Fabrinet Earnings 2020-12-25

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

fn-20201225

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q

____________________________

(Mark One)


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

For the quarterly period ended December 25, 2020


☐			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)

c/o Intertrust Corporate Services (Cayman) Limited

190 Elgin Avenue

George Town

Grand Cayman

Cayman Islands

(Address of principal executive offices)

98-1228572

(I.R.S. Employer

Identification No.)

KY1-9005

(Zip Code)

+66 2-524-9600

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Ordinary Shares, $0.01 par value

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 January 22, 2021, the registrant had 36,870,691 ordinary shares, $0.01 par value, outstanding.

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FABRINET

FORM 10-Q

QUARTER ENDED DECEMBER 25, 2020

Table of Contents


			Page No.
RISK FACTORS SUMMARY			4
PART I. FINANCIAL INFORMATION			6

Item 1. Financial Statements			6

Condensed Consolidated Balance Sheets as of December 25, 2020 and June 26, 2020 (unaudited)			6

Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended December 25, 2020 and December 27, 2019 (unaudited)			7

Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended December 25, 2020 and December 27, 2019 (unaudited)			8

Condensed Consolidated Statements of Cash Flows for the six months ended December 25, 2020 and December 27, 2019 (unaudited)			10

Notes to Condensed Consolidated Financial Statements (unaudited)			12

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32

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			63

Item 6. Exhibits			64

Signature			65

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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.

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

•If we are unable to continue diversifying our precision optical and electro-mechanical manufacturing services across other markets within the optics industry, or if these markets do not grow as fast as we expect, our business may not grow as fast as we expect.

•If we are unable to compete successfully against our current and future competitors, our business, financial condition and operating results could be harmed.

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

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

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

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

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

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

•If the products that we manufacture contain defects, we could incur significant correction costs, demand for our services may decline and we may be exposed to product liability and product warranty claims.

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

•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.

•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.

•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 PRC, which will continue to expose us to risks inherent in doing business in the PRC.

•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.

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

•The phase-out of the London Interbank Offered Rate could affect interest rates under our existing credit facility agreement, as well as our ability to seek future debt financing.

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

•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.

•Any changes in the estimates, judgments and assumptions used in the preparation of our financial statements 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.

•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.

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

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

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

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

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

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

•Certain provisions in our constitutional documents may discourage our acquisition by a third party, which could limit your 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.

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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 25, 2020		June 26, 2020
Assets
Current assets
Cash and cash equivalents	$	219,221	$	225,430
Short-term restricted cash	7,402		7,402
Short-term investments	261,817		262,693
Trade accounts receivable, net of allowance for doubtful accounts of $123 and $336, respectively	318,430		272,665
Contract assets	16,223		13,256
Inventories	371,996		309,786
Other receivable	24,310		24,310
Prepaid expenses	3,141		5,399
Other current assets	29,187		14,508
Total current assets	1,251,727		1,135,449
Non-current assets
Long-term restricted cash	153		—
Property, plant and equipment, net	227,670		228,274
Intangibles, net	4,367		4,312
Operating right-of-use assets	7,271		8,068
Deferred tax assets	6,213		5,675
Other non-current assets	236		202
Total non-current assets	245,910		246,531
Total Assets	$	1,497,637	$	1,381,980
Liabilities and Shareholders’ Equity
Current liabilities
Long-term borrowings, current portion, net	$	12,156	$	12,156
Trade accounts payable	296,948		251,603
Fixed assets payable	7,748		15,127
Contract liabilities	1,804		1,556
Operating lease liabilities, current portion	2,277		1,979
Income tax payable	2,806		2,242
Accrued payroll, bonus and related expenses	17,633		19,265
Accrued expenses	14,504		8,979
Other payables	39,159		21,514
Total current liabilities	395,035		334,421
Non-current liabilities
Long-term borrowings, non-current portion, net	33,436		39,514
Deferred tax liability	4,592		4,729
Operating lease liability, non-current portion	4,737		5,873
Severance liabilities	19,011		17,379
Other non-current liabilities	4,156		5,655
Total non-current liabilities	65,932		73,150
Total Liabilities	460,967		407,571
Commitments and contingencies (Note 17)
Shareholders’ equity
Preferred shares (5,000,000 shares authorized, $0.01 par value; no shares issued and outstanding as of December 25, 2020 and June 26, 2020)	—		—
Ordinary shares (500,000,000 shares authorized, $0.01 par value; 38,698,068 shares and 38,471,967 shares issued at December 25, 2020 and June 26, 2020, respectively; and 36,852,416 shares and 36,727,864 shares outstanding at December 25, 2020 and June 26, 2020, respectively)	387		385
Additional paid-in capital	177,125		175,610
Less: Treasury shares (1,845,652 shares and 1,744,103 shares as of December 25, 2020 and June 26, 2020 respectively)	(75,575)		(68,501)
Accumulated other comprehensive income (loss)	(1,657)		(1,147)
Retained earnings	936,390		868,062
Total Shareholders’ Equity	1,036,670		974,409
Total Liabilities and Shareholders’ Equity	$	1,497,637	$	1,381,980

