Fabrinet — Form 10-Q Summary
Business context and reporting period
Fabrinet provides optical, electro-mechanical and electronic manufacturing services to OEMs, primarily for complex, low-volume, high-mix products. This filing covers the 13 weeks and six months ended December 29, 2017, the second quarter and first half of fiscal 2018. The comparable six-month 2016 period was 27 weeks, versus 26 weeks in 2017.
Key financial metrics
| Metric | Three months ended Dec. 29, 2017 | Prior-year quarter | Six months ended Dec. 29, 2017 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $337.1 million | $351.2 million | $694.4 million | $683.2 million |
| Gross profit / margin | $37.2 million / 11.0% | $43.0 million / 12.3% | $77.5 million / 11.2% | $82.7 million / 12.1% |
| Operating income / margin | $22.2 million / 6.6% | $25.4 million / 7.3% | $46.9 million / 6.8% | $49.2 million / 7.2% |
| Net income | $19.3 million | $25.3 million | $40.3 million | $48.1 million |
| Diluted EPS | $0.51 | $0.67 | $1.06 | $1.28 |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $37.1 million | $19.8 million |
- Quarterly revenue fell 4.0% year over year, while first-half revenue rose 1.6%. Quarterly optical communications revenue declined to $241.9 million from $274.2 million; lasers, sensors and other revenue increased to $95.2 million from $76.9 million.
- Quarterly net income declined 23.6%; first-half net income declined 16.1%. Lower gross margins and foreign-exchange losses contributed to weaker earnings.
- First-half investing cash outflow was $20.6 million, including $21.4 million of property, plant and equipment purchases. Financing cash outflow was $15.6 million, including $9.9 million of share repurchases.
- At December 29, cash and cash equivalents were $134.8 million and marketable securities were $149.4 million. Total assets were $1.04 billion; current assets were $799.3 million and current liabilities $281.8 million.
- Debt was approximately $68.4 million: $39.0 million revolving borrowings and $29.6 million term loans. The company reported $111.0 million of available credit facilities and compliance with all facility covenants.
Material changes and unusual items
- Quarterly gross margin decreased 1.3 percentage points year over year; first-half gross margin decreased 0.9 points. Cost of revenue rose as a share of revenue in both comparisons.
- Foreign exchange shifted from a $1.9 million gain in the prior-year quarter to a $1.3 million loss; for the six months, the result shifted from a $3.6 million gain to a $3.3 million loss. Management attributed the change primarily to currency movements, particularly U.S. dollar depreciation against the Thai baht.
- The company recorded $1.8 million of workforce-reduction costs for terminating approximately 204 employees.
- Fabrinet repurchased 315,973 shares for $9.9 million at an average $31.36 per share under a $30 million authorization; $20.1 million remained authorized at period-end. In February 2018, the board approved an additional $30 million, raising aggregate authorization to $60 million.
- The December 2017 U.S. tax law reduced the value of U.S. subsidiary deferred tax assets, offset by reversal of a valuation allowance; the company reported no resulting financial-statement impact.
Outlook, management commentary and risks
- Management expects non-North-American customers to account for a growing share of future revenue. It expects fiscal 2018 SG&A to rise in absolute dollars but decline as a percentage of revenue versus fiscal 2017, and expects employee costs to increase in Thailand and China.
- Expansion into new geographic markets is expected to add costs of revenue. Management said current manufacturing capacity should meet anticipated requirements for at least the next few quarters.
- Management believes cash, marketable securities, operating cash flow and credit availability will be sufficient for working-capital and capital-expenditure needs for at least 12 months. It also noted a term-loan maturity within the next 12 months.
- Key disclosed risks include dependence on a small number of customers, short-term and nonbinding customer forecasts, optical communications market cyclicality, competition and pricing pressure, supply constraints, inventory obsolescence, and exposure to the Thai baht and other currencies. One customer represented 17% of quarterly revenue and 15% of first-half revenue; three customers each represented at least 10% of receivables at period-end.
- Other considerations include debt covenants and collateral requirements, tax examinations and uncertain tax positions, Thailand and China operating risks, and possible product-quality or warranty claims. The company reported no material pending or threatened legal claims and said disclosure controls were effective.
Important facts for investors to verify
- Whether optical communications demand and gross-margin pressure persist, and whether growth in other end markets offsets declines.
- Customer concentration, order visibility, receivables collection and inventory exposure, including the ability to recover customer-specific or excess materials.
- Thai baht and other currency movements, hedge coverage and their effect on operating costs and reported earnings.
- Debt maturities, revolving-credit renewal terms, covenant compliance and the $40 million U.S.-located cash and securities requirement.
- Execution and costs of geographic expansion, the remaining share-repurchase authorization, and any material developments in tax positions or commitments.