ITEM 1A. RISK FACTORS
Investing in our ordinary shares involves a high degree of risk. You should carefully consider the following risks, as well as the other
information contained in this Quarterly Report on Form
10-Q,
including our condensed consolidated financial statements and the related notes, before investing in our ordinary shares. The risks and
uncertainties described below are not the only ones that we may face. Additional risks and uncertainties of which we are unaware, or that we currently deem immaterial, also may become important factors that affect us or our ordinary shares. If any
of the following risks actually occur, they may harm our business, financial condition and operating results. In this event, the market price of our ordinary shares could decline and you could lose some or all of your investment.
Risks Related to Our Business
Our
sales depend on and will continue to depend on a small number of customers. A reduction in orders from any of these customers, the loss of any of these customers, or a customer exerting significant pricing and margin pressures on us could harm our
business, financial condition and operating results.
We have depended, and will continue to depend, upon a small number of
customers for a significant percentage of our total revenues. During the three months ended March 30, 2018 and March 31, 2017, we had one customer that contributed 10% or more of our total revenues. This customer accounted for 17% and 15%
of our total revenues during the respective periods. During the nine months ended March 30, 2018 and March 31, 2017, we had one customer that contributed 10% or more of our total revenues. This customer accounted for 16% and 18% of our
total revenues during the respective periods. Dependence on a small number of customers means that a reduction in orders from, a loss of, or other adverse actions by any one of these customers would reduce our revenues and could have a material
adverse effect on our business, financial condition and operating results.
Further, our customer concentration increases the
concentration of our accounts receivable and our exposure to payment default by any of our key customers. Many of our existing and potential customers have substantial debt burdens, have experienced financial distress or have static or declining
revenues, all of which may be exacerbated by adverse conditions in the credit markets, continual uncertainty in global economies and the impacts of Brexit. Certain of our customers have gone out of business, declared bankruptcy, been acquired, or
announced their withdrawal from segments of the optics market. We generate significant accounts payable and inventory for the services that we provide to our customers, which could expose us to substantial and potentially unrecoverable costs if we
do not receive payment from our customers.
Reliance on a small number of customers gives those customers substantial purchasing power and
leverage in negotiating contracts with us. In addition, although we enter into master supply agreements with our customers, the level of business to be transacted under those agreements is not guaranteed. Instead, we are awarded business under those
agreements on a
project-by-project
basis. Some of our customers have at times significantly reduced or delayed the volume of manufacturing services that they order from
us. If we are unable to maintain our relationships with our existing significant customers, our business, financial condition and operating results could be harmed.
Consolidation in the markets we serve could harm our business, financial condition and operating results.
Consolidation in the markets we serve has resulted in a reduction in the number of potential customers for our services. For example, in March
2018, Lumentum Holdings Inc. and Oclaro, Inc., both of which are our customers, entered into an agreement for Lumentum to acquire Oclaro. In some cases, consolidation among our customers has led to a reduction in demand for our services as customers
acquired the capacity to manufacture products
in-house.
Consolidation among our customers and
their customers may continue and may adversely affect our business, financial condition and operating results in several ways. Consolidation among our customers and their customers may result in a smaller number of large customers whose size and
purchasing power give them increased leverage that may
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result in, among other things, decreases in our average selling prices. In addition to pricing pressures, this consolidation may also reduce overall demand for our manufacturing services if
customers obtain new capacity to manufacture products
in-house
or discontinue duplicate or competing product lines in order to streamline operations. If demand for our manufacturing services decreases, our
business, financial condition and operating results could be harmed.
If the optical communications market does not expand as we
expect, our business may not grow as fast as we expect, which could adversely impact our business, financial condition and operating results.
Our future success as a provider of precision optical, electro-mechanical and electronic manufacturing services for the optical communications
market depends on the continued growth of the optics industry and, in particular, the continued expansion of global information networks, particularly those directly or indirectly dependent upon a fiber optic infrastructure. As part of that growth,
we anticipate that demand for voice, video, and other data services delivered over high-speed connections (both wired and wireless) will continue to increase. Without network and bandwidth growth, the need for enhanced communications products would
be jeopardized. Currently, demand for network services and for high-speed broadband access, in particular, is increasing but growth may be limited by several factors, including, among others: (1) relative strength or weakness of the global
economy or certain countries or regions, (2) an uncertain regulatory environment, and (3) uncertainty regarding long-term sustainable business models as multiple industries, such as the cable, traditional telecommunications, wireless and
satellite industries, offer competing content delivery solutions. The optical communications market also has experienced periods of overcapacity, some of which have occurred even during periods of relatively high network usage and bandwidth demands.
If the factors described above were to slow, stop or reverse the expansion in the optical communications market, our business, financial condition and operating results would be negatively affected.
Natural disasters (like the 2011 flooding in Thailand), epidemics, acts of terrorism and other political and economic developments could
harm our business, financial condition, and operating results.
Natural disasters, such as the 2011 flooding in Thailand, where
most of our manufacturing operations are located, could severely disrupt our manufacturing operations and increase our supply chain costs. These events, over which we have little or no control, could cause a decrease in demand for our services, make
it difficult or impossible for us to manufacture and deliver products and for our suppliers to deliver components allowing us to manufacture those products, require large expenditures to repair or replace our facilities, or create delays and
inefficiencies in our supply chain. For example, the 2011 flooding in Thailand forced us to temporarily shut down all of our manufacturing facilities in Thailand and cease production permanently at our Chokchai facility in Thailand, which adversely
affected our ability to meet our customers demands during fiscal year 2012. In some countries in which we operate, including the PRC and Thailand, potential outbreaks of infectious diseases such as the H1N1 influenza virus, severe acute
respiratory syndrome (SARS) or bird flu could disrupt our manufacturing operations, reduce demand for our customers products and increase our supply chain costs. In addition, increased international political instability, evidenced
by the threat or occurrence of terrorist attacks, enhanced national security measures, conflicts in the Middle East and Asia, strained international relations arising from these conflicts and the related decline in consumer confidence and economic
weakness, may hinder our ability to do business. Any escalation in these events or similar future events may disrupt our operations and the operations of our customers and suppliers, and may affect the availability of materials needed for our
manufacturing services. Such events may also disrupt the transportation of materials to our manufacturing facilities and finished products to our customers. These events have had, and may continue to have, an adverse impact on the U.S. and world
economy in general, and customer confidence and spending in particular, which in turn could adversely affect our total revenues and operating results. The impact of these events on the volatility of the U.S. and world financial markets also could
increase the volatility of the market price of our ordinary shares and may limit the capital resources available to us, our customers and our suppliers.
We are not fully insured against all potential losses. Natural disasters or other catastrophes could adversely affect our business,
financial condition and operating results.
