Fabrinet(FN) - 2022 Q3 - Quarterly Report

Risk Factors Summary The company faces principal risks from customer concentration, supply chain vulnerabilities, foreign operational risks, and financial exposures including currency volatility and debt covenants - Sales are concentrated with a small number of customers, making the company vulnerable to order reductions or customer loss[10] - The business is exposed to supply chain disruptions due to reliance on single-source or limited suppliers for critical materials[10] - Operations are primarily conducted in foreign countries, particularly Thailand and the PRC, exposing the company to geopolitical, economic, and currency risks[10][12] - Financial risks include fluctuations in foreign currency exchange rates, restrictive covenants in loan agreements, and uncertainties related to the phase-out of LIBOR[10][12] PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for the quarter ended March 25, 2022, detailing balance sheets, income, equity, cash flows, and accounting notes Condensed Consolidated Balance Sheets Total assets increased to $1.78 billion from $1.62 billion, with liabilities rising to $551.4 million and shareholders' equity growing to $1.23 billion as of March 25, 2022 Condensed Consolidated Balance Sheets (in thousands) | Account | March 25, 2022 | June 25, 2021 | | :--- | :--- | :--- | | Total Current Assets | $1,470,148 | $1,352,507 | | Total Assets | $1,780,139 | $1,616,122 | | Total Current Liabilities | $502,659 | $444,358 | | Total Liabilities | $551,412 | $503,602 | | Total Shareholders' Equity | $1,228,727 | $1,112,520 | Condensed Consolidated Statements of Operations and Comprehensive Income Quarterly revenues increased to $564.4 million with net income of $50.7 million, while nine-month revenues reached $1.67 billion and net income $144.2 million Key Performance Indicators (Three Months Ended, in thousands) | Metric (in thousands) | March 25, 2022 | March 26, 2021 | | :--- | :--- | :--- | | Revenues | $564,395 | $479,317 | | Gross Profit | $70,693 | $56,778 | | Operating Income | $53,659 | $37,676 | | Net Income | $50,661 | $37,493 | | Diluted EPS | $1.35 | $1.00 | Key Performance Indicators (Nine Months Ended, in thousands) | Metric (in thousands) | March 25, 2022 | March 26, 2021 | | :--- | :--- | :--- | | Revenues | $1,674,350 | $1,369,783 | | Gross Profit | $203,661 | $160,279 | | Operating Income | $148,114 | $107,158 | | Net Income | $144,191 | $105,928 | | Diluted EPS | $3.85 | $2.82 | Condensed Consolidated Statements of Shareholders' Equity Total shareholders' equity increased to $1.23 billion, driven by $144.2 million net income, partially offset by $28.6 million in share repurchases and tax withholdings - Key activities affecting shareholders' equity in the nine months ended March 25, 2022, included net income of $144.2 million, share-based compensation of $21.7 million, and share repurchases of $28.6 million[21] Condensed Consolidated Statements of Cash Flows Operating activities provided $107.9 million cash, while investing used $83.2 million and financing used $58.2 million, resulting in a $33.5 million net cash decrease Cash Flow Summary (Nine Months Ended, in thousands) | Cash Flow Activity | March 25, 2022 | March 26, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $107,897 | $79,316 | | Net cash used in investing activities | $(83,218) | $(36,414) | | Net cash used in financing activities | $(58,204) | $(28,915) | | Net (decrease) increase in cash | $(33,525) | $13,987 | Notes to Condensed Consolidated Financial Statements Notes detail business, accounting policies, and financial instruments, including revenue by end market (optical communications 78.7%), derivative hedging, borrowings, and $1.41 billion in purchase obligations Revenues by End Market (Nine Months Ended March 25, 2022, in thousands) | End Market | Revenue (in thousands) | % of Total | | :--- | :--- | :--- | | Optical communications | $1,318,087 | 78.7% | | Lasers, sensors and other | $356,263 | 21.3% | | Total | $1,674,350 | 100.0% | - The company uses foreign currency forward contracts and interest rate swaps to manage financial risks. As of March 25, 2022, it had outstanding U.S. dollar forward contracts with a notional amount of $135.0 million against the Thai baht[56][62][68] - As of March 25, 2022, the company had a share repurchase program with a remaining authorization of $52.5 million. During the nine months ended, 275,608 shares were repurchased for $28.6 million[111] - The company has significant purchase obligations of $1.41 billion and capital expenditure commitments of $17.7 million as of March 25, 2022[116][117] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, highlighting 17.7% quarterly revenue growth and 22.2% nine-month growth, improved gross margins, COVID-19 impacts, foreign exchange risks, and sufficient liquidity - The COVID-19 pandemic continues to create challenges, including supply chain disruptions and fluctuations in material availability, which are expected to negatively affect gross margins for the foreseeable future[130][135][136] Revenue Comparison (in millions) | Period | March 25, 2022 | March 26, 2021 | % Change | | :--- | :--- | :--- | :--- | | Three Months Ended | $564.4 | $479.3 | 17.7% | | Nine Months Ended | $1,674.4 | $1,369.8 | 22.2% | Gross Profit Comparison (in millions) | Period | March 25, 2022 | March 26, 2021 | | :--- | :--- | :--- | | Three Months Ended | $70.7M (12.5% of revenue) | $56.8M (11.8% of revenue) | | Nine Months Ended | $203.7M (12.2% of revenue) | $160.3M (11.7% of revenue) | - The company believes its cash position of $515.0 million in cash, cash equivalents, and short-term investments, along with cash flow from operations, is sufficient to meet working capital and capital expenditure needs for at least the next 12 months[135][204] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company details market risks, including interest rate risk mitigated by swaps, and significant foreign currency exposure from operations in Thailand, PRC, and UK, partially hedged by derivatives - A hypothetical 100 basis point increase in LIBOR would have increased interest expense by approximately $0.3 million for the nine months ended March 25, 2022[215] - The company has significant exposure to fluctuations in the Thai baht, RMB, and GBP against the U.S. dollar, as most revenues are in USD while a substantial portion of operating expenses are in local currencies[220][221] - 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 by approximately $5.5 million as of March 25, 2022[222] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 25, 2022, 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 have materially affected, or are reasonably likely to materially affect, these controls[225] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company reports no material legal claims or actions are currently pending or threatened against it - As of the filing date, the company is not involved in any material pending or threatened legal proceedings[227] Item 1A. Risk Factors This section details significant business risks, including customer concentration, supply chain disruptions, intense competition, international operational risks, financial covenants, and intellectual property and cybersecurity concerns - The company depends on a small number of customers for a significant portion of its revenue. In the three months ended March 25, 2022, three customers accounted for 53.5% of total revenues[232] - The optical communications market represented 78.0% of revenues for the three months ended March 25, 2022, making the company's growth dependent on this market's expansion[237] - The company faces significant competition from customers' internal manufacturing capabilities and other third-party manufacturers[242] - A substantial portion of operating expenses are paid in Thai baht, while revenues are primarily in U.S. dollars, creating significant exposure to currency exchange rate fluctuations[268] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 237,339 ordinary shares for $24.2 million during the quarter, with $52.5 million remaining authorized for future repurchases Share Repurchase Activity (Three Months Ended March 25, 2022) | Metric | Value | | :--- | :--- | | Total Shares Purchased | 237,339 | | Average Price Paid Per Share | $101.90 | | Total Cost (in millions) | $24.2 | | Remaining Authorization (in millions) | $52.5 | Item 6. Exhibits This section lists exhibits filed with Form 10-Q, including a consulting agreement, CEO/CFO certifications, and Inline XBRL data files - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32.1) and Inline XBRL financial data files (101 series)[336]