What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-05-05 compared with 2020-02-04 · 146 added, 140 removed, 234 unchanged (55% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to historical information, this Quarterly Report on Form 10-Q

contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

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 our expectations, future events or 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:

2 unchanged sentences

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

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

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

5 unchanged sentences

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 results of operations;

our suppliers’ estimates regarding future costs;

26 unchanged sentences

We incorporate our customized optics and glass into many of the products we manufacture for our OEM customers, and we also sell customized optics and glass in the merchant market.

Recent Events

In December 2019, a strain of Coronavirus surfaced in Wuhan, China, home to numerous high-tech component suppliers, including telecommunications components, and an important transportation hub in China.

As a result, there have been numerous factory closures in Wuhan and surrounding areas, and a decrease in traffic in China.

As the virus spreads across China, there is uncertainty about whether factories and businesses in other parts of China will be affected.

While many factories were closed for a few days because of China’s Lunar New Year holiday (LNY Holiday), the Chinese government has ordered that businesses in various areas extend the LNY Holiday.

For example, the Chinese government initially ordered our Casix facility in Fuzhou, China, which manufactures custom optics components, to not resume operations until February 3, 2020, and has subsequently ordered we not resume operations in this facility until after February 9.

As a result of this disruption, our revenues for the quarter ending March 27, 2020, will be negatively affected.

Moreover, because of the current restrictions on travel in China, our employees may be affected and we may have labor shortages.

Also, there can be no assurances the Chinese government will not further extend these closures.

Some of our suppliers and customers in China have similarly been affected and currently are experiencing closures and risks of labor shortages.

If these suppliers remain closed, we could have difficulty sourcing materials necessary to fulfill production requirements and meet scheduled shipments, which also would negatively affect our revenues.

Even if we are able to find alternate sources for such materials, they may cost more, which could affect our profitability.

With respect to our customers in China that are experiencing closures, if they are not able to accept orders or if they delay or cancel such orders, our revenues will be negatively affected.

At this point in time, there is significant uncertainty relating to the potential effect of the Coronavirus on our business.

Infections may become more widespread and factory closures may be extended for longer periods of time and to other parts of China, all of which would have a negative impact on our business, financial condition and operating results.

On February 1, 2020, Toh-Seng Ng, Executive Vice President, Chief Financial Officer of the Company, notified the Company that he would retire on February 1, 2021 (the “Retirement Date”).

Effective February 17, 2020, Mr.

Ng will step down as Chief Financial Officer and transition to Executive Vice President, Special Projects until his Retirement Date.

On February 3, 2020, the Company announced that Csaba Sverha was appointed Executive Vice President, Chief Financial Officer of the Company, effective February 17, 2020.

Recent Developments Related to COVID-19

In the quarter ended March 27, 2020, the effects of the global COVID-19

pandemic impacted us in several ways and created various challenges.

It started with our Casix facility in Fuzhou, China, which manufactures custom optics components for us and other customers.

In January 2020, while many factories (including our Casix facility) were closed for about eight days because of China’s Lunar New Year holiday, the Chinese government, as part of its efforts to mitigate the spread of COVID-19,

ordered that businesses in various parts of the country extend the holiday closures.

The Chinese government ordered our Casix facility to not resume operations for almost two weeks.

Because of the restrictions on travel in China in place during this period, many of our employees were unable to return from their holiday travel as planned.

As a result, fewer than 90% of our employees were able to return to work at our Casix facility until early March.

Our other manufacturing facilities also have been affected by various government restrictions put in place in their locations to slow the spread of COVID-19.

In Thailand, the government declared a national state of emergency effective March 26, 2020, to reduce the spread of COVID-19.

The government required the closure of various businesses, in particular retail establishments, and passed measures restricting movement and activities in Thailand.

Our operations in Thailand have not been closed, and we have implemented a number of safety protocols that have allowed our operations in those facilities to continue.

Our facilities in the United States, located in California and New Jersey, and in the United Kingdom have remained open, while adhering to the local government restrictions and orders implemented in March 2020, including shelter in place orders and social distancing guidelines, except that our facility in California was closed for about a week beginning in late March until it reopened in early April as a previously classified “essential” business.

The health and well-being of our employees is our top priority.

Over the past several months, we have implemented significant precautionary measures throughout our worldwide operations to keep our employees and their families safe, such as mandatory temperature detection at building entrances, rigorous and regular facility and equipment disinfection, and mandatory personal protective equipment protocols, including (1) 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 before unpacking, or baking them to kill potential viruses, (4) directing our non-factory

personnel to work from home, and (5) restricting all non-employee

visits to our campuses.