Our current property and casualty insurance covers loss or damage to our property and
third-party property over which we have custody and control, as well as losses associated with business interruption, subject to specified exclusions and limitations such as coinsurance, facilities location
sub-limits
and other policy limitations and covenants. Even with insurance coverage, natural disasters or other catastrophic events, including acts of war, could cause us to suffer substantial losses in our
operational capacity and could also lead to a loss of opportunity and to a potential adverse impact on our relationships with our existing customers resulting from our inability to produce products for them, for which we could not be compensated by
existing insurance. This in turn could have a material adverse effect on our business, financial condition and operating results.
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Our quarterly revenues, gross profit margins and operating results have fluctuated
significantly and may continue to do so in the future, which may cause the market price of our ordinary shares to decline or be volatile.
Our quarterly revenues, gross profit margins, and operating results have fluctuated significantly and may continue to fluctuate significantly
in the future. For example, any of the risks described in this Risk Factors section and, in particular, the following factors, could cause our quarterly and annual revenues, gross profit margins, and operating results to fluctuate from
period to period:
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our ability to acquire new customers and retain our existing customers by delivering superior quality and customer service;
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the cyclicality of the optical communications market, as well as the industrial lasers, medical and sensors markets;
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our ability to achieve favorable pricing for our services;
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the effect of fluctuations in foreign currency exchange rates;
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our ability to manage our headcount and other costs; and
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changes in the relative mix in our revenues.
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Therefore, we believe that
quarter-to-quarter
comparisons of our operating results may not be useful in predicting our future operating results. You should not rely on our results for one quarter as any
indication of our future performance. Quarterly variations in our operations could result in significant volatility in the market price of our ordinary shares.
If we are unable to continue diversifying our precision optical and electro-mechanical manufacturing services across other markets
within the optics industry, such as the semiconductor processing, biotechnology, metrology and material processing markets, or if these markets do not grow as fast as we expect, our business may not grow as fast as we expect, which could adversely
impact our business, financial condition and operating results.
We intend to continue diversifying across other markets within the
optics industry, such as the semiconductor processing, biotechnology, metrology, and material processing markets, to reduce our dependence on the optical communications market and to grow our business. Currently, the optical communications market
contributes the significant majority of our revenues. There can be no assurance that our efforts to further expand and diversify into other markets within the optics industry will prove successful or that these markets will continue to grow as fast
as we expect. In the event that the opportunities presented by these markets prove to be less than anticipated, if we are less successful than expected in diversifying into these markets, or if our margins in these markets prove to be less than
expected, our growth may slow or stall, and we may incur costs that are not offset by revenues in these markets, all of which could harm our business, financial condition and operating results.
We face significant competition in our business. If we are unable to compete successfully against our current and future competitors,
our business, financial condition and operating results could be harmed.
Our current and prospective customers tend to evaluate
our capabilities against the merits of their internal manufacturing as well as the capabilities of other third-party manufacturers. We believe the internal manufacturing capabilities of current and prospective customers are our primary competition.
This competition is particularly strong when our customers have excess manufacturing capacity, as was the case when the markets that we serve experienced a significant downturn in 2008 and 2009 that resulted in underutilized capacity. Should our
existing and potential customers have excess manufacturing capacity at their facilities, it could adversely affect our business. In addition, as a result of the 2011 flooding in Thailand, some of our customers began manufacturing products internally
or using other third-party manufacturers that were not affected by the flooding. If our customers choose to manufacture products internally rather than to outsource production to us, or choose to outsource to a third-party manufacturer, our
business, financial condition and operating results could be harmed.
Competitors in the market for optical manufacturing services include
Benchmark Electronics, Inc., Celestica Inc.,
Sanmina-SCI
Corporation, Jabil Circuit, Inc., and Venture Corporation Limited. Our customized optics and glass operations face competition from companies such as
Browave Corporation, Fujian Castech Crystals, Inc., Photop
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Technologies, Inc., and Research Electro-Optic, Inc. Our UK competitors for printed circuit board assemblies include STI Limited and Axiom Manufacturing Services Limited. Other existing contract
manufacturing companies, original design manufacturers or outsourced semiconductor assembly and test companies could also enter our target markets. In addition, we may face more competitors as we attempt to penetrate new markets.
Many of our customers and potential competitors have longer operating histories, greater name recognition, larger customer bases and
significantly greater resources than we have. These advantages may allow them to devote greater resources than we can to the development and promotion of service offerings that are similar or superior to our service offerings. These competitors may
also engage in more extensive research and development, undertake more
far-reaching
marketing campaigns, adopt more aggressive pricing policies or offer services that achieve greater market acceptance than
ours. These competitors may also compete with us by making more attractive offers to our existing and potential employees, suppliers, and strategic partners. Further, consolidation in the optics industry could lead to larger and more geographically
diverse competitors. New and increased competition could result in price reductions for our services, reduced gross profit margins or loss of market share. We may not be able to compete successfully against our current and future competitors, and
the competitive pressures we face may harm our business, financial condition and operating results.
Cancellations, delays or
reductions of customer orders and the relatively short-term nature of the commitments of our customers could harm our business, financial condition and operating results.
We do not typically obtain firm purchase orders or commitments from our customers that extend beyond 13 weeks. While we work closely with our
customers to develop forecasts for periods of up to one year, these forecasts are not binding and may be unreliable. Customers may cancel their orders, change production quantities from forecasted volumes or delay production for a number of reasons
beyond our control. Any material delay, cancellation or reduction of orders could cause our revenues to decline significantly and could cause us to hold excess materials. Many of our costs and operating expenses are fixed. As a result, a reduction
in customer demand could decrease our gross profit and harm our business, financial condition and operating results.
In addition, we make
significant decisions, including production schedules, material procurement commitments, personnel needs and other resource requirements, based on our estimate of our customers requirements. The short-term nature of our customers
commitments and the possibility of rapid changes in demand for their products reduce our ability to accurately estimate the future requirements of our customers. Inability to forecast the level of customer orders with certainty makes it difficult to
allocate resources to specific customers, order appropriate levels of materials and maximize the use of our manufacturing capacity. This could also lead to an inability to meet a spike in production demand, all of which could harm our business,
financial condition and operating results.
Our exposure to financially troubled customers or suppliers could harm our business,
financial condition and operating results.
We provide manufacturing services to companies, and rely on suppliers, that have in the
past and may in the future experience financial difficulty, particularly in light of uncertainty in the credit markets and the overall economy that affected access to capital and liquidity. As a result, we devote significant resources to monitor
receivables and inventory balances with certain of our customers. If our customers experience financial difficulty, we could have difficulty recovering amounts owed to us from these customers, or demand for our services from these customers could
decline. If our suppliers experience financial difficulty, we could have trouble sourcing materials necessary to fulfill production requirements and meet scheduled shipments. Any such financial difficulty could adversely affect our operating results
and financial condition by resulting in a reduction in our revenues, a charge for inventory write-offs, a provision for doubtful accounts, and an increase in working capital requirements due to increases in days in inventory and in days in accounts
receivable. For example, in July 2014, one of our customers filed for bankruptcy protection under the Local Trade Court in France; however, the potential losses from this particular customer did not have a significant effect on our unaudited
condensed consolidated financial statements.
