Fabrinet Form 10-Q Summary
Reporting period: Quarter ended December 25, 2020, the second quarter of Fabrinet’s fiscal 2021 (13 weeks). The filing compares results with the quarter ended December 27, 2019. The six-month period also ended December 25, 2020. The statements are unaudited.
Business context
Fabrinet provides advanced optical packaging and precision optical, electro-mechanical and electronic manufacturing services to OEMs. Optical communications remained its largest end market. The company operates as one reportable segment, with manufacturing principally in Thailand and additional operations in China, the U.S., the U.K. and other locations.
Financial performance
| Metric | Quarter ended Dec. 25, 2020 | Prior-year quarter | Six months ended Dec. 25, 2020 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $453.8 million | $426.2 million | $890.5 million | $825.5 million |
| Gross profit / margin | $53.0 million / 11.7% | $49.2 million / 11.5% | $103.5 million / 11.6% | $95.1 million / 11.5% |
| Operating income / margin | $35.9 million / 7.9% | $32.1 million / 7.5% | $69.5 million / 7.8% | $62.1 million / 7.5% |
| Net income / margin | $35.4 million / 7.8% | $31.2 million / 7.3% | $68.4 million / 7.7% | $57.2 million / 6.9% |
| Diluted EPS | $0.94 | $0.83 | $1.83 | $1.52 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $41.3 million | $52.6 million |
Quarterly revenue rose 6.5%; management attributed growth to greater demand from key customers for optical communications services and newer programs. Optical communications revenue increased 8.0% in the quarter and represented 76.6% of sales, versus 75.6% a year earlier. Gross margin improved mainly due to a more favorable product mix. Six-month revenue increased 7.9% and net income increased 19.7% year over year.
Six-month operating cash flow declined 21.5%, primarily reflecting higher inventory, slower timing of receivable collections, and increased other assets, partly offset by lower payments to suppliers and higher earnings. Inventory rose to $372.0 million from $309.8 million at June 26, 2020. Purchases of property, plant and equipment were $22.7 million for the six months.
Financial position and liquidity
- At December 25, 2020, cash and cash equivalents were $219.2 million and short-term investments were $261.8 million, totaling approximately $481.0 million in cash and short-term investments.
- Total borrowings were $45.7 million, down from $51.7 million at June 26, 2020. The term loan matures in June 2024; interest-rate swaps effectively fix the rate. Fabrinet reported compliance with its loan covenants.
- Current assets were $1.252 billion and current liabilities were $395.0 million. Shareholders’ equity was $1.037 billion.
- Cash, cash equivalents and restricted cash declined by $6.7 million during the six months. Net cash used in investing activities was $24.3 million and net cash used in financing activities was $23.6 million.
Material changes, outlook and risks
- Management expects the share of revenue from customers outside North America for the remainder of fiscal 2021 to be in line with the 51.5% recorded in the first half. It did not provide specific revenue or earnings guidance.
- Management said it expects current liquidity, operating cash flow and available credit to cover working-capital and capital needs for at least 12 months. It also considered existing capacity sufficient for anticipated production over the next few quarters.
- Fabrinet reported no significant operational disruption or decrease in customer demand during the quarter from COVID-19, but warned that worsening outbreaks could affect operations, demand and supply availability. Management expects supply-chain disruption and related costs to persist; it said these, along with safety measures, would continue to weigh on gross margins for the foreseeable future.
- Management expects fiscal 2021 SG&A expenses to increase versus fiscal 2020, including due to Israel start-up costs and management retirement compensation. Employee costs in Thailand and China are also expected to rise, and expansion into new geographic markets is expected to add costs of revenue.
- Fabrinet began construction of a new manufacturing building at its Chonburi campus in December 2020. The contract price was approximately $50.3 million, with $10.1 million remaining as a commitment at quarter-end. Outstanding purchase obligations were $515.5 million, generally expected to be fulfilled within one year.
- A $24.3 million customer receivable relating to a manufacturing transfer was extended to April 1, 2021; the funds are expected to be offset against inventory purchases from that customer. A related €6.0 million letter of credit expired December 31, 2020, and its $7.4 million cash collateral was released in January 2021.
- Customer concentration is material: three customers accounted for 36.6% of quarterly revenue, compared with one customer at 15.3% a year earlier. The company also cites short customer order commitments, reliance on limited-source suppliers, inventory exposure, foreign-exchange and geopolitical risks, and dependence on optical communications.
- Fabrinet repurchased 101,549 shares for $7.1 million during the six months and had $92.9 million of authorization remaining. No material claims or actions were pending or threatened, according to the filing. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether optical communications demand and newer programs continue to support growth, and how customer concentration evolves.
- Whether inventory growth converts into sales and cash collections; operating cash flow weakened despite higher net income.
- Whether supply constraints, rising wages, currency movements and COVID-19-related costs affect margins and production.
- How the $515.5 million of purchase obligations and Chonburi construction commitment align with customer demand and capacity utilization.
- Whether the customer receivable is recovered or offset as expected by April 1, 2021, and whether liquidity and covenant compliance remain satisfactory.