Fabrinet 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements of Fabrinet Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 1194 ) 50 Consolidated Balance Sheets as of June 30 , 202 3 and June 2 4 , 20 2 2 52 Consolidated Statements of Operations and Comprehensive Income for the Years Ended June 30 , 202 3 , June 2 4 , 202 2 and June 2 5 , 20 21 53 Consolidated Statements of Shareholders’ Equity for the Years Ended June 30 , 202 3 , June 2 4 , 202 2 and June 2 5 , 20 21 54 Consolidated Statements of Cash Flows for the Years Ended June 30 , 202 3 , June 2 4 , 202 2 and June 2 5 , 20 21 55 Notes to Consolidated Financial Statements 57 49 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Fabrinet Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Fabrinet and its subsidiaries (the “Company”) as of June 30, 2023 and June 24, 2022, and the related consolidated statements of operations and comprehensive income, consolidated statements of shareholders’ equity and consolidated statements of cash flows for each of the three years in the period ended June 30, 2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of June 30, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and June 24, 2022, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 50 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue recognition – Identifying and evaluating terms and conditions in contracts for the timing of revenue recognition. As described in Note 2 to the consolidated financial statements, management applies five-step in their determination of revenue to be recognized and the control of the product is typically transferred to the customer depending on the terms of the contract. The management applies judgment in identifying and evaluating any terms and conditions when the Company has an enforceable right to payment. For the fiscal year ended June 30, 2023, the Company’s revenue was $2,645.2 million. The principal considerations for our determination that performing procedures relating to revenue recognition, specifically the identification and evaluation of terms and conditions in contracts for the timing of revenue recognition, is a critical audit matter are that there was a significant amount of judgment exercised by management in identifying and evaluating terms and conditions in contracts that impact the timing of revenue recognition. This in turn led to a high degree of auditor judgment and an increased extent of audit effort in performing our audit procedures to evaluate whether terms and conditions in contracts and point of controls transferred were appropriately identified and evaluated by management. Addressing the matter involved performing procedures and evaluating audit evidence connected with forming our overall opinion on the consolidated financial statements. These procedures involved testing the effectiveness of internal controls relating to the revenue recognition process, including controls related to the identification and evaluation of terms and conditions in contracts and the determination of the appropriate amount and timing of revenue recognition based on the contractual terms. These procedures also included, among others: (i) assessed the terms in the customer contract and evaluated the appropriateness of management’s application of their accounting policies and determination of revenue recognition; (ii) tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements; and; (iii) selected samples of sales transaction from the period within a defined period before and after the Company’s fiscal year ended and obtained the invoices, purchase orders and proof of delivery, to evaluate whether revenue was recognized in the appropriate fiscal year. /s/ PricewaterhouseCoopers ABAS Ltd. Bangkok, Thailand August 22, 2023 We have served as the Company’s auditor since 1999. 51 Table of Contents FABRINET CONSOLIDATED BALANCE SHEETS (in thousands of U.S. dollars, except share data and par value) June 30, 2023 June 24, 2022 Assets Current assets Cash and cash equivalents $ 231,368 $ 197,996 Short-term restricted cash — 220 Short-term investments 319,100 280,157 Trade accounts receivable, net of allowance for doubtful accounts of $ 965 and $ 1,271 , respectively 531,767 452,670 Inventories 519,576 557,145 Prepaid expenses 7,849 11,626 Other current assets 42,880 25,357 Total current assets 1,652,540 1,525,171 Non-current assets Long-term restricted cash — 149 Property, plant and equipment, net 310,350 292,277 Intangibles, net 2,394 3,508 Operating right-of-use assets 1,634 4,084 Deferred tax assets 12,095 9,800 Other non-current assets 635 652 Total non-current assets 327,108 310,470 Total Assets $ 1,979,648 $ 1,835,641 Liabilities and Shareholders’ Equity Current liabilities Long-term borrowings, current portion, net $ 12,156 $ 12,156 Trade accounts payable 381,129 439,684 Fixed assets payable 13,526 9,085 Operating lease liabilities, current portion 1,201 2,319 Income tax payable 6,024 2,898 Accrued payroll, bonus and related expenses 23,748 20,374 Accrued expenses 20,447 24,758 Other payables 23,654 27,213 Total current liabilities 481,885 538,487 Non-current liabilities Long-term borrowings, non-current portion, net — 15,202 Deferred tax liability 4,799 6,001 Operating lease liabilities, non-current portion 66 1,476 Severance liabilities 22,159 18,384 Other non-current liabilities 2,081 2,409 Total non-current liabilities 29,105 43,472 Total Liabilities 510,990 581,959 Commitments and contingencies (Note 19) Shareholders’ equity Preferred shares ( 5,000,000 shares authorized, $ 0.01 par value; no shares issued and outstanding as of June 30, 2023 and June 24, 2022) — — Ordinary shares ( 500,000,000 shares authorized, $ 0.01 par value; 39,284,176 shares and 39,048,700 shares issued as of June 30, 2023 and June 24, 2022, respectively; and 36,183,682 shares and 36,436,683 shares outstanding as of June 30, 2023 and June 24, 2022, respectively) 393 390 Additional paid-in capital 206,624 196,667 Less: Treasury shares ( 3,100,494 shares and 2,612,017 shares as of June 30, 2023 and June 24, 2022, respectively) ( 194,833 ) ( 147,258 ) Accumulated other comprehensive income (loss) ( 8,115 ) ( 12,793 ) Retained earnings 1,464,589 1,216,676 Total Shareholders’ Equity 1,468,658 1,253,682 Total Liabilities and Shareholders’ Equity $ 1,979,648 $ 1,835,641 The accompanying notes are an integral part of these consolidated financial statements. 52 Table of Contents FABRINET CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME Years Ended (in thousands of U.S. dollars, except per share data) June 30, 2023 June 24, 2022 June 25, 2021 Revenues $ 2,645,237 $ 2,262,224 $ 1,879,350 Cost of revenues ( 2,308,964 ) ( 1,983,630 ) ( 1,657,987 ) Gross profit 336,273 278,594 221,363 Selling, general and administrative expenses ( 77,673 ) ( 73,941 ) ( 70,567 ) Restructuring and other related costs ( 6,896 ) ( 135 ) ( 43 ) Operating income 251,704 204,518 150,753 Interest income 11,234 2,205 3,783 Interest expense ( 1,472 ) ( 432 ) ( 1,100 ) Foreign exchange gain (loss), net ( 1,211 ) 2,302 508 Other income (expense), net ( 159 ) ( 1,627 ) ( 3,460 ) Income before income taxes 260,096 206,966 150,484 Income tax expense ( 12,183 ) ( 6,586 ) ( 2,143 ) Net income 247,913 200,380 148,341 Other comprehensive income (loss), net of tax Change in net unrealized gain (loss) on available-for-sale securities 2,739 ( 6,326 ) ( 1,182 ) Change in net unrealized gain (loss) on derivative instruments 1,541 ( 578 ) ( 5,106 ) Change in net retirement benefits plan – prior service cost 473 622 584 Change in foreign currency translation adjustment ( 75 ) ( 245 ) 585 Total other comprehensive income (loss), net of tax 4,678 ( 6,527 ) ( 5,119 ) Net comprehensive income $ 252,591 $ 193,853 $ 143,222 Earnings per share Basic 6.79 5.43 4.02 Diluted 6.73 5.36 3.95 Weighted average number of ordinary shares outstanding (thousands of shares) Basic 36,515 36,876 36,872 Diluted 36,855 37,394 37,555 The accompanying notes are an integral part of these consolidated financial statements. 53 Table of Contents FABRINET CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in thousands of U.S. dollars, except share data) Ordinary Share Additional Paid-in Capital Treasury Shares Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Shares Amount Balances at June 26, 2020 38,471,967 385 175,610 ( 68,501 ) ( 1,147 ) 868,062 974,409 Net income — — — — — 148,341 148,341 Other comprehensive income (loss) — — — — ( 5,119 ) — ( 5,119 ) Cumulative effect adjustment from adoption of ASC 326 — — — — — ( 107 ) ( 107 ) Share-based compensation — — 25,462 — — — 25,462 Issuance of ordinary shares 277,078 3 ( 3 ) — — — — Repurchase of 239,486 shares held as treasury shares — — — ( 18,842 ) — — ( 18,842 ) Tax withholdings related to net share settlement of restricted share units — — ( 11,624 ) — — — ( 11,624 ) Balances at June 25, 2021 38,749,045 388 189,445 ( 87,343 ) ( 6,266 ) 1,016,296 1,112,520 Net income — — — — — 200,380 200,380 Other comprehensive income (loss) — — — — ( 6,527 ) — ( 6,527 ) Share-based compensation — — 28,048 — — — 28,048 Issuance of ordinary shares 299,655 2 ( 2 ) — — — — Repurchase of 628,428 shares held as treasury shares — — — ( 59,915 ) — — ( 59,915 ) Tax withholdings related to net share settlement of restricted share units — — ( 20,824 ) — — — ( 20,824 ) Balances at June 24, 2022 39,048,700 390 196,667 ( 147,258 ) ( 12,793 ) 1,216,676 1,253,682 Net income — — — — — 247,913 247,913 Other comprehensive income (loss) — — — — 4,678 — 4,678 Share-based compensation — — 28,127 — — — 28,127 Issuance of ordinary shares 235,476 3 ( 3 ) — — — — Repurchase of 488,477 shares held as treasury shares — — — ( 47,575 ) — — ( 47,575 ) Tax withholdings related to net share settlement of restricted share units — — ( 18,167 ) — — — ( 18,167 ) Balances at June 30, 2023 39,284,176 393 206,624 ( 194,833 ) ( 8,115 ) 1,464,589 1,468,658 The accompanying notes are an integral part of these consolidated financial statements. 54 Table of Contents FABRINET CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended (in thousands of U. S. dollars) June 30, 2023 June 24, 2022 June 25, 2021 Cash flows from operating activities Net income $ 247,913 $ 200,380 $ 148,341 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 43,832 38,738 36,252 Non-cash restructuring charges and other related costs 2,201 — — (Gain) loss on disposal and impairment of property, plant and equipment ( 1,506 ) ( 101 ) 13 (Gain) loss from sales and maturities of available-for-sale securities 92 13 ( 187 ) Amortization of discount (premium) of short-term investments 280 3,691 2,093 Amortization of deferred debt issuance costs 31 32 32 (Reversal of) allowance for doubtful accounts ( 307 ) 1,171 ( 343 ) Unrealized loss (gain) on exchange rate and fair value of foreign currency forward contracts 175 ( 2,832 ) ( 859 ) Amortization of fair value at hedge inception of interest rate swaps ( 587 ) ( 937 ) ( 1,299 ) Share-based compensation 28,127 28,048 25,462 Deferred income tax ( 3,484 ) ( 191 ) ( 3,473 ) Other non-cash expenses 601 1,390 ( 450 ) Changes in operating assets and liabilities Trade accounts receivable ( 76,917 ) ( 105,550 ) ( 62,314 ) Inventories 37,449 ( 135,011 ) ( 112,349 ) Other current assets and non-current assets ( 13,568 ) ( 6,430 ) ( 10,871 ) Trade accounts payable ( 58,596 ) 93,499 96,312 Income tax payable 2,977 ( 761 ) 1,353 Severance liabilities 3,753 1,033 3,181 Other current liabilities and non-current liabilities 844 8,064 1,263 Net cash provided by operating activities 213,310 124,246 122,157 Cash flows from investing activities Purchase of short-term investments ( 217,005 ) ( 198,318 ) ( 244,330 ) Proceeds from sales of short-term investments 30,179 19,463 79,439 Proceeds from maturities