Fluctuations in foreign currency exchange rates and changes in governmental policies
regarding foreign currencies could increase our operating costs, which would adversely affect our operating results.
Volatility in
the functional and
non-functional
currencies of our entities and the U.S. dollar could seriously harm our business, financial condition, and operating results. The primary impact of currency exchange
fluctuations is on our cash, receivables, and payables of our operating entities. We may experience significant unexpected losses from fluctuations in exchange rates. For example, in the three months ended March 30, 2018, we experienced a
$2.4 million foreign exchange loss, which negatively affected our net income per share by $0.06.
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Our customer contracts generally require that our customers pay us in U.S. dollars. However, the
majority of our payroll and other operating expenses are paid in Thai baht. As a result of these arrangements, we have significant exposure to changes in the exchange rate between the Thai baht and the U.S. dollar, and our operating results are
adversely impacted when the U.S. dollar depreciates relative to the Thai baht and other currencies. We have experienced such depreciation in the U.S. dollar as compared with the Thai baht, and our results have been adversely impacted by this
fluctuation in exchange rates. As of March 30, 2018, the U.S. dollar had depreciated approximately 11.6% against the Thai baht since March 25, 2016. Further, while we attempt to hedge against certain exchange rate risks, we typically enter
into hedging contracts with maturities of up to 12 months, leaving us exposed to longer term changes in exchange rates.
Also, we have
significant exposure to changes in the exchange rate between the RMB and GBP and the U.S. dollar. The expenses of our subsidiaries located in the PRC and UK are denominated in RMB and GBP, respectively. Currently, RMB are convertible in connection
with trade- and service-related foreign exchange transactions, foreign debt service, and payment of dividends. The PRC government may at its discretion restrict access in the future to foreign currencies for current account transactions. If this
occurs, our PRC subsidiary may not be able to pay us dividends in U.S. dollars without prior approval from the PRC State Administration of Foreign Exchange. In addition, conversion of RMB for most capital account items, including direct investments,
is still subject to government approval in the PRC. This restriction may limit our ability to invest the earnings of our PRC subsidiary. As of March 30, 2018, the U.S. dollar had appreciated approximately 0.9% against the RMB since
March 25, 2016. There remains significant international pressure on the PRC government to adopt a substantially more liberalized currency policy. GBP are convertible in connection with trade- and service-related foreign exchange transactions
and foreign debt service. As of March 30, 2018, the U.S. dollar had depreciated approximately 8.3% against the GBP since September 14, 2016, the date we acquired Fabrinet UK. Any appreciation in the value of the RMB and GBP against the
U.S. dollar could negatively impact our operating results.
We purchase some of the critical materials used in certain of our
products from a single source or a limited number of suppliers. Supply shortages have in the past, and could in the future, impair the quality, reduce the availability or increase the cost of materials, which could harm our revenues, profitability
and customer relations.
We rely on a single source or a limited number of suppliers for critical materials used in a significant
number of the products we manufacture. We generally purchase these single or limited source materials through standard purchase orders and do not maintain long-term supply agreements with our suppliers. We generally use a rolling 12 month forecast
based on anticipated product orders, customer forecasts, product order history, backlog, and warranty and service demand to determine our materials requirements. Lead times for the parts and components that we order vary significantly and depend on
factors such as manufacturing cycle times, manufacturing yields, and the availability of raw materials used to produce the parts or components. Historically, we have experienced supply shortages resulting from various causes, including reduced
yields by our suppliers, which prevented us from manufacturing products for our customers in a timely manner. Our revenues, profitability and customer relations could be harmed by a stoppage or delay of supply, a substitution of more expensive or
less reliable parts, the receipt of defective parts or contaminated materials, an increase in the price of supplies, or an inability to obtain reductions in price from our suppliers in response to competitive pressures.
We continue to undertake programs to strengthen our supply chain. Nevertheless, we are experiencing, and expect for the foreseeable future to
continue to experience, strain on our supply chain, and periodic supplier problems. We have incurred, and expect to continue to incur for the foreseeable future, costs to address these problems.
Managing our inventory is complex and may require write-downs due to excess or obsolete inventory, which could cause our operating
results to decrease significantly in a given fiscal period.
Managing our inventory is complex. We are generally required to
procure material based upon the anticipated demand of our customers. The inaccuracy of these forecasts or estimates could result in excess supply or shortages of certain materials. Inventory that is not used or expected to be used as and when
planned may become excess or obsolete. Generally, we are unable to use most of the materials purchased for one of our customers to manufacture products for any of our other customers. Additionally, we could experience reduced or delayed product
shipments or incur additional inventory write-downs and cancellation charges or penalties, which would increase costs and could harm our business, financial condition and operating results. While our agreements with customers are structured to
mitigate our risks related to excess or obsolete inventory, enforcement of these provisions may result in material expense, and delay in payment for inventory. If any of our significant customers becomes unable or unwilling to purchase inventory or
does not agree to such contractual provisions in the future, our business, financial condition and operating results may be harmed.
We conduct operations in a number of countries, which creates logistical and communications challenges for us and exposes us to other
risks that could harm our business, financial condition and operating results.
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The vast majority of our operations, including manufacturing and customer support, are located
primarily in the Asia-Pacific region. The distances between Thailand, the PRC and our customers and suppliers globally, create a number of logistical and communications challenges for us, including managing operations across multiple time zones,
directing the manufacture and delivery of products across significant distances, coordinating the procurement of raw materials and their delivery to multiple locations and coordinating the activities and decisions of our management team, the members
of which are based in different countries.
Our customers are located throughout the world. Total revenues from the
bill-to-location
of customers outside of North America accounted for 51.6% and 57.8% of our total revenues for the three months ended March 30, 2018 and March 31,
2017, respectively, and 54.2% and 54.4% of our total revenues for the nine months ended March 30, 2018 and March 31, 2017, respectively. We expect that total revenues from the
bill-to-location
of customers outside of North America will continue to account for a significant portion of our total revenues. Our customers also depend on
international sales, which further exposes us to the risks associated with international operations. In addition, our international operations and sales subject us to a variety of domestic and foreign trade regulatory requirements.
Political unrest and demonstrations, as well as changes in the political, social, business or economic conditions in Thailand, could
harm our business, financial condition and operating results.
The majority of our assets and manufacturing operations are located
in Thailand. Therefore, political, social, business and economic conditions in Thailand have a significant effect on our business. In March 2018, Thailand was assessed as a medium-high overall risk by AON Political Risk, a risk management, insurance
and consulting firm. Any changes to tax regimes, laws, exchange controls or political action in Thailand may harm our business, financial condition and operating results.
