What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-03 compared with 2020-05-05 · 126 added, 152 removed, 228 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 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.

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:

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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 nine months ended March 27, 2020;

our expectation that the portion of our revenues attributable to customers in regions outside of North America for the remainder of fiscal year 2021 will be in line with the portion of those revenues for the three months ended September 25, 2020;

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

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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 Form 10-Q,

Factors that could cause or contribute to such

differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-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 the Securities and Exchange Commission.

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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

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 in Fuzhou, China, experienced a prolonged temporary closure following its customary eight-day

Chinese Lunar New Year holiday in January 2020.

In accordance with the Chinese government’s official efforts to mitigate the spread of COVID-19,

our PRC subsidiary, along with other businesses in various parts of the country, delayed resumption of operations following the holiday closures for approximately two weeks.

Furthermore, because of the restrictions in place on travel in China during this period, many of our employees were unable to return from their holiday travel as planned, resulting in fewer than 90% of our employees being able to return to work at our PRC subsidiary before early March.

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

In Thailand, the government declared a national state of emergency effective March 26, 2020 and required the closure of various businesses, in particular retail establishments, and passed measures restricting movement and activities in Thailand.

While our operations in Thailand 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 in Santa Clara, California, which closed for approximately one week beginning in late March before reopening in early April as a previously classified “essential business,” our facilities in the U.S., including in New Jersey, and in the U.K.

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.

The health and well-being of our employees continues to be our top priority.

Over the last few quarters, we have implemented significant precautionary measures throughout our worldwide operations to ensure our employees and their families remain 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 prior to unpacking, or applying extreme heat to them to kill potential viruses, (4) directing our non-factory

personnel to work remotely, 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;

During the three months ended September 25, 2020, we also continued to experience a shift in the demand for our services, with some customers canceling, decreasing or delaying orders and other customers accelerating and increasing orders.

However, the most significant effect of the COVID-19

pandemic on our operations has been the disruption of our supply chain, including significant fluctuations in the availability of parts and materials necessary to manufacture products for our customers.

While we were able to mitigate some of these issues by quickly identifying and securing alternative sources, these mitigation efforts, combined with our employee safety initiatives, negatively impacted our gross margins due to the associated costs and expenses.

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

pandemic, 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:

it is extremely challenging to provide a forward-looking disclosure.

Despite the uncertainty and concern about the global economy and the health of various industries, we believe it is important to share our considerations as we continue to assess the impacts of COVID-19

as they relate to 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.

outbreak intensifies or returns in various geographic areas as happened at the end of our third quarter in fiscal 2020.

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.

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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.

A significant portion of our costs are 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, and 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.

Given our $496.4 million in cash, cash equivalents and short-term investments, and our total debt of approximately $48.6 million, as of September 25, 2020, we believe we are in a solid position from a capital and financial resources perspective.

We expect that current cash and cash equivalent balances and short-term investments, and cash flows that are 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.

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

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The percentage of our revenues generated from a bill-to

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.

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 nine months ended March 27, 2020.

location outside of North America increased from 49.7% in the three months ended September 27, 2019 to 52.5% in the three months ended September 25, 2020, primarily because the increase in sales to our customers in North America was lower 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 2021 will be in line with the portion of revenues attributable to such customers during the three months ended September 25, 2020.

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

Three Months Ended

Nine Months Ended

September 25,

September 27,

North America

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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.

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In fiscal year 2020, the compensation committee of our board of directors approved a fiscal year 2020 executive incentive plan with quantitative objectives based solely on achieving certain revenue targets and non-GAAP

gross margin targets for fiscal year 2019.

operating margin targets for fiscal year 2020.

Additional Financial Disclosures

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In order to manage the risks arising from fluctuations in foreign currency exchange rates, we use derivative 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.

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.

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

As of March 27, 2020

As of September 25, 2020

As of June 26, 2020

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

As of September 25, 2020, there was $130.0 million of foreign currency forward contracts outstanding on the Thai baht payables.

As of June 26, 2020, there was $126.0 million of foreign currency forward contracts outstanding on the Thai baht payables.

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

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

As of September 25, 2020 and June 26, 2020, 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 March 27, 2020 and June 28, 2019, we did not have any derivative contracts denominated in GBP.

As of September 25, 2020 and June 26, 2020, we did not have any derivative contracts denominated in GBP.

For the three months ended September 25, 2020 and September 27, 2019, we recorded losses of $1.5 million and $1.9 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

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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.

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Throughout the period of our operations in Thailand, we have generally received income tax and other incentives from the Thailand Board of Investment.

Preferential tax treatment from the Thai government in the form of a corporate tax exemption is currently available to us through June 2020 and June 2026 on income generated from projects to manufacture certain products at our Pinehurst campus and Chonburi campus, respectively.

