Fabrinet [FN] Filings

10-Q 1 fn-20230929.htm 10-Q fn-20230929

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q

____________________________

(Mark One)


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

For the quarterly period ended September 29, 2023


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

For the transition period from__________to__________

Commission File Number: 001-34775

____________________________

FABRINET

(Exact name of registrant as specified in its charter)

____________________________


Cayman Islands (State or other jurisdiction of incorporation or organization)			98-1228572 (I.R.S. Employer Identification No.)

c/o Intertrust Corporate Services

One Nexus Way, Camana Bay

Grand Cayman

Cayman Islands

(Address of principal executive offices)

KY1-9005

(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

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 x No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ☐

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


Large accelerated filer	x	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No

As of October 27, 2023, the registrant had 36,330,858 ordinary shares, $0.01 par value, outstanding.

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FABRINET

FORM 10-Q

QUARTER ENDED SEPTEMBER 29, 2023

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			Page No.
RISK FACTORS SUMMARY			3
PART I. FINANCIAL INFORMATION			5

Item 1. Financial Statements			5

Condensed Consolidated Balance Sheets as of September 29 , 2023 and June 30 , 202 3 (unaudited)			5

Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended S eptember 29 , 2023 and S eptember 30 , 2022 (unaudited)			6

Condensed Consolidated Statements of Shareholders’ Equity for the three months ended September 29 , 2023 and September 30 , 2022 (unaudited)			7

Condensed Consolidated Statements of Cash Flows for the three months ended September 29 , 2023 and September 30 , 2022 (unaudited)			8

Notes to Condensed Consolidated Financial Statements (unaudited)			10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28

Item 3. Quantitative and Qualitative Disclosures About Market Risk			38

Item 4. Controls and Procedures			39

PART II. OTHER INFORMATION			40

Item 1. Legal Proceedings			40

Item 1A. Risk Factors			40

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			56

Item 6. Exhibits			57

Signature			58

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RISK FACTORS SUMMARY

You should carefully consider the information set forth below under the heading “Risk Factors” in Part II, Item 1A before deciding whether to invest in our securities. Below is a summary of the principal risks associated with an investment in our securities.

•Our sales depend on a small number of customers. A reduction in orders from any of these customers, the loss of any of these customers, or a customer exerting significant pricing and margin pressures on us could harm our business, financial condition and operating results.

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

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

•Our quarterly revenues, gross profit margins and operating results have fluctuated significantly and may continue to do so in the future, which may cause the market price of our ordinary shares to decline or be volatile.

•If we are unable to continue diversifying our precision optical and electro-mechanical manufacturing services across other markets within the optics industry, 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 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.

•Cancellations, delays or reductions of customer orders and the relatively short-term nature of the commitments of our customers could harm our business, financial condition and operating results.

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

•We purchase some of the critical materials used in certain of our products from a single source or a limited number of suppliers. Supply shortages have in the past, and could in the future, impair the quality, reduce the availability or increase the cost of materials, which could harm our revenues, profitability and customer relations.

•Managing our inventory is complex and may require write-downs due to excess or obsolete inventory, which could cause our operating results to decrease significantly in a given fiscal period.

•If we fail to adequately expand our manufacturing capacity, we will not be able to grow our business, which would harm our business, financial condition and operating results. Conversely, if we expand too much or too rapidly, we may experience excess capacity, which would harm our business, financial condition and operating results.

•We may experience manufacturing yields that are lower than expected, potentially resulting in increased costs, which could harm our business, operating results and customer relations.

•If the products that we manufacture contain defects, we could incur significant correction costs, demand for our services may decline and we may be exposed to product liability and product warranty claims, which could harm our business, financial condition, operating results and customer relations.

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

•Fluctuations in foreign currency exchange rates and changes in governmental policies regarding foreign currencies could increase our operating costs, which would adversely affect our operating results.

•We conduct operations in a number of countries, which creates logistical and communications challenges for us and exposes us to other risks and challenges that could harm our business, financial condition and operating results.

•We are subject to governmental export and import controls in several jurisdictions that subject us to a variety of risks, including liability, impairment of our ability to compete in international markets, and decreased sales and customer orders.

•We are subject to risks related to the ongoing U.S.-China trade dispute, including increased tariffs on materials that we use in manufacturing, which could adversely affect our business, financial condition and operating results.

•Political unrest and demonstrations, as well as changes in the political, social, business or economic conditions in Thailand, could harm our business, financial condition and operating results.

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•We expect to continue to invest in our manufacturing operations in the People's Republic of China ("PRC"), which will continue to expose us to risks inherent in doing business in the PRC, any of which risks could harm our business, financial condition and operating results.

•Natural disasters, epidemics, acts of terrorism and political and economic developments could harm our business, financial condition and operating results.

•Unfavorable worldwide economic conditions (including inflation and supply chain disruptions) may negatively affect our business, financial condition and operating results.

•The loan agreements for our long-term debt obligations and other credit facilities contain financial ratio covenants that may impair our ability to conduct our business.

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

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

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

•There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with U.S. GAAP. Any changes in estimates, judgments and assumptions could have a material adverse effect on our business, financial condition and operating results.

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

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

•Any failure to protect our customers’ intellectual property that we use in the products we manufacture for them could harm our customer relationships and subject us to liability.

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

•We have incurred and will continue to incur significant increased costs as a result of operating as a public company, and our management will be required to continue to devote substantial resources to various compliance initiatives.

