Fabrinet (NYSE: FN) — Form 10-Q summary
Reporting period: Second quarter and first six months of fiscal 2020, ended December 27, 2019. The quarter comprised 13 weeks; the six-month period comprised 26 weeks. Amounts are in U.S. dollars unless stated otherwise.
Business context and financial performance
Fabrinet provides advanced optical, electro-mechanical and electronic manufacturing services, principally for optical communications and other complex products. Optical communications represented 75.6% of revenue in both the quarter and six-month period.
| Metric | Three months ended Dec. 27, 2019 | Year-over-year change | Six months ended Dec. 27, 2019 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $426.2 million | +5.7% | $825.5 million | +5.8% |
| Gross profit / margin | $49.2 million / 11.5% | +7.9%; up from 11.3% | $95.1 million / 11.5% | +10.8%; up from 11.0% |
| Operating income / margin | $32.1 million / 7.5% | Down from $32.5 million / 8.1% | $62.1 million / 7.5% | Up from $58.3 million; margin unchanged |
| Net income | $31.2 million | Down from $31.5 million | $57.2 million | Down from $59.4 million |
| Diluted EPS | $0.83 | Down from $0.84 | $1.52 | Down from $1.59 |
Quarterly revenue growth reflected increased customer demand in both optical and non-optical communications manufacturing. North America accounted for 52.4% of quarterly revenue, versus 45.3% a year earlier; Asia-Pacific was 33.1%, versus 41.4%. Management attributed gross-margin improvement to higher revenue and effective cost controls. SG&A rose 34.3% in the quarter to $17.1 million, increasing from 3.2% to 4.0% of revenue, primarily due to higher share-based compensation, management costs, severance and new-business start-up expenses.
Cash flow, liquidity and debt
- Six-month operating cash flow was $52.6 million, down from $69.3 million. Management cited higher payments to suppliers; working-capital movements included a $25.0 million increase in receivables and a $22.8 million decrease in payables.
- Investing cash flow was a $5.7 million use, compared with $13.1 million provided a year earlier. The period included $15.4 million of property and equipment purchases and a $24.3 million customer receivable related to the transfer of manufacturing operations to Thailand.
- At December 27, cash and cash equivalents were $220.0 million and short-term investments were $222.8 million, totaling approximately $442.8 million. Current assets were $1.071 billion and current liabilities were $313.4 million.
- Long-term borrowings were $57.9 million, including $12.2 million current; Fabrinet reported compliance with loan covenants. The new term loan matures in June 2024, and interest-rate swaps effectively fixed its rate at 4.36%.
- Management said available cash, investments, operating cash flow and credit facilities should meet working-capital and capital-expenditure needs for at least 12 months. Cash, cash equivalents and restricted cash increased by $39.1 million during the six months.
Material changes, outlook and risks
- Six-month net income declined despite revenue and gross-profit growth. Higher SG&A, a less favorable foreign-exchange result, and increased income tax expense contributed. Foreign exchange moved from a $2.6 million gain in the prior-year period to a $2.9 million loss.
- Management expected fiscal 2020 SG&A to rise as a percentage of revenue versus fiscal 2019, and expected employee costs in Thailand and China to increase. Planned expansion into new geographies was expected to add cost of revenue; management did not quantify the amount.
- Coronavirus disruption: The filing states that closures and extended Lunar New Year shutdowns in China had affected Fabrinet’s Casix facility in Fuzhou and some suppliers and customers. The company expected a negative revenue effect in the quarter ending March 27, 2020, while noting substantial uncertainty, potential labor and supply shortages, and possible further shutdown extensions.
- Customer concentration remains significant: one customer generated 15.3% of quarterly revenue and 16.4% of six-month revenue. The filing also identifies risks from customer order volatility, optical-communications market dependence, supplier concentration, foreign exchange, tariffs and operations concentrated in Thailand and China.
- A customer agreed to repay the $24.3 million manufacturing-transfer support receivable by September 30, 2020. Related standby letters of credit were backed by $7.7 million of cash collateral.
- The CFO notified the company of plans to retire effective February 1, 2021, and was to transition from CFO to special projects effective February 17, 2020. Csaba Sverha was appointed CFO effective February 17, 2020.
- The filing reported no material pending or threatened legal claims. Disclosure controls and procedures were assessed as effective; no material changes to internal control were reported for the quarter, apart from lease-standard adoption.
Important facts for investors to verify
- How China-related facility closures, supplier availability and customer demand affected the March 2020 quarter and subsequent periods.
- Whether revenue growth and gross-margin gains can offset rising SG&A, wage costs and foreign-exchange volatility.
- The customer concentration, order visibility and exposure to changes in optical-communications demand.
- Repayment status of the $24.3 million customer receivable and the continuing requirements and collateral for related letters of credit.
- Debt covenant compliance, the effectiveness of interest-rate hedges, and the impact of the LIBOR transition on borrowing terms.
- The duration and financial effects of Thai tax incentives, alongside the status of the CFO transition.