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
(amount in thousands)	Level 1		Level 2			Level 3		Total
As of March 27, 2020
Assets
Cash equivalents	$	—	$	21,528		$	—	$	21,528
Liquidity funds		—		20,954			—		20,954
Certificates of deposit and time deposits		—		20,000			—		20,000
Corporate debt securities		—		131,438			—		131,438
U.S. agency and U.S. Treasury securities		—		61,230			—		61,230
Derivative assets		—		—			—		—

Total	$	—	$	255,150		$	—	$	255,150

Liabilities
Derivative liabilities	$	—	$	11,977	(1)	$	—	$	11,977


Total	$	—	$	11,977		$	—	$	11,977


	Fair Value Measurements at Reporting Date Using
(amount in thousands)	Level 1		Level 2			Level 3		Total
As of June 28, 2019
Assets
Cash equivalents	$	—	$	2,820		$	—	$	2,820
Liquidity funds		—		20,552			—		20,552
Certificates of deposit and time deposits		—		35,028			—		35,028
Corporate debt securities		—		131,256			—		131,256
U.S. agency and U.S. Treasury securities		—		69,657			—		69,657
Derivative assets		—		2,201	(2)		—		2,201

Total	$	—	$	261,514		$	—	$	261,514

Liabilities
Derivative liabilities	$	—	$	2,591	(3)	$	—	$	2,591

Total	$	—	$	2,591		$	—	$	2,591

(1)	Foreign currency forward and option contracts with a notional amount of $126.0 million and Canadian dollars of $0.7 million , and two interest rate swap agreements with an aggregate notional amount of $125.1 million.

(2)	Foreign currency forward contracts with notional amount of $72.0 million and Canadian dollars of $0.6 million.

(3)	Interest rate swap agreement with a notional amount of $64.2 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 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.

The Company may enter into foreign currency forward contracts to hedge flu

ctu

ations 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 qualifying 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 through foreign exchange gain (loss), net in the unaudited condensed consolidated statements of operations and comprehensive income.

As of March 27, 2020, the Company had 100 outstanding U.S. dollar foreign currency forward contracts against Thai baht

with an aggregate notional amount of $101.0 million

and

maturity dates ranging from April 2020 through October 2020 that were designated for cash flow hedge accounting.

he hedging relationship was determined to be highly effective based on the performance of retrospective and prospective regression testing. During the three and nine months ended March 27, 2020, the Company recorded an unrealized loss of $6.6 million from changes in the fair value of these foreign currency forward contracts, designated as hedging instruments, in other comprehensive income in the unaudited condensed consolidated statements of operations and comprehensive income.

During the three and nine months ended March 27, 2020, the Company de-designated 20 foreign currency forward contracts against the Thai baht that had previously been designated as cash flow hedges and reclassified a loss of $1.7 million from accumulated other comprehensive income to foreign exchange loss, net, cost of revenues, and selling, general and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income.

As of March 29, 2019, the Company had no foreign currency forward contracts designated as cash flow hedges.

As of March 27, 2020, the Company had 20 outstanding U.S. dollar foreign currency forward contracts with an aggregate notional amount of $24.0 million, one outstanding U.S. dollar foreign currency option contract with a notional amount of $1.0 million

and one outstanding Canadian dollar foreign currency forward contract with a notional amount of $0.5 million,

and

maturity dates ranging from June 2020 through July 2020, that were not designated for hedge accounting. These foreign currency option and forward contracts were used to hedge fluctuations in the U.S. dollar value of forecasted transactions denominated in Thai

aht and Canadian dollar

. During the three and nine months ended March 27, 2020, the Company recorded an unrealized loss of $2.1 million and $4.0 million, respectively, from changes in the fair value of these foreign currency option and forward contracts in earnings as foreign exchange loss, net in the unaudited condensed consolidated statements of operations and comprehensive income.

As of March 29, 2019, the Company had 45 outstanding U.S. dollar foreign currency forward contracts with an aggregate notional amount of $98.0 million, one outstanding U.S. dollar foreign currency option contract with a notional amount of $5.0 million

and one outstanding Canadian dollar forward contract with a notional amount of $0.4 million

, and

maturity dates ranging from April 2019 through August 2019, that were not designated for hedge accounting. These foreign currency forward and option contracts were used to hedge fluctuations in the U.S. dollar value of forecasted transactions denominated in Thai

aht and Canadian dollar

. During the nine months ended March 29, 2019, the Company recorded an unrealized gain of $1.5 million from changes in the fair value of these foreign currency forward and option contracts in earnings as foreign exchange loss, net in the unaudited condensed consolidated statements of operations and comprehensive income.