•If we are unable to meet regulatory quality standards applicable to our manufacturing and quality processes for the products we manufacture, our business, financial condition and operating results could be harmed.

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

•Our share price may be volatile due to fluctuations in our operating results and other factors, including the activities and operating results of our customers or competitors, any of which could cause our share price to decline.

•If securities or industry analysts do not publish research or if they publish misleading or unfavorable research about our business, the market price and trading volume of our ordinary shares could decline.

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

•Our business and share price could be negatively affected as a result of activist shareholders.

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

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

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

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

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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)	September 29, 2023		June 30, 2023
Assets
Current assets
Cash and cash equivalents	$	308,338	$	231,368

Short-term investments	362,428		319,100
Trade accounts receivable, net of allowance for doubtful accounts of $1,768 and $965, respectively	535,006		531,767

Inventories	440,095		519,576
Prepaid expenses	6,328		7,849
Other current assets	39,766		42,880
Total current assets	1,691,961		1,652,540
Non-current assets

Property, plant and equipment, net	306,665		310,350
Intangibles, net	2,598		2,394
Operating right-of-use assets	6,024		1,634
Deferred tax assets	11,363		12,095
Other non-current assets	610		635
Total non-current assets	327,260		327,108
Total Assets	$	2,019,221	$	1,979,648
Liabilities and Shareholders’ Equity
Current liabilities
Long-term borrowings, current portion, net	$	9,117	$	12,156
Trade accounts payable	357,106		381,129
Fixed assets payable	9,313		13,526


Operating lease liabilities, current portion	1,587		1,201
Income tax payable	7,013		6,024
Accrued payroll, bonus and related expenses	22,976		23,748
Accrued expenses	24,034		20,447
Other payables	24,287		23,654
Total current liabilities	455,433		481,885
Non-current liabilities

Deferred tax liability	5,117		4,799

Operating lease liability, non-current portion	4,052		66
Severance liabilities	22,269		22,159
Other non-current liabilities	2,181		2,081
Total non-current liabilities	33,619		29,105
Total Liabilities	489,052		510,990
Commitments and contingencies (Note 15)
Shareholders’ equity
Preferred shares (5,000,000 shares authorized, $0.01 par value; no shares issued and outstanding as of September 29, 2023 and June 30, 2023)	—		—
Ordinary shares (500,000,000 shares authorized, $0.01 par value; 39,430,970 shares and 39,284,176 shares issued at September 29, 2023 and June 30, 2023, respectively; and 36,330,476 shares and 36,183,682 shares outstanding at September 29, 2023 and June 30, 2023, respectively)	394		393
Additional paid-in capital	202,432		206,624
Less: Treasury shares (3,100,494 shares as of September 29, 2023 and June 30, 2023)	(194,833)		(194,833)
Accumulated other comprehensive income (loss)	(7,502)		(8,115)
Retained earnings	1,529,678		1,464,589
Total Shareholders’ Equity	1,530,169		1,468,658
Total Liabilities and Shareholders’ Equity	$	2,019,221	$	1,979,648

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)


	Three Months Ended
(in thousands of U.S. dollars, except per share data)		September 29, 2023		September 30, 2022
Revenues		$	685,477	$	655,429
Cost of revenues		(601,073)		(572,673)
Gross profit		84,404		82,756
Selling, general and administrative expenses		(20,429)		(20,565)

Operating income		63,975		62,191
Interest income		5,898		1,559
Interest expense		(45)		(391)
Foreign exchange gain (loss), net		415		2,085
Other income (expense), net		(80)		(141)
Income before income taxes		70,163		65,303
Income tax expense		(5,074)		(688)
Net income		65,089		64,615
Other comprehensive income (loss), net of tax:
Change in net unrealized gain (loss) on available-for-sale securities		948		(1,461)
Change in net unrealized gain (loss) on derivative instruments		(561)		(1,218)
Change in net retirement benefits plan – prior service cost		126		168
Change in foreign currency translation adjustment		100		246
Total other comprehensive income (loss), net of tax		613		(2,265)
Net comprehensive income		$	65,702	$	62,350
Earnings per share
Basic		$	1.80	$	1.77
Diluted		$	1.78	$	1.76
Weighted-average number of ordinary shares outstanding (thousands of shares)
Basic		36,256		36,528
Diluted		36,481		36,758

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 September 29, 2023


	Ordinary Share			Additional Paid-in Capital		Treasury Shares		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total
(in thousands of U.S. dollars, except share data)	Shares	Amount
Balances at June 30, 2023	39,284,176	$	393	$	206,624	$	(194,833)	$	(8,115)	$	1,464,589	$	1,468,658
Net income	—	—		—		—		—		65,089		65,089
Other comprehensive income (loss)	—	—		—		—		613		—		613
Share-based compensation	—	—		7,956		—		—		—		7,956
Issuance of ordinary shares	146,794	1		(1)		—		—		—		—

Tax withholdings related to net share settlement of restricted share units	—	—		(12,147)		—		—		—		(12,147)
Balances at September 29, 2023	39,430,970	$	394	$	202,432	$	(194,833)	$	(7,502)	$	1,529,678	$	1,530,169

