Fabrinet — Form 10-K summary
Reporting period: Fiscal year ended June 26, 2020 (52 weeks), filed August 18, 2020. This is an annual report, not a standalone 2019 Q4 filing; the filing also provides unaudited quarterly data for the quarter ended June 26, 2020. Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services, primarily for optical communications and also for lasers, sensors and other markets.
Key financial results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $1,641.8 million | $1,584.3 million |
| Gross profit / margin | $186.1 million / 11.3% | $179.2 million / 11.3% |
| Operating income / margin | $117.4 million / 7.1% | $122.6 million / 7.7% |
| Net income / margin | $113.5 million / 6.9% | $121.0 million / 7.6% |
| Diluted EPS | $3.01 | $3.23 |
| Operating cash flow | $150.7 million | $147.4 million |
| Cash, cash equivalents and short-term investments at year-end | $488.1 million | $437.3 million |
| Long-term borrowings, net, at year-end | $51.7 million | $60.9 million |
FY2020 capital expenditures were $51.3 million; operating cash flow less capital expenditures was approximately $99.3 million. Year-end total assets were $1.38 billion, total liabilities $407.0 million, and shareholders’ equity $974.4 million. Reported working capital, defined by Fabrinet as receivables plus inventory less payables, was $330.8 million.
For the quarter ended June 26, 2020, revenue was $405.1 million, gross profit $46.6 million and net income $28.0 million (diluted EPS $0.75). In the comparable prior-year quarter, revenue was $405.1 million, gross profit $46.6 million and net income $33.0 million (diluted EPS $0.88).
Material changes versus the prior year
- Annual revenue rose 3.6%, chiefly on higher optical communications demand. Optical communications grew to 76.0% of revenue from 74.8%; lasers, sensors and other revenue declined to $393.7 million from $399.4 million.
- Gross margin was unchanged at 11.3%, but operating margin fell to 7.1% from 7.7%. SG&A increased 24.2% to $68.4 million, including a $3.5 million UK goodwill impairment, higher share-based compensation and new-business start-up costs.
- Net income declined 6.2%. Lower operating income and a swing from a $1.4 million foreign-exchange gain to a $3.8 million loss outweighed higher interest income and lower interest expense.
- Operating cash flow increased 2.2%. Cash and short-term investments rose, while debt decreased following refinancing and repayments. Fabrinet repurchased 355,000 shares for $20.7 million during the year.
- Optical communications customers Lumentum, Acacia and Infinera accounted for 19%, 10% and 10% of FY2020 revenue, respectively; Lumentum accounted for 20% in FY2019.
Outlook, risks and unusual items
- Management said COVID-19 caused facility interruptions in China, order cancellations, reductions and delays at some customers, and significant supply-chain disruption. Alternative sourcing and safety measures added costs and pressured gross margins. Management expected margin pressure to continue at least into the first half of FY2021.
- Management cited long-term demand support from rising internet bandwidth needs, but warned of near-term regional demand weakness and reduced demand in industrial laser and automotive markets if economic conditions remain weak. No quantified revenue or earnings guidance is provided in the filing text.
- Management expected FY2021 SG&A and capital expenditures to increase year over year, employee costs to rise in Thailand and China, and incremental cost of revenue from geographic expansion. It said existing capacity was sufficient for anticipated production in the next few quarters and liquidity was adequate for at least 12 months.
- Key risks include customer concentration and short, cancellable purchase-order commitments; dependence on sole-source suppliers; exposure to the Thai baht, RMB and pound sterling; export controls and US-China trade tensions; and reliance on Thailand for most manufacturing. The company also faces COVID-19 uncertainty and geopolitical, regulatory, and operational risks.
- A $24.3 million customer receivable arose from funds advanced to support a customer’s transfer of manufacturing operations to Thailand; repayment was due by September 30, 2020. A €6.0 million standby letter of credit supporting the transfer was collateralized by $7.4 million of restricted cash.
- The new Thai term loan had $51.7 million outstanding at year-end, matures in June 2024, and is secured by Thai land and buildings. Fabrinet reported compliance with its financial covenants. An August 2020 board action subsequently authorized an additional $58.5 million of repurchases, bringing total program authorization to $168.5 million.
- The auditor gave an unqualified opinion on the financial statements and internal controls, and identified revenue recognition judgments as a critical audit matter. Management and the auditor concluded internal control over financial reporting was effective at year-end.
Investor facts to verify
- Whether customer demand, particularly from the three largest customers, remains stable and whether customer concentration or customer consolidation changes.
- Whether supply availability and COVID-related costs improve as management expected, and whether gross margins recover after the first half of FY2021.
- Collection of the $24.3 million customer receivable by the stated due date and the status of the related manufacturing transfer and letter of credit.
- Debt repayment, covenant compliance, interest-rate hedging and exposure to the LIBOR transition.
- Progress against expected FY2021 increases in SG&A and capital expenditures, and the effect of Thai tax incentives and foreign-exchange movements on earnings.