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EX-31 - EX-31.2 - MULTI FINELINE ELECTRONIX INCmflx-ex31_2014063078.htm
EX-31 - EX-31.1 - MULTI FINELINE ELECTRONIX INCmflx-ex31_2014063077.htm
EX-32 - EX-32.1 - MULTI FINELINE ELECTRONIX INCmflx-ex32_2014063079.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

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 000-50812

 

MULTI-FINELINE ELECTRONIX, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

95-3947402

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

8659 Research Drive

Irvine, CA 92618

(Address of principal executive offices, Zip Code)

(949) 453-6800

(Registrant’s telephone number, including area code)

 

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 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨ (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, as of July 31, 2014 was 24,167,749.

 

 

 

 

 


Multi-Fineline Electronix, Inc.

Index

 

 

 

 

 


PART I. FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements

MULTI-FINELINE ELECTRONIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

(unaudited)

 

ASSETS

June 30, 2014

 

 

September 30, 2013

 

Cash and cash equivalents

$

117,440

 

 

$

105,150

 

Accounts receivable, net of allowances of $1,576 and $4,281

   at June 30, 2014 and September 30, 2013, respectively

 

94,446

 

 

 

132,247

 

Inventories

 

43,430

 

 

 

86,853

 

Deferred taxes

 

1,563

 

 

 

5,909

 

Income tax receivable

 

5,477

 

 

 

2,535

 

Assets held for sale

 

7,360

 

 

 

-

 

Other current assets

 

6,149

 

 

 

8,821

 

Total current assets

 

275,865

 

 

 

341,515

 

Property, plant and equipment, net

 

183,717

 

 

 

244,056

 

Land use rights

 

6,579

 

 

 

7,703

 

Deferred taxes

 

7,900

 

 

 

11,685

 

Other assets

 

5,627

 

 

 

5,255

 

Total assets

$

479,688

 

 

$

610,214

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Accounts payable

$

99,609

 

 

$

166,474

 

Accrued liabilities

 

29,236

 

 

 

31,459

 

Line of credit

 

20,000

 

 

 

-

 

Income taxes payable

 

720

 

 

 

1,027

 

Total current liabilities

 

149,565

 

 

 

198,960

 

Other long-term liabilities

 

25,165

 

 

 

19,063

 

Total liabilities

 

174,730

 

 

 

218,023

 

Commitments and contingencies (Note 2)

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 5,000,000 and 5,000,000

   shares authorized at June 30, 2014 and September 30,

   2013, respectively; 0 and 0 shares issued and outstanding

   at June 30, 2014 and September 30, 2013, respectively

 

-

 

 

 

-

 

Common stock, $0.0001 par value; 100,000,000 and

   100,000,000 shares authorized at June 30, 2014 and

   September 30, 2013, respectively; 24,167,077 and 24,082,802

   shares issued and outstanding at June 30, 2014 and

   September 30, 2013, respectively

 

2

 

 

 

2

 

Additional paid in capital

 

94,226

 

 

 

90,857

 

Retained earnings

 

162,201

 

 

 

252,656

 

Accumulated other comprehensive income

 

48,529

 

 

 

48,676

 

Total stockholders' equity

 

304,958

 

 

 

392,191

 

Total liabilities and stockholders' equity

$

479,688

 

 

$

610,214

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

1


MULTI-FINELINE ELECTRONIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

Three Months Ended

June 30,

 

 

Nine Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net sales

$

130,804

 

 

$

136,066

 

 

$

460,269

 

 

$

599,390

 

Cost of sales

 

138,023

 

 

 

140,312

 

 

 

477,964

 

 

 

594,466

 

Gross (loss) profit

 

(7,219

)

 

 

(4,246

)

 

 

(17,695

)

 

 

4,924

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

1,720

 

 

 

1,997

 

 

 

4,671

 

 

 

5,812

 

Sales and marketing

 

4,547

 

 

 

5,676

 

 

 

14,808

 

 

 

16,925

 

General and administrative

 

4,163

 

 

 

2,647

 

 

 

11,140

 

 

 

12,614

 

Stock-based compensation resulting from change in control

 

-

 

 

 

9,582

 

 

 

-

 

 

 

9,582

 

Impairment and restructuring

 

8,361

 

 

 

7,537

 

 

 

33,159

 

 

 

7,537

 

Total operating expenses

 

18,791

 

 

 

27,439

 

 

 

63,778

 

 

 

52,470

 

Operating loss

 

(26,010

)

 

 

(31,685

)

 

 

(81,473

)

 

 

(47,546

)

Other income and expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

170

 

 

 

248

 

 

 

625

 

 

 

404

 

Interest expense

 

(19

)

 

 

(112

)

 

 

(358

)

 

 

(361

)

Other income (expense), net

 

711

 

 

 

73

 

 

 

1,123

 

 

 

228

 

Loss before income taxes

 

(25,148

)

 

 

(31,476

)

 

 

(80,083

)

 

 

(47,275

)

(Provision for) benefit from income taxes

 

(3,612

)

 

 

(53

)

 

 

(10,372

)

 

 

215

 

Net loss

 

(28,760

)

 

 

(31,529

)

 

 

(90,455

)

 

 

(47,060

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(2,330

)

 

 

3,597

 

 

 

(147

)

 

 

6,472

 

Total comprehensive net loss

$

(31,090

)

 

$

(27,932

)

 

$

(90,602

)

 

$

(40,588

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(1.19

)

 

$

(1.32)

 

 

$

(3.75

)

 

$

(1.97

)

Diluted

$

(1.19

)

 

$

(1.32)

 

 

$

(3.75

)

 

$

(1.97

)

Shares used in computing net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

24,144,874

 

 

 

23,948,428

 

 

 

24,106,495

 

 

 

23,847,413

 

Diluted

 

24,144,874

 

 

 

23,948,428

 

 

 

24,106,495

 

 

 

23,847,413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

2


MULTI-FINELINE ELECTRONIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(unaudited)

 

 

Nine Months Ended

June 30,

 

Cash flows from operating activities

2014

 

 

2013

 

Net loss

$

(90,455

)

 

$

(47,060

)

Adjustments to reconcile net loss to net cash

   (used in) provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

39,264

 

 

 

44,027

 

Deferred taxes

 

8,130

 

 

 

(2,908

)

