Fabrinet (FN) — Form 10-Q Summary
Business context and reporting period
Fabrinet provides advanced optical packaging and precision optical, electro-mechanical and electronic manufacturing services to OEMs, primarily for optical communications, lasers, sensors and other markets. This filing covers fiscal 2023 Q2, the three months ended December 30, 2022, and the first six months of fiscal 2023. The comparable six-month period last year was one week shorter.
Financial performance
| Metric | Fiscal Q2 2023 | Fiscal Q2 2022 | First six months FY2023 | First six months FY2022 |
|---|---|---|---|---|
| Revenue | $668.7 million | $566.6 million | $1,324.1 million | $1,110.0 million |
| Gross profit / margin | $85.2 million / 12.7% | $69.4 million / 12.2% | $168.0 million / 12.7% | $133.0 million / 12.0% |
| Operating income / margin | $66.3 million / 9.9% | $51.4 million / 9.1% | $128.5 million / 9.7% | $94.5 million / 8.5% |
| Net income / margin | $63.2 million / 9.4% | $48.9 million / 8.6% | $127.8 million / 9.7% | $93.5 million / 8.4% |
| Diluted EPS | $1.71 | $1.30 | $3.47 | $2.50 |
Q2 revenue increased 18.0% year over year; operating income rose 29.0%. Six-month revenue increased 19.3% and operating income 36.0%; management attributed part of the six-month revenue increase to the additional week. Optical communications represented 75.7% of Q2 revenue, down from 79.6%; revenue from lasers, sensors and other markets grew 40.4% year over year in the quarter. North America accounted for 48.5% of Q2 revenue, Asia-Pacific and others 43.1%, and Europe 8.4%.
For the first six months, operating cash flow was $105.1 million, versus $57.6 million a year earlier; investing cash flow was $(21.6) million and financing cash flow $(31.0) million. Cash, cash equivalents and restricted cash increased $52.5 million. At December 30, cash and cash equivalents were $250.8 million and short-term investments $276.8 million, or $527.6 million combined. Long-term borrowings were $18.3 million; the company repaid $9.1 million during the half. Total assets were $2.0 billion and shareholders’ equity $1.4 billion.
Material changes and unusual items
- Gross and operating margins improved year over year, with management citing higher sales volume; SG&A declined as a share of revenue.
- Q2 reported a $3.9 million net foreign-exchange loss, compared with a $0.4 million loss a year earlier. For the six-month period, the company moved from a $1.4 million FX gain to a $1.8 million loss.
- The effective tax rate was 1.7% in Q2 and 1.4% for the half, down from 2.4% and 1.9%, respectively. Management attributed the decreases primarily to more income not subject to tax.
- Inventories were $536.5 million at period-end, down from $557.1 million at fiscal year-end; work in progress increased while raw materials declined.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management expects the share of revenue from customers outside North America for the rest of FY2023 to be in line with the first-half share.
- Management expects supply constraints and parts availability issues to continue, and potentially worsen, for at least the next 12 months. It also expects inflation and supply-chain issues to pressure gross margins, employee costs to rise in Thailand and China, and FY2023 SG&A to exceed FY2022 levels. Manufacturing capacity is expected to meet requirements for at least the next few quarters.
- COVID-related infections disrupted Fabrinet’s China operations in late December, though management said contingency measures prevented a significant impact on reported results. Further restrictions or facility shutdowns could materially affect operations.
- Customer concentration remains significant: three customers each represented at least 10% of quarterly revenue and together accounted for 45.6%, versus 49.6% in the prior-year quarter. Customer orders are generally not firmly committed beyond 13 weeks.
- As of December 30, purchase obligations and other commitments totaled $1.16 billion, generally expected to be fulfilled within one year; capital expenditure commitments were $27.7 million. The company reported compliance with its term-loan financial covenants and no material pending or threatened legal claims.
- Key exposures include supply disruption and sole-source suppliers, customer concentration and order volatility, foreign exchange movements, inflation and wage costs, geopolitical and trade risks, and reliance on Thailand and China operations. The company had $130 million of Thai baht forward contracts outstanding and uses interest-rate swaps to hedge debt exposure.
Important facts for investors to verify
- Whether customer demand, concentration and short order commitments support continued revenue growth.
- Whether supply constraints, inflation and rising labor costs affect margins or delivery schedules.
- Inventory quality and customer recovery provisions, given the elevated inventory balance and material procurement commitments.
- The durability of unusually low tax rates and Thai tax incentives, and the sensitivity of earnings to currency movements.
- Liquidity and investment portfolio quality, as well as the timing and terms of remaining debt repayments and capital spending.