of short-term investments 150,252 133,632 179,532 Funds repayment from (provided to) customer to support transfer of manufacturing operations — — 24,310 Purchase of property, plant and equipment ( 61,360 ) ( 89,588 ) ( 46,060 ) Purchase of intangibles ( 911 ) ( 995 ) ( 1,915 ) Proceeds from disposal of property, plant and equipment 128 263 90 Net cash used in investing activities ( 98,717 ) ( 135,543 ) ( 8,934 ) Cash flows from financing activities Repayment of long-term borrowings ( 15,233 ) ( 12,188 ) ( 12,188 ) Repayment of finance lease liability ( 9 ) ( 7 ) ( 100 ) Repurchase of ordinary shares ( 47,575 ) ( 59,915 ) ( 18,842 ) Withholding tax related to net share settlement of restricted share units ( 18,167 ) ( 20,824 ) ( 11,624 ) Net cash used in financing activities ( 80,984 ) ( 92,934 ) ( 42,754 ) Net increase (decrease) in cash, cash equivalents and restricted cash $ 33,609 $ ( 104,231 ) $ 70,469 Movement in cash, cash equivalents and restricted cash 55 Table of Contents FABRINET CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended (in thousands of U. S. dollars) June 30, 2023 June 24, 2022 June 25, 2021 Cash, cash equivalents and restricted cash at the beginning of period $ 198,365 $ 303,123 $ 232,832 Increase (decrease) in cash, cash equivalents and restricted cash 33,609 ( 104,231 ) 70,469 Effect of exchange rate on cash, cash equivalents and restricted cash ( 606 ) ( 527 ) ( 178 ) Cash, cash equivalents and restricted cash at the end of period $ 231,368 $ 198,365 $ 303,123 Supplemental disclosures Cash paid for Interest $ 2,377 $ 2,244 $ 2,438 Taxes $ 14,158 $ 9,296 $ 7,945 Cash received for interest $ 11,048 $ 1,603 $ 4,445 Non-cash investing and financing activities Construction, software and equipment related payables $ 13,526 $ 9,085 $ 19,206 The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sums to the total of the same amounts shown in the consolidated statements of cash flows: As of (in thousands of U. S. dollars) June 30, 2023 June 24, 2022 June 25, 2021 Cash and cash equivalents $ 231,368 $ 197,996 $ 302,969 Restricted cash — 369 154 Cash, cash equivalents and restricted cash $ 231,368 $ 198,365 $ 303,123 The accompanying notes are an integral part of these consolidated financial statements. 56 Table of contents FABRINET NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 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 Israel Ltd. (“Fabrinet Israel”). 57 Table of contents 2. Summary of significant accounting policies Principles of consolidation The Company utilizes a 52-53 week fiscal year ending on the last Friday in June. Fiscal years 2023, 2022, and 2021 ended on June 30, 2023, June 24, 2022, and June 25, 2021, respectively, and consisted of 53 weeks, 52 weeks and 52 weeks, respectively. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include Fabrinet and its subsidiaries. All inter-company accounts and transactions have been eliminated. Use of estimates The preparation of the Company’s 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 the Company's estimates or assumptions prove to be different from actual results, adjustments will be made in subsequent periods to reflect more current information. Reclassifications For presentation purposes, certain prior period amounts have been reclassified to conform to the current period presentation. The reclassifications have been made to the consolidated balance sheet as of June 24, 2022 and the consolidated statement of cash flows for the year ended June 24, 2022 and June 25, 2021 as follows: June 24, 2022 (in thousands) As previously reported Reclassification After reclassification Consolidated Balance Sheet Current assets Trade accounts receivable 439,330 13,340 452,670 Contract assets 13,464 ( 13,340 ) 124 Consolidated Statement of Cash Flows Changes in operating assets and liabilities Trade accounts receivable ( 103,970 ) ( 1,580 ) ( 105,550 ) Contract assets ( 1,586 ) 1,580 ( 6 ) Contract assets and contract liabilities are presented in the consolidated balance sheets under other current assets and other payables, respectively. June 25, 2021 (in thousands) As previously reported Reclassification After reclassification Consolidated Statement of Cash Flows Changes in operating assets and liabilities Trade accounts receivable ( 63,810 ) 1,496 ( 62,314 ) Contract assets 1,378 ( 1,496 ) ( 118 ) These reclassifications do not affect the Company’s net income or shareholders’ equity. 58 Table of contents Foreign currency transactions and translation The consolidated financial statements are presented in United States dollars (“$” or “USD”). The functional currency of Fabrinet and most of its subsidiaries is the USD. With respect to subsidiaries that use USD as their functional currency, transactions denominated in a currency other than USD are translated into USD at the rates of exchange in effect at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate prevailing at the consolidated balance sheet dates. Transaction gains and losses are included in foreign exchange gain (loss) in the accompanying consolidated statements of operations and comprehensive income. Fabrinet translates the assets and liabilities of its subsidiaries that do not use USD as their functional currency into USD using exchange rates in effect at the end of each period. Revenue and expenses for such subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation adjustment included in accumulated other comprehensive income (loss) (“AOCI”) in the Company’s consolidated balance sheets. Cash and cash equivalents All highly liquid investments with original maturities of three months or less from the date of purchase are classified as cash equivalents. Cash and cash equivalents consist of cash deposited in checking accounts, time deposits with maturities of less than three months, money market accounts, and short-term investments with maturities of three months or less at the date of purchase. 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 maturities of the Company’s short-term investments generally range from three months to three years. The short-term investments in debt securities are carried at either amortized cost or fair value. Investments in debt securities that the Company has 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. The Company determines 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. Held-to-maturity debt securities require the use of the current expected credit losses (“CECL”) impairment model to assess the expected credit loss. According to the CECL model, the Company requires the immediate recognition of estimated expected credit losses over the life of the financial instrument through the allowance for credit losses account. The allowance for credit losses is a valuation account that is deducted from, or added to, the amortized cost basis of the financial asset to present the net amount expected to be collected on the financial asset. In determining expected credit losses, the Company considers relevant qualitative factors including, but not limited to, term and structure of the instrument, credit rating by rating agencies and historic credit losses adjusted for current conditions and reasonable and supportable forecasts. Available-for-sale 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 when (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 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 consolidated statements of operations and comprehensive income. If an impairment is considered 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 consolidated statements of operations and comprehensive income, and any remaining unrealized losses are included in AOCI in the consolidated balance sheets. 59 Table of contents Trade accounts receivable Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. The Company estimates 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 consolidated statements of operations and comprehensive income. Contract assets A contract asset is recognized when the Company has recognized revenues prior to generating an invoice for payment. Contract assets are recognized in the consolidated balance sheets under other current assets and transferred to accounts receivable when rights to payment become unconditional. The Company estimates 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 the Company's consolidated statements of operations and comprehensive income. Contract liabilities 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. Inventory Inventory is stated at the lower of cost or market value. Cost is estimated using the standard costing method, computed on a first-in, first-out basis, with adjustments for variances to reflect actual costs not in excess of net realizable market value. Market value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. The Company assesses the valuation of inventory on a quarterly basis and writes down the value for estimated excess and obsolete inventory based upon estimates of future demand. Leases Operating leases The Company determines if an arrangement contains a lease at inception. The Company applies the guidance in ASC 842 to determine whether a contract is, or contains, a lease. A contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Operating leases are included in operating lease right of use (“ROU”) assets and operating lease liabilities within the Company’s consolidated balance sheets. The Company rents certain real estate under agreements that are classified as operating leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives and initial direct costs incurred. Variable lease payments are expensed as incurred and are not included within the ROU asset and lease liability calculation. Variable lease payments primarily include reimbursements of costs incurred by lessors for common area maintenance and utilities. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company does not account for lease components (e.g., fixed payments including rent) separately from the non-lease components (e.g., common-area maintenance costs). Finance leases Finance leases are accounted for in a manner similar to financed purchases. The right-of-use asset is amortized to amortization expense. Interest expense is recorded in connection with the lease liability. 