FABRINET In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about: •our goals and strategies; •our and our customers' estimates regarding future revenues, operating results, expenses, capital requirements and liquidity; •our belief that we will be able to maintain favorable pricing on our services; •our expectation that the portion of our revenues attributable to customers in regions outside ofNorth America for the remainder of fiscal year 2022 will be in line with the portion of those revenues for the three months endedSeptember 24, 2021 ; •our expectation that we will incur incremental costs of revenue as a result of our planned expansion of our business into new geographic markets; •our expectation that our fiscal year 2022 selling, general and administrative ("SG&A") expenses will increase as a percentage of revenue compared to fiscal year 2021 SG&A expenses; •our expectation that our employee costs will increase inThailand and the PRC; •our future capital expenditures and our needs for additional financing; •the expansion of our manufacturing capacity, including into new geographies; •the growth rates of our existing markets and potential new markets; •our ability, and the ability of our customers and suppliers, to respond successfully to technological or industry developments; •our expectations regarding the potential impact of the COVID-19 pandemic on our business, financial condition and operating results; •our suppliers' estimates regarding future costs; •our ability to increase our penetration of existing markets and to penetrate new markets; •our plans to diversify our sources of revenues; •our plans to execute acquisitions; •trends in the optical communications, industrial lasers, and sensors markets, including trends to outsource the production of components used in those markets; •our ability to attract and retain a qualified management team and other qualified personnel and advisors; and •competition in our existing and new markets. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form10-Q, in particular, the risks discussed under the heading "Risk Factors" in Part II, Item 1A as well as those discussed in other documents we file with theSecurities and Exchange Commission . We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. "We," "us" or "our" collectively refer toFabrinet and its subsidiaries. 28 -------------------------------------------------------------------------------- Table of Contents Overview We provide advanced optical packaging and precision optical, electro-mechanical and electronic manufacturing services to original equipment manufacturers ("OEMs") of complex products such as optical communication components, modules and sub-systems, industrial lasers, automotive components, medical devices and sensors. We offer a broad range of advanced optical and electro-mechanical capabilities across the entire manufacturing process, including process design and engineering, supply chain management, manufacturing, complex printed circuit board assembly, advanced packaging, integration, final assembly and testing. Although we focus primarily on low-volume production of a wide variety of high complexity products, which we refer to as "low-volume, high-mix," we also have the capability to accommodate high-volume production. Based on our extensive experience and the positive feedback we have received from our customers, we believe we are a global leader in providing these services to the optical communications, industrial lasers and automotive markets. Our customer base includes companies in complex industries that require advanced precision manufacturing capabilities such as optical communications, industrial lasers, automotive and sensors. The products that we manufacture for our OEM customers include: selective switching products; tunable transponders and transceivers; active optical cables; solid state, diode-pumped, gas and fiber lasers; and sensors. In many cases, we are the sole outsourced manufacturing partner used by our customers for the products that we manufacture for them. We also design and fabricate application-specific crystals, lenses, prisms, mirrors, laser components, and substrates (collectively referred to as "customized optics") and other custom and standard borosilicate, clear fused quartz, and synthetic fused silica glass products (collectively referred to as "customized glass"). We incorporate our customized optics and glass into many of the products we manufacture for our OEM customers, and we also sell customized optics and glass in the merchant market. Recent Developments Related to COVID-19 The global COVID-19 pandemic has impacted us in several ways and created various challenges. At the onset of the pandemic, our PRC subsidiary, which manufactures custom optics components for us and other customers at its facility inFuzhou, China , experienced a two-week temporary closure inJanuary 2020 in accordance with the Chinese government's official efforts to mitigate the spread of COVID-19. Furthermore, travel restrictions in the PRC during that period resulted in fewer than 90% of our employees in the PRC being able to return to work before earlyMarch 2020 . Our other global manufacturing facilities also have been affected by government restrictions put in place to slow the spread of COVID-19. While our operations inThailand have not been suspended, we have implemented a number of safety protocols to allow our operations in our facilities there to continue in accordance