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				Six Months Ended
(in thousands of U.S. dollars, except per share data)	December 25, 2020		December 27, 2019		December 25, 2020		December 27, 2019
Revenues	$	453,827	$	426,217	$	890,466	$	825,513
Cost of revenues	(400,806)		(377,059)		(786,965)		(730,368)
Gross profit	53,021		49,158		103,501		95,145
Selling, general and administrative expenses	(17,156)		(17,078)		(34,019)		(33,078)
Expenses related to reduction in workforce	—		(16)		—		(16)
Operating income	35,865		32,064		69,482		62,051
Interest income	1,111		1,940		2,215		4,038
Interest expense	(265)		(181)		(516)		(2,574)
Foreign exchange gain (loss), net	(533)		(988)		(405)		(2,941)
Other income (expense), net	158		397		279		774
Income before income taxes	36,336		33,232		71,055		61,348
Income tax expense	(952)		(2,001)		(2,620)		(4,160)
Net income	35,384		31,231		68,435		57,188
Other comprehensive income (loss), net of tax:
Change in net unrealized gain (loss) on available-for-sale securities	(42)		(82)		(367)		(47)
Change in net unrealized gain (loss) on derivative instruments	2,385		(189)		(823)		(150)
Change in net retirement benefits plan – prior service cost	50		101		223		184
Change in foreign currency translation adjustment	(146)		616		457		247
Total other comprehensive income (loss), net of tax	2,247		446		(510)		234
Net comprehensive income (loss)	$	37,631	$	31,677	$	67,925	$	57,422
Earnings per share
Basic	$	0.96	$	0.84	$	1.86	$	1.55
Diluted	$	0.94	$	0.83	$	1.83	$	1.52
Weighted-average number of ordinary shares outstanding (thousands of shares)
Basic	36,936		37,011		36,877		36,962
Diluted	37,551		37,763		37,467		37,646

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 25, 2020


	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 September 25, 2020	38,680,659	$	387	$	171,715	$	(68,501)	$	(3,904)	$	901,006	$	1,000,703
Net income	—	—		—		—		—		35,384		35,384
Other comprehensive income (loss)	—	—		—		—		2,247		—		2,247
Share-based compensation	—	—		5,851		—		—		—		5,851
Issuance of ordinary shares	17,409	—		—		—		—		—		—
Repurchase of 101,549 shares held as treasury shares	—	—		—		(7,074)		—		—		(7,074)
Tax withholdings related to net share settlement of restricted share units	—	—		(441)		—		—		—		(441)
Balances at December 25, 2020	38,698,068	$	387	$	177,125	$	(75,575)	$	(1,657)	$	936,390	$	1,036,670

For the Six Months Ended December 25, 2020


	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 26, 2020	38,471,967	$	385	$	175,610	$	(68,501)	$	(1,147)	$	868,062	$	974,409
Net income	—	—		—		—		—		68,435		68,435
Other comprehensive income (loss)	—	—		—		—		(510)		—		(510)
Cumulative effect adjustment from adoption of ASC 326	—	—		—		—		—		(107)		(107)
Share-based compensation	—	—		11,878		—		—		—		11,878
Issuance of ordinary shares	226,101	2		(2)		—		—		—		—
Repurchase of 101,549 shares held as treasury shares	—	—		—		(7,074)		—		—		(7,074)
Tax withholdings related to net share settlement of restricted share units	—	—		(10,361)		—		—		—		(10,361)
Balances at December 25, 2020	38,698,068	$	387	$	177,125	$	(75,575)	$	(1,657)	$	936,390	$	1,036,670