60 Table of contents Property, plant and equipment Land is stated at historical cost. Other property, plant and equipment, except for construction in process and machinery under installation, are stated at historical cost less accumulated depreciation. Repair and maintenance costs are expensed as incurred. Depreciation is calculated using the straight-line method to write-off the cost of each asset to its residual value over its estimated useful life as follows: Land improvements 10 years Building and building improvements 5 - 30 years Leasehold improvements Shorter of useful life or lease term Manufacturing equipment 3 - 7 years Office equipment 3 - 5 years Motor vehicles 3 - 5 years Computer hardware 3 - 5 years Construction in process and machinery under installation is stated at historic cost and depreciation begins after it is constructed and fully installed and is ready for its intended use in the operations of the Company. Gains and losses on disposal are determined by comparing proceeds with carrying amounts and are included in other income in the consolidated statements of operations and comprehensive income. The Company reviews long-lived assets or asset groups for recoverability on a quarterly basis for any events or changes in circumstances that indicate that their carrying amount may not be recoverable. Recoverability of long-lived assets or asset groups is measured by comparing their carrying amount to the projected undiscounted cash flows that the long-lived assets or asset groups are expected to generate. If such assets are considered to be impaired, the impairment loss recognized, if any, is the amount by which the carrying amount of the long-lived assets exceeds its fair value. Intangibles Intangibles are stated at historical cost less amortization. Amortization of customer relationships is calculated using the accelerated method as to reflect the pattern in which the economic benefits of the intangible assets are consumed. Amortization of other intangibles is calculated using the straight-line method. Intangible assets are reviewed for impairment quarterly or more frequently whenever changes or circumstances indicate the carrying amount of related assets may not be recoverable. Goodwill Goodwill arising from acquisition is primarily attributable to the ability to expand future products and services and the assembled workforce. Goodwill is reviewed annually for impairment or more frequently whenever circumstances indicate that the carrying amount of a reporting unit may exceed its fair value. The impairment charge is based on that difference and is limited to the amount of goodwill allocated to that unit. The Company conducts impairment testing for goodwill at the reporting unit level. Reporting units may be operating segments as a whole, or an operation one level below an operating segment, referred to as a component. The Company has determined that its reporting unit is Fabrinet UK. The Company may initiate goodwill impairment testing by considering qualitative factors to determine whether it is more likely than not that a reportable segment’s carrying value is greater than its fair value. If the Company’s qualitative assessment indicates it is more likely than not that the fair value of a reporting unit exceeds its carrying value, no further analysis is required and goodwill is not impaired. Otherwise, the Company performs a quantitative goodwill impairment test to determine if goodwill is impaired. The quantitative test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of the reportable segment exceeds the carrying value of the net assets associated with the segment, goodwill is not considered impaired. If the carrying value of the net assets associated with the reportable segment exceeds the fair value of the segment, the Company recognizes an impairment loss in an amount equal to the excess, not to exceed the carrying value of the reportable segment’s goodwill. The reporting unit’s carrying value used in an impairment test represents the assignment of various assets and liabilities, excluding certain corporate assets and liabilities, such as cash, investments, and debt. Goodwill is not deductible for tax purposes. Accordingly, if goodwill is impaired for financial reporting purposes, there is no impact on deferred taxes. 61 Table of contents Treasury shares Treasury share purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury shares. Gains and losses in excess of par value on the subsequent reissuance of shares are credited or charged to additional paid-in capital in the consolidated balance sheets using the average-cost method. Borrowing costs Borrowing costs are accounted for on an accrual basis and are charged to the consolidated statements of operations and comprehensive income in the year incurred, except for interest costs on general and specific borrowings attributable to finance certain qualifying assets. Such costs to finance qualifying assets are capitalized during the period of time that is required to complete and prepare the assets for their intended use, as part of the cost of the assets. All other borrowing costs are expensed as incurred. Where funds are not borrowed for a specific acquisition, construction or production of assets, the capitalization rate used to determine the amount of interest to be capitalized is the weighted average interest rate applicable to the Company’s outstanding borrowings during the year. Where funds are borrowed specifically for the acquisition, construction or production of assets, the amount of borrowing costs eligible for capitalization on the respective assets is determined as the actual borrowing costs are incurred on that borrowing during the respective periods. 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 for similar assets and liabilities in active markets other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. Level 3 inputs that are significant to the fair value measurement and unobservable (i.e. supported by little or no market activity), 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. The carrying amounts of certain financial instruments, which include cash and cash equivalents, trade accounts receivable, contract assets, trade accounts payable, and contract liabilities, approximate their fair values due to their short maturities. The carrying amounts of borrowings approximate their fair values as the applicable interest rate is based on market interest rates. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item. Derivatives The derivative assets and liabilities are measured at fair value and recognized on the consolidated balance sheets by offsetting the fair value amounts under master netting arrangements. For presentation in consolidated balance sheets, the Company may choose not to separate a derivative into its current and non-current portion as follows: • A derivative for which the fair value is a net liability is classified in total as current. • A derivative for which the fair value is a net asset and the current portion is an asset is classified in total as non-current. If the current portion is liability, it should be presented as current liability. For presentation in consolidated statements of cash flows are classified in the same line item as the underlying item. The Company applies hedge accounting to arrangements that qualify and are designated for cash flow or fair value hedge accounting treatment. Hedge accounting is discontinued prospectively if the hedging relationship ceases to be effective or the hedging or hedged items cease to exist as a result of maturity, sale, termination or cancellation. Derivatives designated and qualifying as hedges of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges which include foreign currency forward contracts and interest rate swap. In a cash flow hedging relationship, the change in the fair value of the hedging derivative is initially 62 Table of contents recorded in AOCI in the consolidated balance sheets, gain or loss on the derivative instrument is 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. In accordance with the fair value measurement guidance, the Company’s accounting policy is to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. The Company executes derivative instruments with financial institutions that are credit-worthy, which the Company defines as institutions that hold an investment grade credit rating. 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. Revenue recognition The Company derives revenues primarily from the assembly of products under supply agreements with its customers and the fabrication of customized optics and glass. The Company recognizes revenue relating to contracts with customers that depicts the transfer of promised goods or services to customers in an amount reflecting the consideration to which the Company expects to be entitled in exchange for such goods or services. In order to meet this requirement, the Company applies the following five steps: (1) identify the contract with a customer, (2) identify the performance obligations under the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations under the contract, and (5) recognize revenue when a performance obligation is satisfied. Revenue is recognized net of any taxes collected from customers, which is subsequently remitted to governmental authorities. A performance obligation is a contractual promise to transfer a distinct good or service to the customer. In contracts with multiple performance obligations, the Company identifies each performance obligation and evaluates whether the performance obligation is distinct within the context of the contract at contract inception. The majority of the Company’s 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 The Company manufactures 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, the Company 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 the Company to store finished products at the Company’s warehouse where customers bear risks of loss themselves. In these instances, the Company receives a written request from the customer asking the Company to hold the inventory at the Company’s 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 the Company’s warehouse. Customers generally are obligated to purchase finished goods that the Company has 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 the 63 Table of contents Company’s contracts. Once materials are designated as either excess or obsolete inventory, customers are typically required to purchase such inventory from the Company 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 the Company expects to be entitled, the Company evaluates whether the price is subject to refund or adjustment. The Company generally does not grant return privileges, except for in the case of defective products during the warranty period. The Company generally provides a warranty of between one to five years on any given product. These standard warranties are assurance-type warranties, and the Company does not offer any services in addition to the assurance that the product will continue to work as specified. The Company recognized revenue net of rebates and other similar allowances. Revenues are recognized only if these estimates can be reasonably and reliably determined. The Company estimates 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. The Company considers 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. Services The Company provides services for customers that are related to the Company’s manufacturing activities. In many cases, although the nature of work performed is that of a service, revenue is only recognized 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. Service revenues of $ 116.2 million, $ 140.4 million and $ 108.5 million were recognized in the consolidated statements of operations and comprehensive income for the years ended June 30, 2023, June 24, 2022 and June 25, 2021, respectively. Contract Costs The incremental costs of obtaining a contract with a customer are recognized as an asset (not expensed as incurred) if such costs are expected to be recovered. Incremental costs of obtaining a contract are costs that the Company would not have incurred if the contract had not been obtained (e.g., sales commissions or similar incentive payments linked directly to new or modified customer contracts). Costs that would have been incurred regardless of whether a customer contract was obtained (e.g., costs of pursuing the contract, legal advice, etc.) are expensed as incurred, unless such costs are explicitly chargeable to the customer. During the years ended June 30, 2023, June 24, 2022 and June 25, 2021, the Company did not have any incremental costs of obtaining a contract. Shipping and Handling Shipping costs billed to customers are recorded as revenue. Shipping and handling expense related to costs incurred to deliver product are recognized within cost of goods sold. The Company accounts for shipping and handling activities that occur after control has transferred as a fulfillment cost, as opposed to a separate performance obligation, and the costs of shipping and handling are recognized concurrently with the related revenue. Warranty provision Provisions for estimated expenses relating to product warranties are made at the time the products are sold using historical experience. Generally, this warranty is limited to workmanship and the Company’s liability is capped at the price of the product. The provisions will be adjusted when experience indicates an expected settlement will differ from initial estimates. Warranty cost allowances were recognized in the consolidated statements of operations and comprehensive income for the years ended June 30, 2023, June 24, 2022 and June 25, 2021 with de minimis amount. Share-based compensation Share-based compensation is recognized in the consolidated financial statements based on grant-date fair value. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service period. For restricted share units and performance share units, the fair values are based on the market value of our ordinary shares on the date of grant. 64 Table of contents Employee contribution plan The Company operates a defined contribution plan, known as a provident fund, in its subsidiaries in Thailand and the United Kingdom. The assets of these plans are in separate trustee-administered funds. The provident fund is funded by matching payments from employees and by the subsidiaries on a monthly basis. Current contributions to the provident fund are accrued and paid to the fund manager on a monthly basis. The Company sponsors the Fabrinet U.S. 401(k) Retirement Plan, a Defined Contribution Plan under ERISA, at its subsidiaries in the United States, which provides retirement benefits for its eligible employees through tax deferred salary deductions. Severance liabilities Under labor protection laws applicable in Thailand and the Company’s subsidiary in Thailand’s employment policy, all employees of such subsidiary with more than 120 days of service are entitled to severance pay on forced termination or retrenchment or in the event that the employee reaches the retirement age of 55. The entitlement to severance pay is determined according to an employee’s individual employment tenure with the Company and is subject to a maximum benefit of 400 days of salary unless otherwise agreed upon in an employee’s employment contract. For employees of other subsidiaries who have a specific termination date, the entitlement to severance pay is determined according to their employment tenure, until their designated termination date. The Company accounts for these severance liabilities based on an actuarial valuation using the Projected Unit Credit Method, which apply the long-term Thai government bond yield as a discount rate. There are no separate plan assets held in respect to these liabilities. The Company’s subsidiary in the U.K. operates a defined benefit pension plan that defines the pension benefit an employee will receive on retirement, usually dependent upon several factors including but not limited to age, length of service and remuneration. The defined benefit obligation is calculated using the projected unit credit method. Annually the Company engages independent actuaries to calculate the obligation. The present value is determined by discounting the estimated future payments using market yields on high quality corporate bonds that are denominated in sterling and that have terms approximating the estimated period of the future payments (discount rate). The plan assets are held separately from those of the Company in independently administered funds and are measured at fair value. Severance liabilities are recognized in the Company’s consolidated balance sheet under non-current liabilities. The related expenses, if incurred during the period, are recognized in the Company’s consolidated statements of operations and comprehensive income as selling, general and administrative expenses. Prior service cost is initially recognized to other comprehensive income (loss) at the date of plan amendment. Such prior service cost is amortized as expenses as a component of net periodic pension cost using the weighted average remaining years of service to full eligibility date for active employees. Annual leave Employee entitlements to annual leave are recognized when earned by the employee. On termination of employment, accrued employee entitlement to annual leave is paid in cash. Income taxes The Company uses the asset and liability method of accounting for income taxes, whereby deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Fabrinet’s subsidiaries are subject to income tax audits by the respective tax authorities in all of the jurisdictions in which they operate. The determination of tax liabilities in each of these jurisdictions requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. The Company recognizes liabilities based on its estimate of whether, and the extent to which, additional tax liabilities are more-likely-than-not. If the Company ultimately determines that the payment of such a liability is not probable, then it reverses the liability and recognizes a tax benefit during the period in which the determination is made that the liability is no longer probable. The recognition and measurement of current taxes payable or refundable and deferred tax assets and liabilities requires that the Company makes certain estimates and judgments. Changes to these estimates or a change in judgment may have a material impact on the Company’s tax provision in a future period. 65 Table of contents The authoritative guidance provides for recognition of deferred tax assets if the realization of such deferred tax assets is more likely than not to occur based on an evaluation of both positive and negative evidence and the relative weight of the evidence. A company shall reduce its deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is “more likely than not” (i.e., a likelihood of greater than 50 percent) that some portion or all of the deferred tax assets will not be realized. The valuation allowance shall be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. The valuation allowance shall be monitored and considered from all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is not needed. The accounting standard clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. The Company recognizes a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is that the position is “more likely than not” to be sustained upon examination by the tax jurisdiction based solely on the technical merits of the position. The term “tax position” refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. The accounting interpretation also provides guidance on measurement methodology, derecognition thresholds, financial statement classification and disclosures, recognition of interest and penalties, and accounting for the cumulative-effect adjustment at the date of adoption. New Accounting Pronouncements—adopted by the Company In November 2021, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2021-10, “Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance,” which requires annual disclosures that increase the transparency of transactions involving government assistance, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity’s financial statements. The amendments in this update are effective for all entities within the ASU's scope for financial statements issued for annual periods beginning after December 15, 2021. The Company adopted this standard in the first quarter of fiscal year 2023 with no material impact on its consolidated financial statements. 66 Table of contents 3. Revenues from contracts with customers Contract Assets and Liabilities A contract asset is recognized when the Company has recognized revenues prior to an invoice for payment. Contract assets are recognized in the consolidated balance sheets under other current assets and transferred to accounts receivable when rights to payment become unconditional. No impairment for contract assets was recorded for the years ended June 30, 2023 and June 24, 2022. As of June 30, 2023 and June 24, 2022, the contract assets are de minimis . A contract liability is recognized when the Company has advance payment arrangements with customers. Contract liabilities are recognized in the consolidated balance sheets under other payables. The contract liabilities balance is normally recognized as revenue within six months. The following tables summarize the activity in the Company’s contract liabilities during the years ended June 30, 2023 and June 24, 2022: (in thousands) Contract Liabilities Balance as of June 25, 2021 $ 1,680 Advance payment received during the year 5,927 Revenue recognized ( 5,625 ) Balance as of June 24, 2022 1,982 Advance payment received during the year 14,124 Revenue recognized ( 13,070 ) Balance as of June 30, 2023 $ 3,036 Revenue by Geographic Area and End Market Total revenues are attributed to a particular geographic area based on the bill-to-location of the Company’s customers. The Company operates primarily in three geographic regions: North America; Asia-Pacific and others; and Europe. The following table presents total revenues by geographic regions: (in thousands, except percentages) Year ended June 30, 2023 As a % of Total Revenues Year ended June 24, 2022 As a % of Total Revenues Year ended June 25, 2021 As a % of Total Revenues North America $ 1,269,965 48.0 % $ 1,114,504 49.3 % $ 887,536 47.2 % Asia-Pacific 1,143,510 43.2 838,051 37.0 668,597 35.6 Europe 231,762 8.8 309,669 13.7 323,217 17.2 $ 2,645,237 100.0 % $ 2,262,224 100.0 % $ 1,879,350 100.0 % 67 Table of contents Years Ended (in thousands, except percentages) June 30, 2023 June 24, 2022 June 25, 2021 North America U.S. 1,247,422 1,099,244 884,862 Others (1) 22,543 15,260 2,674 Total revenue in North America 1,269,965 1,114,504 887,536 Asia-Pacific and others Israel 341,025 101,058 107,584 India 325,478 278,117 152,249 Malaysia 162,599 212,286 157,213 Hong Kong 132,136 83,651 87,235 China 73,094 55,201 51,597 Thailand 58,850 36,489 27,081 Japan 41,105 60,121 69,779 Others 9,223 11,128 15,859 Total revenue in Asia-Pacific and others 1,143,510 838,051 668,597 Europe U.K. 125,082 90,921 60,516 Germany 54,732 40,794 28,163 Ireland 647 133,225 193,103 Others 51,301 44,729 41,435 Total revenue in Europe $ 231,762 $ 309,669 $ 323,217 Total revenue $ 2,645,237 $ 2,262,224 $ 1,879,350 (1) Others includes revenues from external customers based in our country of domicile, the Cayman Islands, which for each year presented is $ 0 . The following table presents revenues by end market. (in thousands, except percentages) Year ended June 30, 2023 As a % of Total Revenues Year ended June 24, 2022 As a % of Total Revenues Year ended June 25, 2021 As a % of Total Revenues Optical communications $ 2,008,347 75.9 % $ 1,782,799 78.8 % $ 1,441,338 76.7 % Lasers, sensors and other 636,890 24.1 479,425 21.2 438,012 23.3 Total $ 2,645,237 100.0 % $ 2,262,224 100.0 % $ 1,879,350 100.0 % 4 . Income taxes Fabrinet ’s effective tax rate is a function of the mix of tax rates in the various jurisdictions in which we conduct business. Fabrinet is domiciled in the Cayman Islands. Under the current laws of the Cayman Islands, Fabrinet is not subject to tax in the Cayman Islands on income or capital gains until March 6, 2039. Income of the Company exempted from corporate income tax in the Cayman Islands amounted to $ 196.5 million, $ 171.0 million and $ 115.8 million for the years ended June 30, 2023, June 24, 2022 and June 25, 2021, respectively. The majority of the Company’s operations and production take place in Thailand. The Company was not subject to tax in Thailand from July 2012 through June 2020 on income generated from the manufacture of products at its Pinehurst campus Building 6, and is not subject to tax in Thailand from July 2018 through June 2026 on income