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EX-31 - EX-31.1 - MULTI FINELINE ELECTRONIX INCmflx-ex31_8.htm
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EX-32 - EX-32.1 - MULTI FINELINE ELECTRONIX INCmflx-ex32_7.htm
EX-21 - EX-21.1 - MULTI FINELINE ELECTRONIX INCmflx-ex21_9.htm
EX-23 - EX-23.1 - MULTI FINELINE ELECTRONIX INCmflx-ex23_10.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

x

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

For the fiscal year ended December 31, 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, California

 

92618

(Address of principal executive offices)

 

(Zip Code)

(949) 453-6800

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of Each Exchange on Which Registered

Common Stock, par value $0.0001 per share

 

NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨     No  x

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act from their obligations under those Sections.

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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 definitions of “accelerated filer,” “large 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 Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of Common Stock held by non-affiliates of the registrant (based upon the closing sale price per share of Common Stock on the NASDAQ Global Select Market on June 30, 2015) was $200,156,150. Shares held by each executive officer, director and by each person that owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, as of January 31, 2016 was 24,609,141.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10 (as to directors and Section 16(a) Beneficial Ownership Reporting Compliance), 11, 12 (as to Beneficial Ownership), 13 and 14 of Part III incorporate by reference information from the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the registrant’s 2016 Annual Meeting of Stockholders.

 

 

 

 

 


Multi-Fineline Electronix, Inc.

Index

 

PART I

Item 1.

 

Business

  

1

Item 1A.

 

Risk Factors

  

11

Item 1B.

 

Unresolved Staff Comments

  

24

Item 2.

 

Properties

  

24

Item 3.

 

Legal Proceedings

  

24

Item 4.

 

Mine Safety Disclosures

  

24

PART II

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  

25

Item 6.

 

Selected Financial Data

  

27

Item 7.

 

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

  

28

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

  

39

Item 8.

 

Financial Statements and Supplementary Data

  

41

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  

66

Item 9A.

 

Controls and Procedures

  

66

Item 9B.

 

Other Information

  

66

PART III

Item 10.

 

Directors, Executive Officers and Corporate Governance

  

67

Item 11.

 

Executive Compensation

  

67

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  

67

Item 13.

 

Certain Relationships, Related Transactions, and Director Independence

  

67

Item 14.

 

Principal Accounting Fees and Services

  

67

PART IV

Item 15.

 

Exhibits, Financial Statement Schedules

  

68

 

 

Signatures

  

70

 

 

 


This Annual Report on Form 10-K (“Annual Report”) contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they prove incorrect or never materialize, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The forward-looking statements are contained principally in Part I, Item 1“Business,” Item 1A“Risk Factors” and Item 7“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but may also appear in other areas of this Annual Report. Such forward-looking statements include any expectation of earnings, revenues or other financial items; any statements regarding our ability to successfully complete our proposed merger transaction with Suzhou Dongshan Precision Manufacturing Co., Ltd.; the use of working capital, anticipated growth strategies and the development of and applications for new technology; factors that may affect our operating results; statements concerning our customers and diversification of our products or customer base; statements concerning new products or services; statements related to future economic conditions or performance; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as “anticipate,” “believe,” “should,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” or “plan,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed under Part I, Item 1A “Risk Factors” in this Annual Report, and such forward-looking statements are qualified in their entirety by reference to such risk factors. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. New factors emerge from time to time, and their emergence is impossible for us to predict. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

Part I

 

Item 1.

Business

Change in Fiscal Year End

On August 4, 2014, our Board of Directors approved a change in our fiscal year end from September 30 to December 31. The fiscal periods presented in this Annual Report include the fiscal year ended December 31, 2015, the three months ended December 31, 2014 and the fiscal years ended September 30, 2014 and 2013.

Proposed Acquisition by DSBJ

On February 4, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Suzhou Dongshan Precision Manufacturing Co., Ltd., a company organized under the laws of the People’s Republic of China (“DSBJ”), and Dragon Electronix Merger Sub Inc., a Delaware corporation and indirect wholly owned subsidiary of DSBJ (“Merger Sub”), under which Merger Sub will be merged with and into our company (the “Merger”), with us continuing after the Merger as the surviving corporation and indirect subsidiary of DSBJ. The Merger Agreement has been unanimously approved by our Board of Directors.

Under the terms of the Merger Agreement, our stockholders will receive $23.95 in cash for each share of common stock held at the close of the transaction. The proposed transaction values our equity at approximately $610.0 million, on a fully diluted basis. Consummation of the Merger is expected to occur in the third quarter of 2016 and is subject to approval by our stockholders and DSBJ’s stockholders, certain regulatory approvals and other closing conditions.

Additional information about the Merger and the terms of the Merger Agreement can be found in the Current Report on Form 8-K filed by us under Item 1.01 of that Form 8-K on February 4, 2016, including the full text of the Merger Agreement filed as Exhibit 2.1 to that Form 8-K. Our stockholders are urged to read all relevant documents filed with the Securities and Exchange Commission (“SEC”) because they contain important information about the proposed transaction. Investors and security holders are able to obtain the documents free of charge at the SEC’s web site, www.sec.gov, or for free from us by contacting (949) 453-6800 or through the investor relations section of our website (www.mflex.com).

Overview

We are one of the world’s largest producers of flexible printed circuits and flexible circuit assemblies. With facilities in Irvine, California; Suzhou, China; and Singapore, we offer a global service and support base for the sale, design and manufacture of flexible interconnect solutions.

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 seamless,

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integrated flexible printed circuit and assembly solutions from design and application engineering and prototyping through high-volume fabrication, component assembly and testing. We primarily target our solutions to the consumer electronics market, but we also provide solutions to other markets, such as the medical and automotive industries. Current examples of applications for our products include smartphones, tablets, computer/data storage, portable bar code scanners, personal computers, wearables, connected home devices, medical and automotive industry applications 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. Our business model, and the way we approach the markets which we serve, is based on value-added engineering and providing technology solutions that enable our customers to achieve a desired size, shape, weight and functionality for their portable electronic devices or other consumer products. We currently rely on a core mobility end-market for nearly all of our net sales. We believe this dynamic market offers fewer, but larger, opportunities than other electronic markets. Through early involvement with our customers and potential customers, we look to assist in the development of new designs and processes for the manufacturing of their products and, through our value-added assembly of components on flex, we seek to provide an integrated flexible printed circuit and assembly solution that fits with their supply chain needs. This approach may or may not always fit with the operating practices of all OEMs, and changes in the market and our customers’ needs can occur with little to no warning. Our ability to add to our customer base may have a direct impact on the relative percentage of each customer’s net sales to total net sales during any reporting period. Our business has been subject to seasonality, primarily due to the mobile device and consumer electronics markets, which historically exhibit strength generally in the two quarters leading up to the end of the calendar year in connection with the holiday season.

We are a party to contracts with a number of our customers. These contracts generally provide that we will manufacture products for the customers against purchase orders delivered by the customers or their subcontractors. We also conduct business with certain customers on a purchase order basis. The contracts generally do not contain any minimum purchase obligations, but do generally contain terms regarding timing of payment, product delivery, product quality controls, confidentiality, ownership of intellectual property and indemnification. Additional terms may also be included in specific purchase orders. Some of these contracts also contain provisions that require us to pay substantial damages if we fail to perform our obligations under the contracts.

We typically have numerous programs in production at any particular time, the life cycle for which is typically around one year. The price for each program is subject to intense negotiations and is 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 third-party components necessary for the program. Our profitability for each particular program is dependent upon how we perform against our targets and the assumptions on which we base our prices. In addition, our customers generally require that the price on a particular program decrease as the program matures. Our volumes, margins and yields also vary from program to program and, because of the 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 experience an increase in volume 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, that higher volume may or may not result in an increase in overall profitability. In the mobility market, the first six months of production are the most critical in terms of growth and profitability opportunities.

