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EX-32.1 - EX-32.1 - MULTI FINELINE ELECTRONIX INCmflx-ex321_8.htm
EX-31.1 - EX-31.1 - MULTI FINELINE ELECTRONIX INCmflx-ex311_7.htm
EX-31.2 - EX-31.2 - MULTI FINELINE ELECTRONIX INCmflx-ex312_6.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 September 30, 2015

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 October 31, 2015 was 24,395,342.

 

 

 

 

 

 


 

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)

 

 

September 30, 2015

 

 

December 31, 2014

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

$

168,536

 

 

$

132,382

 

Accounts receivable, net of allowances of $1,553 and $3,126

   at September 30, 2015 and December 31, 2014, respectively

 

118,813

 

 

 

133,151

 

Inventories

 

76,636

 

 

 

65,627

 

Income tax receivable

 

1,071

 

 

 

265

 

Assets held for sale

 

 

 

11,387

 

Other current assets

 

10,512

 

 

 

7,548

 

Total current assets

 

375,568

 

 

 

350,360

 

Property plant and equipment, net

 

142,436

 

 

 

164,345

 

Land use rights

 

3,279

 

 

 

3,108

 

Deferred taxes

 

8,994

 

 

 

9,120

 

Other assets

 

401

 

 

 

454

 

Total assets

$

530,678

 

 

$

527,387

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Accounts payable

$

134,030

 

 

$

143,032

 

Other current liabilities

 

30,068

 

 

 

42,697

 

Income taxes payable

 

2,333

 

 

 

2,020

 

Total current liabilities

 

166,431

 

 

 

187,749

 

Other long-term liabilities

 

8,755

 

 

 

11,178

 

Total liabilities

 

175,186

 

 

 

198,927

 

Commitments and contingencies (Note 2)

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

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

   shares authorized at September 30, 2015 and December 31, 2014,

   respectively; 0 and 0 shares issued and outstanding at

   September 30, 2015 and December 31, 2014, respectively

 

 

 

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

   100,000,000 shares authorized at September 30, 2015

   and December 31, 2014, respectively;

   24,395,342 and 24,303,267 shares issued and outstanding

   at September 30, 2015 and December 31, 2014, respectively

 

2

 

 

 

2

 

Additional paid in capital

 

96,743

 

 

 

94,394

 

Retained earnings

 

218,759

 

 

 

184,099

 

Accumulated other comprehensive income

 

39,988

 

 

 

49,965

 

Total stockholders' equity

 

355,492

 

 

 

328,460

 

Total liabilities and stockholders' equity

$

530,678

 

 

$

527,387

 

 

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

September 30,

 

 

Nine Months Ended

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net sales

$

165,690

 

 

$

172,884

 

 

$

467,554

 

 

$

421,481

 

Cost of sales

 

143,146

 

 

 

155,340

 

 

 

407,399

 

 

 

424,128

 

Gross profit (loss)

 

22,544

 

 

 

17,544

 

 

 

60,155

 

 

 

(2,647

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

1,258

 

 

 

1,270

 

 

 

3,858

 

 

 

4,486

 

Sales and marketing

 

3,509

 

 

 

4,207

 

 

 

11,452

 

 

 

13,107

 

General and administrative

 

4,857

 

 

 

4,281

 

 

 

14,989

 

 

 

12,078

 

Impairment and restructuring

 

(485

)

 

 

780

 

 

 

(1,808

)

 

 

33,939

 

      Total operating expenses

 

9,139

 

 

 

10,538

 

 

 

28,491

 

 

 

63,610

 

Operating income (loss)

 

13,405

 

 

 

7,006

 

 

 

31,664

 

 

 

(66,257

)

Other income and expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

490

 

 

 

400

 

 

 

1,265

 

 

 

816

 

Interest expense

 

(97

)

 

 

(139

)

 

 

(282

)

 

 

(375

)

Other income (expense), net

 

1,874

 

 

 

375

 

 

 

3,958

 

 

