Fabrinet — Form 10-K summary
Period note: The supplied filing is Fabrinet’s annual report for the fiscal year ended June 29, 2018, not a filing for 2017 Q4. Fiscal 2018 had 52 weeks; fiscal 2017 had 53 weeks. The filing also reports the quarter ended June 29, 2018.
Business context and reporting period
Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services, primarily to OEMs in optical communications, industrial lasers, medical devices and sensors. It operates as one segment, with most manufacturing capacity in Thailand and additional facilities in China, the U.K. and the U.S. Optical communications remained its largest market, although the company continued diversifying into lasers, sensors and other markets.
Financial performance and liquidity
Amounts below are in U.S. dollars; annual figures compare fiscal 2018 with fiscal 2017.
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $1,371.9 million | $1,420.5 million |
| Gross profit / margin | $153.4 million / 11.2% | $171.5 million / 12.1% |
| Operating income / margin | $93.8 million / 6.8% | $105.8 million / 7.5% |
| Net income / margin | $84.2 million / 6.2% | $97.1 million / 6.8% |
| Diluted EPS | $2.21 | $2.57 |
| Operating cash flow | $138.1 million | $70.9 million |
| Capital expenditures | $30.5 million | $56.2 million |
At June 29, 2018, cash and cash equivalents were $158.1 million and marketable securities were $174.3 million, for combined cash and securities of $332.4 million. Total debt was $64.2 million; $25.0 million of revolving credit was available. Working capital, as defined in the filing as receivables plus inventory less payables, was $284.4 million, versus $287.8 million a year earlier. Total assets were $1.088 billion and total liabilities $347.1 million.
Fiscal 2018 cash, cash equivalents and restricted cash increased by $25.3 million. Operating cash flow benefited from working-capital management, including collections and lower ending inventory. Financing cash use included $42.4 million of share repurchases. The company repurchased 1.289 million shares during the year and had $17.6 million of authorization remaining at year-end.
For the quarter ended June 29, 2018, revenue was $345.3 million, gross profit $39.0 million, net income $22.8 million, and diluted EPS $0.60.
Material changes versus the prior comparable period
- Revenue fell $48.6 million, or 3.4%, primarily because optical communications demand—particularly telecom manufacturing—slowed after a strong data-center market year. Fiscal 2018 also had one fewer week than fiscal 2017.
- Optical communications revenue declined to $1,000.3 million from $1,108.6 million; lasers, sensors and other revenue rose to $371.7 million from $311.9 million. The latter markets increased to 27.1% of revenue from 22.0%.
- Gross profit declined 10.5%, and gross margin contracted 0.9 percentage points. Cost of revenue declined less than revenue, reflecting lower volume and cost pressures.
- SG&A declined 11.9% to $57.8 million, mainly due to lower incentive compensation and no acquisition-related costs, partly offset by chairman-transition severance.
- Net income declined 13.3%. Foreign-exchange loss increased to $6.6 million from $1.1 million, primarily due to Thai baht and RMB movements.
- Operating cash flow nearly doubled, while investing cash use decreased as construction of the Chonburi facility was completed and there were no business acquisitions in fiscal 2018.
Outlook, commentary and risks
- Management expected fiscal 2019 SG&A to decrease from fiscal 2018, employee costs to rise in Thailand and China, and capital expenditures to increase, mainly for existing and new facilities. It expected incremental costs from expansion into new geographic markets but did not quantify them.
- Management said current manufacturing capacity was sufficient for anticipated production over at least the next few quarters and expected a greater share of revenue from customers outside North America. These are expectations, not guaranteed outcomes.
- The June 2018 credit amendment refinanced existing borrowings into a $65.0 million term loan maturing June 2023, reduced interest-rate margins and extended a $25.0 million revolving facility. The company reported covenant compliance at year-end. Debt is floating-rate and subject to financial covenants; $51.2 million of term-loan principal was scheduled for fiscal 2023.
- Key risks include customer concentration and short, revisable purchase orders; Lumentum represented 16% of annual revenue and 18% of year-end receivables. The filing says customer forecasts and master agreements do not guarantee future sales.
- Other material exposures include reliance on Thailand-based operations, sole- or limited-source suppliers and ongoing supply-chain strain, currency movements, wage inflation, inventory obsolescence, customer financial distress, market cyclicality, and potential U.S.-China tariffs. The company stated that tariff costs were then expected to be immaterial, but that could change.
- Thailand tax incentives are conditional and expire at different dates, including June 2020 for specified Pinehurst production and June 2026 for specified Chonburi production. The Cayman Islands tax undertaking was due to expire in August 2019; management intended to seek renewal.
- Unusual or notable items included $1.8 million of workforce-reduction expenses; a $6.6 million annual foreign-exchange loss; and a $5.2 million reversal of deferred-tax valuation allowances following improved U.S. subsidiary performance. The company reported no material pending or threatened litigation, no off-balance-sheet arrangements, and an unmodified audit opinion; management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether optical communications demand stabilizes and diversification into lasers, sensors and other markets sustains growth and margins.
- Current customer concentration, order visibility and any changes in Lumentum’s demand, receivables or customer consolidation.
- Whether gross-margin pressure from currency, wages, materials and supply constraints persists, and how effectively hedges offset currency exposure.
- Fiscal 2019 capital spending, new-market expansion costs, facility utilization and the expected decline in SG&A.
- Debt covenant headroom, floating-rate exposure, scheduled repayment requirements and the availability and terms of revolving credit.
- Whether Thai tax incentives and the Cayman Islands tax undertaking remain available, and whether tax-law or ASC 606 adoption effects alter reported results.