Fabrinet — Form 10-Q Summary
Reporting period: Fiscal third quarter ended March 29, 2013, with results compared with the quarter ended March 30, 2012. The nine-month periods were 39 weeks in 2013 and 40 weeks in 2012. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where applicable.
Business context
Fabrinet provides advanced optical packaging and precision optical, electro-mechanical and electronic manufacturing services, primarily for optical communications, industrial laser and sensor products. It operates as one reportable segment, with most manufacturing in Asia-Pacific.
Financial performance and liquidity
| Metric | Three months ended Mar. 29, 2013 | Prior-year quarter | Nine months ended Mar. 29, 2013 | Prior-year period |
|---|---|---|---|---|
| Revenue | $155.6 million | $139.0 million | $481.6 million | $422.0 million |
| Gross profit / margin | $16.3 million / 10.4% | $14.9 million / 10.7% | $52.3 million / 10.9% | $46.7 million / 11.1% |
| Operating income (loss) | $20.9 million | $(47.3) million | $55.0 million | $(67.7) million |
| Net income (loss) | $21.1 million | $(46.3) million | $53.8 million | $(63.9) million |
| Diluted EPS | $0.61 | $(1.35) | $1.55 | $(1.86) |
- Quarterly revenue rose 11.9%; nine-month revenue rose 14.1%. Management attributed growth mainly to higher optical communications volume as operations recovered from the Thailand floods. Optical communications represented 69.6% of quarterly revenue versus 63.6% a year earlier.
- Quarterly cost of revenue was 89.6% of revenue versus 89.3%; nine-month cost was 89.1% versus 88.9%. Management cited Thai baht appreciation and higher Thai minimum wages among cost pressures. Gross margin declined year over year in both comparisons.
- Reported operating and net income included flood-related insurance recovery: $11.4 million in the quarter and $21.1 million for nine months. Comparisons with the prior-year losses are heavily affected by prior-year flood charges of $55.6 million for the quarter and $95.9 million for nine months.
- Nine-month operating cash flow was $51.3 million, versus $0.1 million; investing cash use was $3.7 million versus $28.1 million, and financing cash use was $6.7 million versus $25.6 million provided in the prior period. Cash at period end was $157.5 million, up from $115.5 million at June 29, 2012.
- At March 29, 2013, current assets were $387.1 million and current liabilities $150.8 million. Total debt was $31.3 million, down from $38.6 million at June 29, 2012. The company reported compliance with debt covenants and $5.8 million of undrawn short-term credit facilities.
- Three customers each accounted for at least 10% of accounts receivable at quarter-end. Two customers together represented 44% of quarterly revenue and 47% of nine-month revenue.
Material changes and notable items
- Revenue recovery followed the 2011 Thailand flooding and suspension of manufacturing; production at the Chokchai facility was permanently discontinued. Most operations resumed elsewhere, and Pinehurst Building 6 construction was completed in April 2012.
- On March 14, 2013, existing shareholders sold 3.8 million shares at $14 per share in a secondary offering. Fabrinet received no proceeds and recorded approximately $0.5 million of offering expenses.
- Flood-related liabilities to third parties were $48.4 million at March 29, 2013, down from $61.2 million at June 29, 2012. The company disclosed customer settlements and continuing differences with customers about damaged consigned property and responsibility for losses.
- Subsequent events: two customer flood settlements were completed on April 1, 2013. On April 16, Fabrinet agreed to pay a customer’s insurer $6.5 million in installments for a flood-related subrogation claim. In the fourth quarter of fiscal 2013, it also incurred approximately $2.0 million in severance costs for a workforce reduction of about 200 employees.
Outlook, risks and contingencies
- No specific revenue or earnings guidance for a coming quarter is provided. Management expects fiscal 2013 SG&A to rise in absolute dollars but decline as a percentage of revenue versus fiscal 2012; it also expects higher employee costs in Thailand and China and incremental cost of revenue from diversification and geographic expansion.
- Management said current cash and expected operating cash flow should meet working-capital and capital-expenditure needs for the next 12 months. It expects existing cash and internally generated working capital to fund scheduled debt repayment.
- Flood insurance claims remain subject to exclusions, limits, valuation disputes and delays. Management expects to recover a majority of losses, while acknowledging the difference between claims and recoveries may be material. Cash outlays before insurance receipts and potential customer disputes could affect liquidity.
- Key disclosed risks include customer concentration and short-term, nonbinding forecasts; reliance on single- or limited-source suppliers; exposure to Thai baht and RMB movements; wage inflation; natural disasters and Thailand operating risks; and demand, pricing and competitive volatility in optical communications.
- Management reported disclosure controls and procedures were effective at period-end and no material change in internal control over financial reporting during the quarter. No material legal claims were pending or threatened, according to the filing.
Important facts for investors to verify
- How much of reported earnings and operating cash flow reflects recurring manufacturing performance versus flood-related insurance recoveries and settlements.
- Outstanding insurance claims, expected timing and amount of recoveries, and potential remaining customer or insurer obligations related to the Thailand floods.
- Whether gross margins stabilize despite Thai wage and currency pressures and the changing mix of optical communications and other products.
- Revenue and receivables concentration among major customers, and customer demand visibility given the limited firm-order horizon.
- Cash needs for the $6.5 million subrogation settlement, workforce reduction costs, and scheduled debt maturities.