Fabrinet Form 10-Q Summary
Reporting period: The filing covers the quarter ended March 29, 2019 (Fabrinet fiscal 2019 third quarter), not 2018 Q3 as indicated in the request metadata. The quarter comprised 13 weeks; year-to-date results cover 39 weeks. Unless otherwise stated, amounts are U.S. dollars.
Business context and results
Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services, primarily for optical communications products. Optical communications represented 74.7% of Q3 revenue; the company reports one operating segment.
| Metric | Q3 FY2019 | Q3 prior year | Nine months FY2019 | Nine months prior year |
|---|---|---|---|---|
| Revenue | $399.0 million | $332.2 million | $1,179.2 million | $1,026.6 million |
| Gross profit | $46.8 million | $36.9 million | $132.6 million | $114.4 million |
| Gross margin | 11.7% | 11.1% | 11.2% | 11.1% |
| Operating income | $32.3 million | $24.5 million | $90.6 million | $71.4 million |
| Net income | $28.6 million | $21.1 million | $88.0 million | $61.4 million |
| Diluted EPS | $0.76 | $0.55 | $2.35 | $1.61 |
Financial position, cash flow and liquidity
- Q3 revenue grew 20.1% year over year and net income increased about 36%; nine-month revenue grew 14.9% and net income about 43%. Management attributed revenue growth chiefly to higher customer demand in optical and non-optical manufacturing.
- Q3 operating margin was 8.1%, versus 7.4% a year earlier. Operating income growth reflected higher gross profit; management cited revenue growth and cost controls as drivers of gross-profit improvement.
- For the nine months, operating cash flow was $105.5 million, compared with $89.8 million. Investing cash flow was negative $79.0 million, including net purchases of short-term investments; financing cash flow was negative $22.1 million. Capital spending on property, plant and equipment was $13.2 million. Cash and restricted cash increased by $4.4 million.
- At March 29, cash and cash equivalents were $166.4 million and short-term investments were $242.5 million, or $408.9 million combined. Current assets were $987.5 million and current liabilities $305.6 million.
- Total bank borrowings were approximately $61.8 million, with no revolving loans outstanding. The company had $25 million of available revolving commitments beyond one year and reported compliance with its credit-facility covenants.
Material changes, outlook and risks
- Revenue growth was led by optical communications, up 23.8% in Q3; lasers, sensors and other revenue increased 10.3%. North America accounted for 49.0% of Q3 revenue and Asia-Pacific 37.9%.
- Management expected SG&A as a percentage of revenue to decline in fiscal 2019, non-North-American revenue share to remain around the year-to-date proportion, and current manufacturing capacity to cover anticipated needs for at least the next few quarters. It expected incremental cost of revenue from geographic expansion and continued employee-cost increases in Thailand and China. No numerical revenue or earnings guidance was provided.
- Q3 included a $3.1 million foreign-exchange loss; management linked the increase partly to mark-to-market losses on Thai-baht forward contracts. Interest expense also included losses on the interest-rate swap. The company uses derivatives but does not designate the disclosed contracts as hedges for accounting purposes.
- Customer concentration is significant: one customer generated 20% of Q3 revenue and 19% of nine-month revenue. Two customers each represented at least 10% of receivables at period end.
- Key disclosed risks include customer order variability and concentration, dependence on optical communications, foreign-exchange and Thai political exposure, constrained or single-source suppliers, inventory and yield risks, and potential effects of trade tariffs. Management said cash, investments, operating cash flow and credit availability should meet working-capital and capital needs for at least 12 months.
- Fabrinet adopted ASC 606 using the modified retrospective method; prior-year comparisons were not restated. The filing’s reconciliation shows a $0.325 million reduction to nine-month net income versus the prior revenue standard; Q3’s net-income adjustment was positive $0.094 million.
- After quarter end, a Thai law increasing certain long-service severance payments took effect on May 4, 2019; the company was assessing the impact. In May 2019, the board authorized an additional $50 million of share repurchases, bringing aggregate authorization to $110 million. No material legal proceedings were reported. Management stated disclosure controls were effective.
Important facts for investors to verify
- Whether the customer-driven revenue growth and gross-margin improvement are sustainable, especially given customer concentration and short-term order commitments.
- Working-capital trends: inventory reached $285.4 million and receivables $265.1 million; confirm subsequent conversion to cash and inventory quality.
- Exposure to Thai-baht appreciation, including the effectiveness and accounting volatility of foreign-exchange contracts and the interest-rate swap.
- Compliance with debt covenants and the terms and availability of the $25 million revolving facility; $40 million of U.S.-located cash, cash equivalents or marketable securities is required under the facility.
- The financial effect of the Thai severance-law change and the timing and execution of the expanded repurchase authorization.