Fabrinet — Form 10-Q Summary
Reporting period: Fiscal second quarter ended December 30, 2011; the filing also reports six-month results. The quarter and comparable prior-year quarter each comprised 13 weeks; the six-month periods comprised 27 and 26 weeks, respectively. Dollar amounts below are in U.S. dollars.
Business context and financial performance
Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services, primarily for low-volume, high-mix products. Severe flooding in Thailand disrupted production during the quarter and drove a substantial decline in revenue and a large one-time flood charge.
| Metric | Three months ended Dec. 30, 2011 | Prior-year quarter | Six months ended Dec. 30, 2011 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $96.6 million | $184.6 million | $283.0 million | $358.4 million |
| Gross profit / margin | $8.9 million / 9.2% | $23.7 million / 12.8% | $31.8 million / 11.2% | $45.4 million / 12.7% |
| Operating income (loss) | $(36.7) million | $17.7 million | $(20.4) million | $34.7 million |
| Net income (loss) | $(33.3) million | $15.8 million | $(17.6) million | $31.0 million |
| Diluted earnings (loss) per share | $(0.96) | $0.46 | $(0.51) | $0.90 |
- Flood-related expense was $40.3 million in the quarter and six-month period. It included inventory and equipment write-offs, restoration estimates, shutdown payroll and recovery costs.
- Revenue fell 47.7% in the quarter and 21.0% for six months, primarily because of flood-related shutdowns. Optical communications revenue was $68.4 million in the quarter; lasers, sensors and other revenue was $28.3 million.
- Lasers, sensors and other markets rose to 29.2% of quarterly revenue, from 19.3% a year earlier; management expected these markets to represent an increasing share over time.
- Cost of revenue was 90.8% of quarterly revenue and 88.8% for six months, versus 87.2% and 87.3%, respectively, in the comparable periods. SG&A was $5.3 million for the quarter and $12.0 million for six months.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $112.1 million at December 30, down from $127.3 million at June 24, 2011. Total debt was $29.9 million, up from $16.4 million; $6.4 million was current and $23.5 million non-current. The company reported compliance with loan covenants.
- For six months, operating cash flow was $(9.4) million, investing cash flow $(20.1) million, and financing cash flow $14.2 million. Capital spending on property, plant and equipment was $18.3 million. Cash decreased by $15.3 million, before a $0.1 million favorable exchange-rate effect.
- Undrawn credit facilities totaled $62.3 million: $50.3 million short-term and $12.0 million long-term. Current assets were $321.6 million and current liabilities $95.8 million at period-end.
- Management expected cash flow to be negative for the quarter ending March 30, 2012, and possibly beyond, but believed available cash, operating cash flow and potential insurance proceeds would meet working-capital and capital needs for at least 12 months. That assessment depends partly on recovery progress and insurance collections.
Flood impacts, outlook and risks
- Thailand production was suspended beginning the week of October 17. Chokchai facilities were inundated; Pinehurst remained dry. By the filing, production at Pinehurst had returned to pre-flood levels and the company said it was serving all customers there.
- Fabrinet recognized $40.3 million of flood costs but had recognized no insurance recovery. Insurance proceeds, if any, remained uncertain and subject to policy exclusions, sublimits and other limitations.
- Potential damage to customer-owned equipment and machinery was estimated at $44 million to $63 million; no liability or provision for those losses had been recorded, and the assessment was ongoing.
- The company warned revenue would be adversely affected for at least the remainder of fiscal 2012 and potentially beyond, and expected revenue for the March 2012 quarter to be substantially below previous periods. Limited capacity was expected until Building 6 construction was completed; full construction was expected in fiscal Q4 2012.
- Current property and casualty insurance, effective January 1, 2012, did not cover flood losses. Management cited higher insurance costs, lack of commercially reasonable flood coverage, possible customer departures, supplier disruption, additional recovery spending and uncertain insurance timing as material risks.
- Other exposures include reliance on a concentrated customer base, short-term and changeable customer orders, sole-source suppliers, Thai baht and RMB currency movements, and debt covenants. No material legal proceedings were reported. Management concluded disclosure controls were effective; no material internal-control changes were reported.
Important facts for investors to verify
- Progress, timing and amount of insurance claims and cash recoveries for flood-related losses.
- Final assessment and allocation of the estimated $44 million to $63 million of customer-owned equipment losses, including any resulting liability or customer disputes.
- Revenue recovery, customer retention, supplier availability and capacity constraints, including Building 6 completion and capital spending.
- Actual post-flood cash flow, liquidity and financing needs compared with management’s 12-month sufficiency assessment.
- Whether flood-related costs, insurance effects and customer or supplier disruptions continue to affect margins and results beyond fiscal 2012.