Fabrinet(FN) - 2023 Q1 - Quarterly Report

RISK FACTORS SUMMARY This section summarizes key risks including customer concentration, market consolidation, operational volatility, supply chain dependencies, international operational challenges, and macroeconomic conditions - Sales depend on a small number of customers, making the company vulnerable to order reductions or loss[10] - Market consolidation could reduce potential customers and increase pricing pressure[10] - Significant fluctuations in quarterly revenues, gross profit margins, and operating results are expected, leading to potential share price volatility[10] - Reliance on single or limited suppliers for critical materials poses risks of shortages, quality issues, or increased costs[10] - International operations face risks from foreign currency fluctuations, U.S.-China trade disputes, and political/economic instability[10][12] - Unfavorable worldwide economic conditions, including inflation and supply chain disruptions, may negatively affect business and financial results[12] PART I. FINANCIAL INFORMATION This section presents Fabrinet's unaudited condensed consolidated financial statements, including balance sheets, income statements, equity statements, and cash flow statements, with detailed notes on business and accounting policies Item 1. Financial Statements This item provides the unaudited condensed consolidated financial statements of Fabrinet, including the balance sheets, statements of operations and comprehensive income, statements of shareholders' equity, and statements of cash flows, along with comprehensive notes detailing the company's business, accounting policies, and specific financial instrument disclosures Condensed Consolidated Balance Sheets This section presents the company's financial position at specific points in time, detailing assets, liabilities, and shareholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands of U.S. dollars) | Item | September 30, 2022 | June 24, 2022 | Change | | :-------------------------- | :------------------- | :------------ | :----- | | Total Assets | $1,864,389 | $1,835,641 | +$28,748 | | Total Liabilities | $562,023 | $581,959 | -$19,936 | | Total Shareholders' Equity | $1,302,366 | $1,253,682 | +$48,684 | Condensed Consolidated Statements of Operations and Comprehensive Income This section details the company's financial performance over specific periods, including revenues, expenses, and net income Condensed Consolidated Statements of Operations Highlights (Three Months Ended, in thousands of U.S. dollars, except per share data) | Item | September 30, 2022 | September 24, 2021 | Change (YoY) | | :-------------------------------- | :------------------- | :------------------- | :------------- | | Revenues | $655,429 | $543,322 | +$112,107 (+20.6%) | | Gross profit | $82,756 | $63,597 | +$19,159 (+30.1%) | | Operating income | $62,191 | $43,010 | +$19,181 (+44.6%) | | Net income | $64,615 | $44,651 | +$19,964 (+44.7%) | | Diluted Earnings per share | $1.76 | $1.20 | +$0.56 (+46.7%) | Condensed Consolidated Statements of Shareholders' Equity This section outlines changes in the company's equity over time, reflecting net income, other comprehensive income, and share transactions Changes in Shareholders' Equity (Three Months Ended, in thousands of U.S. dollars) | Item | September 30, 2022 | June 24, 2022 | | :-------------------------- | :------------------- | :------------ | | Balances at period end | $1,302,366 | $1,253,682 | | Net income | $64,615 | N/A | | Other comprehensive income (loss) | $(2,265) | N/A | | Share-based compensation | $7,723 | N/A | | Repurchase of treasury shares | $(4,900) | N/A | Condensed Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities over specific periods Condensed Consolidated Statements of Cash Flows Highlights (Three Months Ended, in thousands of U.S. dollars) | Cash Flow Activity | September 30, 2022 | September 24, 2021 | Change (YoY) | | :--------------------------------------- | :------------------- | :------------------- | :------------- | | Net cash provided by operating activities | $60,634 | $36,911 | +$23,723 (+64.3%) | | Net cash provided by (used in) investing activities | $23,367 | $(47,535) | +$70,902 | | Net cash used in financing activities | $(27,485) | $(22,112) | -$5,373 (-24.3%) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $56,516 | $(32,736) | +$89,252 | | Cash, cash equivalents and restricted cash at end of period | $255,401 | $270,066 | -$14,665 (-5.4%) | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements, covering business operations, accounting policies, and specific financial disclosures 1. Business and organization This note describes Fabrinet's core business, its manufacturing services, and operational focus - Fabrinet provides advanced optical packaging and precision manufacturing services to OEMs of complex products[30] - The company offers comprehensive manufacturing capabilities from design to final assembly and testing[30] - Fabrinet focuses on low-volume, high-mix products with capacity for high-volume production[30] 2. Accounting policies This note outlines the significant accounting principles and methods used in preparing the financial statements, including estimates and recent pronouncements - Unaudited condensed consolidated financial statements adhere