During the quarter, we also experienced a shift in the demand for our services, with some customers canceling, decreasing or delaying their orders and other customers accelerating and increasing their orders.

However, the most significant effect of COVID-19

on our operations this quarter was the disruption of our supply chain, in which we experienced significant fluctuations in the availability of parts and materials we need to manufacture products for our customers.

We were able to mitigate some of these issues by quickly identifying and securing alternative sources;

however, these mitigation efforts, combined with our employee safety initiatives, negatively affected our gross margins because they increased our costs and expenses.

Given the unprecedented global, human, and economic impact of COVID-19;

the extraordinary economic short-term uncertainty;

and the evolving and differing national strategies for dealing with COVID-19,

it is extremely difficult and challenging to provide forward-looking disclosure.

However, given the uncertainty and concern about the global economy and the health of various industries, we think it important to share some thoughts on how COVID-19

may impact 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 expand network capacity, we believe this will have a positive impact on our business in the long-term.

While we believe that 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 for products we manufacture for our customers, especially if the COVID-19

outbreak intensifies or returns in various geographic areas as happened at the end of our third fiscal quarter.

Moreover, we believe the markets for other products we manufacture, such as the industrial lasers and automotive markets, are likely to see reduced demand in a prolonged economic downturn.

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 sources.

A significant portion of our costs are variable and, because of this, we can adjust manufacturing costs relatively quickly to the changing demand of our customers.

However, because the largest portion of our costs is for parts and materials, because of the supply chain issues noted above and, to a lesser extent, our commitment to 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, at least into the first half of fiscal 2021.

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.

Given our $457.8 million in cash, cash equivalents and short-term investments, and our total debt of approximately $54.8 million, as of March 27, 2020, we believe we are in a solid position from a capital and financial resources perspective.

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

9 unchanged sentences

The percentage of our revenues generated from a bill-to

location outside of North America decreased from 54.7% in the three months ended December 28, 2018 to 47.6% in the three months ended December 27, 2019 and from 53.5% in the six months ended December 28, 2018 to 48.6% in the six months ended December 27, 2019, primarily because the increase in sales to our customers in North America was higher than the increase in sales to our customers outside of North America.

Based on the short and medium-term indications and forecasts from our customers, we expect that the portion of our future revenues attributable to customers in regions outside North America for the remainder of fiscal year 2020 will be in line with the portion of total revenues attributable to such customers during the six months ended December 27, 2019.

location outside of North America decreased from 51.0% in the three months ended March 29, 2019 to 49.7% in the three months ended March 27, 2020 and from 52.7% in the nine months ended March 29, 2019 to 49.0% in the nine months ended March 27, 2020, primarily because the increase in sales to our customers in North America was higher than the increase in sales to our customers outside of North America.

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

Three Months Ended

Six Months Ended

Nine Months Ended

North America

24 unchanged sentences

Historically, our employee costs have increased primarily due to increases in the number of employees necessary to support our growth and, to a lesser extent, costs to recruit, train and retain employees.

Our cost of revenues is significantly impacted by salary levels in Thailand, the PRC and the United Kingdom, the fluctuation of the Thai baht, Chinese Renminbi (“RMB”) and Pound Sterling (“GBP”) against our functional currency, the U.S.

Our cost of revenues is significantly impacted by salary levels in Thailand, the PRC and the United Kingdom, the fluctuation of the Thai baht, Chinese Renminbi (“RMB”) and

Pound Sterling (“GBP”) against our functional currency, the U.S.

dollar, and our ability to retain our employees.

25 unchanged sentences

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.

We may enter into foreign exchange currency forward or put option contracts to manage foreign currency exposures associated with certain assets and liabilities and other forecasted foreign currency transactions and may designate these instruments as hedging instruments.

The forward and put option contracts generally have maturities of up to 12 months.

All foreign currency exchange contracts are recognized in the unaudited condensed consolidated balance sheets at fair value.

Gain or loss on our forward and put option contracts generally offset the assets, liabilities, and transactions economically hedged.

Gains or losses on our forward and put option contracts generally offset the assets, liabilities, and transactions economically hedged.

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

As of December 27, 2019

As of March 27, 2020

As of June 28, 2019

3 unchanged sentences

We manage our exposure to fluctuations in foreign exchange rates by the use of foreign currency contracts and offsetting assets and liabilities denominated in the same currency in accordance with management’s policy.