Thailand has a history of political unrest that includes the involvement of the military as an active participant in the ruling government. In
recent years, political unrest in the country has sparked political demonstrations and, in some instances, violence. In May 2014, the Thai military took over the government in a coup, and it continues to rule the country today. It is unknown how
long it may take for the current political situation to be resolved and for democracy to be restored, or what effects the current political situation may have on Thailand and the surrounding region. In October 2016, Thailands King Bhumibol
Adulyadej died at the age of 88, and was recently succeeded by his son King Maha Vajiralongkorn. While this was a peaceful succession, any future succession crisis or political instability in the Kingdom of Thailand could prevent shipments from
entering or leaving the country, disrupt our ability to manufacture products in Thailand, and force us to transfer our operations to more stable, and potentially more costly, regions.
Further, the Thai government may raise the minimum wage standards for labor and could repeal certain promotional certificates that we have
received or tax holidays for certain export and value added taxes that we enjoy, either preventing us from engaging in our current or anticipated activities or subjecting us to higher tax rates. A new regime could nationalize our business or
otherwise seize our assets and any other future political instability could harm our business, financial condition and operating results.
We expect to continue to invest in our manufacturing operations in the PRC, which will continue to expose us to risks inherent in doing
business in the PRC, any of which risks could harm our business, financial condition and operating results.
We anticipate that we
will continue to invest in our customized optics manufacturing facilities located in Fuzhou, China. Because these operations are located in the PRC, they are subject to greater political, legal and economic risks than the geographies in which the
facilities of many of our competitors and customers are located. In particular, the political and economic climate in the PRC (both at national and regional levels) is fluid and unpredictable. In March 2018, AON Political Risk assessed the PRC as a
medium overall risk. A large part of the PRCs economy is still being operated under varying degrees of control by the PRC government. By imposing industrial policies and other economic measures, such as control of foreign exchange, taxation,
import and export tariffs, environmental regulations, land use rights, intellectual property and restrictions on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect influence
on the development of the PRC economy. Many of the economic reforms carried out by the PRC government are unprecedented or experimental and are expected to change further. Any changes to the political, legal or economic climate in the PRC could harm
our business, financial condition and operating results.
Our PRC subsidiary is a wholly foreign-owned enterprise and is
therefore subject to laws and regulations applicable to foreign investment in the PRC, in general, and laws and regulations applicable to wholly foreign-owned enterprises, in particular. The PRC has made significant progress in the promulgation of
laws and regulations pertaining to economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, the promulgation of new laws, changes in existing laws and abrogation of local regulations
by national laws may have a negative impact on our business and prospects. In addition, these laws and regulations are relatively new, and published cases are limited in volume and
non-binding.
Therefore, the
interpretation and enforcement of these laws and regulations involve significant uncertainties. Laws may be changed with little or no prior notice, for political or other reasons. These uncertainties could limit the legal protections available to
foreign investors. Furthermore, any litigation in the PRC may be protracted and result in substantial costs and diversion of resources and managements attention.
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Our business and operations would be adversely impacted in the event of a failure of our
information technology infrastructure and/or cyber security attacks.
We rely upon the capacity, availability and security of our
information technology hardware and software infrastructure. For instance, we use a combination of standard and customized software platforms to manage, record, and report all aspects of our operations and, in many instances, enable our customers to
remotely access certain areas of our databases to monitor yields, inventory positions,
work-in-progress
status and vendor quality data. We are constantly expanding and
updating our information technology infrastructure in response to our changing needs. Any failure to manage, expand and update our information technology infrastructure or any failure in the operation of this infrastructure could harm our business.
Despite our implementation of security measures, our systems are vulnerable to damages from computer viruses, natural disasters,
unauthorized access and other similar disruptions. Any system failure, accident or security breach could result in disruptions to our operations. To the extent that any disruptions, cyber-attack or other security breach results in a loss or damage
to our data, or inappropriate disclosure of confidential information, it could harm our business. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
Unfavorable worldwide economic conditions may negatively affect our business, operating results and financial condition.
Volatility and disruption in the capital and credit markets, depressed consumer confidence, and negative global economic
conditions have affected levels of business and consumer spending. Concerns about the potential default of various national bonds and debt backed by individual countries as well as the politics impacting these, could negatively impact the U.S. and
global economies and adversely affect our financial results. In particular, Brexit and economic uncertainty in Europe has led to reduced demand in some of our customers optical communications product portfolios. Brexit could also lead to
economic and legal uncertainty, including significant volatility in global stock markets and currency exchange rates, and increasingly divergent laws and regulations as the United Kingdom determines which European Union laws to replace or replicate.
Any of these effects of Brexit, among others, could adversely affect our financial results. If economic conditions in Europe do not recover or if they continue to deteriorate, our operating results could be harmed.
Uncertainty about worldwide economic conditions poses a risk as businesses may further reduce or postpone spending in response to reduced
budgets, tight credit, negative financial news and declines in income or asset values, which could adversely affect our business, financial condition and operating results and increase the volatility of our share price. In addition, our ability to
access capital markets may be restricted, which could have an impact on our ability to react to changing economic and business conditions and could also adversely affect our business, financial condition and operating results.
If we fail to adequately expand our manufacturing capacity, we will not be able to grow our business, which would harm our business,
financial condition and operating results. Conversely, if we expand too much or too rapidly, we may experience excess capacity, which would harm our business, financial condition and operating results.
We may not be able to pursue many large customer orders or sustain our historical growth rates if we do not have sufficient manufacturing
capacity to enable us to commit to provide customers with specified quantities of products. If our customers do not believe that we have sufficient manufacturing capacity, they may: (1) outsource all of their production to another source that
they believe can fulfill all of their production requirements; (2) look to a second source for the manufacture of additional quantities of the products that we currently manufacture for them; (3) manufacture the products themselves; or
(4) otherwise decide against using our services for their new products.
Most recently, we expanded our manufacturing capacity with a
new facility in Chonburi, Thailand. We may continue to devote significant resources to the expansion of our manufacturing capacity, and any such expansion will be expensive, will require managements time and may disrupt our operations. In the
event we are unsuccessful in our attempts to expand our manufacturing capacity, our business, financial condition and operating results could be harmed.
However, if we expand our manufacturing capacity and are unable to promptly utilize the additional space due to reduced demand for our
services, an inability to win new projects, new customers or penetrate new markets, or if the optics industry does not grow as we expect, we may experience periods of excess capacity, which could harm our business, financial condition and operating
results.
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We may experience manufacturing yields that are lower than expected, potentially resulting
in increased costs, which could harm our business, operating results and customer relations.
Manufacturing yields depend on a
number of factors, including the following:
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the quality of input, materials and equipment;
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the quality and feasibility of our customers design;
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the repeatability and complexity of the manufacturing process;
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the experience and quality of training of our manufacturing and engineering teams; and
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the monitoring of the manufacturing environment.