to U.S. GAAP for interim reporting and SEC rules[31] - Management relies on significant estimates for share-based compensation, doubtful accounts, income taxes, and inventory obsolescence[33] - ASU 2021-10 adoption in Q1 FY2023 had no material impact on financial statements[35] - The three months ended September 30, 2022, comprised 14 weeks, compared to 13 weeks in the prior year period[34] 3. Revenues from contracts with customers This note details the company's revenue recognition policies, including disaggregation of revenue by geographic region and end market, and information on contract assets and liabilities Total Revenues by Geographic Region (Three Months Ended, in thousands of U.S. dollars, except percentages) | Region | September 30, 2022 | % of Total | September 24, 2021 | % of Total | | :---------------------- | :------------------- | :--------- | :------------------- | :--------- | | North America | $348,704 | 53.2% | $246,590 | 45.4% | | Asia-Pacific and others | $248,294 | 37.9% | $206,183 | 37.9% | | Europe | $58,431 | 8.9% | $90,549 | 16.7% | | Total Revenue | $655,429 | 100.0% | $543,322 | 100.0% | Revenues by End Market (Three Months Ended, in thousands of U.S. dollars, except percentages) | End Market | September 30, 2022 | % of Total | September 24, 2021 | % of Total | | :------------------------ | :------------------- | :--------- | :------------------- | :--------- | | Optical communications | $497,561 | 75.9% | $427,301 | 78.6% | | Lasers, sensors and other | $157,868 | 24.1% | $116,021 | 21.4% | | Total | $655,429 | 100.0% | $543,322 | 100.0% | Contract Assets and Liabilities (in thousands of U.S. dollars) | Item | June 24, 2022 | September 30, 2022 | | :-------------------- | :------------ | :------------------- | | Contract Assets | $13,464 | $14,220 | | Contract Liabilities | $1,982 | $6,348 | 4. Earnings per ordinary share This note provides a breakdown of basic and diluted earnings per ordinary share, including the calculation methodology and relevant share counts Earnings Per Ordinary Share (Three Months Ended, in thousands of U.S. dollars, except per share data) | Item | September 30, 2022 | September 24, 2021 | | :---------------------------------------------------------------- | :------------------- | :------------------- | | Net income attributable to shareholders | $64,615 | $44,651 | | Weighted-average number of ordinary shares outstanding (Basic) | 36,528 | 36,877 | | Weighted-average number of ordinary shares outstanding (Diluted) | 36,758 | 37,328 | | Basic earnings per ordinary share | $1.77 | $1.21 | | Diluted earnings per ordinary share | $1.76 | $1.20 | 5. Cash, cash equivalents and short-term investments This note details the composition of cash, cash equivalents, and short-term investments, along with their classification criteria and maturities Cash, Cash Equivalents, and Short-term Investments (in thousands of U.S. dollars) | Item | September 30, 2022 | June 24, 2022 | | :-------------------------- | :------------------- | :------------ | | Cash and cash equivalents | $255,260 | $197,996 | | Short-term investments | $244,536 | $280,157 | | Total | $499,796 | $478,153 | - Highly liquid investments with original maturities of three months or less are classified as cash equivalents[43] - Short-term investments generally have maturities ranging from three months to three years[43] 6. Fair value of financial instruments This note describes the company's use of derivative financial instruments for hedging and provides fair value measurements of financial assets and liabilities - Derivative financial instruments are used to hedge foreign exchange and interest rate risks on long-term debt[48] Fair Value Measurements at Reporting Date (in thousands of U.S. dollars) | Item | September 30, 2022 (Total) | June 24, 2022 (Total) | | :-------------------------------- | :------------------------- | :-------------------- | | Assets (Cash equivalents, securities, derivatives) | $258,660 | $290,633 | | Liabilities (Derivative liabilities) | $(10,489) | $(7,579) | - As of September 30, 2022, AOCI expected to be reclassified into earnings within 12 months included a $6.3 million loss for foreign currency forward contracts and a $0.2 million loss for interest rate swaps[55][63] 7. Inventories This note provides a breakdown of inventory components, including raw materials, work in progress, finished goods, and goods in transit Inventories (in thousands of U.S. dollars) | Item | September 30, 2022 | June 24, 2022 | Change | | :---------------- | :------------------- | :------------ | :----- | | Raw materials | $196,196 | $275,730 | -$79,534 | | Work in progress | $268,075 | $217,638 | +$50,437 | | Finished goods | $24,587 | $15,203 | +$9,384 | | Goods in transit | $39,192 | $48,574 | -$9,382 | | Total inventories | $528,050 | $557,145 | -$29,095 (-5.2%) | 8. Leases This note describes the company's lease agreements, including lease liabilities maturities and rental expenses - The company leases facilities, equipment, and vehicles under non-cancelable operating lease agreements expiring through 2025[68] Operating Lease Liabilities Maturities (as of September 30, 2022, in thousands of U.S. dollars) | Year | Amount | | :------------------------ | :----- | | 2023 (remaining nine months) | $1,749 | | 2024 | $1,238 | | 2025 | $37 | | Total