Stock-based compensation expense

 

2,547

 

 

 

13,009

 

Income tax benefit related to stock option exercises

 

(57

)

 

 

(29

)

Asset impairments

 

18,439

 

 

 

7,537

 

Gain on disposal of property, plant and equipment

 

(1,566

)

 

 

(1,661

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

37,824

 

 

 

71,005

 

Inventories

 

43,270

 

 

 

55,045

 

Other current assets

 

2,693

 

 

 

5,133

 

Other assets

 

(369

)

 

 

(34

)

Accounts payable

 

(61,984

)

 

 

(62,797

)

Accrued liabilities

 

(2,387

)

 

 

(10,918

)

Income taxes

 

(3,209

)

 

 

(1,931

)

Other liabilities

 

6,287

 

 

 

1,020

 

Net cash (used in) provided by operating activities

 

(1,573

)

 

 

69,438

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(14,000

)

 

 

(35,945

)

Proceeds from sale of equipment and assets held for sale

 

3,368

 

 

 

2,360

 

Change in restricted cash

 

(520

)

 

 

-

 

Government grants received

 

4,151

 

 

 

-

 

Net cash used in investing activities

 

(7,001

)

 

 

(33,585

)

Cash flows from financing activities

 

 

 

 

 

 

 

Income tax benefit related to stock option exercises

 

57

 

 

 

29

 

Tax withholdings for net share settlement of equity awards

 

(40

)

 

 

(2,762

)

Proceeds from exercise of stock options

 

813

 

 

 

608

 

Borrowings from lines of credit

 

20,000

 

 

 

-

 

Repurchase of common stock

 

-

 

 

 

(1,617

)

Net cash provided by (used in) financing activities

 

20,830

 

 

 

(3,742

)

Effect of exchange rate changes on cash

 

34

 

 

 

(338

)

Net increase in cash

 

12,290

 

 

 

31,773

 

Cash and cash equivalents at beginning of period

 

105,150

 

 

 

82,322

 

Cash and cash equivalents at end of period

$

117,440

 

 

$

114,095

 

Non-cash investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

4,525

 

 

 

3,892

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

3


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

1. Description of Business

Multi-Fineline Electronix, Inc. (“MFLEX” or the “Company”) was incorporated in 1984 in the State of California and reincorporated in the State of Delaware in June 2004. The Company is primarily engaged in the engineering, design and manufacture of flexible printed circuit boards along with related component assemblies.

United Engineers Limited (“UEL”) and its wholly owned subsidiary, UE Centennial Venture Pte. Ltd (“UECV”, and together with UEL, “UE”), through its affiliates and subsidiaries, beneficially owned approximately 61% and 62% of the Company’s outstanding common stock as of June 30, 2014 and September 30, 2013, respectively. This beneficial ownership of the Company’s common stock by UE provides these entities with control over the outcome of stockholder votes at the Company, except with respect to certain related-party transactions with UE or its subsidiaries, including WBL Corporation Limited (“WBL”), which require a separate vote of the non-UE stockholders.

 

2. Basis of Presentation

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company has two wholly owned subsidiaries located in China: MFLEX Suzhou Co., Ltd., (“MFC”) and MFLEX Chengdu Co., Ltd. (“MFLEX Chengdu”); one located in the Cayman Islands: M-Flex Cayman Islands, Inc. (“MFCI”); one located in Singapore: Multi-Fineline Electronix Singapore Pte. Ltd. (“MFLEX Singapore”); one located in Malaysia: Multi-Fineline Electronix Malaysia Sdn. Bhd. (“MFM”); one located in Cambridge, England: MFLEX UK Limited (“MFE”); one located in Korea: MFLEX Korea, Ltd. (“MKR”); and one located in the Netherlands: MFLEX B.V. (“MNE”). In 2010, the Company merged its subsidiary, Multi-Fineline Electronix (Suzhou) Co., Ltd (“MFC1”) into MFC; however, the Company is still in the process of deregistering MFC1. All significant intercompany transactions and balances have been eliminated in consolidation.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s 2013 Annual Report on Form 10-K. The financial information presented in the accompanying statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the periods indicated. All such adjustments are of a normal recurring nature. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Operating results for the three and nine months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2014. Unless otherwise indicated, the financial information in these notes is presented in thousands (except per share amounts).

Recently Issued Accounting Pronouncements Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires a reporting entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. This standard will be effective for the Company beginning January 1, 2017. The Company is currently evaluating the impact of its pending adoption of this guidance on its financial position, results of operations and cash flows.

4


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

Fair Value Measurements

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximated fair value due to their short maturities. For recognition purposes, on a recurring basis, the Company’s assets and liabilities related to money market funds and derivative financial instruments are measured at fair value at the end of each reporting period. The fair value of the Company’s money market funds were measured using Level 1 fair value inputs and the fair value of the Company’s derivative assets and liabilities were measured using Level 2 fair value inputs, which consisted of observable market-based inputs of foreign currency spot and forward rates quoted by major financial institutions.

 

The Company’s assets and liabilities measured at fair value on a recurring basis subject to the disclosure requirements as defined under the FASB authoritative accounting guidance were as follows:

 

 

Fair Value Measurements of Assets and Liabilities

on a Recurring Basis as of

June 30, 2014

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds (cash and cash equivalents)

$

17,173

 

 

$

-

 

 

$

-

 

Forward contracts (accrued liabilities)

 

-

 

 

 

61

 

 

 

-

 

 

$

17,173

 

 

$

61

 

 

$

-

 

 

 

Fair Value Measurements of Assets and Liabilities

on a Recurring Basis as of

September 30, 2013

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds (cash and cash equivalents)

$

14,141

 

 

$

-

 

 

$

-

 

Forward contracts (other current assets)

 

-

 

 

 

179

 

 

 

-

 

Forward contracts (accrued liabilities)

 

-

 

 

 

(34

)

 

 

-

 

 

$

14,141

 

 

$

145

 

 

$

-

 

 

As of June 30, 2014, assets held for sale were measured at fair value on a non-recurring basis. Based on the relevant FASB guidance, the carrying value of assets held for sale was written down to $7,360 after recording an impairment charge of $6,890 during the three months ended June 30, 2014 (refer to Note 8). The fair value of the assets was determined using Level 3 unobservable inputs not corroborated by market data, consisting of third-party offers for assets held for sale. Below is a summary of the Company’s assets measured at fair value on a non-recurring basis as of June 30, 2014:

 

 

Fair Value Measurements of Assets 
on a Non-Recurring Basis as of
June 30, 2014

 

 

Level 1

 

Level 2

 

Level 3

 

Building and equipment (assets held for sale)

  $

 —  

  $

 —  

  $

 7,360

 

 

 

 

 

 

 

 

  $

 —  

  $

—  

  $

7,360

 

 

 

 

 

 

 

No assets or liabilities were measured at fair value on a non-recurring basis as of September 30, 2013.

