Fabrinet — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 27, 2020 (Fabrinet fiscal 2020 third quarter), not 2019 Q3 as stated in the request metadata. Comparisons below are with the quarter ended March 29, 2019. Dollar amounts are U.S. dollars.
Business context and reporting period
Fabrinet provides advanced optical packaging and precision optical, electro-mechanical and electronic manufacturing services to OEMs. It operates as one reportable segment and serves optical communications, lasers, sensors and other markets. Optical communications represented 75.0% of revenue in the quarter.
Key financial metrics
| Metric | Three months ended March 27, 2020 | Year-over-year change | Nine months ended March 27, 2020 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $411.2 million | +3.1% | $1,236.7 million | +4.9% |
| Gross profit / margin | $44.3 million / 10.8% | $46.8 million / 11.7% | $139.5 million / 11.3% | $132.6 million / 11.2% |
| Operating income / margin | $27.2 million / 6.6% | $32.3 million / 8.1% | $89.3 million / 7.2% | $90.6 million / 7.7% |
| Net income / margin | $28.3 million / 6.9% | $28.6 million / 7.1% | $85.5 million / 6.9% | $88.0 million / 7.5% |
| Diluted EPS | $0.75 | Compared with $0.76 | $2.27 | Compared with $2.35 |
| Operating cash flow | Not separately presented for the quarter | $104.4 million | Compared with $105.5 million |
For the nine-month period, investing cash outflow was $28.9 million and financing cash outflow was $32.0 million. Capital spending on property, plant and equipment was $27.5 million. Cash, cash equivalents and restricted cash increased by $43.5 million.
At March 27, 2020, cash and cash equivalents were $224.1 million, short-term investments were $233.6 million, and restricted cash was $7.4 million. Management reported $457.8 million of cash, cash equivalents and short-term investments, against $54.8 million of borrowings. Current assets were $1,092.9 million and current liabilities were $327.5 million.
Material changes versus the prior comparable period
- Quarterly revenue increased, but gross margin fell 0.9 percentage points and operating margin fell 1.5 points. Management attributed weaker quarterly gross profit to less favorable product mix and COVID-related supply-chain costs; SG&A also increased.
- Quarterly SG&A rose 21.1% to $17.1 million, including higher share-based compensation, new-business start-up costs, severance expense following a change in Thai labor law, and management compensation.
- For nine months, revenue and gross profit increased, but operating income and net income declined. Higher SG&A and foreign-exchange losses offset revenue growth and cost-control benefits.
- The company refinanced its prior Bank of America term loan with a Bank of Ayudhya loan in September 2019. The new facility had $54.8 million outstanding at quarter-end; interest-rate swaps effectively fixed the loan rate at 4.36% through June 2024. The company reported compliance with loan covenants.
- Fabrinet repurchased 355,000 shares for $20.7 million during the quarter at an average $58.37 per share; $41.5 million remained authorized.
Outlook, commentary and risks
- Management said COVID-19 disrupted operations and supply availability, caused some customers to cancel, reduce or delay orders while others accelerated orders, and increased costs. China facility closures and staffing constraints, Thai restrictions, and a brief California facility closure were described; the company said it had not experienced a direct, materially adverse financial impact through the reporting date.
- Management expected supply-chain disruption and margin pressure to continue, potentially into the first half of fiscal 2021. It noted that a prolonged downturn could reduce demand, particularly in industrial lasers and automotive, while greater internet bandwidth demand could support longer-term optical communications growth.
- Management expected non-North-American customers to contribute a share of revenue during the remainder of fiscal 2020 broadly in line with the 49.0% recorded for the first nine months. It also expected fiscal 2020 SG&A as a percentage of revenue to exceed fiscal 2019’s level and anticipated incremental costs from geographic expansion and wage increases in Thailand and China.
- The company stated that available liquidity, operating cash flow and credit-facility resources should meet working-capital and capital-expenditure needs for at least 12 months. It also said current manufacturing capacity was sufficient for anticipated requirements over the next few quarters.
- Key risks include COVID-19 uncertainty, supply constraints and reliance on single or limited-source suppliers; customer concentration and short-term, nonbinding demand forecasts; optical-communications market concentration; foreign-exchange exposure, especially Thai baht; and trade, regulatory and geopolitical risks. One customer accounted for 16.4% of revenue in both the quarter and nine-month period.
- A $24.3 million advance to a customer supporting transfer of manufacturing operations to Thailand was recorded as a receivable; repayment was due by September 30, 2020. A €6.0 million standby letter of credit supporting the transfer was backed by $7.4 million of restricted cash. Purchase obligations were $15.2 million. No material legal claims were pending or threatened.
Most important facts for investors to verify
- Whether COVID-related supply constraints, customer order changes and elevated costs persisted after March 27, 2020, and whether gross margins recovered as management expected.
- Customer concentration and order patterns, particularly the largest customer’s demand and the sustainability of optical-communications growth.
- Collection of the $24.3 million customer receivable by its stated due date and the status of the related manufacturing transfer and letter of credit.
- Liquidity and investment portfolio quality, debt repayments, covenant compliance, and the effectiveness and accounting treatment of foreign-exchange and interest-rate hedges.
- Actual fiscal 2020 SG&A, expansion costs, and the effect of Thai tax incentives and changing labor costs on future margins.