undiscounted lease payments | $3,024 | - Rental expense for long-term operating leases was $0.6 million for the three months ended September 30, 2022, a decrease from $0.7 million in the prior year period[71] 9. Intangibles This note provides details on the company's intangible assets, including their carrying amounts, amortization expense, and weighted-average remaining useful lives Intangibles, Net (in thousands of U.S. dollars) | Item | September 30, 2022 | June 24, 2022 | Change | | :-------------------- | :------------------- | :------------ | :----- | | Software | $2,783 | $2,803 | -$20 | | Customer relationships | $565 | $705 | -$140 | | Total intangibles | $3,348 | $3,508 | -$160 (-4.6%) | - Amortization expense for intangibles was $0.4 million for both the three months ended September 30, 2022, and September 24, 2021[74] Weighted-Average Remaining Life of Intangibles (in years) | Item | September 30, 2022 | June 24, 2022 | | :-------------------- | :------------------- | :------------ | | Software | 3.7 | 3.8 | | Customer relationships | 2.9 | 3.1 | | Total intangibles | 3.7 | 3.8 | 10. Borrowings This note outlines the company's long-term debt obligations, including terms, interest rates, repayment schedules, and compliance with financial covenants Long-term Borrowings, Net (in thousands of U.S. dollars) | Item | September 30, 2022 | June 24, 2022 | Change | | :------------------------------------ | :------------------- | :------------ | :----- | | Long-term borrowings, current portion, net | $12,156 | $12,156 | $0 | | Long-term borrowings, non-current portion, net | $9,117 | $15,202 | -$6,085 | | Total Long-term Borrowings, Net | $21,273 | $27,358 | -$6,085 (-22.2%) | - The term loan accrues interest at 3-month LIBOR plus 1.35% and is repayable in quarterly installments of $3.0 million, maturing on June 30, 2024[79] - As of September 30, 2022, the company complied with all financial covenants under the Term Loan Agreement[81] 11. Income taxes This note provides information on the company's income tax liabilities, effective tax rate, and open tax years subject to examination Income Tax Liability (in thousands of U.S. dollars) | Item | September 30, 2022 | June 24, 2022 | Change | | :------------------------------------ | :------------------- | :------------ | :----- | | Liability for uncertain tax positions | $800 | $1,600 | -$800 (-50.0%) | - The effective tax rate for the three months ended September 30, 2022, was 1.1%, a decrease from 1.3% in the prior year, primarily due to increased non-taxable income[86] - Tax years 2015-2021 remain open for examination by U.S. federal, state, and foreign tax authorities[85] 12. Share-based compensation This note details the company's share-based compensation plans, including expense recognition, unrecognized compensation, and share settlement activities Share-based Compensation Expense (Three Months Ended, in thousands of U.S. dollars) | Type of Award | September 30, 2022 | September 24, 2021 | Change (YoY) | | :-------------------------- | :------------------- | :------------------- | :------------- | | Restricted share units | $4,901 | $4,924 | -$23 | | Performance share units | $2,822 | $4,368 | -$1,546 | | Total expense | $7,723 | $9,292 | -$1,569 (-16.9%) | - As of September 30, 2022, unrecognized share-based compensation expense totaled $20.0 million for restricted share units and $14.9 million for performance share units, amortized over 2.9 and 1.6 years respectively[95] - The company withheld 162,985 shares and remitted $16.5 million in cash for employee tax withholding related to share settlements[96] 13. Shareholders' equity This note provides information on the company's authorized share capital, share issuances, and share repurchase activities - Fabrinet's authorized share capital includes 500,000,000 ordinary shares and 5,000,000 preferred shares, each with a par value of $0.01 per share[97] - During the three months ended September 30, 2022, Fabrinet issued 196,847 ordinary shares upon vesting of restricted and performance share units[97] - The company repurchased 46,977 shares for $4.9 million during the three months ended September 30, 2022, with a remaining authorization of $95.1 million[100] 14. Accumulated other comprehensive income (loss) This note details the components of accumulated other comprehensive income (loss), including unrealized gains/losses on securities and derivatives, and foreign currency translation adjustments Accumulated Other Comprehensive Income (Loss) (in thousands of U.S. dollars) | Item | September 30, 2022 | June 24, 2022 | Change | | :------------------------------------ | :------------------- | :------------ | :----- | | Unrealized net (Losses)/Gains on Available-for-sale Securities | $(7,479) | $(6,018) | $(1,461) | | Unrealized net (Losses)/Gains on Derivative Instruments | $(6,300) | $(5,082) | $(1,218) | | Retirement benefit plan - Prior service cost | $(635) | $(803) | $168 | | Foreign Currency Translation Adjustment | $(644) | $(890) | $246 | | Total | $(15,058) | $(12,793) | $(2,265) (-17.7%) | 15. Commitments and contingencies This note outlines the company's various commitments and potential liabilities, including bank guarantees, purchase obligations, and capital expenditure commitments - As of September 30, 2022, outstanding bank guarantees totaled $1.4 