 

1,202

 

Income (loss) before taxes

 

15,672

 

 

 

7,642

 

 

 

36,605

 

 

 

(64,614

)

Provision for income taxes

 

(1,983

)

 

 

(1,719

)

 

 

(1,945

)

 

 

(10,639

)

Net income (loss)

 

13,689

 

 

 

5,923

 

 

 

34,660

 

 

 

(75,253

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(10,164

)

 

 

33

 

 

 

(9,977

)

 

 

(2,297

)

Total comprehensive net income (loss)

$

3,525

 

 

$

5,956

 

 

$

24,683

 

 

$

(77,550

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.56

 

 

$

0.25

 

 

$

1.42

 

 

$

(3.12

)

Diluted

$

0.54

 

 

$

0.24

 

 

$

1.37

 

 

$

(3.12

)

Shares used in computing net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

24,362,797

 

 

 

24,171,352

 

 

 

24,345,631

 

 

 

24,135,955

 

Diluted

 

25,192,967

 

 

 

24,389,191

 

 

 

25,219,334

 

 

 

24,135,955

 

 

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

September 30,

 

 

2015

 

 

2014

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income (loss)

$

34,660

 

 

$

(75,253

)

Adjustments to reconcile net income (loss) to net cash

   provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

35,323

 

 

 

38,559

 

Deferred taxes

 

126

 

 

 

7,564

 

Stock-based compensation expense

 

3,283

 

 

 

2,526

 

Income tax benefit related to stock option exercises

 

-

 

 

 

(57

)

Asset (recoveries) impairments

 

(946

)

 

 

18,241

 

Gain on disposal of equipment and assets held for sale

 

(830

)

 

 

(513

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

12,294

 

 

 

13,340

 

Inventories

 

(20,303

)

 

 

2,207

 

Other current assets

 

(1,907

)

 

 

6,226

 

Other assets

 

63

 

 

 

4,976

 

Accounts payable

 

(6,351

)

 

 

(19,192

)

Other current liabilities

 

(11,811

)

 

 

(2,548

)

Income taxes payable

 

(780

)

 

 

(2,481

)

Other liabilities

 

(2,328

)

 

 

2,399

 

Net cash provided by (used in) operating activities

 

40,493

 

 

 

(4,006

)

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(10,623

)

 

 

(11,966

)

Proceeds from sale of equipment and assets held for sale

 

6,987

 

 

 

3,096

 

Change in restricted cash, net

 

520

 

 

 

(520

)

Net cash used in investing activities

 

(3,116

)

 

 

(9,390

)

Cash flows from financing activities

 

 

 

 

 

 

 

Income tax benefit related to stock option exercises

 

 

 

57

 

Tax withholdings for net share settlement of equity awards

 

(934

)

 

 

(538

)

Borrowings from lines of credit

 

 

 

20,000

 

Repayment of borrowings under line of credit agreement

 

 

 

(20,000

)

Proceeds from exercise of stock options

 

 

 

782

 

Debt issuance costs

 

 

 

(442

)

Net cash used in financing activities

 

(934

)

 

 

(141

)

Effect of exchange rate changes on cash

 

(289

)

 

 

317

 

Net change in cash

 

36,154

 

 

 

(13,220

)

Cash and cash equivalents at beginning of period

 

132,382

 

 

 

111,887

 

Cash and cash equivalents at end of period

$

168,536

 

 

$

98,667

 

Non-cash investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

$

9,106

 

 

$

6,474

 

 

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

 

 

 

3


 

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% of the Company’s outstanding common stock as of each of September 30, 2015 and December 31, 2014. 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 three wholly owned subsidiaries located in China: MFLEX Suzhou Co., Ltd., (“MFC”), formerly known as Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd. (“MFC2”) and into which Multi-Fineline Electronix (Suzhou) Co., Ltd. (“MFC1”, which we are in the process of de-registering) was merged in fiscal 2010, 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”). 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 Transition Report on Form 10-K for the transition period from October 1, 2014 to December 31, 2014 filed with the SEC on February 13, 2015 (the “Transition Report”). 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 September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. Unless otherwise indicated, the financial information in these notes is presented in thousands (except per share amounts).

