What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-08-16 compared with 2021-08-17 · 99 added, 180 removed, 324 unchanged (46% of the section changed)

5 unchanged sentences

• our and our customers’ estimates regarding future revenues, operating results, expenses, capital requirements and liquidity;

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

• our expectation that the portion of our future revenues attributable to customers in regions outside of North America will decrease compared with the portion of those revenues for fiscal year 2022;

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• our ability, and the ability of our customers and suppliers, to respond successfully to technological or industry developments;

• our expectations regarding the potential impact of the COVID-19 pandemic on our business, financial condition and results of operations;

• our expectations regarding the potential impact of the COVID-19 pandemic, macroeconomic conditions and international political instability on our business, financial condition and operating results;

• our suppliers’ estimates regarding future costs;

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We utilize a 52-53 week fiscal year ending on the Friday in June closest to June 30.

Fiscal year 2021 ended on June 25, 2021 and consisted of 52 weeks.

Fiscal year 2020 ended on June 26, 2020 and consisted of 52 weeks.

Fiscal year 2019 ended on June 28, 2019 and consisted of 52 weeks.

Our fiscal years 2022, 2021, and 2020 ended on June 24, 2022, June 25, 2021 and June 26, 2020, respectively, and were each 52-week years.

Our fiscal year 2023 will end on June 30, 2023 and be a 53-week year.

The additional week in a 53-week year is added to the first quarter, making such quarter consist of 14 weeks.

Recent Developments Related to COVID-19

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We believe these capabilities have enabled us to help our OEM customers reduce their manufacturing costs while maintaining or improving the design, quality, reliability, and delivery times for their products.

Revenues, by percentage, from individual customers representing 10% or more of our total revenues is set forth in Note 22 of our audited consolidated financial statements.

Revenues, by percentage, from individual customers representing 10% or more of our revenues is set forth in Note 20 of our audited consolidated financial statements.

Because we depend upon a small number of customers for a significant percentage of our total revenues, a reduction in orders from, a loss of, or any other adverse actions by, any one of these customers would reduce our revenues and could have a material adverse effect on our business, operating results and share price.

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If we are unable to maintain our relationships with our existing significant customers, our business, financial condition and operating results could be harmed.

COVID-19 has also created dynamics in the semiconductor component supply chain that have led to shortages of the types of components needed in the products we manufacture for our customers.

If we or our customers are unable to procure needed semiconductor components, our ability to manufacture products for our customers will be impacted, which may reduce our revenue as we experienced during the fourth quarter of fiscal year 2021.

The impact of semiconductor component shortages may increase in the near term as supplier and customer buffer inventories and safety stocks are exhausted.

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.

Revenues by Geography

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The substantial majority of our revenues are derived from our manufacturing facilities in Asia-Pacific.

The percentage of our revenues generated from a bill-to-location outside of North America increased from 49.4% in fiscal year 2020 to 52.8% in fiscal year 2021, which was partially due to an increase in sales to our customers in Asia-Pacific by 1.9%.

Based on the short- and medium-term indications and forecasts from our customers, we expect that the portion of our

future revenues attributable to customers in regions outside of North America will decrease as compared with the portion of revenues attributable to such customers during fiscal year 2021.

The percentage of our revenues generated from a bill-to-location outside of North America decreased from 52.8% in fiscal year 2021 to 50.7% in fiscal year 2022, which was partially due to a decrease in sales to our customers in Europe by 3.5%.

Based on the short- and medium-term indications and forecasts from our customers, we expect that the portion of our future revenues attributable to customers in regions outside of North America will decrease as compared with the portion of revenues attributable to such customers during fiscal year 2022.

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

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dollar, and our ability to retain our employees.

We expect our employee costs to increase as wages continue to increase in Thailand and the PRC.

We expect our employee costs to increase as wages continue to increase in Thailand and the

Wage increases may impact our ability to sustain our competitive advantage and may reduce our profit margin.

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We expect to incur incremental costs of revenue as a result of our planned expansion into new geographic markets, though we are not able to determine the amount of these incremental expenses.

In addition, we expect our cost of revenue to increase in the first quarter of fiscal 2022 in response to the recent surge in COVID-19 cases, particularly in our Thailand operations.

We have implemented additional safeguards beyond what we have been doing for the past 18 months in order to protect our employees.

For example, we have increased testing of our employees and have sent employees home – with pay – if they test positive for COVID-19.

In addition, we have been granted permission by the Thai government to vaccinate our employees and have been carrying out this initiative since July 2021 at our expense.

Selling, General and Administrative Expenses

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GAAP operating margin targets for fiscal year 2021.

In the three months ended September 29, 2020, the compensation committee awarded bonuses to our executive employees for Company achievements of performance under our fiscal year 2020 executive incentive plan.