Our success has been due, in part, to our early supplier involvement, which allows our engineers to gain an understanding of the application and our customers’ specific circuit needs. This knowledge allows our engineers to utilize their expertise in flex circuit design and assist in the selection of materials and technologies to provide a high quality and cost effective product. Our vertically integrated flex circuit manufacturing, assembly and tooling operations have allowed us to offer superior lead time support to facilitate customer requirements. We believe the early involvement and knowledge of the specific customer flexible assemblies and designs of these assemblies allows us to ramp production at a very fast pace, creating a competitive advantage. The speed and certainty of the production ramp is critical to our customers who view time to market as a key success factor.

We were incorporated as Multi-Fineline Electronix, Inc. in California in October 1984. In connection with our initial public offering, we reincorporated as Multi-Fineline Electronix, Inc. in Delaware on June 4, 2004. References in this Annual Report to “we,” “our,” “us,” the “Company” and “MFLEX” refer to Multi-Fineline Electronix, Inc. and our consolidated subsidiaries: three located in the People’s Republic of 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”); except where it is made clear that the term means only the parent company.

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Industry Background

We primarily target our solutions to OEMs and EMS providers in the electronics market. We believe that the global market for flexible printed circuits (“FPCs”) will continue to grow over the coming years as consumers continue to demand smaller, more functional, portable electronic devices. Given the inherent design and cost advantages of FPCs, we believe they will remain a favored solution for electronics OEMs that strive to increase the features and functionality of electronic devices while optimizing the size, shape and weight of such devices.

Historically, electronics manufacturers have relied upon rigid printed circuit boards (“PCBs”) to provide the electrical interconnections between the components in electronics devices. A PCB consists of an array of copper wires sandwiched between layers of fiberglass that then has multiple microprocessors, transistors and other components attached to its surface. Much like PCBs, a flexible printed circuit assembly (“FPCA”) is a similarly-produced array of copper wires with the same types of components mounted to its surface. However, FPCAs contain thinner, more flexible and lighter, polymer-based materials in place of the bulkier fiberglass, epoxy-based material in a PCB.

PCBs are inherently thick and cannot bend or twist and they are relatively heavy. In contrast, a thinner, lighter FPC can bend, fold over itself and twist to better fit into smaller, non-linear spaces in microprocessors and other electrical components such as connectors, switches, resistors, capacitors and light-emitting devices. In the past, FPC technologies and material sets were reserved for specialty uses, as they were difficult and costly to produce. Today, they are used in devices where size and form factor are important considerations, such as smartphones and tablets.

Having found innovative ways to produce a wide range of FPCs in mass volumes at increasingly affordable prices, companies began offering consumer electronics manufacturers new FPC and FPCA based materials and technologies that enabled design engineers to innovate interconnect and packaging solutions for smaller and increasingly complex electronic devices.

In addition to these functional advantages, we provide engineering and manufacturing support for assembling components onto flexible circuits to enable OEMs to design and construct modular components that can be incorporated into the final product. The integration of the circuit fabrication and component assembly “under one roof” reduces the complexity of the assembly of the final product, simplifies the supply chain for procuring FPCAs and reduces the overall manufacturing costs to produce a device.

Looking forward, we believe that the overall market for FPCs and FPCAs is poised for growth over the next several years as a result of favorable technological and market developments, including:

 

Increased Portability and Complexity of Electronic Devices. As electronic devices become more functional, complex and compact, product size and electrical performance become the major design factors. From an engineering standpoint, FPCs possess an inherently better overall interconnect solution than PCBs. The reasons are that the materials used in building FPCs offer good electrical signal integrity and better heat dissipation. The polymer-based FPC materials offer better physical and electrical properties than the epoxy-based materials in PCBs. As a result, the electronics industry is increasingly relying upon FPCs and FPCAs to meets its increasingly demanding design needs.

 

Outsourcing. Due to the increasing complexity and miniaturization of smartphones, tablets and other mobile devices, we believe electronics companies will continue to rely heavily upon outsourcing to technically-qualified, strategically-located manufacturing partners to provide integrated, end-to-end flexible printed circuit and component assembly solutions. By employing end-to-end manufacturers with full-service FPCA design and application engineering, prototyping, and competitive high-volume production services, electronics companies are able to reduce time-to-market, avoid product delays, reduce manufacturing costs, minimize logistical problems, and focus on their core competencies.

 

Expanding Markets and Flexible Component Demand. Global demand for new and increasingly-complex mobile device and other consumer electronics products is driving the demand for more and increasingly-complex FPCAs. We believe that the application of flex assemblies is expanding and could result in the use of more flex assemblies per device than have been used in previous-generation product applications.

Competitive Strengths

We are a leading global provider of high-quality, technologically advanced, flexible printed circuit and component assembly solutions to the electronics industry. We believe the following capabilities differentiate us from our competitors and enable us to better serve our customers’ requirements:

 

Our End-to-End Solutions for Flexible Printed Circuit Applications. We provide seamless, efficient and integrated end-to-end FPC and FPCA solutions for our customers. This full-service, “under one roof,” offer includes design and application engineering, prototyping and high-volume manufacturing to turnkey component assembly and testing. By relying on a single provider early in the product development lifecycle for their flexible printed circuit requirements, our customers can

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benefit from a robust, customized product design and development process. This, in turn, frequently leads to production cost savings and quicker time to volume in the market. We believe our seamless, integrated, end-to-end mass production solution, together with our expertise and manufacturing capabilities, provides us with a competitive advantage that our customers can leverage to meet their global production requirements.

 

Our Design and Application Engineering Expertise. We assist customers at the earliest stages of product development and provide engineering expertise and a knowledge base of product applications. This enables us to gain intimate knowledge of our customers’ interconnect and packaging design challenges and to provide value-added engineering support. Our history of successful early design-participation fosters strong relationships with our customers, often resulting in their reliance on our engineering expertise and support for the life of a specific application, and subsequent generations of similar applications. We continue to enhance our design and application engineering capabilities in China to best position us to provide an integrated end-to-end solution to the electronics markets in China and other parts of Asia.

 

Our Manufacturing Capabilities. Our China manufacturing facilities are organized to ramp production of new products from the prototype stage to high volume, which allows us to cost-effectively deliver high-quality products that meet our customers’ time to market requirements. Our ongoing efforts to enhance our manufacturing facilities with technologically-advanced, automated manufacturing and handling machinery allows us to improve our product yields, streamline our customers’ supply chains, shorten our customers’ time to market and lower the overall costs of our products. While we believe our China manufacturing facilities benefit the Company, they do subject us to additional risks inherent in international business, including, among others, those detailed under Item 1A, “Risk Factors” and Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.”

 

Our Management Experience and Expertise. Our management team has been with us for many years. During that time, our executive management team has made a number of critical, strategic decisions to manage our business, including pursuing a strategy of deploying our design and application engineers at the early stages of a customer’s product designs; responding to the trend of OEM outsourcing; identifying China’s manufacturing capabilities; creating a seamless, integrated end-to-end solution in our China operations to serve the needs of multinational OEMs and EMS providers; and, in 2014, restructuring our operations to align our capacity with customer demand in order to maximize profitability.

Business Strategy

Our objective is to enhance our business by expanding our customer base and product offerings, while maintaining our core customers and flexible printed circuit and assembly capabilities. We plan to do this by strategically seeking opportunities with new customers and leveraging our core technologies of high-quality, technologically advanced, flexible printed circuits and assemblies. In order to maintain an optimum profitability, we strive to utilize our capacity with the most attractive customer orders available to us. To achieve our business objectives, we intend to continue our pursuit of the following strategies:

 

Provide an Integrated Solution to Our Customers. We intend to maintain our leadership in providing a complete end-to-end solution to our customers that includes design and application engineering, prototyping, high-volume manufacturing, materials acquisition, component assembly and testing.