Such preferential tax treatment is contingent on various factors, including the export of our customers’ products out of Thailand and our agreement not to move our manufacturing facilities out of our current province in Thailand for at least 15 years from the date on which preferential tax treatment was granted (i.e., at least until June 2020 in the case of our Pinehurst campus and until June 2026 in the case of our Chonburi campus).

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 through June 2026.

Similar preferential tax treatment was available to us through June 2020 with respect to products manufactured at our Pinehurst campus.

After June 2020, 50% of our income generated from products manufactured at our Pinehurst campus will be exempted from tax through June 2025.

Currently, the corporate income tax rate for our Thai subsidiary is 20%.

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for the fiscal year ended June 26, 2020.

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).

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 ASC 326, “Financial Instruments—Credit Losses:

Measurement of Credit Losses on Financial Instruments”.

Results of Operations

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

Three Months Ended

Nine Months Ended

(amount in thousands)

Three Months Ended

September 25,

September 27,

Cost of revenues

Selling, general and administrative expenses

Expenses related to reduction in workforce

Operating income

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Interest expense

Foreign exchange loss, net

Other income, net

Foreign exchange gain (loss), net

Other income (expense), net

Income before income taxes

Income tax expense

Other comprehensive (loss) income, net of tax

Other comprehensive income (loss), net of tax

Net comprehensive income

The following table sets forth a summary of our unaudited condensed consolidated statements of operations and comprehensive income as a percentage of total revenues for the periods indicated.

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

Nine Months Ended

September 25,

September 27,

Cost of revenues

Selling, general and administrative expenses

Expenses related to reduction in workforce

Operating income

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Interest expense

Foreign exchange loss, net

Other income, net

Foreign exchange gain (loss), net

Other income (expense), net

Income before income taxes

Income tax expense

Other comprehensive (loss) income, net of tax

Other comprehensive income (loss), net of tax

Net comprehensive income

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Three Months Ended

Nine Months Ended

(amount in thousands)

September 25,

September 27,

Optical communications

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

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 $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 March 27, 2020.

Revenues from optical and non-optical

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 nine months ended March 27, 2020.

Revenues from optical and non-optical

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.

Comparison of Three Months Ended September 25, 2020 with Three Months Ended September 27, 2019

Our revenues increased by $37.3 million, or 9.4%, to $436.6 million for the three months ended September 25, 2020, compared with $399.3 million for the three months ended September 27, 2019.

This increase was due to an increase in our key customers’ demand for optical communications manufacturing services during the three months ended September 25, 2020.

Revenues from optical communications products increased by $41.5 million, or 13.7%, for the three months ended September 25, 2020.

Cost of revenues.

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 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.

Our cost of revenues increased by $32.9 million, or 9.3%, to $386.2 million, or 88.4% of revenues, for the three months ended September 25, 2020, compared with $353.3 million, or 88.5% of revenues, for the three months ended September 27, 2019.

The increase in cost of revenues on an absolute dollar basis was in line with the increase in revenue.

Gross profit.

Our gross profit increased by $4.5 million, or 9.8%, to $50.5 million, or 11.6% of revenues, for the three months ended September 25, 2020, compared with $46.0 million, or 11.5% of revenues, for the three months ended September 27, 2019.

The increase was primarily due to a more favorable product mix.

SG&A expenses.

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 in our subsidiary of $0.9 million.

Our SG&A expenses increased by $0.9 million, or 5.4%, to $16.9 million, or 3.9% of revenues, for the three months ended September 25, 2020, compared with $16.0 million, or 4.0% of revenues, for the three months ended September 27, 2019.

The increase was primarily due to an increase in start-up

costs for our subsidiary in Israel of $0.8 million.

Operating income.

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 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.

Our operating income increased by $3.6 million to $33.6 million, or 7.7% of revenues, for the three months ended September 25, 2020, compared with $30.0 million, or 7.5% of revenues, for the three months ended September 27, 2019.

The increase was primarily due to an increase in revenues.

Interest income.

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.

Our interest income decreased by $1.0 million, or 47.4%, to $1.1 million, or 0.3% of revenues, for the three months ended September 27, 2019, compared with $2.1 million, or 0.5% of revenues, for the three months ended September 27, 2019.

The decrease was primarily due to a lower weighted average interest rate during the three months ended September 25, 2020 compared to same period in fiscal year 2020.

Interest expense.

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.

Our interest expense decreased by $2.1 million to $0.3 million for the three months ended September 25, 2020, compared with $2.4 million for the three months ended September 27, 2019.

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

of interest rate swaps recognized to earnings as a result of applying cash flow hedge accounting during the three months ended September 25, 2020.

Foreign exchange gain (loss), net.

We recorded foreign exchange gain, net of $0.1 million for the three months ended September 25, 2020, compared with foreign exchange loss, net of $2.0 million for the three months ended September 27, 2019.

The increase in foreign exchange gain was mainly due to an unrealized foreign exchange gain from revaluation of outstanding Thai baht assets and liabilities of $2.0 million for the three months ended September 25, 2020, as compared to an unrealized foreign exchange loss from revaluation of outstanding Thai baht assets and liabilities of $0.2 million for the three months ended September 27, 2019.