In August 2021, the compensation committee awarded bonuses to our executive employees for Company achievements of performance under our fiscal year 2021 executive incentive plan.

Discretionary merit-based bonus awards are also available to our non-executive employees and payable on a quarterly basis.

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As of June 24, 2022, there was $135.0 million in foreign currency forward contracts outstanding on the Thai baht payables.

As of June 26, 2020, there was $125.0 million in foreign currency forward contracts and $1.0 million in foreign currency option contracts outstanding on the Thai baht payables.

As of June 25, 2021, there was $130.0 million in foreign currency forward contracts outstanding on the Thai baht payables.

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

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

The Tax Cuts and Jobs Act was enacted on December 22, 2017 and provided for significant changes to U.S.

tax law, including a reduction in the U.S.

corporate income tax rate to 21%, which is the current rate for our U.S.

subsidiaries.

The corporate income tax rates for our subsidiaries in the PRC, the U.K.

The corporate income tax rates for our subsidiaries in the PRC, the U.S., the U.K.

and Israel are 25%, 21%, 19% and 23%, respectively.

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Our critical accounting policies and the adoption of new accounting policies are disclosed in Note 2 – Summary of significant accounting policies.

There were no changes to our accounting policies other than the adoption of ASC 326, “Financial Instruments—Credit Losses:

Measurement of Credit Losses on Financial Instruments” and ASC 820, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement."

There were no changes to our accounting policies other than the adoption of ASU 740, “Income taxes (Topic 740).”

Revenue Recognition

On June 30, 2018, we adopted ASC 606 using the modified retrospective method, which was applied to those contracts which were not completed as of June 29, 2018.

The modified retrospective method required us to recognize the cumulative effect of the adoption of ASC 606, for all contracts with customers, to the opening balance of equity at June 30, 2018.

We derive total revenues primarily from the assembly of products under supply agreements with our customers and the fabrication of customized optics and glass.

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A performance obligation is a contractual promise to transfer a distinct good or service to the customer.

In contracts with multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligation is distinct within the context of the contract at contract inception.

In contracts with multiple performance obligations, we identify each performance obligation and evaluate whether such obligation is distinct within the context of the contract at contract inception.

The majority of our contracts have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable from other promises under the contracts and, therefore, is not distinct.

Sales of finished goods

We manufacture products that are customized to customers’ specifications;

however, control of the products is typically transferred to the customer at the point in time the product is either shipped or delivered, depending on the terms of the arrangement, as the criteria for over time recognition are not met.

On evaluation of the contracts, we identified that there were no contractual rights to bill profit for work in progress in the event of a contract termination, which is expected to be infrequent.

Further, in limited circumstances, contracts provide for substantive acceptance by the customer, which results in the deferral of revenue until formal notice of acceptance is received from the customer.

Judgment may be required in determining if an acceptance clause provides for substantive acceptance.

Certain customers may request us to store finished products at our warehouse where customers bear risks of loss themselves.

In these instances, we receive a written request from the customer asking us to hold the inventory at our warehouse and refrain from using the ordered goods to fulfill other customer orders.

In these situations, revenue is only recognized when the completed goods are ready for shipment and transferred to our warehouse.

Customers generally are obligated to purchase finished goods that we have manufactured according to their demand requirements.

Materials that are not consumed by customers within a specified period of time, or are no longer required due to a product’s cancellation or end-of-life, are typically designated as excess or obsolete inventory under our contracts.

Once materials are designated as either excess or obsolete inventory, customers are typically required to purchase such inventory from us even if the customer has chosen to cancel production of the related products.

The excess or obsolete inventory is shipped to the customer and revenue is recognized upon shipment.

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

In determining the net consideration to which we expect to be entitled, we evaluate whether the price is subject to refund or adjustment.

We generally do not grant return privileges, except for in the case of defective products during the warranty period.

We generally provide a warranty of between one to five years on any given product.

These standard warranties are assurance-type warranties, and we do not offer any services in addition to the assurance that the product will continue to work as specified.

We recognize revenue net of rebates and other similar allowances.

Revenues are recognized only if these estimates can be reasonably and reliably determined.

We estimate expected rebates and other similar allowances based on historical results taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

We consider such estimated rebates and other similar allowances as variable consideration when allocating the transaction price to the extent it is probable that there will not be a significant reversal of cumulative revenue recognized.

The estimate is primarily based on the most likely level of consideration to be paid to the customer under the specific terms of each arrangement.

We provide services for customers that are related to our manufacturing activities.

In many cases, although the nature of work performed is that of a service, revenue is only recognizable upon shipment of the product because the customer has specific requirements as to how many items can be shipped at any given point in time, i.e.

at point-in-time.

The related costs are expensed as incurred.

Management uses judgment to identify performance obligations within a contract and to determine whether multiple promised goods or services in a contract should be accounted for separately or as a group.