For the Three Months Ended September 30, 2022


	Ordinary Share			Additional Paid-in Capital		Treasury Shares		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total
(in thousands of U.S. dollars, except share data)	Shares	Amount
Balances at June 24, 2022	39,048,700	$	390	$	196,667	$	(147,258)	$	(12,793)	$	1,216,676	$	1,253,682
Net income	—	—		—		—		—		64,615		64,615
Other comprehensive income (loss)	—	—		—		—		(2,265)		—		(2,265)
Share-based compensation	—	—		7,723		—		—		—		7,723
Issuance of ordinary shares	196,847	2		(2)		—		—		—		—
Repurchase of 46,977 shares held as treasury shares	—	—		—		(4,900)		—		—		(4,900)
Tax withholdings related to net share settlement of restricted share units	—	—		(16,489)		—		—		—		(16,489)
Balances at September 30, 2022	39,245,547	$	392	$	187,899	$	(152,158)	$	(15,058)	$	1,281,291	$	1,302,366

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)


	Three Months Ended
(in thousands of U.S. dollars)	September 29, 2023		September 30, 2022
Cash flows from operating activities
Net income for the period	$	65,089	$	64,615
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	11,961		11,055

(Gain) loss on disposal and impairment of property, plant and equipment and intangibles	12		(9)
(Gain) loss from sales and maturities of available-for-sale securities	—		92
Amortization of discount (premium) of short-term investments	(596)		442

(Reversal of) allowance for doubtful accounts	803		(91)
Unrealized loss (gain) on exchange rate and fair value of foreign currency forward contracts	(52)		(386)

Amortization of fair value at hedge inception of interest rate swaps	(88)		(191)
Share-based compensation	7,733		7,723
Deferred income tax	1,377		(219)
Other non-cash expenses	222		(439)
Changes in operating assets and liabilities
Trade accounts receivable	(4,138)		(24,476)

Inventories	79,481		28,808
Other current assets and non-current assets	3,238		(10,661)
Trade accounts payable	(24,397)		(29,774)

Income tax payable	963		(276)
Severance liabilities	706		617
Other current liabilities and non-current liabilities	2,735		13,804
Net cash provided by operating activities	145,049		60,634
Cash flows from investing activities
Purchase of short-term investments	(77,692)		(25,609)
Proceeds from sales of short-term investments	—		30,000
Proceeds from maturities of short-term investments	35,909		29,236
Purchase of property, plant and equipment	(11,435)		(10,258)
Purchase of intangibles	(180)		(11)
Proceeds from disposal of property, plant and equipment	318		9
Net cash used in investing activities	(53,080)		23,367
Cash flows from financing activities
Repayment of long-term borrowings	(3,047)		(6,094)

Repayment of finance lease liability	—		(2)
Repurchase of ordinary shares	—		(4,900)
Withholding tax related to net share settlement of restricted share units	(12,147)		(16,489)
Net cash used in financing activities	(15,194)		(27,485)
Net increase (decrease) in cash, cash equivalents and restricted cash	$	76,775	$	56,516
Movement in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at the beginning of period	$	231,368	$	198,365
Increase (decrease) in cash, cash equivalents and restricted cash	76,775		56,516
Effect of exchange rate on cash, cash equivalents and restricted cash	195		520
Cash, cash equivalents and restricted cash at the end of period	$	308,338	$	255,401
Non-cash investing and financing activities
Construction, software and equipment-related payables	$	9,313	$	12,541

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:


(in thousands of U.S. dollars)	As of September 29, 2023		As of September 30, 2022
Cash and cash equivalents	$	308,338	$	255,260
Restricted cash	—		141
Cash, cash equivalents and restricted cash	$	308,338	$	255,401

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 of complex products, such as optical communication components, modules and sub-systems, automotive components, industrial lasers, 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 Israel Ltd. (“Fabrinet Israel”).

2. Accounting policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements for Fabrinet as of September 29, 2023 and for the three months ended September 29, 2023 and September 30, 2022 include normal recurring adjustments necessary for a fair statement of the financial statements set forth herein, in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or "GAAP") for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such information does not include all of the information and footnotes required by U.S. GAAP for annual financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in Fabrinet’s Annual Report on Form 10-K for the year ended June 30, 2023.

The balance sheet as of June 30, 2023 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The results for the three months ended September 29, 2023 may not be indicative of results for the year ending June 28, 2024 or any future periods.

Use of Estimates

The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amount of total revenues and expenses during the year. The Company bases estimates on historical experience and various assumptions about the future that are believed to be reasonable based on available information. The Company’s reported financial position or results of operations may be materially different under different conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies, which are discussed below. Significant assumptions are used in accounting for share-based compensation, allowance for doubtful accounts, allowance for expected credit losses, income taxes, inventory obsolescence, goodwill and valuation of intangible assets related to business acquisition, among others. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates. In the event that the Company's estimates or assumptions prove to be different from actual results, adjustments will be made in subsequent periods to reflect more current information.

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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 September 29, 2023 and September 30, 2022 consisted of 13 and 14 weeks, respectively. Fiscal year 2024 will comprise 52 weeks and will end on June 28, 2024.

Adoption of New Accounting Standards

No new accounting standard was adopted in the first quarter of fiscal year 2024.

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3. Revenues from contracts with customers

Revenue by Geographic Area and End Market

Revenues are attributed to a particular geographic area based on the bill-to-location of the Company’s customers. The Company operates in three geographic regions: North America; Asia-Pacific and others; and Europe.

