Fabrinet — Form 10-Q Summary
Business context and reporting period
Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services to OEMs, primarily for low-volume, high-mix products. This unaudited quarterly report covers the three and six months ended December 24, 2021, the second quarter and first half of fiscal 2022, respectively; comparisons are with periods ended December 25, 2020.
Key financial metrics
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $566.6 million; up 24.9% year over year | $1,110.0 million; up 24.6% |
| Gross profit / margin | $69.4 million / 12.2%, versus $53.0 million / 11.7% | $133.0 million / 12.0%, versus $103.5 million / 11.6% |
| Operating income / margin | $51.4 million / 9.1%, versus $35.9 million / 7.9% | $94.5 million / 8.5%, versus $69.5 million / 7.8% |
| Net income / diluted EPS | $48.9 million / $1.30, versus $35.4 million / $0.94 | $93.5 million / $2.50, versus $68.4 million / $1.83 |
| Operating cash flow | Not reported separately for the quarter | $57.6 million, versus $41.3 million |
For the six months, investing cash outflow was $53.8 million, including $51.9 million of property, plant and equipment purchases. Financing cash outflow was $29.8 million. Cash, cash equivalents and short-term investments totaled $519.9 million at quarter-end; total debt was $33.5 million. Cash and cash equivalents alone were $276.5 million and short-term investments were $243.3 million. Current assets were $1,440.0 million and current liabilities $500.0 million.
Inventory increased to $484.9 million from $422.1 million at fiscal year-end; accounts receivable rose to $384.7 million from $336.5 million. The company repaid $6.1 million of debt and repurchased 38,269 shares for $4.4 million during the first half. It reported a $0.1 million workforce-reduction expense in the quarter.
Material changes versus prior period
- Revenue growth was led by optical communications: quarterly revenue from that end market rose 29.6% to $450.8 million; it represented 79.6% of quarterly revenue, compared with 76.6% a year earlier. Six-month optical communications revenue rose 26.9%.
- Quarterly and first-half gross and operating margins improved year over year. Management attributed higher gross profit primarily to volume growth; cost of revenue increased broadly in line with sales.
- Three customers each accounted for at least 10% of quarterly revenue; together they represented 54.8%, versus 36.6% a year earlier. For the first half, the three largest qualifying customers represented 54.7%, versus 37.2%.
- Revenue mix shifted toward customers billed outside North America: 56.4% of quarterly revenue and 55.5% of first-half revenue, compared with 50.5% and 51.5%, respectively.
- First-half capital spending increased to $51.9 million from $22.7 million in the comparable period, principally reflecting manufacturing expansion.
Outlook, management commentary and risks
- No specific revenue or earnings guidance is provided. Management expects the share of revenue from customers outside North America for the remainder of fiscal 2022 to be in line with the first-half mix. It expects fiscal 2022 SG&A expenses to increase versus fiscal 2021 and employee costs to rise in Thailand and the PRC.
- Management says current cash, investments, operating cash flow and available credit should cover working capital and capital needs for at least 12 months, and that current manufacturing capacity should meet anticipated production for at least the next few quarters.
- Management reported no significant operational disruption or demand decline from COVID-19 during the quarter, but warned that worsening outbreaks could lead to restrictions or factory closures. Ongoing supply-chain strain, including semiconductor shortages, has affected and may continue to affect revenue and costs; management expects gross margins to remain negatively affected for the foreseeable future.
- Major risks include customer concentration and short-term, nonbinding forecasts; supplier and materials constraints; inventory exposure; optical communications market dependence; foreign-exchange exposure, especially to the Thai baht; and operating, political and regulatory risks in Thailand and the PRC.
- Purchase obligations and other third-party commitments totaled $1.302 billion, generally expected to be fulfilled within one year. Capital expenditure commitments were $19.9 million, including $2.9 million for the Chonburi building project. The filing reports no material pending or threatened legal claims.
- The effective tax rate was low at 2.4% for the quarter and 1.9% for the first half, which management attributed primarily to a greater proportion of income not subject to tax. The filing also says the liability for uncertain tax positions was $1.3 million and is expected to increase within 12 months.
Investor verification priorities
- Confirm whether customer concentration and reliance on optical communications remain elevated, and assess customer-specific revenue and receivables exposure.
- Track semiconductor and other supply availability, inventory growth, and the extent to which shortages constrain shipments or margins.
- Review the return and funding needs of the Chonburi expansion, capital spending, and the large purchase-obligation balance.
- Assess the sustainability of margin improvement and the unusually low effective tax rate, including Thai tax incentives and uncertain tax positions.
- Monitor liquidity, operating cash conversion, debt covenant compliance, and the transition from LIBOR-based borrowing and hedges.