Judgment is also used in interpreting commercial terms and determining when transfer of control occurs.

Moreover, judgment is used to estimate the contract’s transaction price and allocate it to each performance obligation.

Any material changes in the identification of performance obligations, determination and allocation of the transaction price to performance obligations, and determination of when transfer of control occurs to the customer, could impact the timing and amount of revenue recognition, which could have a material effect on our financial condition and results of operations.

Long-Lived Assets

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If such assets are considered to be impaired, the impairment loss recognized, if any, is the amount by which the carrying amount of the property and equipment exceeds its fair value.

The estimate of projected cash flows involves numerous assumptions which require significant judgment by us, including, but not limited to, future use of the assets for our operations versus sale or disposal of the assets, future selling prices for our products, and future production and sales volumes.

In addition, significant judgment is required in determining the groups of assets for which impairment tests are separately performed.

Allowance for Doubtful Accounts

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We evaluate the collectability of our accounts receivable based on specific customer circumstances, current economic trends, historical experience with collections, and the age of past due receivables.

Unanticipated changes in the liquidity or financial position of our customers may require additional provisions for doubtful accounts.

Under our specific identification method, it is not practical to assess the sensitivity of our estimates.

Changes in circumstances, such as an unexpected material adverse change in a major customer’s ability to meet its financial obligation to us or its payment trends, may require us to further adjust estimates of the recoverability of amounts due to us, which could have a material adverse effect on our business, financial condition and results of operations.

Inventory Valuation

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In addition, unanticipated changes in liquidity or the financial positions of our customers or changes in economic conditions may require additional provisions for inventory due to our customers’ inability to fulfill their contractual obligations.

During fiscal year 2021 and fiscal year 2020, a change of 10% for excess and obsolete materials, based on product demand and production requirements from our customers, would have affected our net income by approximately $0.1 million and $0.2 million, respectively.

As the market conditions or our customers’ product demands are inherently difficult to predict, the actual volumes may vary significantly from projected volumes.

Differences in forecasted volume used in calculating excess and obsolete inventory can result in a material adverse effect on our business, financial condition and results of operations.

During fiscal year 2022 and fiscal year 2021, a

change of 10% for excess and obsolete materials, based on product demand and production requirements from our customers, would have affected our net income by approximately $0.7 million and $0.1 million, respectively.

Deferred Income Taxes

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If these estimates and related assumptions change in the future, we may be required to increase or decrease our valuation allowance against the deferred tax assets, resulting in additional or lesser income tax expense.

As of the end of fiscal year 2019, we had assessed and set up a partial valuation allowance for the deferred tax assets at the same level as in fiscal year 2018.

However, in fiscal year 2020, one of our subsidiaries in the U.S.

During fiscal year 2020, one of our subsidiaries in the U.S.

generated net operating loss and management expected that such subsidiary would continue to have net operating losses in the foreseeable future;

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generated taxable income sufficient for the utilization of loss carryforwards due to better operating performance and effective control of operating expenses and management determined that it was more likely than not that future taxable income would be sufficient to allow utilization of the deferred tax assets.

Thus, a full valuation allowance of $1.5 million for the deferred tax assets was released as of June 25, 2021.

During fiscal year 2021, our subsidiaries in the U.K.

Thus, a full valuation allowance of $2.1 million for the deferred tax assets was released as of June 25, 2021 and no valuation allowances for deferred tax assets of our subsidiaries in the U.S.

have been set up as of June 24, 2022.

During fiscal year 2020, our subsidiary in the U.K.

also generated net operating loss and management expected that such subsidiary would continue to have net operating losses in the foreseeable future.

Therefore, management believed it was more likely than not that all of the deferred tax assets of such subsidiary would not be utilized.

Thus, a full valuation allowance of $ 2.1 million for the deferred tax assets was set up as of June 25, 2021.

Thus, a full valuation allowance of $1.6 million for the deferred tax assets was set up as of the end of fiscal year 2020.

A full valuation allowance of $2.1 million and $4.9 million were set up for the fiscal year ended June 25, 2021 and June 24, 2022, respectively.

Results of Operations

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Comparison of Fiscal Year 2022 with Fiscal Year 2021

Total revenues .

Our total revenues increased by $237.5 million, or 14.5%, to $1.88 billion for fiscal year 2021, compared with $1.64 billion for fiscal year 2020.

Our revenues increased by $382.8 million, or 20.4%, to $2,262.2 million for fiscal year 2022, compared with $1,879.4 million for fiscal year 2021.

This increase was primarily due to an increase in customers’ demand for optical communications manufacturing services, particularly telecom manufacturing services, for fiscal year 2022.

Revenues from optical communications products represented 76.7% of our total revenues for fiscal year 2021, compared with 76.0% for fiscal year 2020.