As of December 27, 2019 there was $126.0 million of foreign currency forward contracts outstanding on the Thai baht payables.

As of March 27, 2020 there was $126.0 million of foreign currency forward contracts outstanding on the Thai baht payables.

As of June 28, 2019, there was $72.0 million of foreign currency forward contracts outstanding on the Thai baht payables.

1 unchanged sentence

The RMB liabilities represent trade accounts payable, accrued expenses, income tax payable and other payables.

As of December 27, 2019 and June 28, 2019, we did not have any derivative contracts denominated in RMB.

As of March 27, 2020 and June 28, 2019, we did not have any derivative contracts denominated in RMB.

The GBP assets represent cash, trade accounts receivable, and other current assets.

The GBP liabilities represent trade accounts payable and other payables.

As of December 27, 2019 and June 28, 2019, we did not have any derivative contracts denominated in GBP.

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

As of March 27, 2020 and June 28, 2019, we did not have any derivative contracts denominated in GBP.

Currency Regulation and Dividend Distribution

8 unchanged sentences

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.

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.

27 unchanged sentences

for the fiscal year ended June 28, 2019.

The adoption of new accounting policies and accounting standards are disclosed in Note 2 to the unaudited condensed consolidated financial statements.

There were no changes to our accounting policies other than the adoption of Leases (Topic 842) and Derivatives and Hedging (Topic 815), which resulted from Accounting Standards Codification Topic 842 (“ASC 842”) and Accounting Standards Codification Topic 815 (“ASC 815”), respectively.

We adopted ASC 842 using the modified retrospective transition approach, effective on June 29, 2019.

Accordingly, our comparative financial statements as of June 28, 2019 will not be adjusted.

ASC 842 also provides practical expedients for our ongoing accounting.

We plan to elect the short-term lease recognition exemption for our operating leases with terms of less than 12 months, which will not require recognition of right of use assets or lease liabilities for these leases.

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

The adoption of new accounting policies and accounting standards are disclosed in Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

There were no changes to our accounting policies other than the adoption of Leases (Topic 842) and Derivatives and Hedging (Topic 815).

Results of Operations

2 unchanged sentences

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

(amount in thousands)

Three Months Ended

Six Months Ended

Nine Months Ended

(amount in thousands)

Cost of revenues

4 unchanged sentences

Interest expense

Foreign exchange (loss) gain, net

Foreign exchange loss, net

Other income, net

1 unchanged sentence

Income tax expense

Other comprehensive income, net of tax

Other comprehensive (loss) income, net of tax

Net comprehensive income

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

Cost of revenues

4 unchanged sentences

Interest expense

Foreign exchange (loss) gain, net

Foreign exchange loss, net

Other income, net

1 unchanged sentence

Income tax expense

Other comprehensive income, net of tax

Other comprehensive (loss) income, net of tax

Net comprehensive income

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

(amount in thousands)

3 unchanged sentences

As such, discrete information with respect to separate product lines and segments is not accumulated.

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

Comparison of Three and Nine Months Ended March 27, 2020 with Three and Nine Months Ended March 29, 2019

Total revenues

Our total revenues increased by $23.1 million, or 5.7%, to $426.2 million for the three months ended December 27, 2019, compared with $403.1 million for the three months ended December 28, 2018.

Our total revenues increased by $12.3 million, or 3.1%, to $411.2 million for the three months ended March 27, 2020, compared with $399.0 million for the three months ended March 29, 2019.

This increase was primarily due to an increase in our customers’ demand for both optical and non-optical

communications manufacturing services during the three months ended December 27, 2019.

communications manufacturing services during the three months ended March 27, 2020.

Revenues from optical and non-optical

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

Our total revenues increased by $45.3 million, or 5.8%, to $825.5 million for the six months ended December 27, 2019, compared with $780.3 million for the six months ended December 28, 2018.

communications products increased by $10.4 million and $1.8 million, or 3.5% and 1.8%, respectively, for the three months ended March 27, 2020.

Our total revenues increased by $57.5 million, or 4.9%, to $1,236.7 million for the nine months ended March 27, 2020, compared with $1,179.2 million for the nine months ended March 29, 2019.

This increase was primarily due to an increase in our customers’ demand for both optical and non-optical

communications manufacturing services during the six months ended December 27, 2019.

communications manufacturing services during the nine months ended March 27, 2020.

Revenues from optical and non-optical

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

communications products increased by $48.6 million and $9.0 million, or 5.5% and 3.0%, respectively, for the nine months ended March 29, 2019.