 

Support the Development of Flexible Printed Circuit Technology for New Applications. We believe that flexible printed circuit technology provides a cost-effective solution to improving the functionality and packaging of electronic devices. We believe that the trend toward miniaturization has and will continue to drive the growth of flexible printed circuits in many new applications and devices in the future. To address these new opportunities, we will continue our efforts to research, develop and market new applications for flexible printed circuits and component assemblies. We believe that our design and application engineering and manufacturing capabilities, coupled with our flexible printed circuit assembly expertise, will enable us to effectively target additional high-volume flexible printed circuit applications in various markets of the electronics industry where functionality, size, shape and weight are primary drivers of product development.

 

Expand Our Existing Expertise in the Design and Manufacture of Flexible Printed Circuit Technology. By expanding our market share in existing markets and partnering with customers in the early stage design of their products, we strive to continue to expand our engineering and manufacturing expertise and capabilities for applications and functionality for electronic product packaging technology and to assist our customers in developing more efficient manufacturing processes for their products. We believe that we will be able to continue to capture market share in the sectors we serve and attract other companies from the electronics industry by utilizing our expertise in design and application engineering to expand product designs and applications for flexible printed circuit solutions in conjunction with our high-volume, cost-effective manufacturing capabilities.

 

Diversify Our Customer Base. We primarily serve the mobility market. Mobility refers to an overall end-market of portable devices that provide access to data (content) and applications that were previously confined to the desktop, server, cloud or living room. We leverage our internal sales force, comprised of design and application engineers, and our

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existing outside non-exclusive sales representatives to pursue new customers in the mobility market, as well as in other sectors of the electronics industry where mobility, functionality and packaging size dictate the need for flexible printed circuits and component assemblies, including the automotive market.

 

Increase Manufacturing Capabilities and Improve Manufacturing Processes. We continue to invest in advanced manufacturing, automation and engineering capabilities in China. By continuing to improve and expand these capabilities, we can offer our customers technologically advanced manufacturing processes for complex FPC fabrication in mass production volumes.

 

Increase Intellectual Property Content of Our Products. We are investing in advanced technologies and enhancing our research and development centers to be able to innovate and offer differentiated solutions to our customers. By offering differentiated capabilities, we hope to increase our gross margin percentage over time.

Products

Our design and application engineering expertise enables us to offer flexible printed circuit and value-added component assembly solutions for a wide range of electronic applications. We offer products in a broad range of sectors, including smartphones, tablets, computer/data storage, portable bar code scanners, personal computers, wearables, connected home devices, medical and automotive industry applications and other consumer electronic devices.

Flexible Printed Circuits. Flexible printed circuits, which consist of copper conductive patterns that have been etched or printed while affixed to flexible substrate materials such as polyimide or polyester, are used to provide connections between electronic components and as a substrate to support these electronic devices. The circuits are manufactured by subjecting the base materials to multiple processes, such as drilling, screening, photo imaging, etching, plating and finishing. We produce a wide range of flexible printed circuits, including single-sided, double-sided, multi-layer (with and without gaps between layers) and rigid-flex. Single-sided flexible printed circuits, which have an etched conductive pattern on one side of the substrate, are normally less costly and more flexible than double-sided flexible printed circuits because their construction consists of a single patterned conductor layer. Double-sided flexible printed circuits, which have conductive patterns or materials on both sides of the substrate that are interconnected by a drilled and copper-plated hole, can provide either more functionality than a single-sided flexible printed circuit by containing conductive patterns on both sides, or greater shielding of components against electromagnetic interference than a single-sided flexible printed circuit by covering one side of the circuit with a shielding material rather than a circuit pattern. Multi-layer and rigid-flex printed circuits, which consist of layers of circuitry that are stacked and then laminated, are used where the complexity of the design demands multiple layers of flexible printed circuitry. If some of the layers of circuitry are rigid printed circuit material, the product is known as a “rigid-flex” printed circuit. Gapped flexible printed circuits, which consist of layers of circuitry that are stacked and separated in some parts of the circuit, and laminated in other parts of the circuit, are used where the complexity of the design demands multiple layers of flexible printed circuitry but the flexibility of a single-sided flexible printed circuit in some parts of the circuit.

Flexible Printed Circuit Assemblies. Flexible printed circuits can be enhanced by attaching electronic components, such as connectors, switches, resistors, capacitors, light-emitting devices, integrated circuits, cameras, optical sensors and other microelectronic mechanical sensor (“MEMS”) devices to the circuit. The reliability of flexible printed circuit component assemblies is dependent upon proper assembly design and the use of appropriate fixtures. Connector selection is also important in determining the signal integrity of the overall assembly, a factor which is very important to devices that rely upon high system speed to function properly. We are one of the pioneers in attaching connectors and components to flexible printed circuits and have developed the expertise and technology to mount a full range of electronic devices, from ordinary passive components to advanced and sophisticated surface mount components.

Mechanical Integration of Flexible Printed Circuit Assemblies. Three dimensional packaging solutions for smartphones, tablets and other consumer electronic devices can be enhanced by integrating mechanical components (metal and plastic chassis using mechanical joining techniques compared to electronic assembly) onto flexible printed circuit assemblies.

Customers

Our customers include leading OEMs and EMS providers in a variety of sectors of the electronics industry. These sectors include smartphones, tablets, computer/data storage, portable bar code scanners, personal computers, wearables, connected home devices and other consumer electronic devices, and are primarily in what we refer to as the mobility market. Our expertise in flexible printed circuit design and component assembly enables us to assist our customers in resolving their design challenges through our design and assembly techniques, which can enhance the likelihood of us becoming the main provider for flexible printed circuits and component assembly included in that product. Achieving status as a main provider to an OEM for a high-volume program can enable us to build strong customer relationships with respect to existing products and any future product that requires the use of flexible printed circuits and component assemblies.

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We sell our products by first working with OEMs in the design of their programs. Assuming we get a “design win,” the OEM then informs us of the percentage of the program it intends to buy from us (our “allocation”), and instructs the EMS providers to purchase products from us based on this allocation to be incorporated into the OEM’s program. We then “tool-up” (design or buy equipment, materials and components) for the program based on a forecast from the OEM, and build the product based on the OEM’s forecast. Once the product is built, we typically ship it to hubs, where the EMS companies then pull the product when they need it to build for the OEM. Our relationships with EMS providers normally are directed by the OEMs. Therefore, it is typically the OEMs that negotiate product pricing and volumes directly with us, even though the purchase orders may come from the EMS providers. Our obligation is typically to keep a certain amount of product, based on the OEM’s forecast, in the hub. Although our product is built to the OEMs’ specifications and quality requirements, the EMS companies actually determine when to pull our product from the hubs, and also determine whether to pull our product, or the product of one of our competitors.

For the past several years, a substantial portion of our net sales has been derived from products that are incorporated into products manufactured by or on behalf of a limited number of key customers and their subcontractors. For the fiscal year ended December 31, 2015, approximately 85% of our net sales were to two customers in the aggregate. In addition, for the fiscal year ended December 31, 2015, the three months ended December 31, 2014 and the fiscal years ended September 30, 2014 and 2013, approximately 75%, 76%, 57% and 75%, respectively, of our net sales were to Apple Inc., inclusive of net sales made to its designated subcontractors, and 10%, 12%, 17% and 3%, respectively, of our net sales were to Beijing Xiaomi Technology Co., Ltd., inclusive of net sales made to its designated subcontractors.

Our results are highly dependent upon the success of our customers in the marketplace and our success in maintaining or growing our market share with them and new customers. Refer to Item 1A, “Risk Factors,” and in particular, the “Risks Related to Our Business” for more information about our reliance on our customers.

Our net sales fluctuate from quarter to quarter as a result of changes in demand for our products from our customer base. This may change depending upon market reception and sales volumes for any large OEM program, as at any given time, one OEM program can represent a significant part of our sales within a particular quarter. Our major customers provide consumer-related products that historically have experienced their highest sales activity during the two quarters leading up to the end of the calendar year in connection with the holiday season. As a result, we typically experience a decline in our first fiscal quarter sales as the holiday period ends. Our net sales and operating results have fluctuated significantly from period-to-period in the past and are likely to do so in the future.