generated from the manufacture of products at its Chonburi campus. After June 2020, 50 % of the Company's income generated from products manufactured at its Pinehurst campus Building 6 will be exempted from tax in Thailand through June 2025. New preferential tax treatment is available to the Company for products manufactured at its Chonburi campus Building 9, where income generated will be tax exempt through 2031, capped at the Company’s actual investment amount. Such preferential tax treatment is contingent on various factors, including the export of our customers’ products out of Thailand and our agreement not to move our manufacturing facilities out of our current province in Thailand for at least 68 Table of contents 15 years from the date on which preferential tax treatment was granted. Currently, the corporate income tax rate for our Thai subsidiary is 20 %. The corporate income tax rates for our subsidiaries in the PRC, the U.S., the U.K. and Israel are 25 %, 21 %, 25 % and 23 %, respectively. Our provision for income taxes is computed using the asset and liability method, under which deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at currently enacted statutory tax rates for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment. The Company’s income tax expense consisted of the following: Years Ended (in thousands) June 30, 2023 June 24, 2022 June 25, 2021 Current $ 15,044 $ 6,744 $ 6,355 Deferred ( 2,861 ) ( 158 ) ( 4,212 ) Total income tax expense $ 12,183 $ 6,586 $ 2,143 The reconciliation between the Company’s taxes that would arise by applying the statutory tax rate of the country of the Company’s principal operations, Thailand, to the Company’s effective tax charge is shown below: Years Ended (in thousands) June 30, 2023 June 24, 2022 June 25, 2021 Income before income taxes (1) $ 260,096 $ 206,966 $ 150,484 Tax expense calculated at a statutory corporate income tax rate of 20% 52,019 41,393 30,097 Effect of income taxes from locations with tax rates different from Thailand 659 681 198 Income not subject to tax (2) ( 43,679 ) ( 35,982 ) ( 24,853 ) Income tax on unremitted earnings 2,452 1,417 1,395 Foreign operations 2,003 ( 1,165 ) ( 2,855 ) Tax rebate from research and development application ( 124 ) ( 873 ) ( 728 ) Provision for uncertain income tax position ( 7 ) 668 ( 403 ) Utilization of loss and tax credits carryforward ( 80 ) ( 194 ) ( 610 ) Changes in valuation allowance (3) ( 1,608 ) — ( 2,146 ) Others 548 641 2,048 Corporate income tax expense $ 12,183 $ 6,586 $ 2,143 (1) Income before income taxes was mostly generated from domestic income in the Cayman Islands. (2) Income not subject to tax relates to income earned in the Cayman and Mauritius Islands and income subject to an investment promotion privilege for Pinehurst Building 6 and the Company’s Chonburi campus. Income not subject to tax per ordinary share on a diluted basis was $ 1.19 , $ 0.96 , and $ 0.63 for the years ended June 30, 2023, June 24, 2022, and June 25, 2021, respectively. (3) Changes in valuation allowances were due to adjustments based on management's assessment on the realizability of the related deferred tax assets. 69 Table of contents The Company’s deferred tax assets and deferred tax liabilities, net of valuation allowance, at each balance sheet date are as follows: As of (in thousands) June 30, 2023 June 24, 2022 Deferred tax assets: Depreciation $ 1,999 $ 1,579 Severance liability 4,058 3,345 Reserves and allowance 1,712 1,711 Net operating loss carryforwards 7,142 7,025 Others 1,008 1,074 Total 15,919 14,734 Less: Valuation allowance ( 3,824 ) ( 4,934 ) Net deferred tax assets $ 12,095 $ 9,800 Deferred tax liabilities: Temporary differences from intangibles and changes in the fair value of assets acquired $ ( 1,711 ) $ ( 1,816 ) Deferred tax from unremitted earnings ( 4,819 ) ( 5,550 ) Others 1,731 1,365 Total ( 4,799 ) ( 6,001 ) Net $ 7,296 $ 3,799 The changes in the valuation allowances of deferred tax assets were as follows: (in thousands) Valuation allowances of deferred tax assets Balance as of June 26, 2020 $ 3,728 Additional 479 Reduction ( 2,146 ) Balance as of June 25, 2021 2,061 Additional 2,873 Balance as of June 24, 2022 4,934 Additional 498 Reduction ( 1,608 ) Balance as of June 30, 2023 $ 3,824 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; 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 the end of fiscal year 2020. During fiscal year 2021, our subsidiaries in the U.S. generated taxable income sufficient for the utilization of loss carryforwards due to better operating performance and effective control of operating expenses. 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 $ 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 30, 2023 and 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 $ 1.6 million for the deferred tax assets was set up as of the end of fiscal year 2020. A full valuation allowance of $ 4.9 million and $ 2.1 million were set up for the fiscal year ended June 24, 2022 and June 25, 2021, respectively. 70 Table of contents During fiscal year 2023, our subsidiary in the U.K. generated taxable income and was able to utilize loss carryforwards. 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 $ 1.6 million for the deferred tax assets was released as of June 30, 2023. Income tax liabilities have not been established for withholding tax and other taxes that would be payable on the unremitted earnings in Thailand, which are permanently reinvested. Unremitted earnings in Thailand totaled $ 135.1 million and $ 135.5 million as of June 30, 2023 and June 24, 2022, respectively. Unrecognized deferred tax liabilities for such unremitted earnings were $ 12.3 million and $ 11.3 million as of June 30, 2023 and June 24, 2022, respectively. Deferred tax liabilities of $ 1.9 million and $ 1.4 million have been established for withholding tax on the unremitted earnings in China for the years ended June 30, 2023 and June 24, 2022, respectively, which are included in non-current deferred tax liability in the consolidated balance sheets. Uncertain income tax positions Interest and penalties related to uncertain income tax positions are recognized in income tax expense. The Company had approximately $ 0.1 million of accrued interest and penalties related to uncertain income tax positions on the consolidated balance sheets as of June 30, 2023. The Company recorded interest and penalties of $ 0.1 million and $ 0.4 million for the years ended June 24, 2022 and June 25, 2021, respectively, in the consolidated statements of operations and comprehensive income. The amount of interest and penalties reversed in fiscal 2023 provision for income taxes is not material. With regard to the Thailand jurisdiction, tax years 2017 through 2021 remain open to examination by the local authorities. The following table indicates the changes to the Company’s uncertain income tax positions for the years ended June 30, 2023, June 24, 2022 and June 25, 2021, excluding interest and penalties, were as follows: Years Ended (in thousands) June 30, 2023 June 24, 2022 June 25, 2021 Beginning balance $ 1,392 $ 807 $ 970 Additions during the year 15 610 389 Release of tax positions of prior years ( 119 ) ( 25 ) ( 552 ) Ending balance $ 1,288 $ 1,392 $ 807 71 Table of contents 5. 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 year using the treasury stock method. Dilutive ordinary equivalent shares consist of share options, restricted share units and performance share units. Earnings per ordinary share was calculated as follows: Years Ended (in thousands, except per share data) June 30, 2023 June 24, 2022 June 25, 2021 Net income attributable to shareholders $ 247,913 $ 200,380 $ 148,341 Weighted-average number of ordinary shares outstanding (thousands of shares) 36,515 36,876 36,872 Incremental shares arising from the assumed exercise of share options and vesting of restricted share units and performance share units (thousands of shares) 340 518 683 Weighted-average number of ordinary shares for diluted earnings per ordinary share (thousands of shares) 36,855 37,394 37,555 Basic earnings per ordinary share $ 6.79 $ 5.43 $ 4.02 Diluted earnings per ordinary share $ 6.73 $ 5.36 $ 3.95 Outstanding performance share units excluded from the computation of diluted earnings per ordinary share (thousands of shares) (1) — — 53 (1) These performance share units were not 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. 6. Cash, cash equivalents and short-term investments The Company’s cash, cash equivalents, and short-term investments by category is as follows: Fair Value (in thousands) Carrying Cost Unrealized Gain/ (Loss) Cash and Cash Equivalents Marketable Securities Other Investments As of June 30, 2023 Cash $ 230,967 $ — $ 230,967 $ — $ — Cash equivalents 401 — 401 — — Liquidity funds 41,104 — — — 41,104 Certificates of deposit and time deposits 64,278 329 — 64,607 — Corporate debt securities 161,453 ( 3,375 ) — 158,078 — U.S. agency and U.S. Treasury securities 55,542 ( 231 ) — 55,311 — Total $ 553,745 $ ( 3,277 ) $ 231,368 $ 277,996 $ 41,104 As of June 24, 2022 Cash $ 187,630 $ — $ 187,630 $ — $ — Cash equivalents 10,367 ( 1 ) 10,366 — — Liquidity funds 31,477 — — — 31,477 Corporate debt securities 234,689 ( 5,671 ) — 229,018 — U.S. agency and U.S. Treasury securities 20,007 ( 345 ) — 19,662 — Total $ 484,170 $ ( 6,017 ) $ 197,996 $ 248,680 $ 31,477 72 Table of contents The cash equivalents include short-term bank deposits, investments in money market funds, and marketable securities with maturities of three months or less at the date of purchase. The effective interest rate on short term bank deposits was 2.4 % and 0.5 % per annum for the years ended June 30, 2023 and June 24, 2022, respectively. As of June 30, 2023, the Company had investments in certificates of deposit of $ 44.6 million and term deposit of $ 20.0 million which classified as available-for-sale debt securities. As of June 24, 2022, the Company had no investments in certificates of deposit. As of June 30, 2023 and June 24, 2022, 69 % and 59 %, respectively, of our cash and cash equivalents were held by the Parent Company. 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 June 30, 2023 and June 24, 2022: June 30, 2023 June 24, 2022 (in thousands) Carrying Cost Fair Value Carrying Cost Fair Value Due within one year $ 172,992 $ 173,137 $ 101,976 $ 101,400 Due between one to five years 149,385 145,963 184,197 178,757 Total $ 322,377 $ 319,100 $ 286,173 $ 280,157 During the year ended June 30, 2023, the Company recognized a realized loss of $ 0.1 million from sales of available-for-sale debt securities in interest income in the consolidated statements of operations and comprehensive income. During the year ended June 24, 2022, the Company recognized a realized loss of a de minimis amount from sales of available-for-sale debt securities in interest income in the consolidated statements of operations and comprehensive income. As of June 30, 2023 and June 24, 2022, the Company considered the decline in market value of its available-for-sale debt securities by using the AFS debt security impairment model. The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments generally to be investment grade, with the primary objective of minimizing the potential risk of principal loss. Fair values were determined for each individual security in the investment portfolio. The Company assessed impairment at the individual security level according to the relevant accounting standard by comparing its fair value/market value with its amortized cost. The Company considered factors such as the failure of the issuer of the security to make scheduled interest and principal payments and any changes to the credit rating of the security by a rating agency. The credit rating of the Company's invested securities are still in compliance with the Company's investment policy. No impairment losses on available-for-sale debt securities were recorded for the year ended June 30, 2023 and June 24, 2022. 