporarily impaired, which would require us to record an impairment charge in the period any such determination is made. In making this judgment, we evaluate, among other things, the duration and extent to which the fair value of a security is less than its cost; the financial condition of the issuer and any changes thereto; and our intent to sell, or whether we will more likely than not be required to sell, the security before recovery of its amortized cost basis. Our assessment on whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security.

Should financial market conditions worsen, investments in some financial instruments may pose risks arising from market liquidity and credit concerns. In addition, any deterioration of the capital markets could cause our other income and expense to vary from expectations. As of December 27, 2019, we did not record any impairment charges associated with our portfolio of short-term investments, and although we believe our current investment portfolio has little risk of material impairment, we cannot predict future market conditions or market liquidity, or credit availability, and can provide no assurance that our investment portfolio will remain materially unimpaired.

Energy price volatility may negatively impact our business, financial condition and operating results.

We, along with our suppliers and customers, rely on various energy sources in our manufacturing and transportation activities. Energy prices have been subject to increases and volatility caused by market fluctuations, supply and demand, currency fluctuation, production and transportation disruption, world events and government regulations. While we are currently experiencing lower energy prices, a significant increase is possible, which could increase our raw material and transportation costs. In addition, increased transportation costs of our suppliers and customers could be passed along to us. We may not be able to increase our prices enough to offset these increased costs, and any increase in our prices may reduce our future customer orders, which could harm our business, financial condition and operating results.

Risks Related to Ownership of Our Ordinary Shares

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.

Our revenues, expenses and results of operations have fluctuated in the past and are likely to do so in the future from

quarter-to-quarter

and

year-to-year

due to the risk factors described in this section and elsewhere in this Quarterly Report on Form

10-Q.

In addition to market and industry factors, the price and trading volume of our ordinary shares may fluctuate in response to a number of events and factors relating to us, our competitors, our customers and the markets we serve, many of which are beyond our control. Factors such as variations in our total revenues, earnings and cash flow, announcements of new investments or acquisitions, changes in our pricing practices or those of our competitors, commencement or outcome of litigation, sales of ordinary shares by us or our principal shareholders, fluctuations in market prices for our services and general market conditions could cause the market price of our ordinary shares to change substantially. Any of these factors may result in large and sudden changes in the volume and price at which our ordinary shares trade. Among other things, volatility and weakness in our share price could mean that investors may not be able to sell their shares at or above the prices they paid. Volatility and weakness could also impair our ability in the future to offer our ordinary shares or convertible securities as a source of additional capital and/or as consideration in the acquisition of other businesses.

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may cause the market price of our ordinary shares to decline. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

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.

The trading market for our ordinary shares depends in part on the research and reports that securities or industry analysts publish about us or our business. If securities or industry analysts stop covering us, or if too few analysts cover us, the market price of our ordinary shares could be adversely impacted. If one or more of the analysts who covers us downgrades our ordinary shares or publishes misleading or unfavorable research about our business, our market price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our ordinary shares could decrease, which could cause the market price or trading volume of our ordinary shares to decline.

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We may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors.

Based upon estimates of the value of our assets, which are based in part on the trading price of our ordinary shares, we do not expect to be a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes for the taxable year 2020 or for the foreseeable future. However, despite our expectations, we cannot assure you that we will not be a PFIC for the taxable year 2020 or any future year because our PFIC status is determined at the end of each year and depends on the composition of our income and assets during such year. If we are a PFIC, our U.S. investors will be subject to increased tax liabilities under U.S. tax laws and regulations and to burdensome reporting requirements.

Certain provisions in our constitutional documents may discourage our acquisition by a third party, which could limit your opportunity to sell shares at a premium.

Our constitutional documents include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in

change-of-control

transactions, including, among other things, provisions that:

•

establish a classified board of directors;

•

prohibit our shareholders from calling meetings or acting by written consent in lieu of a meeting;

•

limit the ability of our shareholders to propose actions at duly convened meetings; and

•

authorize our board of directors, without action by our shareholders, to issue preferred shares and additional ordinary shares.

These provisions could have the effect of depriving you of an opportunity to sell your ordinary shares at a premium over prevailing market prices by discouraging third parties from seeking to acquire control of us in a tender offer or similar transaction.

Our shareholders may face difficulties in protecting their interests because we are incorporated under Cayman Islands law.