with government regulations. With the exception of our facility inSanta Clara, California , which closed for approximately one week beginning in lateMarch 2020 before reopening in earlyApril 2020 as a previously classified "essential business," our facilities in theU.S. , including inNew Jersey , and in theU.K. have remained open while adhering to the local government restrictions. During the three months endedSeptember 24, 2021 , several countries where we have manufacturing facilities, includingThailand , the PRC, theU.S. and theU.K. , experienced a surge in the number of COVID-19 cases. InThailand , we have recently experienced an increase in the number of employees who have tested positive for COVID-19. We have responded by taking additional precautionary measures based on recommendations from local authorities. These precautionary measures include implementing leaves of absence for affected employees and their close contacts, stringent contact tracing, enhanced safe distancing measures, and arrangements for the vaccination of our employees inThailand . Although we did not experience any significant disruptions in our operations or decrease in customer demand during the three months endedSeptember 24, 2021 , any worsening of the pandemic may result in more stringent recommendations or requirements being implemented by local authorities, such as shutting down our manufacturing facilities, which would have a significant negative impact on our operations. The health and well-being of our employees continues to be our top priority. In early 2020, we implemented significant precautionary measures throughout our worldwide operations to ensure our employees and their families remain safe. Such measures include mandatory temperature detection at building entrances, rigorous and regular facility and equipment disinfection, and mandatory personal protective equipment protocols, including (1) requiring the wearing of face masks throughout our factories at all times; (2) distributing our employees across shifts to better maintain safe personal distances; (3) isolating incoming parts and materials for a week or more prior to unpacking, or applying extreme heat to kill potential viruses; (4) directing our non-factory personnel to work remotely; and (5) restricting all non-employee visits to our campuses. Given the unprecedented human and economic impact of the COVID-19 pandemic globally, the extraordinary economic short-term uncertainty resulting therefrom, and the evolving and differing national strategies for dealing with COVID-19, it is challenging to provide a forward-looking assessment. However, despite uncertainty and concern about the global economy and 29 -------------------------------------------------------------------------------- Table of Contents the health of various industries, we can share some relevant perspectives as we continue to assess the impacts of COVID-19 on our business in the future: •With work-from-home protocols in place around the world, global demand for internet bandwidth has grown and we believe it will continue to grow. Because the next-generation telecom and datacom products we manufacture for our customers are important to expanding network capacity, we believe such growth in bandwidth demand will have a positive impact on our business in the long-term. •While we believe the long-term growth outlook for the markets we serve has not been significantly impacted, in the short-term we are likely to continue to see regional downward demand adjustments, especially if the COVID-19 outbreak intensifies or returns in various geographic areas as was the case at the end of our third quarter in fiscal year 2020. •We expect we will continue to experience disruptions in our supply chain and the availability of parts and materials will continue to fluctuate, especially if the COVID-19 outbreak intensifies or returns in various geographic areas. However, we believe we can mitigate these disruptions by continuing to identify and secure alternative supply chain sources. •A significant portion of our costs is variable and, because of this, we can adjust manufacturing costs relatively quickly to respond to the changing demand of our customers. However, because parts and materials account for the largest portion of our costs, in combination with the supply chain issues noted above and, to a lesser extent, the expenses associated with the safety and health protocols we have implemented across our global operations, our gross margins will continue to be negatively affected for the foreseeable future. •The safety and health of our employees is and will remain a key priority, and we will continue to follow robust safety protocols in all of our facilities. To this end, we have arranged for the vaccination of our employees inThailand in the first quarter of fiscal year 2022. •Given our$528.4 million in cash, cash equivalents and short-term investments, and our total debt of approximately$36.6 million , as ofSeptember 24, 2021 , we believe we are in a solid position from a capital and financial resources perspective. We expect that our current cash and cash equivalent balances, short-term investments, and cash flows generated from operations will be sufficient to meet our domestic and international working capital needs and other capital and liquidity requirements for at least the next 12 months. Revenues We believe our ability to expand our relationships with existing customers and attract new customers is due