Inventories

Inventories, net of applicable write-downs, were composed of the following:

 

 

June 30,

2014

 

 

September 30,

2013

 

Raw materials and supplies

$

13,109

 

 

$

27,080

 

Work-in-progress

 

14,275

 

 

 

20,965

 

Finished goods

 

16,046

 

 

 

38,808

 

 

$

43,430

 

 

$

86,853

 

5


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

Restricted Cash

As of June 30, 2014, the Company held $520 of cash restricted due to customs deposit requirements, which was segregated from cash and cash equivalents and included within other current assets. The restriction is expected to cease within twelve months.

Property, Plant and Equipment

Property, plant and equipment, net, were composed of the following:

 

 

June 30,

2014

 

 

September 30,

2013

 

Building

$

52,592

 

 

$

68,679

 

Machinery and equipment

 

338,535

 

 

 

406,010

 

Computers and capitalized software

 

13,119

 

 

 

13,014

 

Leasehold improvements

 

10,611

 

 

 

14,145

 

Construction-in-progress

 

4,953

 

 

 

5,307

 

 

$

419,810

 

 

$

507,155

 

Accumulated depreciation and amortization

 

(236,093

)

 

 

(263,099

)

 

$

183,717

 

 

$

244,056

 

 

Accrued Liabilities

Accrued liabilities were composed of the following:

 

June 30,

2014

 

 

September 30,

2013

Wages and compensation

$

10,017

 

 

$

16,822

Restructuring expenses¹

 

5,408

 

 

 

-

Other accrued expenses

 

13,811

 

 

 

14,637

 

$

29,236

 

 

$

31,459

1 

Refer to Note 8 for further information on the Company’s impairment and restructuring activities during the three and nine months ended June 30, 2014.

Product Warranty Accrual

Changes in the product warranty accrual for the three months ended June 30, 2014 and 2013 were as follows:

 

 

Balance at

April 1

 

 

Warranty

Expenditures

 

 

Provision for

Estimated

Warranty Cost

 

 

Balance at

June 30

 

Fiscal 2014

$

1,814

 

 

$

(1,860

)

 

$

902

 

 

$

856

 

Fiscal 2013

$

223

 

 

$

(1,426

)

 

$

1,959

 

 

$

756

 

Changes in the product warranty accrual for the nine months ended June 30, 2014 and 2013 were as follows:

 

 

Balance at

October 1

 

 

Warranty

Expenditures

 

 

Provision for

Estimated

Warranty Cost

 

 

Balance at

June 30

 

Fiscal 2014

$

1,076

 

 

$

(4,106

)

 

$

3,886

 

 

$

856

 

Fiscal 2013

$

346

 

 

$

(2,252

)

 

$

2,662

 

 

$

756

 

 

6


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

Net Income Per Share—Basic and Diluted

The following table presents a reconciliation of basic and diluted shares for the three and nine months ended June 30, 2014 and 2013:

 

 

Three Months Ended

June 30,

 

 

Nine Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Basic weighted-average number of common shares outstanding

 

24,144,874

 

 

 

23,948,428

 

 

 

24,106,495

 

 

 

23,847,413

 

Dilutive effect of potential common shares

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Diluted weighted-average number of common and potential

    common shares outstanding

 

24,144,874

 

 

 

23,948,428

 

 

 

24,106,495

 

 

 

23,847,413

 

Potential common shares excluded from the per share

    computations as the effect of their inclusion would not

    be dilutive

 

931,932

 

 

 

938,850

 

 

 

881,392

 

 

 

982,851

 

 

Commitments and Contingencies

Litigation

The Company is involved in litigation from time to time in the ordinary course of business. Management does not believe the outcome of any currently pending matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Other Commitments

The Company has outstanding purchase and other commitments, which exclude amounts already recorded on the Condensed Consolidated Balance Sheets. The outstanding purchase commitments to acquire capital assets and other materials and services totaled $10,588 and $6,454 as of June 30, 2014 and September 30, 2013, respectively.

Pursuant to the laws applicable to the People’s Republic of China’s Foreign Investment Enterprises, the Company’s two wholly owned subsidiaries in China, MFC and MFLEX Chengdu, are restricted from paying cash dividends on 10% of after-tax statutory profit, subject to certain cumulative limits. These restrictions as of June 30, 2014 and September 30, 2013 were $19,823 and $19,838, respectively.

Significant Concentrations

 

The Company’s net sales into its largest industry sectors, as a percentage of total net sales, are presented below:

 

 

Three Months Ended

June 30,

 

 

Nine Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Smartphones

 

65

%

 

 

78

%

 

 

71

%

 

 

69

%

Tablets

 

17

%

 

 

13

%

 

 

15

%

 

 

23

%

Consumer electronics

 

6

%

 

 

8

%

 

 

7

%

 

 

7

%

 

 

7


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

3. Lines of Credit

During July 2013, MFC entered into a Line of General Credit Agreement (the “MFC Credit Line”) with Agricultural Bank of China, Suzhou Wuzhong Sub-branch (“ABC”), providing for a line of credit to MFC in an amount of 200,000 Chinese Renminbi (“RMB”) ($32,506 at June 30, 2014). The MFC Credit Line became effective on July 31, 2013 and will mature on July 30, 2016. At June 30, 2014, the Company had $20,000 outstanding under the MFC Credit Line at an interest rate of 3.1% and with a maturity date in August 2014.  

During May 2013, MFC entered into a Line of Credit Agreement (the “CCB Credit Line”) with China Construction Bank, Suzhou Industry Park Sub-Branch (“CCB”), which provides for a borrowing facility for 300,000 RMB ($48,758 at June 30, 2014). The CCB Credit Line will mature on May 5, 2016.