Our corporate affairs are governed by our amended and restated memorandum and articles of association (“MOA”), by the Companies Law (as amended) of the Cayman Islands and the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under the laws of the Cayman Islands are not as clearly established under statutes or judicial precedent as in jurisdictions in the U.S. Therefore, you may have more difficulty in protecting your interests than would shareholders of a corporation incorporated in a jurisdiction in the U.S., due to the comparatively less developed nature of Cayman Islands law in this area.

The Companies Law permits mergers and consolidations between Cayman Islands companies and between Cayman Islands companies and

non-Cayman

Islands companies. Dissenting shareholders have the right to be paid the fair value of their shares (which, if not agreed between the parties, will be determined by the Cayman Islands court) if they follow the required procedures, subject to certain exceptions. Court approval is not required for a merger or consolidation which is effected in compliance with these statutory procedures.

In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting convened for that purpose. The convening of the meeting and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. A dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved.

When a takeover offer is made and accepted by holders of 90.0% of the shares within four months, the offeror may, within a

two-month

period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but is unlikely to succeed unless there is evidence of fraud, bad faith or collusion.

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If the arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of a corporation incorporated in a jurisdiction in the U.S., providing rights to receive payment in cash for the judicially determined value of the shares. This may make it more difficult for you to assess the value of any consideration you may receive in a merger or consolidation or to require that the offeror give you additional consideration if you believe the consideration offered is insufficient.

Shareholders of Cayman Islands exempted companies have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders. Our directors have discretion under our MOA to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

Subject to limited exceptions, under Cayman Islands law, a minority shareholder may not bring a derivative action against the board of directors.

Certain judgments obtained against us by our shareholders may not be enforceable.

The Cayman Islands Parent is a Cayman Islands exempted company and substantially all of our assets are located outside of the U.S. Given our domicile and the location of our assets, it may be difficult to enforce in U.S. courts judgments obtained against us in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us. In addition, there is uncertainty as to whether the courts of the Cayman Islands, Thailand or the PRC would recognize or enforce judgments of U.S. courts against us predicated upon the civil liability provisions of the securities laws of the U.S. or any state. In particular, a judgment in a U.S. court would not be recognized and accepted by Thai courts without a

re-trial

or examination of the merits of the case. In addition, there is uncertainty as to whether such Cayman Islands, Thai or PRC courts would be competent to hear original actions brought in the Cayman Islands, Thailand or the PRC against us predicated upon the securities laws of the U.S. or any state.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Sales of Unregistered Securities

Not applicable.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On August 21, 2017, we announced that our board of directors had approved a share repurchase program to permit us to repurchase up to $30.0 million worth of our issued and outstanding ordinary shares in the open market in accordance with applicable rules and regulations, at such time and such prices as management may decide. In February 2018 and May 2019, we announced that our board of directors approved increases of $30.0 million and $50.0 million, respectively, to the original share repurchase authorization, bringing the aggregate authorization to $110.0 million. The repurchased shares will be held as treasury stock. During the three months ended December 27, 2019, no shares were repurchased under this program. As of December 27, 2019, we had a remaining authorization to purchase up to $62.2 million worth of our ordinary shares.

The following table summarizes share repurchase activity for the three months ended December 27, 2019:


Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased As Part of Publicly Announced Program		Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program
September 28, 2019 – October 25, 2019		—	$	—		—	$	62,220,607
October 26, 2019 – November 22, 2019		—	$	—		—	$	62,220,607
November 23, 2019 – December 27, 2019		—	$	—		—	$	62,220,607

Total		—	$	—		—	$	62,220,607

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ITEMS 3, 4 and 5 are not applicable and have been omitted.

ITEM 6. EXHIBITS

Exhibit
Number

Description

Incorporated by reference herein

Form

Exhibit
No.

Filing Date

10.1

Fabrinet 2020 Equity Incentive Plan

S-8

99.1

December 12, 2019

10.2

Fabrinet 2020 Equity Incentive Plan—Form of Restricted Share Unit Agreement

S-8

99.2

December 12, 2019

10.3

Fabrinet 2020 Equity Incentive Plan—Form of Performance-Based Restricted Share Unit Agreement

S-8

99.3

December 12, 2019

31.1

Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

Inline XBRL Instance.

101.SCH

Inline XBRL Taxonomy Extension Schema.

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase.

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase.

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase.

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 4, 2020.


		FABRINET

By:		/s/ Toh-Seng Ng
Name:		Toh-Seng Ng
Title:		Executive Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)