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 27, 2019


	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 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 (loss)	—	—		—		—		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 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 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 (loss)	—	—		—		—		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 CASH FLOWS (unaudited)


	Six Months Ended
(in thousands of U.S. dollars)	December 25, 2020		December 27, 2019
Cash flows from operating activities
Net income for the period	$	68,435	$	57,188
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	17,650		15,279
(Gain) loss on disposal of property, plant and equipment	(24)		242
(Gain) loss from sales and maturities of available-for-sale securities	(86)		(79)
Amortization of investment discount	1,003		117
Amortization of deferred debt issuance costs	16		10
(Reversal of) allowance for doubtful accounts	(321)		6
Unrealized (gain) loss on exchange rate and fair value of foreign currency forward contracts	(290)		1,205
Unrealized loss (gain) on fair value of interest rate swaps	—		1,672
Amortization of fair value at hedge inception of interest rate swaps	(695)		(433)
Share-based compensation	11,878		12,183
Deferred income tax	(461)		1,543
Other non-cash expenses	(657)		(851)
Changes in operating assets and liabilities
Trade accounts receivable	(45,410)		(24,970)
Contract assets	(2,967)		1,333
Inventories	(62,211)		(767)
Other current assets and non-current assets	(11,983)		7,471
Trade accounts payable	45,179		(22,816)
Contract liabilities	248		121
Income tax payable	548		1,336
Severance liabilities	1,350		2,015
Other current liabilities and non-current liabilities	20,112		805
Net cash provided by operating activities	41,314		52,610
Cash flows from investing activities
Purchase of short-term investments	(126,701)		(101,727)
Proceeds from sales of short-term investments	57,486		72,664
Proceeds from maturities of short-term investments	68,807		62,666
Funds provided to customer to support transfer of manufacturing operations (Note 8)	—		(24,310)
Purchase of property, plant and equipment	(22,693)		(15,411)
Purchase of intangibles	(1,271)		(808)
Proceeds from disposal of property, plant and equipment	26		1,195
Net cash used in investing activities	(24,346)		(5,731)
Cash flows from financing activities
Payment of debt issuance costs	—		(153)
Proceeds from long-term borrowings	—		60,938
Repayment of long-term borrowings	(6,094)		(63,985)
Repayment of finance lease liability	(100)		(189)
Repurchase of ordinary shares	(7,074)		—
Withholding tax related to net share settlement of restricted share units	(10,361)		(4,377)
Net cash used in financing activities	(23,629)		(7,766)
Net increase (decrease) in cash, cash equivalents and restricted cash	$	(6,661)	$	39,113
Movement in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at the beginning of period	$	232,832	$	188,241
Increase (decrease) in cash, cash equivalents and restricted cash	(6,661)		39,113
Effect of exchange rate on cash, cash equivalents and restricted cash	605		351
Cash, cash equivalents and restricted cash at the end of period	$	226,776	$	227,705
Non-cash investing and financing activities
Construction, software and equipment-related payables	$	7,748	$	14,307

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 25, 2020		As of December 27, 2019
Cash and cash equivalents	$	219,221	$	220,031
Restricted cash	7,555		7,674
Cash, cash equivalents and restricted cash	$	226,776	$	227,705

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 25, 2020 and for the three and six months ended December 25, 2020 and December 27, 2019 includes normal recurring adjustments necessary for a fair statement of the financial statements set forth herein, in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such information does not include all of the information and footnotes required by U.S. GAAP for annual financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in Fabrinet’s Annual Report on Form 10-K for the year ended June 26, 2020.

The balance sheet as of June 26, 2020 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The results for the three and six months ended December 25, 2020 may not be indicative of results for the year ending June 25, 2021 or any future periods.

