| Summary of significant accounting policies | 2.
Summary of significant accounting policies
Principles of consolidation
The Company
utilizes a 52-53
The
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States
(“U.S. GAAP”) and include Fabrinet and its
subsidiaries. All inter-company accounts and transactions have been
eliminated.
On
September 14, 2016, the Company acquired Global CEM Solutions,
Ltd. and all of its subsidiaries (collectively, “Fabrinet
UK”), a privately-held group located in Wiltshire,
United Kingdom. The consolidated financial statements of the
Company include the financial position, results of operations and
the cash flows of Fabrinet UK commencing as of the acquisition
date. See Note 9, Business acquisition for further details on the
accounting for this transaction.
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,
income taxes, inventory obsolescence and valuation of intangible
assets related to business acquisition, among others. Due to the
inherent uncertainty involved in making estimates, actual results
reported in future periods may be different from these estimates.
In the event that estimates or assumptions prove to differ from
actual results, adjustments will be made in subsequent periods to
reflect more current information.
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
at 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 marketable securities with maturities of
three months or less at the date of purchase.
Marketable securities
Management
determines the appropriate classification of its investments at the
time of purchase and re-evaluates available-for-sale.
The
Company’s investments in marketable securities are classified
as available-for-sale available-for-sale
The Company
reviews its marketable securities on a regular basis to evaluate
whether or not any security has experienced an other-than-temporary
decline in fair value. The Company considers factors such as the
length of time and extent to which the market value has been less
than the cost, the financial condition and near-term prospects of
the issue and the Company’s intent to sell, or whether it is
more likely than not the Company will be required to sell the
investment before recovery of the investment’s amortized cost
basis. If the Company believes that an other-than-temporary decline
exists in one of these securities, the Company will write down
these investments to fair value.
Trade
accounts receivable
Accounts
receivable are carried at anticipated realizable value. The Company
assesses the collectability of its accounts receivable based on
specific customer circumstances, current economic trends,
historical experience with collection and the age of past due
receivables and provides an allowance for doubtful receivables
based on a review of all outstanding amounts at the period end. Bad
debts are written-off
Unanticipated
changes in the liquidity or financial position of the
Company’s customers may require revision to the allowances
for doubtful accounts.
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
Leases
Operating
leases
Payments made
under operating leases are expensed on a straight-line basis over
the lease term.
Capital
lease
Certain
machine and equipment held under capital leases are classified as
property, plant and equipment and amortized using the straight-line
method over the terms of the lease contracts. The related
obligations from the capital lease are recorded as liabilities in
the consolidated balance sheets.
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. Depreciation is calculated using the straight-line
method to write-off
Land
improvements 10 years
Building and building improvements 7 - 30 years
Leasehold
improvements Shorter of useful life or lease term
Manufacturing
equipment 3 - 7 years
Office
equipment 3 - 7 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 operating 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 property and equipment 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.
Business acquisition
For the
acquisition of Fabrinet UK, the Company allocated the fair value of
purchase consideration to the assets acquired and liabilities
assumed based on their fair values at the acquisition date. The
allocation of consideration to the individual net assets was
finalized in the fourth quarter of fiscal year 2017.
The acquired
intangible assets, which consist of customer relationships and
backlog, are recorded as intangibles in the consolidated balance
sheets. The fair value of the acquired intangible assets was
determined based on the multi-period excess earnings method. The
Company reviews intangibles for impairment whenever changes or
circumstances indicate the carrying amount may not be
recoverable.
In connection
with the business acquisition, $3.4 million of cash, net of
foreign currency translation adjustment, for deferred
consideration, was placed into an escrow account which is under the
Company’s control. However, the Company has contractually
agreed to remit this deferred consideration to the sellers of
Fabrinet UK, subject to the resolution of claims that the Company
may make against the funds with respect to indemnification and
other claims within 24 months from the closing date of the
transaction. As of June 29, 2018, the cash is presented as
restricted cash in the consolidated balance sheets within current
assets and the related liability is presented within current
liabilities for the deferred consideration. As of June 30,
2017, the cash is presented as restricted cash in the consolidated
balance sheets within non-current non-current
Goodwill
Goodwill
arising from the 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 changes or circumstances indicate the carrying
amount of goodwill may not be recoverable.
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
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, and trade accounts
payable, 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
derivatives assets and liabilities are recognized on the
consolidated balance sheets as other current assets or other
current liabilities and are measured at fair value.
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 forward
currency contracts. In a cash flow hedging relationship, the
effective portion of the change in the fair value of the hedging
derivative is initially recorded in AOCI in the consolidated
balance sheets, while any ineffective portion is recognized
directly in earnings, as a component of foreign exchange gain
(loss) in the consolidated statements of operations and
comprehensive income. The portion of gain or loss on the derivative
instrument remains in AOCI until the forecasted transaction is
recognized in earnings.
The Company
also enters into derivative contracts that are intended to
economically hedge certain of the Company’s risks. The
changes in the fair value of the derivatives are recorded directly
in earnings as a component of foreign exchange gain (loss) in the
consolidated statements of operations and comprehensive income. 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, marketable
securities, derivatives and accounts receivable.
