Fabrinet — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 25, 2022 (Fabrinet fiscal 2022 third quarter), not 2021 Q3. Financial statements are unaudited and amounts below are in U.S. dollars.
Business context and reporting period
Fabrinet provides optical, electro-mechanical and electronic manufacturing services to OEMs, principally for optical communications, lasers, sensors, automotive and medical products. It operates as one reportable segment and focuses mainly on complex, low-volume, high-mix manufacturing. The quarter and comparable prior-year quarter each comprised 13 weeks; nine-month periods each comprised 39 weeks.
Financial performance
| Metric | Three months ended Mar. 25, 2022 | Prior-year quarter | Nine months ended Mar. 25, 2022 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $564.4 million | $479.3 million | $1,674.4 million | $1,369.8 million |
| Gross profit; margin | $70.7 million; 12.5% | $56.8 million; 11.8% | $203.7 million; 12.2% | $160.3 million; 11.7% |
| Operating income; margin | $53.7 million; 9.5% | $37.7 million; 7.8% | $148.1 million; 8.8% | $107.2 million; 7.8% |
| Net income | $50.7 million | $37.5 million | $144.2 million | $105.9 million |
| Diluted EPS | $1.35 | $1.00 | $3.85 | $2.82 |
Quarterly revenue rose 17.7% year over year, primarily on higher optical communications demand from key customers. Optical communications represented 78.0% of quarterly revenue, up from 75.5%; nine-month revenue from that end market increased 25.1% year over year. Quarterly operating income rose 42.4%, with improved gross and operating margins. Nine-month revenue grew 22.2%, and net income grew 36.1%.
For the nine months, operating cash flow was $107.9 million, versus $79.3 million a year earlier. Investing cash outflow was $83.2 million, including $75.3 million of property, plant and equipment purchases, mainly for a new Chonburi manufacturing building. Financing cash outflow was $58.2 million, including $28.6 million of share repurchases, $20.4 million of share-based award tax withholdings and $9.1 million of debt repayments. Cash, cash equivalents and restricted cash declined $33.5 million during the period.
At March 25, 2022, cash and cash equivalents were $269.1 million and short-term investments were $245.9 million. Total debt was approximately $30.5 million, down from $39.6 million at June 25, 2021. Current assets were $1,470.1 million and current liabilities were $502.7 million. Shareholders’ equity was $1,228.7 million. The company reported no impairment losses on available-for-sale debt securities for the quarter.
Material changes versus the prior comparable period
- Growth was led by optical communications manufacturing; quarterly sales in that end market increased 21.6% year over year.
- Gross margin improved 0.7 percentage points in the quarter and 0.5 points for the nine-month period. Management attributed gross-profit growth primarily to higher sales volume.
- Quarterly SG&A fell 10.6% to $17.0 million, partly because the prior-year quarter included senior-management retirement severance and higher share-based compensation. Nine-month SG&A increased 4.4% to $55.4 million.
- Accounts receivable increased to $446.1 million from $336.5 million at June 25, 2021, and inventory rose to $452.6 million from $422.1 million. The nine-month operating cash flow included a $109.3 million use of cash from receivables and a $30.5 million use from inventory, partly offset by higher accounts payable.
- Capital spending increased substantially: nine-month PP&E purchases were $75.3 million versus $33.3 million a year earlier. Repurchases were $28.6 million versus $8.3 million.
Outlook, management commentary and risks
- Management expected revenue from customers outside North America for the remainder of fiscal 2022 to be in line with the 52.8% share reported for the first nine months. The filing gives no specific revenue or earnings forecast.
- Management expected supply constraints to continue and potentially worsen for at least the next 12 months, despite strong customer demand. COVID-related China lockdowns, freight delays, semiconductor and other component shortages, and the Russia-Ukraine conflict were cited as disruptions; the conflict had also affected demand from some automotive customers.
- The company reported no significant operational disruption or demand decline during the quarter from COVID-19, but warned that renewed restrictions or facility shutdowns could materially affect operations.
- Management expected fiscal 2022 SG&A to increase versus fiscal 2021 and employee costs to rise in Thailand and the PRC. Planned geographic expansion is expected to add costs of revenue, with the amount not specified.
- Management said available cash, short-term investments, operating cash flow and credit-facility availability should be sufficient for working capital and capital needs for at least 12 months. Manufacturing capacity was considered adequate 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 53.5%, versus 47.7% a year earlier. Three customers together accounted for 54.3% of nine-month revenue, versus 46.3%.
- Other key risks include reliance on limited-source suppliers, short and nonbinding customer forecasts, pricing pressure, foreign-exchange exposure (particularly Thai baht), operations concentrated in Thailand and China, and interest-rate benchmark transition. The term loan carried a LIBOR-based rate, effectively fixed through swaps; the company reported compliance with its financial covenants.
- At March 25, purchase obligations and other commitments to third parties totaled $1,414.6 million, generally expected to be fulfilled within one year. The filing says purchase orders generally allow cancellation, rescheduling or adjustment before delivery. Capital expenditure commitments were $17.7 million. No material litigation was pending or threatened.
Important facts for investors to verify
- Whether customer demand and the elevated customer concentration persist, and how much future sales depend on the three largest customers and optical communications.
- Whether component availability, China lockdowns and logistics disruptions constrain shipments, revenue conversion or gross margins; monitor receivables, inventory and supplier commitments.
- Whether the Chonburi expansion spending translates into utilized capacity and returns, given $75.3 million of nine-month PP&E purchases and remaining capital commitments.
- The quality and liquidity of the $245.9 million investment portfolio: available-for-sale securities had $3.3 million of net unrealized losses at quarter-end, though no impairment loss was recorded.
- The terms and treatment of the $1,414.6 million purchase-obligation balance, the company’s ability to meet its commitments, and progress on the LIBOR transition and debt repayment.