Business context and reporting period
Fabrinet provides optical, electro-mechanical and electronic manufacturing services, primarily for optical communications, as well as industrial lasers, sensors and other markets. The submitted filing is the company’s FY2022 Form 10-K for the 52 weeks ended June 24, 2022—not a standalone 2021 Q4 report. Comparisons below are with FY2021, ended June 25, 2021.
Optical communications supplied 78.8% of FY2022 revenue, up from 76.7%; lasers, sensors and other markets supplied 21.2%, down from 23.3%. Cisco, Infinera and Lumentum represented 25.4%, 12.5% and 10.3% of revenue, respectively.
Financial performance and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $2,262.2 million | $1,879.4 million |
| Gross profit / margin | $278.6 million / 12.3% | $221.4 million / 11.8% |
| Operating income / margin | $204.5 million / 9.0% | $150.8 million / 8.0% |
| Net income / margin | $200.4 million / 8.8% | $148.3 million / 7.9% |
| Diluted EPS | $5.36 | $3.95 |
| Operating cash flow | $124.2 million | $122.2 million |
| Capital expenditures | $80.5 million | $52.1 million |
Revenue rose 20.4%, mainly on stronger optical communications demand, particularly telecom manufacturing. Gross margin improved 0.5 percentage points, attributed primarily to volume, product mix and foreign exchange. Operating margin increased 1.0 point; net margin increased 0.9 point.
At June 24, 2022, cash, cash equivalents and short-term investments totaled $478.2 million, including $280.2 million of short-term investments; debt was $27.4 million. Cash and cash equivalents plus restricted cash were $198.4 million. Current assets were $1,525.2 million and current liabilities $538.5 million. Inventory rose to $557.1 million from $422.1 million and receivables to $439.3 million from $336.5 million.
Operating cash flow was supported by net income and higher payables, but absorbed by increases in inventory ($135.0 million) and receivables ($104.0 million). Investing used $135.5 million, including $89.6 million for property, plant and equipment and net purchases of short-term investments. Financing used $92.9 million, including $59.9 million of share repurchases, $20.8 million of share-award tax withholding and $12.2 million of debt repayment.
Material changes and unusual items
- SG&A increased 4.7% to $73.9 million, but declined as a share of revenue to 3.3% from 3.8%. The FY2022 expense included a $1.6 million net increase in doubtful-account allowance, primarily a specific provision for one customer.
- Foreign exchange moved to a $2.3 million gain from a $0.5 million gain in FY2021. Other comprehensive loss was $6.5 million, chiefly reflecting unrealized losses on available-for-sale securities.
- FY2022 effective tax rate was 3.2%, versus 1.4% in FY2021; management cited higher taxable income and a greater share of income taxed in higher-rate jurisdictions. Tax benefits and exemptions, including Thai investment incentives, materially affect the rate.
- The company repurchased 628,428 shares for $59.9 million during FY2022. In August 2022, after year-end, the board authorized an additional $78.7 million of repurchases, raising aggregate authorization to $247.2 million.
Outlook, management commentary and risks
Management expected supply constraints to persist and potentially worsen for at least 12 months, despite strong customer demand. China lockdowns, freight delays, the Russia-Ukraine conflict, constrained component availability and lengthy customer requalification of replacement parts could delay revenue and pressure margins. Fabrinet reported no significant operational disruption or decline in customer demand during FY2022, but warned that renewed COVID-related restrictions could disrupt production.
Management expected FY2023 SG&A to increase and capital expenditures to decrease from FY2022, largely because the new Chonburi manufacturing building was completed. It said existing liquidity, operating cash flow and credit facilities should cover working capital and capital needs for at least 12 months. FY2023 is a 53-week year, with the extra week in the first quarter. No specific revenue or earnings guidance is provided in the supplied filing text.
Key risks include customer concentration and pricing leverage; short-term, cancellable orders; sole- or limited-source suppliers; inventory and working-capital exposure; dependence on Thailand and facilities in China; foreign-exchange exposure; inflation and wage increases; and debt covenants. The company had $1.51 billion of purchase obligations and $24.8 million of capital-expenditure commitments at year-end. It reported covenant compliance and no material pending or threatened legal claims. The auditor issued an unqualified opinion on the financial statements and internal controls; revenue recognition was identified as a critical audit matter.
Important facts for investors to verify
- Whether supply shortages, logistics delays and component requalification continue to constrain shipments or increase costs.
- How customer concentration evolves: the three largest customers represented 48.2% of FY2022 revenue, versus 35.9% in FY2021.
- Whether higher inventory and receivables convert into cash; FY2022 operating cash flow was substantially below net income.
- The sustainability of margin improvement and the unusually low effective tax rate, including the duration and conditions of tax incentives.
- Capital spending, share repurchases and debt repayment relative to liquidity, purchase commitments and customer demand.