million for Thailand and $0.1 million for the PRC[103] - The company had purchase obligations and other commitments to third parties of $1.39 billion as of September 30, 2022[105] - Capital expenditure commitments to third parties amounted to $25.9 million as of September 30, 2022[106] 16. Business segments and geographic information This note provides information on the company's operating segments, geographic distribution of long-lived assets, and customer concentration - The company operates and manages a single operating segment[109] Long-Lived Assets by Country (in thousands of U.S. dollars) | Country | September 30, 2022 | June 24, 2022 | | :-------------- | :------------------- | :------------ | | Thailand | $244,548 | $240,750 | | U.S. | $26,234 | $25,938 | | China | $18,851 | $19,686 | | Israel | $3,678 | $4,025 | | U.K. | $1,015 | $1,281 | | Cayman Islands | $551 | $597 | | Total | $294,877 | $292,277 | - Three customers each contributed 10% or more of total trade accounts receivable as of September 30, 2022, and June 24, 2022[111] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Fabrinet's financial condition and results of operations, discussing key factors influencing performance, recent developments, and future outlook, including detailed comparisons of financial results Overview This section provides a general description of Fabrinet's business, its manufacturing services, and product offerings - Fabrinet provides advanced optical packaging and precision manufacturing services to OEMs of complex products[115] - The company manufactures products for optical communications, industrial lasers, automotive, medical devices, and sensors[115] - Fabrinet designs and fabricates customized optics and glass products for OEM integration and merchant market sales[117] Recent Developments Related to COVID-19 This section discusses the impact of the COVID-19 pandemic on the company's operations, supply chain, and financial position - Thailand relaxed COVID-19 measures in October 2022, reclassifying it as a communicable disease under surveillance[118] - The company experienced no significant operational or customer demand disruptions during the three months ended September 30, 2022[118] - Inflationary pressures and supply chain issues are expected to continue negatively affecting gross margins[120] - Fabrinet maintains a strong capital position with $499.8 million in cash, cash equivalents, and short-term investments, and approximately $21.3 million in total debt as of September 30, 2022[120] Revenues This section discusses factors influencing the company's revenue generation, including pricing strategies, supply chain disruptions, and customer demand - The company aims to maintain favorable pricing through cycle time reduction, product mix adjustment, quality improvements, and material cost reduction[121] - Supply chain disruptions, intensified by COVID-19 lockdowns and geopolitical conflicts, continue to significantly impact revenue generation despite strong demand[122] - Securing alternative supply chain sources involves lengthy requalification, negatively impacting revenue timing[122] Revenues by Geography This section analyzes the company's revenue distribution across different geographic regions and highlights shifts in customer locations - Revenues are attributed by customer bill-to-location, with the majority derived from Asia-Pacific manufacturing facilities[123] Percentage of Total Revenues by Geographic Region | Region | Three Months Ended September 30, 2022 | Three Months Ended September 24, 2021 | | :---------------------- | :------------------------------------ | :------------------------------------ | | North America | 53.2% | 45.4% | | Asia-Pacific and others | 37.9% | 37.9% | | Europe | 8.9% | 16.7% | | Total | 100.0% | 100.0% | - Revenues from bill-to locations outside North America decreased from 54.6% in Q1 FY2022 to 46.8% in Q1 FY2023[124] Our Contracts This section describes the nature of the company's supply agreements with customers, including terms, demand forecasting, and inventory obligations - Customer supply agreements typically have initial terms of up to three years, with automatic one-year renewals[127] - Customer demand forecasts are non-binding and subject to change, potentially leading to excess materials[127] - Customers are generally obligated to purchase finished goods and designated excess or obsolete inventory, even if production is canceled[128] Cost of Revenues This section discusses the primary components of the cost of revenues and factors that may influence gross profit margins, such as material costs, employee expenses, and supply shortages - Material costs constitute the majority of cost of revenues, followed by employee and infrastructure-related costs[129] - Supply shortages from sole-source suppliers can increase expenses and negatively impact gross profit margins[129] - Employee costs are expected to increase due to rising wages in Thailand and the PRC, potentially reducing profit margins[130] - The company anticipates incremental costs of revenue from planned expansion into new geographic markets[132] Selling, General and Administrative Expenses This section outlines the composition of selling, general, and administrative expenses and discusses expected trends - SG&A expenses primarily comprise corporate employee