Fabrinet — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 30, 2012; comparative periods ended March 25, 2011. The filing covers fiscal 2012 Q3, notwithstanding the request metadata identifying 2011 Q3. Amounts below are in U.S. dollars.
Business context
Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services, mainly for optical communications, industrial lasers and sensors. Manufacturing is concentrated in Asia-Pacific, particularly Thailand. The company operates as one reportable segment.
Financial results and liquidity
| Metric | Three months ended Mar. 30, 2012 | Three months ended Mar. 25, 2011 | Nine months ended Mar. 30, 2012 | Nine months ended Mar. 25, 2011 |
|---|---|---|---|---|
| Revenue | $139.0m | $194.9m | $422.0m | $553.2m |
| Gross profit | $14.9m | $25.3m | $46.7m | $70.8m |
| Gross margin | 10.7% | 13.0% | 11.1% | 12.8% |
| Operating income (loss) | $(47.3)m | $17.8m | $(67.7)m | $52.5m |
| Net income (loss) | $(46.3)m | $16.7m | $(63.9)m | $47.7m |
| Basic/diluted EPS | $(1.35) | $0.49 | $(1.86) | $1.41 basic; $1.39 diluted |
- Cash flow: For the nine months, operating cash flow was $0.1m, versus $24.6m a year earlier; investing cash flow was $(28.1)m, primarily reflecting facility construction and replacement equipment; financing cash flow was $25.6m, including $28.0m of new bank loans. Cash declined $2.4m to $125.4m.
- Balance sheet at March 30, 2012: Current assets were $353.8m and current liabilities $172.2m. Cash was $125.4m; debt was $41.0m, compared with $16.4m at June 24, 2011. Total liabilities were $210.6m and shareholders’ equity $242.5m. Current liabilities included $61.2m due to third parties related to flood losses.
- Management said cash, cash equivalents and expected operating cash generation should meet working-capital and capital-expenditure needs for the next 12 months, while cautioning that flood-related outlays, delayed insurance proceeds and potentially slower customer collections could pressure liquidity.
Material changes and unusual items
- Revenue fell 28.7% in the quarter and 23.7% over nine months, primarily due to Thailand flooding and weaker optical-communications demand. Optical communications revenue declined to $93.0m for the quarter; lasers, sensors and other revenue was $46.0m. Those other markets rose to 33.1% of quarterly revenue from 20.5% a year earlier.
- Thailand facilities halted production from October 17 through December 2011. Flood-related expense was $55.6m in the quarter and $95.9m for nine months, including $48.5m for customer-owned equipment and machinery. No insurance recovery was recorded because insurers had not indicated what they would accept. Claims submitted through April 19 totaled approximately $96m; additional claims were planned.
- Gross margin declined year over year in both comparison periods. Before the flood expense, quarterly gross profit was $14.9m; the reported operating loss also reflects the $55.6m flood charge.
- Property, plant and equipment increased to $96.4m from $75.4m at fiscal year-end, amid investment in Pinehurst Building 6 and replacement of flood-damaged equipment. The new facility was completed in fiscal Q4 2012, with approximately 180,000 square feet of clean-room assembly area available.
- After quarter-end, the company reduced its workforce by approximately 200 employees and incurred about $2.2m of severance expense in fiscal Q4.
Outlook, commentary and risks
- Management expected revenue for the quarter ending June 29, 2012 to be substantially lower than in previous periods because of the flooding. It also expected additional business-interruption costs in the next two fiscal quarters and believed industrial lasers and sensors would represent a growing share of revenue. The filing provides no specific revenue or earnings forecast.
- Management believed it would ultimately recover a majority of flood losses, but stated that policy exclusions, limits and delays could materially reduce or defer proceeds. New Thai property and casualty coverage carried materially higher premiums and was subject to exclusions and limits.
- Key risks include customer concentration and purchasing power, possible customer or supplier financial distress, reliance on limited-source components, production disruption or further natural disasters in Thailand, wage increases, Thai-baht and RMB currency exposure, and uncertain insurance recoveries. Three customers accounted for 51.2% of quarterly revenue.
- Long-term loans contain debt-to-equity and debt-service-coverage covenants; the company reported compliance at March 30, 2012. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. No material legal proceedings were reported.
Most important facts for investors to verify
- Insurers’ coverage determinations, accepted claim amounts, exclusions, and timing of cash recoveries versus the approximately $96m of claims submitted.
- Production recovery, customer demand and revenue trends following the Thailand shutdown, particularly the June 2012 quarter outlook.
- Customer retention, payment timing, and any disputes or customer obligations concerning damaged consigned equipment and inventory.
- Cash needs and borrowing levels as the company funds recovery costs, replacement equipment, facility investment and higher insurance premiums.
- Margin recovery amid lower volumes, rising Thai wages, currency movements and ongoing diversification into industrial lasers and sensors.