to a number of factors, including our broad range of complex engineering and manufacturing service offerings, flexible low-cost manufacturing platform, process optimization capabilities, advanced supply chain management, excellent customer service, and experienced management team. Although we expect the prices we charge for our manufactured products to decrease over time (partly as a result of competitive market forces), we still believe we will be able to maintain favorable pricing for our services because of our ability to reduce cycle time, adjust our product mix by focusing on more complicated products, improve product quality and yields, and reduce material costs for the products we manufacture. We believe these capabilities have enabled us to help our OEM customers reduce their manufacturing costs while maintaining or improving the design, quality, reliability, and delivery times for their products. Revenues by Geography We generate revenues from three geographic regions:North America ,Asia-Pacific and others andEurope . Revenues are attributed to a particular geographic area based on the bill-to location of our customers, notwithstanding that our customers may ultimately ship their products to end customers in a different geographic region. The majority of our revenues are derived from our manufacturing facilities inAsia-Pacific . The percentage of our revenues generated from a bill-to location outside ofNorth America increased from 52.5% in the three months endedSeptember 25, 2020 to 54.6% in the three months endedSeptember 24, 2021 , primarily because the increase in sales to our customers outside ofNorth America was greater than the increase in sales to our customers inNorth America . 30 -------------------------------------------------------------------------------- Table of Contents Based on the short and medium-term indications and forecasts from our customers, we expect that the portion of our future revenues attributable to customers in regions outsideNorth America for the remainder of fiscal year 2022 will be in line with the portion of revenues attributable to such customers during the three months endedSeptember 24, 2021 . The following table presents percentages of total revenues by geographic region: Three Months Ended September 24, 2021 September 25, 2020 North America 45.4 % 47.5 % Asia-Pacific and others 37.9 33.4 Europe 16.7 19.1 100.0 % 100.0 % Our Contracts We enter into supply agreements with our customers which generally have an initial term of up to three years, subject to automatic renewals for subsequent one-year terms unless expressly terminated. Although there are no minimum purchase requirements in our supply agreements, our customers provide us with rolling forecasts of their demand requirements. Our supply agreements generally include provisions for pricing and periodic review of pricing, consignment of our customer's unique production equipment to us, and the sharing of benefits from cost-savings derived from our efforts. We are generally required to purchase materials, which may include long lead-time materials and materials that are subject to minimum order quantities and/or non-cancelable or non-returnable terms, to meet the stated demands of our customers. After procuring materials, we manufacture products for our customers based on purchase orders that contain terms regarding product quantities, delivery locations and delivery dates. Our customers generally are obligated to purchase finished goods that we have manufactured according to their demand requirements. Materials that are not consumed by our customers within a specified period of time, or are no longer required due to a product's cancellation or end-of-life, are typically designated as excess or obsolete inventory under our contracts. Once materials are designated as either excess or obsolete inventory, our customers are typically required to purchase such inventory from us even if they have chosen to cancel production of the related products. The excess or obsolete inventory is shipped to the customer and revenue is recognized upon shipment. Cost of Revenues The key components of our cost of revenues are material costs, employee costs, and infrastructure-related costs. Material costs generally represent the majority of our cost of revenues. Several of the materials we require to manufacture products for our customers are customized for their products and often sourced from a single supplier or in some cases, our own subsidiaries. Shortages from sole-source suppliers due to yield loss, quality concerns and capacity constraints, among other factors, may increase our expenses and negatively impact our gross profit margin or total revenues in a given quarter. Material costs include scrap material. Historically, scrap rate diminishes during a product's life cycle due to process, fixturing and test improvement and optimization. A second significant element of our cost of revenues is employee costs, including indirect employee costs related to design, configuration and optimization of manufacturing processes for our customers, quality testing, materials testing and other engineering services; and direct costs related to our manufacturing employees. Direct employee costs include employee salaries, insurance and benefits, merit-based bonuses, recruitment, training and retention. Historically, our employee costs have increased primarily due to increases in the number of employees necessary to support our growth and, to a