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Lower volume production due to continually
changing designs generally results in lower yields. Manufacturing yields and margins can also be lower if we receive or inadvertently use defective or contaminated materials from our suppliers. In addition, our customer contracts typically provide
that we will supply products at a fixed price each quarter, which assumes specific production yields and quality metrics. If we do not meet the yield assumptions and quality metrics used in calculating the price of a product, we may not be able to
recover the costs associated with our failure to do so. Consequently, our operating results and profitability may be harmed.
If the
products that we manufacture contain defects, we could incur significant correction costs, demand for our services may decline and we may be exposed to product liability and product warranty claims, which could harm our business, financial
condition, operating results and customer relations.
We manufacture products to our customers specifications, and our
manufacturing processes and facilities must comply with applicable statutory and regulatory requirements. In addition, our customers products and the manufacturing processes that we use to produce them are often complex. As a result, products
that we manufacture may at times contain manufacturing or design defects, and our manufacturing processes may be subject to errors or fail to be in compliance with applicable statutory or regulatory requirements. Additionally, not all defects are
immediately detectible. The testing procedures of our customers are generally limited to the evaluation of the products that we manufacture under likely and foreseeable failure scenarios. For various reasons (including, among others, the occurrence
of performance problems that are unforeseeable at the time of testing or that are detected only when products are fully deployed and operated under peak stress conditions), these products may fail to perform as expected after their initial
acceptance by a customer.
We generally provide a warranty of between one to five years on the products that we manufacture for our
customers. This warranty typically guarantees that products will conform to our customers specifications and be free from defects in workmanship. Defects in the products we manufacture, whether caused by a design, engineering, manufacturing or
component failure or by deficiencies in our manufacturing processes and whether during or after the warranty period, could result in product or component failures, which may damage our business reputation, whether or not we are indemnified for such
failures. We could also incur significant costs to repair or replace defective products under warranty, particularly when such failures occur in installed systems. In some instances, we may also be required to incur costs to repair or replace
defective products outside of the warranty period in the event that a recurring defect is discovered in a certain percentage of a customers products delivered over an agreed upon period of time. We have experienced product or component
failures in the past and remain exposed to such failures, as the products that we manufacture are widely deployed throughout the world in multiple environments and applications. Further, due to the difficulty in determining whether a given defect
resulted from our customers design of the product or our manufacturing process, we may be exposed to product liability or product warranty claims arising from defects that are not our fault. In addition, if the number or type of defects
exceeds certain percentage limitations contained in our contractual arrangements, we may be required to conduct extensive failure analysis,
re-qualify
for production or cease production of the specified
products.
Product liability claims may include liability for personal injury or property damage. Product warranty claims may include
liability to pay for a recall, repair or replacement of a product or component. Although liability for these claims is generally assigned to our customers in our contracts, even where they have assumed liability, our customers may not, or may not
have the resources to, satisfy claims for costs or liabilities arising from a defective product. Additionally, under one of our contracts, in the event the products we manufacture do not meet the
end-customers
testing requirements or otherwise fail, we may be required to pay penalties to our customer, including a fee during the time period that the customer or
end-customers
production line is not operational as a result of the failure of the products that we manufacture, all of which could harm our business, operating results and customer relations. If we
engineer or manufacture a product that is found to cause any personal injury or property damage or is otherwise found to be
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defective, we could incur significant costs to resolve the claim. While we maintain insurance for certain product liability claims, we do not maintain insurance for any recalls and, therefore,
would be required to pay any associated costs that are determined to be our responsibility. A successful product liability or product warranty claim in excess of our insurance coverage or any material claim for which insurance coverage is denied,
limited, is not available or has not been obtained could harm our business, financial condition and operating results.
If we are
unable to meet regulatory quality standards applicable to our manufacturing and quality processes for the products we manufacture, our business, financial condition or operating results could be harmed.
As a manufacturer of products for the optics industry, we are required to meet certain certification standards, including the following:
ISO9001 for Manufacturing Quality Management Systems; ISO14001 for Environmental Management Systems; TL9000 for Telecommunications Industry Quality Certification; ISO/TS16949 for Automotive Industry Quality Certification; ISO13485 for Medical
Devices Industry Quality Certification; AS9100 for Aerospace Industry Quality Certification; and OHSAS18001 for Occupational Health and Safety Management Systems. We also maintain compliance with various additional standards imposed by the U.S. Food
and Drug Administration, or FDA, with respect to the manufacture of medical devices.
Additionally, we are required to register with the
FDA and other regulatory bodies and are subject to continual review and periodic inspection for compliance with various regulations, including testing, quality control and documentation procedures. We hold the following additional certifications:
ANSI ESD S20.20 for facilities and manufacturing process control, in compliance with ESD standard; Transported Asset Protection Association, or TAPA, for Logistic Security Management System; and
CSR-DIW
for
Corporate Social Responsibility in Thailand. In the European Union, we are required to maintain certain ISO certifications in order to sell our precision optical, electro-mechanical and electronic manufacturing services and we must undergo periodic
inspections by regulatory bodies to obtain and maintain these certifications. If any regulatory inspection reveals that we are not in compliance with applicable standards, regulators may take action against us, including issuing a warning letter,
imposing fines on us, requiring a recall of the products we manufactured for our customers, or closing our manufacturing facilities. If any of these actions were to occur, it could harm our reputation as well as our business, financial condition and
operating results.
If we fail to attract additional skilled employees or retain key personnel, our business, financial condition
and operating results could suffer.
Our future success depends, in part, upon our ability to attract additional skilled employees
and retain our current key personnel. We have identified several areas where we intend to expand our hiring, including business development, finance, human resources, operations and supply chain management. We may not be able to hire and retain such
personnel at compensation levels consistent with our existing compensation and salary structure. Our future also depends on the continued contributions of our executive management team and other key management and technical personnel, each of whom
would be difficult to replace. Although we have key person life insurance policies on some of our executive officers, the loss of any of our executive officers or key personnel or the inability to continue to attract qualified personnel could harm
our business, financial condition and operating results.
Failure to comply with applicable environmental laws and regulations could
have a material adverse effect on our business, financial condition and operating results.
The sale and manufacturing of products
in certain states and countries may subject us to environmental laws and regulations. In addition, rules adopted by the U.S. Securities and Exchange Commission (SEC) implementing the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 impose diligence and disclosure requirements regarding the use of conflict minerals mined from the Democratic Republic of Congo and adjoining countries in the products we manufacture for our customers. Compliance with these
rules has resulted in additional cost and expense, including for due diligence to determine and verify the sources of any conflict minerals used in the products we manufacture, and may result in additional costs of remediation and other changes to
processes or sources of supply as a consequence of such verification activities. These rules may also affect the sourcing and availability of minerals used in the products we manufacture, as there may be only a limited number of suppliers offering
conflict free metals that can be used in the products we manufacture for our customers.
