Fabrinet — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, the three months ended September 28, 2012. The comparable quarter ended September 30, 2011 comprised 14 weeks, versus 13 weeks in the current quarter. Unless noted otherwise, amounts are in U.S. dollars.
Business context and financial performance
Fabrinet provides optical, electro-mechanical and electronic manufacturing services, mainly for optical communications, industrial lasers and sensors. Production is concentrated in Asia-Pacific, and the company operates as one reportable segment.
| Metric | Quarter ended Sep. 28, 2012 | Prior comparable quarter |
|---|---|---|
| Revenue | $158.6 million | $186.3 million |
| Gross profit / margin | $17.7 million / 11.2% | $22.9 million / 12.3% |
| Operating income / margin | $16.7 million / 10.5% | $16.2 million / 8.7% |
| Net income / margin | $16.0 million / 10.1% | $15.7 million / 8.4% |
| Diluted earnings per share | $0.46 | $0.45 |
| Cash from operations | $5.9 million | $9.8 million |
| Capital expenditure (PPE purchases) | $4.1 million | $5.9 million |
Revenue declined 14.9%, primarily due to weaker customer demand and lingering effects of Thailand’s 2011 flooding. Optical communications revenue fell to $109.6 million from $133.5 million; lasers, sensors and other revenue was $49.0 million versus $52.8 million. Gross margin contracted by 1.1 percentage points, which management attributed mainly to lower volume and increased salaries. Operating income included $4.8 million of flood-related insurance proceeds; therefore, the increase in reported operating income did not reflect stronger underlying gross profit.
Balance sheet and liquidity
- Cash and cash equivalents were $115.4 million at September 28, 2012, essentially unchanged from $115.5 million at June 29, 2012.
- Bank borrowings totaled $36.2 million, down from $38.6 million; net cash was approximately $79.2 million. The company reported compliance with debt covenants.
- Current assets were $374.7 million and current liabilities were $175.4 million. Trade receivables rose to $137.9 million from $128.3 million; inventory rose to $110.7 million from $103.2 million.
- Operating cash flow declined year over year, with management citing a $4.0 million flood-loss settlement payment to a customer. Investing cash outflow was $4.0 million and financing cash outflow was $2.3 million, mainly from scheduled debt repayments.
- Current liabilities included $57.2 million owed to third parties for flood losses.
Outlook, commentary and principal risks
- No numerical revenue or earnings guidance was provided. Management said existing cash and expected operating cash flow should cover working-capital and capital-expenditure needs for the next 12 months, and current manufacturing capacity should meet anticipated requirements for the next few years.
- Management expected fiscal 2013 SG&A to rise in dollars but decline as a percentage of revenue versus fiscal 2012. It also noted expected cost increases from wages, diversification and possible geographic expansion.
- Flood insurance claims remain subject to policy exclusions, limits and insurer review of loss valuations. The company expected to recover a majority of losses but warned that the timing and amount were uncertain. It anticipated further business-interruption losses and planned additional claims; customer discussions over damaged consigned assets and responsibility for losses could produce additional costs.
- Customer concentration is significant: two customers represented 48% of quarterly revenue, compared with three customers representing 57% in the prior-year quarter. Orders are generally short-term and supply agreements do not guarantee minimum purchases.
- Other key risks include dependence on Thailand operations, possible natural-disaster disruption, foreign-exchange exposure (especially Thai baht), sole- or limited-source suppliers, customer credit and collection risk, and pressure on margins from lower volumes and wage increases.
- The company reported no material pending or threatened legal claims and no material subsequent events. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Progress, timing and expected net recovery from flood-related insurance claims, including any policy limits or disputes over valuations.
- Whether the $4.8 million flood-related income is recurring or should be excluded when assessing operating performance.
- Revenue and margin trends after accounting for the prior-year quarter’s additional week, and customer demand by end market.
- Customer concentration, receivables collection and inventory growth, including exposure to customers affected by the flooding.
- Cash needs for flood recovery, debt repayments and planned investment, and continued compliance with loan covenants.