What changed in this filing

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Item 1. Business

2022-08-16 compared with 2021-08-17 · 75 added, 74 removed, 305 unchanged (33% of the section changed)

1 unchanged sentence

We offer a broad range of advanced optical and electro-mechanical capabilities across the entire manufacturing process, including process design and engineering, supply chain management, manufacturing, complex printed circuit board assembly, advanced packaging, integration, final assembly and testing.

Although we focus primarily on low-volume production of a wide variety of high complexity products, which we refer to as “low-volume, high-mix,” we also have the capability to accommodate high-volume production.

Based on our experience with and positive feedback from our customers, we believe we are a global leader in providing these services to the optical communications, industrial lasers and automotive markets.

Our customer base includes companies in complex industries that require advanced precision manufacturing capabilities such as optical communications, industrial lasers, automotive components and sensors.

We focus primarily on low-volume production of a wide variety of high complexity products, which we refer to as “low-volume, high-mix.” We also have the capability to accommodate high-volume production.

Based on our extensive experience and the positive feedback we have received from our customers, we believe we are a global leader in providing these services to the optical communications, industrial lasers and automotive markets.

Our customers include companies in complex industries that require advanced precision manufacturing capabilities such as optical communications, industrial lasers, automotive and sensors.

Our customers in these industries support a growing number of end-markets, including automotive, biotechnology, communications, materials processing, medical devices, metrology and semiconductor processing.

Our total revenues for the year ended June 25, 2021 (“fiscal year 2021”) increased by $237.5 million, or 14.5%, from $1.64 billion for the year ended June 26, 2020 (“fiscal year 2020”) to $1.88 billion for fiscal year 2021.

Our revenues from lasers, sensors and other markets as a percentage of total revenues decreased from 24.0% in fiscal year 2020 to 23.3% in fiscal year 2021, while our revenues from optical communications products as a percentage of total revenues increased from 76.0% in fiscal year 2020 to 76.7% in fiscal year 2021.

Our revenues for the year ended June 24, 2022 (“fiscal year 2022”) increased by $382.8 million, or 20.4%, from $1.88 billion for the year ended June 25, 2021 (“fiscal year 2021”) to $2.26 billion for fiscal year 2022.

Our percentage of revenues from lasers, sensors and other markets decreased from 23.3% in fiscal year 2021 to 21.2% in fiscal year 2022, while our percentage of revenues from optical communications products increased from 76.7% in fiscal year 2021 to 78.8% in fiscal year 2022.

In many cases, we are the sole outsourced manufacturing partner used by our customers for the products that we produce for them.

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We believe there is no other manufacturing services provider with a similar breadth and depth of optical and electro-mechanical engineering and process technology capabilities that does not directly compete with its customers in their end-markets.

As a result, we believe we are more closely aligned and better able to develop long-term relationships with our customers than our competitors.

As of June 25, 2021, our facilities comprised approximately 2.1 million total square feet, including approximately 0.2 million square feet of office space and approximately 1.9 million square feet devoted to manufacturing and related activities, of which approximately 0.9 million square feet are clean room facilities.

As a result, we believe we are more closely aligned and better able to develop long-term relationships with our customers than our competitors are.

As of June 24, 2022, our facilities comprised approximately 3.7 million total square feet, including approximately 0.9 million square feet of office space used for general administration purposes and approximately 2.8 million square feet devoted to manufacturing and related activities, of which approximately 1.2 million square feet are clean room facilities.

Of the aggregate square footage of our facilities, approximately 3.2 million square feet are located in Thailand and the remaining balance is located in the People’s Republic of China (“PRC” or “China”), the United Kingdom, the United States, Israel and the Cayman Islands.

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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 the PRC 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 2020.

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

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 2020 before reopening in early April 2020 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 including social distancing guidelines.

During the three months ended June 25, 2021, several countries where we have manufacturing facilities, including Thailand, the PRC, the U.S.

and the U.K., experienced a surge in the number of COVID-19 cases.

In Thailand, we have recently experienced an increase in the number of employees who have tested positive for COVID-19.

We have responded by taking additional actions based on recommendations from local authorities.

These actions include leave of absence for affected employees and their close contacts, stringent contact tracing, enhanced safe distancing measures, and arrangements for the vaccination of our employees in Thailand.