Moreover, there was a reduction of foreign exchange gain (loss) volatility from the application of cash flow hedge which was implemented on December 28, 2019.

Unrealized foreign exchange loss from marking-to-market

of foreign exchange forward contracts after cash flow hedge application was $1.5 million for the three months ended September 25, 2020, as compared to unrealized foreign exchange loss from marking-to-market

of foreign exchange forward contracts of $1.9 million for the three months ended September 27, 2019.

Income before income taxes.

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.

We recorded income before income taxes of $34.7 million for the three months ended September 25, 2020, compared with $28.1 million for the three months ended September 27, 2019.

Income tax expense.

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.

Our provision for income tax reflects an effective tax rate of 4.5% and 5.6% for the three months ended September 25, 2020 and September 27, 2019, respectively.

The decrease was primarily due to the fact that we had lower income subject to tax during the first quarter of fiscal year 2021 as compared to the same period in fiscal year 2020.

We recorded net income of $33.1 million, or 7.6% of revenues, for the three months ended September 25, 2020, compared with $26.0 million, or 6.5% of revenues, for the three months ended September 27, 2019.

Other comprehensive income (loss).

We recorded other comprehensive loss of $2.8 million, or 0.6% of revenues, for the three months ended September 25, 2020, compared with other comprehensive loss of $0.2 million, or 0.1% of revenues, for the three months ended September 27, 2019.

The increase in other comprehensive loss was mainly due to the implementation of cash flow hedge for foreign exchange forward contracts on December 28, 2019;

therefore, unrealized foreign exchange loss of $3.2 million was recognized into other comprehensive income (loss), as compared to the three months ended September 27, 2019, other comprehensive loss comprised of unrealized foreign exchange loss of $0.4 million from foreign currency translation adjustment.

Liquidity and Capital Resources

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We primarily finance our operations through cash flow from operations.

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.

As of September 25, 2020 and September 27, 2019, we had cash, cash equivalents, and short-term investments of $496.4 million and $406.8 million, respectively, and outstanding debt of $48.6 million and $60.9 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 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.

The weighted-average interest rate on our cash and cash equivalents for the three months ended September 25, 2020 and September 27, 2019 was 0.9% and 2.0%, respectively.

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

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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 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.

During the three months ended September 25, 2020, we repaid $3.0 million of the term loan under the Credit Facility Agreement with the Bank of Ayudhya Public Company Limited.

As a result, as of September 25, 2020, we had a long-term borrowing of $48.6 million under our 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 $233.6 million as of March 27, 2020.

To better manage our cash on hand, we held short-term investments of $307.2 million as of September 25, 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.

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

Nine Months Ended

Three Months Ended

(amount in thousands)

September 25,

September 27,

Net cash provided by operating activities

Net cash used in investing activities

Net cash (used in) provided by investing activities

Net cash used in financing activities

Net increase in cash, cash equivalents and restricted cash

Net (decrease) increase in cash, cash equivalents and restricted cash

Operating Activities

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.

Net cash provided by operating activities increased by $31.9 million, or 1,203.6%, to $34.5 million for the three months ended September 25, 2020, compared with net cash provided by operating activities of $2.6 million for the three months ended September 27, 2019.

This increase was primarily due to (1) a decrease of $38.8 million in payments to trade accounts payable and (2) an increase in net income of $7.1 million offset by (1) a decrease in change of other current liabilities and non-current

liabilities of $8.8 million, (2) a decrease in cash receipts related to the timing of collection of trade accounts receivable of $3.5 million, (3) an increase in unrealized gain on exchange rate and fair value of foreign currency forwards contracts and interest rate swaps of $4.0 million, (4) a decrease in change in inventories of $1.7 million and (5) an increase in change in other current assets and non-current

assets of $3.6 million.

Investing Activities

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.

Net cash used in investing activities increased by $70.1 million, or 600.5%, to $58.4 million for the three months ended September 25, 2020, compared with net cash provided by investing activities of $11.7 million for the three months ended September 27, 2019.

This increase was primarily due to (1) an increase in purchases of short-term investments, net of proceeds from sales and maturities of $63.6 million and (2) an increase in the purchase of property, plant and equipment and intangibles of $6.5 million.

Financing Activities

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.

Net cash used in financing activities increased by $8.7 million, or 196.6%, to $13.1 million for the three months ended September 25, 2020, compared with net cash used in financing activities of $4.4 million for the three months ended September 27, 2019.

This increase was primarily due to (1) an increase in withholding tax related to net share settlement of restricted share units of $5.8 million and (2) an increase of $3.0 million in repayment of loans to a bank.

Sheet Commitments and Arrangements

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.

As of September 25, 2020, we had one outstanding standby letter of credit of 6.0 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 September 25, 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 in Part I, Item 1 of this Quarterly Report on Form 10-Q

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

See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements 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