Fabrinet 10-Q

ITEM 1. FINANCIAL STATEMENTS FABRINET CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands of U.S. dollars, except share data and par value) September 25, 2020 June 26, 2020 Assets Current assets Cash and cash equivalents $ 189,201 $ 225,430 Short-term restricted cash 7,402 7,402 Short-term investments 307,238 262,693 Trade accounts receivable, net of allowance for doubtful accounts of $ 186 and $ 336 , respectively 289,162 272,665 Contract assets 11,757 13,256 Inventories 339,429 309,786 Other receivable 24,310 24,310 Prepaid expenses 4,095 5,399 Other current assets 7,827 14,508 Total current assets 1,180,421 1,135,449 Non-current assets Property, plant and equipment, net 227,623 228,274 Intangibles, net 4,147 4,312 Operating right-of-use assets 7,228 8,068 Deferred tax assets 5,766 5,675 Other non-current assets 221 202 Total non-current assets 244,985 246,531 Total Assets $ 1,425,406 $ 1,381,980 Liabilities and Shareholders’ Equity Current liabilities Long-term borrowings, current portion, net $ 12,156 $ 12,156 Trade accounts payable 284,173 251,603 Fixed assets payable 9,616 15,127 Contract liabilities 966 1,556 Operating lease liabilities, current portion 2,098 1,979 Income tax payable 2,940 2,242 Accrued payroll, bonus and related expenses 18,881 19,265 Accrued expenses 10,077 8,979 Other payables 14,542 21,514 Total current liabilities 355,449 334,421 Non-current liabilities Long-term borrowings, non-current portion, net 36,475 39,514 Deferred tax liability 4,927 4,729 Operating lease liability, non-current portion 4,906 5,873 Severance liabilities 17,609 17,379 Other non-current liabilities 5,337 5,655 Total non-current liabilities 69,254 73,150 Total Liabilities 424,703 407,571 Commitments and contingencies (Note 1 7 ) Shareholders’ equity Preferred shares ( 5,000,000 shares authorized, $ 0.01 par value; no shares issued and outstanding as of September 25, 2020 and June 26, 2020) — — Ordinary shares ( 500,000,000 shares authorized, $ 0.01 par value; 38,680,659 shares and 38,471,967 shares issued at September 25, 2020 and June 26, 2020, respectively; and 36,936,556 shares and 36,727,864 shares outstanding at September 25, 2020 and June 26, 2020, respectively) 387 385 Additional paid-in capital 171,715 175,610 Less: Treasury shares ( 1,744,103 shares and 1,744,103 shares as of September 25, 2020 and June 26, 2020, respectively) ( 68,501 ) ( 68,501 ) Accumulated other comprehensive loss ( 3,904 ) ( 1,147 ) Retained earnings 901,006 868,062 Total Shareholders’ Equity 1,000,703 974,409 Total Liabilities and Shareholders’ Equity $ 1,425,406 $ 1,381,980 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents FABRINET CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (unaudited) Three Months Ended (in thousands of U.S. dollars, except per share data) September 25, 2020 September 27, 2019 Revenues $ 436,639 $ 399,296 Cost of revenues ( 386,159 ) ( 353,309 ) Gross profit 50,480 45,987 Selling, general and administrative expenses ( 16,863 ) ( 16,000 ) Operating income 33,617 29,987 Interest income 1,104 2,098 Interest expense ( 251 ) ( 2,393 ) Foreign exchange gain (loss), net 128 ( 1,953 ) Other income (expense), net 121 377 Income before income taxes 34,719 28,116 Income tax expense ( 1,668 ) ( 2,159 ) Net income 33,051 25,957 Other comprehensive income (loss), net of tax: Change in net unrealized gain (loss) on available-for-sale securities ( 325 ) 35 Change in net unrealized gain (loss) on derivative instruments ( 3,208 ) 39 Change in net retirement benefits plan – prior service cost 173 83 Change in foreign currency translation adjustment 603 ( 369 ) Total other comprehensive income (loss), net of tax ( 2,757 ) ( 212 ) Net comprehensive income $ 30,294 $ 25,745 Earnings per share Basic $ 0.90 $ 0.70 Diluted $ 0.88 $ 0.69 Weighted-average number of ordinary shares outstanding (thousands of shares) Basic 36,818 36,913 Diluted 37,383 37,529 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents FABRINET CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited) For the three months ended September 25, 2020 Ordinary Share Additional Paid-in Capital Treasury Shares Accumulated Other Comprehensive (Loss) Income Retained Earnings Total (in thousands of U.S. dollars, except share data) Shares Amount Balances at June 26, 2020 38,471,967 385 175,610 ( 68,501 ) ( 1,147 ) 868,062 974,409 Net income — — — — — 33,051 33,051 Other comprehensive income — — — — ( 2,757 ) — ( 2,757 ) Cumulative effect adjustment from adoption of ASC 326 — — — — — ( 107 ) ( 107 ) Share-based compensation — — 6,027 — — — 6,027 Issuance of ordinary shares 208,692 2 ( 2 ) — — — — Tax withholdings related to net share settlement of restricted share units — — ( 9,920 ) — — — ( 9,920 ) Balances at September 25, 2020 38,680,659 387 171,715 ( 68,501 ) ( 3,904 ) 901,006 1,000,703 For the three months ended September 27, 2019 Ordinary Share Additional Paid-in Capital Treasury Shares Accumulated Other Comprehensive (Loss) Income Retained Earnings Total (in thousands of U.S. dollars, except share data) Shares Amount Balances at June 28, 2019 38,230,753 382 158,299 ( 47,779 ) ( 2,386 ) 754,583 863,099 Net income — — — — — 25,957 25,957 Other comprehensive income — — — — ( 212 ) — ( 212 ) Share-based compensation — — 5,995 — — — 5,995 Issuance of ordinary shares 158,375 2 ( 2 ) — — — — Tax withholdings related to net share settlement of restricted share units — — ( 4,144 ) — — — ( 4,144 ) Balances at September 27, 2019 38,389,128 384 160,148 ( 47,779 ) ( 2,598 ) 780,540 890,695 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents FABRINET CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended (in thousands of U.S. dollars) September 25, 2020 September 27, 2019 Cash flows from operating activities Net income for the period $ 33,051 $ 25,957 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 8,570 7,465 (Gain) loss on disposal of property, plant and equipment ( 19 ) 8 (Gain) loss from sales and maturities of available-for-sale securities — ( 67 ) Amortization of investment discount 481 65 Amortization of deferred debt issuance costs 8 2 (Reversal of) allowance for doubtful accounts ( 257 ) ( 5 ) Unrealized (gain) loss on exchange rate and fair value of foreign currency forward contracts ( 890 ) 1,479 Unrealized loss (gain) on fair value of interest rate swaps — 1,671 Amortization of fair value at hedge inception of interest rate swaps ( 359 ) — Share-based compensation 6,027 5,995 Deferred income tax 56 705 Other non-cash expenses 96 53 Changes in operating assets and liabilities Trade accounts receivable ( 16,497 ) ( 12,967 ) Contract assets 1,499 827 Inventories ( 29,643 ) ( 27,898 ) Other current assets and non-current assets 7,812 4,225 Trade accounts payable 33,546 ( 5,263 ) Contract liabilities ( 590 ) 27 Income tax payable 871 733 Severance liabilities 745 811 Other current liabilities and non-current liabilities ( 10,001 ) ( 1,176 ) Net cash provided by operating activities 34,506 2,647 Cash flows from investing activities Purchase of short-term investments ( 79,103 ) ( 62,880 ) Proceeds from sales of short-term investments — 49,472 Proceeds from maturities of short-term investments 33,750 31,673 Purchase of property, plant and equipment ( 12,572 ) ( 6,343 ) Purchase of intangibles ( 530 ) ( 246 ) Proceeds from disposal of property, plant and equipment 21 — Net cash (used in) provided by investing activities ( 58,434 ) 11,676 Cash flows from financing activities Payment of debt issuance costs — ( 153 ) Proceeds from long-term borrowings — 60,938 Repayment of long-term borrowings ( 3,047 ) ( 60,938 ) Repayment of finance lease liability ( 100 ) ( 109 ) Withholding tax related to net share settlement of restricted share units ( 9,920 ) ( 4,144 ) Net cash used in financing activities ( 13,067 ) ( 4,406 ) Net (decrease) increase in cash, cash equivalents and restricted cash ( 36,995 ) 9,917 Movement in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash at the beginning of period 232,832 188,241 (Decrease) increase in cash, cash equivalents and restricted cash ( 36,995 ) 9,917 Effect of exchange rate on cash, cash equivalents and restricted cash 766 ( 41 ) Cash, cash equivalents and restricted cash at the end of period $ 196,603 $ 198,117 Non-cash investing and financing activities Construction, software and equipment-related payables $ 9,616 $ 9,816 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents FABRINET CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Continued) The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the total of the same amounts shown in the unaudited condensed consolidated