Cost of revenues

Our cost of revenues increased by $19.5 million, or 5.5%, to $377.1 million, or 88.5% of total revenues, for the three months ended December 27, 2019, compared with $357.5 million, or 88.7% of total revenues, for the three months ended December 28, 2018.

This increase in cost of revenues on an absolute dollar basis was in line with the increase in sales volume.

Our cost of revenues increased by $36.0 million, or 5.2%, to $730.4 million, or 88.5% of total revenues, for the six months ended December 27, 2019, compared with $694.4 million, or 89.0% of total revenues, for the six months ended December 28, 2018.

Our cost of revenues increased by $14.7 million, or 4.2%, to $366.9 million, or 89.2% of total revenues, for the three months ended March 27, 2020, compared with $352.2 million, or 88.3% of total revenues, for the three months ended March 29, 2019.

This increase in cost of revenues was generally in line with the increase in sales volume, except for an increase in costs due to supply chain disruption resulting from COVID-19.

Our cost of revenues increased by $50.6 million, or 4.8%, to $1,097.2 million, or 88.7% of total revenues, for the nine months ended March 27, 2020, compared with $1,046.6 million, or 88.8% of total revenues, for the nine months ended March 29, 2019.

This increase in cost of revenues on an absolute dollar basis was in line with the increase in sales volume.

Our gross profit increased by $3.6 million, or 7.9%, to $49.2 million, or 11.5% of total revenues, for the three months ended December 27, 2019, compared with $45.6 million, or 11.3% of total revenues, for the three months ended December 28, 2018.

The increase was primarily due to an increase in revenues and effective cost controls.

Our gross profit increased by $9.3 million, or 10.8%, to $95.1 million, or 11.5% of total revenues, for the six months ended December 27, 2019, compared with $85.8 million, or 11.0% of total revenues, for the six months ended December 28, 2018.

Our gross profit decreased by $2.4 million, or 5.2%, to $44.3 million, or 10.8% of total revenues, for the three months ended March 27, 2020, compared with $46.8 million, or 11.7% of total revenues, for the three months ended March 29, 2019.

The decrease was primarily due to a less favorable product mix and an increase in costs due to supply chain disruption resulting from COVID-19.

Our gross profit increased by $6.9 million, or 5.2%, to $139.5 million, or 11.3% of total revenues, for the nine months ended March 27, 2020, compared with $132.6 million, or 11.2% of total revenues, for the nine months ended March 29, 2019.

The increase was primarily due to an increase in revenues and effective cost controls.

SG&A expenses

Our SG&A expenses increased by $4.4 million, or 34.3%, to $17.1 million, or 4.0% of total revenues, for the three months ended December 27, 2019, compared with $12.7 million, or 3.2% of total revenues, for the three months ended December 28, 2018.

The increase was primarily due to (1) an increase in share-based compensation expenses of $1.9 million;

(2) an increase in executive and management expenses of $1.2 million;

(3) an increase in severance liabilities of $0.3 million;

and (4) an increase in new business start-up

costs of $0.5 million.

Our SG&A expenses increased by $5.9 million, or 21.8%, to $33.1 million, or 4.0% of total revenues, for the six months ended December 27, 2019, compared with $27.2 million, or 3.5% of total revenues, for the six months ended December 28, 2018.

The increase was primarily due to (1) an increase in share-based compensation expenses of $3.1 million;

(2) an increase in executive and management expenses of $1.8 million;

(3) an increase in severance liabilities of $0.6 million;

Our SG&A expenses increased by $3.0 million, or 21.1%, to $17.1 million, or 4.2% of total revenues, for the three months ended March 27, 2020, compared with $14.1 million, or 3.5% of total revenues, for the three months ended March 29, 2019.

The increase was primarily due to (1) an increase in share-based compensation expenses of $1.4 million including $1.2 million from an increase in performance share-based awards granted in the period and $0.2 million from an increase in restricted share-based awards granted in the period;

(2) an increase in new business start-up

costs in our subsidiary of $0.4 million;

(3) an increase in severance liabilities expense of $0.4 million due to a change in labor protection law in Thailand in May 2019 that increased the required severance payment compensation for employees with 20 years of service from 300 days of wage to 400 days of wage;

and (4) an increase in executive and management expenses of $0.2 million from bonuses and other benefits.

Our SG&A expenses increased by $8.9 million, or 21.5%, to $50.2 million, or 4.1% of total revenues, for the nine months ended March 27, 2020, compared with $41.3 million, or 3.5% of total revenues, for the nine months ended March 29, 2019.