Revenues from optical communications products represented 78.8% of our revenues for fiscal year 2022, compared with 76.7% for fiscal year 2021.

Cost of revenues .

Our cost of revenues increased by $202.3 million, or 13.9%, to $1.66 billion, or 88.2% of total revenues, for fiscal year 2021, compared with $1.46 billion, or 88.7% of total revenues, for fiscal year 2020.

Our cost of revenues increased by $325.6 million, or 19.6%, to $1,983.6 million, or 87.7% of revenues, for fiscal year 2022, compared with $1,658.0 million, or 88.2% of revenues, for fiscal year 2021.

The increase in cost of revenues was primarily due to a proportional increase in sales volume.

Gross profit .

Our gross profit increased by $35.3 million, or 18.9%, to $221.4 million, or 11.8% of total revenues, for fiscal year 2021, compared with $186.1 million, or 11.3% of total revenues, for fiscal year 2020.

Our gross profit increased by $57.2 million, or 25.8%, to $278.6 million, or 12.3% of revenues, for fiscal year 2022, compared with $221.4 million, or 11.8% of revenues, for fiscal year 2021.

The increase was primarily due to sales volume, product mix and foreign exchange gain.

SG&A expenses .

Our SG&A expenses increased by $2.2 million, or 3.2%, to $70.6 million, or 3.8% of total revenues, for fiscal year 2021, compared with $68.4 million, or 4.2% of total revenues, for fiscal year 2020.

Our SG&A expenses increased during fiscal year 2021, compared with fiscal year 2020, mainly due to (1) an increase in share-based compensation expenses of $3.2 million from an increase in awards of performance share units and restricted share units;

(2) an increase in new business start-up costs related to our subsidiary in Israel of $1.4 million;

and (3) an increase in severance liabilities expense of $0.9 million related to a senior management retirement;

offset by a goodwill impairment loss related to our subsidiary in the U.K.

of $3.5 million in fiscal year 2020.

Our SG&A expenses increased by $3.3 million, or 4.7%, to $73.9 million, or 3.3% of revenues, for fiscal year 2022, compared with $70.6 million, or 3.8% of revenues, for fiscal year 2021.

Our SG&A expenses increased during fiscal year 2022, compared with fiscal year 2021, mainly due to (1) an increase in share-based compensation expenses of $2.8

million from an increase in awards of performance share units and restricted share units;

(2) a net increase in allowance for doubtful accounts of $1.6 million primarily due to a specific provision set up for one customer in fiscal year 2022;

and (3) an increase in executive bonuses of $0.6 million;

offset by actuarial gain on obligation of $1.5 million in fiscal year 2022.

Operating income .

Our operating income increased by $33.4 million to $150.8 million, or 8.0% of total revenues, for fiscal year 2021, compared with $117.4 million, or 7.1% of total revenues, for fiscal year 2020.

Our operating income increased by $53.7 million to $204.5 million, or 9.0% of revenues, for fiscal year 2022, compared with $150.8 million, or 8.0% of revenues, for fiscal year 2021.

Interest income .

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Our interest expense decreased by $0.7 million to $0.4 million for fiscal year 2022, compared with $1.1 million for fiscal year 2021.

The decrease was primarily due to lower unrealized loss from mark-to-market of interest rate swaps recognized to earnings for fiscal year 2021, due to the implementation of cash flow hedge accounting on the interest rate swaps on September 27, 2019 and lower interest expense from loan repayment in fiscal year 2021.

The decrease was primarily due to (1) interest expense capitalized to a new manufacturing building at our Chonburi campus of $0.9 million in fiscal year 2022, and (2) lower loan interest expense of $0.2 million in fiscal year 2022;

offset by lower amortization of the fair value of interest rate swaps of $0.4 million in fiscal year 2022.

Foreign exchange gain (loss), net .

We recorded foreign exchange gain, net of $0.5 million for fiscal year 2021, compared with foreign exchange loss, net of $3.8 million for fiscal year 2020.

The increase in foreign exchange gain was mainly due to an unrealized foreign exchange gain from revaluation of outstanding Thai baht assets and liabilities of $2.0 million, foreign exchange gain from subsidiaries in the PRC and the U.K., totaling $1.7 million, and realized foreign exchange gain from payment/receipt of $0.5 million in fiscal year 2021, as compared to an unrealized foreign exchange loss from mark-to-market of forward contracts of $1.2 million and realized foreign exchange loss from payment/receipt of $1.6 million in fiscal year 2020

We recorded foreign exchange gain, net of $2.3 million for fiscal year 2022, compared with foreign exchange gain, net of $0.5 million for fiscal year 2021.

