Fabrinet — Form 10-Q summary
Business and period: Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services, primarily for complex, low-volume, high-mix products. This filing covers the quarter ended September 30, 2016 (the first quarter of fiscal 2017); the quarter contained 14 weeks, versus 13 weeks in the comparable prior-year period. Figures below are in U.S. dollars.
Key financial results
| Metric | Quarter ended Sep. 30, 2016 | Comparable prior period |
|---|---|---|
| Revenue | $332.0 million | $216.4 million |
| Gross profit / margin | $39.6 million / 11.9% | $26.0 million / 12.0% |
| Operating income / margin | $23.8 million / 7.2% | $13.2 million / 6.1% |
| Net income / margin | $22.8 million / 6.9% | $1.6 million / 0.7% |
| Diluted EPS | $0.61 | $0.04 |
| Operating cash flow | $(1.0) million | $4.5 million |
- Revenue rose 53.4%, driven mainly by increased customer demand for optical and non-optical communications manufacturing, the additional fiscal week, and $0.8 million of acquired-company revenue. Optical communications revenue was $256.8 million, or 77.3% of total revenue.
- Gross profit increased with volume, but gross margin edged down 0.1 percentage point. SG&A was $15.8 million, or 4.8% of revenue, versus $11.9 million, or 5.5%.
- Net income benefited materially from the year-over-year foreign-exchange swing: a $1.7 million net gain in 2016 versus a $10.5 million net loss in 2015. The prior-year comparison also included $0.9 million of flood-related expense. These items make the large earnings increase less indicative of underlying operating growth.
- Investing cash outflow was $46.7 million, including $27.1 million of property and equipment purchases and acquisition-related cash outlays. Financing provided $10.4 million, including $13.5 million of revolving-loan proceeds.
Financial position and material changes
- At September 30, cash and cash equivalents were $105.9 million and marketable securities were $147.7 million, totaling $253.6 million. Combined cash and securities were $284.5 million at June 24, 2016.
- Fabrinet reported $70.8 million of outstanding debt, compared with $39.0 million at September 25, 2015. At September 30, bank borrowings included $20.0 million revolving debt and $46.6 million term debt; $133.4 million of credit facilities remained available. The revolving maturity was extended in October to November 2016.
- Current assets were $680.5 million and current liabilities $269.2 million. Receivables increased to $212.7 million and inventory to $205.5 million from June 24, while operating cash flow was negative, reflecting working-capital investment and liability movements.
- On September 14, Fabrinet acquired UK-based Exception EMS for approximately $13.0 million net of cash acquired. The preliminary allocation included $4.4 million of customer relationships, $0.1 million of backlog and $3.0 million of goodwill. The valuation and purchase-price allocation remained subject to adjustment; transaction costs of about $1.1 million were expensed in SG&A.
Outlook, risks and unusual items
- Management said current cash, marketable securities, operating cash flow and available credit should meet working-capital and capital-expenditure needs for at least 12 months. The Chonburi facility was substantially completed in October 2016, with operations expected to begin in the second quarter of fiscal 2017. Management expected fiscal 2017 SG&A to rise in dollars but decline as a percentage of revenue; it also expected higher employee costs in Thailand and China and incremental costs from geographic expansion.
- Fabrinet expected non-North-American revenue share to continue decreasing. Revenue is exposed to customer demand, pricing and product mix; one customer represented 21% of quarterly revenue, and one customer accounted for at least 10% of receivables at quarter-end.
- Key exposures include Thai baht and other currency movements, reliance on sole- or limited-source suppliers, inventory obsolescence, customer concentration, manufacturing disruption and natural disasters, and political or regulatory risks in Thailand, China and other operating regions. A 10% weakening of the U.S. dollar against the Thai baht and RMB would have reduced the company’s net dollar position by approximately $4.7 million, based on quarter-end exposures.
- The credit facility requires at least $40 million of qualifying U.S.-located cash, cash equivalents or securities and imposes financial covenants. Fabrinet reported compliance with its covenants at September 30. It had $30.1 million of outstanding commitments, mainly for the Chonburi building. No material litigation was reported.
- Disclosure controls were assessed as effective; management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of revenue growth and earnings improvement reflects durable demand and operating performance, versus the extra week and foreign-exchange effects?
- Whether working-capital growth—particularly receivables and inventory—converts into operating cash flow, and whether planned capital spending remains within liquidity expectations.
- Whether Exception EMS meets integration and growth expectations, and how the final purchase-price allocation, acquired intangibles and deferred consideration change.
- Customer concentration, foreign-exchange exposure, the revolving-loan renewal and covenant requirements, and the execution and costs of the Chonburi expansion.