 

Fair Value Measurements

The carrying amounts of certain of the Company’s financial instruments, including cash, accounts receivable, accounts payable and other current 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 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, which consisted of quoted market prices in active markets for identical assets and liabilities.

The Company’s assets and liabilities measured at fair value on a recurring basis subject to the disclosure requirements as defined under the Financial Accounting Standards Board (“FASB”) authoritative accounting guidance were as follows:

 

 

Fair Value Measurements of Assets and Liabilities

on a Recurring Basis as of

September 30, 2015

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds (cash and cash equivalents)

$

5,007

 

 

$

 

 

$

 

 

$

5,007

 

 

$

 

 

$

 

4


 

 

 

Fair Value Measurements of Assets and Liabilities

on a Recurring Basis as of

December 31, 2014

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds (cash and cash equivalents)

$

18,208

 

 

$

 

 

$

 

 

$

18,208

 

 

$

 

 

$

 

 

As of September 30, 2015, no assets were measured at fair value on a non-recurring basis. Below is a summary of the Company’s assets measured at fair value on a non-recurring basis as of December 31, 2014; refer to Note 7 for further information. The fair value of the assets was determined using Level 3 unobservable inputs not corroborated by market data, consisting of a value assessment report and third-party offers for the building and equipment.

 

 

 

Fair Value Measurements of Assets and Liabilities

on a Non-Recurring Basis as of

December 31, 2014

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Building and equipment (assets held for sale)

$

 

 

$

 

 

$

11,387

 

 

$

 

 

$

 

 

$

11,387

 

 

Inventories

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

 

 

September 30, 2015

 

 

December 31, 2014

 

Raw materials and supplies

$

18,407

 

 

$

19,268

 

Work-in-progress

 

23,273

 

 

 

15,713

 

Finished goods

 

34,956

 

 

 

30,646

 

 

$

76,636

 

 

$

65,627

 

 

 

Property, Plant and Equipment

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

 

 

September 30, 2015

 

 

December 31, 2014

 

Building

$

54,458

 

 

$

50,450

 

Machinery and equipment

 

328,676

 

 

 

334,539

 

Computers and capitalized software

 

14,124

 

 

 

13,328

 

Leasehold improvements

 

1,092

 

 

 

1,290

 

Construction-in-progress

 

2,160

 

 

 

598

 

 

$

400,510

 

 

$

400,205

 

Accumulated depreciation and amortization

 

(258,074

)

 

 

(235,860

)

 

$

142,436

 

 

$

164,345

 

 

 

5


 

Other Current Liabilities

Other current liabilities were composed of the following:

 

 

September 30, 2015

 

 

December 31, 2014

 

Wages and compensation

$

14,714

 

 

$

13,855

 

Restructuring expenses¹

 

3,090

 

 

 

5,710

 

Current portion of liabilities on uncertain tax positions

 

 

 

12,524

 

Other accrued expenses

 

12,264

 

 

 

10,608

 

 

$

30,068

 

 

$

42,697

 

 

1 

Refer to Note 7 for further information on the Company’s impairment and restructuring activities during the three and nine months ended September 30, 2015.

 

Product Warranty Accrual

Changes in the product warranty accrual for the three and nine months ended September 30, 2015 and 2014 were as follows:

 

 

Balance at July 1

 

 

Warranty

Expenditures

 

 

Provision for

Estimated

Warranty Cost

 

 

Balance at September 30

 

2015

$

668

 

 

 

(588

)

 

 

569

 

 

$

649

 

2014

$

856

 

 

 

(465

)

 

 

606

 

 

$

997

 

 

 

Balance at

January 1

 

 

Warranty

Expenditures

 

 

Provision for

Estimated

Warranty Cost

 

 

Balance at September 30

 