7. 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. 73 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 (in thousands) Level 1 Level 2 Level 3 Total As of June 30, 2023 Assets Cash equivalents $ — $ 401 $ — $ 401 Liquidity funds — 41,104 — 41,104 Certificates of deposit and time deposits — 64,607 — 64,607 Corporate debt securities — 158,078 — 158,078 U.S. agency and U.S. Treasury securities — 55,311 — 55,311 Derivative assets - current portion — 221 (1) — 221 Total $ — $ 319,722 $ — $ 319,722 Liabilities Derivative liabilities - current portion $ — $ ( 5,236 ) $ — $ ( 5,236 ) Total $ — $ ( 5,236 ) (2) $ — $ ( 5,236 ) Fair Value Measurements at Reporting Date Using (in thousands) Level 1 Level 2 Level 3 Total As of June 24, 2022 Assets Cash equivalents $ — $ 10,366 $ — $ 10,366 Liquidity funds — 31,477 — 31,477 Corporate debt securities — 229,018 — 229,018 U.S. agency and U.S. Treasury securities — 19,662 — 19,662 Derivative assets - current portion — 110 (3) — 110 Total $ — $ 290,633 $ — $ 290,633 Liabilities Derivative liabilities - current portion $ — $ ( 7,345 ) $ — $ ( 7,345 ) Derivative liabilities - non-current portion — ( 234 ) — ( 234 ) Total $ — $ ( 7,579 ) (4) $ — $ ( 7,579 ) (1) Foreign currency forward contracts with an aggregate notional amount of $ 3.0 million and 0.2 million Canadian dollars and interest rate swap agreement with notional amount of $ 60.9 million. (2) Foreign currency forward contracts with an aggregate notional amount of $ 140.0 million. (3) Interest rate swap agreement with a notional amount of $ 64.2 million. (4) Foreign currency forward contracts with an aggregate notional amount of $ 135.0 million and 0.5 million Canadian dollars and an interest rate swap agreement with a notional amount of $ 60.9 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. 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 74 Table of contents 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 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 consolidated statements of operations and comprehensive income. As of June 30, 2023, the Company had 143 outstanding U.S. dollar foreign currency forward contracts against Thai baht with an aggregate notional amount of $ 143.0 million and with maturity dates ranging from July 2023 through January 2024, and one foreign currency contract with a notional amount of 0.2 million Canadian dollars and with a maturity date in September 2023. As of June 24, 2022, the Company had 135 outstanding U.S. dollar foreign currency forward contracts against Thai baht with an aggregate notional amount of $ 135.0 million and with maturity dates ranging from July 2022 through January 2023, and one foreign currency contract with a notional amount of 0.5 million Canadian dollars and with a maturity date in September 2022. As of June 30, 2023, the hedging relationship over foreign currency forward contracts which were designated for hedge accounting had been tested to be highly effective based on the performance of retrospective and prospective regression testing. As of June 30, 2023, the amount in AOCI that is expected to be reclassified into earnings within 12 months as loss was $ 4.0 million. During the year ended June 30, 2023 and June 24, 2022, the Company included an unrealized gain of $ 0.4 million and unrealized loss of $ 0.8 million, respectively, from changes in fair value of foreign currency forward and option contracts which were not designated for hedge accounting in earnings as foreign exchange gain (loss), net in the consolidated statements of operations and comprehensive income. 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 June 30, 2023 and June 24, 2022, the Company had one and two outstanding interest rate swap agreements with an aggregate notional amount of $ 60.9 million, and $ 125.1 million, respectively. On July 25, 2018, Fabrinet Thailand entered into an interest rate swap agreement to effectively convert the floating interest rate of the term loan under the Company's previous syndicated senior 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 13). The Company did not designate this interest rate swap for hedge accounting. On September 3, 2019, Fabrinet Thailand entered into a term loan agreement under a credit facility agreement with Bank of Ayudhya Public Company Limited, and on September 10, 2019, the Company repaid in full the outstanding term loan under the Company's previous syndicated senior credit facility agreement (see Note 13) 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 converts the floating interest rate of the Company’s term loan with Bank of Ayudhya Public Company Limited 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 Bank of Ayudhya Public Company Limited. The combination of these 75 Table of contents 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 the Company intends 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 earnings. From September 27, 2019, any gains or losses related to these interest rate swaps will be recorded in AOCI in the consolidated balance sheets. The Company will reclassify a portion of the gains or losses from AOCI into earnings at each reporting period based on either the accrued interest amount or the interest payment. As of June 30, 2023, the amount in AOCI that is expected to be reclassified into earnings within 12 months as gain is $ 0.4 million. 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 consolidated statements of operations and other comprehensive income: Year Ended (in thousands) Financial statements line item June 30, 2023 June 24, 2022 Derivatives gain (loss) recognized in other comprehensive income (loss): Foreign currency forward contracts Other comprehensive income $ 1,142 $ ( 2,304 ) Interest rate swaps Other comprehensive income 1,302 2,461 Total derivatives loss (gain) recognized in other comprehensive income $ 2,444 $ 157 Derivatives loss (gain) reclassified from accumulated other comprehensive income into earnings: Foreign currency forward contracts Cost of revenues $ 7,995 $ 7,283 Foreign currency forward contracts Selling, general and administrative expenses 334 303 Foreign currency forward contracts Foreign exchange gain (loss), net ( 8,644 ) ( 7,384 ) Interest rate swaps Interest expense ( 588 ) ( 937 ) Total derivatives (gain) loss reclassified from accumulated other comprehensive income into earnings $ ( 903 ) $ ( 735 ) Change in net unrealized gain (loss) on derivative instruments $ 1,541 $ ( 578 ) Fair value of derivatives The following table provides the fair values of the Company’s derivative financial instruments for the periods presented: June 30, 2023 June 24, 2022 (in thousands) Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities Derivatives not designated as hedging instruments Foreign currency forward and option contracts $ 2 $ ( 1,256 ) $ — $ ( 1,561 ) Derivatives designated as hedging instruments Foreign currency forward contracts 4 ( 3,980 ) — ( 4,821 ) Interest rate swaps 215 — 110 ( 1,197 ) Derivatives, gross balances 221 ( 5,236 ) 110 ( 7,579 ) 76 Table of contents The Company presents its derivatives at gross fair values in the consolidated balance sheets. The Company recorded the fair value of derivative financial instruments in the consolidated balance sheets as follows: Derivative Financial Instruments Balance Sheet line item Fair Value of Derivative Assets Other current assets, Other non-current assets Fair Value of Derivative Liabilities Accrued expenses, Other non-current liabilities 8. Trade accounts receivable, net (in thousands) As of June 30, 2023 As of June 24, 2022 Trade accounts receivable $ 532,732 $ 453,941 Less: Allowance for doubtful account ( 965 ) ( 1,271 ) Trade accounts receivable, net $ 531,767 $ 452,670 9. Inventories (in thousands) As of June 30, 2023 As of June 24, 2022 Raw materials $ 157,379 $ 275,730 Work in progress 305,627 217,638 Finished goods 28,608 15,203 Goods in transit 27,962 48,574 Inventories $ 519,576 $ 557,145 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, the PRC, the U.S., the U.K., Israel and Singapore 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 right of use (“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 the form of a lease of office and manufacturing space. As of June 30, 2023, the maturities of the Company’s operating lease liabilities were as follows: (in thousands) 2024 $ 1,217 2025 71 Total undiscounted lease payments 1,288 Less imputed interest ( 21 ) Total present value of lease liabilities $ 1,267 (1) (1) Includes current portion of operating lease liabilities of $ 1.2 million. 77 Table of contents 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 years ended June 30, 2023, June 24, 2022 and June 25, 2021 was $ 2.4 million, $ 2.2 million and $ 2.6 million, respectively. Rental expense for short-term leases for the years ended June 30, 2023, June 24, 2022 and June 25, 2021 was $ 0.8 million, $ 0.2 million and $ 0.3 million, respectively. The following summarizes additional information related to the Company’s operating leases: As of June 30, 2023 Weighted-average remaining lease term (in years) Operating leases 1.2 Weighted-average discount rate Operating leases 3.4 % The following information represents supplemental disclosure for the statement of cash flows related to operating leases: (in thousands) Year Ended June 30, 2023 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 2,477 Financing cash flows from finance leases $ 9 ROU assets obtained in exchange for lease liabilities $ 312 78 Table of contents 11. Property, plant and equipment, net The components of property, plant and equipment, net were as follows: (in thousands) Land and Land Improvements Building and Building Improvements Manufacturing Equipment Office Equipment Motor Vehicles Computers Construction and Machinery Under Installation Total As of June 30, 2023 Cost $ 60,424 $ 200,039 $ 289,390 $ 6,362 $ 1,081 $ 24,951 $ 15,450 $ 597,697 Less: Accumulated depreciation ( 71 ) ( 73,558 ) ( 189,284 ) ( 5,136 ) ( 852 ) ( 17,873 ) — ( 286,774 ) Less: Impairment reserve — — ( 573 ) — — — — ( 573 ) Net book value $ 60,353 $ 126,481 $ 99,533 $ 1,226 $ 229 $ 7,078 $ 15,450 $ 310,350 As of June 24, 2022 Cost $ 58,489 $ 201,403 $ 255,972 $ 6,330 $ 1,053 $ 21,329 $ 7,962 $ 552,538 Less: Accumulated depreciation ( 35 ) ( 65,943 ) ( 171,870 ) ( 5,273 ) ( 830 ) ( 15,737 ) — ( 259,688 ) Less: Impairment reserve — — ( 573 ) — — — — ( 573 ) Net book value $ 58,454 $ 135,460 $ 83,529 $ 1,057 $ 223 $ 5,592 $ 7,962 $ 292,277 Depreciation expense amounted to $ 42.5 million, $ 37.2 million and $ 34.7 million for the years ended June 30, 2023, June 24, 2022 and June 25, 2021, respectively, and has been allocated between cost of revenues and selling, general and administrative expenses in the consolidated statements of operations and comprehensive income. The cost of fully depreciated property, plant and equipment written-off during the years ended June 30, 2023, June 24, 2022 and June 25, 2021 amounted to $ 16.5 million, $ 25.1 million and $ 16.3 million, respectively. During the year ended June 30, 2023, June 24, 2022 and June 25, 2021, the Company recognized impairment reserves for property, plant and equipment of $ 0.6 million, $ 0.6 million and $ 0.8 million, respectively. During the years ended June 30, 2023, and June 25, 2021, the Company had de minimis amount of borrowing costs capitalized. During year ended June 24, 2022, the Company had capitalized $ 0.9 million of borrowing cost. 79 Table of contents 12 . Intangibles The following tables present details of the Company’s intangibles: (in thousands) Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Adjustment Net As of June 30, 2023 Software $ 10,533 $ ( 8,139 ) $ — $ 2,394 Total intangibles (1) $ 10,533 $ ( 8,139 ) $ — $ 2,394 (1) Customer relationships and backlog were written-off in March 2023. (in thousands) Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Adjustment Net As of June 24, 2022 Software $ 10,484 $ ( 7,681 ) $ — $ 2,803 Customer relationships 4,373 ( 3,610 ) ( 58 ) 705 Backlog 119 ( 119 ) — — Total intangibles $ 14,976 $ ( 11,410 ) $ ( 58 ) $ 3,508 The Company recorded amortization expense relating to intangibles of $ 1.3 million, $ 1.6 million and $ 1.5 million for the years ended June 30, 2023, June 24, 2022 and June 25, 2021, respectively. The weighted-average remaining life of customer relationships was: (years) As of June 30, 2023 As of June 24, 2022 Software 3.1 3.8 Customer relationships — 3.1 Total intangibles 3.1 3.8 Based on the carrying amount of intangibles as of June 30, 2023, and assuming no future impairment of the underlying assets, the estimated future amortization during each fiscal year was as follows: (in thousands) 2024 $ 949 2025 675 2026 453 2027 245 2028 72 Total $ 2,394 80 Table of contents 13. Borrowings The Company’s total borrowings, including current and non-current portions of long-term borrowings, consisted of the following: (in thousands of U.S. dollars) Rate Conditions Maturity As of June 30, 2023 As of June 24, 2022 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 12,188 27,421 Less: Current portion ( 12,188 ) ( 12,188 ) Less: Unamortized debt issuance costs—non-current portion — ( 31 ) Long-term borrowings, non-current portion, net $ — $ 15,202 (1) The Company entered into interest rate swaps that effectively fix a series of future interest payments on its term loans. Refer to Note 7. The movements of long-term borrowings were as follows for the years ended June 30, 2023 and June 24, 2022: Years ended (in thousands) June 30, 2023 June 24, 2022 Opening balance $ 27,421 $ 39,609 Repayments during the period ( 15,233 ) ( 12,188 ) Closing balance $ 12,188 $ 27,421 Credit facilities agreements: On August 20, 2019, Fabrinet Thailand (the “Borrower”) and Bank of Ayudhya Public Company Limited (the “Bank”) entered into a credit facility agreement (the “2019 Credit Facility Agreement”), which 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 that 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 2019 Credit Facility Agreement and may increase or decrease any facility amount in its sole discretion. Under the 2019 Credit Facility Agreement, on August 20, 2019, the Borrower and the Bank entered into a term loan agreement (the "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. On March 9, 2023, the Borrower and the Bank amended the Term Loan Agreement to replace the interest rate reference from LIBOR to the Secured Overnight Financing Rate ("SOFR") effective from September 29, 2023. 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 30, 2023, the Company recorded $ 2.1 million of interest expense in connection with this term loan, including the impact from interest rate swaps. 81 Table of contents Any borrowings under the 2019 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, and 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 30, 2023, the Company was in compliance with all of its financial covenants under the Term Loan Agreement. The events of default under the Term Loan Agreement include failure to timely pay amounts due under the Term Loan Agreement or the related finance documents, 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 30, 2023, there was $ 12.2 million outstanding under the term loan. On March 9, 2023, Fabrinet Thailand and the Parent Company (the “Borrowers”) and the Bank entered into a credit facility agreement (the “2023 Credit Facility Agreement”), which provides a facility of $ 55.0 million. Any borrowings under the 2023 Credit Facility Agreement are secured by land and buildings owned by the Borrowers in the Pathumthani and Chonburi Provinces in Thailand. Under the 2023 Credit Facility Agreement, the Borrowers are required to maintain a loan to value of the mortgaged real property ratio of not greater than 60 %. The Borrowers are also required to maintain a debt service coverage ratio of at least 1.25 times and a debt-to-equity ratio of 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 30, 2023, there was no amount outstanding under the 2023 Credit Facility Agreement. 82 Table of contents 14. Severance liabilities The following table provides information regarding severance liabilities: Years Ended (in thousands) June 30, 2023 June 24, 2022 Changes in severance liabilities Balance, beginning of the fiscal year $ 18,588 $ 19,782 Current service cost $ 2,349 $ 2,318 Interest cost 683 518 Benefit paid ( 288 ) ( 322 ) Unrealized loss (gain) on exchange rate ( 58 ) ( 2,133 ) Actuarial (gain) loss on obligation 1,089 ( 1,542 ) Foreign currency translation 7 ( 33 ) Balance, end of the fiscal year $ 22,370 $ 18,588 Changes in plan assets Balance, beginning of the fiscal year $ 338 $ 356 Actual return on plan assets $ — $ ( 13 ) Employer contributions — 38 Foreign currency translation 11 ( 43 ) Balance, end of the fiscal year $ 349 $ 338 Underfunded status $ ( 22,021 ) $ ( 18,250 ) The following table sets forth our severance liabilities as of June 30, 2023: (in thousands) 2024 $ 1,449 2025 2,022 2026 1,389 2027 1,641 2028 2,045 Thereafter 13,824 Total $ 22,370 The amount recognized in the consolidated balance sheets under non-current liabilities and non-current assets were determined as follows: (in thousands) As of June 30, 2023 As of June 24, 2022 Non-current assets $ 138 $ 134 Non-current liabilities $ 22,159 $ 18,384 The following table provides information regarding accumulated benefit obligations: (in thousands) As of June 30, 2023 As of June 24, 2022 Accumulated benefit obligations $ 15,168 $ 13,018 The principal actuarial assumptions used were as follows: Weighted average actuarial assumptions used to determine severance liabilities 83 Table of contents Years Ended June 30, 2023 June 24, 2022 June 25, 2021 Discount rate 3.5 % - 5.3 % 2.1 % - 3.9 % 0.2 % - 2.9 % Future salary increases 3.5 % - 10.0 % 3.5 % - 10.0 % 3.5 % - 10.0 % Weighted average actuarial assumptions used to determine benefit costs Years Ended June 30, 2023 June 24, 2022 June 25, 2021 Discount rate 0.2 % - 2.9 % 0.2 % - 2.9 % 0.4 % - 3.1 % Expected long-term rate of return on assets 2.1 % 2.1 % 2.3 % 15. Share-based compensation Share-based compensation The grant date fair value of restricted share units and performance share units is based on the closing price of our ordinary shares on the date of grant. The effect of recording share-based compensation expense for the years ended June 30, 2023, June 24, 2022 and June 25, 2021 was as follows: Years Ended (in thousands) June 30, 2023 June 24, 2022 June 25, 2021 Share-based compensation expense by type of award: Restricted share units $ 16,979 $ 15,150 $ 16,725 Performance share units 11,148 12,898 8,737 Total share-based compensation expense 28,127 28,048 25,462 Tax effect on share-based compensation expense — — — Net effect on share-based compensation expense $ 28,127 $ 28,048 $ 25,462 Share-based compensation expense was recorded in the consolidated statements of operations and comprehensive income as follows: Years Ended (in thousands) June 30, 2023 June 24, 2022 June 25, 2021 Cost of revenue $ 6,664 $ 5,967 $ 6,185 Selling, general and administrative expense 20,939 22,081 19,277 Restructuring and other related costs 524 — — Total share-based compensation expense $ 28,127 $ 28,048 $ 25,462 The Company did not capitalize any share-based compensation expense as part of any asset costs during the years ended June 30, 2023, June 24, 2022 and June 25, 2021. 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 June 30, 2023, there were 341,706 restricted share units outstanding, 204,016 performance share units outstanding and 1,946,938 ordinary shares available for future grant under the 2020 Plan. 84 Table of contents As of June 30, 2023, there were 27,059 restricted 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 Inducement 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 June 30, 2023, there were no awards 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.” The following table summarizes the number of equity awards outstanding and ordinary shares available for grant under each of the Equity Incentive Plans as of June 30, 2023: (share units) Restricted Share Units outstanding Performance Share Units outstanding Ordinary Shares available for future grant 2020 Plan 341,706 204,016 1,946,938 2010 Plan 27,059 — — 2017 Inducement Plan — — 111,347 Total 368,765 204,016 2,058,285 Restricted share units and performance share units Restricted share units and performance share units have been granted under the Equity Incentive Plans. 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 230,759 $ 70.53 Vested ( 358,508 ) $ 45.39 Forfeited ( 28,133 ) $ 57.86 Balance as of June 25, 2021 641,875 $ 55.74 Granted 186,633 $ 101.25 Vested ( 323,326 ) $ 52.20 Forfeited ( 45,556 ) $ 71.53 Balance as of June 24, 2022 459,626 $ 75.14 Granted 165,378 $ 117.35 Vested ( 233,607 ) $ 67.85 Forfeited ( 22,632 ) $ 94.69 Balance as of June 30, 2023 368,765 $ 97.49 Expected to vest as of June 30, 2023 327,128 $ 98.07 85 Table of contents 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 184,718 $ 69.85 Vested ( 82,185 ) 48.02 Forfeited ( 115,645 ) $ 48.02 Balance as of June 25, 2021 427,028 $ 57.82 Granted 110,832 $ 101.05 Vested ( 190,213 ) $ 48.65 Forfeited ( 61,765 ) $ 53.38 Balance as of June 24, 2022 285,882 $ 81.64 Granted 97,142 $ 117.35 Vested ( 179,008 ) 70.05 Forfeited — $ — Balance as of June 30, 2023 204,016 $ 108.81 Expected to vest as of June 30, 2023 204,016 $ 108.81 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. The total fair value of restricted share units and performance share units vested during the years ended June 30, 2023, June 24, 2022 and June 25, 2021 was $ 28.4 million, $ 24.2 million and $ 22.1 million, respectively. The aggregate intrinsic value of restricted share units and performance share units outstanding as of June 30, 2023 was $ 74.4 million. As of June 30, 2023, there was $ 11.9 million and $ 6.6 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 2.5 years and 1.1 years, respectively. For the years ended June 30, 2023 and June 24, 2022, the Company withheld an aggregate of 177,139 shares and 213,884 shares, respectively, upon the vesting of restricted share units and performance shares units, based upon the closing share price on the vesting date to settle employee tax withholding obligations. For the years ended June 30, 2023 and June 24, 2022, the Company then remitted cash of $ 18.2 million and $ 20.8 million, respectively, to the appropriate taxing authorities, and presented it as a financing activity within the consolidated statements of cash flows. The payment was recorded as a reduction of additional paid-in capital. 