Information regarding net sales based on the customer’s billing location by geographic area is summarized below:

 

 

Fiscal Year Ended

 

 

Three Months Ended

 

 

Fiscal Years Ended September 30,

 

 

December 31, 2015

 

 

December 31, 2014

 

 

2014

 

 

2013

 

United States

 

45

%

 

 

39

%

 

 

10

%

 

 

2

%

China

 

23

%

 

 

26

%

 

 

56

%

 

 

74

%

Hong Kong

 

7

%

 

 

12

%

 

 

22

%

 

 

17

%

Japan

 

13

%

 

 

18

%

 

 

7

%

 

 

1

%

Taiwan

 

10

%

 

 

5

%

 

 

3

%

 

 

0

%

Other

 

2

%

 

 

0

%

 

 

2

%

 

 

6

%

Total

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

Sales and Marketing

We sell our products primarily through our global sales and program management organizations who meet regularly with our customers and potential customers. The program management organizations provide electronic packaging solutions related to our products and enabling technologies that create customer differentiation and market advantage. Our market and product teams have successfully expanded our market penetration in each sector of the electronics industry that we targeted by leveraging our design and application engineers within each of these teams. We then design and manufacture our products to agreed-upon customer specifications.

As of December 31, 2015, our backlog, which constitutes customer orders placed with us but that have not yet shipped, was $142.4 million, which we expect to ship within the next 12 months. We cannot guarantee that our customers will not cancel any or all of the orders in our backlog and, in addition, our current backlog is not indicative of our future operating results.

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Technology

We are a global provider of single, double-sided, multi-layer and air-gapped flexible and rigid-flex printed circuit and component assemblies. We use proprietary processes and chemical recipes, which coupled with our innovative application engineering, design expertise and manufacturing experience, enables us to deliver high-unit volumes of complex flexible printed circuits and component assemblies at cost-effective yields.

Design Technology. The flexible printed circuits we manufacture are designed specifically for each application, frequently requiring significant joint design activities with the customer at the start of a project. We have developed design methodologies that solve difficult interconnection problems and save our customers time and money. We design and mass produce flexible printed circuits that range from single-sided circuits to more complex double-sided and multi-layer (with and without gaps between layers). We are continually investing in and improving our computer-based design tools to more quickly design new flexible printed circuits, enhance cooperative design and communication with our customers, and more closely integrate design and application engineering to our prototyping and manufacturing processes.

Circuit Fabrication Technology. We have extensive experience producing fine-line flexible printed circuits and have developed manufacturing processes that are designed to deliver high-unit volumes at cost-effective yields. In the flexible printed circuit industry, fine-line flexible printed circuits are easier to construct as the thickness of the copper decreases. However, as the thickness of the copper or insulation layers decrease, the cost of fabrication increases. We have developed a manufacturing process to plate in selective regions of the circuitry pattern, such as around the holes used to connect the two sides of a flexible printed circuit. In addition, the normal manufacturing technology, by itself, has been improved with new equipment which enables thicker, less expensive copper to be etched down precisely enough to form fine-line circuitry. A portion of the new equipment includes roll-to-roll capabilities that allow the handling of materials in a continuous web. The combination of these processes allows us to achieve finer patterns without a substantial increase in costs and with generally acceptable yields. We continually invest in computerization and automation of our circuit fabrication technology to enhance our performance and better track production costs, product yields and process times.

In addition to fine-line techniques, we have developed a proprietary process using lasers to drill very small diameter holes, known as micro-vias, for the connection of circuits on the reverse side of the substrate. The combination of multi-layer flexible circuits with fine-lines and micro-vias are part of the new high-density interconnect technology that is one of our competitive strengths.

Component Assembly and Test Technology. Our component assembly and test technology involve the arrangement of the circuits on a panel to minimize material waste and facilitate requirements for component assembly, such as placing tooling holes, optical locators for vision-based machines, test points and pre-cut zones to allow part removal without compromising the integrity of the components. We assemble passive electrical and various mechanical components, including capacitors, resistors, integrated circuits, connectors, diodes and other devices to flexible printed circuits. We also perform advanced assembly of integrated circuit devices, as well as the functional testing of these flexible printed circuit component assemblies. Assembling these components directly onto the flexible printed circuit may enhance performance and reduce space, weight and cost. We continually invest in computerization and automation of our component assembly and test technology to enhance our performance and better track production costs, product yields and process times.

Intellectual Property

Our success will depend in part on our ability to protect our intellectual property. Our intellectual property relates to proprietary processes and know-how covering methods of designing and manufacturing flexible printed circuits, attaching components, process technology for circuit manufacturing, and embedded magnetics. We require our employees to enter into confidentiality agreements and assignment of invention agreements to protect our intellectual property. In addition, we consider filing patents on our inventions that are significant to our business, although none of our existing patents or patent applications pertain to inventions that are significant to our current business. We also pursue trademarks where applicable and appropriate.

In the future, we may encounter disputes over rights and obligations concerning intellectual property and we cannot provide assurance that we will prevail in any such intellectual property dispute.

Suppliers

Generally, we do not maintain a large surplus stock of raw materials or components for our products because the specific assemblies are uniquely applicable to the products we produce for our customers; therefore, we rely on third-party suppliers to provide these raw materials and components in a timely fashion and on commercially reasonable terms. We purchase raw circuit materials, process chemicals and various components from a limited number of outside sources. For components, we normally make short-term purchasing commitments to key suppliers for specific customer programs. These commitments are usually made for three to 12-month

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periods. These suppliers agree to cooperate with us in engineering activities, as required, and in some cases maintain a local inventory to provide shorter lead times and reduced inventory levels for us. In most cases, suppliers are approved and often dictated by our customers. For process chemicals, certain copper and polyimide laminate materials and certain specialty chemicals used in our manufacturing process, we rely on a limited number of key suppliers. Alternate chemical products are available from other sources, but process chemical changes often require approval by our customers and requalification of the processes, which could take weeks or months to complete. We seek to mitigate these risks by identifying stable companies with leading technology and delivery capabilities and by attempting to qualify at least two suppliers for all critical raw materials and components.

We, or our customers, may not be able to obtain the components or flex materials that are required for our customers’ programs, which in turn could forestall, delay, or halt our production or our customers’ programs. We expect that delays may occur in future periods for a variety of reasons, including, but not limited to, natural disasters and the effect of conflict minerals regulations and customer requirements. Furthermore, the supply of certain precious metals required for our products is limited, and our suppliers could lose their export or import licenses on materials we require, any of which could limit or halt our ability to manufacture our products. We may not be successful in managing any shortage of raw materials or components that we may experience in the future, which could adversely affect our relationships with our customers and result in a decrease in our net sales. Component shortages could also increase our cost of goods sold because we may be required to pay higher prices for components in short supply. In addition, suppliers could go out of business, discontinue the supply of key materials, or consider us too small of a customer to sell to directly, and could require us to buy through distributors, increasing the cost of such components to us. There are certain chemical materials used in our processes that are under review by regulatory authorities of various countries for their use in the fabrication processes for FPCs or FPCAs. If such materials are banned, or if we are prohibited from importing such materials into the countries in which we operate, we will be forced to find alternatives, which may or may not exist, or may not be acceptable for use by our customers.

Furthermore, we are increasingly being required to purchase materials and components before our customers are contractually committed to an order. Refer to the risk factor entitled “Our customers have in the past and likely will continue to cancel their orders, change production quantities, delay production or qualify additional vendors, any of which could reduce our net sales, increase our expenses and/or cause us to write down inventory” in Item 1A, “Risk Factors” for more information.

Competition

The flexible printed circuit market is extremely competitive, with a variety of large and small companies offering design and manufacturing services. The flexible printed circuit market is differentiated by customers, applications and geography, with each niche requiring specific combinations of complex packaging and interconnection. We believe that our ability to offer an integrated, end-to-end flexible printed circuit solution has enabled us to compete favorably with respect to design capabilities; product performance, reliability and consistency; customer and application support; and resources, equipment and expertise in component assembly and integration of mechanical components including MEMS devices on flexible printed circuits.