costs for sales, marketing, general and administrative, and R&D for customized optics and glass[133] - SG&A expenses are projected to increase in fiscal year 2023 compared to fiscal year 2022, primarily due to higher employee costs[133] Additional Financial Disclosures This section provides further details on specific financial aspects, including foreign exchange risks, currency regulations, income tax, and critical accounting policies Foreign Exchange This section discusses the company's exposure to foreign currency exchange rate risk and its strategies for managing this risk - The company faces foreign exchange risk from expenses in Thai baht, RMB, and GBP, while most revenues are in U.S. dollars[135][188] - Derivative instruments, such as foreign currency forward contracts, are used to manage foreign exchange risk, typically with maturities up to 12 months[136] Foreign Currency Denominated Assets (in thousands of U.S. dollars) | Currency | As of September 30, 2022 ($) | % | | :------- | :--------------------------- | :-- | | Thai baht | $23,022 | 70.4% | | RMB | $3,987 | 12.2% | | GBP | $5,678 | 17.4% | | Total | $32,687 | 100.0% | Foreign Currency Denominated Liabilities (in thousands of U.S. dollars) | Currency | As of September 30, 2022 ($) | % | | :------- | :--------------------------- | :-- | | Thai baht | $75,112 | 88.2% | | RMB | $7,814 | 9.2% | | GBP | $2,225 | 2.6% | | Total | $85,151 | 100.0% | Currency Regulation and Dividend Distribution This section addresses foreign exchange regulations, particularly in the PRC, and their potential impact on fund flows and dividend distributions - PRC foreign exchange regulations permit free convertibility for current account items but restrict capital account items without SAFE approval[142] - Circular 142 restricts the use of RMB converted from foreign currencies to approved business scope, prohibiting equity investments within the PRC[145] - Limitations on intercompany fund flows could restrict the ability to respond to changing market conditions[148] Income Tax This section discusses the company's effective tax rate, preferential tax treatments, and corporate income tax rates in various jurisdictions - The effective tax rate for the three months ended September 30, 2022, was 1.1%, down from 1.3% in the prior year, primarily due to increased non-taxable income[86][168] - Fabrinet benefits from preferential tax treatment in Thailand, including corporate tax exemptions for certain manufacturing projects through June 2026, June 2025, and 2030, contingent on various factors[150] - Corporate income tax rates for subsidiaries are 20% in Thailand, 25% in PRC, 21% in the U.S., 19% in the U.K. (increasing to 25% on April 1, 2023), and 23% in Israel[151] Critical Accounting Policies and Use of Estimates This section highlights the critical accounting policies and the significant estimates and assumptions made by management in preparing the financial statements - U.S. GAAP financial statement preparation requires management estimates and assumptions affecting reported assets, liabilities, revenues, and expenses[152] - Estimates are based on historical experience and future assumptions, and actual results may differ[152] - No changes occurred in the company's critical accounting policies during the three months ended September 30, 2022[153] Results of Operations This section provides a detailed comparison of the company's financial performance for the three months ended September 30, 2022, versus the prior year period Comparison of Three Months Ended September 30, 2022 with Three Months Ended September 24, 2021 This section analyzes the period-over-period changes in key financial metrics, including revenues, gross profit, operating income, and net income Key Financial Performance Comparison (Three Months Ended, in thousands of U.S. dollars) | Item | September 30, 2022 | September 24, 2021 | Change (YoY) | | :-------------------------- | :------------------- | :------------------- | :------------- | | Revenues | $655,429 | $543,322 | +$112,107 (+20.6%) | | Gross profit | $82,756 | $63,597 | +$19,159 (+30.2%) | | Operating income | $62,191 | $43,010 | +$19,181 (+44.7%) | | Net income | $64,615 | $44,651 | +$19,964 (+44.7%) | - Revenue increase primarily driven by higher demand for optical communications manufacturing services and an additional week of revenue[159] - Gross profit margin improved from 11.7% to 12.6%, and operating income margin improved from 7.9% to 9.5%[156][161][163] - Interest income increased by 104.9% to $1.6 million due to a higher weighted average interest rate[164] - Interest expense increased by $0.4 million, primarily due to lower capitalized interest and reduced amortization of interest rate swap fair value[165] Liquidity and Capital Resources This section discusses the company's ability to generate and manage cash, its working capital position, and its capacity to meet short-term and long-term financial obligations Cash Flows and Working Capital This section provides an overview of the company's cash flow generation and its working capital management strategies - The company primarily finances operations through cash flow from operations[171] Cash, Cash Equivalents, and Short-term Investments (in thousands of U.S. dollars) | Item | September 30, 2022 | September 24, 2021 | Change (YoY) | | :------------------------------------ | :------------------- | :------------------- | :------------- | | Cash, cash equivalents, and short-term investments | $499,800 | $528,400 | -$28,600 (-5.4%) | | Outstanding debt | $21,300 | $36,600 | -$15,300 (-41.8%) | - Management believes current cash, cash equivalents, short-term investments, and operating cash flow will suffice for working capital and capital expenditure needs for at least the next 12 months[175] Operating Activities This section details the cash generated or used by the company's primary business operations - Cash provided by operating activities increased to $60.6 million for the three months ended September 30, 2022, from $36.9 million in the prior year, driven by higher net income and favorable working capital changes[177][178] Investing Activities This section outlines the cash flows related to the purchase and sale of long-term assets and investments - Cash provided by investing activities was $23.4 million for the three months ended September 30, 2022, compared to cash used of $47.5 million in the prior year, due to fewer investment purchases, increased proceeds from short-term investment sales, and decreased capital expenditures[177][179] Financing Activities This section describes the cash flows associated with debt, equity, and dividend transactions - Cash used in financing activities increased to $27.5 million for the three months ended September 30, 2022, from $22.1 million in the prior year, due to increased debt repayment and share repurchases, partially offset by lower withholding tax[177][180] Recent Accounting Pronouncements This section refers to disclosures regarding recently adopted or issued accounting standards and their impact on the financial statements - Refer to Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements for recent accounting pronouncement details[181] - ASU 2021-10 adoption in Q1 FY2023 had no material impact on unaudited condensed consolidated financial statements[35] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item discusses the company's exposure to market risks, specifically interest rate risk and foreign currency risk, and the strategies employed to manage these risks, including derivative instruments. It also addresses credit risk Interest Rate Risk This section describes the company's exposure to interest rate fluctuations, particularly concerning investments and LIBOR-based debt, and its hedging strategies - The company faces interest rate risk from highly liquid investments and LIBOR-based interest-bearing liabilities[183][184] - Interest rate swap agreements convert floating debt rates to fixed rates, designated as cash flow hedges to manage risk[185] - A 10 basis point decline in interest rates would decrease interest income by approximately $0.1 million for both periods[183] - A 100 basis point increase in LIBOR would increase interest expense by approximately $0.1 million for both periods[184] Foreign Currency Risk This section details the company's exposure to foreign currency exchange rate fluctuations and its use of derivative instruments to mitigate this risk - Significant foreign currency risk arises from expenses, assets, and liabilities in Thai baht, RMB, and GBP, while most revenues are in U.S. dollars[188][189] - Derivative instruments, typically 1 to 18 months, hedge exchange rate risks, with foreign currency forward contracts designated as cash flow hedges[190] - A 10% weakening in the U.S. dollar against the Thai baht, RMB, and GBP would have decreased the net dollar position by approximately $5.9 million as of September 30, 2022[190] Credit Risk This section discusses the company's exposure to credit risk from financial institutions, suppliers, and customers, and its risk management practices - The company faces credit risk from financial institutions, suppliers, and customers, especially given global economic conditions[191] - Cash and cash equivalents are held with institutions rated A- or above, and short-term investments are in securities rated A1, P-1, F1 or better[191] - Management believes the company will not incur material losses from credit risk exposure[191] Item 4. Controls and Procedures This item details management's evaluation of the effectiveness of disclosure controls and procedures and confirms no material changes in internal control over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures This section describes management's assessment of the effectiveness of the company's disclosure controls and procedures - Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2022[192] - Disclosure controls and procedures were deemed effective in providing reasonable assurance of timely information recording, processing, summarizing, and reporting[192] Changes in Internal Control over Financial Reporting This section reports on any changes in the company's internal control over financial reporting during the period - No material changes in internal control over financial reporting occurred during the three months ended September 30, 2022[193] PART II. OTHER INFORMATION This section covers other information, including legal proceedings, updated risk factors, equity security sales, and a list of filed exhibits Item 1. Legal Proceedings This item states that the company is not currently involved in any material legal