The following table presents total revenues by geographic region:


(in thousands, except percentages)	Three Months Ended September 29, 2023		As a % of Total Revenues		Three Months Ended September 30, 2022		As a % of Total Revenues
North America
U.S.	$	254,859			$	345,080
Others (1)	3,460				3,624
Total revenue in North America	258,319		37.7	%	348,704		53.2	%
Asia-Pacific and others
Israel (2)	210,676				37,277
India	70,777				80,033
Malaysia	33,319				49,324
China	20,260				23,064
Hong Kong	15,788				32,472
Thailand	13,027				12,616
Japan	6,810				10,348
Others	1,165				3,160
Total revenue in Asia-Pacific and others	371,822		54.2	%	248,294		37.9	%
Europe
U.K.	29,774				32,832
Germany	12,780				13,314
Others	12,782				12,285
Total revenue in Europe	$	55,336	8.1	%	$	58,431	8.9	%
Total revenue	$	685,477	100.0	%	$	655,429	100.0	%

(1)Others includes revenues from external customers based in our country of domicile, the Cayman Islands, which for each year presented is $0.

(2)Due to increase in revenue from a significant customer.

The following table presents revenues by end market:


(in thousands, except percentages)	Three Months Ended September 29, 2023		As a % of Total Revenues		Three Months Ended September 30, 2022		As a % of Total Revenues
Optical communications	$	533,257	77.8	%	$	497,561	75.9	%
Automotive, lasers and other	152,220		22.2	%	157,868		24.1	%
Total	$	685,477	100.0	%	$	655,429	100.0	%

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Contract Assets and Liabilities

A contract asset is recognized when the Company has recognized revenues prior to an invoice for payment. Contract assets are recognized in the unaudited condensed consolidated balance sheets under other current assets and transferred to accounts receivable when rights to payment become unconditional.

As of September 29, 2023 and June 30, 2023, the contract assets are de minimis.

A contract liability is recognized when the Company has advance payment arrangements with customers. Contract liabilities are recognized in the unaudited condensed consolidated balance sheets under other payables. The contract liabilities balance is normally recognized as revenue within six months.

The following tables summarize the activity in the Company’s contract liabilities during the three months ended September 29, 2023:


(in thousands)	Contract Liabilities
Beginning balance, June 30, 2023	$	3,036
Advance payment received during the period	1,497
Revenue recognized	(3,285)
Ending balance, September 29, 2023	$	1,248

4. Earnings per ordinary share

Basic earnings per ordinary share is computed by dividing reported net income by the weighted-average number of ordinary shares outstanding during each period. Diluted earnings per ordinary share is computed by calculating the effect of potential dilutive ordinary shares outstanding during the period using the treasury stock method. Dilutive ordinary equivalent shares consist of restricted share units and performance share units.

Earnings per ordinary share was calculated as follows:


	Three Months Ended
(in thousands, except per share data)		September 29, 2023		September 30, 2022
Net income attributable to shareholders		$	65,089	$	64,615
Weighted-average number of ordinary shares outstanding		36,256		36,528
Incremental shares arising from the assumed vesting of restricted share units and performance share units		225		230
Weighted-average number of ordinary shares for diluted earnings per ordinary share		36,481		36,758
Basic earnings per ordinary share		$	1.80	$	1.77
Diluted earnings per ordinary share		$	1.78	$	1.76

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5. Cash, cash equivalents and short-term investments

The Company’s cash, cash equivalents, and short-term investments are as follows:


					Fair Value
(in thousands)	Carrying Cost		Unrealized Gain/ (Loss)		Cash and Cash Equivalents		Marketable Securities		Other Investments
As of September 29, 2023
Cash	$	306,108	$	—	$	306,108	$	—	$	—
Cash equivalents	2,230		—		2,230		—		—
Liquidity funds	41,723		—		—		—		41,723
Certificates of deposit and time deposits	84,278		826		—		85,104		—
Corporate debt securities	145,138		(3,007)		—		142,131		—
U.S. agency and U.S. treasury securities	93,618		(148)		—		93,470		—
Total	$	673,095	$	(2,329)	$	308,338	$	320,705	$	41,723
As of June 30, 2023
Cash	$	230,967	$	—	$	230,967	$	—	$	—
Cash equivalents	401		—		401		—		—
Liquidity funds	41,104		—		—		—		41,104
Certificates of deposit and time deposits	64,278		329		—		64,607		—
Corporate debt securities	161,453		(3,375)		—		158,078		—
U.S. agency and U.S. treasury securities	55,542		(231)		—		55,311		—
Total	$	553,745	$	(3,277)	$	231,368	$	277,996	$	41,104

All highly liquid investments with original maturities of three months or less at the date of purchase are classified as cash equivalents. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the designations at each balance sheet date. The Company may sell certain of its short-term investments prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. The maturities of the Company’s short-term investments generally range from three months to three years.

The following table summarizes the cost and estimated fair value of short-term investments classified as available-for-sale securities based on stated effective maturities as of September 29, 2023 and June 30, 2023:


	September 29, 2023				June 30, 2023
(in thousands)	Carrying Cost		Fair Value		Carrying Cost		Fair Value
Due within one year	$	185,691	$	186,414	$	172,992	$	173,137
Due between one to five years	179,066		176,014		149,385		145,963
Total	$	364,757	$	362,428	$	322,377	$	319,100

6. Fair value of financial instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is established, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs for the valuation of an asset or liability as of the measurement date. The three levels of inputs that may be used to measure fair value are defined as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for assets or liabilities, either directly or indirectly. If the assets or liabilities have a specified (contractual) term, Level 2 inputs must be observable for substantially the full term of assets or liabilities.

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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.

