Fabrinet — Form 10-K Summary
Period note: The filing is the annual report for the fiscal year ended June 29, 2012, not a standalone 2011 Q4 filing. It includes unaudited quarterly results, including the quarter ended June 29, 2012. Dollar amounts below are in U.S. dollars.
Business context and reporting period
Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services, primarily for optical communications, industrial lasers and sensors. Fiscal 2012 comprised 53 weeks; fiscal 2011 comprised 52 weeks. Operations are concentrated in Thailand, with additional manufacturing in China and the United States.
Industrial lasers, sensors and other markets grew to 29.3% of fiscal 2012 revenue, from 20.9% in fiscal 2011; optical communications declined to 70.7% from 79.1%.
Financial results and liquidity
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Revenue | $564.7 million | $743.6 million |
| Gross profit / margin | $61.9 million / 11.0% | $94.7 million / 12.7% |
| Operating income (loss) | $(60.8) million | $69.9 million |
| Net income (loss) | $(56.5) million | $64.3 million |
| Diluted earnings (loss) per share | $(1.64) | $1.87 |
| Cash from operating activities | $2.3 million | $41.3 million |
| Cash and cash equivalents at year-end | $115.5 million | $127.3 million |
| Current and long-term debt | $38.6 million | $16.4 million |
Fiscal 2012 investing cash outflow was $37.4 million, mainly reflecting construction of Pinehurst Building 6 and replacement of flood-damaged equipment. Financing cash inflow was $23.2 million, including $28.0 million of loan proceeds. Working capital, as defined by the company, was $145.5 million, versus $131.6 million. The company reported $8.2 million of unused short-term borrowing capacity and compliance with its debt covenants at year-end.
In the quarter ended June 29, 2012, revenue was $142.8 million, gross profit was $15.2 million (approximately 10.7% margin), and net income was $7.5 million. The preceding two quarters reported net losses, including a $46.3 million loss in the quarter ended March 30, 2012.
Material changes versus the prior comparable period
- Revenue fell 24.1% year over year, mainly because of Thailand flooding and lower optical communications demand. Non-optical communications revenue increased $9.6 million.
- Optical communications revenue declined to $399.3 million from $587.8 million; lasers, sensors and other revenue increased to $165.4 million from $155.8 million.
- Gross margin decreased to 11.0% from 12.7%, while operating results swung from $69.9 million income to a $60.8 million loss.
- Operating cash flow declined to $2.3 million from $41.3 million. Debt increased by $22.2 million and shareholders’ equity fell to $250.7 million from $301.5 million.
- Three customers each represented at least 10% of revenue and together accounted for 47%, compared with four customers and 58% in fiscal 2011. JDS Uniphase represented 25% of fiscal 2012 revenue.
Outlook, management commentary, risks and unusual items
- Thailand flooding: Production at all Thai facilities was suspended from October 17 to November 14, 2011; the Chokchai facilities were permanently closed. Fabrinet recorded $97.3 million of flood-related expenses, including $61.2 million of liabilities to third parties. Insurance recovery was uncertain and would be recognized only when realizable and probable. Management expected to recover a majority of losses but noted policy limits, valuation disputes and potential customer disagreements could reduce recovery or create additional costs.
- Near-term outlook: Management expected flooding, lost revenue, recovery spending and sharply higher Thai property and casualty insurance premiums to continue affecting cash and results. It anticipated additional business-interruption losses in the first quarter of fiscal 2013. The company stated that cash and operating cash flow were expected to cover working capital and capital expenditures for at least 12 months.
- Costs and capacity: Fiscal 2012 included $2.0 million of severance and benefits for approximately 170 employees. Management expected fiscal 2013 SG&A to rise in dollars but decline as a share of revenue, and expected additional manufacturing equipment purchases. It said current capacity was sufficient for anticipated production requirements over the next few years.
- Key exposures: Customer concentration and short, cancellable purchase orders; reliance on sole-source suppliers; Thai political and natural-disaster risk; foreign-exchange exposure, especially to the Thai baht; wage increases; and potential inventory, receivable and liquidity pressure.
- Other disclosures: The company did not intend to pay dividends. Management and the auditor concluded internal control over financial reporting was effective as of June 29, 2012; the auditor issued an unqualified opinion on the financial statements. No material litigation was reported.
Investor facts to verify
- Progress and timing of insurance claims, actual proceeds collected, policy limits and any remaining dispute over customer-owned assets or responsibility for losses.
- Whether production, customer orders and margins recovered after the Thailand shutdown, and the continuing effects of closing Chokchai.
- Customer concentration, particularly JDS Uniphase’s 25% revenue share and the credit quality and collections of major customers.
- Cash conversion and working-capital trends, planned capital spending, and the company’s ability to meet debt repayments and covenant requirements.
- Whether diversification into lasers and sensors offsets optical communications weakness, and how wage, currency and insurance cost changes affect margins.