Cash, cash
equivalents and marketable securities 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 investments in marketable securities to securities with
a maturity not in excess of three years, and all marketable
securities that the Company invests in are rated
A1, P-1,
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 total revenues primarily from the assembly of products
under supply agreements with its customers and the fabrication of
customized optics and glass. Revenues represent the invoiced value
of products, net of trade discounts and allowances, and exclude
goods and services tax. The Company recognizes revenues when
realized or realizable and earned. The Company considers revenues
realized or realizable and earned when there is persuasive evidence
of an arrangement, delivery has occurred, the sales price is fixed
or determinable, and collectability is reasonably assured. Delivery
does not occur until products have been shipped or services have
been provided to the customer, risk of loss has transferred to the
customer and customer acceptance has been obtained, customer
acceptance provisions have lapsed, or the Company has objective
evidence that the criteria specified in the customer acceptance
provisions have been satisfied. In situations where a formal
acceptance is required but the acceptance only relates to whether
the product meets its published specifications, revenues are
generally recognized upon shipment provided all other revenue
recognition criteria are met. The sales price is not considered to
be fixed or determinable until all contingencies related to the
sale have been resolved. The Company reduces revenues for rebates
and other similar allowances. Revenues are recognized only if these
estimates can be reasonably and reliably determined. The Company
bases its estimates utilizing historical results taking into
consideration the type of customer, the type of transaction and the
specifics of each arrangement. In addition to the aforementioned
general policies, the following are the specific revenue
recognition policies for each major category of
revenues.
Services
The Company
provides services for its customers that range from process design
to product manufacturing. The Company recognizes service revenues
when the services have been performed. The related costs are
expensed as incurred.
Services
revenue of $57.1 million, $75.4 million and
$31.7 million were recognized in the consolidated statements
of operations and comprehensive income for the years ended
June 29, 2018, June 30, 2017 and June 24, 2016,
respectively.
Sales of
goods
Revenues from
sales of goods are generally recognized when the product is shipped
to the customer and when there are no unfulfilled obligations that
affect the customer’s final acceptance of the arrangement.
Any cost of warranties and remaining obligations that are
inconsequential or perfunctory are accrued when the corresponding
revenues are recognized.
Certain
customers may request the Company to store finished products
purchased by them at the Company’s warehouse. 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 the ordered goods are segregated in the
Company’s warehouse from other inventory and cannot be used
to fulfill other customer orders. In these situations, revenue is
only recognized when persuasive evidence of the sales arrangement
exists, the goods are completed and ready for shipment, pricing is
fixed or determinable, collection is reasonably assured, and title
and risk of loss have passed to the customer.
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.
(Reversal of)
warranty cost allowances of ($0.02 million), $1.0 million and
$0.1 million were recognized in the consolidated statements of
operations and comprehensive income for the years ended
June 29, 2018, June 30, 2017 and June 24, 2016,
respectively.
Shipping and handling costs
The Company
records costs related to shipping and handling in cost of revenues
for all periods presented.
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. The Company estimates
the fair value of share option awards utilizing the
Black-Scholes-Merton option-pricing model (“BSM”), net
of estimated forfeitures. 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.
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 (the “401(k) 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 10 months 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 on an actuarial basis
using the Projected Unit Credit Method, using the long-term Thai
government bond yield as a discount rate. There are no separate
plan assets held in respect of these liabilities.
Annual
leave
Employee
entitlements to annual leave are recognized when they accrue to 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. more-likely-than-not.
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—not yet adopted by the
Company
In November
2017, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update
(“ASU”) 2017-14, No. 33-10403”. No. 33-10403.
In September
2017, the FASB issued ASU 2017-13,
In January
2017, the FASB issued ASU 2017-04,
In January
2017, the FASB issued ASU 2017-03, 2014-09, 2016-02 2016-13
In January
2017, the FASB issued ASU 2017-01,
In August
2016, the FASB issued ASU 2016-15, 2016-15
In February
2016, the FASB issued ASU 2016-02,
In January
2016, the FASB issued ASU 2016-01, 825-10): 2018-03, 825-10), 2016-01
In May 2014,
as part of its ongoing efforts to assist in the convergence
of accounting principles generally accepted in the United
States of America (“U.S. GAAP”), the
FASB issued ASU 2014-09, 2015-14); 2016-08); 2016-10); 2016-10). 2016-12, “Revenue
The Company
set up a team for the implementation of the new revenue recognition
accounting standard, including hiring of external advisors to help
with the implementation efforts of ASC 606, as amended. The Company
utilized a comprehensive approach to evaluate the impact of
adopting ASC 606 on its contract portfolio by reviewing the current
revenue accounting policies and practices to identify differences
that would result from applying the new guidance to the revenue
contracts on amount and timing of revenue recognition.
The Company
currently recognizes the majority of its manufacturing revenue when
title and risk and rewards of ownership have passed, the price to
the buyer is fixed or determinable and recoverability is reasonably
assured, which generally is when the goods are shipped. The Company
has determined that the new standard will have no substantial
changes to its current revenue recognition policy as the
Company’s revenues will continue to be recognized at a
“point in time” model. However, there will be a portion
of revenue contracts that will fall into an “over time”
model as the customers take control of the products as they are
produced, as opposed to at a “point in time” upon
physical delivery. Service revenue will also continue to be
recognized at an “over time” model as services are
performed.
The Company
has substantially completed a review of the accounting systems and
processes required to apply this new guidance. Additionally, the
Company has completed the majority of the assessment phase and
documentation of new policies and is currently in the process of
adjusting its accounting policies, operational and financial
reporting processes, and relevant internal controls and gathering
data for the new disclosure requirements.
ASC 606
allows for either “full retrospective” adoption,
meaning the standard is applied to all periods presented, or
“modified retrospective” adoption, meaning the standard
is applied only to the most current period presented in the
financial statements as of the adoption date. The Company will
adopt the standard using the modified retrospective approach,
effective as of June 30, 2018.
New
Accounting Pronouncements—adopted by the
Company
In February
2018, the FASB issued ASU 2018-02 2018-05,
In August
2017, the FASB issued ASU 2017-12, 2016-310—Derivatives
In November
2016, the FASB issued ASU 2016-18,
In March
2016, the FASB issued ASU 2016-09, “Compensation—Stock
In March
2016, the FASB issued ASU 2016-05, |
