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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
____________________________
(Mark One)
| | | | | |
☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended December 30, 2022
OR
| | | | | |
☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from__________to__________
Commission File Number: 001-34775
____________________________
FABRINET
(Exact name of registrant as specified in its charter)
____________________________
| | | | | |
Cayman Islands (State or other jurisdiction of incorporation or organization) | 98-1228572 (I.R.S. Employer Identification No.) |
c/o Intertrust Corporate Services
One Nexus Way, Camana Bay
Grand Cayman
Cayman Islands
(Address of principal executive offices)
KY1-9005
(Zip Code)
+66 2-524-9600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Ordinary Shares, $0.01 par value | | FN | | New York Stock Exchange |
____________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | x | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No
As of January 27, 2023, the registrant had 36,608,619 ordinary shares, $0.01 par value, outstanding.
FABRINET
FORM 10-Q
QUARTER ENDED DECEMBER 30, 2022
Table of Contents
RISK FACTORS SUMMARY
You should carefully consider the information set forth below under the heading “Risk Factors” in Part II, Item 1A before deciding whether to invest in our securities. Below is a summary of the principal risks associated with an investment in our securities.
•Our sales depend on a small number of customers. A reduction in orders from any of these customers, the loss of any of these customers, or a customer exerting significant pricing and margin pressures on us could harm our business, financial condition and operating results.
•Consolidation in the markets we serve could harm our business, financial condition and operating results.
•If the optical communications market does not expand as we expect, our business may not grow as fast as we expect.
•Our quarterly revenues, gross profit margins and operating results have fluctuated significantly and may continue to do so in the future, which may cause the market price of our ordinary shares to decline or be volatile.
•If we are unable to continue diversifying our precision optical and electro-mechanical manufacturing services across other markets within the optics industry, or if these markets do not grow as fast as we expect, our business may not grow as fast as we expect.
•If we are unable to compete successfully against our current and future competitors, our business, financial condition and operating results could be harmed.
•Cancellations, delays or reductions of customer orders and the relatively short-term nature of the commitments of our customers could harm our business, financial condition and operating results.
•Our exposure to financially troubled customers or suppliers could harm our business, financial condition and operating results.
•We purchase some of the critical materials used in certain of our products from a single source or a limited number of suppliers. Supply shortages have in the past, and could in the future, impair the quality, reduce the availability or increase the cost of materials, which could harm our revenues, profitability and customer relations.
•Managing our inventory is complex and may require write-downs due to excess or obsolete inventory, which could cause our operating results to decrease significantly in a given fiscal period.
•If we fail to adequately expand our manufacturing capacity, we will not be able to grow our business, which would harm our business, financial condition and operating results. Conversely, if we expand too much or too rapidly, we may experience excess capacity, which would harm our business, financial condition and operating results.
•We may experience manufacturing yields that are lower than expected, potentially resulting in increased costs, which could harm our business, operating results and customer relations.
•If the products that we manufacture contain defects, we could incur significant correction costs, demand for our services may decline and we may be exposed to product liability and product warranty claims, which could harm our business, financial condition, operating results and customer relations.
•If we fail to attract additional skilled employees or retain key personnel, our business, financial condition and operating results could suffer.
•Fluctuations in foreign currency exchange rates and changes in governmental policies regarding foreign currencies could increase our operating costs, which would adversely affect our operating results.
•We conduct operations in a number of countries, which creates logistical and communications challenges for us and exposes us to other risks and challenges that could harm our business, financial condition and operating results.
•We are subject to governmental export and import controls in several jurisdictions that subject us to a variety of risks, including liability, impairment of our ability to compete in international markets, and decreased sales and customer orders.
•We are subject to risks related to the ongoing U.S.-China trade dispute, including increased tariffs on materials that we use in manufacturing, which could adversely affect our business, financial condition and operating results.
•Political unrest and demonstrations, as well as changes in the political, social, business or economic conditions in Thailand, could harm our business, financial condition and operating results.
•We expect to continue to invest in our manufacturing operations in the People's Republic of China ("PRC"), which will continue to expose us to risks inherent in doing business in the PRC, any of which risks could harm our business, financial condition and operating results.
•Natural disasters, epidemics (including COVID-19), acts of terrorism and political and economic developments could harm our business, financial condition and operating results.
•Unfavorable worldwide economic conditions (including inflation and supply chain disruptions) may negatively affect our business, financial condition and operating results.
•The loan agreements for our long-term debt obligations and other credit facilities contain financial ratio covenants that may impair our ability to conduct our business.
•The phase-out of the London Interbank Offered Rate ("LIBOR") could affect interest rates under our existing credit facility agreement, as well as our ability to seek future debt financing.
•We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our shareholders.
•Our investment portfolio may become impaired by deterioration of the capital markets.
•We are not fully insured against all potential losses. Natural disasters or other catastrophes could adversely affect our business, financial condition and operating results.
•There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with U.S. GAAP. Any changes in estimates, judgments and assumptions could have a material adverse effect on our business, financial condition and operating results.
•Our business and operations would be adversely impacted in the event of a failure of our information technology infrastructure and/or cyber security attacks.
•Intellectual property infringement claims against our customers or us could harm our business, financial condition and operating results.
•Any failure to protect our customers’ intellectual property that we use in the products we manufacture for them could harm our customer relationships and subject us to liability.
•We are subject to the risk of increased income taxes, which could harm our business, financial condition and operating results.
•We have incurred and will continue to incur significant increased costs as a result of operating as a public company, and our management will be required to continue to devote substantial resources to various compliance initiatives.
•Failure to comply with applicable environmental laws and regulations could have a material adverse effect on our business, financial condition and operating results.
•If we are unable to meet regulatory quality standards applicable to our manufacturing and quality processes for the products we manufacture, our business, financial condition and operating results could be harmed.
•Our share price may be volatile due to fluctuations in our operating results and other factors, including the activities and operating results of our customers or competitors, any of which could cause our share price to decline.
•If securities or industry analysts do not publish research or if they publish misleading or unfavorable research about our business, the market price and trading volume of our ordinary shares could decline.
•We may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors.
•Our business and share price could be negatively affected as a result of activist shareholders.
•Certain provisions in our constitutional documents may discourage our acquisition by a third party, which could limit our shareholders' opportunity to sell shares at a premium.
•Our shareholders may face difficulties in protecting their interests because we are incorporated under Cayman Islands law.
•Certain judgments obtained against us by our shareholders may not be enforceable.
•Energy price volatility may negatively impact our business, financial condition and operating results.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FABRINET
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
| | | | | | | | | | | |
(in thousands of U.S. dollars, except share data and par value) | December 30, 2022 | | June 24, 2022 |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 250,829 | | | $ | 197,996 | |
Short-term restricted cash | — | | | 220 | |
Short-term investments | 276,778 | | | 280,157 | |
Trade accounts receivable, net of allowance for doubtful accounts of $1,521 and $1,271, respectively | 520,024 | | | 439,330 | |
Contract assets | 13,578 | | | 13,464 | |
Inventories | 536,536 | | | 557,145 | |
Prepaid expenses | 9,483 | | | 11,626 | |
Other current assets | 40,543 | | | 25,233 | |
Total current assets | 1,647,771 | | | 1,525,171 | |
Non-current assets | | | |
Long-term restricted cash | — | | | 149 | |
Property, plant and equipment, net | 302,282 | | | 292,277 | |
Intangibles, net | 3,319 | | | 3,508 | |
Operating right-of-use assets | 2,805 | | | 4,084 | |
Deferred tax assets | 11,212 | | | 9,800 | |
Other non-current assets | 635 | | | 652 | |
Total non-current assets | 320,253 | | | 310,470 | |
Total Assets | $ | 1,968,024 | | | $ | 1,835,641 | |
Liabilities and Shareholders’ Equity | | | |
Current liabilities | | | |
Long-term borrowings, current portion, net | $ | 12,156 | | | $ | 12,156 | |
Trade accounts payable | 438,475 | | | 439,684 | |
Fixed assets payable | 18,920 | | | 9,085 | |
Contract liabilities | 3,636 | | | 1,982 | |
| | | |
Operating lease liabilities, current portion | 2,005 | | | 2,319 | |
Income tax payable | 2,470 | | | 2,898 | |
Accrued payroll, bonus and related expenses | 21,940 | | | 20,374 | |
Accrued expenses | 22,465 | | | 24,758 | |
Other payables | 27,528 | | | 25,231 | |
Total current liabilities | 549,595 | | | 538,487 | |
Non-current liabilities | | | |
Long-term borrowings, non-current portion, net | 6,078 | | | 15,202 | |
Deferred tax liability | 5,934 | | | 6,001 | |
| | | |
Operating lease liability, non-current portion | 476 | | | 1,476 | |
Severance liabilities | 20,335 | | | 18,384 | |
Other non-current liabilities | 1,475 | | | 2,409 | |
Total non-current liabilities | 34,298 | | | 43,472 | |
Total Liabilities | 583,893 | | | 581,959 | |
Commitments and contingencies (Note 15) | | | |
Shareholders’ equity | | | |
Preferred shares (5,000,000 shares authorized, $0.01 par value; no shares issued and outstanding as of December 30, 2022 and June 24, 2022) | — | | | — | |
Ordinary shares (500,000,000 shares authorized, $0.01 par value; 39,251,581 shares and 39,048,700 shares issued at December 30, 2022 and June 24, 2022, respectively; and 36,590,939 shares and 36,436,683 shares outstanding at December 30, 2022 and June 24, 2022, respectively) | 393 | | | 390 | |
Additional paid-in capital | 194,366 | | | 196,667 | |
Less: Treasury shares (2,660,642 shares and 2,612,017 shares as of December 30, 2022 and June 24, 2022, respectively) | (152,362) | | | (147,258) | |
Accumulated other comprehensive income (loss) | (2,714) | | | (12,793) | |
Retained earnings | 1,344,448 | | | 1,216,676 | |
Total Shareholders’ Equity | 1,384,131 | | | 1,253,682 | |
Total Liabilities and Shareholders’ Equity | $ | 1,968,024 | | | $ | 1,835,641 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
FABRINET
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(in thousands of U.S. dollars, except per share data) | December 30, 2022 | | December 24, 2021 | | December 30, 2022 | | December 24, 2021 |
Revenues | $ | 668,656 | | | $ | 566,633 | | | $ | 1,324,085 | | | $ | 1,109,955 | |
Cost of revenues | (583,441) | | | (497,262) | | | (1,156,114) | | | (976,987) | |
Gross profit | 85,215 | | | 69,371 | | | 167,971 | | | 132,968 | |
Selling, general and administrative expenses | (18,930) | | | (17,791) | | | (39,495) | | | (38,378) | |
Expenses related to reduction in workforce | — | | | (135) | | | — | | | (135) | |
Operating income | 66,285 | | | 51,445 | | | 128,476 | | | 94,455 | |
Interest income | 2,334 | | | 295 | | | 3,893 | | | 1,056 | |
Interest expense | (389) | | | (238) | | | (780) | | | (274) | |
Foreign exchange gain (loss), net | (3,904) | | | (364) | | | (1,819) | | | 1,408 | |
Other income (expense), net | (68) | | | (1,055) | | | (209) | | | (1,315) | |
Income before income taxes | 64,258 | | | 50,083 | | | 129,561 | | | 95,330 | |
Income tax expense | (1,101) | | | (1,204) | | | (1,789) | | | (1,800) | |
Net income | 63,157 | | | 48,879 | | | 127,772 | | | 93,530 | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Change in net unrealized gain (loss) on available-for-sale securities | 1,183 | | | (947) | | | (278) | | | (1,160) | |
Change in net unrealized gain (loss) on derivative instruments | 11,188 | | | 3,294 | | | 9,970 | | | 2,077 | |
Change in net retirement benefits plan – prior service cost | 57 | | | 126 | | | 225 | | | 324 | |
Change in foreign currency translation adjustment | (84) | | | — | | | 162 | | | (164) | |
Total other comprehensive income (loss), net of tax | 12,344 | | | 2,473 | | | 10,079 | | | 1,077 | |
Net comprehensive income | $ | 75,501 | | | $ | 51,352 | | | $ | 137,851 | | | $ | 94,607 | |
Earnings per share | | | | | | | |
Basic | $ | 1.73 | | | $ | 1.32 | | | $ | 3.50 | | | $ | 2.53 | |
Diluted | $ | 1.71 | | | $ | 1.30 | | | $ | 3.47 | | | $ | 2.50 | |
Weighted-average number of ordinary shares outstanding (thousands of shares) | | | | | | | |
Basic | 36,589 | | | 37,017 | | | 36,558 | | | 36,947 | |
Diluted | 36,939 | | | 37,552 | | | 36,848 | | | 37,440 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
FABRINET
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
For the Three Months Ended December 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ordinary Share | | Additional Paid-in Capital | | Treasury Shares | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total |
(in thousands of U.S. dollars, except share data) | Shares | | Amount | |
Balances at September 30, 2022 | 39,245,547 | | | $ | 392 | | | $ | 187,899 | | | $ | (152,158) | | | $ | (15,058) | | | $ | 1,281,291 | | | $ | 1,302,366 | |
Net income | — | | | — | | | — | | | — | | | — | | | 63,157 | | | 63,157 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | 12,344 | | | — | | | 12,344 | |
Share-based compensation | — | | | — | | | 6,775 | | | — | | | — | | | — | | | 6,775 | |
Issuance of ordinary shares | 6,034 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | |
Repurchase of 1,648 shares held as treasury shares | — | | | — | | | | | (204) | | | — | | | — | | | (204) | |
Tax withholdings related to net share settlement of restricted share units | — | | | — | | | (307) | | | — | | | — | | | — | | | (307) | |
Balances at December 30, 2022 | 39,251,581 | | | $ | 393 | | | $ | 194,366 | | | $ | (152,362) | | | $ | (2,714) | | | $ | 1,344,448 | | | $ | 1,384,131 | |
For the Six Months Ended December 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ordinary Share | | Additional Paid-in Capital | | Treasury Shares | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total |
(in thousands of U.S. dollars, except share data) | Shares | | Amount | |
Balances at June 24, 2022 | 39,048,700 | | | $ | 390 | | | $ | 196,667 | | | $ | (147,258) | | | $ | (12,793) | | | $ | 1,216,676 | | | $ | 1,253,682 | |
Net income | — | | | — | | | — | | | — | | | — | | | 127,772 | | | 127,772 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | 10,079 | | | — | | | 10,079 | |
Share-based compensation | — | | | — | | | 14,498 | | | — | | | — | | | — | | | 14,498 | |
Issuance of ordinary shares | 202,881 | | | 3 | | | (3) | | | — | | | — | | | — | | | — | |
Repurchase of 48,625 shares held as treasury shares | — | | | — | | | — | | | (5,104) | | | — | | | — | | | (5,104) | |
Tax withholdings related to net share settlement of restricted share units | — | | | — | | | (16,796) | | | — | | | — | | | — | | | (16,796) | |
Balances at December 30, 2022 | 39,251,581 | | | $ | 393 | | | $ | 194,366 | | | $ | (152,362) | | | $ | (2,714) | | | $ | 1,344,448 | | | $ | 1,384,131 | |
FABRINET
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
For the Three Months Ended December 24, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ordinary Share | | Additional Paid-in Capital | | Treasury Shares | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total |
(in thousands of U.S. dollars, except share data) | Shares | | Amount | |
Balances at September 24, 2021 | 39,000,843 | | | $ | 390 | | | $ | 179,670 | | | $ | (87,343) | | | $ | (7,662) | | | $ | 1,060,947 | | | $ | 1,146,002 | |
Net income | — | | | — | | | — | | | — | | | — | | | 48,879 | | | 48,879 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | 2,473 | | | — | | | 2,473 | |
Share-based compensation | — | | | — | | | 6,686 | | | — | | | — | | | — | | | 6,686 | |
Issuance of ordinary shares | 8,153 | | | — | | | — | | | — | | | — | | | — | | | — | |
Repurchase of 38,269 shares held as treasury shares | — | | | — | | | — | | | (4,433) | | | — | | | — | | | (4,433) | |
Tax withholdings related to net share settlement of restricted share units | — | | | — | | | (416) | | | — | | | — | | | — | | | (416) | |
Balances at December 24, 2021 | 39,008,996 | | | $ | 390 | | | $ | 185,940 | | | $ | (91,776) | | | $ | (5,189) | | | $ | 1,109,826 | | | $ | 1,199,191 | |
For the Six Months Ended December 24, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ordinary Share | | Additional Paid-in Capital | | Treasury Shares | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total |
(in thousands of U.S. dollars, except share data) | Shares | | Amount | |
Balances at June 25, 2021 | 38,749,045 | | | $ | 388 | | | $ | 189,445 | | | $ | (87,343) | | | $ | (6,266) | | | $ | 1,016,296 | | | $ | 1,112,520 | |
Net income | — | | | — | | | — | | | — | | | — | | | 93,530 | | | 93,530 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | 1,077 | | | — | | | 1,077 | |
Share-based compensation | — | | | — | | | 15,978 | | | — | | | — | | | — | | | 15,978 | |
Issuance of ordinary shares | 259,951 | | | 2 | | | (2) | | | — | | | — | | | — | | | — | |
Repurchase of 38,269 shares held as treasury shares | — | | | — | | | — | | | (4,433) | | | — | | | — | | | (4,433) | |
Tax withholdings related to net share settlement of restricted share units | — | | | — | | | (19,481) | | | — | | | — | | | — | | | (19,481) | |
Balances at December 24, 2021 | 39,008,996 | | | $ | 390 | | | $ | 185,940 | | | $ | (91,776) | | | $ | (5,189) | | | $ | 1,109,826 | | | $ | 1,199,191 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
FABRINET
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
| | | | | | | | | | | |
| Six Months Ended |
(in thousands of U.S. dollars) | December 30, 2022 | | December 24, 2021 |
Cash flows from operating activities | | | |
Net income for the period | $ | 127,772 | | | $ | 93,530 | |
Adjustments to reconcile net income to net cash provided by operating activities | | | |
Depreciation and amortization | 21,596 | | | 19,114 | |
(Gain) loss on disposal and impairment of property, plant and equipment | (337) | | | (135) | |
(Gain) loss from sales and maturities of available-for-sale securities | 92 | | | (13) | |
Amortization of discount (premium) of short-term investment | 565 | | | 2,079 | |
Amortization of deferred debt issuance costs | 16 | | | 16 | |
(Reversal of) allowance for doubtful accounts | 251 | | | (30) | |
Unrealized loss (gain) on exchange rate and fair value of foreign currency forward contracts | 3,086 | | | (673) | |
| | | |
Amortization of fair value at hedge inception of interest rate swaps | (346) | | | (513) | |
Share-based compensation | 14,498 | | | 15,978 | |
Deferred income tax | (1,338) | | | (986) | |
Other non-cash expenses | (321) | | | 268 | |
Changes in operating assets and liabilities | | | |
Trade accounts receivable | (79,831) | | | (48,046) | |
Contract assets | (114) | | | (1,270) | |
Inventories | 20,475 | | | (62,740) | |
Other current assets and non-current assets | (11,946) | | | (5,568) | |
Trade accounts payable | (4,176) | | | 44,078 | |
Contract liabilities | 1,654 | | | 214 | |
Income tax payable | (577) | | | (1,323) | |
Severance liabilities | 1,269 | | | 1,708 | |
Other current liabilities and non-current liabilities | 12,812 | | | 1,880 | |
Net cash provided by operating activities | 105,100 | | | 57,568 | |
Cash flows from investing activities | | | |
Purchase of short-term investments | (74,482) | | | (78,786) | |
Proceeds from sales of short-term investments | 30,000 | | | 19,463 | |
Proceeds from maturities of short-term investments | 46,925 | | | 57,721 | |
Purchase of property, plant and equipment | (23,643) | | | (51,917) | |
Purchase of intangibles | (412) | | | (446) | |
Proceeds from disposal of property, plant and equipment | 32 | | | 188 | |
Net cash used in investing activities | (21,580) | | | (53,777) | |
Cash flows from financing activities | | | |
Repayment of long-term borrowings | (9,140) | | | (6,094) | |
| | | |
Repayment of finance lease liability | (5) | | | — | |
Repurchase of ordinary shares | (5,104) | | | (4,198) | |
Withholding tax related to net share settlement of restricted share units | (16,796) | | | (19,481) | |
Net cash used in financing activities | (31,045) | | | (29,773) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 52,475 | | | $ | (25,982) | |
Movement in cash, cash equivalents and restricted cash | | | |
Cash, cash equivalents and restricted cash at the beginning of period | $ | 198,365 | | | $ | 303,123 | |
Increase (decrease) in cash, cash equivalents and restricted cash | 52,475 | | | (25,982) | |
Effect of exchange rate on cash, cash equivalents and restricted cash | (11) | | | (296) | |
Cash, cash equivalents and restricted cash at the end of period | $ | 250,829 | | | $ | 276,845 | |
Non-cash investing and financing activities | | | |
Construction, software and equipment-related payables | $ | 18,920 | | | $ | 28,740 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
FABRINET
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Continued)
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the total of the same amounts shown in the unaudited condensed consolidated statements of cash flows:
| | | | | | | | | | | |
(in thousands of U.S. dollars) | As of December 30, 2022 | | As of December 24, 2021 |
Cash and cash equivalents | $ | 250,829 | | | $ | 276,531 | |
Restricted cash | — | | | 314 | |
Cash, cash equivalents and restricted cash | $ | 250,829 | | | $ | 276,845 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
FABRINET
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands of U.S. dollars unless otherwise noted)
1. Business and organization
General
Fabrinet (“Fabrinet” or the “Parent Company”) was incorporated on August 12, 1999, and commenced operations on January 1, 2000. The Parent Company is an exempted company incorporated in the Cayman Islands, British West Indies. The “Company” refers to Fabrinet and its subsidiaries as a group.
The Company provides advanced optical packaging and precision optical, electro-mechanical and electronic manufacturing services to original equipment manufacturers (“OEMs”) of complex products, such as optical communication components, modules and sub-systems, industrial lasers, automotive components, medical devices and sensors. The Company offers a broad range of advanced optical and electro-mechanical capabilities across the entire manufacturing process, including process design and engineering, supply chain management, manufacturing, complex printed circuit board assembly, advanced packaging, integration, final assembly and testing. The Company focuses primarily on the production of low-volume, high-mix products. The principal subsidiaries of Fabrinet include Fabrinet Co., Ltd. (“Fabrinet Thailand”), Casix, Inc. (“Casix”), Fabrinet West, Inc. (“Fabrinet West”), Fabrinet UK Limited (“Fabrinet UK”) and Fabrinet Israel Ltd. (“Fabrinet Israel”).
2. Accounting policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements for Fabrinet as of December 30, 2022 and for the three and six months ended December 30, 2022 and December 24, 2021 include normal recurring adjustments necessary for a fair statement of the financial statements set forth herein, in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or "GAAP") for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such information does not include all of the information and footnotes required by U.S. GAAP for annual financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in Fabrinet’s Annual Report on Form 10-K for the year ended June 24, 2022.
The balance sheet as of June 24, 2022 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
The results for the three and six months ended December 30, 2022 may not be indicative of results for the year ending June 30, 2023 or any future periods.
Use of Estimates
The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amount of total revenues and expenses during the year. The Company bases estimates on historical experience and various assumptions about the future that are believed to be reasonable based on available information. The Company’s reported financial position or results of operations may be materially different under different conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies, which are discussed below. Significant assumptions are used in accounting for share-based compensation, allowance for doubtful accounts, allowance for expected credit losses, income taxes, inventory obsolescence, goodwill and valuation of intangible assets related to business acquisition, among others. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates. In the event that the Company's estimates or assumptions prove to be different from actual results, adjustments will be made in subsequent periods to reflect more current information. Additionally, the extent to which the evolving COVID-19 pandemic impacts the Company’s unaudited condensed consolidated financial statements will depend on a number of factors, including the magnitude and duration of the pandemic. These estimates may change, as new events occur and additional information is obtained, or based upon the occurrence of other factors related to the COVID-19 pandemic that could result in material impacts to the Company's unaudited condensed consolidated financial statements in future reporting periods.
Fiscal years
The Company utilizes a 52-53 week fiscal year ending on the Friday in June closest to June 30. The three months ended December 30, 2022 and December 24, 2021 consisted of 13 weeks. The six months ended December 30, 2022 and December 24, 2021 consisted of 27 weeks and 26 weeks, respectively. Fiscal year 2023 will comprise 53 weeks and will end on June 30, 2023.
Adoption of New Accounting Standards
In November 2021, the Financial Accounting Standard Board issued Accounting Standards Update ("ASU") 2021-10, “Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance,” which requires annual disclosures that increase the transparency of transactions involving government assistance, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity’s financial statements. The amendments in this update are effective for all entities within the ASU's scope for financial statements issued for annual periods beginning after December 15, 2021. The Company adopted this standard in the first quarter of fiscal year 2023 with no material impact on its unaudited condensed consolidated financial statements.
3. Revenues from contracts with customers
Revenue by Geographic Area and End Market
Revenues are attributed to a particular geographic area based on the bill-to-location of the Company’s customers. The Company operates in three geographic regions: North America; Asia-Pacific and others; and Europe.
The following table presents total revenues by geographic region:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except percentages) | Three Months Ended December 30, 2022 | | As a % of Total Revenues | | Six Months Ended December 30, 2022 | | As a % of Total Revenues |
North America | | | | | | | |
U.S. | $ | 319,918 | | | | | $ | 664,998 | | | |
Others (1) | 4,033 | | | | | 7,657 | | | |
Total revenue in North America | 323,951 | | | 48.5 | % | | 672,655 | | | 50.8 | % |
Asia-Pacific and others | | | | | | | |
India | 82,178 | | | | | 162,211 | | | |
Israel | 59,893 | | | | | 97,170 | | | |
Malaysia | 50,390 | | | | | 99,714 | | | |
Hong Kong | 39,723 | | | | | 72,195 | | | |
China | 26,480 | | | | | 49,544 | | | |
Thailand | 16,098 | | | | | 28,714 | | | |
Japan | 11,737 | | | | | 22,085 | | | |
Others | 1,901 | | | | | 5,061 | | | |
Total revenue in Asia-Pacific and others | 288,400 | | | 43.1 | % | | 536,694 | | | 40.5 | % |
Europe | | | | | | | |
U.K. | 30,316 | | | | | 63,148 | | | |
Germany | 13,129 | | | | | 26,443 | | | |
Ireland (2) | 143 | | | | | 262 | | | |
Others | 12,717 | | | | | 24,883 | | | |
Total revenue in Europe | $ | 56,305 | | | 8.4 | % | | $ | 114,736 | | | 8.7 | % |
Total revenue | $ | 668,656 | | | 100.0 | % | | $ | 1,324,085 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except percentages) | Three Months Ended December 24, 2021 | | As a % of Total Revenues | | Six Months Ended December 24, 2021 | | As a % of Total Revenues |
North America | | | | | | | |
U.S. | $ | 243,720 | | | | | $ | 488,994 | | | |
Others (1) | 3,557 | | | | | 4,873 | | | |
Total revenue in North America | 247,277 | | | 43.6 | % | | 493,867 | | | 44.5 | % |
Asia-Pacific and others | | | | | | | |
India | 74,121 | | | | | 139,054 | | | |
Malaysia | 60,369 | | | | | 112,118 | | | |
Hong Kong | 23,206 | | | | | 44,237 | | | |
Israel | 22,801 | | | | | 50,434 | | | |
Japan | 15,832 | | | | | 30,809 | | | |
China | 14,146 | | | | | 27,781 | | | |
Others | 11,565 | | | | | 23,790 | | | |
Total revenue in Asia-Pacific and others | 222,040 | | | 39.2 | % | | 428,223 | | | 38.6 | % |
Europe | | | | | | | |
Ireland (2) | 54,900 | | | | | 104,384 | | | |
U.K. | 22,941 | | | | | 42,519 | | | |
Germany | 8,985 | | | | | 17,410 | | | |
Others | 10,490 | | | | | 23,552 | | | |
Total revenue in Europe | $ | 97,316 | | | 17.2 | % | | $ | 187,865 | | | 16.9 | % |
Total revenue | $ | 566,633 | | | 100.0 | % | | $ | 1,109,955 | | | 100.0 | % |
(1)Others includes revenues from external customers based in our country of domicile, the Cayman Islands, which for each year presented is $0.
(2)Due to change in bill-to-location for a certain customer.
The following table presents revenues by end market:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except percentages) | Three Months Ended December 30, 2022 | | As a % of Total Revenues | | Six Months Ended December 30, 2022 | | As a % of Total Revenues |
Optical communications | $ | 506,056 | | | 75.7 | % | | $ | 1,003,617 | | | 75.8 | % |
Lasers, sensors and other | 162,600 | | | 24.3 | % | | 320,468 | | | 24.2 | % |
Total | $ | 668,656 | | | 100.0 | % | | $ | 1,324,085 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except percentages) | Three Months Ended December 24, 2021 | | As a % of Total Revenues | | Six Months Ended December 24, 2021 | | As a % of Total Revenues |
Optical communications | $ | 450,783 | | | 79.6 | % | | $ | 878,084 | | | 79.1 | % |
Lasers, sensors and other | 115,850 | | | 20.4 | % | | 231,871 | | | 20.9 | % |
Total | $ | 566,633 | | | 100.0 | % | | $ | 1,109,955 | | | 100.0 | % |
Contract Assets and Liabilities
A contract asset is recognized when the Company has recognized revenues prior to generating an invoice for payment. Contract assets are classified separately within the unaudited condensed consolidated balance sheets and transferred to accounts receivable when rights to payment become unconditional.
A contract liability is recognized when the Company has advance payment arrangements with customers. The contract liabilities balance is normally recognized as revenue within six months.
The following tables summarize the activity in the Company’s contract assets and contract liabilities during the six months ended December 30, 2022:
| | | | | |
(in thousands) | Contract Assets |
Beginning balance, June 24, 2022 | $ | 13,464 | |
Revenue recognized | 31,601 | |
Amounts collected or invoiced | (31,487) | |
Ending balance, December 30, 2022 | $ | 13,578 | |
| | | | | |
(in thousands) | Contract Liabilities |
Beginning balance, June 24, 2022 | $ | 1,982 | |
Advance payment received during the period | 12,515 | |
Revenue recognized | (10,861) | |
Ending balance, December 30, 2022 | $ | 3,636 | |
4. Earnings per ordinary share
Basic earnings per ordinary share is computed by dividing reported net income by the weighted-average number of ordinary shares outstanding during each period. Diluted earnings per ordinary share is computed by calculating the effect of potential dilutive ordinary shares outstanding during the period using the treasury stock method. Dilutive ordinary equivalent shares consist of restricted share units and performance share units.
Earnings per ordinary share was calculated as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(in thousands, except per share data) | December 30, 2022 | | December 24, 2021 | | December 30, 2022 | | December 24, 2021 |
Net income attributable to shareholders | $ | 63,157 | |