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Fair value of financial instruments | 6 Months Ended
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Dec. 30, 2022
Fair Value Disclosures [Abstract] |
Fair value of financial instruments | 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. 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 December 30, 2022 |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |
Cash equivalents | $ | — |  |  | $ | 14,325 |  |  |  | $ | — |  |  | $ | 14,325 |
Liquidity funds | — |  |  | 30,127 |  |  |  | — |  |  | 30,127 |
Corporate debt securities | — |  |  | 236,911 |  |  |  | — |  |  | 236,911 |
U.S. agency and U.S. treasury securities | — |  |  | 9,740 |  |  |  | — |  |  | 9,740 |
Derivative assets – current portion | — |  |  | 5,835 |  | (1) |  | — |  |  | 5,835 |
Derivative assets – non-current portion | — |  |  | 37 |  | (2) |  | — |  |  | 37 |
Total | $ | — |  |  | $ | 296,975 |  |  |  | $ | — |  |  | $ | 296,975 |
Liabilities |  |  |  |  |  |  |  |
Derivative liabilities – current portion | $ | — |  |  | $ | (764) |  |  |  | $ | — |  |  | $ | (764) |
Total | $ | — |  |  | $ | (764) |  | (3) |  | $ | — |  |  | $ | (764) |
| 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 |  | (4) |  | — |  |  | 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) |  | (5) |  | $ | — |  |  | $ | (7,579) |
(1)Foreign currency forward contracts with an aggregate notional amount of $126.0 million and an interest rate swap agreement with a notional amount of $64.2 million. (2)Interest rate swap agreement with notional amount of $60.9 million. (3)Foreign currency forward contracts with an aggregate notional amount of $4.0 million and 0.8 million Canadian dollars and an interest rate swap agreement with a notional amount of $60.9 million. (4)Interest rate swap agreement with a notional amount of $64.2 million. (5)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 the foreign exchange risk associated with a portion of its foreign currency denominated assets and liabilities and other foreign currency transactions. The Company enters into foreign currency forward and option contracts to hedge fluctuations in the U.S. dollar value of forecasted transactions denominated in Thai baht and Canadian dollars with counterparties that meet the Company’s minimum credit quality standard. The Company may enter into foreign currency forward contracts with maturities of up to 12 months to hedge fluctuations in the U.S. dollar value of forecasted transactions denominated in Thai baht, including inventory purchases, payroll and other operating expenses. The Company considers these forward contracts as dual-purpose hedges, that hedge both the foreign exchange fluctuation (i) from inception through the forecasted expenditure, and (ii) any subsequent revaluation of the account payable or accrual. The Company may designate the forward contracts that hedge the foreign exchange fluctuation from inception through the forecasted expenditure as cash flow hedges. The gain or loss on a derivative instrument designated and qualified as a cash flow hedging instrument is recorded as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The reclassified amounts are presented in the same income statement line item as the earnings effect of the hedged item. Once the forecasted transactions are recorded, the Company will discontinue the hedging relationship by de-designating the derivative instrument and recording subsequent changes in fair value through contract maturity to foreign exchange gain (loss), net in the unaudited condensed consolidated statements of operations and comprehensive income as a natural hedge against the Thai baht denominated assets and liabilities. The Company may also enter into non-designated foreign currency forward and option contracts to provide an offset to the re-measurement of foreign currency denominated assets and liabilities and to hedge certain forecasted exposures. Changes in the fair value of these non-designated derivatives are recorded as foreign exchange gain (loss), net in the unaudited condensed consolidated statements of operations and comprehensive income. As of December 30, 2022, the Company had 130 outstanding U.S. dollar foreign currency forward contracts against Thai baht, with an aggregate notional amount of $130.0 million and maturity dates ranging from January 2023 through July 2023 and one outstanding Canadian dollar foreign currency forward contract with an aggregate notional amount of 0.8 million Canadian dollars and a maturity date in March 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 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 December 30, 2022, the hedging relationship over foreign currency forward contracts that were designated for hedge accounting was determined to be highly effective based on the performance of retrospective and prospective regression testing. As of December 30, 2022, the amount in accumulated other comprehensive income (“AOCI”) that is expected to be reclassified into earnings within 12 months was a gain of $4.7 million. As of June 24, 2022, the hedging relationship over foreign currency forward contracts that 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 24, 2022, the amount in AOCI that is expected to be reclassified into earnings within 12 months was a loss of $4.8 