The following table provides details of the financial instruments measured at fair value on a recurring basis, including:


	Fair Value Measurements at Reporting Date Using
(in thousands)	Level 1		Level 2			Level 3		Total
As of September 29, 2023
Assets
Cash equivalents	$	—	$	2,230		$	—	$	2,230
Liquidity funds	—		41,723			—		41,723
Certificates of deposit and time deposits	—		85,104			—		85,104
Corporate debt securities	—		142,131			—		142,131
U.S. agency and U.S. treasury securities	—		93,470			—		93,470
Derivative assets – current portion	—		148		(1)	—		148

Total	$	—	$	364,806		$	—	$	364,806
Liabilities
Derivative liabilities – current portion	$	—	$	(6,812)		$	—	$	(6,812)

Total	$	—	$	(6,812)	(2)	$	—	$	(6,812)


	Fair Value Measurements at Reporting Date Using
(in thousands)	Level 1		Level 2			Level 3		Total
As of June 30, 2023
Assets
Cash equivalents	$	—	$	401		$	—	$	401
Liquidity funds	—		41,104			—		41,104
Certificates of deposit and time deposits	—		64,607			—		64,607
Corporate debt securities	—		158,078			—		158,078
U.S. agency and U.S. treasury securities	—		55,311			—		55,311
Derivative assets – current portion	—		221		(3)	—		221
Total	$	—	$	319,722		$	—	$	319,722
Liabilities
Derivative liabilities – current portion	$	—	$	(5,236)		$	—	$	(5,236)

Total	$	—	$	(5,236)	(4)	$	—	$	(5,236)

(1)Foreign currency forward contracts with an aggregate notional amount of $3.0 million and an interest rate swap agreement with a notional amount of $60.9 million.

(2)Foreign currency forward contracts with an aggregate notional amount of $142.0 million and 0.2 million Canadian dollars.

(3)Foreign currency forward contracts with an aggregate notional amount of $3.0 million and 0.2 million Canadian dollars and an interest rate swap agreement with a notional amount of $60.9 million.

(4)Foreign currency forward contracts with an aggregate notional amount of $140.0 million.

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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.

Foreign currency forward and option contracts

As a result of foreign currency rate fluctuations, the U.S. dollar equivalent values of the Company’s foreign currency denominated assets and liabilities fluctuate. The Company uses foreign currency forward and option contracts to manage the foreign exchange risk associated with a portion of its foreign currency denominated assets and liabilities and other foreign currency transactions. The Company enters into foreign currency forward and option contracts to hedge fluctuations in the U.S. dollar value of forecasted transactions denominated in Thai baht and Canadian dollars with counterparties that meet the Company’s minimum credit quality standard.

The Company may enter into foreign currency forward contracts with maturities of up to 12 months to hedge fluctuations in the U.S. dollar value of forecasted transactions denominated in Thai baht, including inventory purchases, payroll and other operating expenses. The Company considers these forward contracts as dual-purpose hedges, that hedge both the foreign exchange fluctuation (i) from inception through the forecasted expenditure, and (ii) any subsequent revaluation of the account payable or accrual. The Company may designate the forward contracts that hedge the foreign exchange fluctuation from inception through the forecasted expenditure as cash flow hedges. The gain or loss on a derivative instrument designated and qualified as a cash flow hedging instrument is recorded as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The reclassified amounts are presented in the same income statement line item as the earnings effect of the hedged item. Once the forecasted transactions are recorded, the Company will discontinue the hedging relationship by de-designating the derivative instrument and recording subsequent changes in fair value through contract maturity to foreign exchange gain (loss), net in the unaudited condensed consolidated statements of operations and comprehensive income as a natural hedge against the Thai baht denominated assets and liabilities.

The Company may also enter into non-designated foreign currency forward and option contracts to provide an offset to the re-measurement of foreign currency denominated assets and liabilities and to hedge certain forecasted exposures. Changes in the fair value of these non-designated derivatives are recorded as foreign exchange gain (loss), net in the unaudited condensed consolidated statements of operations and comprehensive income.

As of September 29, 2023, the Company had 145 outstanding U.S. dollar foreign currency forward contracts against Thai baht, with an aggregate notional amount of $145.0 million and maturity dates ranging from October 2023 through April 2024 and one outstanding Canadian dollar foreign currency forward contract with a notional amount of 0.2 million Canadian dollars and a maturity date in December 2023.

As of June 30, 2023, the Company had 143 outstanding U.S. dollar foreign currency forward contracts against Thai baht with an aggregate notional amount of $143.0 million and maturity dates ranging from July 2023 through January 2024, and one foreign currency contract with a notional amount of 0.2 million Canadian dollars and with a maturity date in September 2023.

As of September 29, 2023, the hedging relationship over foreign currency forward contracts designated for hedge accounting was determined to be highly effective based on the performance of retrospective and prospective regression testing. As of September 29, 2023, the amount in accumulated other comprehensive income (“AOCI”) expected to be reclassified into earnings within 12 months was a loss of $4.9 million.

As of June 30, 2023, the hedging relationship over foreign currency forward contracts designated for hedge accounting had been tested to be highly effective based on the performance of retrospective and prospective regression testing. As of June 30, 2023, the amount in AOCI expected to be reclassified into earnings within 12 months was a loss of $4.0 million.