statements of cash flows: (amount in thousands) As of September 25, 2020 As of September 27, 2019 Cash and cash equivalents $ 189,201 $ 168,535 Restricted cash 7,402 29,582 Cash, cash equivalents and restricted cash $ 196,603 $ 198,117 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents FABRINET NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands of U.S. dollars unless otherwise noted) 1. Business and organization General Fabrinet (“ Fabrinet ” or the “Parent Company”) was incorporated on August 12 , 1999 , and commenced operations on January 1 , 2000 . The Parent Company is an exempted company incorporated in the Cayman Islands, British West Indies. The “Company” refers to Fabrinet and its subsidiaries as a group. The Company provides advanced optical packaging and precision optical, electro-mechanical and electronic manufacturing services to original equipment manufacturers (“OEMs”) of complex products, such as optical communication components, modules and sub-systems, industrial lasers, automotive components, medical devices and sensors. The Company offers a broad range of advanced optical and electro-mechanical capabilities across the entire manufacturing process, including process design and engineering, supply chain management, manufacturing, complex printed circuit board assembly, advanced packaging, integration, final assembly and testing. The Company focuses primarily on the production of low-volume, high-mix products. The principal subsidiaries of Fabrinet include Fabrinet Co., Ltd. (“Fabrinet Thailand”), Casix, Inc. (“Casix”), Fabrinet West, Inc. (“Fabrinet West”) and Fabrinet UK Limited (“Fabrinet UK”). 2. Accounting policies Basis of presentation The accompanying unaudited condensed consolidated financial statements for Fabrinet as of September 25, 2020 and for the three months ended September 25, 2020 and September 27, 2019 includes normal recurring adjustments necessary for a fair statement of the financial statements set forth herein, in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such information does not include all of the information and footnotes required by U.S. GAAP for annual financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in Fabrinet’s Annual Report on Form 10-K for the year ended June 26, 2020. The balance sheet as of June 26, 2020 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The results for the three months ended September 25, 2020 may not be indicative of results for the year ending June 25, 2021 or any future periods. Use of Estimates The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and the reported amount of total revenues and expenses during the year. The Company bases estimates on historical experience and various assumptions about the future that are believed to be reasonable based on available information. The Company’s reported financial position or results of operations may be materially different under different conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies, which are discussed below. Significant assumptions are used in accounting for share-based compensation, allowance for doubtful accounts, allowance for expected credit losses, income taxes, inventory obsolescence, goodwill and valuation of intangible assets related to business acquisition, among others. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates. In the event that estimates or assumptions prove to be different from actual results, adjustments will be made in subsequent periods to reflect more current information. Additionally, the extent to which the evolving COVID-19 pandemic impacts the Company’s unaudited condensed consolidated financial statements will depend on a number of factors, including the magnitude and duration of the pandemic. These estimates may change, as new events occur and additional information is obtained, as well as other factors related to the COVID-19 pandemic that could result in material impacts to our unaudited condensed consolidated financial statements in future reporting periods. 8 Table of Contents Fiscal years The Company utilizes a 52-53 week fiscal year ending on the Friday in June closest to June 30. The three months ended September 25, 2020 and September 27, 2019 each consisted of 13 weeks. Fiscal year 2021 will be comprised of 52 weeks and will end on June 25, 2021. Reclassifications For presentation purposes, certain prior period amounts have been reclassified to conform to the current period presentation. As of June 26, 2020, the derivative assets and liabilities were measured at fair value and recognized by offsetting the fair value amounts under master netting arrangements. Also, the Company chose not to separate a derivative into current and non-current portions as follows: (i) A derivative for which the fair value is a net liability is classified in total as a current liability. (ii) A derivative for which the fair value is a net asset and the current portion is an asset is classified in total as a non-current asset. If the current portion is a liability, it is presented as a current liability. As of September 25, 2020, the derivative assets and liabilities were measured at fair value, but the gross fair value amount is presented in the unaudited condensed consolidated balance sheets. Additionally, a classification of current and non-current portion is determined by the maturity date of that derivative (e.g., a derivative that matures within one year is classified as current). The reclassifications have been made to the consolidated balance sheet as of June 26, 2020 as shown in the following table: June 26, 2020 (amount in thousands) As previously reported Reclassification After reclassification Consolidated Balance Sheet Current assets Other current assets $ 13,915 $ 593 $ 14,508 Current liabilities Accrued expenses $ 12,104 $ ( 3,125 ) $ 8,979 Non-current liabilities Other non-current liabilities $ 1,937 $ 3,718 $ 5,655 Adoption of New Accounting Standards In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. The standard replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. The new standard also expands the required quantitative and qualitative disclosures surrounding expected credit losses. On June 27, 2020, the Company adopted Accounting Standards Codification (“ASC”) 326 using the modified retrospective transition approach. The modified retrospective method requires the Company to recognize the cumulative effect of the adoption of ASC 326, to the opening accumulated retained earnings. Accordingly, the Company’s comparative financial statements as of June 26, 2020 have not been adjusted. The Company implemented internal controls to enable the preparation of financial information upon adoption. Management estimates the expected credit losses of financial assets using relevant available information from internal and external sources relating to historical credit loss experience, current conditions and reasonable forecasts over a financial asset’s contractual term. Adjustments to historical loss information are made from qualitative and quantitative factors if economic conditions on the reporting date reflect stronger or weaker economic performance than the historical data implies based on management’s expectations of economic conditions on certain indicators of the Company, industry and economy. The Company reviews factors such as past collection experience, age of the accounts receivable and contract assets balance, significant trends in current balances, internal operations and macroeconomic conditions. In addition, the Company modified its impairment model to the Current Expected Credit Losses (“CECL”) model for available-for-sale (“AFS”) debt securities and discontinued using the concept of “other than temporary” impairment on these AFS debt securities. CECL on the AFS debt securities are recognized in interest income and other income (expense), net on the Company’s unaudited condensed consolidated statements of operations and comprehensive income, and any remaining unrealized losses, are included in accumulated other comprehensive loss (“AOCI”) in the unaudited condensed consolidated balance sheet. 