lesser extent, costs to recruit, train and retain employees. Our cost of revenues is significantly impacted by salary levels inThailand , the PRC and theU.K. , the fluctuation of the Thai baht, Chinese Renminbi ("RMB") and Pound Sterling ("GBP") against our functional currency, theU.S. dollar, and our ability to retain our employees. We expect our employee costs to increase as wages continue to increase inThailand and the PRC. Wage increases may impact our ability to sustain our competitive advantage and may reduce our profit margin. We seek to mitigate these cost increases through improvements in employee productivity, employee retention and asset utilization. Our infrastructure costs are comprised of depreciation, utilities, facilities management and overhead costs. Most of our facility leases are long-term agreements. Our depreciation costs include buildings and fixed assets, primarily at ourPinehurst and Chonburi campuses inThailand , and capital equipment located at each of our manufacturing locations. 31 -------------------------------------------------------------------------------- Table of Contents We expect to incur incremental costs of revenue as a result of our planned expansion into new geographic markets, though we are not able to determine the amount of these incremental expenses. Selling, General and Administrative Expenses Our SG&A expenses primarily consist of corporate employee costs for sales and marketing, general and administrative and other support personnel, including research and development expenses related to the design of customized optics and glass, travel expenses, legal and other professional fees, share-based compensation expense and other general expenses not related to cost of revenues. In fiscal year 2022, we expect our SG&A expenses will increase as compared with our fiscal year 2021 SG&A expenses due to an increase in management compensation, staff cost, marketing and business development cost. The compensation committee of our board of directors approved a fiscal year 2022 executive incentive plan with quantitative objectives that are based solely on achieving certain revenue targets and non-GAAP operating margin targets for our fiscal year endingJune 24, 2022 . Bonuses under the fiscal year 2022 executive incentive plan are payable after the end of fiscal year 2022. In fiscal year 2021, the compensation committee of our board of directors approved a fiscal year 2021 executive incentive plan with quantitative objectives based solely on achieving certain revenue targets and non-GAAP operating margin targets for fiscal year 2021. Additional Financial Disclosures Foreign Exchange As a result of our international operations, we are exposed to foreign exchange risk arising from various currency exposures primarily with respect to the Thai baht. Although a majority of our total revenues is denominated inU.S. dollars, a substantial portion of our payroll plus certain other operating expenses are incurred and paid in Thai baht. The exchange rate between the Thai baht and theU.S. dollar has fluctuated substantially in recent years and may continue to fluctuate substantially in the future. We report our financial results inU.S. dollars and our results of operations have been and could in the future be negatively impacted if the Thai baht appreciates against theU.S. dollar. Smaller portions of our expenses are incurred in a variety of other currencies, including RMB, GBP, Canadian dollars, Euros, and Japanese yen, the appreciation of which may also negatively impact our financial results. In order to manage the risks arising from fluctuations in foreign currency exchange rates, we use derivative instruments. We may enter into exchange currency forward or put option contracts to manage foreign currency exposures associated with certain assets and liabilities and other forecasted foreign currency transactions and may designate these instruments as hedging instruments. The forward and put option contracts generally have maturities of up to 12 months. All foreign currency exchange contracts are recognized in the unaudited condensed consolidated balance sheets at fair value. Gains or losses on our forward and put option contracts generally present gross amount in the assets, liabilities, and transactions economically hedged. 32 -------------------------------------------------------------------------------- Table of Contents We had foreign currency denominated assets and liabilities in Thai baht, RMB and GBP as follows: As of September 24, 2021 As of June 25, 2021 (amount in thousands, except percentages) Currency $ % Currency $ % Assets Thai baht 756,692$ 22,581 57.5 % 1,472,249$ 46,312 67.5 % RMB 56,396 8,730 22.2 98,056 15,14522.1 GBP 5,833 7,950 20.3 5,111 7,119 10.4 Total$ 39,261 100.0 %$ 68,576 100.0 % Liabilities Thai baht 2,729,136$ 81,442 89.8 % 2,250,514$ 70,793 87.7 % RMB 40,456 6,263 6.9 40,112 6,1957.7 GBP 2,164 2,949 3.3 2,656 3,699 4.6 Total$ 90,654 100.0 %$ 80,687 100.0 % The Thai baht assets represent cash and cash equivalents, trade accounts receivable, deposits and other current assets. The Thai baht liabilities represent trade accounts payable, accrued expenses, income tax payable and other payables. We manage our exposure to fluctuations in foreign exchange rates by the use of foreign currency contracts and offsetting assets and liabilities denominated in the same currency in accordance with management's policy. As ofSeptember 24, 2021 , there was$135.0 million of foreign