Fabrinet — Form 10-Q Summary
Business context and reporting period
Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services, primarily for complex, low-volume, high-mix products. The filing covers the 13 weeks ended September 27, 2013, the first quarter of fiscal 2014, and compares results with the 13 weeks ended September 28, 2012. Nearly all manufacturing is in Asia-Pacific; revenue is reported by customer bill-to location.
Financial performance and liquidity
Amounts below are in U.S. dollars, millions, except per-share data and percentages.
| Metric | Q1 FY2014 | Prior-year quarter |
|---|---|---|
| Revenue | $171.6 | $158.6 |
| Gross profit / margin | $18.6 / 10.9% | $17.7 / 11.2% |
| Operating income | $18.5 | $16.7 |
| Net income / diluted EPS | $19.2 / $0.55 | $16.0 / $0.46 |
| Operating cash flow | $18.1 | $5.9 |
| Capital expenditures | $1.3 | $4.1 |
- Revenue rose 8.1%, primarily on higher demand for optical communications services. Optical communications revenue increased to $124.5 million from $109.6 million; lasers, sensors and other revenue was $47.0 million, down from $49.0 million.
- Gross margin declined 0.3 percentage points. SG&A rose 14.3% to $6.7 million, or 3.9% of revenue, from $5.9 million, or 3.7%.
- Reported operating income includes $6.6 million of flood-related insurance income, compared with $4.8 million in the prior-year quarter. Net foreign-exchange gain was $1.1 million versus $0.3 million.
- Cash and cash equivalents were $163.9 million at quarter-end, up from $149.7 million at June 28, 2013. Total borrowings were $26.5 million, down from $28.9 million; cash exceeded borrowings by approximately $137.4 million.
- Current assets were $389.4 million and current liabilities $121.7 million at quarter-end. Operating cash flow benefited from higher net income, improved customer collections and lower cash payments to vendors. Accounts receivable and inventory increased during the quarter.
Material changes, outlook and risks
- Management said it expects cash, operating cash flow and available credit to cover working capital and capital spending for at least 12 months, and current manufacturing capacity to meet anticipated production requirements for at least 12 months.
- For fiscal 2014, management expects SG&A to increase in dollars but remain flat as a percentage of revenue versus fiscal 2013. It expects employee costs to rise in Thailand and China and significant incremental cost of revenue from diversification, customized optics and glass development, and geographic expansion. No specific revenue or earnings guidance was provided.
- Management expects the share of revenue billed outside North America to remain approximately at the Q1 FY2014 level. That share was 54.1%, versus 55.2% in the prior-year quarter.
- Four of five Thailand flood insurance claims had been settled; the remaining equipment claim was still pending. The $6.6 million insurance recovery recorded this quarter was an interim payment. Policy exclusions, limits and disagreements over loss valuation could reduce ultimate recovery.
- In October 2013, a customer was authorized to return units manufactured during Q1 FY2014 because of functional failures. The company was still assessing the extent and cost of the issue at the filing date; the filing gives no clear estimate.
- Two customers each represented at least 10% of quarterly revenue and together accounted for 50%, versus 48% in the prior-year quarter. Other key risks include customer order volatility, sole- or limited-source suppliers, foreign-exchange exposure, Thailand operational and political risks, and product-quality costs.
- The company reported compliance with its debt covenants, effective disclosure controls, and no material pending or threatened legal claims.
Important facts for investors to verify
- Whether the remaining flood insurance claim is settled and how much additional recovery, if any, is realized.
- The scope, customer resolution and financial cost of the returned product units; no reliable estimate was available in the filing.
- Whether gross margins stabilize or improve as revenue grows, given slightly lower Q1 gross margin and expected incremental expansion costs.
- Customer concentration, order patterns and collection quality, including the effect of higher receivables and inventory.
- Exposure to Thai baht and RMB movements, and the status of China’s tax-incentive renewal and uncertain tax positions.