9 Table of Contents As of June 27, 2020, the Company recorded a cumulative adjustment from CECL in the amount of $ 0.1 million, net of tax impact, to accumulated retained earnings in the unaudited condensed consolidated balance sheet. On June 27, 2020, the Company also adopted ASC 820, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This standard is intended to improve the effectiveness of disclosures in the notes to the financial statements, including (1) the development of a framework that promotes consistent decisions by the FASB about disclosure requirements and (2) the appropriate exercise of discretion by reporting entities. The amendment modifies the disclosure requirements on transferring between level 1 and level 2 and valuation processes of level 3 fair value measurements. The Company adopted this standard with no impact on its unaudited condensed consolidated financial statements. Changes in Accounting Policies Except for the adoption of ASC 326, the Company has consistently applied the accounting policies to all periods presented in these unaudited condensed consolidated financial statements. Short-term investments Management determines the appropriate classification of its investments at the time of purchase and re-evaluates the designations at each balance sheet date. The Company may sell certain of the Company’s short-term investments prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. The maturities of the Company’s short-term investments generally range from three months to three years. The Company’s short-term investments, which consist of investments in U.S. Treasury, fixed income securities, liquidity funds that invest in short-term debt securities and certificates of deposit and time deposits, have been classified and accounted for as AFS. The AFS investments are carried at estimated fair value with any unrealized gains and losses, included in AOCI in the Company’s unaudited condensed consolidated balance sheet. The Company determines realized gains or losses on sale of marketable securities on a specific identification method and records such gains or losses as interest income and other income (expense), net in the unaudited condensed consolidated statements of operations and comprehensive income. AFS debt securities are required to be individually evaluated for impairment. A security is considered impaired if the fair value of the security is less than its amortized cost basis. An impairment is considered other than temporary if (i) the Company has the intent to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of the entire amortized cost basis, or (iii) the Company does not expect to recover the entire amortized cost basis of the security. If an impairment is considered other than temporary based on condition (i) or (ii), the entire difference between the amortized cost and the fair value of the debt security is recognized as interest income and other income (expense), net in the unaudited condensed consolidated statements of operations and comprehensive income. If an impairment is considered other than temporary based on condition (iii), the amount representing credit losses (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security) is recognized in interest and other income (expense), net in the unaudited condensed consolidated statements of operations and comprehensive income, and any remaining unrealized losses are included in AOCI in the unaudited condensed consolidated balance sheet. Trade accounts receivable Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. The Company makes estimates of expected credit losses for the allowance for doubtful accounts based upon its assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of its customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect the Company’s ability to collect from customers. The estimated credit loss allowance is recorded as selling, general and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income. 10 Table of Contents Contract assets A contract asset is recognized when the Company has recognized revenues prior to generating an invoice for payment. Contract assets are classified separately within the unaudited condensed consolidated balance sheets and transferred to accounts receivable when rights to payment become unconditional. The Company makes estimates of expected credit losses for the allowance for contract assets based upon its assessment of various factors, including historical experience, the age of the contract assets balances, credit quality of its customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect the Company’s ability to collect from customers. The estimated credit loss allowance is recorded as selling, general and administrative expenses in its unaudited condensed consolidated statements of operations and comprehensive income. Concentration of credit risk Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, short-term investments, derivatives, accounts receivable and contract assets. Cash, cash equivalents and short-term investments are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The Company seeks to mitigate its credit risks by spreading such risks across multiple counterparties and monitoring the risk profiles of these counterparties. The Company limits its short-term investments in marketable securities to securities with a maturity not in excess of three years and securities that are rated A1, P-1, F1, or better. The Company enters into derivative contracts with financial institutions with reputable credit and monitors the credit profiles of these counterparties. The Company performs ongoing credit evaluations for credit worthiness of its customers and usually does not require collateral from its customers. Management has implemented a program to closely monitor near term cash collection and credit exposures to mitigate any material losses. New Accounting Pronouncements – not yet adopted by the Company In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. This ASU will be effective for the Company in the first quarter of fiscal year 2022. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this update on its unaudited condensed consolidated financial statements. 1 1 Table of Contents 3. Revenues from contracts with customers Revenue by Geographic Area and End Market Revenues are attributed to a particular geographic area based on the bill-to-location of the Company’s customers. The Company operates in three geographic regions: North America, Asia-Pacific and Europe. The following table presents total revenues by geographic region: (amount in thousands, except percentages) Three Months Ended September 25, 2020 As a % of Total Revenues North America $ 207,402 47.5 % Asia-Pacific 145,646 33.4 Europe 83,591 19.1 $ 436,639 100.0 % (amount in thousands, except percentages) Three Months Ended September 27, 2019 As a % of Total Revenues North America $ 200,947 50.3 % Asia-Pacific 118,423 29.7 Europe 79,926 20.0 $ 399,296 100.0 % The following table presents revenues by end market. (amount in thousands, except percentages) Three Months Ended September 25, 2020 As a % of Total Revenues Optical communications $ 343,917 78.8 % Lasers, sensors and other 92,722 21.2 Total $ 436,639 100.0 % (amount in thousands, except percentages) Three Months Ended September 27, 2019 As a % of Total Revenues Optical communications $ 302,379 75.7 % Lasers, sensors and other 96,917 24.3 Total $ 399,296 100.0 % 12 Table of Contents Contract Assets and Liabilities A contract asset is recognized when the Company has recognized revenues prior to generating an invoice for payment. Contract assets are classified separately within the unaudited condensed consolidated balance sheets and transferred to accounts receivable when rights to payment become unconditional. A contract liability is recognized when the Company has advance payment arrangements with customers. The contract liabilities balance is normally recognized as revenue within six months. The following tables summarize the activity in the Company’s contract assets and contract liabilities during the three months ended September 25, 2020: (amount in thousands) Contract Assets Beginning balance, June 26, 2020 $ 13,256 Revenue recognized 17,444 Amounts collected or invoiced ( 18,943 ) Ending balance, September 25, 2020 $ 11,757 (amount in thousands) Contract Liabilities Beginning balance, June 26, 2020 $ 1,556 Additions advance payment received during the period 4,308 Revenue recognized ( 4,898 ) Ending balance, September 25, 2020 $ 966 13 Table of Contents 4. Earnings per ordinary share Basic earnings per ordinary share is computed by dividing reported net income by the weighted-average number of ordinary shares outstanding during each period. Diluted earnings per ordinary share is computed by calculating the effect of potential dilutive ordinary shares outstanding during the period using the treasury stock method. Dilutive ordinary equivalent shares consist of restricted share units and performance share units. Earnings per ordinary share was calculated as follows: Three Months Ended (amount in thousands except per share amounts) September 25, 2020 September 27, 2019 Net income attributable to shareholders $ 33,051 $ 25,957 Weighted-average number of ordinary shares outstanding (thousands of shares) 36,818 36,913 Incremental shares arising from the assumed vesting of restricted share units and performance share units (thousands of shares) 565 616 Weighted-average number of ordinary shares for diluted earnings per ordinary share (thousands of shares) 37,383 37,529 Basic earnings per ordinary share $ 0.90 $ 0.70 Diluted earnings per ordinary share $ 0.88 $ 0.69 Outstanding performance share units excluded from the computation of diluted earnings per ordinary share (thousands of shares) (1) 61 50 (1) These performance share units were no t included in the computation of diluted earnings per ordinary share because they are not expected to vest based on the Company’s current assessment of the related performance obligations. 