Fabrinet — Form 10-Q Summary
Business and period. Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services, mainly for low-volume, high-mix products. This unaudited report covers the 13-week fiscal second quarter and six months ended December 25, 2015; comparisons are with the periods ended December 26, 2014. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $233.0 million; up 23.7% | $449.5 million; up 19.0% |
| Gross profit / margin | $28.5 million / 12.2% | $54.5 million / 12.1% |
| Operating income / margin | $14.8 million / 6.3% | $28.0 million / 6.2% |
| Net income / diluted EPS | $19.8 million / $0.54 | $21.4 million / $0.59 |
| Operating cash flow | Not separately presented | $23.7 million, versus $30.6 million |
- Quarterly revenue growth reflected higher demand for optical and non-optical manufacturing services and a $4.8 million consignment-revenue comparison effect: the prior-year quarter did not recognize that revenue. Optical communications contributed 72.4% of quarterly revenue; lasers, sensors and other contributed the balance.
- Gross margin improved from 11.2% to 12.2% for the quarter and from 11.0% to 12.1% for the half, primarily due to more favorable product mix. SG&A increased 33.0% in the quarter, including higher U.S. facility startup costs and compensation-related expenses.
- Quarterly foreign-exchange gain was $6.2 million, versus $0.1 million a year earlier; the six-month period instead recorded a $4.3 million foreign-exchange loss. These derivative fair-value movements materially affected the comparison of pretax and net income. Six-month net income declined from $19.8 million to $21.4 million? The filing reports $21.4 million versus $19.8 million, an increase; net margin nevertheless fell from 5.2% to 4.8%.
- Six-month operating cash flow fell by $6.9 million, mainly reflecting increased receivables and inventory associated with higher sales, and increased vendor payments. Investing cash outflow was $19.6 million, including $26.4 million of property and equipment purchases; financing provided $15.0 million, including an $18.0 million revolving-loan draw. Cash and equivalents increased to $131.4 million.
- At December 25, cash, cash equivalents and marketable securities totaled $266.6 million, compared with $255.8 million at June 26, 2015. Total borrowings were $55.5 million, including $48.0 million of revolving debt. The company reported $152.0 million of available credit under its main facility and compliance with its covenants. The revolver’s maturity was extended to February 2016; at least $40.0 million of U.S.-located cash and securities must be maintained under the facility.
Changes, outlook and key risks
- Revenue increased in both reported periods, with North America’s share rising to 53.3% for the quarter and 51.3% for the half. Management expects the share of revenue billed outside North America to continue decreasing.
- Management expects fiscal 2016 SG&A to increase in dollars and as a percentage of revenue, partly due to startup costs at the new U.S. manufacturing facility. It also expects incremental cost of revenue from diversification into industrial lasers, automotive, sensors and other markets, customized optics and glass, and expansion into new geographies. No specific revenue or earnings guidance is provided.
- Fabrinet purchased Chonburi, Thailand land for approximately $12.4 million and began construction of a manufacturing facility, expected to be completed in the second quarter of fiscal 2017. It reported $33.3 million of outstanding third-party commitments, mainly related to that construction. Management said current cash, operating cash flow and credit availability should cover working capital and capital needs for the next 12 months.
- Typhoon-related flooding temporarily halted production at the China facility in August 2015. The company recorded $0.9 million of losses for the six months and expects to recover a majority through insurance, but policy exclusions and limits could reduce recovery; no recovery had been recognized as realizable and probable in the filing.
- Other items include $1.2 million of prior-year workforce-reduction expense and approximately $0.7 million of severance expense incurred in January 2016 following a former named executive officer’s resignation. The six-month effective tax rate increased to 10.7% from 9.2%, partly because a Thai subsidiary tax privilege expired.
- Principal risks include dependence on a small number of customers (two customers represented 31% of quarterly revenue), short-term and changeable customer orders, sole-source supply constraints, inventory exposure, foreign-exchange movements, Thailand and China operating and political risks, and execution or delay risk in capacity expansion. The company also cautions that customer, market and product mix changes can cause significant quarterly fluctuations.
Investor verification points
- Confirm the extent to which quarterly earnings depended on the $6.2 million foreign-exchange gain and how derivative values may move in subsequent periods.
- Track receivables, inventory and operating cash conversion as demand grows; six-month operating cash flow was below the prior-year period.
- Verify revolver renewal and repayment terms, the $40.0 million U.S. liquidity covenant, and continued compliance with facility covenants.
- Monitor Chonburi construction costs, the $33.3 million commitment, completion timing and whether added capacity is utilized as planned.
- Assess customer concentration and the timing and amount of any flood-insurance recovery.