Although we did not experience any significant disruptions in our operations or decrease in customer demand during the three months ended June 25, 2021, any worsening of the pandemic may result in more stringent measures being implemented by the local authorities, such as shutting down of our manufacturing facilities, which will have a significant negative impact on our operations.

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

In early 2020, we implemented significant precautionary measures throughout our worldwide operations to ensure our employees and their families remain safe.

Such measures include mandatory temperature detection at building entrances, rigorous and regular facility and equipment disinfection, and mandatory personal protective equipment protocols, including (1) the wearing of face masks throughout our factories at all times;

(2) distributing our employees across shifts to better maintain safe personal distances;

(3) isolating incoming parts and materials for a week or more prior to unpacking, or applying extreme heat to kill potential viruses;

(4) directing our non-factory personnel to work remotely;

and (5) restricting all non-employee visits to our campuses.

Given the unprecedented human, and economic impact of the COVID-19 pandemic globally, the extraordinary economic short-term uncertainty resulting therefrom, and the evolving and differing national strategies for dealing with COVID-19, it is challenging to provide a forward-looking disclosure.

However, despite the uncertainty and concern about the

global economy and the health of various industries, we believe it is important to share some relevant perspectives as we continue to assess the impacts of COVID-19 on our business in the future:

• With work-from-home protocols in place around the world, global demand for internet bandwidth has grown and we believe it will continue to grow.

Because the next-generation telecom and datacom products we manufacture for our customers are important to expanding network capacity, we believe such growth in bandwidth demand will have a positive impact on our business in the long-term.

• While we believe 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, especially if the COVID-19 outbreak intensifies or returns in various geographic areas as was the case at the end of our third quarter in fiscal year 2020.

• We expect we will continue to experience disruptions in our supply chain and the availability of parts and materials will continue to fluctuate, especially if the COVID-19 outbreak intensifies or returns in various geographic areas.

However, we believe we can mitigate these disruptions by continuing to identify and secure alternative sources.

Our PRC subsidiary, which manufactures custom optics components for us and other customers at its facility in Fuzhou, China, experienced a two-week closure in January 2020 in accordance with the Chinese government’s official efforts to mitigate the spread of COVID-19.

Furthermore, travel restrictions in the PRC during that period resulted in fewer than 90% of our employees in the PRC being able to return to work before early March 2020.

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

While our operations in Thailand have not been suspended, we have implemented a number of safety protocols to allow such operations to continue in accordance with government regulations.

With the exception of approximately one week beginning in late March 2020 when our facility in Santa Clara, California closed before reopening in early April 2020 as a previously classified “essential business,” our facilities in the U.S.

have remained open while adhering to the local government restrictions.

The health and well-being of our employees is our top priority, and we continue to take precautionary measures throughout our worldwide operations to ensure our employees and their families remain safe.

These measures include leaves of absence for affected employees and their close contacts, stringent contact tracing, enhanced safe distancing measures, and arrangements for the vaccination of our employees in Thailand.

Although we did not experience any significant disruptions in our operations or decrease in customer demand during the year ended June 24, 2022, any worsening of the pandemic may result in more stringent measures being implemented by local authorities, such as shutting down our manufacturing facilities, which would have a significant negative impact on our operations.

We expect that disruptions in our supply chain and fluctuations in the availability of parts and materials will continue to have a significant impact on our ability to generate revenue, despite strong demand from our customers.

These supply chain disruptions have been exacerbated by recent global events, such as (1) COVID-related lockdowns in China, which have caused freight and logistics issues and unforeseen delays, and (2) the armed conflict between Russia and Ukraine.

While we have no significant direct business in Ukraine or Russia, the conflict has negatively impacted demand from some of our automotive customers that have other suppliers in the region.

Moreover, if the facilities of our subsidiary in Fuzhou, China are locked down, we would also be negatively impacted since we and some of our customers rely on the optics components that are manufactured in such facilities.

Furthermore, in some cases, our efforts to identify and secure alternative supply chain sources has resulted in our customers or their end customers requiring requalification and validation of components, a process that can often be lengthy and has negatively impacted the timing of our revenue.

We expect these supply constraints to continue, and potentially worsen, for at least the next 12 months.

Due to the unprecedented and unpredictable human and economic impact of the COVID-19 pandemic globally, including inflationary pressures and supply chain constraints as the world exits the acute phase of the pandemic, and the evolving and differing national strategies for dealing with COVID-19, it is challenging to provide a forward-looking assessment.