We compete on a global level with a number of leading Asian providers, such as Nippon Mektron Ltd., Interflex Co. Ltd., Zhen Ding Technology Holding Ltd., HI-P (Shanghai) Technology Co. Ltd., Career Technology (MFG) Co. Ltd., Flexium Interconnect, Inc., Sumitomo Electric Industries Ltd., and Fujikura Ltd. We expect others to enter the market in the Asian region because of government subsidies and lower labor rates available there.

We believe that our technology leadership and capabilities in designing and manufacturing flexible printed circuits component assemblies and module assemblies have enabled us to build strong partnerships and customer relationships with many companies. We also believe that customers typically rely upon a limited number of vendors’ designs for the life of specific applications and, to the extent possible, subsequent generations of similar applications. Accordingly, it is difficult to achieve significant sales to a particular customer for any application once a different vendor has been selected to design and manufacture a specific flexible printed circuit. Any expansion of existing products or services could expose us to new competition. In addition, our competitors may devote significantly greater amounts of their financial, technical and other resources to market, develop and adopt competitive products, and those efforts may materially and adversely affect our market position. Moreover, competitors may offer more attractive product pricing or financing terms than we do as a means of gaining access to the markets in which we compete.

Employees

As of December 31, 2015, we employed approximately 5,560 full-time employees, of which approximately 44 were in the United States, approximately 5,502 were in China and approximately 14 were in other locations. We also employed approximately 1,610 contract employees in China although not all of these contract employees work a full-time work schedule.

We do not have employment agreements with any of our executive officers; however, we have entered into employment agreements with all of our employees in China. In general, these employment agreements provide for a three-year term and can be

8


renewed for a one, two or three-year term. Starting in 2008, the employment agreements for employees in China are non-terminable by us once they are renewed for the third time.

A trade union was established at MFC on November 10, 2011. On that same day, an employee union charter was unanimously passed, a union committee and audit committee were elected by the employee representatives and an election of union officials was held. The tenure of union officials and committee members is three years. We consider our relationship with the trade union to be good.

Environmental Controls

Flexible printed circuit manufacturing requires the use of chemicals. As a result, we are subject to a variety of environmental laws relating to the storage, discharge, handling, emission, generation, manufacture, use and disposal of chemicals, solid and hazardous waste and other toxic and hazardous materials used to manufacture our products in China. Given the extensive regulatory environment surrounding the use of hazardous materials and the uncertainties associated with any occurrence of environmental contamination, there can be no assurance that the costs of compliance or any alleged violations of applicable regulatory requirement, as well as any required remediation in the event of an environmental contamination, will not harm our business, financial condition or results of operations.

We believe we are operating our facilities in material compliance with existing environmental laws and regulations. However, we cannot predict the nature, scope or effect of legislation or regulatory requirements that could be imposed or how existing or future laws or regulations will be administered or interpreted. Compliance with more stringent laws or regulations, more vigorous enforcement policies of regulatory agencies, or significant penalties could require substantial expenditures by us, cause us to lose manufacturing capacity (which could cause us to be unable to meet our customers’ demand), or could otherwise harm our business, results of operations and financial condition. However, at this time, we do not anticipate any material amount of environmental-related capital expenditures through the end of 2016.

Executive Officers of the Registrant

The following table sets forth information about our executive officers as of January 31, 2016:

 

Name

 

Age

 

Position(s)

Reza Meshgin

 

52

 

President and Chief Executive Officer

Thomas Kampfer

 

52

 

Executive Vice President and Chief Financial Officer

Thomas Lee

 

56

 

Executive Vice President of Business Development

Christine Besnard

 

45

 

Executive Vice President, General Counsel and Secretary

Lance Jin

 

50

 

Executive Vice President and Managing Director of China Operations

 

Reza Meshgin joined us in June 1989, assumed his current position as our President and Chief Executive Officer in March 2008 and was elected to the Board of Directors in April 2008. Prior to his current role, Mr. Meshgin served as our President and Chief Operating Officer from January 2003 through February 2008, was Vice President and General Manager from May 2002 through December 2003, and prior to that time was our Engineering Supervisor, Application Engineering Manager, and Director of Engineering and Telecommunications Division Manager. Mr. Meshgin holds a B.S. in Electrical Engineering from Wichita State University and an M.B.A. from University of California at Irvine. Mr. Meshgin holds the following positions at our wholly owned subsidiaries: (a) Chairman of the board of directors for MFCI, MFLEX Singapore, and MFM, (b) Director for MFLEX, MNE, MFC and MFLEX Chengdu, (c) Chief Executive Officer and President at MFCI, MFLEX Singapore, MFC, MFLEX Chengdu, MKR, MFE and MFM, (d) Executive Chairman at MFE and (e) Representative Director for MKR.

Thomas Kampfer joined us as Chief Financial Officer and Executive Vice President in June 2015. Prior to joining us, Mr. Kampfer served from February 2012 to June 2015 as President of CohuHD, formerly a division of Cohu, Inc., which was divested and acquired by Costar Technologies, Inc. in June 2014. Prior to that, Mr. Kampfer served as President and Chief Executive Officer of H2O Audio, Inc., a venture-backed startup, from 2010 to 2012. Previously, Mr. Kampfer was President and Chief Operating Officer of Iomega Corporation, a publicly traded company specializing in data storage products. During his tenure at Iomega from 2001 to 2009, Mr. Kampfer held a variety of other executive positions, including Chief Financial Officer; Executive Vice President, Business Solutions; Vice President, Corporate Development; and General Counsel and Secretary. Mr. Kampfer holds a B.S. in Industrial Engineering from Purdue University and a Juris Doctor from Georgetown University Law Center. Mr. Kampfer holds the following positions at our wholly owned subsidiaries: (a) Director for MFCI, MFLEX Singapore, MFC, MFLEX Chengdu, MFM, MKR, MNE and MFE, (b) Chief Financial Officer at MFCI, MFLEX Singapore, MFM, MKR and MFE, (c) Executive Vice President of MFE and (d) Legal Representative for MFLEX Singapore in China for our two Chinese subsidiaries.

9


Thomas Lee joined us in October 1986 as our Supervisor of Photo Department and subsequently served as our Manufacturing Manager and Director of Operations from May 1995 to May 2002. Mr. Lee served as our Executive Vice President of Global Operations from May 2002 until March 2011, and as our Executive Vice President of Operations-Program Management from March 2011 until November 2012, when he transitioned to the position of Executive Vice President of Operations. In June 2014, Mr. Lee transitioned to the role of Executive Vice President, Business Development. Prior to joining us, Mr. Lee served as a Mechanical Engineer at the Agricultural Corporation in Burma. Mr. Lee holds a B.E. in Mechanical Engineering from the Rangoon Institute of Technology in Burma. Mr. Lee also holds the following positions at our wholly owned subsidiaries: (a) Executive Vice President at MFLEX Singapore and (b) Executive Vice President at MKR and MFE.

Christine Besnard joined us as General Counsel in August 2004, assumed the role of Secretary in March 2005, was named Vice President in March 2006 and Executive Vice President in March 2011. Prior to joining us, Ms. Besnard was Senior Corporate Counsel at Sage Software, Inc., from August 2000 to July 2004, and a Corporate Securities Associate at Pillsbury, Madison & Sutro LLP. Ms. Besnard holds a Bachelor’s Degree in Political Science from San Diego State University and a Juris Doctor from the University of Southern California Law Center. She was admitted to the California State Bar in 1997. Ms. Besnard holds the following positions at our wholly owned subsidiaries: (a) Director for MFCI, MFC, MFLEX Chengdu, MFM, MKR and MFE and (b) Secretary at MFCI.

