Fabrinet — Form 10-Q Summary
Reporting period: Fiscal 2021 first quarter, the 13 weeks ended September 25, 2020; comparisons are with the 13 weeks ended September 27, 2019. Fabrinet provides optical, electro-mechanical and electronic manufacturing services to OEMs. Unless otherwise stated, dollar amounts are U.S. dollars.
Financial performance
| Metric | Q1 FY2021 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $436.6 million | $399.3 million | +9.4% |
| Gross profit / margin | $50.5 million / 11.6% | $46.0 million / 11.5% | +9.8% gross profit |
| Operating income / margin | $33.6 million / 7.7% | $30.0 million / 7.5% | +12.1% |
| Net income | $33.1 million | $26.0 million | +27.3% |
| Diluted earnings per share | $0.88 | $0.69 | +$0.19 |
| Operating cash flow | $34.5 million | $2.6 million | +$31.9 million |
Optical communications revenue grew 13.7% to $343.9 million and represented 78.8% of sales; lasers, sensors and other revenue declined to $92.7 million. North America provided 47.5% of revenue, Asia-Pacific 33.4%, and Europe 19.1%. Management attributed growth principally to higher optical communications demand and improved gross profit primarily to more favorable product mix. SG&A rose 5.4% to $16.9 million, including $0.8 million of increased Israel start-up costs.
Cash, debt and liquidity
- At September 25, cash and cash equivalents were $189.2 million and short-term investments were $307.2 million; together, $496.4 million. Restricted cash of $7.4 million was additional and collateralized a customer-related letter of credit.
- Long-term borrowings were $48.8 million gross ($48.6 million net of issuance costs), down from $51.8 million gross at June 26 after $3.0 million of repayments. The term loan matures in June 2024; Fabrinet reported compliance with its financial covenants.
- Current assets were $1.180 billion and current liabilities $355.4 million. Inventories rose to $339.4 million from $309.8 million, and accounts payable rose to $284.2 million from $251.6 million.
- Investing cash outflow was $58.4 million, largely reflecting net purchases of short-term investments and $12.6 million of property, plant and equipment purchases. Financing cash outflow was $13.1 million, including $9.9 million of tax withholding on vested share awards and debt repayment. Cash, cash equivalents and restricted cash decreased by $37.0 million to $196.6 million.
Outlook, commentary and risks
- Management expects cash, investments and operating cash flow to cover working capital and other liquidity needs for at least 12 months, and considers current manufacturing capacity sufficient for anticipated production over the next few quarters. No specific revenue or earnings guidance is provided.
- Management expects supply-chain disruption and related costs, together with employee health and safety measures, to continue weighing on gross margins for the foreseeable future, at least into the first half of fiscal 2021. It also expects FY2021 SG&A as a percentage of revenue to increase versus FY2020 and employee costs in Thailand and China to rise.
- COVID-19 continued to cause uneven customer ordering and material availability. Management cited long-term potential support from rising demand for network bandwidth, but warned of near-term regional demand reductions and weaker demand in industrial lasers and automotive during a prolonged downturn.
- Customer concentration is significant: two customers each contributed at least 10% of quarterly revenue and together represented 28.6%, versus one such customer and 18.0% in the prior-year quarter. Optical communications accounted for 78.8% of sales. Other principal exposures include customer order changes, supplier constraints, foreign exchange, and trade and geopolitical developments.
- A $24.3 million customer advance remained recorded as a receivable. In an October 1, 2020 subsequent event, Fabrinet extended payment terms to April 1, 2021 and reduced the interest rate; the customer agreed to transfer additional manufacturing operations to Thailand. Fabrinet also committed to buy $26.0 million of inventory from that customer. The advance is to be offset against amounts due for inventory purchases.
- Fabrinet reported no material pending or threatened legal claims. Disclosure controls and procedures were assessed as effective, and no material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Whether optical communications demand and the 28.6% revenue concentration among two major customers persist, and how customer forecasts translate into firm orders.
- Whether supply constraints, safety measures, product mix and currency movements cause gross margins to develop as management expects.
- Collection and repayment terms for the $24.3 million customer receivable, the inventory commitment, and the timing and economics of the additional manufacturing transfer.
- Inventory growth, operating cash conversion and capital spending needs, alongside the stated 12-month liquidity outlook and debt-covenant compliance.
- The impact of COVID-19, foreign-exchange exposure, and potential customer or supplier disruption on future results; management cautions that quarterly results may not indicate future performance.