Fabrinet (FN) — FY2024 Second-Quarter 10-Q
Reporting period: The quarter ended December 29, 2023; comparisons are with the quarter ended December 30, 2022. Fabrinet provides optical, electro-mechanical and electronic manufacturing services, primarily for complex, low-volume, high-mix products. The six-month comparisons cover 26 weeks in FY2024 versus 27 weeks in the prior year.
Financial performance
Amounts are U.S. dollars; financial statement amounts below are in millions except per-share data.
| Metric | Q2 FY2024 | Q2 FY2023 | First half FY2024 | First half FY2023 |
|---|---|---|---|---|
| Revenue | $712.7 (+6.6%) | $668.7 | $1,398.2 (+5.6%) | $1,324.1 |
| Gross profit / margin | $88.3 / 12.4% | $85.2 / 12.7% | $172.7 / 12.4% | $168.0 / 12.7% |
| Operating income / margin | $69.0 / 9.7% | $66.3 / 9.9% | $133.0 / 9.5% | $128.5 / 9.7% |
| Net income / margin | $69.1 / 9.7% | $63.2 / 9.4% | $134.2 / 9.6% | $127.8 / 9.7% |
| Diluted EPS | $1.89 | $1.71 | $3.67 | $3.47 |
| Operating cash flow | Not separately presented | Not separately presented | $229.2 | $105.1 |
- Quarterly interest income rose to $7.7 million from $2.3 million, reflecting higher rates and average cash and investment balances. Net foreign-exchange losses were $3.8 million for the quarter and $3.4 million for the half year.
- At December 29, cash and cash equivalents were $334.1 million and short-term investments were $406.5 million, totaling $740.6 million. Current assets were $1.806 billion and current liabilities $486.8 million.
- Debt was $6.1 million, down from $12.2 million at June 30, 2023; the remaining term loan matures in June 2024. A separate $55 million credit facility had no borrowings. The company reported compliance with loan covenants.
Changes and business mix
- Optical communications revenue increased 12.2% in the quarter to $567.9 million, or 79.7% of revenue. Management attributed growth mainly to data-communications products, particularly for AI applications; telecom revenue declined amid continued customer inventory absorption.
- Automotive, lasers and other revenue fell 11.0% to $144.8 million, primarily due to lower automotive revenue. For the first half, this category declined 7.3%.
- Asia-Pacific and other customer bill-to locations contributed 60.3% of quarterly revenue, versus 43.1% a year earlier. Management attributed the shift mainly to increased revenue from a significant customer in Israel and lower North American sales. Three customers each represented at least 10% of quarterly revenue and together accounted for 57.0%, versus 45.6% a year earlier.
- Gross margin declined 0.3 percentage points in both the quarter and first half; operating margin also declined 0.2 percentage points. Higher sales volume lifted gross profit and operating income, but cost of revenue grew faster than revenue.
- Operating cash flow more than doubled year over year in the first half, primarily due to favorable working-capital changes, especially inventory management. Inventory fell to $414.8 million from $519.6 million at June 30.
Outlook, risks and other items
- No quantitative revenue or earnings guidance is provided. Based on customer indications and forecasts, management expects the share of revenue from outside North America for the remainder of FY2024 to be in line with the first-half share. Management says current manufacturing capacity should meet anticipated production requirements for at least the next few quarters and liquidity should cover working-capital and capital-expenditure needs for at least 12 months.
- Management expects optical-customer inventory correction and supply-chain disruptions to continue weighing on revenue timing and fulfillment, despite strong customer demand. It expects higher employee costs in Thailand and China, incremental costs from expansion into new geographic markets, and FY2024 SG&A above FY2023.
- Key exposures include customer concentration and short-term, nonbinding customer forecasts; supply constraints and single-source materials; inventory obsolescence; foreign-exchange movements, especially the Thai baht; and economic, political, trade and operating risks in Thailand and China. Optical communications remains the dominant end market.
- Commitments included $1.00 billion of purchase obligations and other commitments, generally expected to be fulfilled within one year, plus $13.1 million of capital-expenditure commitments. Outstanding Thai subsidiary bank guarantees totaled $2.1 million. Management reported no material pending or threatened legal claims.
- Income-tax expense was $3.8 million in the quarter; the quarterly effective tax rate was 5.2%, versus 1.7% a year earlier. The first-half effective rate was 6.2%, versus 1.4%; the change included a $2.1 million valuation allowance on Israeli deferred tax assets. Uncertain-tax-position liabilities, including interest and penalties, were $2.5 million.
- The company repurchased 38,239 shares for $6.4 million in the first half and had $93.6 million of authorization remaining. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether AI-related data-communications demand offsets continued telecom inventory correction, and whether automotive demand recovers.
- Monitor customer concentration, particularly the significant Israel-related revenue increase, and customer receivables and order forecasts.
- Assess gross-margin recovery against wage inflation, supply constraints, product mix and geographic expansion costs.
- Review inventory quality and working-capital trends, including whether first-half cash-flow improvement is sustained.
- Verify repayment or refinancing of the $6.1 million term loan by its June 2024 maturity, and monitor tax exposures and compliance with facility covenants.