Lance Jin joined us in May 1995 and since that time has held a variety of positions, including Director of Business Development, Telecommunications Division Manager, Program Manager and Application Engineer. Mr. Jin was appointed as our Vice President and Managing Director, Operations in October 2008, as our Executive Vice President and Managing Director of MFLEX China in March 2011 and he transitioned to Executive Vice President of Business Development in October 2012. In June 2014, Mr. Jin transitioned back to the role of Executive Vice President and Managing Director of China Operations. Prior to joining MFLEX, Mr. Jin was responsible for business development at the China National Import/Export Corporation. Mr. Jin holds a Bachelor’s Degree in Optical Engineering from ZheJiang University in China and a Master’s of Science in Optics and Fine Mechanics from the China Academy of Science. Mr. Jin has also received a Master’s Degree in Business Administration from National University in San Diego. Mr. Jin also holds the following positions at our wholly owned subsidiaries: (a) Executive Vice President of MSG and MFE, (b) Legal Representative and General Manager for MFC and MFLEX Chengdu and (c) Chairman of the Board of Directors for MFC and MFLEX Chengdu.

Foreign and Domestic Operations and Geographic Data

Information regarding financial information about segments and financial data by geographic area is set forth in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 6 “Segment Information and Geographic Data.”

Available Information

We file reports with the SEC. We make available on our website under “Investor Relations,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such materials with or furnish them to the SEC. Our website address is www.mflex.com. Our website address is provided as an inactive textual reference only, and the contents of that website are not incorporated in or otherwise to be regarded as part of this report. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may also obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.

 

 

 

10


Item 1A.

Risk Factors

FACTORS THAT MAY AFFECT OUR OPERATING RESULTS

Our business, financial condition, operating results and cash flows can be impacted by a number of factors, including, but not limited to those set forth below, any of which could cause our results to be adversely impacted and could result in a decline in the value or loss of an investment in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business.

Risks Related to Our Proposed Acquisition by DSBJ

On February 4, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Suzhou Dongshan Precision Manufacturing Co., Ltd., a company organized under the laws of the People’s Republic of China (“DSBJ”), and Dragon Electronix Merger Sub Inc., a Delaware corporation and indirect wholly owned subsidiary of DSBJ (“Merger Sub”), under which Merger Sub will be merged with and into our company (the “Merger”), with us continuing after the Merger as the surviving corporation and indirect subsidiary of DSBJ. The Merger Agreement has been unanimously approved by our Board of Directors.

Under the terms of the Merger Agreement, our stockholders will receive $23.95 in cash for each share of common stock held at the close of the transaction.

Consummation of the Merger is expected to occur in the third quarter of 2016 and is subject to certain customary closing conditions including, among others, the absence of certain legal impediments; the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; antitrust regulatory approval in the People’s Republic of China; review and clearance by the Committee on Foreign Investment in the United States; certain other filings and approvals by governmental authorities in the People’s Republic of China; and approval by our stockholders and DSBJ’s stockholders.

The Merger Agreement contains certain termination rights for us and DSBJ. Upon termination of the Merger Agreement, we may be required to pay DSBJ a termination fee, or DSBJ may be required to pay us a reverse termination fee, depending on the circumstances under which the Merger Agreement is terminated. Concurrently with the execution of the Merger Agreement, DSBJ has deposited $20.0 million of the aggregate Merger consideration into an escrow account with Citibank, N.A., and has agreed to make a further deposit of $7.45 million within 21 calendar days of the execution of the Merger Agreement, in order to secure the reverse termination fee that may become payable by DSBJ to us.

We will be required to pay a termination fee of 3.0% of the aggregate Merger consideration to DSBJ if the Merger Agreement is terminated because, among other things, we enter into an alternative definitive agreement in respect of a superior proposal, our Board of Directors changes its recommendation to stockholders with respect to the Merger, or our stockholders do not approve the Merger.

DSBJ will be required to pay us a reverse termination fee of $27.45 million if the Merger Agreement is terminated because, among other things, the DSBJ’s shareholders do not approve the transaction, DSBJ fails to consummate the Merger after fulfilling its other closing conditions, or the Merger is not consummated solely because certain required regulatory approvals are not obtained within six months after the execution date of the Merger Agreement (which date may, in certain circumstances, be extended at DSBJ’s discretion for an additional three months only if additional time is needed to obtain certain required regulatory approvals and DSBJ deposits an additional $10.0 million into the escrow account, increasing the reverse termination fee to $37.45 million).

For additional information related to the Merger Agreement, please refer to the Current Report on Form 8-K filed with the SEC on February 4, 2016, including the full text of the Merger Agreement filed as Exhibit 2.1 to that Form 8-K.

The announcement and pendency of our proposed Merger with DSBJ could adversely affect our business, financial results and operations.

The announcement and pendency of the proposed acquisition of our company by DSBJ could cause disruptions in and create uncertainty surrounding our business, including affecting our relationships with our existing and future customers, suppliers and employees, which could have an adverse effect on our business, financial results and operations, regardless of whether the proposed Merger is completed. In particular, we could potentially lose important personnel as a result of the departure of employees who decide to pursue other opportunities in light of the proposed acquisition. We could also potentially lose customers or suppliers, and new customer or supplier contracts could be delayed or decreased. In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the transaction, which could adversely affect our business and results of operations.

We are also subject to restrictions on the conduct of our business prior to the consummation of the Merger as provided in the Merger Agreement, including, among other things, certain restrictions on our ability to acquire other businesses, sell, transfer or license our assets, amend our organizational documents, and incur indebtedness. These restrictions could result in our inability to

11


respond effectively to competitive pressures, industry developments and future opportunities and may otherwise harm our business, financial results and operations.

Failure to complete the proposed Merger could adversely affect our business and the market price of our common stock.

There is no assurance that the closing of the Merger will occur. Consummation of the Merger is subject to various conditions, including, among other things, the absence of certain legal impediments; the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; antitrust regulatory approval in the People’s Republic of China; review and clearance by the Committee on Foreign Investment in the United States; certain other filings and approvals by governmental authorities in the People’s Republic of China; and approval by our stockholders and DSBJ’s stockholders. We cannot predict with certainty whether and when any of these conditions will be satisfied. Although there is not a financing contingency in the Merger Agreement, the Merger could fail if DSBJ is unable to obtain the financing for the transaction, in which event we would likely be entitled to the reverse break-up fee. In addition, the Merger Agreement may be terminated under certain specified circumstances, including, but not limited to, a change in the recommendation of our Board of Directors or a termination of the Merger Agreement by us to enter into an agreement for a “superior proposal.” If the Merger is not consummated, our stock price will likely decline as our stock has recently traded based on the proposed per share price for the Merger. We will have incurred significant costs, including, among other things, the diversion of management resources, for which we will have received little or no benefit if the closing of the Merger does not occur. A failed transaction may result in negative publicity and a negative impression of us in the investment community. The occurrence of any of these events individually or in combination could have a material adverse effect on our results of operations and our stock price.

Risks Related to Our Business

We experienced a decline in revenue in each year from fiscal 2011 to 2014 , as well as incurred net losses in fiscal years 2014 and 2013, and we may incur net losses in future periods.

From fiscal year 2011 to fiscal year 2014, we experienced a decline in revenue from $831.6 million in 2011, to $818.9 million in 2012, to $787.6 million in 2013, to $633.2 million in 2014, resulting from a decline in sales to certain of our key customers. We believe this resulted from decline of business from one of our key customers, which has been undergoing a business transition, as well as loss of market share from another key customer. Although we are undertaking efforts to diversify our customer base and increase our sales, including to new customers, there can be no assurance that we will be successful in offsetting these losses with sales to other customers.

In addition, in fiscal years 2013 and 2014, we incurred a net loss of $65.5 million and $84.5 million, respectively, on a full year basis. These losses, among other things, adversely affect our stockholders’ equity and working capital. Although we have undergone strategic restructuring efforts and returned to profitability for the last six consecutive quarters, we cannot be certain that this return to profitability will be sustained, and our profitability may fluctuate from quarter to quarter based on a variety of factors, including capacity utilization, overhead absorption, yields and product mix.

