Fabrinet Form 10-Q Summary
Reporting period: Fiscal 2023 first quarter, three months ended September 30, 2022. The quarter comprised 14 weeks, compared with 13 weeks in the prior-year quarter ended September 24, 2021. Financial statements are unaudited.
Business context and key financial metrics
Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services to OEMs. Optical communications remained its largest end market; the company operates as one reportable segment.
| Metric | Quarter ended Sep. 30, 2022 | Prior comparable quarter |
|---|---|---|
| Revenue | $655.4 million | $543.3 million |
| Gross profit / margin | $82.8 million / 12.6% | $63.6 million / 11.7% |
| Operating income / margin | $62.2 million / 9.5% | $43.0 million / 7.9% |
| Net income / margin | $64.6 million / 9.9% | $44.7 million / 8.2% |
| Diluted EPS | $1.76 | $1.20 |
| Operating cash flow | $60.6 million | $36.9 million |
| Cash, cash equivalents and short-term investments | $499.8 million at Sep. 30, 2022 | $528.4 million at Sep. 24, 2021 |
| Outstanding debt | $21.3 million | $36.6 million at Sep. 24, 2021 |
At September 30, 2022, current assets were $1.552 billion and current liabilities were $526.4 million. Cash and cash equivalents were $255.3 million, short-term investments were $244.5 million, and inventory was $528.1 million. The company reported total assets of $1.864 billion and shareholders’ equity of $1.302 billion.
Changes versus the prior comparable period
- Revenue increased 20.6%; management attributed growth to stronger key-customer demand for optical communications services and the additional week in the quarter. Optical communications revenue rose 16.4% to $497.6 million; lasers, sensors and other revenue rose to $157.9 million from $116.0 million.
- Gross profit increased 30.2%, and gross margin improved by 0.9 percentage points. Operating income increased 44.7%; SG&A remained approximately flat at $20.6 million.
- Net income increased to $64.6 million from $44.7 million. The effective tax rate was 1.1%, versus 1.3%, primarily reflecting more income not subject to tax.
- Operating cash flow rose to $60.6 million, driven primarily by higher net income and cash-favorable working-capital changes. Investing activities provided $23.4 million, reflecting investment sales and maturities exceeding purchases, alongside lower capital spending. Financing activities used $27.5 million, including $6.1 million of debt repayments, $4.9 million of share repurchases and $16.5 million of employee tax-withholding payments.
- Quarter-end debt declined from $27.4 million at June 24, 2022 to $21.3 million. The company was in compliance with its loan financial covenants.
Outlook, commentary and risks
- Management expects revenue from customers outside North America for the remainder of fiscal 2023 to be in line with the 46.8% share recorded this quarter. It expects fiscal 2023 SG&A to increase versus fiscal 2022, mainly due to employee costs, and anticipates added cost of revenue from geographic expansion. No specific revenue or earnings guidance was provided.
- Management expects supply constraints to continue, and potentially worsen, for at least the next 12 months. China COVID-related lockdowns, freight and logistics delays, component shortages and lengthy customer requalification processes could constrain revenue and margins. Management also cited inflation and rising labor costs in Thailand and China as pressures on gross margin.
- The company said current cash, investments and operating cash flow should cover working-capital and capital needs for at least the next 12 months. It considered current manufacturing capacity sufficient for anticipated production over the next few quarters.
- Customer concentration is significant: three customers each represented at least 10% of quarterly revenue and together accounted for 46.0%, compared with 48.1% in the prior-year quarter. Optical communications represented 75.9% of revenue.
- Available-for-sale securities had $7.5 million of net unrealized losses at quarter-end; other comprehensive loss for the quarter was $2.3 million. The filing reported no impairment charge on the investment portfolio.
- Purchase obligations and other third-party commitments totaled $1.39 billion, generally expected to be fulfilled within one year; capital expenditure commitments were $25.9 million. These commitments should be considered alongside the company’s liquidity and customer order visibility.
- Other principal risks include dependence on a limited number of customers and suppliers, short-term and nonbinding customer forecasts, foreign-exchange exposure, geopolitical and trade risks, and potential disruption to manufacturing in Thailand or China. No material legal claims were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much of reported revenue growth reflects underlying demand versus the extra week in the quarter, and whether customer demand remains strong.
- Whether supply constraints, inflation, wage increases and new-geography expansion affect gross margins in subsequent quarters.
- Developments in the largest customer relationships and the concentration of revenue and receivables.
- The liquidity, maturity and market-value profile of short-term investments, including unrealized losses, and progress on scheduled debt repayments.
- The scale, timing and customer recoverability of purchase commitments and capital expenditure commitments.