As of March 27, 2020, the amount in a

umulated other

comprehensive

income which is expected to be reclassified into earnings within 12 months is $4.9 million.

Interest

ate

wap

greements

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 March 27, 2020, the Company had two outstanding interest rate swap agreements with an aggregate notional amount of $125.1 million. As of

June 28

, 2019, the Company had one outstanding interest rate swap agreement with a notional amount of $64.2 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 the Bank of America Credit Facility Agreement to a fixed interest rate of 2.86% per annum through the scheduled maturity of the term loan in June 2023 (see Note 14). The Company did not designate this interest rate swap for hedge accounting.

On September 3, 2019, the Company drew down a term loan under a new Credit Facility Agreement with the Bank of Ayudhya Public Company Limited (the “Bank”) (see Note 14) and on September 10, 2019, repaid in full the outstanding term loan under the Bank of America Credit Facility (see Note 14). 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 convert 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 based on a regression testing result which proved the hedges are highly effective. In addition, the Company has designated and documented contemporaneously the hedging relationships involving these interest rate swaps. At least quarterly, the Company performs a qualitative effectiveness test on the interest rate swaps to support the continued application of hedge accounting. As of March 27, 2020, the hedging relationship was determined to be highly effective based on the performance of a qualitative effectiveness testing. While the Company intends to continue to meet the conditions for hedge accounting, if hedges do not qualify as highly effective, the changes in the fair value of the derivatives used as hedges would be reflected in earnings. From September 27, 2019, any gains or losses related to these interest rate swaps will be recorded in accumulated other comprehensive income in the unaudited condensed consolidated balance sheets, with a portion reclassified from accumulated other comprehensive income into earnings at each reporting period based on either the accrued interest amount or the interest payment.

As of March 27, 2020, the amount in accumulated other comprehensive income that is expected to be reclassified into earnings within 12 months is $17 thousand.

Prior to September 27, 2019, these interest rate swaps were not designated as cash flow hedges and all changes in the fair value of these interest rate swaps were reflected in earnings. During the nine months ended March 27, 2020 and March 29, 2019, the Company recorded unrealized loss of $1.7 million and $1.6 million, respectively, from changes in the fair value of these interest rate swaps as interest expense in the unaudited condensed consolidated statements of operations and comprehensive income.

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					Nine Months Ended
(amount in thousands)	Financial statements line item		March 27, 2020			March 29, 2019		March 27, 2020			March 29, 2019
Derivatives gain (loss) recognized in other comprehensive income:
Foreign currency forward contracts		Other comprehensive income	$	(6,609	)	$	—	$	(6,609	)	$	—
Interest rate swaps		Other comprehensive income		(1,239	)		—		(956	)		—

Total derivatives loss recognized in other comprehensive income			$	(7,848	)	$	—	$	(7,565	)	$	—


Derivatives gain (loss) reclassified from accumulated other comprehensive income into earnings:
Foreign currency forward contracts		Cost of revenues	$	14		$	—	$	14		$	—
Foreign currency forward contracts		SG&A		1			—		1			—
Foreign currency forward contracts		Foreign exchange loss, net		1,669			—		1,669			—
Interest rate swaps		Interest expense		(405	)		—		(838	)		—

Total derivatives gain reclassified from accumulated other comprehensive income into earnings			$	1,279		$	—	$	846		$	—

Change in net unrealized loss on derivatives instruments			$	(6,569	)	$	—	$	(6,719	)	$	—

Fair value of derivatives

The following table provides the fair values of the Company’s derivative financial instruments for the periods presented:


(amount in thousands)	March 27, 2020						June 28, 2019
(amount in thousands)	Derivative Assets			Derivative Liabilities			Derivative Assets		Derivative Liabilities
Derivatives not designated as hedging instruments
Foreign currency forward and option contracts	$	—		$	(1,833	)	$	2,201	$	—
Interest rate swaps		—			—			—		(2,591	)

Derivatives designated as hedging instruments
Foreign currency forward contracts	$	31		$	(4,956	)	$	—	$	—
Interest rate swaps		83			(5,302	)		—		—

Derivatives, gross balances	$	114		$	(12,091	)	$	2,201	$	(2,591	)
Derivatives, gross balances offset in the balance sheet		(114	)		114			—		—

Derivatives, net balances	$	—		$	(11,977	)	$	2,201	$	(2,591	)

The Company presents its derivatives at net fair values in the unaudited condensed consolidated balance sheets.

The

Company’s netting arrangements allow net settlements under certain conditions. The Company’s derivative instruments are typically settled monthly or quarterly.

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
Fair Value of Derivative Liabilities		Accrued expenses