Fabrinet — Form 10-Q Summary
Period clarification: The request labels this “2014 Q3,” but the filing is for the quarter ended March 27, 2015 (Fabrinet fiscal 2015 Q3), with nine-month comparisons to March 28, 2014. Unaudited results; amounts below are in U.S. dollars.
Business context and reporting period
Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services, primarily for optical communications, and also for lasers, sensors and other markets. It operates as one reportable segment, with most manufacturing in Asia-Pacific.
Financial performance and liquidity
| Metric | Three months ended Mar. 27, 2015 | Prior-year quarter | Nine months ended Mar. 27, 2015 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $189.5m | $167.7m | $567.1m | $517.8m |
| Gross profit / margin | $21.7m / 11.4% | $17.3m / 10.3% | $63.2m / 11.2% | $56.5m / 10.9% |
| Operating income | $12.0m | $48.1m | $33.4m | $80.2m |
| Net income | $10.8m | $47.7m | $30.6m | $81.4m |
| Diluted EPS | $0.30 | $1.33 | $0.85 | $2.29 |
- Quarterly revenue rose 13.0%; nine-month revenue rose 9.5%. Management attributed growth to higher customer demand in optical and non-optical manufacturing services.
- For the quarter, favorable product mix lifted gross margin to 11.4%. SG&A rose 31.1% to $9.7m, including increased U.S. facility, executive compensation and sales and marketing costs. Nine-month SG&A was $28.7m, including $4.1m of Audit Committee investigation costs.
- Operating income and net income fell sharply against prior-year periods that included $38.2m of net flood-related income in the quarter and $44.7m for the nine months. The prior-period flood proceeds were not recurring.
- Nine-month operating cash flow was $40.5m, versus $58.6m; capital expenditures were $43.0m. Investing cash outflow was $169.2m, largely reflecting purchases of marketable securities and property, plant and equipment. Financing cash inflow was $24.1m, including $30.0m drawn on the revolving facility.
- At March 27, cash and cash equivalents were $128.9m and marketable securities $125.4m, or $254.3m combined. Debt totaled $42.0m: $30.0m revolving borrowings and $12.0m long-term loans. The $200m syndicated facility had $170m available; the company reported covenant compliance.
- Current assets were $506.6m and current liabilities $167.6m. A $40m minimum U.S.-located cash, cash-equivalent and marketable-securities covenant applies under the facility.
Material changes, outlook and risks
- Fabrinet bought a Santa Clara, California property for $25.5m to expand U.S. manufacturing capacity. Nine-month PP&E purchases were $43.0m. Management said current capacity, including the new facility, should meet anticipated production needs for at least 12 months.
- Management expected fiscal 2015 SG&A to increase in both dollars and as a percentage of revenue versus fiscal 2014, partly due to U.S. facility start-up. It also expected incremental cost of revenue from diversification, new geographies and development of customized optics and glass, and higher employee costs in Thailand and China. No quantified revenue or earnings guidance is provided.
- A workforce reduction of approximately 100 employees resulted in $1.2m of severance and benefit costs during the nine months.
- The filing reports a material weakness in internal control over financial reporting concerning revenue recognition under certain volume supply agreements; disclosure controls were deemed ineffective as of March 27, 2015. Remediation included technical accounting support, staff training and enhanced contract review. Management said remediation was ongoing.
- The company disclosed prior-period consignment revenue recognition errors and said the errors were not material to previously issued statements, so comparative statements were not adjusted. Amended customer agreements supported $8.0m of consignment revenue and $0.8m of gross profit in the current nine-month period.
- Key risks include dependence on a small number of customers (two customers together represented 30% of quarterly revenue and 31% of nine-month revenue), short-term and changeable customer orders, supplier concentration, foreign-exchange exposure, and political, operational and natural-disaster risks in Thailand and China. No material legal claims were reported as pending or threatened.
Important facts for investors to verify
- Confirm the fiscal-period label: the filing covers fiscal 2015 Q3, not 2014 Q3.
- Review the revenue-recognition material weakness, prior-period error disclosures and whether remediation was completed and independently tested.
- Assess recurring operating profitability separately from the prior-year flood-related gains, and monitor gross-margin and SG&A trends.
- Verify cash availability and restrictions, the revolving loan’s renewal and maturity terms, covenant headroom, and the planned use of credit for expansion.
- Monitor customer concentration, order visibility, expansion costs and utilization of the Santa Clara facility, and the impact of currency, wage and supplier risks.