Fabrinet (FBRN) 10-Q Summary: Quarter Ended March 25, 2011
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 25, 2011, and the nine-month period ended March 25, 2011. Fabrinet is a precision optical, electro-mechanical, and electronic manufacturing services provider for original equipment manufacturers (OEMs) in the optical communications, industrial lasers, and sensors markets. The company operates primarily in Thailand, China, the U.S., and Singapore. As of the reporting date, the company had 34,179,327 ordinary shares outstanding.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Mar 25, 2011 | Nine Months Ended Mar 25, 2011 |
|---|---|---|
| Total Revenues | $194,851 | $553,222 |
| Gross Profit | $25,323 | $70,762 |
| Gross Margin | 13.0% | 12.8% |
| Operating Income | $17,807 | $52,468 |
| Net Income | $16,663 | $47,674 |
| Diluted EPS | $0.49 | $1.39 |
| Cash and Cash Equivalents | $116,419 | $116,419 (Balance Sheet) |
| Total Debt (Long-term loans) | $15,964 | $15,964 (Balance Sheet) |
| Operating Cash Flow (9 months) | N/A | $24,602 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 42.3% year-over-year for the quarter and 58.8% for the nine-month period. This was driven by a $45.8 million increase in optical communications products and a $12.2 million increase in industrial lasers and sensors for the quarter.
- Profitability: Net income rose 23.3% for the quarter and 55.0% for the nine-month period compared to the prior year. However, gross margins compressed slightly from 14.0% to 13.0% for the quarter and from 12.9% to 12.8% for the nine-month period.
- Expense Increases: Selling, General, and Administrative (SG&A) expenses increased 72.5% for the quarter, primarily due to stock-based compensation, costs associated with the secondary public offering, and severance expenses related to an executive separation.
- Related Party Transactions: Revenues from related party JDS Uniphase Corporation were $0 for the current periods, compared to $22.5 million for the quarter and $51.8 million for the nine months ended March 26, 2010, as JDSU ceased to be a related party following its IPO participation.
Guidance, Outlook, and Risks
- Outlook: Management expects industrial lasers and sensors to represent an increasing portion of revenues. The company anticipates SG&A expenses to increase in fiscal 2011 due to public company compliance costs (Sarbanes-Oxley, reporting, insurance).
- Capital Expenditures: The company is constructing Pinehurst Building 6 in Thailand, with completion expected in the first quarter of calendar year 2012. There is an outstanding commitment of $26.7 million for this development.
- Liquidity: The company believes current cash, cash equivalents, and operating cash flows are sufficient to meet needs for the next 12 months. It maintains approximately $50.5 million in undrawn short-term credit facilities.
- Risks:
- Currency Risk: Significant exposure to the Thai baht and RMB. Appreciation of these currencies against the U.S. dollar negatively impacts operating results.
- Customer Concentration: Four customers accounted for 59% of total revenues for both the quarter and nine-month periods.
- Political Risk: Operations in Thailand are subject to political instability and potential changes in tax regimes.
- Supply Chain: Reliance on single-source suppliers for critical materials creates risk of shortages or price increases.
Investor Verification Checklist
- Verify the sustainability of the 42% revenue growth rate given the high concentration of revenue from four major customers.
- Monitor the Thai baht and RMB exchange rates against the U.S. dollar, as currency fluctuations significantly impact gross margins.
- Review the progress and cost overruns associated with the construction of Pinehurst Building 6 ($26.7 million commitment).
- Assess the impact of the recent executive separation and associated severance costs on future SG&A trends.
- Confirm the status of the company's tax incentives in Thailand, which are contingent on export volumes and facility location.