5. Cash, cash equivalents and short-term investments The Company’s cash, cash equivalents, and short-term investments are as follows: Fair Value (amount in thousands) Carrying Cost Unrealized Gain/ (Loss) Cash and Cash Equivalents Marketable Securities Other Investments As of September 25, 2020 Cash $ 175,550 $ — $ 175,550 $ — $ — Cash equivalents 13,651 — 13,651 — — Liquidity funds 41,151 — — — 41,151 Certificates of deposit and time deposits 22,300 — — — 22,300 Corporate debt securities 192,509 739 — 193,248 — U.S. agency and U.S. treasury securities 50,113 426 — 50,539 — Total $ 495,274 $ 1,165 $ 189,201 $ 243,787 $ 63,451 As of June 26, 2020 Cash $ 218,117 $ — $ 218,117 $ — $ — Cash equivalents 7,313 — 7,313 — — Liquidity funds 41,051 — — — 41,051 Certificates of deposit and time deposits 11,800 — — — 11,800 Corporate debt securities 159,220 948 — 160,168 — U.S. agency and U.S. treasury securities 49,130 544 — 49,674 — Total $ 486,631 $ 1,492 $ 225,430 $ 209,842 $ 52,851 14 Table of Contents All highly liquid investments with original maturities of three months or less at the date of purchase are classified as cash equivalents. Management determines the appropriate classification of its investments at the time of purchase and re-evaluates the designations at each balance sheet date. The Company may sell certain of its short-term investments prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. The maturities of the Company’s short-term investments generally range from three months to three years . The following table summarizes the cost and estimated fair value of short-term investments classified as available-for-sale securities based on stated effective maturities as of September 25, 2020: September 25, 2020 June 26, 2020 (amount in thousands) Carrying Cost Fair Value Carrying Cost Fair Value Due within one year $ 104,723 $ 104,756 $ 76,127 $ 76,196 Due between one to five years 137,899 139,031 132,223 133,646 Total $ 242,622 $ 243,787 $ 208,350 $ 209,842 As of September 25, 2020, the Company considered the declines in market value of its short-term investments portfolio to be temporary in nature and did not consider any of its securities other-than-temporarily impaired. 6. Fair value of financial instruments Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs for the valuation of an asset or liability as of the measurement date. The three levels of inputs that may be used to measure fair value are defined as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for assets or liabilities, either directly or indirectly. If the assets or liabilities have a specified (contractual) term, Level 2 inputs must be observable for substantially the full term of assets or liabilities. Level 3 inputs are unobservable inputs for assets or liabilities, which require the reporting entity to develop its own valuation techniques and assumptions. The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. 1 5 Table of Contents The following table provides details of the financial instruments measured at fair value on a recurring basis, including: Fair Value Measurements at Reporting Date Using (amount in thousands) Level 1 Level 2 Level 3 Total As of September 25, 202 0 Assets Cash equivalents $ — $ 13,651 $ — $ 13,651 Liquidity funds — 41,151 — 41,151 Certificates of deposit and time deposits — 22,300 — 22,300 Corporate debt securities — 193,248 — 193,248 U.S. agency and U.S. treasury securities — 50,539 — 50,539 Derivative assets — 694 (1) — 694 Total $ — $ 321,583 $ — $ 321,583 Liabilities Derivative liabilities – current portion $ — $ 2,426 $ — $ 2,426 Derivative liabilities – non-current portion — 3,305 — 3,305 Total $ — $ 5,731 (2) $ — $ 5,731 Fair Value Measurements at Reporting Date Using (amount in thousands) Level 1 Level 2 Level 3 Total As of June 26, 202 0 Assets Cash equivalents $ — $ 7,313 $ — $ 7,313 Liquidity funds — 41,051 — 41,051 Certificates of deposit and time deposits — 11,800 — 11,800 Corporate debt securities — 160,168 — 160,168 U.S. agency and U.S. treasury securities — 49,674 — 49,674 Derivative assets — 2,823 (3) — 2,823 Total $ — $ 272,829 $ — $ 272,829 Liabilities Derivative liabilities – current portion $ — $ 2,148 $ — $ 2,148 Derivative liabilities – non-current portion — 3,718 — 3,718 Total $ — $ 5,866 (4) $ — $ 5,866 (1) Foreign currency forward contracts with a notional amount of $ 130.0 million and Canadian dollars of 0.8 million. (2) Two interest rate swap agreements with an aggregate notional amount of $ 125.1 million. (3) Foreign currency forward contracts with a notional amount of $ 125.0 million and Canadian dollars of 0.6 million, and option contract with a notional amount of $ 1.0 million. (4) Interest rate swap agreements with an aggregate notional amount of $ 125.1 million. Derivative Financial Instruments The Company utilizes derivative financial instruments to hedge (i) foreign exchange risk associated with certain foreign currency denominated assets and liabilities and other foreign currency transactions, and (ii) interest rate risk associated with its long-term debt. The Company minimizes the credit risk associated with its derivative instruments by limiting the exposure to any single counterparty and by entering into derivative instruments only with counterparties that meet the Company’s minimum credit quality standard. 16 Table of Contents Foreign currency forward and option contracts As a result of foreign currency rate fluctuations, the U.S. dollar equivalent values of the Company’s foreign currency denominated assets and liabilities fluctuate. The Company uses foreign currency forward and option contracts to manage the foreign exchange risk associated with a portion of its foreign currency denominated assets and liabilities and other foreign currency transactions. The Company enters into foreign currency forward and option contracts to hedge fluctuations in the U.S. dollar value of forecasted transactions denominated in Thai baht and Canadian dollars with counterparties that meet the Company’s minimum credit quality standard. The Company may enter into foreign currency forward contracts with maturities of up to 12 months to hedge fluctuations in the U.S. dollar value of forecasted transactions denominated in Thai baht, including inventory purchases, payroll and other operating expenses. The Company considers these forward contracts as dual-purpose hedges, that hedge both the foreign exchange fluctuation (i) from inception through the forecasted expenditure, and (ii) any subsequent revaluation of the account payable or accrual. The Company may designate the forward contracts that hedge the foreign exchange fluctuation from inception through the forecasted expenditure as cash flow hedges. The gain or loss on a derivative instrument designated and qualified as a cash flow hedging instrument is recorded as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The reclassified amounts are presented in the same income statement line item as the earnings effect of the hedged item. Once the forecasted transactions are recorded, the Company will discontinue the hedging relationship by de-designating the derivative instrument and recording subsequent changes in fair value through contract maturity to foreign exchange gain (loss), net in the unaudited condensed consolidated statements of operations and comprehensive income as a natural hedge against the Thai baht denominated assets and liabilities. The Company may also enter into non-designated foreign currency forward and option contracts to provide an offset to the re-measurement of foreign currency denominated assets and liabilities and to hedge certain forecasted exposures. Changes in the fair value of these non-designated derivatives are recorded