Use of Estimates

The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and the reported amount of total revenues and expenses during the year. The Company bases estimates on historical experience and various assumptions about the future that are believed to be reasonable based on available information. The Company’s reported financial position or results of operations may be materially different under different conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies, which are discussed below. Significant assumptions are used in accounting for share-based compensation, allowance for doubtful accounts, allowance for expected credit losses, income taxes, inventory obsolescence, goodwill and valuation of intangible assets related to business acquisition, among others. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates. In the event that estimates or assumptions prove to be different from actual results, adjustments will be made in subsequent periods to reflect more current information. Additionally, the extent to which the evolving COVID-19 pandemic impacts the Company’s unaudited condensed consolidated financial statements will depend on a number of factors, including the magnitude and duration of the pandemic. These estimates may change, as new events occur and additional information is obtained, as well as other factors related to the COVID-19 pandemic that could result in material impacts to the Company's unaudited condensed consolidated financial statements in future reporting periods.

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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 25, 2020 and December 27, 2019 each consisted of 13 weeks. The six months ended December 25, 2020 and December 27, 2019 each consisted of 26 weeks. Fiscal year 2021 will be comprised of 52 weeks and will end on June 25, 2021.

Reclassifications

For presentation purposes, certain prior period amounts have been reclassified to conform to the current period presentation.

As of June 26, 2020, the derivative assets and liabilities were measured at fair value and recognized by offsetting the fair value amounts under master netting arrangements. Also, the Company chose not to separate a derivative into current and non-current portions as follows:

(i)A derivative for which the fair value is a net liability is classified in total as current.

(ii)A derivative for which the fair value is a net asset and the current portion is an asset is classified in total as non-current. If the current portion is a liability, it is presented as a current liability.

As of December 25, 2020, the derivative assets and liabilities were measured at fair value, but the gross fair value amount is presented in the unaudited condensed consolidated balance sheets. Additionally, a classification of current and non-current portion is determined by the maturity date of that derivative (e.g., a derivative that matures within one year is classified as current).

The reclassifications have been made to the consolidated balance sheet as of June 26, 2020 as shown in the following table:


	June 26, 2020
(amount in thousands)	As previously reported		Reclassification		After reclassification
Consolidated Balance Sheet
Current assets
Other current assets	$	13,915	$	593	$	14,508
Current liabilities
Accrued expenses	$	12,104	$	(3,125)	$	8,979
Non-current liabilities
Other non-current liabilities	$	1,937	$	3,718	$	5,655

Adoption of New Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. The standard replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. The new standard also expands the required quantitative and qualitative disclosures surrounding expected credit losses.

On June 27, 2020, the Company adopted Accounting Standards Codification (“ASC”) 326 using the modified retrospective transition approach. The modified retrospective method requires the Company to recognize the cumulative effect of the adoption of ASC 326, to the opening accumulated retained earnings. Accordingly, the Company’s comparative financial statements as of June 26, 2020 have not been adjusted. The Company implemented internal controls to enable the preparation of financial information upon adoption.

Management estimates the expected credit losses of financial assets using relevant available information from internal and external sources relating to historical credit loss experience, current conditions and reasonable forecasts over a financial asset’s contractual term. Adjustments to historical loss information are made from qualitative and quantitative factors if economic conditions on the reporting date reflect stronger or weaker economic performance than the historical data implies based on management’s expectations of economic conditions on certain indicators of the Company, industry and economy. The Company reviews factors such as past collection experience, age of the accounts receivable and contract assets balance, significant trends in current balances, internal operations and macroeconomic conditions. In addition, the Company modified its impairment model to the Current Expected Credit Losses (“CECL”) model for available-for-sale

Tabl e of Contents

(“AFS”) debt securities and discontinued using the concept of “other than temporary” impairment on these AFS debt securities. CECL on the AFS debt securities are recognized in interest income and other income (expense), net on the Company’s unaudited condensed consolidated statements of operations and comprehensive income, and any remaining unrealized losses, are included in accumulated other comprehensive income (loss) (“AOCI”) in the unaudited condensed consolidated balance sheet.

As of June 27, 2020, the Company recorded a cumulative adjustment from CECL in the amount of $0.1 million, net of tax impact, to accumulated retained earnings in the unaudited condensed consolidated balance sheet.

