Fabrinet — Q2 FY2017 Form 10-Q
Reporting period: Quarter ended December 30, 2016; comparative quarter ended December 25, 2015. The six-month current period included 27 weeks versus 26 weeks in the prior-year period. Financial statements are unaudited. Dollar amounts below are in U.S. dollars.
Business context and results
Fabrinet provides optical, electro-mechanical and electronic manufacturing services, primarily for complex, low-volume, high-mix products. Optical communications remained its largest end market. In September 2016, Fabrinet acquired Exception EMS, a U.K. contract electronics manufacturer; its revenue contributed $6.2 million in the quarter and $7.0 million in the six-month period.
| Metric | Three months ended Dec. 30, 2016 | Prior-year quarter | Six months ended Dec. 30, 2016 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $351.2 million | $233.0 million | $683.2 million | $449.5 million |
| Revenue growth | 50.7% | — | 52.0% | — |
| Gross profit / margin | $43.0 million / 12.3% | $28.5 million / 12.2% | $82.7 million / 12.1% | $54.5 million / 12.1% |
| Operating income / margin | $25.4 million / 7.3% | $14.8 million / 6.3% | $49.2 million / 7.2% | $28.0 million / 6.2% |
| Net income / margin | $25.3 million / 7.2% | $19.8 million / 8.5% | $48.1 million / 7.0% | $21.4 million / 4.8% |
| Diluted EPS | $0.67 | $0.54 | $1.28 | $0.59 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $19.8 million | $23.7 million |
Financial position and liquidity
- At December 30, 2016, cash and cash equivalents were $85.6 million and marketable securities were $170.5 million. Including $3.1 million of restricted acquisition-related cash, cash, equivalents and restricted cash totaled $88.7 million.
- Total debt was approximately $68.1 million: $38.3 million current borrowings and $29.4 million long-term borrowings, net of issuance costs. Fabrinet reported $136.8 million of available long-term credit capacity. It was in compliance with borrowing covenants.
- Operating cash flow of $19.8 million was below net income, with receivables and inventory growth weighing on cash generation. Investing cash outflow was $84.1 million, including $44.4 million of property and equipment purchases, net marketable-security purchases, and the Exception EMS acquisition.
- Cash, cash equivalents and marketable securities totaled $256.1 million, compared with $284.5 million at June 24, 2016. Total assets were $945.9 million; shareholders’ equity was $619.7 million.
Changes versus prior comparable periods
- Revenue growth reflected higher customer demand for optical and non-optical manufacturing services, the Exception EMS acquisition, and an additional week in the six-month period.
- Quarterly gross margin was broadly stable, while operating margin improved as SG&A declined as a share of revenue. Six-month gross and operating margins were also stable and improved, respectively.
- Quarterly net income rose, but net margin declined from 8.5% to 7.2%, partly reflecting a smaller foreign-exchange gain. Six-month net income more than doubled, with foreign exchange moving from a $4.3 million loss to a $3.6 million gain.
- Share-based compensation increased to $8.6 million for the quarter and $14.2 million for six months, versus $3.1 million and $5.8 million, respectively. The quarter included $2.8 million related to accelerated vesting of an executive equity award.
- Revenue outside North America increased to 55.0% of quarterly revenue from 46.7% and to 52.6% of six-month revenue from 48.7%, partly due to Exception EMS.
Outlook, commentary and risks
- Management expects revenue from customers outside North America to continue increasing as a share of total revenue. It expects FY2017 SG&A to rise in absolute dollars but fall as a percentage of revenue versus FY2016, and expects incremental cost of revenue from geographic expansion.
- The new Chonburi, Thailand manufacturing facility was substantially completed and management expected operations to begin in FY2017’s third quarter. Fabrinet said existing capacity was sufficient for anticipated production over at least the next few quarters.
- Management believed cash, securities, operating cash flow and credit availability would cover working-capital and capital-expenditure needs for the next 12 months. The company also planned to acquire land in Chonburi for approximately $5.6 million; an initial $1.1 million installment was paid after quarter-end.
- Key risks include dependence on a small number of customers, variable customer orders, supplier concentration and inventory exposure, foreign-exchange movements, expansion execution and utilization, and political, regulatory or natural-disaster disruptions in operating regions. Two customers each represented at least 10% of quarter-end receivables; customer revenue concentration was also material.
- The Exception EMS purchase-price allocation remained preliminary. Fabrinet recorded $1.5 million of acquisition transaction costs for the six months and a $1.2 million foreign-currency translation loss related to the acquired U.K. operations. No material legal claims were pending or threatened, according to the filing.
Most important facts for investors to verify
- Whether strong reported revenue growth persists after accounting for the extra week, acquisition contribution and customer demand trends.
- Customer concentration, order visibility and the effect of pricing, product mix and customer purchasing decisions on margins.
- Whether working-capital investment—particularly receivables and inventory—converts into operating cash flow as sales expand.
- Chonburi facility start-up, capital spending, land-purchase commitment and the pace at which added capacity is utilized.
- Debt maturities, revolving-loan renewals and covenant compliance, including the required $40 million U.S.-located cash and securities balance.
- Exception EMS integration, final purchase-price allocation, acquired-asset valuation and exposure to sterling movements.