Fabrinet — Form 10-Q Summary
Business context and reporting period
Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services to OEMs, primarily for optical communications, lasers, sensors and other complex products. This filing covers its first quarter of fiscal 2018, the three months ended September 29, 2017. The comparable quarter ended September 30, 2016; it comprised 14 weeks versus 13 weeks in the current quarter. Figures below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Quarter ended Sep. 29, 2017 | Comparable prior period |
|---|---|---|
| Revenue | $357.3 million | $332.0 million |
| Gross profit / margin | $40.3 million / 11.3% | $39.6 million / 11.9% |
| Operating income / margin | $24.7 million / 6.9% | $23.8 million / 7.1% |
| Net income / margin | $21.0 million / 5.9% | $22.8 million / 6.9% |
| Diluted EPS | $0.55 | $0.61 |
| Net cash used in operating activities | $3.1 million | $1.0 million |
- Revenue rose 7.6%, which management attributed to higher customer demand for optical and non-optical manufacturing services. Optical communications contributed $275.6 million, or 77.1% of revenue.
- Gross profit increased only 1.8% as cost of revenue grew faster than sales; gross margin declined 0.6 percentage points. Operating income increased 3.7%, but operating margin also declined.
- Net income fell 7.6%. A $1.9 million foreign-exchange loss, compared with a $1.7 million gain in the prior period, was a major factor; management cited currency movements, particularly U.S. dollar depreciation against the Thai baht.
- Cash, cash equivalents and marketable securities totaled $263.3 million at quarter-end, including $111.6 million cash and $151.6 million marketable securities. Current assets were $809.3 million and current liabilities $300.0 million.
- Gross borrowings were $67.0 million: $34.0 million revolving debt and $33.0 million term debt. The company had $116.0 million of available credit facilities and reported compliance with all loan covenants. It had repaid $3.4 million of term debt during the quarter.
- Investing cash outflow was $12.1 million, including $11.2 million of property, plant and equipment purchases. Financing cash outflow was $7.1 million. Cash, cash equivalents and restricted cash decreased by $22.2 million.
Changes, outlook, risks and unusual items
- Revenue mix shifted toward Asia-Pacific: its share rose to 40.0% from 34.6%, while North America fell to 43.9% from 50.0%. Revenue outside North America increased to 56.1% of total.
- Management expects optical communications revenue, particularly telecom-related products, to decrease in the near term and expects total revenue in the quarter ending December 29, 2017 to decline versus the September quarter. No specific revenue or earnings guidance amount is provided.
- Management expects fiscal 2018 SG&A to increase in dollars but decrease as a percentage of revenue versus fiscal 2017, partly due to higher share-based compensation. It also expects employee costs in Thailand and China to rise and incremental costs from expansion into new geographic markets.
- On October 30, 2017, Fabrinet reduced its workforce by approximately 204 employees and expects to record about $1.7 million in severance and benefits expense in the quarter ending December 29, 2017.
- The board authorized a share repurchase program of up to $30 million in August 2017; no shares had been repurchased by quarter-end.
- Key risks include reliance on a small number of customers (two customers generated 25% of quarterly revenue), expected telecom-order declines, foreign-exchange exposure, supplier concentration and inventory risks, and operating concentration in Thailand. A 10% weakening of the U.S. dollar against the Thai baht, RMB and GBP would have reduced the net dollar position by an estimated $4.2 million at quarter-end.
- Management stated that available cash, marketable securities, operating cash flow and credit facilities should meet working-capital and capital-expenditure needs for at least 12 months. It also stated that current manufacturing capacity should cover anticipated production for at least the next few quarters.
Important facts for investors to verify
- Whether telecom-related order declines result in the forecast sequential revenue reduction, and how customer concentration affects demand.
- Whether gross margin stabilizes amid rising employee costs, expansion spending and currency movements; monitor the Thai baht exposure and hedge positions.
- Whether working-capital movements, particularly receivables and inventory, improve after negative operating cash flow.
- Whether the $1.7 million workforce-reduction charge is recorded as expected and whether further restructuring or capacity costs arise.
- Whether Fabrinet maintains compliance with credit-facility covenants and its $40 million U.S.-located cash and securities requirement.
- How customer-contract assessments affect adoption of the new revenue-recognition standard; the filing says the assessment is ongoing and adoption is planned for fiscal 2019.