Although we do not anticipate any
material adverse effects based on the nature of our operations and these laws and regulations, we will need to ensure that we and, in some cases, our suppliers comply with applicable laws and regulations. If we fail to timely comply with such laws
and regulations, our customers may cease doing business with us, which would have a material adverse effect on our business, financial condition and operating results. In addition, if we were found to be in violation of these laws, we could be
subject to governmental fines, liability to our customers and damage to our reputation, which would also have a material adverse effect on our business, financial condition and operating results.
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We are subject to the risk of increased income taxes, which could harm our business,
financial condition and operating results.
We are subject to income and other taxes in Thailand, the PRC, the United Kingdom and
the United States. Our effective income tax rate, provision for income taxes and future tax liability could be adversely affected by numerous factors, including the results of tax audits and examinations, income before taxes being lower than
anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in income tax rates, changes in the valuation of deferred tax assets and liabilities, failure to meet
obligations with respect to tax exemptions, and changes in tax laws and regulations. Our U.S. federal and state tax returns remain open to examination for the tax years 2014 through 2016. In addition, tax returns that remain open to examination in
Thailand, the PRC and the United Kingdom range from the tax years 2012 through 2017. The results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures may have an adverse effect on our provision
for income taxes and tax liability.
We base our tax position upon the anticipated nature and conduct of our business and upon our
understanding of the tax laws of the various countries in which we have assets or conduct activities. However, our tax position is subject to review and possible challenge by tax authorities and to possible changes in law, which may have retroactive
effect. Fabrinet (the Cayman Islands Parent) is an exempted company incorporated in the Cayman Islands. We maintain manufacturing operations in Thailand, the PRC, the United Kingdom and the United States. We cannot determine in advance
the extent to which some jurisdictions may require us to pay taxes or make payments in lieu of taxes. Preferential tax treatment from the Thai government in the form of a corporate tax exemption is currently available to us through June 2020 and
June 2026 on income generated from projects to manufacture certain products at our Pinehurst campus and Chonburi campus, respectively. 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 15 years from the date on which preferential tax treatment was granted (i.e., at least until June 2020 in the
case of our Pinehurst campus and until June 2026 in the case of our Chonburi campus). We will lose this favorable tax treatment in Thailand unless we comply with these restrictions, and as a result we may delay or forego certain strategic business
decisions due to these tax considerations.
There is also a risk that Thailand or another jurisdiction in which we operate may treat the
Cayman Islands Parent as having a permanent establishment in such jurisdiction and subject its income to tax. If we become subject to additional taxes in any jurisdiction or if any jurisdiction begins to treat the Cayman Islands Parent as having a
permanent establishment, such tax treatment could materially and adversely affect our business, financial condition and operating results.
Certain of our subsidiaries provide products and services to, and may from time to time undertake certain significant transactions with, us
and our other subsidiaries in different jurisdictions. For instance, we have intercompany agreements in place that provide for our California and Singapore subsidiaries to provide administrative services for the Cayman Islands Parent, and the Cayman
Islands Parent has entered into manufacturing agreements with our Thai subsidiary. In general, related party transactions and, in particular, related party financing transactions, are subject to close review by tax authorities. Moreover, several
jurisdictions in which we operate have tax laws with detailed transfer pricing rules that require all transactions with
non-resident
related parties to be priced using arms length pricing principles and
require the existence of contemporaneous documentation to support such pricing. Tax authorities in various jurisdictions could challenge the validity of our related party transfer pricing policies. Such a challenge generally involves a complex area
of taxation and a significant degree of judgment by management. If any taxation authorities are successful in challenging our financing or transfer pricing policies, our income tax expense may be adversely affected and we could become subject to
interest and penalty charges, which may harm our business, financial condition and operating results.
On December 22, 2017, the Tax
Cuts and Jobs Act (the TCJ Act) was enacted into law. The TCJ Act provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended (the Code), that impact corporate taxation requirements, such as the
reduction of the federal tax rate for corporations from 35% to 21% and changes or limitations to certain tax deductions. While we are able to make reasonable estimates of the impact of the reduction in corporate rate, the final impact of the TCJ Act
may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued by the I.R.S., and actions we may take.
We may encounter difficulties completing or integrating acquisitions, asset purchases and other types of transactions that we may pursue
in the future, which could disrupt our business, cause dilution to our shareholders and harm our business, financial condition and operating results.
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We have grown and may continue to grow our business through acquisitions, asset purchases and
other types of transactions, including the transfer of products from our customers and their suppliers. Most recently, we acquired Fabrinet UK in September 2016. Acquisitions and other strategic transactions typically involve many risks, including
the following:
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the integration of the acquired assets, information systems and facilities into our business may be difficult, time-consuming and costly, and may adversely impact our profitability;
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we may lose key employees of the acquired companies or divisions;
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we may issue additional ordinary shares, which would dilute our current shareholders percentage ownership in us;
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we may incur indebtedness to pay for the transactions;
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we may assume liabilities, some of which may be unknown at the time of the transactions;
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we may record goodwill and
non-amortizable
intangible assets that will be subject to impairment testing and potential periodic impairment charges;
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we may incur amortization expenses related to certain intangible assets;
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we may devote significant resources to transactions that may not ultimately yield anticipated benefits;
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we may incur greater than expected expenses or lower than expected revenues;
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we may assume obligations with respect to regulatory requirements, including environmental regulations, which may prove more burdensome than expected; or
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we may become subject to litigation.
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Acquisitions are inherently risky, and we can provide no
assurance that the acquisition of Fabrinet UK or any future acquisitions will be successful or will not harm our business, financial condition and operating results.
We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our shareholders.
We anticipate that our current cash and cash equivalents, together with cash provided by operating activities and funds available through our
working capital and credit facilities, will be sufficient to meet our current and anticipated needs for general corporate purposes for at least the next 12 months. We operate in a market, however, that makes our prospects difficult to evaluate. It
is possible that we may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. If this occurs, we may need additional financing to execute on our current or future business
strategies.
Furthermore, if we raise additional funds through the issuance of equity or convertible debt securities, the percentage
ownership of our shareholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing shareholders. If adequate additional funds are not available or are not available
on acceptable terms, if and when needed, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our manufacturing services, hire additional technical and other personnel, or otherwise respond to
competitive pressures could be significantly limited.
Intellectual property infringement claims against our customers or us could
harm our business, financial condition and operating results.
Our services involve the creation and use of intellectual property
rights, which subject us to the risk of intellectual property infringement claims from third parties and claims arising from the allocation of intellectual property rights among us and our customers.