During the three months ended September 29, 2023 and September 30, 2022, the Company included an unrealized gain of $0.3 million and unrealized loss of $0.2 million, respectively, from changes in the fair value of a foreign currency forward contract that was not designated for hedge accounting in earnings as foreign exchange gain (loss), net in the unaudited condensed consolidated statements of operations and comprehensive income.

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Interest Rate Swap Agreements

The Company entered into interest rate swap agreements to mitigate interest rate risk and improve the interest rate profile of the Company’s debt obligations. As of September 29, 2023 and June 30, 2023, the Company had one outstanding interest rate swap agreement with a notional amount of $60.9 million.

On July 25, 2018, Fabrinet Thailand entered into an interest rate swap agreement to effectively convert the floating interest rate of the term loan under the Company's previous syndicated senior 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 10). The Company did not designate this interest rate swap for hedge accounting.

On September 3, 2019, Fabrinet Thailand entered into a term loan agreement under a credit facility agreement with Bank of Ayudhya Public Company Limited, and on September 10, 2019, the Company repaid in full the outstanding term loan under the Company's previous syndicated senior credit facility agreement (see Note 10). In conjunction with the funding of the new term loan, the Company entered into a second interest rate swap agreement. The combination of both of these interest rate swaps effectively converts the floating interest rate of the Company’s term loan with Bank of Ayudhya Public Company Limited 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 Bank of Ayudhya Public Company Limited. The combination of these two interest rate swaps qualified for hedge accounting because the hedges are highly effective, and the Company has designated and documented contemporaneously the hedging relationships involving these interest rate swaps. While the Company intends to continue to meet the conditions for hedge accounting, if hedges do not qualify as highly effective, the changes in the fair value of the derivatives used as hedges would be reflected in earnings. From September 27, 2019, any gains or losses related to these interest rate swaps are recorded in AOCI in the unaudited condensed consolidated balance sheets. The Company reclassifies a portion of the gains or losses from AOCI into earnings at each reporting period based on either the accrued interest amount or the interest payment.

As of September 29, 2023, the amount in AOCI that is expected to be reclassified into earnings within 12 months was a gain of $0.3 million.

As of June 30, 2023, the amount in AOCI that is expected to be reclassified into earnings within 12 months was a gain of $0.4 million.

The following table provides a summary of the impact of derivative gain (loss) of the Company’s foreign currency forward contracts and interest rate swaps which were designated as cash flow hedges on the unaudited condensed consolidated statements of operations and other comprehensive income:


		Three Months Ended
(in thousands)	Financial statements line item		September 29, 2023		September 30, 2022
Derivatives gain (loss) recognized in other comprehensive income (loss):
Foreign currency forward contracts	Other comprehensive income		$	(1,565)	$	(2,992)
Interest rate swaps	Other comprehensive income		(78)		516
Total derivatives gain (loss) recognized in other comprehensive income (loss)			$	(1,643)	$	(2,476)
Derivatives (gain) loss reclassified from accumulated other comprehensive income (loss) into earnings:
Foreign currency forward contracts	Cost of revenues		$	3,672	$	3,794
Foreign currency forward contracts	SG&A		155		160
Foreign currency forward contracts	Foreign exchange loss, net		(3,215)		(2,505)
Interest rate swaps	Interest expense		(89)		(191)
Total derivatives (gain) loss reclassified from accumulated other comprehensive income (loss) into earnings			$	523	$	1,258
Change in net unrealized gain (loss) on derivatives instruments			$	(1,120)	$	(1,218)

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Fair Value of derivatives

The following table provides the fair values of the Company’s derivative financial instruments for the periods presented:


	September 29, 2023				June 30, 2023
(in thousands)	Derivative Assets		Derivative Liabilities		Derivative Assets		Derivative Liabilities
Derivatives not designated as hedging instruments
Foreign currency forward and option contracts	$	—	$	(1,910)	$	2	$	(1,256)

Derivatives designated as hedging instruments
Foreign currency forward contracts	12		(4,902)		4		(3,980)
Interest rate swaps	136		—		215		—
Derivatives, gross balances	$	148	$	(6,812)	$	221	$	(5,236)

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, Other non-current assets


Fair Value of Derivative Liabilities			Accrued expenses, Other non-current liabilities

7. Inventories


(in thousands)	As of September 29, 2023		As of June 30, 2023
Raw materials	$	119,200	$	157,379
Work in progress	248,919		305,627
Finished goods	47,916		28,608
Goods in transit	24,060		27,962
Total inventories	$	440,095	$	519,576

8. Leases

The Company leases facilities under non-cancelable operating lease agreements. The Company leases a portion of its capital equipment and vehicles, certain land and buildings for its facilities in Thailand, the Cayman Islands, the PRC, the U.S., the U.K., Israel and Singapore under operating lease arrangements that expire at various dates through 2029. 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 right of use (“ROU”) assets and lease liabilities as the Company is not reasonably assured that it will exercise these options. None of the lease agreements contain residual value guarantees provided by the lessee. The Company also has one intercompany lease transaction in the form of a lease of office and manufacturing space.

Operating leases

As of September 29, 2023, the maturities of the Company’s operating lease liabilities were as follows:


(in thousands)
2024 (remaining nine months)	$	1,465
2025	1,136
2026	1,068
2027	1,093
2028	1,119
Thereafter	283
Total undiscounted lease payments	6,164
Less imputed interest	(525)
Total present value of lease liabilities	$	5,639	(1)

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(1)Includes current portion of operating lease liabilities of $1.6 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 three months ended September 29, 2023 and September 30, 2022 was $0.5 million and $0.6 million, respectively.