The increase was primarily due to (1) an increase in share-based compensation expenses of $4.5 million including $3.9 million from an increase in performance share-based awards granted in the period and $0.6 million from an increase in restricted share-based awards granted in the period;

(2) an increase in executive and management expenses of $2.0 million from bonuses and other benefits;

(3) an increase in severance liabilities expense of $1.0 million due to a change in labor protection law in Thailand in May 2019 that increased the required severance payment compensation for employees with 20 years of service from 300 days of wage to 400 days of wage;

and (4) an increase in new business start-up

costs of $0.5 million.

costs in our subsidiary of $0.9 million.

Operating income.

Our operating income decreased by $0.5 million to $32.1 million, or 7.5% of total revenues, for the three months ended December 27, 2019, compared with $32.5 million, or 8.1% of total revenues, for the three months ended December 28, 2018.

Our operating income decreased by $5.1 million to $27.2 million, or 6.6% of total revenues, for the three months ended March 27, 2020, compared with $32.3 million, or 8.1% of total revenues, for the three months ended March 29, 2019.

The decrease was primarily due to an increase in SG&A expenses.

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

The increase was primarily due to an increase in revenues.

Our operating income decreased by $1.3 million to $89.3 million, or 7.2% of total revenues, for the nine months ended March 27, 2020, compared with $90.6 million, or 7.7% of total revenues, for the nine months ended March 29, 2019.

The decrease was primarily due to an increase in SG&A expenses.

Interest income

Our interest income increased by $0.8 million, or 64.1%, to $1.9 million, or 0.5% of total revenues, for the three months ended December 27, 2019, compared with $1.2 million, or 0.3% of total revenues, for the three months ended December 28, 2018.

The increase was primarily due to the higher weighted average interest rate and an increase in the average balance of our outstanding cash compared to the same period in the previous year.

Our interest income increased by $1.4 million, or 53.8%, to $4.0 million, or 0.5% of total revenues, for the six months ended December 27, 2019, compared with $2.6 million, or 0.3% of total revenues, for the six months ended December 28, 2018.

The increase was primarily due to the higher weighted average interest rate and an increase in the average balance of our outstanding cash compared to the same period in the previous year.

Our interest income decreased by $0.1 million, or 4.8%, to $2.0 million, or 0.5% of total revenues, for the three months ended March 27, 2020, compared with $2.1 million, or 0.5% of total revenues, for the three months ended March 29, 2019.

The decrease was primarily due to a reduction in the weighted average interest rate compared to the same period in the previous year from 2.3% to 1.9%, consistent with global interest rate trends.

Our interest income increased by $1.3 million, or 27.5%, to $6.1 million, or 0.5% of total revenues, for the nine months ended March 27, 2020, compared with $4.8 million, or 0.4% of total revenues, for the nine months ended March 29, 2019.

The increase was primarily due to an increase in the average balance of our outstanding cash.

Interest expense

Our interest expense decreased by $1.4 million to $0.2 million for the three months ended December 27, 2019, compared with $1.6 million for the three months ended December 28, 2018.

The decrease was due to the implementation of cash flow hedge on interest rate swaps at September 27, 2019 which resulted in (1) the reduction of interest expense of $0.9 million from the recognition of unrealized loss from mark-to-market of interest rate swaps in other comprehensive income instead of in interest expense;

and (2) the amortization of the fair value of interest rate swaps as of hedge inception date of $0.4 million during the three months ended December 27, 2019 in relation to applying hedge accounting which results in the decrease in interest expense.

Our interest expense increased by $0.3 million to $2.6 million for the six months ended December 27, 2019, compared with $2.3 million for the six months ended December 28, 2018.

The increase was primarily due to an unrealized loss from mark-to-market of interest rate swaps of $1.7 million for the three months ended September 27, 2019, before applying cash flow hedge, as compared to an unrealized loss of $0.8 million for the six months ended December 28, 2018;

offset by the amortization of the fair value of interest rate swaps as of hedge inception date of $0.4 million during the three months ended December 27, 2019 in relation to applying hedge accounting which results in the decrease in interest expense.

Foreign exchange gain (loss), net.

We recorded foreign exchange loss, net of $1.0 million for the three months ended December 27, 2019, compared with $0.4 million loss for the three months ended December 28, 2018.