On June 27, 2020, the Company also adopted ASC 820, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This standard is intended to improve the effectiveness of disclosures in the notes to the financial statements, including (1) the development of a framework that promotes consistent decisions by the FASB about disclosure requirements and (2) the appropriate exercise of discretion by reporting entities. The amendment modifies the disclosure requirements on transferring between level 1 and level 2 and valuation processes of level 3 fair value measurements. The Company adopted this standard with no impact on its unaudited condensed consolidated financial statements.

Changes in Accounting Policies

Except for the adoption of ASC 326, the Company has consistently applied the accounting policies to all periods presented in these unaudited condensed consolidated financial statements.

Short-term investments

Management determines the appropriate classification of its investments at the time of purchase and re-evaluates the designations at each balance sheet date. The Company may sell certain of the Company’s short-term investments prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. The maturities of the Company’s short-term investments generally range from three and six months to three years. The Company’s short-term investments, which consist of investments in U.S. Treasury, fixed income securities, liquidity funds that invest in short-term debt securities and certificates of deposit and time deposits, have been classified and accounted for as AFS. The AFS investments are carried at estimated fair value with any unrealized gains and losses, included in AOCI in the Company’s unaudited condensed consolidated balance sheet. The Company determines realized gains or losses on sale of marketable securities on a specific identification method and records such gains or losses as interest income and other income (expense), net in the unaudited condensed consolidated statements of operations and comprehensive income.

AFS debt securities are required to be individually evaluated for impairment. A security is considered impaired if the fair value of the security is less than its amortized cost basis.

An impairment is considered other than temporary if (i) the Company has the intent to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of the entire amortized cost basis, or (iii) the Company does not expect to recover the entire amortized cost basis of the security.

If an impairment is considered other than temporary based on condition (i) or (ii), the entire difference between the amortized cost and the fair value of the debt security is recognized as interest income and other income (expense), net in the unaudited condensed consolidated statements of operations and comprehensive income.

If an impairment is considered other than temporary based on condition (iii), the amount representing credit losses (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security) is recognized in interest and other income (expense), net in the unaudited condensed consolidated statements of operations and comprehensive income, and any remaining unrealized losses are included in AOCI in the unaudited condensed consolidated balance sheet.

Trade accounts receivable

Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. The Company makes estimates of expected credit losses for the allowance for doubtful accounts based upon its assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of its customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect the Company’s ability to collect from customers. The estimated credit loss allowance is recorded as selling, general and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income.

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Contract assets

A contract asset is recognized when the Company has recognized revenues prior to generating an invoice for payment. Contract assets are classified separately within the unaudited condensed consolidated balance sheets and transferred to accounts receivable when rights to payment become unconditional. The Company makes estimates of expected credit losses for the allowance for contract assets based upon its assessment of various factors, including historical experience, the age of the contract assets balances, credit quality of its customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect the Company’s ability to collect from customers. The estimated credit loss allowance is recorded as selling, general and administrative expenses in its unaudited condensed consolidated statements of operations and comprehensive income.

Concentration of credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, short-term investments, derivatives, accounts receivable and contract assets.

Cash, cash equivalents and short-term investments are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The Company seeks to mitigate its credit risks by spreading such risks across multiple counterparties and monitoring the risk profiles of these counterparties. The Company limits its short-term investments in marketable securities to securities with a maturity not in excess of three years and securities that are rated A1, P-1, F1, or better.

The Company enters into derivative contracts with financial institutions with reputable credit and monitors the credit profiles of these counterparties.

The Company performs ongoing credit evaluations for credit worthiness of its customers and usually does not require collateral from its customers. Management has implemented a program to closely monitor near term cash collection and credit exposures to mitigate any material losses.

New Accounting Pronouncements – not yet adopted by the Company

In December 2019, the FASB issued ASU2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. This ASU will be effective for the Company in the first quarter of fiscal year 2022. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this update on its unaudited condensed consolidated financial statements.

3.Revenues from contracts with customers

Revenue by Geographic Area and End Market

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

The following table presents total revenues by geographic region:


(amount in thousands, except percentages)	Three Months Ended December 25, 2020		As a % of Total Revenues		Six Months Ended December 25, 2020		As a % of Total Revenues
North America	$	224,672	49.5	%	$	432,074	48.5	%
Asia-Pacific	153,734		33.9		299,380		33.6
Europe	75,421		16.6		159,012		17.9
	$	453,827	100.0	%	$	890,466	100.0	%

Tabl e of Contents


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

The following table presents revenues by end market.