The increase in foreign exchange gain was mainly due to (1) realized foreign exchange gain from payment/receipt of $1.1 million for fiscal year 2022, as compared to realized foreign exchange loss from payment/receipt of 1.0 million for fiscal year 2021, (2) higher unrealized foreign exchange gain from revaluation of outstanding Thai baht assets and liabilities of $1.6 million, and (3) lower unrealized foreign exchange loss from mark-to-market of forward contracts of $0.7 million, offset by (1) realized foreign exchange loss from subsidiaries in the PRC and the U.K., totaling $1.2 million for fiscal year 2022, as compared to realized foreign exchange gain from subsidiaries in the PRC and the U.K., totaling $1.3 million for fiscal year 2021, and (2) lower unrealized foreign exchange gain from revaluation of other currencies of $0.1 million.

Income before income taxes .

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Our provision for income tax reflects an effective tax rate of 3.2% and 1.4% for fiscal year 2022 and fiscal year 2021, respectively.

The decrease was primarily due to higher income not subject to tax in fiscal year 2021, as compared to fiscal year 2020.

We recorded net income of $148.3 million, or 7.9% of total revenues, for fiscal year 2021, compared with net income of $113.5 million, or 6.9% of total revenues, for fiscal year 2020.

The increase was primarily due to higher income subject to tax as well as more income subjected to tax in jurisdictions with a higher tax rate in fiscal year 2022, as compared to fiscal year 2021.

We recorded net income of $200.4 million, or 8.8% of revenues, for fiscal year 2022, compared with net income of $148.3 million, or 7.9% of revenues, for fiscal year 2021.

Other comprehensive income (loss) .

We recorded other comprehensive loss of $5.1 million, or 0.3% for fiscal year 2021, compared with other comprehensive income of $1.2 million, or 0.1% for fiscal year 2020.

The decrease in other comprehensive income was mainly due to (1) unrealized loss from mark-to-market of forward contracts and interest rate swap agreement of $5.1 million for fiscal year 2021, as compared to unrealized gain from mark-to-market of forward contracts and interest rate swap agreement of $0.6 million for fiscal year 2020, and (2) unrealized loss from mark-to-market of available-for-sale debt securities of $1.2 million for fiscal year 2021, as compared to unrealized gain from mark-to-market of available-for-sale debt securities of $0.5 million for fiscal year 2020.

We recorded other comprehensive loss of $6.5 million, or 0.3% of revenues, for fiscal year 2022, compared with other comprehensive loss of $5.1 million, or 0.3% of revenues, for fiscal year 2021.

The increase in other comprehensive loss was mainly due to (1) higher unrealized loss from mark-to-market of available-for-sale debt securities of $5.1 million, and (2) unrealized loss from foreign currency translation adjustment of $0.2 million for fiscal year 2022, as compared to unrealized gain from foreign currency translation adjustment of $0.6 million for fiscal year 2021;

offset by lower unrealized loss from mark-to-market of forward contracts and interest rate swap agreement of $4.5 million.

Comparison of Fiscal Year 2021 with Fiscal Year 2020

Total revenues .

Our total revenues increased by $57.5 million, or 3.6%, to $1.64 billion for fiscal year 2020, compared with $1.58 billion for fiscal year 2019.

Our revenues increased by $237.5 million, or 14.5%, to $1,879.4 million for fiscal year 2021, compared with $1,641.8 million for fiscal year 2020.

This increase was primarily due to an increase in customers’ demand for optical communications manufacturing services, particularly telecom manufacturing services, for fiscal year 2021.

Revenues from optical communications products represented 76.0% of our total revenues for fiscal year 2020, compared with 74.8% for fiscal year 2019.

Revenues from optical communications products represented 76.7% of our revenues for fiscal year 2021, compared with 76.0% for fiscal year 2020.

Cost of revenues.

Our cost of revenues increased by $50.6 million, or 3.6%, to $1.46 billion, or 88.7% of total revenues, for fiscal year 2020, compared with $1.41 billion, or 88.7% of total revenues, for fiscal year 2019.

Our cost of revenues increased by $202.3 million, or 13.9%, to $1,658.0 million, or 88.2% of revenues, for fiscal year 2021, compared with $1,455.7 million, or 88.7% of revenues, for fiscal year 2020.

The increase in cost of revenues was primarily due to a proportional increase in sales volume.

Gross profit .

Our gross profit increased by $6.9 million, or 3.8%, to $186.1 million, or 11.3% of total revenues, for fiscal year 2020, compared with $179.2 million, or 11.3% of total revenues, for fiscal year 2019.

Our gross profit increased by $35.3 million, or 18.9%, to $221.4 million, or 11.8% of revenues, for fiscal year 2021, compared with $186.1 million, or 11.3% of revenues, for fiscal year 2020.

SG&A expenses .

Our SG&A expenses increased by $13.3 million, or 24.2%, to $68.4 million, or 4.2% of total revenues, for fiscal year 2020, compared with $55.1 million, or 3.5% of total revenues, for fiscal year 2019.