Our customers may require that we indemnify them against the risk of intellectual property infringement arising out of our manufacturing
processes. If any claims are brought against us or our customers for such infringement, whether or not these claims have merit, we could be required to expend significant resources in defense of such claims. In the event of an infringement claim, we
may be required to spend a significant amount of time and money to develop
non-infringing
alternatives or obtain licenses. We may not be successful in developing such alternatives or obtaining such licenses on
reasonable terms or at all, which could harm our business, financial condition and operating results.
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Any failure to protect our customers intellectual property that we use in the
products we manufacture for them could harm our customer relationships and subject us to liability.
We focus on manufacturing
complex optical products for our customers. These products often contain our customers intellectual property, including trade secrets and
know-how.
Our success depends, in part, on our ability to protect
our customers intellectual property. We may maintain separate and secure areas for customer proprietary manufacturing processes and materials and dedicate floor space, equipment, engineers and supply chain management to protect our
customers proprietary drawings, materials and products. The steps we take to protect our customers intellectual property may not adequately prevent its disclosure or misappropriation. If we fail to protect our customers
intellectual property, our customer relationships could be harmed and we may experience difficulty in establishing new customer relationships. In addition, our customers might pursue legal claims against us for any failure to protect their
intellectual property, possibly resulting in harm to our reputation and our business, financial condition and operating results.
We
have incurred and will continue to incur significant increased costs as a result of operating as a public company, and our management will be required to continue to devote substantial time to various compliance initiatives.
The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as other rules implemented by
the SEC and the New York Stock Exchange (NYSE), impose various requirements on public companies, including requiring changes in corporate governance practices. These and proposed corporate governance laws and regulations under
consideration may further increase our compliance costs. If compliance with these various legal and regulatory requirements diverts our managements attention from other business concerns, it could have a material adverse effect on our
business, financial condition and operating results. The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and disclosure controls and procedures quarterly.
While we were able to assert in our Annual Report on Form
10-K
that our internal control over financial reporting was effective as of June 30, 2017, we cannot predict the outcome of our testing in future
periods. If we are unable to assert in any future reporting periods that our internal control over financial reporting is effective (or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our
internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our share price.
Given the nature and complexity of our business and the fact that some members of our management team are located in Thailand while others are
located in the United States, control deficiencies may periodically occur. For example, following an internal investigation by the Audit Committee of our board of directors in September 2014 concerning various accounting
cut-off
issues, we identified certain significant deficiencies in our internal control over financial reporting, which have been remediated. While we have ongoing measures and procedures to prevent and remedy
control deficiencies, if they occur there can be no assurance that we will be successful or that we will be able to prevent material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Moreover, if
we identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses in future periods, the market price of our ordinary shares could decline and we could be subject to potential delisting by the NYSE
and review by the NYSE, the SEC, or other regulatory authorities, which would require the expenditure by us of additional financial and management resources. As a result, our shareholders could lose confidence in our financial reporting, which would
harm our business and the market price of our ordinary shares.
There are inherent uncertainties involved in estimates, judgments and
assumptions used in the preparation of financial statements in accordance with U.S. GAAP. Any changes in estimates, judgments and assumptions could have a material adverse effect on our business, financial condition and operating results.
The preparation of financial statements in accordance with U.S. GAAP involves making estimates, judgments and assumptions that
affect reported amounts of assets (including intangible assets), liabilities and related reserves, revenues, expenses and income. Estimates, judgments and assumptions are inherently subject to change in the future, and any such changes could result
in corresponding changes to the amounts of assets, liabilities, revenues, expenses and income. Any such changes could have a material adverse effect on our business, financial condition and operating results.
We are subject to governmental export and import controls in several jurisdictions that could subject us to liability or impair our
ability to compete in international markets.
We are subject to governmental export and import controls in Thailand, the PRC, the
United Kingdom and the United States that may limit our business opportunities. Various countries regulate the import of certain technologies and have enacted laws that could limit our ability to export or sell the products we manufacture. The
export of certain technologies from the United States, the United Kingdom and other nations to the PRC is barred by applicable export controls, and similar prohibitions could be extended to Thailand, thereby limiting our ability to manufacture
certain
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products. Any change in export or import regulations or related legislation, shift in approach to the enforcement of existing regulations, or change in the countries, persons or technologies
targeted by such regulations, could limit our ability to offer our manufacturing services to existing or potential customers, which could harm our business, financial condition and operating results.
The loan agreements for our long-term debt obligations and other credit facilities contain financial ratio covenants that may impair our
ability to conduct our business.
The loan agreements for our long-term and short-term debt obligations contain financial ratio
covenants that may limit managements discretion with respect to certain business matters. These covenants require us to maintain a specified
debt-to-equity
ratio,
debt service coverage ratio (earnings before interest and depreciation and amortization plus cash on hand minus short-term debt), a minimum tangible net worth and a minimum quick ratio, which may restrict our ability to incur additional indebtedness
and limit our ability to use our cash. In the event of our default on these loans or a breach of a covenant, the lenders may immediately cancel the loan agreement, deem the full amount of the outstanding indebtedness immediately due and payable,
charge us interest on a monthly basis on the full amount of the outstanding indebtedness and, if we cannot repay all of our outstanding obligations, sell the assets pledged as collateral for the loan in order to fulfill our obligation. We may also
be held responsible for any damages and related expenses incurred by the lender as a result of any default. Any failure by us or our subsidiaries to comply with these agreements could harm our business, financial condition and operating results.
Our investment portfolio may become impaired by deterioration of the capital markets.
We use professional investment management firms to manage our excess cash and cash equivalents. Our marketable securities as of March 30,
2018 are primarily investments in a fixed income portfolio, including corporate bonds and commercial paper, U.S. agency and U.S. Treasury securities, and sovereign and municipal securities. Our investment portfolio may become impaired by
deterioration of the capital markets. We follow an established investment policy and set of guidelines to monitor and help mitigate our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure
to any one issuer, as well as our maximum exposure to various asset classes. The policy also provides that we may not invest in marketable securities with a maturity in excess of three years.
We regularly review our investment portfolio to determine if any security is other-than-temporarily impaired, which would require us to record
an impairment charge in the period any such determination is made. In making this judgment, we evaluate, among other things, the duration and extent to which the fair value of a security is less than its cost; the financial condition of the issuer
and any changes thereto; and our intent to sell, or whether we will more likely than not be required to sell, the security before recovery of its amortized cost basis. Our assessment on whether a security is other-than-temporarily impaired could
change in the future due to new developments or changes in assumptions related to any particular security.
Should financial market
conditions worsen, investments in some financial instruments may pose risks arising from market liquidity and credit concerns. In addition, any deterioration of the capital markets could cause our other income and expense to vary from expectations.
As of March 30, 2018, we did not record any impairment charges associated with our investment portfolio of marketable securities, and although we believe our current investment portfolio has little risk of material impairment, we cannot predict
future market conditions or market liquidity, or credit availability, and can provide no assurance that our investment portfolio will remain materially unimpaired.
