Fabrinet — Form 10-Q Summary
Business context and reporting 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, 2011 (the first quarter of fiscal 2012), a 14-week period; the comparable quarter ended September 24, 2010 was 13 weeks. Financial statements are unaudited and amounts below are in U.S. dollars.
Financial performance and position
| Metric | Quarter ended September 30, 2011 | Comparable quarter | Change |
|---|---|---|---|
| Revenue | $186.3 million | $173.7 million | +7.3% |
| Gross profit / margin | $22.9 million / 12.3% | $21.8 million / 12.5% | Profit +5.1%; margin down 0.2 percentage points |
| Operating income / margin | $16.2 million / 8.7% | $16.9 million / 9.7% | Income down about $0.7 million |
| Net income / margin | $15.7 million / 8.4% | $15.2 million / 8.8% | +3.0% |
| Diluted earnings per share | $0.45 | $0.44 | Up $0.01 |
| Operating cash flow | $9.8 million | $(1.9) million | Improved by $11.7 million |
| Investing cash flow | $(8.0) million | $(7.3) million | Greater cash use |
| Financing cash flow | $3.1 million | $24.9 million | Lower, largely because the prior period included IPO proceeds |
- Revenue growth reflected a $11.7 million increase in lasers, sensors and other markets, and a $0.9 million increase in optical communications. Non-optical markets grew to 26.2% of revenue from 21.4%.
- SG&A rose 37.5% to $6.6 million, attributed primarily to increased business development and research and development spending. Share-based compensation increased to $1.0 million from $0.2 million.
- Cash and cash equivalents were $132.3 million at quarter-end. Total borrowings were $19.5 million, up from $16.4 million at June 24, 2011; cash exceeded borrowings by approximately $112.9 million. The company reported compliance with debt covenants.
- Current assets were $367.6 million and current liabilities $116.2 million, implying a current ratio of approximately 3.2. Working capital was approximately $251.3 million.
- Quarter-end assets totaled $455.7 million and shareholders’ equity $318.2 million. Undrawn bank credit facilities were approximately $74.4 million.
Material changes, outlook and risks
- Thailand flooding after quarter-end: All Thai manufacturing was suspended during the week of October 17. Floodwaters breached the Chokchai campus on October 22, inundating Buildings 1 and 2 to as much as five feet. Pinehurst Buildings 3–5 were also temporarily shut due to transportation and utility disruption; limited production resumed there November 7. Chokchai represented 29% and Pinehurst 67% of quarterly revenue. Chokchai production was not expected to resume during the quarter ending December 30, 2011, and the company could not estimate when full operations would return. Fabrinet has no alternative manufacturing operations outside Thailand to which it can transfer its Thai production.
- Management’s December-quarter outlook: Fabrinet expected revenue to be substantially lower than in the September quarter and forecast a net loss, whether or not Pinehurst production resumed before quarter-end. If Pinehurst generated no further revenue, management estimated quarterly revenue would be approximately $28 million; it expected revenue to exceed that level but could not estimate by how much. Negative cash flow was expected, with significant under-utilization, recovery, expedited-delivery, asset impairment and inventory write-down costs; the amount and timing of those charges were not reasonably estimable.
- Insurance and liquidity: Reported coverage included approximately $120 million for equipment, $120 million for inventory, $45 million for building damage and $47 million for business interruption. Recoveries were undetermined and could be delayed or limited. No flood-related adjustment was recorded in the September-quarter statements. Management believed cash, operating cash flow and potential insurance proceeds would cover working-capital and capital needs for 12 months, while also warning that flood-related losses, spending and lost revenue would adversely affect cash.
- Other business risks: Four customers each accounted for at least 10% of revenue and together represented 57% in both comparison periods. Oclaro had given notice to terminate its volume supply agreement effective December 31, 2011. The company also cited customer order volatility, reliance on sole- or limited-source suppliers, foreign-exchange exposure, and dependence on Thai operations. A $18.3 million commitment remained for Pinehurst Building 6 development.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. No material legal proceedings were pending or threatened, according to the filing.
Most important facts for investors to verify
- Actual timing and scale of production recovery at Pinehurst, and whether Chokchai operations will resume or capacity will be relocated.
- Subsequent-quarter revenue, margins, cash flow and flood-related charges compared with management’s stated expectations.
- Insurance coverage determinations, claim timing and proceeds actually recovered, including business-interruption coverage.
- Customer retention and order levels after the shutdown, including the effect of Oclaro’s agreement termination and customer concentration.
- Supplier recovery, availability of materials, Building 6 completion and related cash and capital-expenditure needs.