During March 2013, MFLEX Chengdu entered into a Line of Credit Agreement (the “MCH Credit Line”) with Bank of China Co., Ltd. Chengdu Development West Zone Sub-Branch (“BC”), providing for a line of credit to MFLEX Chengdu in an amount of $11,000. The MCH Credit Line matured on February 5, 2014.

During January 2012, MFLEX Singapore entered into a Facility Agreement (the “Facility Agreement”) with JPMorgan Chase Bank, N.A., Singapore Branch (“JPM”), as mandated lead arranger, the financial institutions from time to time party thereto, as lenders, and JPMorgan Chase Bank, N.A. acting through its Hong Kong Branch, as facility agent and as security agent. The Facility Agreement provided for a three-year, revolving credit facility, under which MFLEX Singapore may obtain loans and other financial accommodations in an aggregate principal amount of up to $50,000. As of December 31, 2013, the Company was not in compliance with one of the financial covenants under the Facility Agreement with JPM due to its trailing twelve-month net losses. No amounts were outstanding under the Facility Agreement with JPM as of December 31, 2013. Effective February 5, 2014, the Company terminated the Facility Agreement.

A summary of the lines of credit is as follows:

 

 

Amounts Available at

 

 

Amounts Outstanding at

 

 

June 30,

2014

 

 

September 30,

2013

 

 

June 30,

2014

 

 

September 30,

2013

 

Line of credit (ABC)

$

12,506

 

 

$

32,531

 

 

$

20,000

 

 

$

-

 

Line of credit (CCB)

 

48,758

 

 

 

48,796

 

 

 

-

 

 

 

-

 

Line of credit (BC)

 

-

 

 

 

11,000

 

 

 

-

 

 

 

-

 

Line of credit (JPM)

 

-

 

 

 

50,000

 

 

 

-

 

 

 

-

 

 

$

61,264

 

 

$

142,327

 

 

$

20,000

 

 

$

-

 

 

On August 6, 2014, the Company, as guarantor, and MFLEX Singapore, as borrower, entered into a Loan and Security Agreement with certain financial institutions, as lenders, and Bank of America, N.A., as agent, providing for a senior revolving credit facility in an amount up to $30,000. Refer to Note 9 for details.

As of June 30, 2014, the Company was in compliance with all applicable financial covenants.

8


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

4. Segment Information

Based on the evaluation of the Company’s internal financial information, management believes that the Company operates in one reportable segment. The Company is primarily engaged in the engineering, design and manufacture of flexible circuit boards along with related component assemblies. For the periods presented, the Company operated in four geographical areas: United States, China, Singapore and Other (which includes Malaysia, Korea and the United Kingdom). Net sales are presented based on the country in which the sales originate, which is where the legal entity is domiciled. The financial results of the Company’s geographic segments are presented on a basis consistent with the condensed consolidated financial statements. Segment net sales and assets amounts include intra-company product sales transactions and subsidiary investment amounts, respectively, which are offset in the eliminations line.

Financial information by geographic segment is as follows:

 

 

Three Months Ended

June 30,

 

 

Nine Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

4,578

 

 

$

2,861

 

 

$

13,207

 

 

$

8,716

 

China

 

123,560

 

 

 

152,653

 

 

 

461,576

 

 

 

593,813

 

Singapore

 

107,797

 

 

 

128,972

 

 

 

396,061

 

 

 

583,659

 

Other

 

13,105

 

 

 

1,121

 

 

 

18,058

 

 

 

1,585

 

Eliminations

 

(118,236

)

 

 

(149,541

)

 

 

(428,633

)

 

 

(588,383

)

Total

$

130,804

 

 

$

136,066

 

 

$

460,269

 

 

$

599,390

 

Operating (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

(2,229

)

 

$

(6,002

)

 

$

(5,952

)

 

$

(10,196

)

China

 

(3,213

)

 

 

(8,953

)

 

 

(11,774

)

 

 

(10,951

)

Singapore

 

(19,921

)

 

 

(11,757

)

 

 

(62,533

)

 

 

(23,218

)

Other

 

(149

)

 

 

(4,996

)

 

 

(1,804

)

 

 

(6,530

)

Eliminations

 

(498

)

 

 

23

 

 

 

590

 

 

 

3,349

 

Total

$

(26,010

)

 

$

(31,685

)

 

$

(81,473

)

 

$

(47,546

)

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

315

 

 

$

544

 

 

$

989

 

 

$

1,841

 

China

 

12,348

 

 

 

28,265

 

 

 

38,066

 

 

 

41,967

 

Singapore

 

27

 

 

 

35

 

 

 

93

 

 

 

94

 

Other

 

66

 

 

 

40

 

 

 

116

 

 

 

125

 

Total

$

12,756

 

 

$

28,884

 

 

$

39,264

 

 

$

44,027

 

 

 

June 30,

2014

 

 

September 30,

2013

 

Total assets

 

 

 

 

 

 

 

United States

$

141,457

 

 

$

136,299

 

China

 

322,796

 

 

 

403,824

 

Singapore

 

242,154

 

 

 

295,714

 

Other

 

5,908

 

 

 

2,022

 

Eliminations

 

(232,627

)

 

 

(227,645

)

Total

$

479,688

 

 

$

610,214

 

 

 

 

 

9


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

5. Stock-Based Compensation

2014

Equity Incentive Plan

At the Company’s annual meeting of stockholders on March 5, 2014, the stockholders approved the Company’s 2014 Equity Incentive Plan (the “2014 Plan”). Upon stockholder approval of the 2014 Plan, the Company’s 2004 Stock Incentive Plan, as amended and restated to date (the “2004 Plan”) was terminated. Under the 2014 Plan, the Company is authorized to issue up to 1,639,279 shares, increased by not more than 2,062,007 shares comprised of the aggregate number of shares of stock that remain available for the future grant of awards under the 2004 Plan immediately prior to its termination and the number of shares subject to any option or other award outstanding under the 2004 Plan that expires or is forfeited for any reason after March 5, 2014.