We are, and have historically been, heavily dependent upon the smartphone, tablet and consumer electronics industries, and any downturn in these sectors may reduce our net sales.

For the fiscal year ended December 31, 2015, the three months ended December 31, 2014 and the fiscal years ended September 30, 2014 and 2013, approximately 73%, 72%, 71% and 71%, respectively, of our net sales were derived from sales to companies for products or services into our smartphone sector; approximately 12%, 18%, 16% and 21%, respectively, of our net sales derived from sales were to companies for products or services into our tablet sector; and approximately 13%, 6%, 7% and 7%, respectively, of our net sales were derived from sales to companies for products or services into our consumer electronics sector, which includes wearables. In general, these sectors are subject to economic cycles, changes in customer order patterns and periods of slowdown. Intense competition, relatively short product life cycles and significant fluctuations in product demand characterize these sectors, and these sectors are also generally subject to rapid technological change and product obsolescence. Fluctuations in demand for our products as a result of periods of slowdown in these markets (including the current economic downturn) or discontinuation of products or modifications developed in connection with next generation products could reduce our net sales.

We depend on a very limited number of key customers, and a limited number of programs from those customers, for significant portions of our net sales and if we lose business with any of these customers or if the products we are in are not commercially successful, our net sales could decline substantially.

For the past several years, a substantial portion of our net sales has been derived from products that are incorporated into programs manufactured by or on behalf of a very limited number of key customers and their subcontractors, including Apple Inc. In the fiscal year ended December 31, 2015, the three months ended December 31, 2014 and the fiscal years ended September 30, 2014 and 2013, our net sales to our largest customer represented approximately 75%, 76%, 57% and 75%, respectively, of our net sales. In

12


the fiscal year ended December 31, 2015, the three months ended December 31, 2014 and the fiscal years ended September 30, 2014 and 2013, our net sales to our second largest customer represented approximately 10%, 12%, 17% and 3%, respectively, of our net sales. In addition, a substantial portion of our sales to each customer is often tied to only one, or a small number of, programs. Our significant customer concentration increases the risk that our business terms with those customers may not be as favorable to us as those we might receive in a more competitive environment. The loss of a major customer or a significant reduction in sales to a major customer, including due to a penalty imposed by a customer, the loss of market share with the customers, the lack of commercial success by such customer or one or more of its products, a product failure of a customer’s program or limited flex content in a program, would seriously harm our business. Although we are continuing our efforts to reduce dependence on a limited number of customers, we may not be successful in such efforts.

We will have difficulty selling our products if customers do not design flexible printed circuits and assemblies into their product offerings or our customers’ product offerings are not commercially successful.

We sell our flexible printed circuits and assemblies directly or indirectly to OEMs, who include our flexible circuits and component assemblies in their product offerings. We must continue to design our products into our customers’ product offerings in order to remain competitive. However, our OEM customers may decide not to design flexible printed circuits into their product offerings (or may reduce the amount of flex in a product offering), or may procure flexible printed circuits from one of our competitors. If an OEM selects one of our competitors to provide a product instead of us or switches to alternative technologies developed or manufactured by one or more of our competitors, it becomes significantly more difficult for us to sell our products to that OEM because changing component providers after the initial production runs begin involves significant cost, time, effort and risk for the OEM. Even if an OEM designs one of our products into its product offering, the product may not be commercially successful or may experience product failures, we may not receive any orders from that manufacturer, the OEM may qualify additional vendors for the product or we could be undercut by a competitor’s pricing. Additionally, if an OEM selects one or more of our competitors, they may rely upon such competitors for the life of that specific offering and subsequent generations of similar offerings. Any of these events would result in fewer sales and reduced profits for us, and could adversely affect the accuracy of any forward-looking guidance we may give.

Changes in the products our customers buy from us can significantly affect our capacity, net sales and profitability.

We sell our flexible printed circuits and assemblies to a very limited number of customers, who typically purchase these products from us for numerous programs at any particular time. Customer programs differ in design and material content and our products’ prices and profitability are dependent on a wide variety of factors, including without limitation, expected volumes, assumed yields, material costs, actual yields and the amount of third-party components within the program. If we lose sales for a program that has higher material content, we may have to replace it with sales for a program that has lower material content, thus requiring additional capacity to generate the same amount of net sales. We may not have such capacity available, or it may not be economically advantageous to acquire such capacity, which could then result in lower net sales. Furthermore, if we were unable to increase our capacity to match our customers’ requests, we may lose existing business from such customer, in addition to losing future sales. In addition, if we were to utilize our capacity to increase sales of bare flex (flex without assembly), this could also generate lower net sales at potentially different (higher or lower) profitability levels.

Our customers often cancel their orders, change production quantities, delay production or qualify additional vendors, any of which can reduce our net sales, increase our expenses, affect our gross margin and/or cause us to write down inventory.

Substantially all of our sales are made on a purchase order basis, and we are not always able to predict with certainty the number of orders we will receive or the timing or magnitude of the orders. Our customers may cancel, change or delay product purchase orders, or suspend business with us altogether, with little or no advance notice to us. These changes may be for a variety of reasons, including changes in their prospects, the perception of the quality of our products, cancellation of orders as a penalty a customer decides to impose on us, the competitiveness of our pricing, the success of their products in the market, reliance on a new vendor and the overall economic forecast. The risk of this is particularly high during the ramp phase of our customers’ new programs, when their programs may not gain the traction they expected or they may decide to push out the timing on a program due to a variety of circumstances, including many that do not relate to us at all. In general, we do not have long-term contractual relationships with our customers that require them to order minimum quantities of our products, and our customers may decide to use another manufacturer or discontinue ordering from us in their discretion, potentially even after we have begun production on their program. In addition, many of our products are shipped to hubs, and we often have limited visibility and no control as to when our customers pull the inventory from the hub. We also have increased risks with respect to inventory control and potential inventory loss, and must rely on third parties for recordkeeping, when our products are shipped to a hub. In addition, whether products are pulled from our hub, or the hub of one of our competitors is not within our control, and the EMS companies who make such decisions may favor one of our competitors over us, particularly if such competitor is affiliated with the EMS company. As a result of these factors, we are not always able to forecast accurately the net sales that we will make in a given period, and our sales could drop precipitously at any time on little

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or no notice. Changes in orders can also result in layoffs and associated severance costs, which in any given financial period could materially adversely affect our financial results.

In addition, we are increasingly being required to purchase materials, components and equipment before a customer becomes contractually committed to an order so that we may timely deliver the expected order to the customer. We may increase our production capacity, working capital and overhead in expectation of orders that may never be placed, or, if placed, may be delayed, reduced or canceled. As a result, we may be unable to recover costs that we incur in anticipation of orders that are never placed or are cancelled without liability after placed, such as costs associated with purchased raw materials, components or equipment. Delayed, reduced or canceled orders could also result in write-offs of obsolete inventory. Although we estimate inventory reserve amounts, the amount reserved may not be sufficient for such write-offs. In addition, we may underutilize our manufacturing capacity if we decline other orders because we expect to use our capacity for orders that are later delayed, reduced or canceled.

Our industry is extremely competitive, and if we are unable to respond to competitive pressures we may lose sales and our market share could decline.

We compete primarily with large flexible printed circuit board manufacturers located throughout Asia, including Taiwan, China, Korea, Japan and Singapore. We believe that the number of companies producing flexible printed circuit boards has increased materially in recent years and may continue to increase. In addition, certain former competitors are in the process of re-instituting their flexible printed circuit production which will increase competition in our market. Certain EMS providers have developed or acquired their own flexible printed circuit manufacturing capabilities or have extensive experience in electronics assembly, and in the future may cease ordering products from us or even compete with us on OEM programs. In addition, the number of customers in the market has been decreasing through consolidation and otherwise and the smartphone and tablet markets continue to become more competitive in terms of pricing. Furthermore, many companies in our target customer base may move the design and manufacturing of their products to original design manufacturers in Asia. These factors, among others, make our industry extremely competitive. If we are not successful in addressing these competitive aspects of our business, we may not be able to grow or maintain our market share, net sales, or profitability.