Rental expense for short-term leases for the three months ended September 29, 2023 was $0.4 million and September 30, 2022 was immaterial.

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


	As of September 29, 2023		As of June 30, 2023
Weighted-average remaining lease term (in years)	4.5		1.2
Weighted-average discount rate	3.9	%	3.4	%

The following table presents supplemental disclosure for the unaudited condensed consolidated statement of cash flows related to operating and finance leases for the three months ended September 29, 2023 and September 30, 2022:


	Three Months Ended
(in thousands)		September 29, 2023		September 30, 2022
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases		$	959	$	641
Financing cash flows from finance leases		$	—	$	2
ROU assets obtained in exchange for lease liabilities		$	4,936	$	—

9. Intangibles

The following tables present details of the Company’s intangibles:


(in thousands)	Gross Carrying Amount		Accumulated Amortization		Net
As of September 29, 2023
Software	$	10,968	$	(8,370)	$	2,598


(in thousands)	Gross Carrying Amount		Accumulated Amortization		Net
As of June 30, 2023
Software	$	10,533	$	(8,139)	$	2,394

The Company recorded amortization expense relating to intangibles of $0.2 million and $0.4 million for the three months ended September 29, 2023 and September 30, 2022, respectively.

The weighted-average remaining life of software and customer relationships was:


(years)	As of September 29, 2023	As of June 30, 2023
Software	2.6	3.1

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Based on the carrying amount of intangibles as of September 29, 2023, and assuming no future impairment of the underlying assets, the estimated future amortization during each fiscal year was as follows:


(in thousands)
2024 (remaining nine months)	$	1,206
2025	640
2026	435
2027	244
2028	73

Total	$	2,598

10. Borrowings

The Company’s total borrowings, including current and non-current portions of long-term borrowings, consisted of the following:


(in thousands)
Rate	Conditions	Maturity	As of September 29, 2023		As of June 30, 2023
Long-term borrowings, current portion, net:
Term loan borrowings:
3-month LIBOR +1.35% per annum (1)	Repayable in quarterly installments	June 2024	$	9,141	$	12,188
Less: Unamortized debt issuance costs, current portion			(24)		(32)
Long-term borrowings, current portion, net			$	9,117	$	12,156

(1)The Company has entered into interest rate swaps that effectively fix a series of future interest payments on its term loans. Refer to Note 6.

The movements of long-term borrowings for the three months ended September 29, 2023 and September 30, 2022 were as follows:


	Three Months Ended
(in thousands)	September 29, 2023		September 30, 2022
Opening balance	$	12,188	$	27,421

Repayments during the period	(3,047)		(6,094)
Closing balance	$	9,141	$	21,327

As of September 29, 2023, future maturities of long-term borrowings during each fiscal year were as follows:


(in thousands)
2024 (remaining nine months)	$	9,141

Credit facility agreements:

On August 20, 2019, Fabrinet Thailand (the “Borrower”) and Bank of Ayudhya Public Company Limited (the “Bank”) entered into a credit facility agreement (the “2019 Credit Facility Agreement”), which 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 that 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 2019 Credit Facility Agreement and may increase or decrease any facility amount in its sole discretion.

Under the 2019 Credit Facility Agreement, on August 20, 2019, the Borrower and the Bank entered into a term loan agreement (the "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 previous syndicated senior credit facility agreement.

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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. On March 9, 2023, the Borrower and the Bank amended the Term Loan Agreement to replace the interest rate reference from LIBOR to the Secured Overnight Financing Rate ("SOFR") effective from September 29, 2023. 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 borrowed again. During the three months ended September 29, 2023, the Company recorded $0.1 million of interest expense in connection with this term loan, including the impact from interest rate swaps.

Any borrowings under the 2019 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, and 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 of 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. As of September 29, 2023, the Company was in compliance with all of its financial covenants under the Term Loan Agreement.

The events of default under the Term Loan Agreement include failure to timely pay amounts due under the Term Loan Agreement or the related finance documents, 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.

As of September 29, 2023, there was $9.1 million outstanding under the term loan.

On March 9, 2023, Fabrinet Thailand and the Parent Company (the “Borrowers”) and the Bank entered into a credit facility agreement (the “2023 Credit Facility Agreement”), which provides a facility of $55.0 million.

Any borrowings under the 2023 Credit Facility Agreement are secured by land and buildings owned by the Borrowers in the Pathumthani and Chonburi Provinces in Thailand.

Under the 2023 Credit Facility Agreement, the Borrowers are required to maintain a loan to value of the mortgaged real property ratio of not greater than 60%. The Borrowers are also required to maintain a debt service coverage ratio of at least 1.25 times and a debt-to-equity ratio of 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.

As of September 29, 2023, there was no amount outstanding under the 2023 Credit Facility Agreement.

11. Income taxes

As of September 29, 2023 and June 30, 2023, the liability for uncertain tax positions including accrued interest and penalties was $1.4 million and $1.5 million, respectively. The Company expects the estimated amount of liability associated with its uncertain tax positions to increase within the next 12 months due to additional provisions on uncertain tax positions from one of the subsidiaries and interest on these positions.

The Company files income tax returns in the United States and foreign tax jurisdictions. The tax years from 2016 to 2022 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 effective tax rate for the Company for the three months ended September 29, 2023 and September 30, 2022 was 7.2% and 1.1%, respectively, of net income. The increase was due to an increase in income subject to tax during the three months ended September 29, 2023 as compared to the three months ended September 30, 2022. In addition, a full valuation allowance of $2.1 million for deferred tax assets was set up during the three months ended September 29, 2023 due to management's belief that the Company's subsidiary in Israel would continue to have losses in the foreseeable future such that the deferred tax assets of such subsidiary would not be utilized.