claims or actions - No material claims or actions are currently pending or threatened against the company[194] Item 1A. Risk Factors This item outlines a comprehensive list of risks that could materially affect Fabrinet's business, financial condition, and operating results, categorized into macroeconomic, operational, international, financial, intellectual property, compliance, and share ownership risks COVID-19 and Macroeconomic Environment Updates This section updates on risks related to the COVID-19 pandemic and broader macroeconomic conditions, including global supply chain disruptions and political instability - The COVID-19 pandemic adversely affected the global economy, disrupted supply chains, and created financial market volatility[196] - Thailand terminated its COVID-19 emergency decree on September 30, 2022, reclassifying it as a communicable disease under surveillance[197] - Increased international political instability, such as the Russia-Ukraine conflict, may hinder business operations[198] Company and Operational Risks This section details risks inherent to the company's operations, including customer concentration, market competition, supply chain dependencies, inventory management, manufacturing capacity, product quality, and personnel retention - Sales depend on a small number of customers (three customers contributed 46.0% of revenues in Q1 FY2023), making the company vulnerable to order reductions or loss[199] - Market consolidation can reduce potential customers and increase pricing and margin pressures[202][203] - The optical communications market, accounting for 75.9% of Q1 FY2023 revenues, must continue to expand for expected business growth[204] - The company faces significant competition from customer internal manufacturing and other third-party manufacturers[209][210] - Reliance on single or limited suppliers for critical materials, exacerbated by global shortages, can lead to supply disruptions, increased costs, and harm to customer relations[215][217] - Complex inventory management and inaccurate forecasts can lead to excess or obsolete inventory, requiring write-downs and increasing costs[218] - Risks include inadequate manufacturing capacity expansion to meet demand or, conversely, rapid expansion leading to excess capacity[219][221] - Lower-than-expected manufacturing yields can increase costs and harm operating results and customer relations[222] - Product defects can lead to significant correction costs, declining demand, and exposure to product liability and warranty claims[223][225] - Failure to attract or retain skilled employees could adversely affect business, financial condition, and operating results[226] Risks Related to Our International Operations This section addresses risks associated with the company's international presence, including foreign currency fluctuations, logistical challenges, export controls, trade disputes, and political instability in key operating regions - Foreign currency exchange rate fluctuations, especially USD against Thai baht, RMB, or GBP, can increase operating costs and adversely affect results[227][229] - Operating in multiple Asia-Pacific countries creates logistical and communication challenges, including time zone management and global supply chain coordination[230] - The company is subject to governmental export and import controls, which can limit business opportunities and sales (e.g., U.S. restrictions on Huawei)[235][236] - The ongoing U.S.-China trade dispute, including tariffs, could increase costs, disrupt supply chains, and reduce customer orders[237] - Political unrest, demonstrations, and changes in Thailand's political, social, business, or economic conditions could harm the business, given its asset and manufacturing concentration[238][239] - Continued investment in PRC manufacturing operations exposes the company to political, legal, and economic risks, including an unpredictable climate and law enforcement uncertainties[242][243] - Natural disasters, epidemics (including COVID-19), terrorism, and political/economic developments could severely disrupt manufacturing and increase supply chain costs[244][245][247] Financial Risks This section covers financial risks such as unfavorable economic conditions, debt covenants, LIBOR phase-out, capital access, investment portfolio impairment, insurance limitations, and uncertainties in financial estimates - Unfavorable worldwide economic conditions, including inflation and supply chain disruptions, may negatively affect business, financial condition, and operating results[248][249] - Long-term debt agreements contain financial ratio covenants that may impair the company's business operations[250] - The LIBOR phase-out by June 30, 2023, for USD settings could affect interest rates on existing credit facilities and future debt financing[251][255] - The company may not obtain desired capital on favorable terms, or at all, or without shareholder dilution[256][257] - The fixed-income investment portfolio may become impaired by capital market deterioration[258][260] - The company is not fully insured against all potential losses, and catastrophes could adversely affect business, financial condition, and operating results[261] - Inherent uncertainties in financial statement estimates, judgments, and assumptions could materially adversely