currency forward contracts outstanding on the Thai baht payables. As ofJune 25, 2021 , there was$130.0 million of foreign currency forward contracts outstanding on the Thai baht payables. The RMB assets represent cash and cash equivalents, trade accounts receivable and other current assets. The RMB liabilities represent trade accounts payable, accrued expenses, income tax payable and other payables. As ofSeptember 24, 2021 andJune 25, 2021 , we did not have any derivative contracts denominated in RMB. The GBP assets represent cash, trade accounts receivable, and other current assets. The GBP liabilities represent trade accounts payable and other payables. As ofSeptember 24, 2021 andJune 25, 2021 , we did not have any derivative contracts denominated in GBP. For the three months endedSeptember 24, 2021 andSeptember 25, 2020 , we recorded losses of$0.6 million and$1.5 million , respectively, related to derivatives that are not designated as hedging instruments in the unaudited condensed consolidated statements of operations and comprehensive income. Currency Regulation and Dividend Distribution Foreign exchange regulation in the PRC is primarily governed by the following rules: •Foreign Currency Administration Rules, as amended onAugust 5, 2008 , or the Exchange Rules; •Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules; and •Notice on Perfecting Practices Concerning Foreign Exchange Settlement Regarding the Capital Contribution byForeign-invested Enterprises , as promulgated by theState Administration of Foreign Exchange ("SAFE"), onAugust 29, 2008 , or Circular 142. Under the Exchange Rules, RMB is freely convertible into foreign currencies for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. However, conversion of RMB for capital account items, such as direct investments, loans, security investments and repatriation of investments, is still subject to the approval of SAFE. Under the Administration Rules, foreign-invested enterprises may only buy, sell, or remit foreign currencies at banks authorized to conduct foreign exchange business after providing valid commercial documents and relevant supporting documents and, in the case of capital account item transactions, obtaining approval from SAFE. Capital investments by foreign-invested enterprises outside of the PRC are also subject to limitations, which include approvals by theMinistry of Commerce , SAFE and theState Development and Reform Commission . 33 -------------------------------------------------------------------------------- Table of Contents Circular 142 regulates the conversion by a foreign-invested company of foreign currency into RMB by restricting how the converted RMB may be used. Circular 142 requires that the registered capital of a foreign-invested enterprise settled in RMB converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the registered capital of foreign-invested enterprises settled in RMB converted from foreign currencies. The use of such RMB capital may not be changed without SAFE's approval and may not be used to repay RMB loans if the proceeds of such loans have not been used. OnJanuary 5, 2007 , SAFE promulgated the Detailed Rules for Implementing the Measures for theAdministration on Individual Foreign Exchange , or the Implementation Rules. Under the Implementation Rules, PRC citizens who are granted share options by an overseas publicly-listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly-listed company, to register with SAFE and complete certain other procedures. In addition, theGeneral Administration of Taxation has issued circulars concerning employee share options. Under these circulars, our employees working in the PRC who exercise share options will be subject to PRC individual income tax. Our PRC subsidiary has obligations to file documents related to employee share options with relevant tax authorities and withhold individual income taxes of those employees who exercise their share options. Furthermore, our transfer of funds to our subsidiaries inThailand and the PRC are each subject to approval by governmental authorities in case of an increase in registered capital, or subject to registration with governmental authorities in case of a shareholder loan. These limitations on the flow of funds between our subsidiaries and us could restrict our ability to act in response to changing market conditions. Income Tax Our effective tax rate is a function of the mix of tax rates in the various jurisdictions in which we do business. We are domiciled in theCayman Islands . Under the current laws of theCayman Islands , we are not subject to tax in theCayman Islands on income or capital gains untilMarch 6, 2039 . Throughout the period of our operations inThailand , we have generally received income tax and other incentives from theThailand Board of Investment . Preferential tax treatment from the Thai government in the form of a corporate tax exemption on income generated from projects to manufacture certain products at our Chonburi campus is currently available to us throughJune 2026 . Similar preferential tax treatment was available to us throughJune 2020 with respect to products manufactured at ourPinehurst campus Building 6. AfterJune 2020 , 50% of our income generated from products manufactured at ourPinehurst campus will be exempted from tax throughJune 2025 . Such preferential tax treatment is contingent on various factors, including the export of our customers' products out ofThailand and our agreement not to move our manufacturing facilities out of our current province inThailand for at least 15 years from the date on which preferential tax treatment was granted. Currently, the corporate income tax rate for our Thai subsidiary is 20%. The corporate income tax rates for our subsidiaries in the PRC, theU.S. , theU.K. andIsrael are 25% , 21%, 19% and 23%, respectively. Critical Accounting Policies and Use of Estimates We prepare our unaudited condensed consolidated financial statements in conformity withU.