2015

$

1,013

 

 

 

(2,924

)

 

 

2,560

 

 

$

649

 

2014

$

1,452

 

 

 

(3,559

)

 

 

3,104

 

 

$

997

 

 

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 September 30, 2015 and 2014:

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Basic weighted-average number of common shares

   outstanding

 

24,362,797

 

 

 

24,171,352

 

 

 

24,345,631

 

 

 

24,135,955

 

Dilutive effect of potential common shares

 

830,170

 

 

 

217,839

 

 

 

873,703

 

 

 

Diluted weighted-average number of common and

   potential common shares outstanding

 

25,192,967

 

 

 

24,389,191

 

 

 

25,219,334

 

 

 

24,135,955

 

Potential common shares excluded from the per share

   computations as the effect of their inclusion would not

   be dilutive

 

532,304

 

 

 

819,356

 

 

 

382,764

 

 

 

912,758

 

 

 

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 $7,470 and $8,791 as of September 30, 2015 and December 31, 2014, respectively.

6


 

Pursuant to the laws applicable to the People’s Republic of China’s Foreign Investment Enterprises, the Company’s two active 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 September 30, 2015 and December 31, 2014 were $18,708 and $20,170, 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

September 30,

 

 

Nine Months Ended

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Smartphones

 

71

%

 

 

69

%

 

 

70

%

 

 

69

%

Tablets

 

10

%

 

 

18

%

 

 

13

%

 

 

16

%

Consumer electronics1

 

17

%

 

 

6

%

 

 

14

%

 

 

7

%

1

Includes wearables.

 

3. Lines of Credit

During August 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. (“BA”), 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 175 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.

 

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”) ($31,440 at September 30, 2015). The MFC Credit Line will mature on July 30, 2016.

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 ($47,160 at September 30, 2015). The CCB Credit Line will mature on May 5, 2016.

A summary of the lines of credit is as follows:

 

 

Amounts Available at

 

 

Amounts Outstanding at

 

 

September 30, 2015

 

 

December 31, 2014

 

 

September 30, 2015

 

 

December 31, 2014

 

Line of credit (BA)

$

30,000

 

 

$

30,000

 

 

$

 

 

$

 

Line of credit (ABC)

 

31,440

 

 

 

32,685

 

 

 

 

 

Line of credit (CCB)

 

47,160

 

 

 

49,028

 

 

 

 

 

 

$

108,600

 

 

$

111,713

 

 

$

 

 

$

 

 

As of September 30, 2015, the Company was in compliance with all applicable financial covenants.

 

 

4. Segment Information

Based on the evaluation of the Company’s internal financial information, management believes that the Company operates in one reportable segment under one reporting unit. 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

7


 

the Company’s geographic segments are presented on a basis consistent with the condensed consolidated financial statements. The geographic area’s net sales amounts include intra-company product sales transactions, which are offset in the elimination line.

 

Net sales by geographic segment is as follows:

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

2,509

 

 

$

3,219

 

 

$

8,390

 

 

$

11,316

 

China

 

156,795

 

 

 

160,899

 

 

 

428,846

 

 

 

395,018

 

Singapore

 

161,876

 

 

 

156,496

 

 

 

453,260

 

 

 

358,532

 

Other

 

28

 

 

 

5,773

 

 

 

708

 

 

 

22,122

 

Eliminations

 

(155,518

)

 

 

(153,503

)

 

 

(423,650

)

 

 

(365,507

)

Total

$

165,690

 

 

$

172,884

 

 

$

467,554

 

 

$

421,481

 

 

 

 

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.

Restricted Stock Units

From time to time, the Company grants service-based restricted stock units (“RSUs”) under the 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.