Stock Options

Stock option activity for the nine months ended June 30, 2014 under the Company’s 2004 Plan is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Number of
Shares

 

 

Weighted-
Average
Exercise
Price

 

  

Aggregate
Intrinsic
Value

 

  

Weighted-
Average
Remaining
Contractual
Life

 

Stock options outstanding at September 30, 2013

  

 

164,652

  

 

$

10.98

  

  

 

 

 

  

 

 

 

Granted

  

 

—  

  

 

 

—  

  

  

 

 

 

  

 

 

 

Exercised

  

 

(81,882

 

 

10.00

  

  

 

 

 

  

 

 

 

Forfeited

  

 

—  

  

 

 

—  

  

  

 

 

 

  

 

 

 

Expired

  

 

(67,770

 

 

10.00

  

  

 

 

 

  

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

  

 

 

 

Stock options outstanding and exercisable at June 30, 2014

  

 

15,000

  

 

$

20.81

  

  

$

  

  

 

0.7

  

 

  

 

 

 

 

 

 

 

  

 

 

 

  

 

 

 

Stock options vested and expected to vest at June 30, 2014

  

 

15,000

  

 

$

20.81

  

  

$

  

  

 

0.7

  

 

  

 

 

 

 

 

 

 

  

 

 

 

  

 

 

 

 

The aggregate intrinsic value of stock options exercised was $147 and $177 during the three and nine months ended June 30, 2014, respectively, and was $6 and $278 during the three and nine months ended June 30, 2013, respectively. Unearned compensation for stock options was zero as of June 30, 2014.

Service and Performance-Based Restricted Stock Units

During the three and nine months ended June 30, 2014 and 2013, the Company granted service-based restricted stock units (“RSUs”) under the 2004 Plan and 2014 Plan to certain employees (including executive officers) and directors at no cost to such individual. Each RSU represents one hypothetical share of the Company’s common stock, without voting or dividend rights. The RSUs granted to employees generally vest over a period of three years with one-third vesting on each of the anniversary dates of the grant date. Total compensation cost related to RSUs is determined based on the fair value of the Company’s common stock on the date of grant and is amortized into expense over the vesting period using the straight-line method.

The Company also grants performance-based RSUs to certain employees (including executive officers) from time to time. For such performance-based RSUs, the Company records stock-based compensation expense based on the grant-date fair value and the probability that the performance metrics will be achieved. Management generally considers the probability that the performance metrics will be achieved to be a 70% chance or greater (“Probability Threshold”). At the end of each reporting period, the Company evaluates the awards to determine if the related performance metrics meet the Probability Threshold. If the Company determines that the vesting of any of the outstanding performance-based RSUs does not meet the Probability Threshold, the stock-based compensation expense related to those performance-based RSUs is reversed in the period in which this determination is made. However, if at a future date conditions have changed and the Probability Threshold is deemed to be met, the previously reversed stock-based compensation expense, as well as all subsequent projected stock-based compensation expense through the date of evaluation, is recognized in the period in which this new determination is made.

On November 11, 2013, the Company granted 183,292 performance-based RSUs (the “November 2013 Awards”). On December 19, 2013, the Company granted 78,553 performance-based RSUs (the “December 2013 Awards”). Both the November 2013 Awards and the December 2013 Awards vest upon the achievement of defined performance and market objectives pertaining to such grants, with vesting estimated to occur between September 30, 2016 and November 30, 2016.

10


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

Approximately two-fifths of the November 2013 Awards and the December 2013 Awards contained performance conditions whereby the Company recorded stock-based compensation cost based on the grant-date fair value and the probability that the performance metrics will be achieved. At the end of each reporting period, the Company evaluates the probability that the performance-based RSUs will vest. As of June 30, 2014, the Company considers the vesting of the November 2013 Awards and the December 2013 Awards to be probable.

Approximately three-fifths of the November 2013 Awards and the December 2013 Awards contained both market and performance conditions, whereby the market condition was measured by determining the Company’s total shareholder return (“TSR”) for the three-year period beginning November 30, 2013 through November 30, 2016 versus the TSR of the Nasdaq Total Return Index for the same period, using the three-month average daily closing price of each on November 30, 2013 as compared to November 30, 2016. An award with a market condition is accounted for and measured differently from an award that has only a performance or service condition. The effect of a market condition is reflected in the award’s fair value on the grant date (e.g., a discount may be taken when estimating the fair value of such grant to reflect the market condition). The fair value may be lower than the fair value of an identical award that has only a service or performance condition because those awards will not include a discount on the fair value. All compensation costs for an award that has a market condition will be recognized if the requisite service period is fulfilled, even if the market condition is never satisfied.

The grant date fair values of the portion of the November 2013 Awards and the December 2013 Awards containing both market and performance conditions were calculated utilizing the following assumptions:

 

 

November 2013
Awards

 

Nasdaq Total Return
Index Benchmark
Inputs

 

December 2013
Awards

 

Nasdaq Total Return
Index Benchmark
Inputs

 

Expected stock return/ discount rate1

 

0.65

%

 

0.65

%

 

0.70

%

 

0.70

%

Dividend yield

 

—  

 

 

—  

 

 

—  

 

 

—  

 

Volatility2

 

40.0

%

 

20.0

%

 

40.0

%

 

20.0

%

Grant date

 

11/30/2013

 

 

11/30/2013

 

 

12/19/2013

 

 

12/19/2013

 

Three-month average
share price3

  $

14.60

 

  $

4,194.45

 

  $

14.60

 

  $

4,194.45

 

Expected vesting period
(in years)

 

3.1

 

 

N/A

 

 

3.0

 

 

N/A

 

Correlation

 

0.48

 

 

0.48

 

 

0.48

 

 

0.48

 

Fair value per share

  $

8.28

 

 

N/A

 

  $

6.70

 

 

N/A

 

1 

The expected stock return/discount rate was based on the yield to maturity of short-term government bonds over the expected term as of the grant date.

2 

Volatilities were calculated as of fiscal year end dates for the Company.

3 

The three-month daily average share price was based on the average of the three-month daily closing price for the Company’s common stock and the Nasdaq Total Return Index as of November 30, 2013.

