Fabrinet FY2015 Form 10-K Summary
Period note: The request identifies “2014 Q4,” but the supplied filing is Fabrinet’s Form 10-K for the fiscal year ended June 26, 2015. It also reports unaudited fourth-quarter results for the three months ended June 26, 2015.
Business context and reporting period
Fabrinet provides optical, electro-mechanical and electronic manufacturing services, primarily for optical communications products, as well as industrial lasers, sensors, medical and other products. It operates as one segment, with most manufacturing capacity in Thailand and additional operations in China and the United States. Optical communications generated 71.5% of FY2015 revenue; lasers, sensors and other markets generated 28.5%.
Key financial metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $773.6 million | $677.9 million |
| Gross profit / margin | $87.8 million / 11.4% | $74.2 million / 11.0% |
| Operating income / margin | $47.2 million / 6.1% | $91.3 million / 13.5% |
| Net income / margin | $43.6 million / 5.6% | $91.7 million / 13.5% |
| Diluted EPS | $1.21 | $2.58 |
| Operating cash flow | $52.6 million | $66.6 million |
| Capital expenditures | $56.1 million | $10.6 million |
| Cash and cash equivalents | $113.0 million | $233.5 million |
| Marketable securities | $142.9 million | None reported |
| Current and long-term debt | $40.5 million | $16.5 million |
| Working capital, as defined in the filing | $150.2 million | $130.9 million |
Fourth-quarter FY2015 revenue was $206.5 million, gross profit $24.5 million and net income $13.0 million. The comparable FY2014 quarter reported revenue of $160.1 million, gross profit of $17.8 million and net income of $10.3 million.
At year-end, total cash, cash equivalents and marketable securities were $255.8 million. Operating cash flow declined 20.9% year over year. Investing activities used $195.5 million, principally reflecting purchases of marketable securities and property and equipment. The company reported $170 million of available credit under its syndicated facility after $30 million was drawn.
Changes versus the prior comparable period
- Revenue rose 14.1%, supported by higher demand across optical and non-optical manufacturing services and $16.5 million of consignment revenue recognized in FY2015.
- Gross margin improved modestly, from 11.0% to 11.4%, with management citing favorable product mix and higher sales volume.
- Operating income fell 48.4% and net income fell 52.4%. The FY2014 comparison included $44.7 million of net income related to flooding; FY2015 had no such benefit. FY2015 SG&A also rose 42.6%, including investigation costs, share-based compensation and U.S. facility startup expenses.
- Cash and cash equivalents decreased, while the company added $142.9 million of marketable securities and increased debt to fund the U.S. facility purchase.
- Two customers each generated at least 10% of revenue; together they represented 30% of FY2015 revenue versus 46% in FY2014. JDS Uniphase accounted for 20% and Oclaro for 10% in FY2015.
Outlook, risks and unusual items
- Management expected available cash, securities, operating cash flow and credit to meet working-capital and capital expenditure needs for at least 12 months. It also expected current capacity to cover anticipated requirements over that period.
- For FY2016, management expected SG&A to increase both in dollars and as a percentage of revenue, partly due to startup costs for the U.S. facility. It anticipated higher employee costs in Thailand and China and incremental costs from diversification and geographic expansion; no amount was specified.
- Customer concentration, short-term and cancellable purchase orders, pricing pressure, inventory exposure and reliance on sole-source suppliers create demand, margin and working-capital risks. Operations are particularly exposed to Thailand, including political instability and natural disasters; currency movements, especially the Thai baht against the U.S. dollar, can also affect results.
- The company disclosed improper revenue recognition involving unfinished consignment goods and employee collusion. It concluded that prior-period errors were not material and did not restate FY2012 or FY2013 financial statements. A material weakness in FY2014 internal control related to revenue recognition; management said it was remediated by year-end FY2015, and the auditor opined that internal control was effective as of June 26, 2015.
- After year-end, Typhoon Soudelor temporarily halted production at a China facility. Fabrinet expected production to resume in August 2015; the financial impact was still being estimated, and FY2015 results were unaffected.
- Fabrinet reported no material pending or threatened legal claims. It was in compliance with its debt covenants at year-end; debt agreements include financial covenants, collateral provisions and restrictions.
Important facts for investors to verify
- Whether FY2015 consignment revenue and the related revenue-recognition controls have been applied consistently, and whether the reported remediation remains effective.
- How much FY2015 revenue growth is recurring customer demand versus the $16.5 million consignment-revenue item.
- Whether margins and cash conversion can hold as U.S. facility startup costs, expansion spending and labor costs increase.
- Current customer concentration, order trends and exposure to financially distressed customers or critical single-source suppliers.
- The subsequent-event costs, insurance recovery and operational impact from Typhoon Soudelor.
- Debt repayment and covenant headroom, including the use and availability of the credit facility.