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities on the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the financial reporting period. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Because the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our unaudited condensed consolidated financial statements, as their application places the most significant demands on our management's judgment. Our critical accounting policies are disclosed in our Annual Report on Form10-K for the fiscal year endedJune 25, 2021 . The adoption of new accounting policies and accounting standards are disclosed in Note 2 to the unaudited condensed consolidated financial statements. There were no changes to our accounting policies. 34 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth a summary of our unaudited condensed consolidated statements of operations and comprehensive income. Note that period-to-period comparisons of operating results should not be relied upon as indicative of future performance. Three Months Ended September 24, September 25, (amount in thousands) 2021 2020 Revenues$ 543,322 $ 436,639 Cost of revenues (479,725) (386,159) Gross profit 63,597 50,480 Selling, general and administrative expenses (20,587) (16,863) Operating income 43,010 33,617 Interest income 761 1,104 Interest expense (36) (251) Foreign exchange gain (loss), net 1,772 128 Other income (expense), net (260) 121 Income before income taxes 45,247 34,719 Income tax expense (596) (1,668) Net income 44,651 33,051 Other comprehensive income (loss), net of tax (1,396) (2,757) Net comprehensive income$ 43,255 $ 30,294 The following table sets forth a summary of our unaudited condensed consolidated statements of operations and comprehensive income as a percentage of revenues for the periods indicated. Three Months Ended September 24, September 25, 2021 2020 Revenues 100.0 % 100.0 % Cost of revenues (88.3) (88.4) Gross profit 11.7 11.6 Selling, general and administrative expenses (3.8) (3.9) Operating income 7.9 7.7 Interest income 0.1 0.3 Interest expense 0.0 (0.1) Foreign exchange gain (loss), net 0.3 0.0 Other income (expense), net (0.0) 0.0 Income before income taxes 8.3 7.9 Income tax expense (0.1) (0.4) Net income 8.2 7.5 Other comprehensive income (loss), net of tax (0.2) (0.6) Net comprehensive income 8.0 % 6.9 % 35
--------------------------------------------------------------------------------
Table of Contents
The following table sets forth our revenues by end market for the periods
indicated.
Three Months Ended
September 24, September 25,
(amount in thousands) 2021 2020
Optical communications $ 427,301 $ 343,917
Lasers, sensors and other 116,021 92,722
Total $ 543,322 $ 436,639
We operate and internally manage a single operating segment. As such, discrete
information with respect to separate product lines and segments is not
accumulated.
Comparison of Three Months Ended September 24, 2021 with Three Months Ended
September 25, 2020
Revenues
Our revenues increased by $106.7 million , or 24.4%, to $543.3 million for the
three months ended September 24, 2021 , compared with $436.6 million for the
three months ended September 25, 2020 . This increase was due to an increase in
our key customers' demand for optical communications manufacturing services
during the three months ended September 24, 2021 . Revenues from optical
communications products increased by $83.4 million , or 24.2%, for the three
months ended September 24, 2021 .
Cost of revenues
Our cost of revenues increased by $93.6 million , or 24.2%, to $479.7 million , or
88.3% of revenues, for the three months ended September 24, 2021 , compared with
$386.2 million , or 88.4% of revenues, for the three months ended September 25,
2020 . This increase in cost of revenues on an absolute dollar basis was in line
with the increase in sales volume.
Gross profit
Our gross profit increased by $13.1 million , or 26.0%, to $63.6 million , or
11.7% of revenues, for the three months ended September 24, 2021 , compared with
$50.5 million , or 11.6% of revenues, for the three months ended September 25,
2020 . The increase was primarily due to an increase in sales volume.
SG&A expenses
Our SG&A expenses increased by $3.7 million , or 22.1%, to $20.6 million , or 3.8%
of revenues, for the three months ended September 24, 2021 , compared with $16.9
million , or 3.9% of revenues, for the three months ended September 25, 2020 . The
increase was primarily due to (1) an increase in share-based compensation
expenses of $3.1 million , (2) an increase in cost of development business unit
of $0.4 million , and (3) a reversal of allowance for doubtful accounts of $0.3
million in fiscal year 2021.
Operating income
Our operating income increased by $9.4 million to $43.0 million , or 7.9% of
revenues, for the three months ended September 24, 2021 , compared with $33.6
million , or 7.7% of revenues, for the three months ended September 25, 2020 . The
increase was primarily due to an increase in revenues.