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12. Share-based compensation

Share-based compensation

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

The effect of recording share-based compensation expense for the three months ended September 29, 2023 and September 30, 2022 was as follows:


	Three Months Ended
(in thousands)		September 29, 2023		September 30, 2022
Share-based compensation expense by type of award:
Restricted share units		$	4,879	$	4,901
Performance share units		2,854		2,822
Total share-based compensation expense		7,733		7,723
Tax effect on share-based compensation expense		—		—
Net effect on share-based compensation expense		$	7,733	$	7,723

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


	Three Months Ended
(in thousands)		September 29, 2023		September 30, 2022
Cost of revenue		$	2,165	$	1,915
Selling, general and administrative expense		5,568		5,808

Total share-based compensation expense		$	7,733	$	7,723

The Company did not capitalize any share-based compensation expense as part of any asset costs during the three months ended September 29, 2023 and September 30, 2022.

Share-based award activity

On December 12, 2019, the 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.

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.

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

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The following table summarizes the number of equity awards outstanding and ordinary shares available for grant under each of the Equity Incentive Plans as of September 29, 2023:


(share units)	Restricted Share Units outstanding	Performance Share Units outstanding	Ordinary Shares available for future grant
2020 Plan	320,011	171,078	1,777,609
2017 Inducement Plan	—	—	111,347
Total	320,011	171,078	1,888,956

Restricted share units and performance share units

Restricted share units and performance share units have been granted under the Equity Incentive Plans.

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 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 30, 2023	368,765	$	97.49
Granted	95,393	$	158.91
Vested	(139,438)	$	85.02
Forfeited	(4,709)	$	108.19
Balance as of September 29, 2023	320,011	$	121.07


	Number of Shares	Weighted- Average Grant Date Fair Value Per Share
Balance as of June 24, 2022	459,626	$	75.14
Granted	122,743	$	117.35
Vested	(180,824)	$	64.19
Forfeited	(9,446)	$	90.47
Balance as of September 30, 2022	392,099	$	93.03

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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 30, 2023	204,016	$	108.81
Granted	73,936	$	158.91
Vested	(106,874)	$	101.05
Forfeited	—	$	—
Balance as of September 29, 2023	171,078	$	135.31


	Number of Shares	Weighted- Average Grant Date Fair Value Per Share
Balance as of June 24, 2022	285,882	$	81.64
Granted	97,142	$	117.35
Vested	(179,008)	70.05
Forfeited	—	$	—
Balance as of September 30, 2022	204,016	$	108.81

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

As of September 29, 2023, there was $21.3 million and $15.5 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 2.9 and 1.5 years, respectively.

For the three months ended September 29, 2023 and September 30, 2022, the Company withheld an aggregate of 99,518 shares and 162,985 shares, respectively, upon the vesting of restricted share units and performance shares units, based upon the closing share price on the vesting date to settle employee tax withholding obligations. For the three months ended September 29, 2023 and September 30, 2022, the Company then remitted cash of $12.1 million and $16.5 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.

13. Shareholders’ equity

Share capital

Fabrinet’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 months ended September 29, 2023, Fabrinet issued 146,794 ordinary shares upon the vesting of restricted share units and performance share units under the Equity Incentive Plans, net of shares withheld.

For the three months ended September 30, 2022, Fabrinet issued 196,847 ordinary shares upon the vesting of restricted share units and performance share units under the Equity Incentive Plans, 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, May 2019, August 2020, August 2022, and August 2023, the Company’s board of directors approved an increase of $30.0 million, $50.0 million, $58.5 million, $78.7 million, and $47.6 million, respectively, to the original share repurchase authorization, bringing the aggregate authorization to $294.8 million.

During the three months ended September 29, 2023, the Company did not repurchase any shares. As of September 29, 2023, the Company had a remaining authorization to repurchase up to $100.0 million worth of its ordinary shares under the share repurchase program. Shares repurchased under the share repurchase program are held as treasury shares.

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14. Accumulated other comprehensive income (loss)

The changes in AOCI for the three months ended September 29, 2023 and September 30, 2022 were as follows:


(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 30, 2023	$	(3,279)	$	(3,541)	$	(330)	$	(965)	$	(8,115)
Other comprehensive income (loss) before reclassification	948		(1,643)		—		100		(595)
Amounts reclassified out of AOCI to the unaudited condensed consolidated statements of operations and comprehensive income	—		523		90		—		613
Tax effects	—		559		36		—		595
Other comprehensive income (loss)	$	948	$	(561)	$	126	$	100	$	613
Balance as of September 29, 2023	$	(2,331)	$	(4,102)	$	(204)	$	(865)	$	(7,502)


(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 24, 2022	$	(6,018)	$	(5,082)	$	(803)	$	(890)	$	(12,793)
Other comprehensive income (loss) before reclassification	(1,553)		(2,476)		—		246		(3,783)
Amounts reclassified out of AOCI to the unaudited condensed consolidated statements of operations and comprehensive income	92		1,258		168		—		1,518
Tax effects	—		—		—		—		—
Other comprehensive income (loss)	$	(1,461)	$	(1,218)	$	168	$	246	$	(2,265)