Fabrinet — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended September 28, 2018. Fabrinet provides advanced optical, electro-mechanical and electronic manufacturing services. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2019 | Comparable quarter | Change / context |
|---|---|---|---|
| Revenue | $377.2 million | $357.3 million | Up 5.6% |
| Gross profit / margin | $40.3 million / 10.7% | $40.3 million / 11.3% | Gross profit essentially flat; margin down 0.6 percentage points |
| Operating income / margin | $25.8 million / 6.9% | $24.7 million / 6.9% | Income increased, margin broadly unchanged |
| Net income / margin | $27.9 million / 7.4% | $21.0 million / 5.9% | Up about 32% |
| Diluted EPS | $0.75 | $0.55 | Up from prior year |
| Cash from operations | $34.6 million | $(3.1) million | Improved; management attributed much of the change to lower accounts-payable payments following a new payment pattern |
| Capital expenditures | $5.4 million | $11.2 million | Lower year over year |
At quarter-end, cash and cash equivalents were $220.0 million and marketable securities were $132.4 million, totaling $352.4 million. Total borrowings were approximately $63.4 million, with no revolving loans outstanding and $25.0 million of revolving capacity available. Current assets were $917.1 million and current liabilities $305.8 million. The company reported a $57.9 million increase in cash, cash equivalents and restricted cash during the quarter.
Optical communications generated $280.8 million, or 74.4% of revenue; lasers, sensors and other markets generated $96.4 million, or 25.6%. Revenue by customer bill-to location was 47.7% North America, 40.3% Asia-Pacific and 12.0% Europe.
Changes versus the prior-year quarter
- Revenue growth reflected higher demand for optical and non-optical manufacturing services. Optical communications revenue rose 1.9%; lasers, sensors and other revenue rose 18.0%.
- Gross margin declined as cost of revenue grew faster than sales; management cited product mix and employee merit increases.
- SG&A declined 7.9% to $14.4 million. Management cited a $1.4 million reversal of previously recorded executive performance-award compensation after concluding performance targets were unlikely to be achieved.
- Net income benefited from a $3.1 million foreign-exchange gain, compared with a $1.9 million loss in the prior-year quarter, and from higher net interest income and lower interest expense. These items contributed materially to the year-over-year earnings increase.
- Operating cash flow improved, but working-capital movements included a $28.9 million inventory cash outflow and a $29.2 million accounts-payable cash inflow. Investing cash flow was positive largely because of marketable-security sales and maturities, not operating investment returns.
Outlook, risks and notable items
- Management expects available cash, marketable securities, operating cash flow and credit capacity to cover working-capital and capital-expenditure needs for at least 12 months. It considers current manufacturing capacity sufficient for anticipated production for at least the next few quarters.
- Management expects the share of revenue from customers outside North America to remain in line with the quarter’s 52.3% level, and expects fiscal 2019 SG&A to decline as a percentage of revenue versus fiscal 2018.
- The company expects incremental cost of revenue from planned geographic expansion and higher employee costs in Thailand and China. It also identifies Thai baht appreciation, wage growth, material shortages, customer order variability, product mix and pricing pressure as risks to margins.
- Customer concentration is significant: one customer represented 18% of quarterly revenue. Customer forecasts are generally nonbinding, and purchase commitments are short-term; reductions or delays in orders could affect revenue and leave excess inventory.
- Fabrinet adopted ASC 606 on June 30, 2018 using the modified retrospective method. The adoption increased opening retained earnings by $1.2 million. For this quarter, reported revenue was $0.3 million higher and net income $0.03 million higher than under the prior standard. Prior-period figures were not recast.
- The company recorded $85,000 of workforce-reduction expense. It released approximately $3.4 million of acquisition escrow cash to sellers. It reported no material pending or threatened legal claims and stated it was compliant with credit-facility covenants.
- The credit facility requires at least $40 million of cash, cash equivalents or marketable securities at U.S. financial institutions. The term loan bears interest at a floating rate, with a swap effectively fixing the rate at 2.86% through June 2023.
Important facts for investors to verify
- Whether revenue growth and the stronger non-optical markets continue, and whether customer concentration changes.
- Whether gross margin stabilizes, given the reported effects of mix, wage increases, currency movements and pricing pressure.
- How much of cash-flow improvement reflects sustainable operations versus payment timing and working-capital changes, particularly inventory and payables.
- How foreign-exchange gains or losses affect reported earnings, and the company’s exposure to Thai baht appreciation despite hedging.
- Whether expansion plans, capital spending and customer demand remain consistent with management’s liquidity and capacity outlook.
- The effect of ASC 606 on revenue timing and comparability with prior periods, and the status of tax exposures and tax incentives.