Fabrinet — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2013, ended December 28, 2012. The quarter comprised 13 weeks; the six-month period comprised 26 weeks, versus 27 weeks in the prior-year comparison. Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services, primarily from facilities in Asia-Pacific.
Financial performance
Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions where shown.
| Metric | Three months ended Dec. 28, 2012 | Six months ended Dec. 28, 2012 | Prior-year comparison |
|---|---|---|---|
| Revenue | $167.4 million | $326.1 million | $96.6 million and $283.0 million, respectively |
| Gross profit / margin | $18.4 million / 11.0% | $36.1 million / 11.1% | $8.9 million / 9.2%; $31.8 million / 11.2% |
| Operating income (loss) | $17.4 million | $34.1 million | $(36.7) million; $(20.4) million |
| Net income (loss) | $16.7 million | $32.7 million | $(33.3) million; $(17.6) million |
| Diluted earnings (loss) per share | $0.48 | $0.94 | $(0.97); $(0.51) |
- Revenue increased 73.3% for the quarter and 15.2% for the six months year over year. Management attributed the increase primarily to restored production and sales volume following the Thailand floods that disrupted the prior-year quarter.
- Quarterly gross margin improved year over year as restored revenue better absorbed fixed costs; six-month gross margin was slightly lower year over year. Six-month SG&A was $11.6 million, down from $12.0 million.
- Flood-related income was $4.8 million in the quarter and $9.6 million for the six months, largely from interim insurance payments. Prior-year periods included $40.3 million in flood-related expense. These items materially affect comparisons of operating and net income.
- Optical communications generated $119.9 million of quarterly revenue and $229.5 million for the six months. Lasers, sensors and other markets contributed $47.5 million and $96.6 million, respectively.
Cash, debt and liquidity
- Cash and cash equivalents were $128.1 million at December 28, 2012, up from $115.5 million at June 29, 2012. Six-month operating cash flow was $17.9 million, versus cash used of $9.4 million a year earlier; investing cash use was $1.2 million, and financing cash use was $4.7 million.
- Total bank debt was $33.7 million, down from $38.6 million at fiscal year-end; $9.7 million was current and $24.1 million non-current. The company repaid $4.8 million of loans and reported compliance with debt covenants. Undrawn short-term bank facilities totaled $5.6 million.
- Current assets were $369.1 million and current liabilities $154.3 million at December 28, including $54.4 million of current liabilities to third parties for flood losses. Management said cash and operating cash flow should cover working capital and capital expenditures for at least 12 months, while noting uncertainty in the timing of insurance recoveries and potential flood-related cash outlays.
Changes, outlook and risks
- Fabrinet permanently ceased production at its Chokchai facility after the 2011 Thailand floods; Pinehurst Building 6 construction was completed in April 2012. Management said current manufacturing capacity should meet anticipated requirements for the next few years.
- Management expects fiscal 2013 SG&A to rise in absolute dollars but decline as a percentage of revenue versus fiscal 2012. It expects higher employee costs in Thailand and China, and incremental cost of revenue from diversification into industrial lasers, sensors and other markets, customized optics and glass, and new geographic markets. No specific revenue or earnings guidance is provided in the supplied filing text.
- Insurance claims remain unresolved. Policy exclusions, limits and disputes over loss valuations could reduce recoveries; management believes it will recover a majority of losses but acknowledges that the difference between claims and recoveries could be material. Customer disputes over damaged consigned assets could create additional costs.
- Flood settlements included payments of $4.0 million and approximately $2.8 million during the six months. Subsequent to quarter-end, one settlement was amended, reducing the outstanding obligation by $4.2 million through equipment transfer and an accounts-receivable offset; another settlement required a $1.263 million payment in the quarter ending March 29, 2013.
- Key risks include dependence on a small number of customers (two customers represented 48% of quarterly revenue), short-term and nonbinding demand forecasts, customer credit and collection exposure, sole-source supply constraints, Thailand-related operational and natural-disaster risk, foreign-exchange exposure, wage and pricing pressures, and dependence on insurance recoveries. The filing reports no material pending or threatened legal claims and says disclosure controls were effective.
Important facts for investors to verify
- Progress, timing and ultimate amounts of flood-insurance recoveries, including remaining claims and policy limitations.
- Final costs and customer obligations tied to flood-damaged consigned property, settlements and subsequent settlement amendments.
- Customer concentration, changes in customer orders, receivable collection and the durability of post-recovery revenue growth.
- Whether margins can be sustained amid wage increases, pricing pressure, diversification costs and currency movements.
- Debt repayment capacity and liquidity if insurance proceeds are delayed or lower than management expects.