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

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

During the six months ended December 27, 2019, foreign exchange loss mainly came from unrealized loss of $1.9 million from mark-to-market

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

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

Our interest expense decreased by $1.2 million to $0.2 million for the three months ended March 27, 2020, compared with $1.4 million for the three months ended March 29, 2019.

The decrease was due to the implementation of cash flow hedge on interest rate swaps at September 27, 2019, which resulted in (1) the reduction of interest expense of $0.7 million from the recognition of an unrealized loss from mark-to-market

of interest rate swaps in other comprehensive income instead of in interest expense;

and (2) the amortization of the fair value of interest rate swaps as of the hedge inception date of $0.4 million during the three months ended March 27, 2020 in relation to the application of hedge accounting which results in a decrease in interest expense.

Our interest expense decreased by $0.9 million to $2.8 million for the nine months ended March 27, 2020, compared with $3.7 million for the nine months ended March 29, 2019.

The decrease was primarily due to an unrealized loss from mark-to-market

of interest rate swaps of $1.7 million for the three months ended September 27, 2019, before applying cash flow hedge, as compared to an unrealized loss of $1.6 million for the nine months ended March 29, 2019;

offset by the amortization of the fair value of interest rate swaps as of the hedge inception date of $0.8 million during the nine months ended March 27, 2020 in relation to applying hedge accounting which results in a decrease in interest expense.

Foreign exchange loss, net.

We recorded foreign exchange loss, net of $8 thousand for the three months ended March 27, 2020, compared with a $3.1 million loss for the three months ended March 29, 2019.

The decrease in foreign exchange loss was mainly due to unrealized gain from revaluation of outstanding Thai baht assets and liabilities of $3.3 million, offset by an unrealized loss from mark to market forward contracts of $2.1 million and other foreign exchange losses, net of $1.2 million for the three months ended March 27, 2020, as compared to an unrealized loss from mark to market forward contracts and revaluation of outstanding Thai baht assets and liabilities of $2.1 million, and a realized loss from payment and receipts of $0.6 million for the three months ended March 29, 2019.

We recorded foreign exchange loss, net of $2.9 million for the nine months ended March 27, 2020, compared with a $0.4 million loss for the nine months ended March 29, 2019.

The increase in foreign exchange loss was due to a realized foreign exchange loss from receipts and payments of $1.6 million for the nine months ended March 27, 2020 as compared to a $0.9 million realized foreign exchange gain from receipts and payments for the nine months ended March 29, 2019.

Income before income taxes

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

We recorded income before income taxes of $29.2 million and $90.6 million for the three and nine months ended March 27, 2020, respectively, compared with $30.1 million and $92.1 million for the three and nine months ended March 29, 2019, respectively.

Income tax expense.

Our provision for income tax reflects an effective tax rate of 4.9% and 4.2% for the three months ended December 27, 2019 and December 28, 2018, respectively.

The increase was primarily due to the fact that we had higher income subject to tax during the three months ended December 27, 2019 as compared to the same period in fiscal year 2019.

Our provision for income tax reflects an effective tax rate of 5.0% and 5.1% for the six months ended December 27, 2019 and December 28, 2018, respectively.

The decrease was primarily due to the fact that we had lower income subject to tax during the six months ended December 27, 2019 as compared to the same period in fiscal year 2019.

We recorded net income of $31.2 million, or 7.3% of total revenues, for the three months ended December 27, 2019, compared with $31.5 million, or 7.8% of total revenues, for the three months ended December 28, 2018.

The decrease was primarily due to (1) a net increase in SG&A expenses of $4.4 million;

(2) an increase in income tax expenses of $1.3 million due to the valuation allowance for deferred tax assets;

and (3) a net increase in foreign exchange loss of $0.6 million;

partially offset by (1) an increase in gross profit of $3.6 million due to increased revenues and effective cost control;

(2) a net change in interest income and expense of $2.2 million;

and (3) a decrease in expenses related to reduction in workforce of $0.3 million.

We recorded net income of $57.2 million, or 6.9% of total revenues, for the six months ended December 27, 2019, compared with $59.4 million, or 7.6% of total revenues, for the six months ended December 28, 2018.

The decrease was primarily due to (1) a net increase in SG&A expenses of $5.9 million;

(2) a net change in foreign exchange gain (loss) of $5.6 million;

and (3) an increase in income tax expenses of $1.6 million primarily due to the valuation allowance for deferred tax assets;

partially offset by (1) an increase in gross profit of $9.3 million due to increased revenues and effective cost control;

(2) a net change in interest income and expense of $1.1 million;

and (3) a decrease in expenses related to reduction in workforce of $0.4 million.

