Fabrinet(FN) - 2022 Q2 - Quarterly Report

Risk Factors Summary Risk Factors Summary This section outlines principal investment risks, including customer dependence, market consolidation, operational challenges, international exposures, financial risks, and cybersecurity threats - Sales are dependent on a small number of customers, and a reduction in orders or loss of any of these customers could significantly harm business results[9] - The business is exposed to risks from international operations, including political unrest in Thailand, the ongoing U.S.-China trade dispute, and fluctuations in foreign currency exchange rates[9] - Supply chain risks are significant, as the company relies on single-source or limited suppliers for critical materials, which could lead to shortages and increased costs[9] - Financial risks include the potential impairment of business due to financial ratio covenants in loan agreements and the impact of the phase-out of the London Interbank Offered Rate (LIBOR)[11] - The company faces risks related to cybersecurity attacks on its IT infrastructure and potential intellectual property infringement claims[11] PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, shareholders' equity, and cash flows, with accompanying notes Condensed Consolidated Balance Sheets Total assets increased to $1.75 billion, driven by receivables and inventories, while liabilities rose to $551.6 million, and shareholders' equity reached $1.20 billion Condensed Consolidated Balance Sheet Highlights (as of December 24, 2021 vs. June 25, 2021) | Account | Dec 24, 2021 (in thousands) | June 25, 2021 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $1,439,987 | $1,352,507 | | Inventories | $484,873 | $422,133 | | Total Assets | $1,750,795 | $1,616,122 | | Total Current Liabilities | $500,037 | $444,358 | | Trade accounts payable | $391,176 | $346,555 | | Total Liabilities | $551,604 | $503,602 | | Total Shareholders' Equity | $1,199,191 | $1,112,520 | Condensed Consolidated Statements of Operations and Comprehensive Income Revenues for the three months ended December 24, 2021, increased 24.9% to $566.6 million, with net income rising to $48.9 million and diluted EPS reaching $1.30 Statement of Operations Highlights (Three Months Ended) | Metric | Dec 24, 2021 (in thousands) | Dec 25, 2020 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Revenues | $566,633 | $453,827 | +24.9% | | Gross Profit | $69,371 | $53,021 | +30.8% | | Operating Income | $51,445 | $35,865 | +43.4% | | Net Income | $48,879 | $35,384 | +38.1% | | Diluted EPS | $1.30 | $0.94 | +38.3% | Statement of Operations Highlights (Six Months Ended) | Metric | Dec 24, 2021 (in thousands) | Dec 25, 2020 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Revenues | $1,109,955 | $890,466 | +24.6% | | Gross Profit | $132,968 | $103,501 | +28.5% | | Operating Income | $94,455 | $69,482 | +35.9% | | Net Income | $93,530 | $68,435 | +36.7% | | Diluted EPS | $2.50 | $1.83 | +36.6% | Condensed Consolidated Statements of Shareholders' Equity Total shareholders' equity increased from $1.11 billion to $1.20 billion, primarily due to net income, partially offset by share settlements and repurchases - For the six months ended December 24, 2021, total shareholders' equity increased by $86.7 million, from $1,112.5 million to $1,199.2 million[20] - Key activities affecting shareholders' equity during the six-month period included net income of $93.5 million, share-based compensation of $16.0 million, share repurchases of $4.4 million, and tax withholdings on restricted share units of $19.5 million[20] Condensed Consolidated Statements of Cash Flows Net cash from operations was $57.6 million, while investing activities used $53.8 million and financing activities used $29.8 million, resulting in $276.8 million cash at period-end Cash Flow Summary (Six Months Ended) | Cash Flow Activity | Dec 24, 2021 (in thousands) | Dec 25, 2020 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $57,568 | $41,314 | | Net cash used in investing activities | ($53,777) | ($24,346) | | Net cash used in financing activities | ($29,773) | ($23,629) | | Net decrease in cash | ($25,982) | ($6,661) | | Cash at end of period | $276,845 | $226,776 | - The increase in cash from operations was mainly due to higher net income, offset by significant increases in inventories ($62.7 million) and trade accounts receivable ($48.0 million)[27] - Investing activities included $51.9 million for the purchase of property, plant, and equipment[27] - Financing activities included $19.5 million for withholding tax on restricted share units, $6.1 million for repayment of long-term borrowings, and $4.2 million for share repurchases[27] Notes to Condensed Consolidated Financial Statements These notes provide detailed information on accounting policies, revenue recognition, financial instruments, inventory, leases, borrowings, taxes, share-based compensation, and commitments Revenue by End Market (Three Months Ended) | End Market | Dec 24, 2021 (in thousands) | % of Total | Dec 25, 2020 (in thousands) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Optical communications | $450,783 | 79.6% | $347,840 | 76.6% | | Lasers, sensors and other | $115,850 | 20.4% | $105,987 | 23.4% | | Total | $566,633 | 100.0% | $453,827 | 100.0% | Revenue by Geographic Region (Three Months Ended Dec 24, 2021) | Region | Revenue (in thousands) | % of Total | | :--- | :--- | :--- | | North America | $247,277 | 43.6% | | Asia-Pacific and others | $222,040 | 39.2% | | Europe | $97,316 | 17.2% | | Total | $566,633 | 100.0% | - As of December 24, 2021, the company had a purchase obligation of $1,301.7 million and capital expenditure commitments of $19.9 million, primarily for a new manufacturing building[117][120] - The company repurchased 38,269 shares for $4.4 million during the three and six months ended December 24, 2021, with $76.7 million remaining under the share repurchase authorization[112] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and results, highlighting strong revenue growth, improved margins, and solid liquidity, alongside COVID-19 impacts, cost structures, and foreign exchange risks Overview and COVID-19 Impact Fabrinet provides optical manufacturing services, navigating COVID-19 supply chain challenges with strong liquidity of $519.9 million in cash and investments, while benefiting from long-term internet bandwidth demand - The company believes that growing global demand for internet bandwidth, driven by work-from-home protocols, will have a positive long-term impact on its business[137] - Near-term challenges from COVID-19 include disruptions in the supply chain and fluctuations in material availability, which are expected to continue impacting revenue generation and negatively affecting gross margins[137] - As of December 24, 2021, the company reported a strong capital position with $519.9 million in cash, cash equivalents, and short-term investments, and total debt of approximately $33.5 million[137] Results of Operations Quarterly revenues grew 24.9% to $566.6 million, with gross margin improving to 12.2% and operating income increasing 43.2% to $51.4 million Quarterly Performance Comparison (Q2 FY22 vs Q2 FY21) | Metric | Q2 FY22 | Q2 FY21 | Change | | :--- | :--- | :--- | :--- | | Revenues | $566.6M | $453.8M | +24.9% | | Gross Profit | $69.4M | $53.0M | +30.8% | | Gross Margin | 12.2% | 11.7% | +50 bps | | Operating Income | $51.4M | $35.9M | +43.2% | | Operating Margin | 9.1% | 7.9% | +120 bps | - The increase in revenue for both the three and six-month periods was primarily due to higher demand for optical communications manufacturing services from key customers[176][177] - SG&A expenses increased by $0.6 million for the quarter, mainly due to higher share-based compensation and R&D expenses, offset by lower start-up costs in Israel[182] Liquidity and Capital Resources The company maintains strong liquidity with $519.9 million in cash and investments, generating $57.6 million from operations, and believes it can meet future capital needs Six-Month Cash Flow Summary | Activity | Six Months Ended Dec 24, 2021 (in thousands) | | :--- | :--- | | Net cash provided by operating activities | $57,568 | | Net cash used in investing activities | ($53,777) | | Net cash used in financing activities | ($29,773) | - Cash from operations of $57.6 million was driven by net income of $93.5 million, offset by increases in inventories ($62.7 million) and accounts receivable ($48.0 million)[207] - The company believes its current cash, investments, and cash flow from operations will be sufficient to meet its needs for at least the next 12 months[204] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rates, foreign currency fluctuations (especially Thai baht), and credit exposure, which are managed through derivative instruments and diversified investments - The company has significant foreign currency risk, particularly from the Thai baht, as most revenues are in USD while a substantial portion of payroll and operating expenses are in THB. A 10% weakening of the USD against the THB, RMB, and GBP would have resulted in a net dollar position decrease of approximately $6.6 million as of December 24, 2021[220][222] - Interest rate risk exists for both investment income and debt expense. A 10 basis point decline in interest rates would have decreased interest income by approximately $0.2 million for the six-month period. A 100 basis point increase in LIBOR would have increased interest expense by a similar amount, though this is mitigated by interest rate swap agreements[214][215] - The company uses derivative instruments, including foreign currency forward contracts and interest rate swaps, to manage market risks. Certain foreign currency and interest rate hedges are designated as cash flow hedges and qualify for hedge accounting[216][222] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 24, 2021, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[224] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[225] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company reports no material legal claims or actions currently pending or threatened against it - There are currently no material legal claims or actions pending or threatened against the company[227] Item 1A. Risk Factors This section details significant business and investment risks, including COVID-19 impacts, customer concentration, supply chain vulnerabilities, international operational risks, financial risks, and cybersecurity threats - Customer concentration is a major risk, with three customers accounting for 54.8% of revenues in the three months ended December 24, 2021[232] - The company is currently experiencing impacts from the significant global semiconductor shortage, which can cause disruptions to production schedules and adversely affect financial results[248] - The majority of operations are in Thailand, exposing the company to political, social, and economic risks specific to that country[270] - The U.S. Commerce Department's addition of Huawei to the BIS Entity List has adversely affected orders from some of the company's customers and is expected to continue to do so[265] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 38,269 ordinary shares for $4.4 million during the quarter, with $76.7 million remaining under the share repurchase authorization Share Repurchase Activity (Three Months Ended Dec 24, 2021) | Metric | Value | | :--- | :--- | | Total Shares Purchased | 38,269 | | Average Price Paid Per Share | $115.82 | | Total Purchase Price | $4.4 million | | Remaining Authorization | $76.7 million | Item 6. Exhibits This section lists filed exhibits, including CEO and CFO certifications and Inline XBRL financial data - Filed exhibits include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[335] - The filing includes financial data in Inline XBRL format as required by the SEC[335]