However, despite uncertainty and concern about the global economy and the health of various industries, we can share some relevant perspectives as we continue to assess the impacts of COVID-19 on our business in the future:

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

However, because parts and materials account for the largest portion of our costs, in combination with the supply chain issues noted above and, to a lesser extent, the expenses associated with the safety and health protocols we have implemented across our global operations, our gross margins will continue to be negatively affected for the foreseeable future.

• The safety and health of our employees is and will remain a key priority, and we will continue to follow robust safety protocols in all of our facilities.

To this end, we have arranged for the vaccination of our employees in Thailand in the first quarter of fiscal year 2022.

However, because parts and materials account for the largest portion of our costs, any of the inflationary pressures and supply chain issues noted above will negatively affect our gross margins for the foreseeable future.

• The ongoing safety and health of our employees is and will remain a key priority, and we will continue to follow robust safety protocols in all of our facilities.

To this end, we arranged for the vaccination of our employees in Thailand in the first quarter of fiscal year 2022.

• Given our $478.2 million in cash, cash equivalents and short-term investments, and our total debt of approximately $27.4 million, as of June 24, 2022, we believe we are in a solid position from a capital and financial resources perspective.

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The optical and electro-mechanical process technologies used in the optical communications market also have applications in other similarly complex end-markets that require advanced precision manufacturing capabilities, such as automotive, industrial lasers, medical devices, and sensors.

These markets are substantially larger than the optical

communications components and modules market.

Growth in the industrial lasers, medical, and sensors markets is expected to be driven by demand for:

These markets are substantially larger than the optical communications components and modules market.

We expect growth in the industrial lasers, medical, and sensors markets will be driven by demand for:

• industrial laser applications across a growing number of end-markets, particularly in semiconductor processing, biotechnology, metrology and materials processing;

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• Advanced Optical and Electro-Mechanical Manufacturing Technologies:

We believe that our optical and electro-mechanical process technologies and capabilities, coupled with our customized optics and glass technologies, provide us with a key competitive advantage.

We believe that our optical and electro-mechanical process technologies and capabilities as well as our customized optics and glass technologies provide us with a key competitive advantage.

These technologies include:

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We believe our capabilities in the design and fabrication of high-value customized optics and glass are complementary to our manufacturing services.

Specifically, these capabilities enable us to strategically align our business to our customers’ needs by streamlining our customers’ product development process and reducing the number of suppliers in our customers’

manufacturing supply chains.

Also, we use these customized optics and glass products in certain of the components, modules and subsystems we manufacture, which enables us to shorten time to market and reduce the cost for our customers.

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We believe the integration of our manufacturing and test controls, quality systems, and software platforms contribute significantly to our ability to deliver high-quality products on a consistent basis and reduce the risk that we will be required to repair or replace defective products.

Our manufacturing execution system (“MES”) is directly integrated with our test system and enterprise resource planning (“ERP”) database allowing us to respond to any process deviations in real time.

Our manufacturing execution system (“MES”) is directly integrated with our test system

and enterprise resource planning (“ERP”) database allowing us to respond to any process deviations in real time.

We work with customers to develop product-specific test strategies.

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Our reliability laboratory enables us to test the degree to which our results and specifications conform to our customers’ requirements.

Through the reliability laboratory, we are able to perform most of the

tests required by industry standards, including damp heat, thermal aging, thermal shock, temperature cycling, shock and vibration, accelerated life testing and stress screening.

Through the reliability laboratory, we are able to perform most of the tests required by industry standards, including damp heat, thermal aging, thermal shock, temperature cycling, shock and vibration, accelerated life testing and stress screening.

The reliability laboratory is critical to verification of root cause failure analysis.

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We use our fiber metallization and fiber lensing capabilities to assist our customers in packaging their products.

Many optical component package designs require metallized fiber and some designs also require lensing at the tip of the fiber.

Many optical component package designs require metallized fiber and

some designs also require lensing at the tip of the fiber.

We have in-house capabilities that enable us to produce these products at a low cost, with short lead times and high quality.

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The optical communications market we serve is highly concentrated.

Therefore, we expect a significant percentage of our total revenues will continue to come from a small number of customers.

