Fabrinet — Q1 Fiscal 2022 Form 10-Q
Reporting period: Three months ended September 24, 2021 (13 weeks), compared with the three months ended September 25, 2020. Fabrinet provides optical packaging and precision optical, electro-mechanical and electronic manufacturing services. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $543.3 million | $436.6 million | +24.4% |
| Gross profit / margin | $63.6 million / 11.7% | $50.5 million / 11.6% | +26.0% gross profit |
| Operating income / margin | $43.0 million / 7.9% | $33.6 million / 7.7% | +28.0% operating income |
| Net income | $44.7 million | $33.1 million | +35.1% |
| Diluted EPS | $1.20 | $0.88 | +36.4% |
| Operating cash flow | $39.0 million | $34.5 million | +$4.5 million |
| Capital expenditure on property, plant and equipment | $34.6 million | $12.6 million | +$22.0 million |
Revenue growth was attributed mainly to higher demand from key customers for optical communications manufacturing services. Optical communications revenue rose 24.2% to $427.3 million and represented 78.6% of sales; lasers, sensors and other revenue was $116.0 million. Cost of revenue was 88.3% of sales versus 88.4%. SG&A rose 22.1% to $20.6 million, though declined to 3.8% of revenue from 3.9%.
Net income included a $1.8 million foreign-exchange gain, compared with $0.1 million a year earlier. The effective tax rate was 1.3%, down from 4.8%, primarily reflecting more income not subject to tax. Other comprehensive loss was $1.4 million versus $2.8 million.
Balance sheet and liquidity
- Cash and cash equivalents were $269.9 million; short-term investments were $258.5 million. Together, these totaled $528.4 million, compared with $547.9 million at June 25, 2021. Fabrinet reported total debt of approximately $36.6 million, implying substantial net cash.
- Current assets were $1.389 billion and current liabilities $479.2 million; the current ratio was approximately 2.9. Total assets were $1.681 billion and shareholders’ equity $1.146 billion.
- Inventory increased $43.1 million from fiscal year-end to $465.3 million. Trade receivables were $346.7 million and trade payables $373.7 million.
- Operating cash flow was supported by net income and higher payables, partly offset by a $43.1 million inventory build. Investing activities used $49.6 million, including capital expenditure and net purchases of short-term investments. Financing activities used $22.1 million, including $19.1 million of tax withholding on vested share awards and $3.0 million of debt repayment. Cash, cash equivalents and restricted cash decreased $32.7 million during the quarter.
- The term loan is repayable quarterly and matures in June 2024. Interest-rate swaps effectively fix the borrowing rate. Fabrinet said it was in compliance with financial covenants at quarter-end.
Material changes and outlook
- Revenue growth was led by optical communications demand. Revenue attributed to customers outside North America rose to 54.6% from 52.5%; management expects that share to remain broadly in line with the quarter for the rest of fiscal 2022.
- Management expects fiscal 2022 SG&A to increase compared with fiscal 2021, citing management compensation, staffing, marketing and business development. It also expects employee costs to rise in Thailand and China and incremental cost of revenue from expansion into new geographic markets.
- Management said supply-chain disruption and material availability remain concerns, including a global semiconductor shortage, and expects supply-chain strain and related costs to persist for the foreseeable future. It also stated that supply-chain issues and employee health and safety measures are expected to continue weighing on gross margins. No specific revenue, earnings or margin guidance was provided.
- COVID-19 cases increased in several countries where the company operates, including Thailand. Fabrinet reported no significant operational disruption or decline in customer demand in the quarter, but warned that worsening conditions or local restrictions could disrupt or shut facilities.
- Management said current cash, investments and operating cash flow should be sufficient for working capital and capital needs for at least 12 months. The company reported $992.8 million in purchase obligations and other commitments, generally expected to be fulfilled within one year; capital expenditure commitments were $31.0 million. A Chonburi manufacturing-building contract was approximately $50.3 million.
- Customer concentration remains material: three customers each represented at least 10% of quarterly revenue, together accounting for 37.5% of revenue, versus two customers and 28.6% in the prior-year quarter. Customers generally do not make firm commitments beyond 13 weeks.
Risks, contingencies and other items
- Principal exposures include dependence on a small number of customers, customer order volatility and pricing pressure, reliance on limited-source suppliers, inventory and yield risks, and concentration in optical communications.
- Foreign-exchange exposure is significant, particularly to the Thai baht, as much of the company’s operating costs are incurred in local currencies while most revenue is denominated in U.S. dollars. Derivatives hedge some exposure; $4.1 million of foreign-currency hedge losses in accumulated other comprehensive income was expected to be reclassified to earnings within 12 months.
- Debt uses LIBOR as a reference rate; the company has adhered to the ISDA fallback protocol for its swaps, with USD LIBOR fallback expected in 2023. Management notes transition-related uncertainty and potential borrowing or hedge effects.
- Uncertain tax-position liabilities, including interest and penalties, were $1.1 million at quarter-end; the company expects this liability to increase within 12 months. Tax years 2015–2020 remain open to examination in relevant jurisdictions, subject to the filing’s jurisdiction-specific descriptions.
- No material claims or actions were reported as pending or threatened. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether customer demand, particularly from the largest customers and optical communications, is sustained and whether concentration increases further.
- Whether semiconductor and other supply constraints, inventory growth, and customer forecasts affect production, cash conversion, or margins.
- Whether expansion spending and the disclosed purchase and capital commitments remain aligned with demand and available capacity.
- Whether the low effective tax rate and Thai tax incentives remain sustainable, and how uncertain tax positions develop.
- Whether foreign-exchange hedging and the LIBOR transition affect earnings, cash flows, or debt costs.