(amount in thousands, except percentages)	Three Months Ended December 25, 2020		As a % of Total Revenues		Six Months Ended December 25, 2020		As a % of Total Revenues
Optical communications	$	347,840	76.6	%	$	691,757	77.7	%
Lasers, sensors and other	105,987		23.4		198,709		22.3
Total	$	453,827	100.0	%	$	890,466	100.0	%

(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

Price	50.41	EPS	3
Shares	38	P/E	16
MCap	1,892	P/FCF	23
Net Debt	-137	EBIT	132
TEV	1,755	TEV/EBIT	13
TTM 2019-09-27, in MM, except price, ratios

10-Q	2020-12-25	Filed 2021-02-02
10-Q	2020-09-25	Filed 2020-11-03
10-K	2020-06-26	Filed 2020-08-18
10-Q	2020-03-27	Filed 2020-05-05
10-Q	2019-12-27	Filed 2020-02-04
10-Q	2019-09-27	Filed 2019-11-05
10-K	2019-06-28	Filed 2019-08-20
10-Q	2019-03-29	Filed 2019-05-07
10-Q	2018-12-28	Filed 2019-02-05
10-Q	2018-09-28	Filed 2018-11-06
10-K	2018-06-29	Filed 2018-08-22
10-Q	2018-03-30	Filed 2018-05-08
10-Q	2017-12-29	Filed 2018-02-07
10-Q	2017-09-29	Filed 2017-11-07
10-K	2017-06-30	Filed 2017-08-23
10-Q	2017-03-31	Filed 2017-05-09
10-Q	2016-12-30	Filed 2017-02-07
10-Q	2016-09-30	Filed 2016-11-09
10-K	2016-06-24	Filed 2016-08-17
10-Q	2016-03-25	Filed 2016-05-03
10-Q	2015-12-25	Filed 2016-02-02
10-Q	2015-09-25	Filed 2015-11-03
10-K	2015-06-26	Filed 2015-08-19
10-Q	2015-03-27	Filed 2015-05-05
10-Q	2014-12-26	Filed 2015-02-03
10-Q	2014-09-26	Filed 2014-11-05
10-K	2014-06-27	Filed 2014-10-16
10-Q	2014-03-28	Filed 2014-05-06
10-Q	2013-12-27	Filed 2014-02-04
10-Q	2013-09-27	Filed 2013-11-05
10-K	2013-06-28	Filed 2013-08-16
10-Q	2013-03-29	Filed 2013-05-03
10-Q	2012-12-28	Filed 2013-02-05
10-K	2012-06-29	Filed 2012-08-28
10-Q	2012-03-30	Filed 2012-05-09
10-Q	2011-12-30	Filed 2012-02-08
10-Q	2011-09-30	Filed 2011-11-09
10-K	2011-06-24	Filed 2011-08-31
10-Q	2011-03-25	Filed 2011-05-04
10-Q	2010-12-24	Filed 2011-02-02
10-Q	2010-09-24	Filed 2010-11-03
10-K	2010-06-25	Filed 2010-09-08

8-K	2021-02-01	Earnings, Exhibits
8-K	2020-12-10	Shareholder Vote
8-K	2020-11-02
8-K	2020-08-11
8-K	2020-05-04
8-K	2020-02-01
8-K	2019-12-12
8-K	2019-11-04
8-K	2019-08-20
8-K	2019-08-19
8-K	2019-08-14
8-K	2019-05-01
8-K	2019-02-26
8-K	2019-02-04
8-K	2018-12-13
8-K	2018-08-14
8-K	2018-06-15
8-K	2018-06-04
8-K	2018-05-03
8-K	2018-02-05
8-K	2018-01-09

EX-31.1	fn-20201225x10qex311.htm
EX-31.2	fn-20201225x10qex312.htm
EX-32.1	fn-20201225x10qex321.htm

FN 10Q Quarterly Report

Fabrinet Earnings 2020-12-25