Interest income
Our interest income decreased by $0.3 million , or 31.1%, to $0.8 million , or
0.1% of revenues, for the three months ended September 24, 2021 , compared with
$1.1 million , or 0.3% of revenues, for the three months ended September 25,
2020 . The decrease was primarily due to a lower weighted average interest rate
following the global interest rate trend.
Interest expense
Our interest expense decreased by $0.2 million to $36.0 thousand for the three
months ended September 24, 2021 , compared with $0.3 million for the three months
ended September 25, 2020 . The decrease was primarily due to the
36
--------------------------------------------------------------------------------
Table of Contents
capitalization of interest expense on the new building at our Chonburi campus of
$0.3 million , offset by lower amortization of the fair value of interest rate
swaps of $0.1 million during the three months ended September 24, 2021 , compared
with the three months ended September 25, 2020 .
Foreign exchange gain (loss), net
We recorded foreign exchange gain, net of $1.8 million for the three months
ended September 24, 2021 , compared with foreign exchange gain, net of $0.1
million for the three months ended September 25, 2020 . The increase in foreign
exchange gain was mainly due to (1) lower unrealized loss from mark-to-market
forward contracts of $0.6 million for the three months ended September 24, 2021 ,
as compared to unrealized loss from mark-to-market forward contracts of $1.5
million for the three months ended September 25, 2020 , (2) higher realized
foreign exchange gain from payment/receipt of $0.3 million for the three months
ended September 24, 2021 , as compared to realized loss of $0.4 million for the
three months ended September 25, 2020 , and (3) higher unrealized gain from
foreign exchange gain from the revaluation of outstanding Thai baht assets and
liabilities of $2.2 million for the three months ended September 24, 2021 , as
compared to an unrealized gain of $2.0 million for the three months ended
September 25, 2020 , partially offset by higher foreign exchange loss from our
subsidiaries in the PRC and the U.K. , totaling $0.1 million for the three months
ended September 24, 2021 , as compared to foreign exchange loss totaling $78
thousand which mainly came from our subsidiaries in the PRC and the U.K. for the
three months ended September 25, 2020 .
Income before income taxes
We recorded income before income taxes of $45.2 million for the three months
ended September 24, 2021 , compared with $34.7 million for the three months ended
September 25, 2020 .
Income tax expense
Our provision for income tax reflects an effective tax rate of 1.3% and 4.8% for
the three months ended September 24, 2021 and September 25, 2020 , respectively.
The decrease was primarily due to an increase in income not subject to tax
during the first quarter of fiscal year 2022 as compared to the same period in
fiscal year 2021. The effective tax rate for fiscal 2022 is expected to be lower
as compared to fiscal year 2021 due to an anticipated increase in income
generated in jurisdictions with tax exemption or preferential tax rate.
Net income
We recorded net income of $44.7 million , or 8.2% of revenues, for the three
months ended September 24, 2021 , compared with $33.1 million , or 7.6% of
revenues, for the three months ended September 25, 2020 .
Other comprehensive income (loss)
We recorded other comprehensive loss of $1.4 million , or 0.2% of revenues, for
the three months ended September 24, 2021 , compared with other comprehensive
loss of $2.8 million , or 0.6% of revenues, for the three months ended
September 25, 2020 . The decrease in other comprehensive loss was mainly due to
(1) unrealized loss from mark-to-market of forward contracts and interest rate
swap agreement of $1.2 million for the three months ended September 24, 2021 , as
compared to unrealized loss from mark-to-market of forward contracts and
interest rate swap agreement of $3.2 million for the three months ended
September 25, 2020 , and (2) unrealized loss from mark-to-market of
available-for-sale debt securities of $0.2 million for the three months ended
September 24, 2021 , as compared to unrealized loss from mark-to-market of
available-for-sale debt securities of $0.3 million for the three months ended
September 25, 2020 , partially offset by an unrealized loss from foreign currency
translation adjustment of $0.2 million for the three months ended September 24,
2021 , as compared to unrealized gain from foreign currency translation
adjustment of $0.6 million for the three months ended September 25, 2020 .
