Fabrinet — Form 10-Q Summary
Reporting period: The filing covers the 13-week quarter and nine months ended March 28, 2014 (fiscal 2014 Q3), with comparisons to the periods ended March 29, 2013. This differs from the “2013 Q3” period in the request metadata. Unless stated otherwise, dollar amounts below are in millions.
Business context and results
Fabrinet provides advanced optical, electro-mechanical and electronic manufacturing services, primarily for low-volume, high-mix products. It operates as one reportable segment, with manufacturing concentrated in Asia-Pacific.
- Quarter revenue: $167.7, up 7.8% year over year; management attributed growth primarily to higher demand for optical communications manufacturing services.
- Nine-month revenue: $517.8, up 7.5% year over year. Optical communications represented 71.4% of quarterly revenue and 72.2% of nine-month revenue.
- Quarter profitability: Gross profit was $17.3, with a 10.3% gross margin versus 10.4% a year earlier. SG&A was $7.4, or 4.4% of revenue. Reported operating income was $48.1 and net income was $47.7; diluted EPS was $1.33.
- Nine-month profitability: Gross profit was $56.5, with a 10.9% margin, compared with $52.3 and 10.9%. Operating income was $80.2, net income $81.4, and diluted EPS $2.29.
- Cash flow, nine months: Operating activities provided $58.6, versus $51.3 a year earlier. Investing activities provided $30.5, including flood-insurance proceeds, versus $3.7 used in the prior period. Financing activities used $3.5, mainly for debt repayment.
Financial position and material changes
- At March 28, 2014, cash and cash equivalents were $233.7, up from $149.7 at June 28, 2013. Total debt was $21.7, down from $28.9; cash exceeded debt by approximately $212.0.
- Current assets were $466.2 and current liabilities $136.0. Inventory rose to $107.8 from $89.0, while trade accounts payable increased to $101.5 from $77.1.
- Cash increased by $85.6 during the nine months. Property and equipment purchases were $7.3; proceeds from insurers for flood-related claims included $37.8 in investing cash flows.
- On April 28, 2014, a subsidiary made an early repayment of a loan; the reported payment, including principal, interest and an early repayment fee, was $3.7. A separate April 25 loan amendment changed collateral and covenant provisions.
Unusual items, outlook and risks
- Flood-related income materially increased reported earnings. The company recorded net income related to the 2011 Thailand flooding of $38.2 for the quarter and $44.7 for the nine months. The related insurance claims had been settled by March 28, 2014. The company said this flood income was not subject to income tax; the quarter and nine-month effective tax rates were 1.5% and 0.2%, respectively. Reported operating income and net income therefore should not be read as recurring operating performance.
- Management expected cash, operating cash flow and available working capital to meet needs for at least 12 months, and believed current manufacturing capacity was sufficient for anticipated production over that period. It expected fiscal 2014 SG&A to rise in dollars but remain flat as a percentage of revenue versus fiscal 2013.
- Management expected increased employee costs in Thailand and China, as well as significant incremental cost of revenue from diversification into industrial lasers, sensors and other markets, development of customized optics and glass, and geographic expansion. The filing gives no specific revenue or EPS forecast.
- Key risks include customer concentration (two customers together accounted for 45% of quarterly revenue and 46% of nine-month revenue), short-term and nonbinding demand forecasts, reliance on sole- or limited-source suppliers, inventory exposure, foreign-exchange movements, and political, natural-disaster and operational risks in Thailand and China. The filing also describes competition, pricing pressure and product-quality risks.
- A $0.5 customer settlement related to product functional failures was recorded during the nine months. The company reported no material pending or threatened legal claims and said disclosure controls were effective, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings and cash generation reflects the final flood-insurance settlement and related payments, rather than recurring manufacturing operations.
- Whether optical communications demand, customer concentration and the geographic revenue mix remain consistent with management’s expectations.
- Whether rising inventory, supplier constraints, wage inflation and customer order variability affect working capital or gross margins.
- The terms and covenant implications of the April loan amendment and early repayment, including collateral pledged and remaining debt obligations.
- Whether expected diversification and geographic expansion produce sustainable revenue and margins despite the incremental costs management anticipates.