Energy price volatility may negatively impact our business, financial condition and operating results.
We, along with our suppliers and customers, rely on various energy sources in our manufacturing and transportation activities. Energy prices
have been subject to increases and volatility caused by market fluctuations, supply and demand, currency fluctuation, production and transportation disruption, world events and government regulations. While we are currently experiencing lower energy
prices, a significant increase is possible, which could increase our raw material and transportation costs. In addition, increased transportation costs of our suppliers and customers could be passed along to us. We may not be able to increase our
prices enough to offset these increased costs, and any increase in our prices may reduce our future customer orders, which could harm our business, financial condition and operating results.
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Risks Related to Ownership of Our Ordinary Shares
Our share price may be volatile due to fluctuations in our operating results and other factors, including the activities and operating
results of our customers or competitors, any of which could cause our share price to decline.
Our revenues, expenses and results
of operations have fluctuated in the past and are likely to do so in the future from quarter to quarter and year to year due to the risk factors described in this section and elsewhere in this Quarterly Report on Form
10-Q.
In addition to market and industry factors, the price and trading volume of our ordinary shares may fluctuate in response to a number of events and factors relating to us, our competitors, our customers
and the markets we serve, many of which are beyond our control. Factors such as variations in our total revenues, earnings and cash flow, announcements of new investments or acquisitions, changes in our pricing practices or those of our competitors,
commencement or outcome of litigation, sales of ordinary shares by us or our principal shareholders, fluctuations in market prices for our services and general market conditions could cause the market price of our ordinary shares to change
substantially. Any of these factors may result in large and sudden changes in the volume and price at which our ordinary shares trade. Among other things, volatility and weakness in our share price could mean that investors may not be able to sell
their shares at or above the prices they paid. Volatility and weakness could also impair our ability in the future to offer our ordinary shares or convertible securities as a source of additional capital and/or as consideration in the acquisition of
other businesses.
Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue
to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general
economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may cause the market price of our ordinary shares to decline. In the past, companies that have experienced volatility in the
market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our managements
attention from other business concerns, which could seriously harm our business.
If securities or industry analysts do not publish
research or if they publish misleading or unfavorable research about our business, the market price and trading volume of our ordinary shares could decline.
The trading market for our ordinary shares depends in part on the research and reports that securities or industry analysts publish about us or
our business. If securities or industry analysts stop covering us, or if too few analysts cover us, the market price of our ordinary shares could be adversely impacted. If one or more of the analysts who covers us downgrades our ordinary shares or
publishes misleading or unfavorable research about our business, our market price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our ordinary shares could
decrease, which could cause the market price or trading volume of our ordinary shares to decline.
We may become a passive foreign
investment company, which could result in adverse U.S. tax consequences to U.S. investors.
Based upon estimates of the value of
our assets, which are based in part on the trading price of our ordinary shares, we do not expect to be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for the taxable year 2017 or for the foreseeable future.
However, despite our expectations, we cannot assure you that we will not be a PFIC for the taxable year 2017 or any future year because our PFIC status is determined at the end of each year and depends on the composition of our income and assets
during such year. If we are a PFIC, our U.S. investors will be subject to increased tax liabilities under U.S. tax laws and regulations and to burdensome reporting requirements.
Certain provisions in our constitutional documents may discourage our acquisition by a third party, which could limit your opportunity
to sell shares at a premium.
Our constitutional documents include provisions that could limit the ability of others to acquire
control of us, modify our structure or cause us to engage in
change-of-control
transactions, including, among other things, provisions that:
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establish a classified board of directors;
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prohibit our shareholders from calling meetings or acting by written consent in lieu of a meeting;
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limit the ability of our shareholders to propose actions at duly convened meetings; and
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authorize our board of directors, without action by our shareholders, to issue preferred shares and additional ordinary shares.
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These provisions could have the effect of depriving you of an opportunity to sell your ordinary
shares at a premium over prevailing market prices by discouraging third parties from seeking to acquire control of us in a tender offer or similar transaction.
Our shareholders may face difficulties in protecting their interests because we are incorporated under Cayman Islands law.
Our corporate affairs are governed by our amended and restated memorandum and articles of association (MOA), by the Companies Law
(as amended) of the Cayman Islands and the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under the laws of the Cayman Islands are not as clearly established under statutes or
judicial precedent as in jurisdictions in the United States. Therefore, you may have more difficulty in protecting your interests than would shareholders of a corporation incorporated in a jurisdiction in the United States, due to the comparatively
less developed nature of Cayman Islands law in this area.
The Companies Law permits mergers and consolidations between Cayman Islands
companies and between Cayman Islands companies and
non-Cayman
Islands companies. Dissenting shareholders have the right to be paid the fair value of their shares (which, if not agreed between the parties, will
be determined by the Cayman Islands court) if they follow the required procedures, subject to certain exceptions. Court approval is not required for a merger or consolidation which is effected in compliance with these statutory procedures.
In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is
approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that
are present and voting either in person or by proxy at a meeting convened for that purpose. The convening of the meeting and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. A dissenting shareholder has the
right to express to the court the view that the transaction ought not to be approved.
When a takeover offer is made and accepted by
holders of 90.0% of the shares within four months, the offeror may, within a
two-month
period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be
made to the Grand Court of the Cayman Islands but this is unlikely to succeed unless there is evidence of fraud, bad faith or collusion.
If the arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which
would otherwise ordinarily be available to dissenting shareholders of a corporation incorporated in a jurisdiction in the United States, providing rights to receive payment in cash for the judicially determined value of the shares. This may make it
more difficult for you to assess the value of any consideration you may receive in a merger or consolidation or to require that the offeror give you additional consideration if you believe the consideration offered is insufficient.
Shareholders of Cayman Islands exempted companies have no general rights under Cayman Islands law to inspect corporate records and accounts or
to obtain copies of lists of shareholders. Our directors have discretion under our MOA to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to
our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
Subject to limited exceptions, under Cayman Islands law, a minority shareholder may not bring a derivative action against the board of
directors.
Certain judgments obtained against us by our shareholders may not be enforceable.
The Cayman Islands Parent is a Cayman Islands exempted company and substantially all of our assets are located outside of the United States.
Given our domicile and the location of our assets, it may be difficult to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us. In addition, there is
uncertainty as to whether the courts of the Cayman Islands, Thailand or the PRC would recognize or enforce judgments of U.S. courts against us predicated upon the civil liability provisions of the securities laws of the United States or any state.
In particular, a judgment in a U.S. court would not be recognized and accepted by Thai courts without a
re-trial
or examination of the merits of the case. In addition, there is uncertainty as to whether such
Cayman Islands, Thai or PRC courts would be competent to hear original actions brought in the Cayman Islands, Thailand or the PRC against us predicated upon the securities laws of the United States or any state.
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