through foreign exchange gain (loss), net in the unaudited condensed consolidated statements of operations and comprehensive income. As of September 25, 2020, the Company had 130 outstanding U.S. dollar foreign currency forward contracts against Thai baht, with an aggregate notional amount of $ 130.0 million and maturity dates ranging from October 2020 through April 2021 and one outstanding Canadian dollar foreign currency forward contract with a notional amount of Canadian dollars of 0.8 million and a maturity date in December 2020. As of September 25, 2020, the hedging relationship over foreign currency forward contracts that were designated for hedge accounting was determined to be highly effective based on the performance of retrospective and prospective regression testing. As of September 25, 2020, the amount in AOCI that is expected to be reclassified into earnings within 12 months was a loss of $ 0.5 million . During the three months ended September 25, 2020, the Company recorded an unrealized loss of $ 1.5 million from changes in the fair value of a foreign currency forward contract that was not designated for hedge accounting in earnings as foreign exchange loss, net in the unaudited condensed consolidated statements of operations and comprehensive income. As of September 27, 2019, the Company had 61 outstanding foreign currency forward contracts with an aggregate notional amount of $ 74.0 million and maturity dates ran ging from October 2019 through January 2020 . These foreign currency forward contracts were not designated for hedge accounting and were used to hedge fluctuations in the U.S. dollar value of forecasted transactions denominated in Thai baht. During the three months ended September 27, 2019, the Company recorded unrealized loss of $ 1.9 million from changes in the fair value of foreign currency contracts in earnings as foreign exchange gain, net in the unaudited condensed consolidated statements of operations and comprehensive income. 17 Table of Contents Interest Rate Swap Agreements The Company entered into interest rate swap agreements to mitigate interest rate risk and improve the interest rate profile of the Company’s debt obligations. As of September 25, 2020 and June 26, 2020 , the Company had two outstanding interest rate swap agreements with an aggregate notional amount of $ 125.1 million. On July 25, 2018, Fabrinet Thailand entered into an interest rate swap agreement to effectively convert the floating interest rate of its term loan under the Bank of America Credit Facility Agreement to a fixed interest rate of 2.86 % per annum through the scheduled maturity of the term loan in June 2023 (see Note 12 ). The Company did not designate this interest rate swap for hedge accounting. On September 3, 2019, the Company entered into a new term loan agreement under a Credit Facility Agreement with the Bank of Ayudhya Public Company Limited (the “Bank”) (see Note 12 ) and on September 10, 2019, repaid in full the outstanding term loan under the Bank of America Credit Facility (see Note 1 2 ). In conjunction with the funding of the new term loan, the Company entered into a second interest rate swap agreement. The combination of both of these interest rate swaps effectively convert the floating interest rate of the Company’s new term loan with the Bank to a fixed interest rate of 4.36 % per annum through the maturity of the term loan in June 2024 . On September 27, 2019, the Company designated these two interest rate swaps as a cash flow hedge for the Company’s term loan under the Credit Facility Agreement with the Bank. The combination of these two interest rate swaps qualified for hedge accounting because the hedges are highly effective, and the Company has designated and documented contemporaneously the hedging relationships involving these interest rate swaps. While we intend to continue to meet the conditions for hedge accounting, if hedges do not qualify as highly effective, the changes in the fair value of the derivatives used as hedges would be reflected in our earnings. From September 27, 2019, any gains or losses related to these interest rate swaps will be recorded in accumulated other comprehensive income in the unaudited condensed consolidated balance sheets. The Company will reclassify a portion of the gains or losses from accumulated other comprehensive income into earnings at each reporting period based on either the accrued interest amount or the interest payment. As of September 25, 2020, the amount in accumulated other comprehensive income that is expected to be reclassified into earnings within 12 months is a ga in of $ 0.5 million . Prior to September 27, 2019, these interest rate swaps were not designated as cash flow hedges and all changes in the fair value of these interest rate swaps were reflected in earnings. During the three months ended September 27, 2019, the Company recorded unrealized loss of $ 1.7 million from changes in the fair value of these interest rate swaps as interest expense in the unaudited condensed consolidated statements of operations and comprehensive income. 1 8 Table of Contents The following table provides a summary of the impact of derivative gain (loss) of the Company’s foreign currency forward contracts and interest rate swaps which were designated as cash flow hedges on the unaudited condensed consolidated statements of operations and other comprehensive income: Three Months Ended (amount in thousands) Financial statements line item September 25, 2020 September 27, 2019 Derivatives gain (loss) recognized in other comprehensive income: Foreign currency forward contracts Other comprehensive income $ ( 2,340 ) $ — Interest rate swaps Other comprehensive income 357 39 Total derivatives gain (loss) recognized in other comprehensive income $ ( 1,983 ) $ 39 Derivatives loss ( gain ) reclassified from accumulated other comprehensive income into earnings: Foreign currency forward contracts Cost of revenues $ ( 2,057 ) $ — Foreign currency forward contracts SG&A ( 87 ) — Foreign currency forward contracts Foreign exchange loss, net 1,278 — Interest rate swaps Interest expense ( 359 ) — Total derivatives (gain) loss reclassified from accumulated other comprehensive income into earnings $ ( 1,225 ) $ — Change in net unrealized gain (loss) on derivatives instruments $ ( 3,208 ) $ — Fair Value of derivatives The following table provides the fair values of the Company’s derivative financial instruments for the periods presented: September 25, 2020 June 26, 2020 (amount in thousands) Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities Derivatives not designated as hedging instruments Foreign currency forward and option contracts $ 447 $ ( 134 ) $ 9 $ ( 611 ) Interest rate swaps — — — — Derivatives designated as hedging instruments Foreign currency forward contracts 247 ( 781 ) 2,814 ( 83 ) Interest rate swaps — ( 4,816 ) — ( 5,172 ) Derivatives, gross balances 694 ( 5,731 ) 2,823 ( 5,866 ) The Company presents its derivatives at net fair values in the unaudited condensed consolidated balance sheets. The Company’s netting arrangements allow net settlements under certain conditions. The Company’s derivative instruments are typically settled monthly or quarterly. 1 9 Table of Contents The Company recorded the fair value of derivative financial instruments in the unaudited condensed consolidated balance sheets as follows: Derivative Financial Instruments Balance Sheet line item Fair Value of Derivative Assets Other current assets Fair Value of Derivative Liabilities Accrued expenses Fair Value of Derivative Liabilities Other non-current liabilities 7 . Inventories (amount in thousands) As of September 25, 2020 As of June 26, 2020 Raw materials $ 153,511 $ 141,522 Work in progress 149,441 136,344 Finished goods 21,619 17,950 Goods in transit 14,858 13,970 Inventories $ 339,429 $ 309,786 8 . Other receivable On October 1, 2019, the Company provided funds in the amount of $ 24.3 million to a customer to support the customer’s transfer of certain manufacturing operations from Berlin, Germany to the Company’s facilities in Thailand. As of September 25, 2020, the Company recorded the $ 24.3 million funds as other receivable in the unaudited condensed consolidated balance sheet. The Company entered into the Amendment on October 1, 2020 to extend the payment terms of this amount and accrued interest and amend certain terms and conditions. (See Note 19) 9 . Restricted cash As of September 25, 2020 and June 26, 2020, the Company had one outstanding standby letter of credit of 6.0 million Euros, related to the Company’s support of a customer’s transfer of certain manufacturing operations from Berlin, Germany to the Company’s facilities in Thailand. As of September 25, 2020 and June 26, 2020, the standby letter of credit w as backed by cash collateral of $ 7.4 million . 