Fabrinet(FN) - 2021 Q4 - Annual Report

Part I Item 1. Business Fabrinet provides advanced optical packaging and precision manufacturing services to OEMs, with fiscal year 2021 revenues growing 14.5% to $1.88 billion, driven by optical communications - Fabrinet provides advanced optical packaging and precision optical, electro-mechanical, and electronic manufacturing services to OEMs of complex products[23] Fiscal Year 2021 Financial Highlights | Metric | Fiscal Year 2021 | Fiscal Year 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $1.88 billion | $1.64 billion | +$237.5 million | +14.5% | | Optical Communications Revenue % | 76.7% | 76.0% | - | - | | Lasers, Sensors, Other Revenue % | 23.3% | 24.0% | - | - | - The company manufactures a range of products including ROADMs, tunable lasers, active optical cables for data centers, industrial lasers for various applications, and sensors for automotive and medical use[26] - In response to COVID-19, the company implemented significant safety measures, including temperature checks, facility disinfection, and remote work policies. While operations were impacted, particularly in China initially, the company believes long-term demand for bandwidth will positively impact its business[29][31][33] Item 1A. Risk Factors The company faces significant risks including customer concentration, supply chain disruptions, international operational instability, and financial covenant restrictions - A small number of customers account for a significant percentage of revenue. In fiscal year 2021, three customers accounted for 39.1% of total revenues, creating concentration risk[78] - The business is exposed to supply chain disruptions, particularly from single-source suppliers for critical materials and a global shortage of semiconductors, which can impact production schedules and costs[94] - The majority of manufacturing operations are in Thailand, making the company susceptible to political, social, and economic instability in the country[116] - The ongoing U.S.-China trade dispute and associated tariffs could increase the cost of materials used in manufacturing, potentially harming operating results[112] - The company's loan agreements contain financial covenants (e.g., leverage ratio, debt service coverage) that could restrict business operations if breached[125] - Preferential tax treatment from the Thai government is contingent on various factors, and the loss of these benefits could significantly increase the company's tax liability[147][148] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments - Not applicable[174] Item 2. Properties Fabrinet's principal facilities are globally located, with major owned manufacturing campuses in Thailand totaling over 1.6 million square feet Principal Facilities as of June 25, 2021 | Location | Owned/Leased | Approximate Square Footage | | :--- | :--- | :--- | | Pinehurst Campus, Bangkok, Thailand | Owned | 1,075,000 sq ft | | Hemaraj Campus, Chonburi, Thailand | Owned | 553,000 sq ft | | Fuzhou, Fujian, PRC | Leased | 300,000 sq ft | | Santa Clara, California, United States | Owned | 72,000 sq ft | | Wiltshire, United Kingdom | Leased | 71,000 sq ft | Item 3. Legal Proceedings The company reports no material legal claims or actions currently pending or threatened - From time to time, the company may be involved in litigation in the ordinary course of business, but there are currently no material claims or actions pending[177] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[178] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Fabrinet's ordinary shares trade on the NYSE under "FN", with no current dividend plans but an active share repurchase program with $81.2 million remaining authorization - The company's ordinary shares are listed on the New York Stock Exchange under the symbol "FN"[181] - The company currently intends to retain earnings for business use and does not plan to pay dividends[183] Share Repurchase Activity (Q4 FY2021) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | March 26, 2021 – April 23, 2021 | — | $ — | | April 24, 2021 – May 21, 2021 | 68,158 | $81.17 | | May 22, 2021 – June 25, 2021 | 54,425 | $91.79 | - As of June 25, 2021, the company had a remaining authorization to repurchase up to an additional $81.2 million worth of its ordinary shares[187] Item 6. [RESERVED] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses fiscal year 2021 financial results, highlighting a 14.5% revenue increase to $1.88 billion, strong liquidity, and key accounting policies Results of Operations Fiscal year 2021 saw total revenues increase 14.5% to $1.88 billion, with gross profit rising to $221.4 million and net income reaching $148.3 million Consolidated Statements of Operations Summary (FY2021 vs. FY2020) | (in thousands) | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Revenues | $1,879,350 | $1,641,836 | | Gross profit | $221,363 | $186,105 | | Operating income | $150,753 | $117,402 | | Net income | $148,341 | $113,479 | Revenues by End Market (FY2021 vs. FY2020) | (in thousands) | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Optical communications | $1,441,338 | $1,248,174 | | Lasers, sensors, and other | $438,012 | $393,662 | | Total | $1,879,350 | $1,641,836 | - The increase in SG&A expenses in FY2021 was mainly due to a $3.2 million increase in share-based compensation, $1.4 million in start-up costs for the Israel subsidiary, and $0.9 million in severance for a senior management retirement[260] Liquidity and Capital Resources The company maintains strong liquidity with $547.9 million in cash and equivalents, primarily financing operations through $118.7 million in cash flow from operating activities Cash and Debt Position (as of June 25, 2021) | Metric | Amount (in millions) | | :--- | :--- | | Cash, cash equivalents, and short-term investments | $547.9 | | Outstanding debt | $39.5 | Cash Flow Summary (Fiscal Year 2021) | Cash Flow Activity | Amount (in millions) | | :--- | :--- | | Net cash provided by operating activities | $118.7 | | Net cash used in investing activities | ($5.4) | | Net