Fabrinet — Form 10-Q Summary
Business context and reporting period. Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services, primarily for optical communications, lasers and sensors. This unaudited filing covers the 13 weeks and 26 weeks ended December 27, 2013 (fiscal 2014 second quarter and first half); comparisons are to the corresponding periods ended December 28, 2012. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results
| Metric | Three months ended Dec. 27, 2013 | Three months ended Dec. 28, 2012 | Six months ended Dec. 27, 2013 | Six months ended Dec. 28, 2012 |
|---|---|---|---|---|
| Revenue | $178.6 | $167.4 | $350.1 | $326.1 |
| Gross profit / margin | $20.5 / 11.5% | $18.4 / 11.0% | $39.2 / 11.2% | $36.1 / 11.1% |
| Operating income / margin | $13.6 / 7.6% | $17.4 / 10.4% | $32.2 / 9.2% | $34.1 / 10.5% |
| Net income / margin | $14.5 / 8.2% | $16.7 / 10.0% | $33.7 / 9.7% | $32.7 / 10.0% |
| Diluted earnings per share | $0.41 | $0.48 | $0.95 | $0.94 |
- Revenue and mix: Revenue grew 6.7% in the quarter and 7.4% in the first half, primarily on stronger optical communications demand. Optical communications revenue was $129.7 million for the quarter and $254.3 million for the half; lasers, sensors and other revenue was $48.8 million and $95.8 million, respectively.
- Cash flow: First-half operating cash flow was $36.8 million, versus $17.9 million a year earlier. Investing cash outflow was $4.2 million, including $4.2 million of property and equipment purchases; financing cash outflow was $1.5 million. Cash increased by $31.1 million to $180.1 million during the half.
- Liquidity and debt: At December 27, cash was $180.1 million and total bank borrowings were $24.1 million, down from $28.9 million at June 28, 2013. Current assets were $403.9 million and current liabilities $119.4 million. The company said cash and operating cash flow should cover working capital, capital expenditures and debt obligations for at least the next 12 months; it reported compliance with loan covenants.
Material changes and unusual items
- Quarterly operating income fell $3.8 million year over year despite higher revenue and gross margin, largely because the prior-year quarter included $4.8 million of flood-related insurance income; no flood income was recognized in the current quarter. First-half flood-related income was $6.6 million, compared with $9.6 million a year earlier.
- Quarterly net income declined year over year, while first-half net income increased modestly. The current-period income tax benefit reflected reversals of uncertain tax liabilities and an increase in deferred tax assets; the filing reports effective tax rates of (10.4)% for the quarter and (1.8)% for the half. These benefits materially affect comparisons of reported earnings.
- In January 2014, after quarter-end, Fabrinet received $38.6 million from insurers in full settlement of its final Thailand flood-related claim. This is a subsequent event, not cash received during the reported six-month period.
- Fabrinet disclosed a customer return of units manufactured at its Pinehurst facility after functional failures. The affected products were made in fiscal 2014’s first quarter; the company was still assessing the scope and could not reliably estimate related costs.
Outlook, management commentary and risks
- Management expects the share of revenue billed to customers outside North America to remain approximately flat from the first half of fiscal 2014. It expects fiscal 2014 SG&A to increase in dollars but remain flat as a percentage of revenue versus fiscal 2013.
- The company expects higher employee costs in Thailand and China and incremental cost of revenue from diversification into lasers, sensors and other markets, customized optics and glass capabilities, and geographic expansion. It stated existing manufacturing capacity should meet anticipated needs for at least 12 months.
- Key exposures include dependence on a small customer base (two customers represented 46% of quarterly and 47% of first-half revenue), reliance on Thailand manufacturing, political and natural-disaster risks, foreign exchange exposure, sole- or limited-source suppliers, inventory and demand variability, and product quality/warranty claims. The company hedges some currency exposures but notes that its hedges are generally short-term.
- Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting during the quarter. No material legal proceedings were reported.
Important facts for investors to verify
- Whether the returned-product issue results in material repair, replacement, warranty or other costs; the filing provides no clear estimate.
- How the post-quarter $38.6 million insurance settlement is recognized and whether any flood-related claims or obligations remain.
- Customer concentration, order visibility and customer commitments, which are largely forecast-based and generally not firm beyond 13 weeks.
- Underlying profitability excluding flood-related insurance income and the unusual tax benefit, particularly given lower reported operating income and quarterly net income.
- Execution and cost impacts of market and geographic diversification, plus wage, supplier, currency and Thailand political risks.