Fabrinet — Form 10-Q Summary
Period clarification: The filing is for the quarter ended March 25, 2016 (Fabrinet fiscal 2016 third quarter), not 2015 Q3 as indicated in the request metadata. The quarter and comparable prior-year quarter each comprised 13 weeks; the nine-month periods each comprised 39 weeks. Unless stated otherwise, figures below are in U.S. dollars.
Business context
Fabrinet provides advanced optical packaging and precision optical, electro-mechanical and electronic manufacturing services to OEMs. It operates as one reportable segment, with manufacturing primarily in Asia-Pacific. Optical communications accounted for 76.6% of quarterly revenue and 73.6% of nine-month revenue.
Financial performance
| Metric | Quarter ended Mar. 25, 2016 | Year-over-year change | Nine months ended Mar. 25, 2016 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $250.9 million | Up 32.4% | $700.4 million | Up 23.5% |
| Gross profit / margin | $31.2 million / 12.4% | Margin up from 11.4% | $85.7 million / 12.2% | Margin up from 11.2% |
| Operating income / margin | $19.8 million / 7.9% | Margin up from 6.3% | $47.8 million / 6.8% | Margin up from 5.9% |
| Net income / margin | $20.8 million / 8.3% | Up from $10.8 million / 5.7% | $42.2 million / 6.0% | Up from $30.6 million / 5.4% |
| Diluted EPS | $0.56 | Up from $0.30 | $1.15 | Up from $0.85 |
Revenue growth reflected higher customer demand for optical and non-optical communications manufacturing services. Management attributed improved gross margin primarily to a more favorable product mix. Prior-year comparisons were also affected by $4.6 million of consignment revenue that could not be recognized in the prior-year period.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $41.4 million, versus $40.5 million a year earlier. Higher net income and lower vendor payments were partly offset by increases in receivables and inventory.
- Investing cash outflow was $35.8 million, compared with $169.2 million in the prior-year period. Capital expenditures were $33.5 million, down from $43.0 million.
- At March 25, 2016, cash and cash equivalents were $128.0 million and marketable securities were $144.8 million, totaling $272.8 million. The company reported total bank borrowings of $50.0 million: $44.0 million revolving and $6.0 million long-term borrowing, classified as current.
- The credit facility had $156.0 million of stated availability. A covenant requires at least $40.0 million of cash, cash equivalents and/or marketable securities in qualifying U.S. accounts. Fabrinet reported compliance with its facility covenants.
- Working capital was $374.8 million, based on current assets of $603.8 million less current liabilities of $228.9 million. Receivables rose to $172.1 million and net inventory to $150.0 million from June 26, 2015.
Changes, outlook and notable items
- Quarterly foreign-exchange results included a $3.1 million gain, versus a small prior-year loss; for the nine-month period, the company recorded a $1.2 million foreign-exchange loss. The quarterly gain materially contributed to income before tax.
- Flood-related income was $0.9 million in the quarter, primarily an insurer payment. For the nine months, net flood-related income was only $0.04 million after related repair and inventory-loss expenses. The affected China facility had resumed operations in August 2015.
- Management said current cash, securities, operating cash flow and available credit should be sufficient for working capital and capital expenditure needs for the next 12 months. No specific revenue or earnings guidance was provided.
- Fabrinet began construction of a new manufacturing building at its Chonburi campus in December 2015 and expected completion in the first quarter of fiscal 2017. It reported current capacity was sufficient for the next few quarters, but a significant construction delay could constrain production. Outstanding commitments to third parties were approximately $35.4 million, mainly for this project.
- Management expected fiscal 2016 SG&A to increase in dollars and as a percentage of revenue compared with fiscal 2015, partly due to startup costs at the U.S. facility. It also expected incremental cost of revenue from expansion into new geographic markets and higher employee costs in Thailand and China.
- Key risks include customer concentration and order volatility, reliance on sole- or limited-source suppliers, inventory exposure, foreign-exchange movements, and disruption from political or natural events in Thailand and China. Customers representing at least 10% of revenue accounted collectively for 21% of quarterly revenue and 20% of nine-month revenue, compared with 30% and 31%, respectively, in the prior-year periods.
- The company reported no material pending or threatened legal claims and stated that disclosure controls were effective. It implemented formal hedge-accounting controls during the quarter; this change did not materially affect internal control over financial reporting.
Important facts for investors to verify
- Confirm the period being analyzed: the filing covers fiscal 2016 Q3, ended March 25, 2016.
- Assess how much earnings growth came from operating performance versus the $3.1 million quarterly foreign-exchange gain and flood-insurance income.
- Monitor receivables, inventory and operating cash conversion as sales expand.
- Review customer concentration, order visibility and exposure to supplier shortages and customer-specific inventory.
- Track Chonburi construction costs and timing, U.S. facility startup expenses, and covenant and liquidity requirements.
- Evaluate exposure to Thai baht and renminbi movements, as well as operating and political risks in Thailand and China.