Fabrinet(US:FN)2023-11-06 16:00PART I. FINANCIAL INFORMATION Financial Statements Fabrinet reported Q1 FY2024 revenues of $685.5 million, a 4.6% YoY increase, with net income of $65.1 million and strong operating cash flow of $145.0 million Condensed Consolidated Balance Sheets Total assets increased to $2.02 billion, driven by cash growth, while liabilities decreased to $489.1 million, boosting shareholders' equity to $1.53 billion Condensed Consolidated Balance Sheets | Financial Metric | Sep 29, 2023 (in thousands USD) | Jun 30, 2023 (in thousands USD) | | :--- | :--- | :--- | | Total Current Assets | $1,691,961 | $1,652,540 | | Total Assets | $2,019,221 | $1,979,648 | | Total Current Liabilities | $455,433 | $481,885 | | Total Liabilities | $489,052 | $510,990 | | Total Shareholders' Equity | $1,530,169 | $1,468,658 | - Inventories decreased significantly from $519.6 million on June 30, 2023, to $440.1 million on September 29, 202316 Condensed Consolidated Statements of Operations Q1 FY2024 revenues rose to $685.5 million, with net income stable at $65.1 million and diluted EPS increasing slightly to $1.78 Condensed Consolidated Statements of Operations | Metric | Q1 FY2024 (ended Sep 29, 2023, in thousands USD) | Q1 FY2023 (ended Sep 30, 2022, in thousands USD) | | :--- | :--- | :--- | | Revenues | $685,477 | $655,429 | | Gross Profit | $84,404 | $82,756 | | Operating Income | $63,975 | $62,191 | | Net Income | $65,089 | $64,615 | | Diluted EPS | $1.78 | $1.76 | Condensed Consolidated Statements of Cash Flows Operating cash flow significantly increased to $145.0 million, while investing activities used $53.1 million and financing activities used $15.2 million Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Q1 FY2024 (ended Sep 29, 2023, in thousands USD) | Q1 FY2023 (ended Sep 30, 2022, in thousands USD) | | :--- | :--- | :--- | | Net cash provided by operating activities | $145,049 | $60,634 | | Net cash (used in) provided by investing activities | ($53,080) | $23,367 | | Net cash used in financing activities | ($15,194) | ($27,485) | | Net increase in cash | $76,775 | $56,516 | - A significant driver for the increase in operating cash flow was a $79.5 million positive change from inventories, compared to a $28.8 million positive change in the prior-year period25 Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, geographic revenue shifts, decreased inventories, stable debt, increased tax rate, and customer concentration Revenue by Geographic Region (Bill-to Location) | Region | Q1 FY2024 (% of Total) | Q1 FY2023 (% of Total) | | :--- | :--- | :--- | | North America | 37.7% | 53.2% | | Asia-Pacific and others | 54.2% | 37.9% | | Europe | 8.1% | 8.9% | Revenue by End Market | End Market | Q1 FY2024 (% of Total) | Q1 FY2023 (% of Total) | | :--- | :--- | :--- | | Optical communications | 77.8% | 75.9% | | Automotive, lasers and other | 22.2% | 24.1% | - As of September 29, 2023, the company had purchase obligations of $1.22 billion and capital expenditure commitments of $12.3 million107108 - The company did not repurchase any shares during the quarter and had a remaining authorization of $100.0 million under its share repurchase program as of September 29, 2023103 Management's Discussion and Analysis (MD&A) MD&A discusses 4.6% revenue growth driven by optical communications, stable gross margin, anticipated supply chain impacts, and strong liquidity of $670.8 million Results of Operations Revenues grew 4.6% to $685.5 million, driven by optical communications, while operating income increased to $64.0 million and the effective tax rate rose to 7.2% - Revenue from optical communications products increased by 7.2% YoY, mainly due to higher demand for data communication products for AI applications, which was offset by a decline in telecommunication product revenues due to inventory absorption159 - Revenue from non-optical communications products decreased by 3.6% YoY, primarily due to a decline in industrial laser products, partially offset by an increase in automotive products159 - The effective tax rate increased to 7.2% from 1.1% YoY. This was due to higher income subject to tax and a new $2.1 million valuation allowance against deferred tax assets for the company's Israeli subsidiary, which is expected to continue generating losses168 Liquidity and Capital Resources Strong liquidity with $670.8 million in cash and equivalents, supported by $145.0 million in operating cash flow, sufficient for future needs Liquidity and Capital Resources | Metric | Sep 29, 2023 (in thousands USD) | Sep 30, 2022 (in thousands USD) | | :--- | :--- | :--- | | Cash, cash equivalents, and short-term investments | $670,800 | $499,800 | | Outstanding debt | $9,100 | $21,300 | - The company believes its current manufacturing capacity is sufficient to meet anticipated production requirements for at least the next few quarters177 Market Risk Disclosures Company faces interest rate, foreign currency, and credit risks, managed through swaps, hedging contracts for Thai baht exposure, and credit monitoring - The company has significant foreign currency exposure, particularly to the Thai baht, as most revenues are in USD while a substantial portion of payroll and operating expenses are in local currencies. This is managed with hedging contracts of up to 18 months188191 - A hypothetical 10% weakening in 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 $6.8 million as of September 29, 2023191 - Interest rate risk on variable-rate debt is managed through interest rate swap agreements, effectively converting floating rates to fixed rates. The company also transitioned its debt reference rate from LIBOR to SOFR effective September 29, 2023184185 Controls and Procedures Management concluded disclosure controls and procedures were effective as of September 29, 2023, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective to provide reasonable assurance that required information is recorded, processed, summarized, and reported in a timely manner193 PART II. OTHER INFORMATION Legal Proceedings The company is not currently involved in any material legal proceedings, though ordinary course litigation may arise - There are currently no material claims or actions pending or threatened against the company195 Risk Factors Key risks include customer concentration (61.5% from four customers), optical market dependence, supply chain disruptions, geopolitical instability, and foreign currency fluctuations - The company is highly dependent on a small number of customers. In Q1 FY2024, four customers accounted for 61.5% of total revenues198 - The optical communications market represented 77.8% of revenues in Q1 FY2024, making the company's growth dependent on the expansion of this market203 - The company relies on single or limited-source suppliers for critical materials and has experienced supply shortages, particularly for semiconductors, which can disrupt production and harm revenues214 - The majority of operations are in Thailand, exposing the company to risks from political unrest, which could disrupt manufacturing and shipments234235 Share Repurchases No share repurchases occurred in Q1 FY2024, with $100.0 million remaining under the authorization program Share Repurchase Activity (Q1 FY2024) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value of Shares That May Yet Be Purchased | | :--- | :--- | :--- | :--- | | July 1 - Sep 29, 2023 | 0 | $0 | $100,000,000 | - In August 2023, the board of directors approved a $47.6 million increase to the share repurchase authorization, bringing the aggregate authorization to $294.8 million287