10 . Leases The Company leases facilities under non-cancelable operating lease agreements. The Company leases a portion of its capital equipment and vehicles, certain land and buildings for its facilities in Thailand, the Cayman Islands, China, the U.S., the U.K. and Israel under operating lease arrangements that expire at various dates through 2025 . Certain of these lease arrangements provide the Company the ability to extend the lease from one to five years following the expiration of the current term. However, the Company has excluded all lease extension options from its ROU assets and lease liabilities as the Company is not reasonably assured that it will exercise these options. None of the lease agreements contain residual value guarantees provided by the lessee. The Company also has one intercompany lease transaction in th e form of a lease of office and manufacturing space between Fabritek and Fabrinet West. 20 Table of Contents Operating leases As of Septe m ber 25, 2020, the m a turities of the Company’s operating lease liabilities w e re as follows: (amount in thousands) As of September 25, 2020 2021 $ 1,786 2022 2,381 2023 2,265 2024 990 2025 19 Total undiscounted lease payments 7,441 Less imputed interest ( 437 ) Total present value of lease liabilities $ 7,004 (1) (1) Included current portion of operating lease liabilities for the period ended September 25, 2020 . Rental expense related to the Company’s operating leases is recognized on a straight-line basis over the lease term. Rental expense for long-term leases for the three months ended September 25, 2020 and September 27, 2019 was $ 0.6 million and $ 0.5 million, respectively. Rental expense for short-term leases for the three months ended September 25, 2020 and September 27, 2019 w as no t material. The following summarizes additional information related to the Company’s operating leases: As of September 25, 2020 As of June 26, 2020 Weighted-average remaining lease term (in years) 3.3 3.3 Weighted-average discount rate 3.7 % 3.7 % The following table presents supplemental disclosure for the unaudited condensed consolidated statement of cash flows related to operating and finance leases for the three months ended September 25, 2020 and September 27, 2019: Three Months Ended (amount in thousands) September 25, 2020 September 27, 2019 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 594 $ 458 Financing cash flows from finance leases $ 100 $ 109 ROU assets obtained in exchange for lease liabilities $ 7,228 $ 6,185 11 . Intangibles The following tables present details of the Company’s intangibles: (amount in thousands) Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Adjustment Net As of September 25, 2020 Software $ 8,486 $ ( 5,826 ) $ — $ 2,660 Customer relationships 4,373 ( 2,825 ) ( 61 ) 1,487 Backlog 119 ( 119 ) — — Total intangibles $ 12,978 $ ( 8,770 ) $ ( 61 ) $ 4,147 2 1 Table of Contents (amount in thousands) Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Adjustment Net As o f June 26, 2020 Software $ 8,317 $ ( 5,577 ) $ — $ 2,740 Customer relationships 4,373 ( 2,691 ) ( 110 ) 1,572 Backlog 119 ( 119 ) — — Total intangibles $ 12,809 $ ( 8,387 ) $ ( 110 ) $ 4,312 The Company recorded amortization expense relating to intangibles of $ 0.2 million and $ 0.3 million for the three months ended September 25, 2020 and September 27, 2019, respectively. The weighted-average remaining life of customer relationships was: (years) As of September 25, 2020 As of June 26, 2020 Customer relationships 4.4 4.6 Based on the carrying amount of intangibles as of September 25, 2020, and assuming no future impairment of the underlying assets, the estimated future amortization during each fiscal year was as follows: (amount in thousands) 2021 (remaining nine months) $ 1,030 2022 1,129 2023 873 2024 642 2025 354 Thereafter 119 Total $ 4,147 12 . Borrowings The Company’s total borrowings, including current and non-current portions of long-term borrowings, consisted of the following: (amount in thousands) Rate Conditions Maturity As of September 25, 2020 As of June 26, 2020 Long-term borrowings, current portion, net: Long-term borrowings, current portion $ 12,188 $ 12,188 Less: Unamortized debt issuance costs – current portion ( 32 ) ( 32 ) Long-term borrowings, current portion, net $ 12,156 12,156 Long-term borrowings, non-current portion, net: Term loan borrowings: 3-month LIBOR + 1.35 % per annum (1) Repayable in quarterly installments June 2024 $ 48,750 $ 51,797 Less: Current portion ( 12,188 ) ( 12,188 ) Less: Unamortized debt issuance costs – non-current portion ( 87 ) ( 95 ) Long-term borrowings, non-current portion, net $ 36,475 $ 39,514 (1) We have entered into interest rate swaps that effectively fix a series of our future interest payments on our term loans. Refer to Note 6. 2 2 Table of Contents The movements of long-term borrowings for the three months ended September 25, 2020 and September 27, 2019 were as follows: Three Months Ended (amount in thousands) September 25, 2020 September 27, 2019 Opening balance $ 51,797 $ 60,938 Borrowings during the period — 60,938 Repayments during the period ( 3,047 ) ( 60,938 ) Closing balance $ 48,750 $ 60,938 As of September 25, 2020, future maturities of long-term borrowings during each fiscal year were as follows: (amount in thousands) 2021 (remaining nine mo n ths) $ 9,140 2022 12,188 2023 15,234 202 4 12,188 Total $ 48,750 Credit facility agreements: Bank of Ayudhya Public Company Limited On August 20, 2019, Fabrinet Thailand (the “Borrower”) and Bank of Ayudhya Public Company Limited (the “Bank”) entered into a Credit Facility Agreement (the “Credit Facility Agreement”). The Credit Facility Agreement provides for a facility of 110.0 million Thai baht (approximately $ 3.6 million based on the applicable exchange rate as of September 27, 2019) and $ 160.9 million which may be used for, among other things, an overdraft facility, short-term loans against promissory notes, a letter of guarantee facility, a term loan facility and foreign exchange facilities. The Bank may approve any request for extension of credit under the Credit Facility Agreement and may increase or decrease any facility amount in its sole discretion. Under the Credit Facility Agreement, on August 20, 2019, the Borrower and the Bank entered into a Term Loan Agreement pursuant to which the Borrower drew down on September 3, 2019 a term loan in the original principal amount of $ 60.9 million. The proceeds from the term loan, together with cash on hand, were used to repay outstanding obligations under the Company’s previous syndicated senior credit facility agreement. The term loan accrues interest at 3-month LIBOR plus 1.35 % and is repayable in quarterly installments of $ 3.0 million, commencing on September 30, 2019. The term loan will mature on June 30, 2024 . The Borrower m a y prepay the term loan in whole or in part at any time without premium or penalty. Any portion of the term loan repaid or prepaid may not be re-borrowed. During the three months ended September 25, 2020, the Company recorded $ 0.2 million of interest expense in connection with this term loan. Any borrowings under the Credit Facility Agreement, including those borrowings under the Term Loan Agreement, are guaranteed by Fabrinet and secured by land and buildings owned by the Borrower in the Pathumthani and Chonburi Provinces in Thailand. The Term Loan Agreement contains affirmative and negative covenants applicable to the Borrower, including delivery of financial statements and other information, compliance with laws, maintenance of insurance, restrictions on granting security interests or liens on its assets, disposing of its assets, incurring indebtedness and making acquisitions. While the term loan is outstanding, the Borrower is required to maintain a loan to value of the mortgaged real property ratio of not greater than 65%. If the loan to value ratio is not maintained, the Borrower will be required to provide additional security or prepay a portion of the term loan in order to restore the required ratio. The Company is also required to maintain a debt service coverage ratio of at least 1.25 times and a debt to equity ratio less than or equal to 1.0 times. In the case of any payment of a dividend by the Company, its debt service coverage ratio must be at least 1.50 times. As of September 25, 2020, the Company was in compliance with all of its financial covenants under the Term Loan Agreement. 