Fabrinet — FY2017 Form 10-K
Reporting period: Fiscal year ended June 30, 2017 (53 weeks), compared with fiscal 2016 ended June 24, 2016 (52 weeks). Although the request references 2016 Q4, the filing is the FY2017 annual report; it also reports unaudited fourth-quarter results. Amounts below are in U.S. dollars.
Business context
Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services, primarily to optical communications OEMs, and also serves industrial laser, medical, sensor and other markets. Optical communications rose to 78.0% of FY2017 revenue from 74.5%; lasers, sensors and other markets fell to 22.0% from 25.5%. Fabrinet operates as one reportable segment. In September 2016 it acquired UK-based Exception EMS for approximately $13.0 million, net of cash acquired.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $1,420.5 million | $976.7 million |
| Gross profit / margin | $171.5 million / 12.1% | $119.5 million / 12.2% |
| Operating income / margin | $105.8 million / 7.5% | $69.8 million / 7.1% |
| Net income / margin | $97.1 million / 6.8% | $61.9 million / 6.3% |
| Diluted EPS | $2.57 | $1.68 |
| Operating cash flow | $70.9 million | $47.1 million |
| Capital expenditures | $56.2 million | $55.2 million |
FY2017 revenue increased 45.4%, reflecting stronger customer demand, the additional fiscal week and acquired Exception EMS revenue. Optical communications revenue was $1,108.6 million, up from $727.6 million; lasers, sensors and other revenue was $311.9 million, up from $249.2 million. Higher share-based compensation, including accelerated vesting of executive awards, contributed to expense growth.
Fourth quarter: For the three months ended June 30, 2017, revenue was $370.5 million, gross profit $44.8 million and net income $27.4 million; basic and diluted EPS were $0.73 and $0.72. The comparable quarter ended June 24, 2016 reported revenue of $276.4 million, gross profit of $33.8 million and net income of $19.7 million; basic and diluted EPS were $0.55 and $0.53.
Liquidity and debt: At June 30, 2017, cash and cash equivalents were $133.8 million and marketable securities $151.5 million, totaling $285.3 million. Reported working capital was $287.8 million. Debt was approximately $71.1 million, comprising $34.0 million of revolving borrowings and $36.4 million of term borrowings, plus approximately $1.0 million of short-term borrowing assumed with Exception EMS. The company reported $116.0 million of available credit facilities and compliance with its loan covenants. Operating cash flow less capital expenditures was approximately $14.7 million.
Material changes, outlook and notable items
- Revenue growth came with nearly flat gross margin: 12.1% versus 12.2%. Operating and net margins improved, to 7.5% and 6.8%, respectively.
- Operating cash flow improved, while cash, cash equivalents and restricted cash decreased by $6.2 million. Investing cash outflow was $90.6 million, including facility investment, marketable securities activity and the acquisition.
- Management expected FY2018 SG&A to rise in absolute dollars but decline as a percentage of revenue. It also expected employee costs in Thailand and China to increase and incremental cost of revenue from geographic expansion; no amount was provided for those incremental costs.
- The new Chonburi, Thailand facility began operations in FY2017 Q4. Management said existing capacity was sufficient for anticipated production requirements for at least the next few quarters and expected additional FY2018 equipment purchases in the United States and Thailand.
- In August 2017, after year-end, the board approved a share repurchase program of up to $30 million. The company stated it did not currently intend to pay dividends.
- Key risks include customer concentration and nonbinding, short-term orders; reliance on sole-source suppliers; Thai baht and other currency exposure; Thailand political and natural-disaster risks; product quality and warranty claims; and execution and integration risks from acquisitions. One customer represented 17% of FY2017 revenue, down from 20% in FY2016.
- The effective tax rate was 5.5%, versus 6.7%, reflecting higher income not subject to tax. Thai tax incentives are conditional and include restrictions on moving certain manufacturing facilities through at least June 2020.
- The auditor reported effective internal control over financial reporting at June 30, 2017. The filing reports no material pending or threatened legal claims.
Important facts for investors to verify
- How much of FY2017’s 45.4% revenue growth reflects underlying demand versus the extra fiscal week and Exception EMS acquisition.
- Whether gross margins can hold or improve amid wage inflation, currency movements, materials constraints and changing product mix.
- Customer concentration, order visibility, receivables and inventory exposure; receivables and net inventory rose to $264.3 million and $238.7 million, respectively.
- Debt maturities, covenant headroom and the terms or utilization of the revolving facility, including its short-term renewal structure.
- Integration and performance of Exception EMS, and the timing and returns from new facility and capacity investments.
- The conditions and duration of tax incentives, the status of tax examinations and uncertain tax positions, and the execution of the post-year-end share repurchase authorization.