 

RSU activity for the nine months ended September 30, 2015 is summarized as follows:

 

 

Number of

Shares

 

 

Weighted

-Average

Grant-Date

Fair Value

 

Non-vested shares outstanding at December 31, 2014

 

1,568,365

 

 

$

9.43

 

Granted

 

63,780

 

 

 

21.80

 

Vested

 

(105,859

)

 

 

17.28

 

Canceled

 

(185,738

)

 

 

9.35

 

Non-vested shares outstanding at September 30, 2015

 

1,340,548

 

 

$

9.41

 

 

 

RSU details for the three and nine months ended September 30, 2015 and 2014 are summarized as follows:

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Service-based RSUs granted

 

 

 

 

 

2,700

 

 

 

 

63,780

 

 

 

 

53,616

 

Stock-based compensation expense recognized

$

 

1,255

 

 

$

 

600

 

 

$

 

3,283

 

 

$

 

2,526

 

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

$

 

 

$

 

9.53

 

 

$

 

21.80

 

 

$

 

13.61

 

Weighted-average grant-date fair value of RSUs vested

$

 

19.48

 

 

$

 

19.39

 

 

$

 

17.28

 

 

$

 

19.28

 

Aggregate intrinsic value of RSUs vested

$

 

1,091

 

 

$

 

1,102

 

 

$

 

1,864

 

 

$

 

1,136

 

8


 

 

 

Unearned compensation as of September 30, 2015 was $6,721 related to non-vested RSUs, which will be recognized into expense over the weighted-average remaining contractual life of the non-vested RSUs of 1.8 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 September 30, 2015 and 2014:

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Cost of sales

$

114

 

 

$

46

 

 

$

326

 

 

$

179

 

Research and development

 

112

 

 

 

55

 

 

 

321

 

 

 

253

 

Sales and marketing

 

110

 

 

 

77

 

 

 

260

 

 

 

333

 

General and administrative

 

919

 

 

 

422

 

 

 

2,376

 

 

 

1,761

 

Total

$

1,255

 

 

$

600

 

 

$

3,283

 

 

$

2,526

 

 

 

6. Income Taxes

As of September 30, 2015, the Company recorded a liability for income taxes associated with uncertain tax positions of $13,963, of which $6,110, if recognized, would favorably affect the Company’s effective tax rate. As of December 31, 2014, the total liability for income taxes associated with uncertain tax positions was $26,109, of which $17,510, if recognized, would favorably affect the Company’s effective tax rate. The decrease in liability was due to the settlement with the Chinese tax authority on its audit of MFC and MFC1 for tax years 2005 through 2011. In addition, the Company recognized a one-time income tax benefit of $2,710 for the three months ended June 30, 2015 due to the expiration of statute of limitation. The Company anticipates that there will be 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.

The Chinese tax authority is currently auditing the income tax returns of MFLEX Chengdu for tax years 2009 through 2015. 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. 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. Impairment and Restructuring

The Company recorded the following impairment and restructuring (recoveries) expenses during the three and nine months ended September 30, 2015 and 2014:

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Asset (recoveries) impairments

$

(564

)

 

$

(198

)

 

$

(946

)

 

$

18,241

 

Gain on sale of a satellite facility

 

 

 

 

 

 

 

(1,101

)

 

 

One-time termination benefits

 

 

 

 

63

 

 

 

13

 

 

 

9,699

 

Other costs

 

79

 

 

 

915

 

 

 

226

 

 

 

5,999

 

      Impairment and restructuring

$

(485

)

 

$

780

 

 

$

(1,808

)

 

$

33,939

 

 

9


 

Assets Held for Sale

During the three months ended March 31, 2015, the Company completed the sale of one of its satellite facilities in Suzhou, China, which resulted in a gain of $1,101. During the three and nine months ended September 30, 2015, the Company recorded impairment recoveries of $(3) and $(385), respectively, upon completing the sale of certain machinery and equipment previously classified as assets held for sale.

