Fabrinet (FBRN) 10-Q Summary: Quarter Ended December 24, 2010
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended December 24, 2010, and the six-month period ended on the same date. Fabrinet is a precision optical, electro-mechanical, and electronic manufacturing services provider for original equipment manufacturers (OEMs) in the optical communications, industrial lasers, and sensors markets. The company operates primarily in Thailand, China, and the U.S., focusing on low-volume, high-mix production. As of January 28, 2011, there were 33,790,325 ordinary shares outstanding.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Dec 24, 2010 | 6 Months Ended Dec 24, 2010 |
|---|---|---|
| Total Revenues | $184,631 | $358,371 |
| Gross Profit | $23,663 | $45,439 |
| Gross Margin | 12.8% | 12.7% |
| Operating Income | $17,712 | $34,661 |
| Net Income | $15,806 | $31,011 |
| Diluted EPS | $0.46 | $0.90 |
| Cash and Cash Equivalents | $102,063 (Balance Sheet) | $102,063 (Balance Sheet) |
| Total Debt | $17,381 | $17,381 |
| Operating Cash Flow | N/A | $6,360 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 61.4% year-over-year (YoY) for the quarter and 69.5% YoY for the six-month period. This growth was driven by a $55.1 million increase in optical communications products and a $15.1 million increase in non-optical products (lasers, sensors, automotive) for the quarter.
- Profitability: Net income rose 43.0% for the quarter and 79.9% for the six-month period compared to the prior year. Operating income increased 60.0% for the quarter and 90.2% for the six-month period.
- Related Party Transactions: Revenues from related party JDS Uniphase Corporation were $0 for the current periods, compared to $16.5 million for the quarter and $29.3 million for the six months ended December 25, 2009. JDS Uniphase ceased to be a related party in June 2010 following its IPO participation and subsequent share sales.
- Foreign Exchange: The company recorded a net foreign exchange loss of $0.67 million for the quarter and $1.05 million for the six months, compared to a gain of $0.03 million and a loss of $0.03 million in the prior year periods, respectively.
- Share-Based Compensation: Expenses increased significantly due to the adoption of new incentive plans post-IPO. Total share-based compensation was $1.19 million for the quarter and $1.42 million for the six months, compared to $0.18 million and $0.31 million in the prior year periods.
Guidance, Outlook, and Risks
- Outlook: Management expects industrial lasers and sensors to represent an increasing portion of revenues. The company anticipates SG&A expenses to increase in fiscal 2011 due to public company compliance costs (Sarbanes-Oxley, reporting) and competitive compensation for the board.
- Capital Expenditures: The company is constructing Pinehurst Building 6 in Thailand, with completion expected in the first quarter of 2012. Net cash used in investing activities was $13.3 million for the six months ended December 24, 2010, primarily for land purchase and construction.
- Liquidity: The company holds $102.1 million in cash and cash equivalents and has $50.5 million in undrawn short-term credit facilities. Management believes current resources are sufficient for the next 12 months.
- Risks:
- Customer Concentration: Four customers accounted for 57% of total revenues in the quarter and 57% in the six-month period. Loss of a major customer could materially harm results.
- Currency Risk: Significant exposure to the Thai baht and RMB. A 10% weakening of the U.S. dollar against these currencies would decrease the net dollar position by approximately $0.7 million.
- Political Risk: Operations in Thailand face risks from political instability and potential changes in tax regimes or labor laws.
- Supply Chain: Reliance on single-source suppliers for critical materials creates vulnerability to shortages and price increases.
Investor Verification Checklist
- Verify the sustainability of revenue growth in the optical communications market versus the diversification into lasers and sensors.
- Monitor the impact of foreign exchange fluctuations on gross margins, given the mismatch between USD revenues and Thai baht/RMB expenses.
- Assess the progress and cost overruns of the Pinehurst Building 6 construction project.
- Review the concentration risk regarding the top four customers and their financial health.
- Confirm compliance with debt covenants (debt-to-equity and debt service coverage ratios) as debt levels remain at $17.4 million.