RSU activity for the nine months ended June 30, 2014 under the 2004 Plan and 2014 Plan is summarized as follows:

 

 

Number of

Shares

 

 

Weighted

-Average

Grant-Date

Fair Value

 

Non-vested shares outstanding at September 30, 2013

 

336,374

 

 

$

17.55

 

Granted

 

586,133

 

 

 

11.44

 

Vested

 

(2,445

)

 

 

13.88

 

Canceled

 

(69,975

)

 

 

14.71

 

Non-vested shares outstanding at June 30, 2014

 

850,087

 

 

$

13.58

 

11


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

 

RSU details for the three and nine months ended June 30, 2014 and 2013 are summarized as follows:

 

 

Three Months Ended

June 30,

 

 

Nine Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Service-based RSUs granted

 

1,800

 

 

 

126,450

 

 

 

324,288

 

 

 

332,261

 

Performance-based RSUs granted

 

-

 

 

 

24,525

 

 

 

261,845

 

 

 

96,556

 

Compensation cost recognized

$

972

 

 

$

8,656

 

 

$

2,547

 

 

$

10,642

 

Weighted-average grant-date fair value of non-vested RSUs granted

$

11.98

 

 

$

15.03

 

 

$

11.44

 

 

$

17.07

 

Weighted-average grant-date fair value of RSUs vested

$

14.64

 

 

$

19.36

 

 

$

13.88

 

 

$

20.42

 

Aggregate intrinsic value of RSUs vested

$

8

 

 

$

5,583

 

 

$

33

 

 

$

8,094

 

 

Unearned compensation as of June 30, 2014 was $6,300 related to non-vested RSUs, which will be recognized into expense over the weighted-average remaining contractual life of the non-vested RSUs of 1.5 years.

Stock-based Compensation Expense Summary

The following table shows a summary of the stock-based compensation expense by expense type included in the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2014 and 2013:

 

 

Three Months Ended

June 30,

 

 

Nine Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Cost of sales

$

71

 

 

$

78

 

 

$

188

 

 

$

344

 

Research and development

 

89

 

 

 

103

 

 

 

270

 

 

 

409

 

Sales and marketing

 

108

 

 

 

130

 

 

 

360

 

 

 

522

 

General and administrative

 

704

 

 

 

568

 

 

 

1,729

 

 

 

2,152

 

Stock-based compensation resulting from change in control

 

-

 

 

 

9,582

 

 

 

-

 

 

 

9,582

 

Total compensation cost

$

972

 

 

$

10,461

 

 

$

2,547

 

 

$

13,009

 

 

6. Income Taxes

As of June 30, 2014, the Company’s liability for income taxes associated with uncertain tax positions increased to $18,250 from $15,425 as of September 30, 2013. The liabilities that would favorably affect the Company’s effective tax rate were $13,054 and $10,517, at June 30, 2014 and September 30, 2013, respectively. As of June 30, 2014, the Company received new information not previously available associated with uncertain tax positions related to prior year intercompany transactions.  After evaluation of such information, the Company changed its judgment on these uncertain tax positions and recorded additional liability in the amount of $2,515 as of June 30, 2014.  The Company anticipates that there will be other changes to the unrecognized tax benefit associated with uncertain tax positions due to the expiration of statutes of limitation, payment of tax on amended returns, audit settlements and other changes in reserves. However, due to the uncertainty regarding the timing of these events, other than the statute of limitation expiration, a current estimate of the range of changes that may occur within the next 12 months cannot be made.

For the three months ended March 31, 2014, the Company incurred significant losses in one of its entities. In addition, the changes in the Company’s forecasted results indicated a three-year cumulative loss by the fourth quarter of fiscal 2014 for another entity. Evidence such as cumulative losses in recent years represents sufficient negative evidence to require a valuation allowance. As a result, during the three months ended March 31, 2014, the Company recorded a charge of $5,001 to reflect a valuation allowance against the deferred tax assets previously recorded related to these two entities. The Company intends to maintain a valuation allowance on its deferred tax assets until sufficient positive evidence exists to support a reversal. Based on an evaluation of the positive and negative evidence, the Company concluded that no valuation allowances were required for its other entities as of June 30, 2014.

12


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

The Company currently enjoys certain tax incentives for certain of its Asian operations. Certain Asian operations are subject to taxes at a rate lower than the statutory rates and for the three and nine months ended June 30, 2014, the Company realized tax savings for these operations. However, these tax holidays and tax incentives may be challenged, modified or even eliminated by taxing authorities or changes in law. The tax incentives for the Company’s operations in Singapore expired on June 30, 2013.

The Internal Revenue Service (“IRS”) is currently examining the Company’s income tax returns for fiscal years 2007 through 2010. On August 1, 2012, the Company received a Revenue Agent Report (the “Original Report”) from the IRS relating to its examination of the Company’s income tax returns for fiscal years 2007 and 2008. On February 6, 2013, the IRS withdrew the Original Report and issued a revised Revenue Agent Report (the “Revised Report”). In the Revised Report, the IRS reduced its proposed adjustments. The remaining proposed adjustments would result in $32,363 of additional taxable income for those two years. Management believes there are numerous errors in the Revised Report, does not agree with the proposed adjustments and has contested the proposed adjustments with the IRS Appeals Office. After reviewing the Revised Report, management continues to believe that an adequate provision has been made for all of the Company’s uncertain tax positions.

The Chinese tax authority is currently auditing the income tax returns of MFC and MFC1 for tax years 2005 through 2011. During fiscal year 2013, the Chinese tax authority raised questions related to transfer pricing on tangible goods sold by the Company to related parties. The questions primarily related to the transfer pricing methodology and the selection of comparable companies. Discussions with the Chinese tax authority surrounding this issue are ongoing. In the event that the audit results in proposed assessment by the Chinese tax authority, the Company may be required to remit the assessment regardless of whether the Company contests the proposed adjustments. Management believes that an adequate provision has been made related to this audit.

The outcome of these tax audits cannot be predicted with certainty. If any issues raised in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, then the Company could be required to adjust its provision for income tax in the period such resolution occurs. Any significant adjustments from the tax authorities could have a material adverse effect on the Company’s results of operations, cash flows and financial position if not resolved favorably.

7. Derivative Financial Instruments

Foreign Currency Forward Contracts

The Company transacts business in various foreign countries and is therefore exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to purchases, obligations, and monetary assets and liabilities that are denominated in currencies other than the Company’s reporting currency. The Company has established foreign currency risk management programs to attempt to protect against short-term volatility in the value of non-U.S. dollar denominated monetary assets and liabilities, and of future cash flows caused by changes in foreign currency exchange rates. As a result, from time to time, the Company enters into foreign currency forward contracts to hedge its aforementioned currency exposures.