In connection with the Company’s restructuring in 2014, the Company classified a manufacturing facility in Chengdu, China, as an asset held for sale as of March 31, 2014. The Company's intent continues to be to sell the facility, but the time of completion of a sale cannot be estimated at this time. Given this change in facts and circumstances, the asset no longer met the held for sale classification criteria under the relevant FASB authoritative guidance as of September 30, 2015. As a result, the Company reclassified this facility as property, plant and equipment and remeasured it at its estimated fair value as of September 30, 2015 (the reclassification date), recording a gain of $561 in impairment and restructuring for the three and nine months ended September 30, 2015.

 

Restructuring Reserve Activity

The following table reflects the movement activity of the restructuring reserve for the nine months ended September 30, 2015:

 

 

One-Time Termination Benefits

 

 

Contract Termination Costs

 

 

Other Costs

 

 

Total Accrued Restructuring

 

Accrued at December 31, 2014

$

 

542

 

 

$

 

(3

)

 

$

 

5,171

 

 

$

 

5,710

 

Restructuring additions

 

 

13

 

 

 

 

 

 

 

 

293

 

 

 

 

306

 

Adjustment/foreign exchange effect

 

 

(181

)

 

 

3

 

 

 

 

(385

)

 

 

 

(563

)

Amount paid

 

 

(374

)

 

 

 

 

 

 

 

(1,989

)

 

 

 

(2,363

)

Accrued at September 30, 2015

$

 

 

 

$

 

 

 

$

 

3,090

 

 

$

 

3,090

 

 

 

 

 


10


 

 

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 United States, needs for additional financing, use of working capital, the benefits and risks of our China operations, the impact of environmental regulations, 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 maintain the cost savings realized by our recent restructuring, 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 and market segments, the success of our customers and their products in the marketplace, our effectiveness in managing manufacturing processes, inventory levels and costs 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 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 smartphones, tablets, computer/data storage, portable bar code scanners, personal computers, wearables, and other consumer electronic 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 assembly of components on flex, seek to provide a higher level of product within their supply chain structure. This approach may or may not always fit with the operating practices of all OEMs. 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 how we perform against our targets and the assumptions on which we base our prices for each particular program. In addition, the price on a particular program typically decreases as the program matures. 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

11


 

period and the pricing and margins between programs vary widely, volumes, while important for overhead absorption, are not necessarily indicative of our financial performance. For example, we could 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.

From our inception in 1984 until 1989, we were engaged primarily in the manufacturing of flexible printed circuits for military and aerospace applications. In early 1990, we began to develop the concept of attaching components on flexible printed circuits. Through these early efforts, we developed the concept of the value-added approach with respect to integrating our design engineering expertise with our component assembly capabilities. This strategy enabled us to capitalize on two trends over the course of the 1990s, the outsourcing by OEMs of their manufacturing needs and the shift of manufacturing facilities outside of the United States. In 1994, we formed a wholly owned Chinese subsidiary to better serve customers that have production facilities in Asia and provide a cost-effective, high-volume production platform for the manufacture of our products. In 2002, we formed a second wholly owned subsidiary in China to further expand our flexible printed circuit manufacturing and assembly capacity, and we merged these two subsidiaries into one in 2010. Our Chinese subsidiaries provide a complete range of capabilities and services to support our global customer base, including design engineering and high-volume production of single-sided, double-sided and multi-layer flexible printed circuits and component assemblies. In 2014, following a full review of our manufacturing footprint and in an effort to realign our manufacturing capacity and costs with expected net sales, we initiated a plan to consolidate our 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, were consolidated into our two main manufacturing plants under MFC in Suzhou. In addition, we closed MFE, which had been located in Cambridge, United Kingdom, and we reduced headcount at other locations. The Restructuring was complete as of December 31, 2014.

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 27 in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Transition Report on Form 10-K for the three months ended December 31, 2014.

 

 

Comparison of the Three Months Ended September 30, 2015 and 2014

The following table sets forth our consolidated statements of income data expressed as a percentage of net sales for the periods indicated:

 

 

Three Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

Net sales

 

100.0

 

%

 

100.0

 

%

Cost of sales

 

86.4

 

 

 

89.9

 

 

Gross profit

 

13.6

 

 

 

10.1

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development