16 . Employee benefit plans Employee contribution plan The Company operates a defined contribution plan, known as a provident fund, in its subsidiaries in Thailand and the United Kingdom. The assets of these plans are in separate trustee-administered funds. The provident fund is funded by matching payments from employees and by the subsidiaries on a monthly basis. Current contributions to the provident fund are accrued and paid to the fund manager on a monthly basis. The Company’s contributions to the provident fund amounted to $ 6.3 million, $ 6.1 million and $ 6.0 million during the years ended June 30, 2023, June 24, 2022 and June 25, 2021, respectively. The Company sponsors the Fabrinet U.S. 401(k) Retirement Plan (“401(k) Plan”), a Defined Contribution Plan under ERISA, at its subsidiaries in the United States which provides retirement benefits for eligible employees through tax deferred salary deductions. The 401(k) Plan allows employees to contribute up to 80 % of their annual compensation, subject to annual contributions limits established by the Internal Revenue Service. The Company provides for a 100 % match of employees’ contributions to the 401(k) Plan up to the first 6 % of annual compensation. All matching contributions are made in cash and vest immediately. The Company’s matching contributions to the 401(k) Plan were $ 0.8 million, $ 0.7 million and $ 0.8 million during the years ended June 30, 2023, June 24, 2022 and June 25, 2021, respectively. 86 Table of contents Executive incentive plan and employee performance bonuses For the years ended June 30, 2023 and June 24, 2022, the Company maintained an executive incentive plan with quantitative objectives, based on achieving certain revenue and non-U.S. GAAP operating margin or gross margin targets. During the years ended June 30, 2023, June 24, 2022 and June 25, 2021, discretionary merit-based bonus awards were also available to Fabrinet’s non-executive employees. Bonus distributions to employees were $ 13.0 million, $ 11.0 million and $ 10.2 million for the years ended June 30, 2023, June 24, 2022 and June 25, 2021, respectively. 17. 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 year ended June 30, 2023, Fabrinet issued 235,476 ordinary shares upon the vesting of restricted share units and performance share units under the Equity Incentive Plans, net of shares withheld. For the year ended June 24, 2022, Fabrinet issued 299,655 ordinary shares upon the vesting of restricted share units and performance share units under the Equity Incentive Plans, net of shares withheld. For the year ended June 25, 2021, Fabrinet issued 277,078 ordinary shares upon the vesting of restricted share units and performance share units under the Equity Incentive Plans, 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, August 2020 and August 2022, the Company’s board of directors approved an increase of $ 30.0 million, $ 50.0 million, $ 58.5 million and $ 78.7 million, respectively, to the original share repurchase authorization, bringing the aggregate authorization to $ 247.2 million. During the year ended June 30, 2023, the Company repurchased 488,477 shares under the program at an average price per share (excluding other direct costs) of $ 97.38 , totaling $ 47.6 million. As of June 30, 2023, the Company had a remaining authorization to repurchase up to $ 52.4 million of its ordinary shares under the share repurchase program. Shares repurchased under the share repurchase program are held as treasury shares. 87 Table of contents 18. Accumulated other comprehensive income (loss) (“AOCI”) The changes in AOCI for the years ended June 30, 2023 and June 24, 2022 were as follows: (in thousands) Unrealized Gains (Losses) on Available-for-sale Securities Unrealized Gains (Losses) on Derivative Instruments Retirement benefit plan - Prior service cost Foreign Currency Translation Adjustment Total Balance as of June 25, 2021 $ 308 $ ( 4,504 ) $ ( 1,425 ) $ ( 645 ) $ ( 6,266 ) Other comprehensive income (loss) before reclassification ( 6,339 ) 157 — ( 245 ) ( 6,427 ) Amounts reclassified from AOCI 13 ( 735 ) 622 — ( 100 ) Tax effects — — — — — Other comprehensive income (loss) ( 6,326 ) ( 578 ) 622 ( 245 ) ( 6,527 ) Balance as of June 24, 2022 ( 6,018 ) ( 5,082 ) ( 803 ) ( 890 ) ( 12,793 ) Other comprehensive income (loss) before reclassification 2,646 2,444 — ( 75 ) 5,015 Amounts reclassified from AOCI 93 ( 903 ) 473 — ( 337 ) Tax effects — — — — — Other comprehensive income (loss) 2,739 1,541 473 ( 75 ) 4,678 Balance as of June 30, 2023 $ ( 3,279 ) $ ( 3,541 ) $ ( 330 ) $ ( 965 ) $ ( 8,115 ) The following table presents the pre-tax amounts reclassified from AOCI into the consolidated statements of operations and comprehensive income for the years ended June 30, 2023 and June 24, 2022, respectively. (in thousands) Years Ended AOCI components Financial statements line item June 30, 2023 June 24, 2022 Unrealized gains (losses) on available-for-sale securities Interest income $ 93 $ 13 Unrealized gains (losses) on derivative instruments Cost of revenues 7,995 7,283 Unrealized gains (losses) on derivative instruments Selling, general and administrative expenses 334 303 Unrealized gains (losses) on derivative instruments Foreign exchange gain (loss), net ( 8,644 ) ( 7,384 ) Unrealized gains (losses) on derivative instruments Interest expense ( 588 ) ( 937 ) Retirement benefit plan – Prior service cost Selling, general and administrative expenses 473 622 Total amounts reclassified from AOCI $ ( 337 ) $ ( 100 ) 88 Table of contents 19. Commitments and contingencies Bank guarantees As of June 30, 2023 and June 24, 2022, there were outstanding bank guarantees on behalf of the Company's subsidiary in Thailand for electricity usage and other normal business expenses totaling $ 1.5 million and $ 1.4 million, respectively, or Thai Baht 53.0 million and Thai Baht 50.2 million, respectively. In addition, there were other immaterial bank guarantees on behalf of the Company's subsidiary in Israel to support the operations related to the Israeli Customs department. As of June 24, 2022, there was an outstanding bank guarantee on behalf of the Company's subsidiary in the PRC to support the subsidiary's operations totaling RMB 1.0 million, which bank guarantee was backed by cash collateral of $ 0.1 million. This bank guarantee was released in December 2022. In addition, there were other immaterial bank guarantees on behalf of the Company's subsidiary in the U.K. to support its operations. 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 June 30, 2023, the Company had purchase obligations and other commitments to third parties of $ 1.06 billion. Capital expenditure As of June 30, 2023, the Company had total capital expenditure commitments to third parties of $ 8.8 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. 20. Restructuring and other related costs Restructuring and other related costs may consist of voluntary or involuntary severance-related charges, asset-related charges and other costs due to exit activities. The Company recognizes voluntary severance-related charges when an employee accepts the offered benefit arrangement. The Company recognizes involuntary severance-related charges depending on whether the termination benefits are provided under an ongoing benefit arrangement or under a one-time benefit arrangement. If the former, the Company recognizes the charges once they are probable and the amounts are estimable. If the latter, the Company recognizes the charges once the benefits have been communicated to employees. 89 Table of contents 21. Business segments and geographic information Operating segments are defined as components of an enterprise that engage in business activities for which discrete financial information is available that is evaluated regularly by the chief operating decision maker (the “CODM”) in deciding how to allocate resources and in assessing performance. The Company’s CODM is Fabrinet’s Chief Executive Officer. As of June 30, 2023, June 24, 2022 and June 25, 2021, 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. The following table presents long-lived assets by the country in which they are based: Years Ended (in thousands) June 30, 2023 June 24, 2022 June 25, 2021 Long-Lived Assets: Thailand $ 264,382 $ 240,750 $ 190,843 U.S. 25,267 25,938 27,403 China 17,407 19,686 14,977 Israel 2,796 4,025 5,271 Others 498 1,878 2,635 310,350 292,277 241,129 Significant customers Total revenues, by percentage, from individual customers representing 10% or more of total revenues in the respective periods were as follows: Years Ended June 30, 2023 June 24, 2022 June 25, 2021 Cisco Systems Inc. 15.6 % 25.4 % 10.7 % Lumentum Operations LLC 15.4 % 10.3 % 13.6 % Nvidia Corporation 12.5 % * * Infinera Corporation 12.4 % 12.5 % 11.6 % * Represents less than 10% of total revenues. Accounts receivable from individual customers representing 10% or more of accounts receivable as of June 30, 2023 and June 24, 2022, respectively, were as follows: As of June 30, 2023 As of June 24, 2022 Infinera Corporation 20.5 % 17.1 % Nvidia Corporation 14.0 % * Lumentum Operations LLC 13.7 % 11.8 % Cisco Systems Inc. * 19.8 % * Represents less than 10% of total accounts receivable. 90 Table of contents 22. Financial instruments Objectives and significant terms and conditions The principal financial risks faced by the Company are foreign currency risk and interest rate risk. The Company borrows at floating rates of interest to finance its operations. A minority of sales and purchases and a majority of labor and overhead costs are entered into in foreign currencies. In order to manage the risks arising from fluctuations in currency exchange rates, the Company uses derivative instruments. Trading for speculative purposes is prohibited under Company policies. The Company enters into short-term foreign currency forward and option contracts to manage foreign currency exposures associated with certain assets, liabilities and other forecasted foreign currency transactions and may designate these instruments as hedging instruments. The foreign currency forward and option contracts generally have maturities of up to twelve months . All foreign currency exchange contracts are recognized on the consolidated balance sheets at fair value. Gain or loss on the Company’s derivative instruments generally offset the assets, liabilities under master netting arrangement and transactions economically hedged. Foreign currency risk The Company operates internationally and is exposed to foreign exchange risk arising from various currency exposures primarily with respect to the Thai baht, RMB and GBP. For the Company’s foreign currency assets and liabilities, see “Additional Financial Disclosures” in Item 7. Interest Rate Risk The Company’s principal interest bearing assets are time deposits and short-term investments with maturities of three years or less held with high quality financial institutions. The Company’s principal interest bearing liabilities are bank loans which bear interest at floating rates. The Company entered into interest rate swap agreements (the “Swap Agreements”) to manage this risk and increase the profile of the Company’s debt obligation. The terms of the Swap Agreements allow the Company to effectively convert the floating interest rate to a fixed interest rate. This locks the variable in interest expenses associated with our floating rate borrowings and results in fixed interest expenses, which is unsusceptible to market rate increase. The Company designated the Swap Agreements as a cash flow hedge, and they qualify for hedge accounting because the hedges are highly effective. While the Company 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 outstanding interest rate swaps will be recorded in accumulated other comprehensive income in the consolidated balance sheets, with subsequent reclassification to interest expense when settled. 23. Subsequent Event In August 2023, the Company’s board of directors approved the repurchase of up to an additional $ 47.6 million of the Company’s outstanding ordinary shares, bringing the aggregate authorization under the Company’s existing share repurchase program to $ 294.8 million, with $ 100.0 million currently remaining. 91 Table of contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable.