Fabrinet Announces First Quarter Fiscal Year 2019 Financial Results

Fabrinet (NYSE: FN), a leading provider of advanced optical packaging and precision optical, electro-mechanical and electronic manufacturing services to original equipment manufacturers of complex products, today announced its financial results for its first quarter ended September 28, 2018.

Seamus Grady, Chief Executive Officer of Fabrinet, said, “With a strong start to the year, we exceeded our guidance for revenue and profitability in the first quarter. Our sequential growth, which was better than anticipated, was driven primarily by double-digit growth in both telecom and datacom optical communications products. We are optimistic that the momentum we experienced during the first quarter will continue into the second quarter, as we leverage the combination of our leading market position and strong execution to deliver further financial success.”

First Quarter Fiscal Year 2019 Financial Highlights

As of the first quarter of fiscal 2019, Fabrinet is reporting results under the new revenue recognition standard Accounting Standards Codification Topic 606 (“ASC 606”), using the modified retrospective method. Financial results for reporting periods prior to fiscal year 2019 are presented as previously disclosed in conformity with the new revenue recognition standard Accounting Standards Codification Topic 606 (“ASC 605”). A reconciliation to ASC 605 is included at the end of this press release.

GAAP Results

• Revenue for the first quarter of fiscal year 2019 was $377.2 million, compared to revenue of $357.3 million for the comparable period in fiscal year 2018.
• GAAP net income for the first quarter of fiscal year 2019 was $27.9 million, compared to GAAP net income of $21.0 million for the first quarter of fiscal year 2018. GAAP net income for the first quarter of fiscal year 2019 included a foreign exchange benefit of $3.1 million, or $0.08 per diluted share, compared to a foreign exchange loss of $1.9 million, or $0.05 per diluted share, for the first quarter of fiscal year 2018.
• GAAP net income per diluted share for the first quarter of fiscal year 2019 was $0.75, compared to GAAP net income per diluted share of $0.55 for the first quarter of fiscal year 2018.

Non-GAAP Results

• Non-GAAP net income for the first quarter of fiscal year 2019 was $34.1 million, compared to non-GAAP net income of $28.6 million for the first quarter of fiscal year 2018. Non-GAAP net income for the first quarter of fiscal year 2019 included a foreign exchange loss of $3.1 million, or $0.08 per diluted share, compared to a foreign exchange loss of $1.9 million, or $0.05 per diluted share, for the first quarter of fiscal year 2018.
• Non-GAAP net income per diluted share for the first quarter of fiscal year 2019 was $0.92, compared to non-GAAP net income per diluted share of $0.75 for the same period a year ago.

Share Repurchase Program Update

There was no share repurchase activity during the three months ended September 28, 2018. As of September 28, 2018, Fabrinet had a remaining authorization to purchase up to an additional $17.6 million worth of its ordinary shares.

Business Outlook

The guidance provided below is based on ASC 605. As of the first quarter of fiscal 2019, Fabrinet is reporting results under ASC 606, which it is adopting for fiscal year 2019 on a modified retrospective method. A reconciliation to ASC 605 is included at the end of this press release.

Based on information available as of November 5, 2018, Fabrinet is issuing guidance for its second fiscal quarter of 2019 ending December 28, 2018, as follows:

• Fabrinet expects second quarter revenue to be in the range of $380 million to $388 million.
• GAAP net income per diluted share is expected to be in the range of $0.77 to $0.80, based on approximately 37.6 million fully diluted shares outstanding.
• Non-GAAP net income per diluted share is expected to be in the range of $0.91 to $0.94, based on approximately 37.6 million fully diluted shares outstanding.

Conference Call Information

What:			Fabrinet First Quarter Fiscal-Year 2019 Financial Results Call
When:			Monday, November 5, 2018
Time:			5:00 p.m. ET
Live Call:			[phone], domestic
			[phone], international
			Passcode: 3789048
Replay:			[phone], domestic
			[phone], international
			Passcode: 3789048
Webcast:			http://investor.fabrinet.com/ (live and replay)

This press release and any other information related to the call will also be posted on Fabrinet’s website at http://investor.fabrinet.com. A recorded version of this webcast will be available approximately two hours after the call and will be archived on Fabrinet’s website for a period of one year.

About Fabrinet

Fabrinet is a leading provider of advanced optical packaging and precision optical, electro-mechanical, and electronic manufacturing services to original equipment manufacturers of complex products, such as optical communication components, modules and subsystems, automotive components, medical devices, industrial lasers and sensors. Fabrinet 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, advanced packaging, integration, final assembly and test. Fabrinet focuses on production of high complexity products in any mix and any volume. Fabrinet maintains engineering and manufacturing resources and facilities in Thailand, the United States of America, the People’s Republic of China and the United Kingdom. For more information visit: www.fabrinet.com.

Forward-Looking Statements

“Safe Harbor” Statement Under U.S. Private Securities Litigation Reform Act of 1995

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include: (1) statements regarding our optimism that our first quarter momentum will continue into the second quarter of fiscal year 2019 and that we will deliver further financial success; and (2) all of the statements under the "Business Outlook" section regarding our expected revenue, GAAP and non-GAAP net income per share, and fully diluted shares outstanding for the second quarter of fiscal year 2019. These forward-looking statements involve risks and uncertainties, and actual results could vary materially from these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: less customer demand for our products and services than forecasted; less growth in the optical communications, industrial lasers and sensors markets than we forecast; difficulties expanding into additional markets, such as the semiconductor processing, biotechnology, metrology and materials processing markets; increased competition in the optical manufacturing services markets; difficulties in delivering products and services that compete effectively from a price and performance perspective; our reliance on a small number of customers and suppliers; difficulties in managing our operating costs; difficulties in managing and operating our business across multiple countries (including Thailand, the People's Republic of China, the U.S. and the U.K.); and other important factors as described in reports and documents we file from time to time with the Securities and Exchange Commission (SEC), including the factors described under the section captioned “Risk Factors” in our Quarterly Report on Form 10-K, filed on August 22, 2018. We disclaim any obligation to update information contained in these forward-looking statements whether as a result of new information, future events, or otherwise.

Use of Non-GAAP Financials

We refer to the non-GAAP financial measures cited above in making operating decisions because they provide meaningful supplemental information regarding our ongoing operational performance. Non-GAAP net income excludes: share-based compensation expenses; depreciation of fair value uplift; severance payments; expenses related to our CFO search; debt administration expense; amortization of intangibles; business combination expenses; loss (gain) on foreign currency contracts; amortization of debt issuance costs; restructuring charges; and ASC 606 adjustments. We have excluded these items in order to enhance investors’ understanding of our underlying operations. The use of these non-GAAP financial measures has material limitations because they should not be used to evaluate our company without reference to their corresponding GAAP financial measures. As such, we compensate for these material limitations by using these non-GAAP financial measures in conjunction with GAAP financial measures.

These non-GAAP financial measures are used to: (1) measure company performance against historical results, (2) facilitate comparisons to our competitors’ operating results, and (3) allow greater transparency with respect to information used by management in making financial and operational decisions. In addition, these non-GAAP financial measures are used to measure company performance for the purposes of determining employee incentive plan compensation.

FABRINET CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars, except share data)			September 28, 2018				June 29, 2018
Assets
Current assets
Cash and cash equivalents			$	219,976			$	158,102
Restricted cash in connection with business acquisition				—				3,331
Marketable securities				132,383				174,269
Trade accounts receivable, net				258,705				246,912
Contract assets				10,157				—
Inventory, net				278,397				257,687
Prepaid expenses				10,978				8,061 8,061
Other current assets				6,512				5,948 5,948
Total current assets				917,108				854,310
Non-current assets
Property, plant and equipment, net				216,849				219,640
Intangibles, net				4,590				4,880
Goodwill				3,822				3,828
Deferred tax assets				5,378				5,280
Deferred debt issuance costs on revolving loan and other non-current assets				57				80
Total non-current assets				230,696				233,708
Total Assets			$	1,147,804			$	1,088,018
Liabilities and Shareholders’ Equity
Current liabilities
Bank borrowings			$	3,250			$	3,250
Trade accounts payable				249,080				220,159
Capital lease liability, current portion				434				451
Income tax payable				2,389				709
Deferred liability in connection with business acquisition				—				3,331
Accrued payroll, bonus and related expenses				19,484				13,476
Accrued expenses				10,277				9,013
Other payables				20,862				19,728
Total current liabilities			305,776				270,117
Non-current liabilities
Long-term loan from bank			60,125				60,938
Deferred tax liability			2,387				2,284
Capital lease liability, non-current portion			414				516
Severance liabilities			10,835				10,162
Other non-current liabilities			2,110				3,062
Total non-current liabilities			75,871				76,962
Total Liabilities				381,647			347,079
Commitments and contingencies
Shareholders’ equity
Preferred shares (5,000,000 shares authorized, $0.01 par value; no shares
issued and outstanding as of September 28, 2018 and June 29, 2018)			—				—
Ordinary shares (500,000,000 shares authorized, $0.01 par value; 38,118,609 shares and 37,723,733 shares issued, and
36,829,506 shares and 36,434,630 shares outstanding
as of September 28, 2018 and June 29, 2018, respectively)				381			377
Additional paid-in capital				147,869			151,797
Treasury shares at cost (1,289,103 shares and 1,289,103 shares as of September 28, 2018 and June 29, 2018, respectively)				(42,401)			(42,401)
Accumulated other comprehensive loss				(1,170)			(1,257)
Retained earnings				661,478			632,423
Total Shareholders’ Equity			766,157				740,939
Total Liabilities and Shareholders’ Equity			$	1,147,804			$	1,088,018

FABRINET CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
		Three Months Ended
(in thousands of U.S. dollars, except per share amounts)		September 28, 2018				September 29, 2017
Revenues		$	377,177			$	357,313
Cost of revenues			(336,901)				(316,981)
Gross profit			40,276				40,332
Selling, general and administrative expenses			(14,437)				(15,678)
Expenses related to reduction in workforce			(85)				—
Operating income			25,754				24,654
Interest income			1,444				809
Interest expense			(634)				(853)
Foreign exchange gain (loss), net			3,068				(1,934)
Other income			77				97
Income before income taxes			29,709				22,773
Income tax expense			(1,859)				(1,740)
Net income			27,850				21,033
Other comprehensive (loss) income, net of tax:
Change in net unrealized gain on marketable securities			288				29
Change in net unrealized loss on derivative instruments			(1)				(1)
Change in foreign currency translation adjustment			(200)				526
Total other comprehensive (loss) income, net of tax			87				554
Net comprehensive income		$	27,937			$	21,587
Earnings per share
Basic		$	0.76			$	0.56
Diluted		$	0.75			$	0.55
Weighted-average number of ordinary shares outstanding (thousands of shares)
Basic			36,625				37,447
Diluted			37,140				38,163

FABRINET CONSOLIDATED STATEMENTS OF CASH FLOWS
			Three Months Ended
(in thousands of U.S. dollars)			September 28, 2018				September 29, 2017
Cash flows from operating activities
Net income for the period			$	27,850			$	21,033
Adjustments to reconcile net income to net cash provided by used in operating activities
Depreciation and amortization				7,412				7,419
Loss (Gain) on disposal of property, plant and equipment				46				(131)
Loss on written-off of intangibles				149				—
Loss from sales and maturities of available-for-sale securities				178				353
Amortization of investment (premium) discount				(94)				(216)
Amortization of deferred debt issuance costs				—				150
(Reversal of) allowance for doubtful accounts				—				(1)
Unrealized (gain) loss on exchange rate and fair value of derivative instruments				(4,232)				2,026
Share-based compensation				4,980				6,920
Deferred income tax				3				(307)
Other non-cash expenses				590				629
Reversal of inventory obsolescence				(478)				(292)
Changes in operating assets and liabilities
Trade accounts receivable				(10,887)				(11,122)
Contract assets				(280)				—
Inventory				(28,904)				(16,032)
Other current assets and non-current assets				(1,029)				(7,263)
Trade accounts payable				29,182				(11,323)
Income tax payable				1,680				493
Other current liabilities and non-current liabilities				8,427				4,610
Net cash provided by (used in) operating activities				34,593				(3,054)
Cash flows from investing activities
Purchase of marketable securities				(1,955)				(26,969)
Proceeds from sales of marketable securities				24,181				11,730
Proceeds from maturities of marketable securities				19,863				14,947
Purchase of property, plant and equipment				(5,410)				(11,203)
Purchase of intangibles				(78)				(702)
Proceeds from disposal of property, plant and equipment				—				142
Net cash provided by (used in) investing activities				36,601				(12,055)
Cash flows from financing activities
Repayment of short-term loans from bank				—				(992)
Repayment of long-term loans from bank				(813)				(3,400)
Repayment of capital lease liability				(123)				(95)
Proceeds from issuance of ordinary shares under employee share option plans				—				931
Release of restricted cash held in connection with business acquisition				(3,478)				—
Withholding tax related to net share settlement of restricted share units				(8,904)				(3,550)
Net cash used in financing activities				(13,318)				(7,106)
Net decrease in cash, cash equivalents and restricted cash				57,876				(22,215)
Movement in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period				161,433				137,137
Increase (decrease) in cash, cash equivalents and restricted cash				57,876				(22,215)
Effect of exchange rate on cash, cash equivalents and restricted cash				667				123
Cash, cash equivalents and restricted cash at end of period			$	219,976			$	115,045
Non-cash investing and financing activities
Construction, software-related and equipment-related payables			$	3,830			$	4,658

FABRINET

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of same amounts shown in the consolidated statements of cash flows:

(amount in thousands)			As of September 28, 2018				As of September 29, 2017
Cash and cash equivalents			$	219,976			$	111,631
Restricted cash in connection with business acquisition (non-current assets)				—				3,414
Cash, cash equivalents and restricted cash			$	219,976			$	115,045

FABRINET RECONCILIATION OF ASC 605 TO ASC 606
			Three Months Ended September 28,2018
(in thousands of U.S. dollars, except per share amounts)			ASC 605				ASC 606					Impact
Revenues			$	376,897			$	377,177			$	(280)
Cost of revenues				(336,652)				(336,901)				249
Gross profit				40,245				40,276				(31)
Selling, general and administrative expenses				(14,437)				(14,437)				—
Expenses related to reduction in workforce				(85)				(85)				—
Operating income				25,723				25,754				(31)
Interest income				1,444				1,444				—
Interest expense				(634)				(634)				—
Foreign exchange gain (loss), net				3,068				3,068				—
Other income				77				77				—
Income before income taxes				29,678				29,709				(31)
Income tax expense				(1,859	)			(1,859)				—
Net income				27,819				27,850				(31)
Other comprehensive (loss) income, net of tax:
Change in net unrealized gain on marketable securities				288				288				—
Change in net unrealized loss on derivative instruments				(1)				(1)				—
Change in foreign currency translation adjustment				(200)				(200)				—
Total other comprehensive (loss) income, net of tax				87				87				—
Net comprehensive income			$	27,906			$	27,937				(31)
Earnings per share
Basic			$	0.76			$	0.76				—
Diluted			$	0.75			$	0.75				—
Weighted-average number of ordinary shares outstanding (thousands of shares)
Basic				36,625				36,625				—
Diluted				37,140				37,140				—

FABRINET RECONCILIATION OF GAAP MEASURES TO NON-GAAP MEASURES
					Three Months Ended
					September 28, 2018 (ASC 606)						September 29, 2017 ASC (605)
(in thousands of U.S. dollars, except per share data)					Net income			Diluted EPS			Net income			Diluted EPS
GAAP measures					$27,850			$0.75			$21,033			$0.55
	Items reconciling GAAP net income & EPS to non-GAAP net income & EPS:
	Related to cost of revenues:
		Share-based compensation expenses			1,847			0.05			1,901			0.05
		Depreciation of fair value uplift			89			0.00			67			0.00
	Total related to gross profit				1,936			0.05			1,968			0.05
	Related to selling, general and administrative expenses:
		Share-based compensation expenses			3,133			0.08			5,019			0.13
		Expenses related to CFO search			190			0.01			—			—
		Amortization of intangibles			192			0.01			169			0.00
		Business combination expenses			182			0.00			106			0.00
		Severance payment			585			0.02			—			—
	Total related to selling, general and administrative expenses				4,282			0.12			5,294			0.14
	Related to other incomes and other expenses:
		Restructuring charges			85			0.00			—			—
		Amortization of debt issuance costs			—			—			273			0.01
	Total related to other incomes and other expenses				85			0.00			273			0.01
	Total related to net income & EPS				6,303			0.17			7,535			0.20
Non-GAAP measures					$34,153			$0.92			$28,568			$0.75
		ASC 606 adoption impact on gross profit			(31)			(0.00)			—			—
Non-GAAP measures (ASC 605)					$34,122			$0.92			$28,568			$0.75
Shares used in computing diluted net income per share
	GAAP diluted shares							37,140						38,163
	Non-GAAP diluted shares							37,140						38,163

FABRINET RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES TO FREE CASH FLOW
(amount in thousands)			Three Months Ended
			September 28, 2018				September 29, 2017
Net cash provided by operating activities			$	34,593			$	(3,054)
Less: Purchase of property, plant and equipment				(5,410)				(11,203)
Non-GAAP free cash flow			$	29,183			$	(14,257)

FABRINET GUIDANCE FOR QUARTER ENDING DECEMBER 28, 2018 RECONCILIATION OF GAAP MEASURES TO NON-GAAP MEASURES
			Diluted
			EPS
GAAP net income per diluted share:			$0.77 to $0.80
Related to cost of revenues:
Share-based compensation expenses			0.04
Total related to gross profit			0.04
Related to selling, general and administrative expenses:
Share-based compensation expenses			0.09
Expenses related to our CFO search			0.01
Total related to selling, general and administrative expenses			0.10
Total related to net income & EPS			0.14
Non-GAAP net income per diluted share			$0.91 to $0.94

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