Liquidity and Capital Resources
Cash Flows and Working Capital
We primarily finance our operations through cash flow from operations. As of
September 24, 2021 and September 25, 2020 , we had cash, cash equivalents, and
short-term investments of $528.4 million and $496.4 million , respectively, and
outstanding debt of $36.6 million and $48.6 million , respectively.
37
--------------------------------------------------------------------------------
Table of Contents
Our cash and cash equivalents, which primarily consist of cash on hand, demand
deposits, and liquid investments with original maturities of three months or
less, are placed with banks and other financial institutions. The
weighted-average interest rate on our cash and cash equivalents for the three
months ended September 24, 2021 and September 25, 2020 , was 0.7% and 0.9%,
respectively.
Our cash investments are made in accordance with an investment policy approved
by the audit committee of our board of directors. In general, our investment
policy requires that securities purchased be rated A1, P-1, F1 or better. No
security may have an effective maturity that exceeds three years. Our
investments in fixed income securities are primarily classified as
available-for-sale and are recorded at fair value. The cost of securities sold
is based on the specific identification method. Unrealized gains and losses on
these securities are recorded as other comprehensive income (loss) and are
reported as a separate component of shareholders' equity.
During the three months ended September 24, 2021 , we repaid $3.0 million of the
term loan under our credit facility agreement with the Bank of Ayudhya Public
Company Limited. As a result, as of September 24, 2021 , we had a long-term
borrowing of $36.6 million under such credit facility agreement. (See Note 12
for further details.) We anticipate that our internally generated working
capital, along with our cash and cash equivalents will be adequate to repay
these obligations. To better manage our cash on hand, we held short-term
investments of $258.5 million as of September 24, 2021 .
We believe that our current cash and cash equivalents, short-term investments,
cash flow from operations, and funds available through our credit facility will
be sufficient to meet our working capital and capital expenditure needs for at
least the next 12 months. Our ability to sustain our working capital position is
subject to a number of risks that we discuss in Part II, Item 1A of this
Quarterly Report on Form 10-Q.
We also believe that our current manufacturing capacity is sufficient to meet
our anticipated production requirements for at least the next few quarters.
The following table shows our cash flows for the periods indicated:
Three Months Ended
September 24, September 25,
(amount in thousands) 2021 2020
Net cash provided by operating activities $ 39,015 $ 34,506
Net cash used in investing activities $ (49,639) $ (58,434)
Net cash used in financing activities $
(22,112)
Operating Activities Net cash provided by operating activities of$39.0 million for the three months endedSeptember 24, 2021 was primarily due to (1) net income of$44.7 million , (2) an increase in trade accounts payable of$27.5 million , and (3) depreciation and amortization of$9.5 million ; offset by an increase in inventories of$43.1 million to support new business. Net cash provided by operating activities of$34.5 million for the three months endedSeptember 25, 2020 was primarily due to (1) an increase in trade accounts payable of$33.5 million , (2) net income of$33.1 million , (3) depreciation and amortization of$8.6 million , and (4) share-based compensation of$6.0 million ; offset by (1) an increase in inventories of$29.6 million ; and (2) an increase in trade accounts receivable of$16.5 million . Investing Activities Net cash used in investing activities of$49.6 million for the three months endedSeptember 24, 2021 was primarily due to (1) the purchase of property, plant and equipment of$34.6 million , (2) a net purchase of short-term investments of$14.8 million , and (3) the purchase of intangibles assets of$0.3 million . Net cash used in investing activities of$58.4 million for the three months endedSeptember 25, 2020 was primarily due to (1) a net purchase of short-term investments of$45.4 million , (2) the purchase of property, plant and equipment of$12.6 million , and (3) the purchase of intangibles assets of$0.5 million . 38
--------------------------------------------------------------------------------
Table of Contents Financing Activities Net cash used in financing activities of$22.1 million for the three months endedSeptember 24, 2021 was primarily due to (1) cash paid for withholding tax related to net share settlement of restricted share units of$19.1 million ; and (2) repayment of bank loans of$3.0 million . Net cash used in financing activities of$13.1 million for the three months endedSeptember 25, 2020 was primarily due to (1) cash paid for withholding tax related to net share settlement of restricted share units of$9.9 million ; and (2) repayment of loans to banks of$3.0 million . Recent Accounting Pronouncements See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements for recent accounting pronouncements that could have an effect on us.
© Edgar Online, source