Our SG&A expenses increased during fiscal year 2020, compared with fiscal year 2019, mainly due to by (1) an increase in share-based compensation expenses of $4.6 million, including $3.2 million from an increase in awards of performance share units and $1.4 million from an increase in awards of restricted share units;

(2) a goodwill impairment loss related to our UK subsidiary of $3.5 million;

(3) an increase in new business start-up costs incurred by our Israel and Thailand subsidiaries of $1.5 million;

(4) an increase in severance liabilities expense of $0.9 million due to a change in labor protection law in Thailand in May 2019 that increased the required severance payment compensation for employees with 20 years of service from 300 days of wage to 400 days of wage;

and (5) an increase in executive and management expenses of $0.4 million from bonuses and other benefits.

Our SG&A expenses increased by $2.2 million, or 3.2%, to $70.6 million, or 3.8% of revenues, for fiscal year 2021, compared with $68.4 million, or 4.2% of revenues, for fiscal year 2020.

(2) an increase in new business start-up costs related to our subsidiary in Israel of $1.4 million;

and (3) an increase in severance liabilities expense of $0.9 million related to a senior management retirement;

offset by a goodwill impairment loss related to our subsidiary in the U.K.

of $3.5 million in fiscal year 2020.

Operating income .

Our operating income decreased by $5.2 million to $117.4 million, or 7.1% of total revenues, for fiscal year 2020, compared with $122.6 million, or 7.7% of total revenues, for fiscal year 2019.

Our operating income increased by $33.4 million to $150.8 million, or 8.0% of revenues, for fiscal year 2021, compared with $117.4 million, or 7.1% of revenues, for fiscal year 2020.

Interest income .

Our interest income increased by $0.9 million to $7.6 million for fiscal year 2020, compared with $6.7 million for fiscal year 2019.

The increase was primarily due to an increase in the average balance of our outstanding cash and cash equivalents and short-term investments.

Our interest income decreased by $3.8 million to $3.8 million for fiscal year 2021, compared with $7.6 million for fiscal year 2020.

The decrease was primarily due to a lower weighted average interest rate in fiscal year 2021 compared with fiscal year 2020.

Interest expense .

Our interest expense decreased by $1.9 million to $1.1 million for fiscal year 2021, compared with $3.0 million for fiscal year 2020.

The decrease was primarily due to lower unrealized loss from mark-to-market of interest rate swaps recognized to earnings as a result of applying cash flow hedge accounting in fiscal year 2020.

In fiscal year 2020, there was unrealized loss from mark-to-market of interest rate swaps of $1.7 million recognized to earnings for the three months ended September 27, 2019, before applying cash flow hedge, as compared to an unrealized loss of $2.6 million for fiscal year 2019.

In addition, there was amortization of the fair value of interest rate swaps as of the hedge inception date of $1.2 million during fiscal year 2020 in relation to applying hedge accounting which results in a decrease in interest expense.

Foreign exchange gain (loss), net .

We recorded foreign exchange loss, net of $3.8 million for fiscal year 2020, compared with foreign exchange gain, net of $1.4 million for fiscal year 2019.

The increase in foreign exchange loss was mainly due to an unrealized foreign exchange loss from mark-to-market of forward contracts of $1.2 million in fiscal year 2020, as compared to an unrealized foreign exchange gain from mark-to-market of forward contracts of $4.8 million in fiscal year 2019.

We recorded foreign exchange gain, net of $0.5 million for fiscal year 2021, compared with foreign exchange loss, net of $3.8 million for fiscal year 2020.

Income before income taxes .

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Our provision for income tax reflects an effective tax rate of 1.4% and 4.8% for fiscal year 2021 and fiscal year 2020, respectively.

The increase was primarily due to the fact that we had higher income subject to tax in fiscal year 2020, as compared to fiscal year 2019.

The decrease was primarily due to higher income not subject to tax in fiscal year 2021, as compared to fiscal year 2020.

We recorded net income of $148.3 million, or 7.9% of total revenues, for fiscal year 2021, compared with net income of $113.5 million, or 6.9% of total revenues, for fiscal year 2020.

Other comprehensive income (loss) .

Our other comprehensive income increased by $2.4 million to $1.2 million for fiscal year 2020 compared with other comprehensive loss of $1.1 million for fiscal year 2019.

We recorded other comprehensive loss of $5.1 million, or 0.3% of revenues, for fiscal year 2021, compared with other comprehensive income of $1.2 million, or 0.1% of revenues, for fiscal year 2020.

Liquidity and Capital Resources

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No security may have an effective maturity that exceeds three years.

Our investments in fixed income securities are primarily classified as available-for-sale and and held-to-maturity.

Our investments in fixed income securities are primarily classified as available-for-sale and held-to-maturity.