cash used in financing activities | ($42.8) | - Capital expenditures were $48.6 million in fiscal year 2021, and are expected to increase in fiscal year 2022, mainly for investment in manufacturing facilities[298] Critical Accounting Policies and Use of Estimates Critical accounting policies requiring significant judgment include revenue recognition, inventory valuation, and accounting for deferred income taxes - Revenue is recognized when control of products transfers to the customer, which is typically at shipment or delivery. The company's contracts generally do not have rights to bill for work-in-progress if terminated[237] - Inventory is valued at the lower of cost or market value, with provisions for excess and obsolete inventory made based on quarterly reviews of customer demand forecasts[246] - The company assesses the need for a valuation allowance against deferred tax assets based on the likelihood of generating sufficient future taxable income. In FY2021, a valuation allowance of $1.5 million was released for a U.S. subsidiary, while a new allowance of $2.1 million was set up for a U.K. subsidiary[249][250] Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to interest rate, foreign currency, and credit risks, which are managed through derivative instruments and credit evaluations - Interest rate risk on floating-rate debt is managed by using interest rate swap agreements to effectively convert the debt to a fixed interest rate[302] - The company has significant foreign currency risk exposure, particularly to the Thai baht, RMB, and GBP. This risk is managed using derivative instruments like foreign currency forward contracts[306][308] - A hypothetical 10% weakening of the U.S. dollar against the Thai baht, RMB, and GBP would have resulted in a decrease in the company's net dollar position of approximately $1.4 million as of June 25, 2021[308] - Credit risk is managed by holding cash and investments with highly-rated financial institutions and performing ongoing credit evaluations of customers[309] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for fiscal year 2021, including the unqualified auditor's report and detailed notes Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers ABAS Ltd. issued an unqualified opinion on the financial statements and internal controls, identifying revenue recognition as a Critical Audit Matter - The auditor, PricewaterhouseCoopers ABAS Ltd., issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[315] - A Critical Audit Matter was identified concerning the timing of revenue recognition, highlighting the significant judgment management exercises in evaluating contract terms and conditions to determine when control is transferred[322][323] Consolidated Financial Statements The consolidated financial statements show total assets of $1.62 billion, total shareholders' equity of $1.11 billion, and net income of $148.3 million for FY2021 Key Balance Sheet Data (as of June 25, 2021) | (in thousands) | Amount | | :--- | :--- | | Total current assets | $1,352,507 | | Total Assets | $1,616,122 | | Total current liabilities | $444,358 | | Total Liabilities | $503,602 | | Total Shareholders' Equity | $1,112,520 | Key Income Statement Data (Year Ended June 25, 2021) | (in thousands, except per share data) | Amount | | :--- | :--- | | Revenues | $1,879,350 | | Gross profit | $221,363 | | Operating income | $150,753 | | Net income | $148,341 | | Diluted EPS | $3.95 | Notes to Consolidated Financial Statements The notes detail accounting policies, including revenue recognition, income taxes, and segment information, highlighting significant customer concentration in FY2021 - The company operates as a single operating segment[554] Significant Customers (as % of Total Revenues) | Customer | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Cisco Systems Inc. | 13.9% | * | | Lumentum Operations LLC | 13.6% | 19.0% | | Infinera Corporation | 11.6% | 10.0% | | Acacia Communications Inc. | * | 10.2% | Represents less than 10% of total revenues. - As of June 25, 2021, the company had purchase obligations and other commitments of $918.7 million and capital expenditure commitments of $66.6 million[548][551] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[571] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of June 25, 2021, a conclusion concurred by the independent auditor - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[572] - Management concluded that the company maintained effective internal control over financial reporting as of June 25, 2021, based on the COSO framework[577] - There were no changes in internal control over financial reporting during the fourth quarter of fiscal 2021 that materially affected, or are reasonably likely to materially affect, internal controls[573] Item 9B. Other Information This item is not applicable to the company - Not applicable[578] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - Information for this item is incorporated by reference from the 2021 Proxy Statement[580] Item 11. Executive Compensation Information on executive compensation is incorporated by reference from the 2021 Proxy Statement - Information for this item is incorporated by reference from the 2021 Proxy Statement[581] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and related stockholder matters is incorporated by reference from the 2021 Proxy Statement - Information for this item is incorporated by reference from the 2021 Proxy Statement[582] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2021 Proxy Statement - Information for this item is incorporated by reference from the 2021 Proxy Statement[583] Item 14. Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement - Information for this item is incorporated by reference from the 2021 Proxy Statement[584] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, including an index of all exhibits - This section provides an index of all exhibits filed with or incorporated by reference into the Form 10-K[587][588] Item 16. Form 10-K Summary This item is not applicable to the company - Not applicable[593]