The Company accounts for all of its derivative instruments in accordance with the relevant FASB authoritative accounting guidance for derivatives and hedges. The guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the Condensed Consolidated Balance Sheets.

As of June 30, 2014, the aggregate notional amount of the Company’s outstanding foreign currency forward contracts is summarized below:

 

Currency

 

Buy/
Sell

 

  

Foreign
Currency
Amount

 

  

Notional
Contract
Value in
USD

 

Foreign currency non-hedge derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

RMB

 

 

Buy

 

 

¥

61,227

 

 

$

10,000

 

The changes in fair value of the Company’s derivative instruments are recognized into earnings during the period of change as other income (expense), net in the Condensed Consolidated Statements of Comprehensive Income. The Company recognized net gains of $201 and $71 during the three and nine months ended June 30, 2014 and $530 and $480 during the three and nine months ended June 30, 2013, respectively, related to derivative financial instruments.

13


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

8. Impairment and Restructuring

During the three months ended March 31, 2014, following a full review of its manufacturing footprint and in an effort to realign its manufacturing capacity and costs with expected net sales, the Company initiated its plan to consolidate its production facilities to reduce the total manufacturing floor space by approximately one-third (the “Restructuring”). As part of the Restructuring, MFLEX Chengdu, along with two satellite manufacturing facilities in Suzhou, China, will be consolidated into the Company’s two main manufacturing plants under MFC in Suzhou. In addition, as part of the Restructuring, the Company expects to close MFE located in Cambridge, United Kingdom and realign headcount at its other locations.

The Company’s manufacturing facility in Chengdu, China ceased operations and met the criteria to be classified as assets held for sale per the relevant authoritative FASB guidance as of March 31, 2014. In addition, machinery and equipment at the Chengdu location and certain machinery and equipment and other fixed assets located at facilities in Suzhou, China ceased use and met the held for sale criteria as of March 31, 2014.

During the three months ended June 30, 2014, certain machinery and equipment and other property, plant and equipment located at facilities in Suzhou, China ceased use and met the held for sale criteria as of June 30, 2014. Certain assets that the Company plans to dispose of as part of the Restructuring at the Company’s satellite facilities in Suzhou and the United Kingdom continue to meet the held for use criteria as of June 30, 2014.

As a result of the Restructuring, the Company recorded the following impairment and restructuring charges for the three and nine months ended June 30, 2014:

 

Three Months
Ended June 30, 2014

 

Nine Months
Ended June 30, 2014

 

Asset impairments

$

6,890

 

$

18,439

One-time termination benefits

 

972

 

 

9,636

Other costs

 

499

 

 

5,084

Impairment and restructuring

$

8,361

 

$

33,159

As the Company continues to execute the Restructuring, the Company may incur additional long-lived asset impairments and restructuring charges required for assets that will meet the held for sale criteria in future periods, one-time termination benefits for additional potential terminated employees and other charges, in the fourth quarter of fiscal 2014. Total charges in connection with the Restructuring are expected to be at the low end of the range of $40,000 to $60,000 previously disclosed.

14


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

Long-Lived Asset Impairment

Based on the Company’s Restructuring plan, the Company determined that a triggering event to test its long-lived assets for recoverability existed during the second and third quarters of fiscal 2014. The Company’s long-lived assets consisted primarily of property, plant and equipment and other assets.

Assets Held For Use

For assets classified as held for use, consisting of all property and equipment not held for sale, the Company compared its calculation of the undiscounted cash flows to the carrying value of the assets and concluded that no instances of impairment were identified as of June 30, 2014. As the Company continues to execute the Restructuring, it will monitor its forecasted undiscounted cash flows in order to test held for use assets.

Assets Held For Sale

For assets classified as held for sale, consisting of the Company’s manufacturing facility in Chengdu and other property, plant and equipment in Chengdu and Suzhou, China, the Company compared the estimated fair value less costs to sell to the carrying value of the assets. If the estimated fair value less costs to sell exceeded the carrying amount, no impairment expense was recorded. However, if the estimated fair value less costs to sell was less than the carrying amount, an impairment expense of the difference was recorded. As a result, the Company concluded that certain assets held for sale were impaired, and pre-tax impairment charges of $6,890 were recorded during the three months ended June 30, 2014 (of which $719 was related to buildings and leasehold improvements, $6,100 was related to machinery and equipment and $71 was related to other property, plant and equipment).

During the nine months ended June 30, 2014, pre-tax impairment charges for assets held for sale of $18,439 were recorded (of which $9,860 was related to land use rights, building and leasehold improvements, $8,416 was related to machinery and equipment and $163 was related to other property, plant and equipment).

Other Restructuring-related Costs  

A pre-tax restructuring charge of $1,471 was recorded during the three months ended June 30, 2014, which included $972 of one-time termination benefits, $(400) of contract termination cost adjustment and $899 of other costs.

A pre-tax restructuring charge of $14,720 was recorded during the nine months ended June 30, 2014, which included $9,636 of one-time termination benefits, $803 of contract termination costs and $4,281 of other costs (of which $198 was non-cash).

The following table reflects the movement activity of the restructuring reserve for the nine months ended June 30, 2014:

 

 

 

One-Time Termination Benefits

 

 

 

Contract Termination Costs

 

 

 

Other Costs

 

 

 

Total Accrued Restructuring

 

Accrued at September 30, 2013

$

 

 

$

 

 

$

 

 

$

 

Restructuring additions

 

9,636

 

 

 

803

 

 

 

4,083

 

 

 

14,522

 

Adjustment/foreign exchange effect

 

92

 

 

 

 

 

 

 

 

 

92

 

Amount paid

 

(8,370)

 

 

 

(797)

 

 

 

(39)

 

 

 

(9,206)

 

Accrued at June 30, 2014

$

1,358

 

 

$

6

 

 

$

4,044

 

 

$

5,408

 

 


15


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

9. Subsequent Events

 

On August 6, 2014, the Company, as guarantor, and MFLEX Singapore, as borrower, entered into a Loan and Security Agreement with certain financial institutions, as lenders, and Bank of America, N.A., as agent, providing for a senior revolving credit facility in an amount up to $30,000. The credit facility has a three-year term, and availability under the credit facility is calculated based on a formula which takes into account multiple factors, including the accounts receivable of borrower, the geographic location of borrower’s customer, and whether the customer’s receivable is insured by a third party. Amounts outstanding will bear interest at either: (1) a rate equal to LIBOR or SIBOR, plus an applicable margin, which ranges from 125 to 275 basis points, or (2) a defined base rate plus an applicable margin ranging from 75 to 275 basis points. In either case, the applicable margin is based on the fixed charge coverage ratio of the Company and its subsidiaries, measured on a consolidated basis.