million. During the three and six months ended December 30, 2022, the Company included an unrealized gain of $4.2 million and $4.0 million, respectively, from changes in the fair value of a foreign currency forward contract that was not designated for hedge accounting in earnings as foreign exchange gain (loss), net in the unaudited condensed consolidated statements of operations and comprehensive income. During the three and six months ended December 24, 2021, the Company included an unrealized gain of $1.1 million and $0.5 million, respectively, from changes in the fair value of a foreign currency forward contract that was not designated for hedge accounting in earnings as foreign exchange gain (loss), net in the unaudited condensed 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 December 30, 2022 and June 24, 2022, the Company had two outstanding interest rate swap agreements with an aggregate notional amount of $125.1 million. On July 25, 2018, Fabrinet Thailand entered into an interest rate swap agreement to effectively convert the floating interest rate of its term loan under a credit facility agreement with Bank of America to a fixed interest rate of 2.86% per annum through the scheduled maturity of the term loan in June 2023 (see Note 10). 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 the Bank of Ayudhya Public Company Limited (the “Bank”) (see Note 10) and on September 10, 2019, the Company repaid in full the outstanding term loan under the Bank of America Credit Facility Agreement (see Note 10). 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 the Bank to a fixed interest rate of 4.36% per annum through the maturity of the term loan in June 2024. On September 27, 2019, the Company designated these two interest rate swaps as a cash flow hedge for the Company’s term loan under the credit facility agreement with the Bank. The combination of these two interest rate swaps qualified for hedge accounting because the hedges are highly effective, and the Company has designated and documented contemporaneously the hedging relationships involving these interest rate swaps. While 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 are recorded in AOCI in the unaudited condensed consolidated balance sheets. The Company reclassifies 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 December 30, 2022, the amount in AOCI that is expected to be reclassified into earnings within 12 months was a gain of $0.1 million. As of June 24, 2022, the amount in AOCI that is expected to be reclassified into earnings within 12 months was a loss of $0.5 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 unaudited condensed consolidated statements of operations and other comprehensive income:
|  |  | Three Months Ended |  | Six Months Ended
(in thousands) | Financial statements line item |  | December 30, 2022 |  | December 24, 2021 |  | December 30, 2022 |  | December 24, 2021
Derivatives gain (loss) recognized in other comprehensive income (loss): |  |  |  |  |  |  |  |  |
Foreign currency forward contracts | Other comprehensive income |  | $ | 14,754 |  |  | $ | 3,685 |  |  | $ | 11,762 |  |  | $ | 1,549 |
Interest rate swaps | Other comprehensive income |  | 310 |  |  | 595 |  |  | 826 |  |  | 1,003 |
Total derivatives gain (loss) recognized in other comprehensive income (loss) |  |  | $ | 15,064 |  |  | $ | 4,280 |  |  | $ | 12,588 |  |  | $ | 2,552 |
Derivatives (gain) loss reclassified from accumulated other comprehensive income (loss) into earnings: |  |  |  |  |  |  |  |  |
Foreign currency forward contracts | Cost of revenues |  | $ | 5,534 |  |  | $ | 2,984 |  |  | $ | 9,328 |  |  | $ | 5,099 |
Foreign currency forward contracts | SG&A |  | 230 |  |  | 124 |  |  | 390 |  |  | 212 |
Foreign currency forward contracts | Foreign exchange loss, net |  | (9,485) |  |  | (3,849) |  |  | (11,990) |  |  | (5,273) |
Interest rate swaps | Interest expense |  | (155) |  |  | (245) |  |  | (346) |  |  | (513) |
Total derivatives (gain) loss reclassified from accumulated other comprehensive income (loss) into earnings |  |  | $ | (3,876) |  |  | $ | (986) |  |  | $ | (2,618) |  |  | $ | (475) |
Change in net unrealized gain (loss) on derivatives instruments |  |  | $ | 11,188 |  |  | $ | 3,294 |  |  | $ | 9,970 |  |  | $ | 2,077 |
Fair Value of derivatives The following table provides the fair values of the Company’s derivative financial instruments for the periods presented:
| December 30, 2022 |  | 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 | $ | 683 |  |  | $ | (39) |  |  | $ | — |  |  | $ | (1,561) |
Derivatives designated as hedging instruments |  |  |  |  |  |  |
Foreign currency forward contracts | 4,725 |  |  | — |  |  | — |  |  | (4,821) |
Interest rate swaps | 464 |  |  | (725) |  |  | 110 |  |  | (1,197) |
Derivatives, gross balances | $ | 5,872 |  |  | $ | (764) |  |  | $ | 110 |  |  | $ | (7,579) |
The Company recorded the fair value of derivative financial instruments in the unaudited condensed consolidated balance sheets as follows:
Derivative Financial Instruments | Balance Sheet line item
Fair Value of Derivative Assets | Other current assets, Other non-current assets
Fair Value of Derivative Liabilities | Accrued expenses, Other non-current liabilities

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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