Investments in debt securities that we have the positive intent and ability to hold to maturity are carried at amortized cost and classified as held-to-maturity.

Investments in debt securities that are not classified as held-to-maturity are carried at fair value and classified as available-for-sale with any unrealized gains and losses included in AOCI in the consolidated balance sheets.

We determine realized gains or losses on sale of available-for-sale debt securities on a specific identification method and records such gains or losses as interest income in the consolidated statements of operations and comprehensive income.

During fiscal year 2020, (1) we paid off a term loan of $60.9 million under our previous credit facility agreement with Bank of America, (2) our subsidiary in Thailand drew down a new term loan of $60.9 million under a new credit facility agreement with the Bank of Ayudhya Public Company Limited, and (3) we repaid $9.1 million of the new term loan under the new credit facility agreement.

As a result, as of June 26, 2020, we had a long-term borrowing of $51.7 million under our new credit facility agreement.

As of June 25, 2021, we had a long-term borrowing of $39.5 million under our new credit facility agreement (see Note 15 for further details).

We determine realized gains or losses on sale of available-for-sale debt securities on a specific identification method and record such gains or losses as interest income in the consolidated statements of operations and comprehensive income.

As of June 24, 2022 and June 25, 2021, we had long-term borrowing under our credit facility agreement of $27.4 million and $39.5 million, respectively (See Note 13 of the Notes to Consolidated Financial Statements for further details).

We anticipate that our internally generated working capital, along with our cash and cash equivalents will be adequate to repay these obligations.

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Operating Activities

Net cash provided by operating activities of $118.7 million for fiscal year 2021 was primarily due to (1) net income of $148.3 million;

(2) an increase in trade accounts payable of $96.3 million;

(3) depreciation and amortization of $36.3 million;

and (4) share-based compensation of $25.5 million;

offset by (1) an increase in inventories of $112.3 million to support new business;

(2) an increase in trade accounts receivable of $63.8 million due to higher sales and timing of collection;

and (3) increase in other current and non-current assets of $15.2 million.

Net cash provided by operating activities of $150.7 million for fiscal year 2020 was primarily due to (1) net income of $113.5 million;

(2) depreciation and amortization of $30.9 million;

(3) share-based compensation of $22.2 million;

and (4) an increase in other current liabilities and non-current liabilities of $11.0 million;

offset by (1) an increase in inventories of $16.2 million;

and (2) an increase in trade accounts receivable of $12.3 million.

Net cash provided by operating activities of $124.2 million for fiscal year 2022 was primarily due to (1) net income of $200.4 million, (2) an increase in trade accounts payable of $93.5 million, (3) depreciation and amortization of $38.7 million, (4) share-based compensation of $28.0 million, and (5) increase in other current and non-current liabilities of $7.8 million, offset by (1) an increase in inventories of $135.0 million to support new business, (2) an increase in trade accounts receivable of $104.0 million due to higher sales and timing of collection, and (3) increase in other current and non-current assets of $6.4 million.

Net cash provided by operating activities of $122.2 million for fiscal year 2021 was primarily due to (1) net income of $148.3 million, (2) an increase in trade accounts payable of $96.3 million, (3) depreciation and amortization of $36.3 million, and (4) share-based compensation of $25.5 million, offset by (1) an increase in inventories of $112.3 million to support new business, (2) an increase in trade accounts receivable of $63.8 million due to higher sales and timing of collection, and (3) increase in other current and non-current assets of $10.8 million.

Investing Activities

Net cash used in investing activities of $5.4 million for fiscal year 2021 was primarily due to (1) purchase of property, plant and equipment of $42.5 million;

and (2) purchase of intangibles assets of $2.0 million;

offset by (1) funds repayment from a customer of $24.3 million;

and (2) net proceeds from sales and maturities of short-term investments of $14.6 million.

Net cash used in investing activities of $71.2 million for fiscal year 2020 was primarily due to (1) purchase of property, plant and equipment of $42.3 million;

(2) funds provided to our customer in the amount of $24.3 million to support the customer’s transfer of certain manufacturing operations from Berlin, Germany to our facilities in Thailand in fiscal year 2020;

(3) a net purchase of short-term investments of $5.1 million;

and (4) purchase of intangibles assets of $1.2 million;

offset by proceeds from disposal of property, plant and equipment of $1.6 million.

Net cash used in investing activities of $135.5 million for fiscal year 2022 was primarily due to (1) purchase of property, plant and equipment of $89.6 million, mainly related to investment in a new manufacturing building at our Chonburi campus, including acquisition of land and equipment and (2) net purchase from sales and maturities of short-term investments of $45.2 million.

Net cash used in investing activities of $8.9 million for fiscal year 2021 was primarily due to (1) purchase of property, plant and equipment of $46.1 million, and (2) purchase of intangibles assets of $2.0 million;

offset by (1) funds repayment from a customer of $24.3 million, and (2) net proceeds from sales and maturities of short-term investments of $14.6 million.

