Fabrinet 10-K Summary: Fiscal Year Ended June 25, 2010
Business Context and Reporting Period
This Annual Report on Form 10-K covers the fiscal year ended June 25, 2010. Fabrinet is a global provider of precision optical, electro-mechanical, and electronic manufacturing services to original equipment manufacturers (OEMs). The company focuses on "low-volume, high-mix" production of complex products for the optical communications, industrial lasers, and sensors markets. Fabrinet operates manufacturing facilities primarily in Thailand, with additional sites in the People's Republic of China (PRC) and the United States. The company went public on the New York Stock Exchange (NYSE) on June 25, 2010.
Key Financial Metrics
| Metric | Fiscal 2010 | Fiscal 2009 |
|---|---|---|
| Total Revenues | $505.7 million | $441.1 million |
| Gross Profit | $64.3 million | $58.0 million |
| Gross Margin | 12.7% | 13.2% |
| Operating Income | $48.2 million | $33.7 million |
| Net Income | $44.3 million | $31.3 million |
| Earnings Per Share (Diluted) | $1.41 | $1.00 |
| Cash and Cash Equivalents | $84.9 million | $114.8 million |
| Total Debt | $20.4 million | $27.3 million |
| Working Capital | $96.7 million | $58.3 million |
Note: Working capital is defined in the filing as trade accounts receivable plus inventories, less trade accounts payable.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by 14.6% ($64.6 million) compared to fiscal 2009. This was driven by a $7.1 million recovery in optical communications demand and a significant $57.5 million increase in non-optical communications products (industrial lasers and sensors).
- Market Diversification: Revenues from lasers, sensors, and other markets grew to 18.3% of total revenues in fiscal 2010, up from 7.9% in fiscal 2009.
- Customer Concentration: The top five customers accounted for 69% of total revenues in fiscal 2010, down from 82% in fiscal 2009, indicating a slight reduction in concentration risk.
- Profitability: Net income increased by 41.6% to $44.3 million. Operating income rose to $48.2 million, aided by a decrease in Selling, General, and Administrative (SG&A) expenses, which dropped 26.3% due to the absence of $4.0 million in IPO-related legal and consulting costs incurred in the prior year.
- Liquidity: Cash and cash equivalents decreased by approximately $30 million, primarily due to a $30.8 million cash dividend paid to shareholders in September 2009.
Guidance, Outlook, and Risks
Outlook and Strategy: Management expects industrial lasers and sensors to represent an increasing portion of revenues. The company plans to use net proceeds from its initial public offering (approximately $24.0 million) for working capital, the construction of a new facility ("Building 6") in Thailand, capital expenditures, and potential acquisitions. The company does not currently intend to pay dividends on its ordinary shares.
Key Risks and Contingencies:
- Customer Concentration: The business remains dependent on a limited number of customers. A reduction in orders from any single major customer could materially harm results.
- Geographic and Political Risk: The majority of assets and manufacturing operations are located in Thailand. Political instability, as seen in demonstrations during 2010, poses a risk to operations and supply chains. Operations in the PRC are subject to regulatory and currency risks.
- Currency Exposure: The company has significant exposure to the Thai baht and RMB. A depreciation of the U.S. dollar against these currencies adversely impacts operating results, as revenues are primarily in USD while expenses are in local currencies.
- Supply Chain: Reliance on sole-source suppliers for critical materials creates risks regarding supply shortages and cost increases.
- Inventory Management: The company faces risks related to excess or obsolete inventory due to rapid technological changes and short-term customer commitments.
Investor Verification Checklist
- Customer Concentration: Verify the stability of the top five customers (Oclaro, JDS Uniphase, Opnext, Finisar, EMCORE), which collectively generated 69% of revenue.
- Thailand Operations: Assess the current political and economic stability of Thailand and its potential impact on the company's primary manufacturing hub.
- Currency Hedging: Review the effectiveness of the company's hedging strategies against the Thai baht and RMB, given the significant mismatch between revenue currency (USD) and expense currency.
- Inventory Levels: Monitor inventory turnover and provisions for obsolescence, as inventory levels increased significantly ($98.1 million) compared to the prior year ($47.8 million).
- Debt Covenants: Confirm continued compliance with financial ratio covenants (debt-to-equity and debt service coverage) attached to long-term bank loans.