Fabrinet — Form 10-Q Summary
Business context and reporting period
Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services, primarily for optical communications and other complex products. This filing covers the fiscal third quarter ended March 31, 2017 and the first nine months of fiscal 2017. The quarter and comparative quarter each comprised 13 weeks; the nine-month periods comprised 40 weeks in 2017 and 39 weeks in 2016.
Financial performance
- Revenue: Third-quarter revenue was $366.8 million, up 46.2% year over year. Nine-month revenue was $1.050 billion, up 49.9%; growth reflected higher customer demand, $6.4 million of quarterly and $13.4 million of nine-month revenue from Exception EMS, and an additional week in the nine-month period.
- Profit and margins: Third-quarter gross profit was $44.0 million (12.0% margin, versus 12.4%); operating income was $27.0 million (7.4%, versus 7.9%); and net income was $21.7 million (5.9%, versus 8.3%). Nine-month gross profit was $126.7 million (12.1%); operating income was $76.1 million (7.3%); and net income was $69.7 million (6.6%). Nine-month net income rose from $42.2 million.
- Per-share results: Third-quarter diluted EPS was $0.57, versus $0.56; nine-month diluted EPS was $1.85, versus $1.15.
- Cash flow: Nine-month operating cash flow was $60.4 million, compared with $41.4 million. Investing used $81.1 million, including $57.2 million of capital expenditures and $9.9 million for the acquisition. Financing provided $17.4 million. Operating cash flow less capital expenditures was approximately $3.2 million.
- Liquidity and debt: At March 31, cash and cash equivalents were $136.6 million and marketable securities were $152.6 million. Total borrowings were approximately $75.1 million; cash and securities therefore exceeded borrowings by about $214 million. The company reported $126.2 million of available long-term credit and compliance with facility covenants. The $34 million revolver was classified as current and had been extended to April 2017.
- Working capital and balance sheet: Receivables were $250.9 million and inventory was $224.6 million, up from $196.1 million and $181.5 million, respectively, at June 24, 2016. Total assets were $1.005 billion and shareholders’ equity was $649.1 million.
Material changes and notable items
- Exception EMS was acquired in September 2016 for approximately $13.0 million, net of cash acquired. Its reported revenue contributed to year-over-year growth; purchase-price allocation remained preliminary. The company recorded $1.5 million of acquisition-related transaction costs over nine months.
- Foreign exchange was a material quarterly earnings swing: a $3.7 million loss in Q3 2017 versus a $3.1 million gain in the prior-year quarter, which management attributed principally to Thai baht strengthening and revaluation of net baht liabilities.
- Share-based compensation rose to $7.7 million in the quarter and $21.9 million for nine months, versus $2.0 million and $7.8 million, respectively. The increase included accelerated vesting of executive equity awards and contributed to higher expenses.
- Capital spending increased, primarily for the new Chonburi, Thailand facility. The facility was substantially completed in Q1; substantial operations were expected to begin in Q4 of fiscal 2017.
Outlook, risks and contingencies
- Management said current cash, securities, operating cash flow and credit availability should cover working-capital and capital-expenditure needs for the next 12 months. It also expected fiscal 2017 SG&A to rise in dollars but decline as a percentage of revenue versus fiscal 2016.
- Management expected the proportion of revenue from customers outside North America to continue increasing and anticipated incremental cost of revenue from expansion into new geographic markets. No specific revenue or earnings guidance was provided in the supplied filing text.
- Key disclosed risks include reliance on a small customer base (one customer represented 15% of quarterly and 18% of nine-month revenue), short-term and nonbinding customer forecasts, sole-source supply exposure, inventory and receivables growth, foreign-exchange exposure, and concentration of manufacturing in Thailand, including political and natural-disaster risks.
- Other items to monitor include the revolver’s near-term renewal, debt covenant requirements, a $12.1 million outstanding commitment to third parties (including the Thailand land purchase), and $2.0 million of uncertain-tax-position liabilities. The company reported no material pending or threatened legal claims and no material off-balance-sheet arrangements.
Investor verification points
- Confirm renewal and current terms of the $34 million revolving borrowing, given its April 2017 maturity extension disclosed in the filing.
- Assess whether revenue growth and customer demand persist, and how much growth reflects the acquisition and the extra week in the nine-month comparison.
- Track gross-margin trends, foreign-exchange effects, and the elevated share-based compensation expense.
- Monitor receivables and inventory conversion into cash alongside capital spending and the Chonburi facility ramp.
- Review customer concentration, Thailand operating exposure, Exception EMS integration, and the final purchase-price allocation.