Financing Activities

Net cash used in financing activities of $42.8 million for fiscal year 2021 was primarily due to (1) repurchase of ordinary shares of $18.8 million;

(2) repayment of loans to banks of $12.2 million;

and (3) cash paid for withholding tax related to net share settlement of restricted share units of $11.6 million.

Net cash used in financing activities of $35.3 million for fiscal year 2020 was primarily due to (1) repurchase of ordinary shares of $20.7 million;

(2) repayment of loans to banks of $9.1 million;

(3) cash paid for withholding tax related to net share settlement of restricted share units of $4.9 million;

and (4) repayment of finance lease liabilities of $0.4 million.

Contractual Obligations

The following table sets forth certain of our contractual obligations as of June 25, 2021:

Payments Due by Period

(amount in thousands) Total Less than

1 year 1-3years 3-5years More than

Long-term borrowing obligations $ 39,609 $ 12,188 $ 27,421 $ — $ —

Interest expense obligation (1)

911 487 423 1 —

Operating lease obligations 6,734 2,775 3,959 — —

Severance liabilities (2)

19,782 1,176 2,647 3,515 12,444

Provision for uncertain income tax position 922 — 309 498 115

Total $ 67,958 $ 16,626 $ 34,759 $ 4,014 $ 12,559

(1) I nterest expense obligation reflects the interest rate on long-term debt obligation as of June 25, 2021.

The interest rates ranged between 1.5% and 1.6%.

For further discussion of long-term borrowing obligations, see Note 15 of our audited consolidated financial statements.

(2) Severance liabilities as of June 25, 2021 are determined based on management assumptions and calculated as expected future cash flows basis.

See Note 16 of our audited consolidated financial statements.

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 may 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 borrowed again .

During the year ended June 25, 2021, the Company recorded $0.7 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 June 25, 2021, the Company was in compliance with all of its financial covenants under the Term Loan Agreement.

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.

As of June 25, 2021, there was $39.5 million outstanding under the term loan.

As of June 25, 2021, we also had certain operating lease arrangements in which the lease payments are calculated using the straight-line method.

Our rental expenses under these leases were $2.6 million, $2.1 million and $1.9 million for fiscal year 2021, fiscal year 2020 and fiscal year 2019, respectively.

Net cash used in financing activities of $92.9 million for fiscal year 2022 was primarily due to (1) repurchase of ordinary shares of $59.9 million, (2) cash paid for withholding tax related to net share settlement of restricted share units of $20.8 million, and (3) repayment of loans to banks of $12.2 million.

Net cash used in financing activities of $42.8 million for fiscal year 2021 was primarily due to (1) repurchase of ordinary shares of $18.8 million, (2) repayment of loans to banks of $12.2 million, and (3) cash paid for withholding tax related to net share settlement of restricted share units of $11.6 million.

Material Cash Requirements for Contractual Obligations

As of June 24, 2022, we had material cash requirements of $32.3 million including scheduled payments within one year of $15.3 million and after one year of $17.0 million.

These material cash requirements consisted of the following contractual and other obligations.

Term Loan and Interest Expenses

As of June 24, 2022, there was $27.4 million outstanding under the term loan that will mature on June 30, 2024 (see Note 13), which consists of scheduled debt payments within one year of $12.2 million and after one year of $15.2 million.

The interest expenses that arise from the term loan have a scheduled debt payment within one year of $0.7 million and after one year of $0.3 million.

Operating Lease

As of June 24, 2022, we have certain operating lease arrangements under which the lease payments are calculated using the straight-line method.

Our rental expenses under these leases which will be paid within one year is $2.4 million and after one year is $1.5 million.

Capital Expenditures

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Capital expenditures $ 80,462 $ 52,054 $ 51,317

During fiscal year 2021 and fiscal year 2020, we purchased equipment to support the expansion of our manufacturing facilities in Thailand, the PRC and Israel.

During fiscal year 2019, we purchased additional equipment to continue to support the expansion of our manufacturing facilities in Thailand.

We expect our capital expenditures for fiscal year 2022 to increase compared to fiscal year 2021 mainly related to investment in existing and new manufacturing facilities.

During fiscal year 2022 and fiscal year 2021, we invested in a new manufacturing building at our Chonburi campus and continued to purchase equipment to support the expansion of our manufacturing facilities in Thailand, the PRC and Israel.

During fiscal year 2020, we purchased equipment to support the expansion of our manufacturing facilities in Thailand.

We expect our capital expenditures for fiscal year 2023 to decrease compared to fiscal year 2022 mainly due to completion of the aforementioned new manufacturing facilities.

Recent Accounting Pronouncements

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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 7. Management’s Discussion and Analysis