Fabrinet (FN) — Form 10-K Summary
Period clarification: The filing is for the fiscal year ended June 28, 2019 (FY2019), not a standalone 2018 Q4 filing. It includes unaudited quarterly data, including the quarter ended June 28, 2019, compared with the quarter ended June 29, 2018. Unless noted otherwise, amounts below are U.S. dollars.
Business context and reporting period
Fabrinet provides advanced optical packaging and precision optical, electro-mechanical, and electronic manufacturing services, principally for optical communications, industrial lasers, sensors, automotive, and medical markets. It operates one reportable segment; most manufacturing is in Thailand. FY2019 and FY2018 each comprised 52 weeks.
Key financial metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $1,584.3 million | $1,371.9 million | +15.5% |
| Gross profit / margin | $179.2 million / 11.3% | $153.4 million / 11.2% | Margin +0.1 percentage point |
| Operating income / margin | $122.6 million / 7.7% | $93.8 million / 6.9% | Income +30.7% |
| Net income / margin | $121.0 million / 7.6% | $84.2 million / 6.2% | Income +43.7% |
| Diluted earnings per share | $3.23 | $2.21 | +46.2% |
| Operating cash flow | $147.4 million | $138.1 million | +6.7% |
FY2019 gross margin benefited from higher revenue and fixed-cost leverage. SG&A declined to $55.1 million from $57.8 million. The effective tax rate was 4.6%, versus 5.0% in FY2018.
At June 28, 2019, cash and cash equivalents were $180.8 million and short-term investments were $256.5 million. Current assets were $1,023.8 million and current liabilities $313.0 million. Total debt was $60.9 million, including $3.25 million current. Working capital, as defined in the filing as receivables plus inventory less payables, was $296.6 million. Capital expenditures were $20.8 million.
FY2019 Q4 revenue was $405.1 million, gross profit $46.6 million, and net income $33.0 million; the corresponding FY2018 Q4 figures were $345.3 million, $39.0 million, and $22.8 million. Q4 diluted EPS was $0.88 versus $0.60.
Material changes versus the prior comparable period
- Annual growth was driven primarily by increased customer demand for optical communications manufacturing, particularly telecom products. Optical communications revenue rose to $1,184.9 million from $1,000.3 million; its share of revenue increased to 74.8% from 72.9%.
- Revenue from lasers, sensors, and other markets increased to $399.4 million from $371.7 million, but declined as a share of total revenue to 25.2% from 27.1%.
- Net foreign-exchange results improved to a $1.4 million gain from a $6.6 million loss. The FY2019 figure included a $4.8 million unrealized gain on currency derivatives.
- Operating cash flow rose, while inventory increased to $293.6 million from $257.7 million. Short-term investments increased to $256.5 million from $174.3 million; total debt declined to $60.9 million from $64.2 million.
Outlook, risks, contingencies, and unusual items
- Outlook: No numeric revenue or earnings guidance is provided. Management expected FY2020 SG&A and capital expenditures to increase, and expected employee costs to rise, including due to wage pressures and a Thai severance-law change. It anticipated incremental costs from geographic expansion and expected revenue from outside North America to increase as a share of the total.
- Huawei/export restrictions: The U.S. addition of Huawei and affiliates to the Entity List led some customers to suspend shipments while assessing restrictions. Fabrinet reported an immediate effect on customer orders in FY2019 Q4 and expected adverse effects for the foreseeable future.
- Customer concentration: Lumentum generated 20% of FY2019 revenue, up from 16% in FY2018. Orders are generally short-term and customer forecasts are not binding; customer reductions, cancellations, pricing pressure, or financial distress could affect results.
- Operating and geographic risks: The filing highlights supply-chain strain and sole-source suppliers, Thai-baht exposure, U.S.-China trade and tariff uncertainty, and reliance on manufacturing in Thailand and China. Foreign-exchange exposure can affect margins; management uses derivatives but does not eliminate longer-term currency risk.
- Debt and commitments: The $60.9 million term loan matures in June 2023 and is subject to financial covenants; the company reported compliance at year-end. A €6.0 million standby letter of credit was backed by $7.4 million of restricted cash. A subsequent €16.2 million letter of credit, backed by $22.1 million cash collateral, was entered into July 8, 2019.
- Accounting and other items: Fabrinet adopted ASC 606 using the modified retrospective method. For FY2019, the filing reports adoption reduced revenue by $2.6 million, gross profit by $0.8 million, net income by $0.8 million, and diluted EPS by $0.02 versus results without adoption. The filing reports $1.5 million of workforce-reduction expenses in FY2019. Auditors gave unqualified opinions on the financial statements and internal controls; management also reported effective controls.
Important facts for investors to verify
- Confirm the intended period: this is an FY2019 10-K, and its Q4 comparison is June 2019 versus June 2018—not a standalone 2018 Q4 filing.
- Track Lumentum concentration, customer order trends, and the continuing revenue and order effects of Huawei-related export restrictions.
- Assess whether inventory growth, receivables, and operating cash flow remain aligned as revenue expands.
- Review the expected FY2020 increases in capital spending, SG&A, labor costs, and expansion-related costs against actual results.
- Check debt covenant compliance, restricted cash and letter-of-credit requirements, currency-hedging outcomes, and the expiration conditions of Thai tax incentives.