Other comprehensive income.

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

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

Our provision for income tax reflects an effective tax rate of 2.4% and 5.2% for the three months ended March 27, 2020 and March 29, 2019, respectively.

The decrease was primarily due to the fact that we had lower income subject to tax during the three months ended March 27, 2020 as compared to the same period in fiscal year 2019.

Our provision for income tax reflects an effective tax rate of 4.2% and 5.2% for the nine months ended March 27, 2020 and March 29, 2019, respectively.

The decrease was primarily due to the fact that we had lower income subject to tax during the nine months ended March 27, 2020 as compared to the same period in fiscal year 2019.

We recorded net income of $28.3 million, or 6.9% of total revenues, for the three months ended March 27, 2020, compared with $28.6 million, or 7.1% of total revenues, for the three months ended March 29, 2019.

The decrease was primarily due to (1) an increase in SG&A expenses of $3.0 million and (2) a decrease in gross profit of $2.4 million;

partially offset by (1) a decrease in foreign exchange loss of $3.0 million, (2) a net change in interest income and expense of $1.1 million;

(3) a decrease in income tax expense of $0.5 million, and (4) a decrease in expenses related to reduction in workforce of $0.3 million.

We recorded net income of $85.5 million, or 6.9% of total revenues, for the nine months ended March 27, 2020, compared with $88.0 million, or 7.5% of total revenues, for the nine months ended March 29, 2019.

The decrease was primarily due to (1) a net increase in SG&A expenses of $8.9 million, (2) a net change in foreign exchange gain (loss) of $2.5 million, and (3) an increase in income tax expenses of $1.1 million primarily due to the valuation allowance for deferred tax assets;

partially offset by (1) an increase in gross profit of $6.9 million due to increased revenues and effective cost control, (2) a net change in interest income and expense of $2.2 million, and (3) a decrease in expenses related to reduction in workforce of $0.7 million.

Other comprehensive (loss) income, net.

We recorded other comprehensive loss of $8.2 million, or 2.0% of total revenues, for the three months ended March 27, 2020, compared with other comprehensive income of $1.0 million, or 0.3% of total revenues, for the three months ended March 29, 2019.

We recorded other comprehensive loss of $8.0 million, or 0.6% of total revenues, for the nine months ended March 27, 2020, compared with other comprehensive income of $1.2 million, or 0.1% of total revenues, for the nine months ended March 29, 2019.

Liquidity and Capital Resources

1 unchanged sentence

We primarily finance our operations through cash flow from operations.

As of December 27, 2019 and December 28, 2018, we had cash, cash equivalents, and short-term investments of $442.8 million and $382.5 million, respectively, and outstanding debt of $57.9 million and $63.4 million, respectively.

As of March 27, 2020 and March 29, 2019, we had cash, cash equivalents, and short-term investments of $457.8 million and $408.9 million, respectively, and outstanding debt of $54.8 million and $61.8 million, respectively.

Our cash and cash equivalents, which primarily consist of cash on hand, demand deposits, and liquid investments with original maturities of three months or less, are placed with banks and other financial institutions.

The weighted-average interest rate on our cash and cash equivalents for each of the three and six months ended December 27, 2019 was 2.0% and for the three and six months ended December 28, 2018 was 1.4% and 1.6%, respectively.

The weighted-average interest rate on our cash and cash equivalents for each of the three and nine months ended March 27, 2020 was 1.9% and 2.0%, respectively, and for the three and nine months ended March 29, 2019 was 2.3% and 1.9%, respectively.

Our cash investments are made in accordance with an investment policy approved by the audit committee of our board of directors.

6 unchanged sentences

Unrealized gains and losses on these securities are recorded as other comprehensive income (loss) and are reported as a separate component of shareholders’ equity.

During the six months ended December 27, 2019, we paid off an existing term loan of $60.9 million under our previous Bank of America Facility Agreement, our subsidiaries in Thailand drew down a new term loan of $60.9 million under a new Credit Facility Agreement with the Bank of Ayudhya Public Company Limited and we repaid $3.0 million of the new term loan.

As a result, as of December 27, 2019, we had a long-term borrowing of $57.9 million under our new Credit Facility Agreement.

During the nine months ended March 27, 2020, (1) we paid off a term loan of $60.9 million under our previous Bank of America Facility Agreement, (2) our subsidiaries in Thailand drew down a new term loan of $60.9 million under a new Credit Facility Agreement with the Bank of Ayudhya Public Company Limited, and (3) we repaid $6.1 million of the new term loan under the new Credit Facility Agreement.