affect business, financial condition, and operating results[262] Intellectual Property and Cybersecurity Risks This section addresses risks related to information technology infrastructure, cybersecurity attacks, intellectual property infringement claims, and the protection of customer intellectual property - Business and operations would be adversely impacted by IT infrastructure failure or cybersecurity attacks[263][264] - Intellectual property infringement claims against the company or its customers could harm business, financial condition, and operating results[265][266] - Failure to protect customer intellectual property in manufactured products could harm customer relationships and incur liability[267] Tax, Compliance and Regulatory Risks This section covers risks related to increased income taxes, compliance with preferential tax treatments, public company operating costs, regulatory quality standards, and environmental laws - The company faces increased income tax risk from audits, rate changes, deferred tax asset valuation, and transfer pricing challenges[268][272] - Preferential tax treatment in Thailand is contingent on various factors, and non-compliance could lead to its loss[270] - Operating as a public company incurs significant increased costs and requires substantial management resources for compliance initiatives[274] - Failure to meet regulatory quality standards (e.g., ISO, FDA) could harm business, financial condition, and operating results[276][278] - Failure to comply with environmental laws and regulations, including 'conflict minerals' rules, could have a material adverse effect[279][280] Risks Related to Ownership of Our Ordinary Shares This section discusses risks pertinent to shareholders, including share price volatility, potential adverse U.S. tax consequences, activist shareholder impact, anti-takeover provisions, and challenges in protecting shareholder interests under Cayman Islands law - Share price may be volatile due to fluctuations in operating results, customer/competitor activities, and general market conditions[281] - Becoming a passive foreign investment company (PFIC) could result in adverse U.S. tax consequences for U.S. investors[285] - Activist shareholders could negatively affect business by causing disruptions, diverting management attention, and increasing share price volatility[286] - Certain constitutional provisions may discourage third-party acquisition, limiting shareholder opportunity to sell shares at a premium[287] - Shareholders may face difficulties protecting interests due to Cayman Islands incorporation, where law is less developed than U.S. law[288] - Certain U.S. court judgments against the company may not be enforceable in the Cayman Islands, Thailand, or the PRC[296] General Risks This section addresses broader risks that could impact the company, such as energy price volatility and its potential effects on costs and customer orders - Energy price volatility may negatively impact business, financial condition, and operating results by increasing raw material and transportation costs[297] - The company may not sufficiently increase prices to offset rising energy costs, potentially reducing future customer orders[298] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item reports on the company's share repurchase activity for the three months ended September 30, 2022, under its publicly announced program Sales of Unregistered Securities This section confirms whether any unregistered sales of equity securities occurred during the reporting period - Not applicable; no unregistered equity security sales occurred during the period[299] Purchases of Equity Securities by the Issuer and Affiliated Purchasers This section details the company's share repurchase activities, including the number of shares purchased, average price paid, and remaining authorization under the program Share Repurchase Activity (Three Months Ended September 30, 2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :-------------------------------- | :----------------------------- | :--------------------------- | | June 25, 2022 – July 29, 2022 | — | $— | | July 30, 2022 – August 26, 2022 | 14,100 | $111.63 | | August 27, 2022 – September 30, 2022 | 32,877 | $101.14 | | Total | 46,977 | $104.28 (average) | - The total purchase price for 46,977 repurchased shares was $4.9 million[300] - As of September 30, 2022, the company had a remaining authorization to repurchase up to $95.1 million worth of ordinary shares[300] Item 6. Exhibits This item lists all exhibits filed with the Form 10-Q, including various agreements, certifications, and XBRL data files - Exhibits include Change in Control and Severance Agreements, Letter Agreements, and Fiscal 2023 Executive Incentive Plan Description[302] - CEO and CFO certifications are included per Exchange Act Rules 13a-14(a) and 15d-14(a), and 18 U.S.C. Section 1350[302] - Inline XBRL Instance and Taxonomy Extension files are provided for financial data[302] Signature This section confirms the official signing and authorization of the report by the company's principal financial and accounting officer - The report was signed by Csaba Sverha, Executive Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) on behalf of Fabrinet[306] - The report was duly authorized and signed on November 8, 2022[305]