Fabrinet Form 10-Q Summary
Reporting period: Fiscal third quarter ended March 26, 2021, and nine months ended March 26, 2021, compared with the corresponding periods ended March 27, 2020. The request metadata says “2020 Q3,” but the filing covers fiscal 2021 Q3.
Business context
Fabrinet provides optical, electro-mechanical and electronic manufacturing services to OEMs, primarily for low-volume, high-mix products. Optical communications remains its largest end market. The company operates one reportable segment, with most manufacturing operations in Thailand.
Key financial metrics
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $479.3 million | $411.2 million | $1,369.8 million | $1,236.7 million |
| Gross profit / margin | $56.8 million / 11.8% | $44.3 million / 10.8% | $160.3 million / 11.7% | $139.5 million / 11.3% |
| Operating income / margin | $37.7 million / 7.8% | $27.2 million / 6.6% | $107.2 million / 7.8% | $89.3 million / 7.2% |
| Net income | $37.5 million | $28.3 million | $105.9 million | $85.5 million |
| Diluted EPS | $1.00 | $0.75 | $2.82 | $2.27 |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $75.2 million | $104.4 million |
Q3 revenue rose 16.6% year over year; nine-month revenue increased 10.8%. Optical communications revenue was $361.7 million in Q3 and $1,053.5 million for the nine-month period, representing 75.5% and 76.9% of revenue, respectively.
At March 26, 2021, cash and cash equivalents were $247.0 million, short-term investments were $261.7 million, and debt was $42.7 million. Current assets totaled $1,255.2 million and current liabilities $366.2 million. The company reported $508.7 million of cash, cash equivalents and short-term investments and said these resources and expected operating cash flows should cover working capital and capital needs for at least 12 months.
Nine-month capital expenditure was $29.1 million for property, plant and equipment. Net cash increased $14.0 million over the nine months, to $247.2 million including restricted cash.
Changes and notable items
- Higher customer demand for optical communications services and newer programs drove revenue growth. Gross and operating margins improved year over year.
- Nine-month operating cash flow fell 28.0%, mainly reflecting inventory growth of $43.5 million, higher other-asset use and the timing of receivable collections, partly offset by higher net income and payable timing.
- Debt declined from $51.8 million at June 26, 2020 to $42.7 million after $9.1 million of repayments. The company reported compliance with its financial covenants.
- Q3 SG&A included a $0.8 million severance payment related to a senior management retirement. The income statement separately reports $43,000 of workforce-reduction expense.
- The company repurchased 116,903 shares for $8.3 million during the nine months; $91.7 million remained authorized. Share-based compensation was $18.7 million for the nine months.
- A $24.3 million customer receivable related to a manufacturing transfer was repaid on April 1, 2021, after quarter-end.
Outlook, commentary and risks
- Management expects revenue from customers outside North America for the remainder of FY2021 to remain in line with the 51.6% share reported for the first nine months. No specific revenue or earnings guidance was provided.
- Management said it expected ongoing supply-chain disruption and fluctuating parts availability, noting a significant global semiconductor shortage and long wafer lead times. It expects to seek alternative sources.
- The company said pandemic-related disruption had not materially affected Q3 operations or demand, but worsening outbreaks could do so. It expects supply-chain and health-protocol costs to weigh on gross margins for the foreseeable future.
- A new manufacturing building at the Chonburi campus is under construction under a contract priced at approximately $50.3 million; related third-party commitments totaled $62.1 million at quarter-end. The filing also reports $661.2 million of purchase obligations and other commitments to third parties.
- Key risks include customer concentration (three customers each generated at least 10% of Q3 revenue and together represented 47.7%), reliance on optical communications, customer order volatility, sole- or limited-source materials, foreign exchange exposure, and operations concentrated in Thailand. Management also cited possible effects from COVID-19, tariffs and political or economic conditions.
- Disclosure controls and procedures were assessed as effective; no material change in internal control over financial reporting was reported. The company disclosed no material pending or threatened legal claims.
Important facts for investors to verify
- Whether the semiconductor shortage and other supply constraints affect customer deliveries, revenue growth or margins.
- Customer concentration, including changes in major-customer demand and the continued value of customer forecasts and orders.
- Inventory growth, receivable collections and operating cash conversion relative to reported earnings.
- Progress, cost and utilization assumptions for the Chonburi expansion and the $50.3 million construction project.
- Exposure to Thai baht, RMB and GBP movements, and the performance and accounting treatment of currency and interest-rate hedges.
- Any change in the customer repayment status of the $24.3 million receivable, which the filing says was repaid April 1, 2021.