As a result, as of March 27, 2020, we had a long-term borrowing of $54.8 million under our new Credit Facility Agreement.

(See Note 14 for further details.) We anticipate that our internally generated working capital, along with our cash and cash equivalents will be adequate to repay these obligations.

To better manage our cash on hand, we held short-term investments of $222.8 million as of December 27, 2019.

To better manage our cash on hand, we held short-term investments of $233.6 million as of March 27, 2020.

We believe that our current cash and cash equivalents, marketable securities, cash flow from operations, and funds available through our credit facility will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.

2 unchanged sentences

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

Six Months Ended

Nine Months Ended

(amount in thousands)

Net cash provided by operating activities

Net cash (used in) provided by investing activities

Net cash used in investing activities

Net cash used in financing activities

1 unchanged sentence

Operating Activities

Net cash provided by operating activities decreased by $16.7 million, or 24.1%, to $52.6 million for the six months ended December 27, 2019, compared with net cash provided by operating activities of $69.3 million for the six months ended December 28, 2018.

This decrease was primarily due to (1) an increase of $52.1 million in payments to trade accounts payable;

and (2) a decrease in accounts receivable of $10.6 million.

These increases were offset by (1) an increase of $28.1 million in inventory;

(2) an increase in unrealized loss on exchange rate and fair value of derivative instruments of $7.0 million;

(3) an increase of $5.3 million in other current assets and non-current

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

Net cash provided by operating activities decreased by $1.1 million, or 1.0%, to $104.4 million for the nine months ended March 27, 2020, compared with net cash provided by operating activities of $105.5 million for the nine months ended March 29, 2019.

The change in net cash provided by operating activities was not significant compared to the same period of the previous year.

Investing Activities

Net cash used in investing activities increased by $18.8 million, or 143.6%, to $5.7 million for the six months ended December 27, 2019, compared with net cash provided by investing activities of $13.1 million for the six months ended December 28, 2018.

This increase was primarily due to (1) funds provided to our customer of $24.3 million to support the customer’s transfer of certain manufacturing operations from Berlin, German to the Company’s facilities in Thailand, which the customer has agreed to repay by September 30, 2020;

and (2) an increase in investments in property, plant and equipment and intangibles of $6.2 million, offset by net cash received from short-term investments of $10.5 million.

Net cash used in investing activities decreased by $50.1 million, or 63.4%, to $28.9 million for the nine months ended March 27, 2020, compared with net cash used in investing activities of $79.0 million for the nine months ended March 29, 2019.

This decrease was primarily due to net cash received from short-term investments of $88.2 million, offset by (1) funds provided to a customer of $24.3 million to support the customer’s transfer of certain manufacturing operations from Berlin, Germany to our facilities in Thailand, which the customer has agreed to repay by September 30, 2020, and (2) an increase in investments in property, plant and equipment and intangibles of $14.8 million.

Financing Activities

Net cash used in financing activities decreased by $5.8 million, or 43.1%, to $7.8 million for the six months ended December 27, 2019, compared with net cash used in financing activities of $13.6 million for the six months ended December 28, 2018.

This decrease was primarily due to (1) a decrease in withholding tax related to net share settlement of restricted share units of $4.7 million;

and (2) the release of restricted cash in connection with business acquisition of $3.5 million.

These decreases were offset by an increase of $2.3 million in repayments of loans from bank.

Net cash used in financing activities increased by $9.9 million, or 45.0%, to $32.0 million for the nine months ended March 27, 2020, compared with net cash used in financing activities of $22.1 million for the nine months ended March 29, 2019.

This increase was primarily due to (1) an increase in ordinary shares repurchase of $15.3 million and (2) an increase of $3.7 million in net repayments of loans to banks.

The increase was offset by (1) an increase in withholding tax related to net share settlement of restricted share units of $5.7 million and (2) the release of restricted cash in connection with a business acquisition of $3.5 million.

Sheet Commitments and Arrangements

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

As of December 27, 2019, the standby letters of credit were backed by cash collateral of in the aggregate amount of $7.7 million.

As of March 27, 2020, we had one outstanding standby letter of credit of 6.0 million Euros, which was related to our support of a customer’s transfer of certain manufacturing operations from Berlin, Germany to our facilities in Thailand.

As of March 27, 2020, the standby letter of credit was backed by cash collateral of $7.4 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.

See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q

for recent accounting pronouncements that could have an effect on us.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis