Fabrinet — Form 10-Q Summary
Period note: The request identifies 2017 Q3, but the supplied filing is Fabrinet’s Form 10-Q for the third quarter of fiscal 2018, ended March 30, 2018. The quarter and nine-month results are unaudited; the comparable periods ended March 31, 2017. Amounts below are in U.S. dollars.
Business context and reporting period
Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services to OEMs, especially in optical communications, lasers, sensors and other complex-product markets. It reports one operating segment. The quarter comprised 13 weeks in both years; the nine-month 2018 period comprised 39 weeks versus 40 weeks in 2017.
Key financial metrics
| Metric | Three months ended Mar. 30, 2018 | Year-over-year | Nine months ended Mar. 30, 2018 | Year-over-year |
|---|---|---|---|---|
| Revenue | $332.2 million | Down 9.4% | $1,026.6 million | Down 2.2% |
| Gross profit / margin | $36.9 million / 11.1% | $44.0 million / 12.0% | $114.4 million / 11.1% | $126.7 million / 12.1% |
| Operating income / margin | $24.5 million / 7.4% | $27.0 million / 7.4% | $71.4 million / 6.9% | $76.1 million / 7.3% |
| Net income / diluted EPS | $21.1 million / $0.55 | $21.7 million / $0.57 | $61.4 million / $1.61 | $69.7 million / $1.85 |
- Cash flow: Nine-month operating cash flow was $89.8 million, compared with $60.4 million. Investing activities used $48.9 million and financing activities used $31.9 million. Capital expenditures were $28.3 million. Cash, cash equivalents and restricted cash increased by $8.9 million.
- Liquidity and debt: At March 30, 2018, cash and cash equivalents were $142.4 million and marketable securities were $169.4 million. Current assets were $816.0 million and current liabilities $287.2 million. Borrowings were $65.2 million in total: $39.0 million revolving and $26.2 million term debt. Available credit facilities were $111.0 million.
- Share repurchases: Fabrinet repurchased 738,425 shares for $22.4 million during the nine months. Remaining authorization at quarter-end was $37.6 million.
Material changes versus the prior comparable period
- Lower optical communications demand drove the revenue decline: quarterly optical communications revenue fell to $240.8 million from $286.9 million. Lasers, sensors and other revenue rose to $91.4 million from $80.0 million. Optical communications represented 72.5% of quarterly revenue, versus 78.2%.
- Gross margin contracted in both periods as cost of revenue represented 88.9% of revenue, versus 88.0% for the quarter and 87.9% for the nine months in the prior year.
- SG&A fell to $12.4 million from $17.1 million for the quarter and to $41.3 million from $50.6 million for the nine months, mainly due to lower incentive compensation; the nine-month comparison also reflected lower acquisition-related expense.
- Nine-month net income fell by $8.3 million. Lower gross profit and a $5.6 million increase in foreign-exchange losses were partly offset by reduced SG&A. Quarterly net income declined by $0.6 million.
- Operating cash flow improved, with management attributing the increase primarily to cash inflows from receivables and inventory, partly offset by outflows from accounts payable and lower net income. Nine-month capital expenditures were lower than in the prior-year period.
Outlook, management commentary and risks
- Management said available cash, marketable securities, operating cash flow and credit facilities should be sufficient for working capital and capital expenditures for at least the next 12 months. It expected existing manufacturing capacity to meet anticipated production for at least the next few quarters.
- For fiscal 2018, management expected SG&A to decrease versus fiscal 2017, primarily due to lower executive share-based compensation and bonus adjustments. It expected the proportion of revenue from customers outside North America to increase from the nine-month fiscal 2018 level.
- Management anticipated incremental cost of revenue from geographic expansion and higher employee costs in Thailand and China. It also identified pricing pressure, product mix and manufacturing efficiency as factors affecting margins.
- Foreign-exchange losses were $5.7 million for the nine months, versus $0.1 million a year earlier; management cited currency movements, particularly U.S. dollar depreciation against the Thai baht. The company’s foreign-exchange exposure is only partly hedged.
- Key disclosed risks include dependence on a small customer base (one customer supplied 17% of quarterly revenue), customer order changes and short-term commitments, optical-communications market cyclicality, sole-source supply constraints, foreign-currency exposure, and concentration of manufacturing in Thailand. Fabrinet also disclosed the Lumentum–Oclaro acquisition agreement, noting that customer consolidation could affect demand and pricing.
- The company reported a workforce reduction of approximately 204 employees and $1.7 million of related severance and benefit expense during the nine months. It was in compliance with its credit-facility covenants at quarter-end. No material legal claims were pending or threatened, according to the filing.
Important facts for investors to verify
- Confirm the period: the supplied filing covers fiscal Q3 2018, not 2017 Q3.
- Track optical communications demand, customer concentration and the effect of customer consolidation on orders, pricing and margins.
- Assess whether gross-margin pressure persists and whether cost controls and non-optical growth offset lower optical communications revenue.
- Monitor Thai baht and other currency movements, foreign-exchange losses, and the effectiveness and duration of hedging.
- Review cash conversion, capital spending, debt maturities and revolving-facility renewal terms; the $39.0 million revolving borrowing was classified as current and had been extended to April 2018.
- Check execution and costs of geographic expansion, wage increases, and the expected reduction in fiscal 2018 SG&A.