During each of fiscal years 2021 and 2020, we had three customers that each contributed 10% or more of our total revenues.

During fiscal year 2021, Cisco Systems Inc., Lumentum Operations LLC and Infinera Corporation contributed 13.9%, 13.6% and 11.6%, respectively, of our total revenues.

During fiscal year 2020, Lumentum Operations LLC, Acacia Communications, Inc.

and Infinera Corporation contributed 19.0%, 10.2% and 10.0%, respectively, of our total revenues.

Therefore, we expect a significant percentage of our revenues will continue to come from a small number of customers.

During each of fiscal years 2022 and 2021, we had three customers that each contributed 10% or more of our revenues.

During fiscal year 2022, Cisco Systems Inc., Infinera Corporation and Lumentum Operations LLC contributed 25.4%, 12.5% and 10.3%, respectively, of our revenues.

During fiscal year 2021, Lumentum Operations LLC, Infinera Corporation and Cisco Systems Inc.

contributed 13.6%, 11.6% and 10.7%, respectively, of our revenues.

The production of optical devices is characterized by a lengthy qualification process.

In particular, the qualification and field testing of the products that we produce for our customers may take three to six months or longer to complete.

we must qualify our production process with our customers, and the products that we manufacture must also meet the product quality requirements of our customers’ customers.

Generally, we must qualify our production process with our customers, and the products that we manufacture must also meet the product quality requirements of our customers’ customers.

While most of our customers do not purchase our services until they qualify the services and satisfactorily complete factory audits and vendor evaluations, we typically produce a test run of their products to demonstrate that the products we produce will meet their qualification standards in advance of receiving an order.

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While we continually undertake programs to strengthen our supply chain, we are experiencing, and expect to experience for the foreseeable future, strain on our supply chain, as well as periodic supplier problems.

We have incurred, and expect to incur for the foreseeable future, costs to address these problems.

While we have no significant direct business in Ukraine or Russia, the conflict has negatively impacted demand from some of our automotive customers that have other suppliers in the region.

We have incurred, and expect to incur for the foreseeable future, costs to address supply chain problems.

Although we have generally managed to pass such costs on to our customers, our gross margins could decrease if the problems persist over a sustained period of time.

We have an extensive quality management system that focuses on continual process improvement and achieving high levels of customer satisfaction.

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NADCAP (National Aerospace and Defense Contractors Accreditation Program) for Quality Assurance throughout the Aerospace and Defense Industries;

and OHSAS 18001 for Occupational Health and Safety Management Systems.

and ISO 45001 for Occupational Health and Safety Management Systems.

We also maintain compliance with various additional standards imposed by the U.S.

Food and Drug Administration, or FDA, with respect to the manufacture of medical devices.

Food and Drug Administration ("FDA") with respect to the manufacture of medical devices.

Additionally, we are required to register with the FDA and other regulatory bodies and are subject to continual review and periodic inspection for compliance with various regulations, including testing, quality control and documentation procedures.

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ANSI ESD S20.20 for facilities and manufacturing process control, in compliance with ESD standard;

Transported Asset Protection Association, or TAPA, for Logistic Security Management System;

Transported Asset Protection Association ("TAPA") and Custom and Trade Partnership Against Terrorism ("C-TPAT") for Logistic Security Management System;

and CSR-DIW for Corporate Social Responsibility in Thailand.

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and Research Electro-Optic, Inc.

Our UK competitors for printed circuit board assemblies include STI Limited and Axiom Manufacturing Services Limited.

Our UK competitors for printed circuit board assemblies include STI Limited, Axiom Manufacturing Services Limited and TT Electronics plc.

Intellectual Property

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We believe that both our evolving business practices and industry trends may result in the continued growth of our patent portfolio and its importance to us, particularly as we expand our business.

Environmental Regulation

Government Regulations

Environmental Compliance

We are subject to a variety of international and U.S.

laws and other legal requirements relating to the use, disposal, cleanup of and human exposure to hazardous materials.

laws and regulations relating to the use, disposal, cleanup of and human exposure to hazardous materials.

To date, such laws and regulations have not materially affected our business.

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While to date we are not aware of any material exposures, there can be no assurance that environmental matters will not arise in the future or that costs will not be incurred with respect to sites as to which no problem is currently known.