2 3 Table of Contents The events of default in the Term Loan Agreement include failure to pay amounts due under the Term Loan Agreement or the related finance documents when due, failure to comply with the covenants under the Term Loan Agreement or the related finance documents, cross default with other indebtedness of the Borrower, events of bankruptcy or insolvency in respect of the Borrower, and the occurrence of any event or series of events that in the opinion of the Bank has or is reasonably likely to have a material adverse effect. At September 25, 2020, there was $ 48.8 million outstanding under the term loan. Bank of America, N.A. On May 22, 2014, the Company and a consortium of banks, entered into a syndicated senior credit facility agreement led by Bank of America (the “Bank of America Facility Agreement”). The Bank of America Facility Agreement provided for a $ 200.0 million credit line, comprised of a $ 150.0 million revolving loan facility and a $ 50.0 million delayed draw term loan facility. From time to time, the Company amended the Bank of America Facility Agreement, before repaying all outstanding amounts under the agreement and terminating such agreement on September 10, 2019 . The most recent amendment on June 4, 2018 (i) reduced the revolving commitments thereunder from $ 150.0 million to $ 25.0 million, (ii) refinanced the outstanding amounts under the revolving loan and term loan facilities into a $ 65.0 million term loan which was to be repaid in quarterly installments through the maturity date of June 4, 2023 ; and (iii) reduced the interest rate margins and commitment fees. The term loan bore interest, at the Company’s option, at a rate per annum equal to a LIBOR rate plus a spread of 1.50% to 2.25% , or a base rate plus a spread of 0.50% to 1.25% . During the three months ended September 27, 2019 , the Company recorded $ 0.5 million of interest expense in connection with this term loan. On September 10, 2019, the Company fully repaid $ 61.0 million in principal, accrued interest and other fees under the agreement. The early termination of this agreement did not trigger any early termination fees. 13 . Income taxes As of September 25, 2020 and June 26, 2020, the liability for uncertain tax positions including accrued interest and penalties was $ 1.5 million. The Company expects the estimated amount of liability associated with its uncertain tax positions to decrease within the next 12 months due to the lapse of the applicable statute of limitations in foreign tax jurisdictions. The Company files income tax returns in the United States and foreign tax jurisdictions. The tax years from 2015 to 2019 remain open to examination by U.S. federal and state, and foreign tax authorities. The Company’s income tax is recognized based on the best estimate of the expected annual effective tax rate for the full financial year of each entity in the Company, adjusted for discrete items arising in that quarter. If the Company’s estimated annual effective tax rate changes, the Company makes a cumulative adjustment in that quarter. The effective tax rate for the Company for the three months ended September 25, 2020 and September 27, 2019 was 4.5 % and 5.0 %, respectively, of net income. The decrease was primarily due to the fact that the Company had lower income subject to tax during the first quarter of fiscal year 2021 as compared to the same period in fiscal year 2020. 14 . Share-based compensation Share-based compensation The grant date fair value of restricted share units and performance share units is based on the market value of our ordinary shares on the date of grant. 24 Table of Contents The effect of recording share-based compensation expense for the three months ended September 25, 2020 and September 27, 2019 was as follows: Three Months Ended (amount in thousands) September 25, 2020 September 27, 2019 Share-based compensation expense by type of award: Restricted share units $ 5,249 $ 4,398 Performance share units 778 1,597 Total share-based compensation expense 6,027 5,995 Tax effect on share-based compensation expense — — Net effect on share-based compensation expense $ 6,027 $ 5,995 Share-based compensation expense was recorded in the unaudited condensed consolidated statements of operations and comprehensive income as follows: Three Months Ended (amount in thousands) September 25, 2020 September 27, 2019 Cost of revenue $ 1,825 $ 1,720 Selling, general and administrative expense 4,202 4,275 Total share-based compensation expense $ 6,027 $ 5,995 The Company did no t capitalize any share-based compensation expense as part of any asset costs during the three months ended September 25, 2020 and September 27, 2019. Share-based award activity On December 12, 2019, the Company’s shareholders approved Fabrinet’s 2020 Equity Incentive Plan (the “2020 Plan”). Upon the approval of the 2020 Plan, Fabrinet’s Amended and Restated 2010 Performance Incentive Plan (the “2010 Plan”) was simultaneously terminated. The 2020 Plan provides for the grant of equity awards thereunder with respect to (i) 1,700,000 ordinary shares, plus (ii) up to 1,300,000 ordinary shares that, as of immediately prior to the termination of the 2010 Plan, had been reserved but not issued pursuant to any awards granted under the 2010 Plan and are not subject to any awards thereunder. Upon termination of the 2010 Plan, 1,281,619 ordinary shares were reserved for issuance under the 2020 Plan pursuant to clause (ii) of the preceding sentence. As of September 25, 2020, there were 222,502 restricted share units outstanding, 182,844 performance share units outstanding and 2,572,597 ordinary shares available for future grant under the 2020 Plan. As of September 25, 2020, there were 459,110 restricted share units outstanding and 238,474 performance share units outstanding under the 2010 Plan. No ordinary shares are available for future grant under the 2010 Plan. On November 2, 2017, the Company adopted the 2017 Inducem e nt Equity Incentive Plan (the “2017 Inducement Plan”) with a reserve of 160,000 ordinary shares authorized for future issuance solely for the granting of inducement share options and equity awards to new employees. The 2017 Inducement Plan was adopted without shareholder approval in reliance on the “employment inducement exemption” provided under the New York Stock Exchange Listed Company Manual. As of September 25, 2020, there were 12,164 restricted share units outstanding and 111,347 ordinary shares available for future grant under the 2017 Inducement Plan. The 2020 Plan, 2010 Plan and 2017 Inducement Plan are collectively referred to as the “Equity Incentive Plans.” Restricted share units and performance share units Restricted share units and performance share units have been granted under the Equity Incentive Plans. 25 Table of Contents Restricted share units granted to employees generally vest in equal installments over three or four years on each anniversary of the vesting commencement date. Restricted share units granted to non-employee directors generally cliff vest 100 % on the first of January, approximately one year from the grant date, provided the director continues to serve through such date. Performance share units granted to executives will vest, if at all, at the end of a two-year performance period based on the Company’s achievement of pre-defined performance criteria, which consist of revenue and non-GAAP operating margin targets. The actual number of performance share units that may vest at the end of the performance period ranges from 0 % to 100 % of the award grant. The following table summarizes restricted share unit activity under the Equity Incentive Plans: Number of Shares Weighted- Average Grant Date Fair Value Per Share Balance as of June 26, 2020 797,757 $ 46.88 Granted 171,946 $ 70.05 Issued ( 268,728 ) $ 43.84 Forfeited ( 7,199 ) $ 50.40 Balance as of September 25, 2020 693,776 $ 53.76 Number of Shares Weighted- Average Grant Date Fair Value Per Share Balance as of June 28, 2019 800,751 $ 42.48 Granted 292,321 $ 48.39 Issued ( 240,595 ) $ 39.62 Forfeited ( 21,577 ) $ 42.00 Balance as of September 27, 2019 830,900 $ 45.40 The following table summarizes performance share unit activity under the Equity Incentive Plans: Number of Shares Weighted- Average Grant Date Fair Value Per Share Balance as of June 26, 2020 440,140 $ 48.37 Granted 179,008 $ 70.05 Issued ( 82,185 ) $ 48.02 Forfeited ( 115,645 ) $ 48.02 Balance as of September 25, 2020 421,318 $ 57.74 Number of Shares Weighted- Average Grant Date Fair Value Per Share Balance as of June 28, 2019 548,500 $ 40.97 Granted 