 

On August 4, 2014, the Board of Directors of the Company approved to change the Company’s fiscal year end from September 30 to December 31. The Company intends to file an Annual Report on Form 10-K for the period ending September 30, 2014 and a transitional report on Form 10-K for the three-month period ending December 31, 2014.

 

 

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements that involve a number of risks and uncertainties. These forward-looking statements include, but are not limited to, statements and predictions as to our expectations regarding our revenues, sales, sales growth, net income and losses, inventory levels, production build plans, restructuring and reorganization efforts and related charges, operating expenses, research and development expenses, earnings, operations, gross margins, including without limitation, our targeted gross margin range, achievement of margins within or outside of such range and factors that could affect gross margins, yields, anticipated cash needs and uses of cash, credit lines, including compliance with covenants and usage of such lines, capital requirements and capital expenditures, payment terms, expected tax rates, results of audits of us in China and the U.S., needs for additional financing, use of working capital, the benefits and risks of our China operations, anticipated growth strategies, ability to attract customers and diversify our customer base, our sources of net sales, anticipated trends and challenges in our business and the markets in which we operate, trends regarding the use of flex and assemblies in smartphones, tablets and other consumer electronic devices, the adequacy of our facilities, capability, capacity and equipment, the impact of economic and industry conditions on our customers and our business, current and upcoming programs and product mix and the learning curves associated with our programs, market opportunities, customer demand, our competitive position, labor issues in the jurisdictions in which we operate, the commercial success of our customers and their products, critical accounting policies and the impact of recent accounting pronouncements. Additional forward-looking statements include, but are not limited to, statements pertaining to other financial items, plans, strategies or objectives of management for future operations, our financial condition or prospects, and any other statement that is not historical fact, including any statement which is preceded by the word “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “anticipate,” “estimate,” “predict,” “aim,” “potential,” “plan,” or similar words. For all of the foregoing forward-looking statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Actual events or results may differ materially from our expectations. Important factors that could cause actual results to differ materially from those stated or implied by our forward-looking statements include, but are not limited to, our ability to successfully restructure our business and reduce our costs, the impact of changes in demand for our products, our success with new and current customers, our ability to be competitive in terms of price, technology, capability and manufacturing, our ability to maintain or grow our market share, our ability to diversify our customer base, the success of our customers and their products in the marketplace, our effectiveness in managing manufacturing processes, inventory levels and costs and reorganizations of our operations, the degree to which we are able to utilize available manufacturing capacity, achieve expected yields and obtain expected gross margins, the impact of competition, the economy and technological advances, and the other risks set forth below under “Part II, Item 1A – Risk Factors.” These forward-looking statements represent our judgment as of the date hereof. We disclaim any intent or obligation to update these forward-looking statements.

Overview

We are a global provider of high-quality, technologically advanced flexible printed circuits and value-added component assembly solutions to the electronics industry. We believe that we are one of a limited number of manufacturers that provide a seamless, integrated flexible printed circuit and assembly solution from design and application engineering and prototyping through high-volume fabrication, component assembly and testing. We currently target our solutions within the electronics market and, in particular, our solutions enable our customers to achieve a desired size, shape, weight or functionality of the device. Current examples of applications for our products include mobile phones, smartphones, tablets, personal computers, consumer products, wearables, portable bar code scanners, computer/data storage and medical devices. We provide our solutions to original equipment manufacturers (“OEMs”) such as Apple, Inc. and to electronic manufacturing services (“EMS”) providers such as Foxconn Electronics, Inc., Protek (Shanghai) Limited and Flextronics International Ltd. Our business model, and the way we approach the markets which we serve, is based on value added engineering and providing technology solutions to our customers facilitating the miniaturization of portable electronics. We currently rely on a core mobility end-market for nearly all of our revenue. We believe this dynamic market offers fewer, but larger, opportunities than other electronic markets do, and changes in market leadership can occur with little to no warning. Through early supplier involvement with customers, we look to assist in the development of new designs and processes for the manufacturing of their products and, through value added component assembly of components on flex, we seek to provide a higher level of product within their supply chain structure. Our ability to add to our customer base may have a direct impact on the relative percentage of each customer’s revenue to total revenues during any reporting period.

We typically have numerous programs in production at any particular time, the life cycle for which is typically around one year. The programs’ prices are subject to intense negotiation and are determined on a program by program basis, dependent on a wide variety of factors, including without limitation, competitor pricing, expected volumes, assumed yields, material costs, and the amount of third party components within the program. Our profitability is dependent upon the extent of competitive pricing pressures, how we perform against our targets and the assumptions on which we base our prices for each particular program. Our volumes, margins and yields also vary from program to program and, given various factors and assumptions on which we base our prices, are not necessarily indicative of our profitability. In fact, some lower-priced programs have higher margins while other higher-priced programs have lower margins. Given that the programs in production vary from period to period and the pricing and margins between programs vary widely, volumes, while important for overhead absorption, are not necessarily indicative of our performance. For example, we could

17


 

experience an increase in volumes for a particular program during a particular period, but depending on that program’s margins and yields and the other programs in production during that period, those higher volumes may or may not result in an increase in overall profitability. In the mobility market, the first few months of production are the most critical in terms of growth and profitability opportunities.

Critical Accounting Policies

Information with respect to our critical accounting policies which we believe have the most significant effect on our reported results and require subjective or complex judgments of management are contained on page 32 in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2013.

Comparison of the Three Months Ended June 30, 2014 and 2013

The following table sets forth our Statement of Operations data expressed as a percentage of net sales for the periods indicated:

 

 

 

Three Months Ended

June 30,

 

 

 

2014

 

 

 

2013

 

 

Net sales

 

100.0

 

%

 

 

100.0

 

%

Cost of sales

 

105.5

 

 

 

 

103.1

 

 

Gross loss