As part of the International Organization for Standardization (“ISO”) 14001 environmental management systems framework, we have established and continue to enforce at our facilities a global environmental policy that includes evaluation and control, compliance obligations, commitment, training, communication, control of documented information, operational control, emergency preparedness and response, and management review.

While environmental regulations have not thus far resulted in a material adverse effect on our operations, changes in regulations could necessitate additional capital expenditures, modification of our operations, or other compliance actions.

Trade Regulations

We and our suppliers and service providers could be affected by tariffs, embargoes, or other trade restrictions, as well as laws and regulations enacted in response to concerns regarding climate change, conflict minerals, responsible sourcing practices, public health crises, contagious disease outbreaks, or other matters, which could limit the supply of our materials and increase their cost.

In addition, compliance with trade regulations may result in disruptions in logistics, which could delay our receipt of materials.

We have experienced increased lead times and expedite fees for the supply of materials.

The disruption of our supply of parts and materials, including where such disruption results in the extension of our lead times, could have a material adverse effect on our business, results of operations, or financial condition.

Similarly, if our customers experience disruptions to their supplies or materials, or the extension of their lead times, they may reduce, cancel, or alter the timing of their purchases with us, which could have a material adverse effect on our business, financial condition and operating results.

We are subject to income taxes in various jurisdictions.

Our provision for income taxes and effective tax rate could be affected by numerous factors, including changes in applicable tax laws, interpretations of applicable tax laws, amount and composition of pre-tax income in jurisdictions with differing tax rates, and valuation of deferred tax assets.

There have been a number of proposed changes in the tax laws that could increase our tax liability.

Several governments are considering various tax reform proposals that, if enacted, may contain provisions that could increase our tax expense.

Further changes in the tax laws of various jurisdictions could arise as a result of the base erosion and profit shifting project undertaken by the Organisation for Economic Co-operation and Development, which represents a coalition of member countries and has recommended changes to numerous long-standing tax principles.

If implemented by taxing authorities, such changes could have a material adverse effect on our business, financial condition and operating results.

Social Responsibility

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Fabrinet was incorporated under the laws of the Cayman Islands in August 1999 and commenced business operations in January 2000.

We have fifteen direct and indirect subsidiaries, all of which are wholly-owned.

We have fourteen direct and indirect subsidiaries, all of which are wholly-owned.

As the parent company, we enter into contracts directly with our customers while some of our subsidiaries in the PRC, the U.S.

enter into sales contracts or purchase orders directly with their customers.

We have inter-company agreements with certain of our subsidiaries in Thailand, the U.S.

and Germany to provide manufacturing services to us, and we have inter-company agreements with certain of our subsidiaries in the U.S.

We have inter-company agreements with certain of our subsidiaries in Thailand and the U.S.

to provide manufacturing services to us, and we have inter-company agreements with certain of our subsidiaries in the U.S.

and Singapore to provide certain administrative and business development services to us.

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We consider our relations with our employees to be positive.

We are committed to promoting diversity and inclusion in the workplace, developing our employees and supporting our employees’ well-being and safety.

To ensure diversity within our workforce we advertise job openings and source candidates broadly to attract a diverse candidate pool.

We are committed to developing our employees and supporting our employees’ well-being and safety.

We advertise job openings and source candidates broadly to attract a diverse candidate pool.

We also monitor hiring, termination and pay practices to ensure compliance with established regulations across the world, and we track and report internally on key talent metrics including talent pipeline, employee promotions, employee turnover, and engagement of our employees.

We provide employee career guidance and counseling through established employee development and training opportunities.

We have taken a wide variety of measures to protect the health and well-being of our employees, suppliers, and customers during the COVID-19 pandemic.

We made substantial modifications to employee travel policies and implemented office closures so non-essential employees could work remotely.

At our manufacturing facilities, we implemented 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 kill potential viruses;

(4) directing our non-factory personnel to work remotely;

and (5) restricting all non-employee visits to our campuses.

We also made arrangements for our employees in Thailand to receive COVID-19 vaccines beginning in the first quarter of fiscal year 2022.

We have taken a wide variety of measures to protect the health and well-being of our employees, suppliers, and customers during the COVID-19 pandemic, including arranging for our employees in Thailand to receive COVID-19 vaccines beginning in the first quarter of fiscal year 2022.

Available Information

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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-K

Item 1. Business