238,474 $ 48.39 Issued — — Forfeited ( 350,670 ) $ 36.99 Balance as of September 27, 2019 436,304 $ 48.22 26 Table of Contents The fair value of restricted share units and performance share units is based on the market value of our ordinary shares on the date of grant. As of September 25, 2020, there was $ 18.7 million and $ 14.6 million of unrecognized share-based compensation expense related to restricted share units and performance share units, respectively, under the Equity Incentive Plans that is expected to be recorded over a weighted-average period of 2.7 years and 1.6 years, respectively. For the three months ended September 25, 2020 and September 27, 2019, the Company withheld an aggregate of 142,221 shares and 82,220 shares, respectively, upon the vesting of restricted share units, based upon the closing share price on the vesting date to settle employee obligations for the applicable income and other employment taxes. For the three months ended September 25, 2020 and September 27, 2019, the Company then remitted cash of $ 9.9 million and $ 4.1 million, respectively, to the appropriate taxing authorities, and presented it as a financing activity within the unaudited condensed consolidated statements of cash flows. The payment was recorded as a reduction of additional paid-in capital. 15 . Shareholders’ equity Share capital Fabrinet’s authorized share capital is 500,000,000 ordinary shares, par value of $ 0.01 per ordinary share, and 5,000,000 preferred shares, par value of $ 0.01 per preferred share. For the three months ended September 25, 2020, Fabrinet issued 208,692 ordinary shares upon the vesting of restricted share units, net of shares withheld. For the three months ended September 27, 2019, Fabrinet issued 158,375 ordinary shares upon the vesting of restricted share units, net of shares withheld. All such issued shares are fully paid. Treasury shares In August 2017 , the Company’s board of directors approved a share repurchase program to permit the Company to repurchase up to $ 30.0 million worth of its issued and outstanding ordinary shares in the open market in accordance with applicable rules and regulations. In February 2018, May 2019 and August 2020, the Company’s board of directors approved an increase of $ 30.0 million, $ 50.0 million and $ 58.5 million, respectively, to the original share repurchase authorization, bringing the aggregate authorization to $ 168.5 million. During the three months ended September 25, 2020, no shares were repurchased under the program. As of September 25, 2020, the Company had a remaining authorization to purchase up to an additional $ 100.0 million worth of its ordinary shares under the share repurchase program. Shares repurchased under the share repurchase program are held as treasury shares. 27 Table of Contents 16. Accumulated other comprehensive income (loss) The changes in AOCI for the three months ended September 25, 2020 and September 27, 2019 were as follows: (amount in thousands) Unrealized net (Losses)/Gains on Available-for-sale Securities Unrealized net (Losses)/Gains on Derivative Instruments Retirement benefit plan - Prior service cost Foreign Currency Translation Adjustment Total Balance as of June 26, 2020 $ 1,490 $ 602 ( 2,009 ) $ ( 1,230 ) $ ( 1,147 ) Other comprehensive income before reclassification adjustment ( 325 ) ( 1,983 ) — 603 ( 1,705 ) Amounts reclassified out of AOCI to the unaudited condensed consolidated statements of operations and comprehensive income — ( 1,225 ) 173 — ( 1,052 ) Tax effects — — — — — Other comprehensive income (loss) $ ( 325 ) $ ( 3,208 ) 173 $ 603 $ ( 2,757 ) Balance as of September 25, 2020 $ 1,165 $ ( 2,606 ) ( 1,836 ) $ ( 627 ) $ ( 3,904 ) (amount in thousands) Unrealized net (Losses)/Gains on Available-for-sale Securities Unrealized net (Losses)/Gains on Derivative Instruments Retirement benefit plan - Prior service cost Foreign Currency Translation Adjustment Total Balance as of June 28, 2019 $ 952 $ 32 $ ( 2,537 ) $ ( 833 ) $ ( 2,386 ) Other comprehensive income before reclassification adjustment ( 32 ) 39 83 ( 369 ) ( 279 ) Amounts reclassified out of AOCI to the unaudited condensed consolidated statements of operations and comprehensive income 67 — — — 67 Tax effects — — — — — Other comprehensive income (loss) $ 35 $ 39 $ 83 $ ( 369 ) $ ( 212 ) Balance as of September 27, 2019 $ 987 $ 71 $ ( 2,454 ) $ ( 1,202 ) $ ( 2,598 ) 17. Commitments and contingencies Letter of credit and Bank guarantees As of September 25, 2020 and June 26, 2020, the Company had one outstanding standby letter of credit of 6.0 million Euros related to the Company’s support of a customer’s transfer of certain manufacturing operations from Berlin, Germany to the Company’s facilities in Thailand. As of September 25, 2020 and June 26, 2020, the standby letter of credit was backed by cash collateral of $ 7.4 million. As of September 25, 2020 and June 26, 2020, there were outstanding bank guarantees given by a bank on behalf of our subsidiary in Thailand for electricity usage and other normal business expenses totaling to $ 1.6 million and $ 1.6 million, respectively, and there were other bank guarantees given by a bank on behalf of our subsidiaries in China and the U.K. to support their operations. As of September 25, 2020 and June 26, 2020, these bank guarantees were no t material. 28 Table of Contents Purchase obligations Purchase obligations represent legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet operational requirements. Although open purchase orders are considered enforceable and legally binding, their terms generally give the Company the option to cancel, reschedule and/or adjust its requirements based on its business needs prior to the delivery of goods or performance of services. Obligations to purchase inventory and other commitments are generally expected to be fulfilled within one year. As of September 25, 2020, the Company had an outstanding commitment to third parties of $ 10.0 million. Indemnification of directors and officers Cayman Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of directors and officers, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Fabrinet’s amended and restated memorandum and articles of association provide for indemnification of directors and officers for actions, costs, charges, losses, damages and expenses incurred in their capacities as such, except that such indemnification does not extend to any matter in respect of any fraud or dishonesty that may attach to any of them. In accordance with Fabrinet’s form of indemnification agreement for its directors and officers, Fabrinet has agreed to indemnify its directors and officers against certain liabilities and expenses incurred by such persons in connection with claims by reason of their being such a director or officer. Fabrinet maintains a director and officer liability insurance policy that may enable it to recover a portion of any future amounts paid under the indemnification agreements. 18 . Business segments and geographic information Operating segments are defined as comp one nts of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is Fabrinet’s Chief Executive Officer. As of September 25, 2020, the Company operated and internally managed a single operating segment. Accordingly, the Company does not accumulate discrete information with respect to separate product lines and does not have separate reportable segments. For the Company’s revenues by geographic region, see “Revenue by Geographic Area and End Market” in Note 3. As of September 25, 2020 and Sep t ember 27, 2019, the Company had approximately $ 29.2 million and $ 30.8 million, respectively, of long-lived assets based in North America, with the substantial remainder of assets based in Asia-Pacific and Europe. Significant customers The Company had two customers and three customers that each contributed to 10% or more of its total trade accounts receivable as of September 25, 2020 and June 26, 2020, respectively. 19 . Subsequent events On October 1, 2020, the Company extended the payment terms of $ 24.3 million in funds it had advanced to a customer and accrued interest from September 30, 2020 to April 1, 2021 , and reduced the interest rate effective from October 1, 2020. The extension is due to the customer’s agreement to transfer additional manufacturing operations to the Company’s facilities in Thailand beginning in November 2020. These funds will be offset by amount due to this customer for the purchases of certain inventories. (See Note 8) The Company has also committed to purchase $ 26.0 million worth of inventories from the customer. 29 Table of Contents