Business Context and Reporting Period
Company: Fabrinet (Cayman Islands)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended June 24, 2011
Fabrinet provides precision optical, electro-mechanical, and electronic manufacturing services to OEMs of complex products, including optical communication components, industrial lasers, and sensors. The company operates on a "low-volume, high-mix" model, focusing on advanced process design, supply chain management, and manufacturing. As of June 24, 2011, the company employed approximately 6,800 people, primarily in Thailand and China.
Key Financial Metrics
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Total Revenues | $743.6 million | $505.7 million |
| Gross Profit | $94.7 million | $64.3 million |
| Gross Margin | 12.7% | 12.7% |
| Operating Income | $69.9 million | $48.2 million |
| Net Income | $64.3 million | $44.3 million |
| Diluted EPS | $1.87 | $1.41 |
| Cash and Cash Equivalents | $127.3 million | $84.9 million |
| Total Debt | $16.4 million | $20.4 million |
| Working Capital | $131.6 million | $96.7 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by 47.0% ($237.9 million) compared to fiscal 2010. This was driven by a $174.4 million increase in optical communications products and a $63.5 million increase in non-optical communications products (lasers, sensors).
- Customer Concentration: While the top four customers accounted for 58% of total revenues in fiscal 2011, this was a decrease from 69% in fiscal 2010, indicating slight diversification.
- Geographic Shift: Revenues from bill-to locations outside North America increased to 56.4% of total revenues in fiscal 2011, up from 50.0% in fiscal 2010.
- Cost Structure: Cost of revenues increased 47.0% to $648.8 million, maintaining the gross margin at 12.7%. SG&A expenses increased 53.2% to $24.8 million, largely due to executive incentive plan accruals and costs associated with being a public company.
- Foreign Exchange: The company recorded a net foreign exchange loss of $1.4 million in fiscal 2011, compared to a loss of $40,000 in fiscal 2010, due to the depreciation of the U.S. dollar against the Thai baht and RMB.
Guidance, Outlook, Risks, and Unusual Items
- Customer Termination Risk: On July 1, 2011 (post-fiscal year end), Oclaro, Inc. delivered a notice of termination of its volume supply agreement, effective December 31, 2011. Following this announcement, Fabrinet's share price declined approximately 22%.
- Expansion Plans: The company is constructing "Pinehurst Building 6" in Thailand, expected to be completed in Q1 2012, with a total cost of approximately $29.7 million. A $30 million credit facility was secured for this purpose.
- Market Risks: The company faces significant risks related to customer concentration, foreign currency fluctuations (specifically Thai baht and RMB appreciation against the USD), and supply chain constraints from sole-source suppliers.
- Political Risk: A significant portion of assets and operations are in Thailand, exposing the company to political instability and potential changes in tax regimes or labor laws.
- Unusual Items: Fiscal 2010 included a $5.0 million recovery of obsolete inventory costs from a customer, which reduced cost of revenues for that period. Fiscal 2011 included $2.6 million in accrued bonuses for the new executive incentive plan.
Investor Verification Checklist
- Oclaro Impact: Verify the extent of revenue exposure to Oclaro, Inc. and the status of negotiations for new manufacturing contracts following the July 2011 termination notice.
- Currency Hedging: Review the effectiveness of the company's hedging strategies against the Thai baht and RMB, given the significant exposure to these currencies for payroll and operations.
- Customer Diversification: Assess the progress of diversifying into industrial lasers and sensors markets to reduce reliance on the optical communications sector.
- Capital Expenditures: Monitor the completion timeline and cost overruns for the Pinehurst Building 6 expansion project.
- Supply Chain Resilience: Evaluate the company's mitigation strategies for sole-source supplier risks and potential inventory obsolescence.