Our products and their terms of sale are subject to various pressures from our customers, competitors and market forces, any of which could harm our gross profits.

Our selling prices are affected by changes in overall demand for our products, changes in the specific products our customers buy, pricing of competitors’ products, our manufacturing efficiency, product life cycles and general economic conditions. In addition, from time to time we may elect to reduce the price of certain products we produce in order to gain additional orders, or not lose orders, on a particular program. A typical life cycle for one of our products has our selling price decrease as the program matures. To offset price decreases during a product’s life cycle, we rely primarily on higher sales volume and improving our manufacturing yield and productivity to reduce a product’s cost. If we cannot reduce our manufacturing costs as prices decline during a product’s life cycle, or if we are required to pay damages to a customer due to a breach of contract or other claim, including due to quality or delivery issues, our cost of sales as a percentage of net sales may increase, which would harm our profitability and could affect our working capital levels.

In addition, our key customers and their subcontractors are able to exert significant pricing pressure on us and often require us to renegotiate the terms of our arrangements with them, including increasing or removing liability and indemnification thresholds and increasing the length of payment terms, among other terms. Increases in our labor costs, especially in China where we may have little or no advance notice of such increases, changes in contract terms and regular price reductions have historically resulted in lower gross margins for us and may continue to do so in future periods. Furthermore, our competitive position is dependent upon the yields and quality we are able to achieve on our products and our level of automation as compared to our competitors. We believe our competitors have been rapidly investing in more efficient and higher capability processes and automation, and if we do not match such investments, this could negatively impact our ability to compete on price, technology and capability. These trends and factors may harm our business and make it more difficult to compete effectively, and grow or maintain our net sales and profitability.

Significant product failures or safety concerns about our or our customers’ products could harm our reputation and our business.

Continued improvement in manufacturing capabilities, quality control, material costs and successful product testing capabilities are critical to our growth. Our efforts to monitor, develop, modify and implement stringent testing and manufacturing processes for our products may not be sufficient. If any flaw in the design, production, assembly or testing of our or our customers’ products were to occur or if our, or our customers’, products were believed to be unsafe, it could result in significant delays in product shipments by, or cancellation of orders or substantial penalties from, our customers and their customers, substantial refund, recall, repair or replacement costs, an increased return rate for our products, potential damage to our reputation, or potential lawsuits which could prove to be time consuming and costly. Pronouncements by the World Health Organization listing mobile phone use as possibly carcinogenic may

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affect our customers’ sales and in turn affect our sales to our customers. Because we normally provide a warranty for our products, a significant claim for damages related to a breach of warranty could materially affect our financial results.

Problems with manufacturing yields and/or our inability to ramp up production could impair our ability to meet customer demand for our products.

We could experience low manufacturing yields due to, among other things, design errors, manufacturing failures in new or existing products, the inexperience of new employees, component defects, or the learning curve experienced during the initial and ramp up stages of new product introduction. If we cannot achieve expected yields in the manufacture of our products, this could result in higher operating costs, which could result in higher per unit costs, reduced product availability and may subject us to substantial penalties by our customers. Reduced yields or an inability to successfully ramp up products can significantly harm our gross margins, resulting in lower profitability or even losses. In addition, if we were unable to ramp up our production in order to meet customer demand, whether due to yield or other issues, it would impair our ability to meet customer demand for our products, which could cause us to lose an order for such product, or lose the customer altogether, and our net sales and profitability would be negatively affected.

We must invest in and develop or adopt new technology and update our manufacturing processes in order to remain an attractive supplier to our customers, and we may not be able to do so successfully.

Our long-term strategy relies in part on timely adopting, developing and manufacturing technological advances and new processes to meet our customers’ needs and to expand into new markets outside the mobility market. However, any new technology or process adopted or developed by us may not meet the expectations of our existing or potential customers, or customers outside the mobility market may not select either our current or new process capabilities for their offerings. Customers could decide to switch to alternative technologies or materials, adopt new or competing industry standards with which our products are incompatible or fail to adopt standards with which our products are compatible. If we are unable to obtain customer qualifications for new processes or product features, cannot qualify our processes for high-volume production quantities or do not execute our operational and strategic plans for new developments in advanced technologies in a timely manner, our net sales or profitability may decrease. In addition, we may incur higher manufacturing costs in connection with new technology, materials, products or product features, as we may be required to replace, modify, design, build and install equipment, all of which would require additional capital expenditures. Also, due to financial constraints, we may not be able to invest in such new technology advancements and as a result, could fall behind our competition and/or not be able to satisfy our customers’ requirements, which could result in loss of sales and decreased profitability.

We must continue to be able to procure raw materials and components on commercially reasonable terms to manufacture our products profitably.

Generally we do not maintain a large surplus stock of raw materials or components for our products because the specific assemblies are uniquely applicable to the products we produce for our customers; therefore, we rely on third-party suppliers to provide these raw materials and components in a timely fashion and on commercially reasonable terms. In addition, we are often required by our customers to seek components from a limited number of suppliers that have been pre-qualified by the customer. We, or our customers, may not be able to obtain the components or flex materials that are required for our customers’ programs, which in turn could forestall, delay, or halt our production or our customers’ programs. Delays may occur in future periods for a variety of reasons, including but not limited to, natural disasters. Furthermore, the supply of certain precious metals required for our products is limited, and our suppliers could lose their export or import licenses on materials we require, any of which could limit or halt our ability to manufacture our products. We may not be successful in managing any shortage of raw materials or components that we may experience in the future, which could adversely affect our relationships with our customers and result in a decrease in our net sales or litigation by our customers against us. Component shortages could also increase our cost of goods sold because we may be required to pay higher prices for components in short supply. In addition, suppliers could go out of business, discontinue the supply of key materials, or consider us too small of a customer to sell to directly, and could require us to buy through distributors, increasing the cost of such components to us.

Our manufacturing and shipping costs may also be impacted by fluctuations in the cost of oil and gas. Any fluctuations in the supply or prices of these commodities could have an adverse effect on our profit margins and financial condition.

If we are unable to attract or retain personnel necessary to operate our business, our ability to develop and market our products successfully could be harmed.

We believe that our success is highly dependent on our current executive officers and management team. We do not have an employment contract with Reza Meshgin, our president and chief executive officer, or any of our other key personnel, and their knowledge of our business and industry would be extremely difficult to replace. The loss of any key employee or the inability to

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attract or retain qualified personnel, including engineers, sales and marketing personnel, management or finance personnel could delay the development and introduction of our products, harm our reputation or otherwise damage our business.

Furthermore, we have experienced very high employee turnover in our facilities in China, and we continue to experience difficulty in recruiting employees for these facilities. In addition, we are noting the signs of wage inflation, labor unrest and increased unionization in China and new regulations regarding the usage of contract workers, and expect these to be ongoing trends for the foreseeable future, which could cause employee issues, including work stoppages, excessive wage increases and increased activity of labor unions, at our China facilities. A large number of our employees works in our facilities in China, and our costs associated with hiring and retaining these employees have increased over the past several years. The high turnover rate, increasing wages, new regulations regarding contract workers, our difficulty in recruiting and retaining qualified employees and the other labor trends we are noting in China have resulted in an increase in our employee expenses, and a continuation of any of these trends could result in even higher costs or production disruptions or delays or the inability to ramp up production to meet increased customer orders, resulting in order cancellation, imposition of customer penalties if we were unable to timely deliver product or a negative impact on net sales and profits for us.

Our reliance on outside service providers may negatively impact our operations, products and customer satisfaction.

From time to time, we use the services of outside service vendors, or OSVs, for certain activities related to our business, including to provide manufacturing services within our facilities. Our reliance on these OSVs subjects us to a number of risks, including:

 

our inability to have the same level of control over the employees of the OSVs who are providing manufacturing services for us as we would have over our own employees, which could affect the pre-employment screening, loss control, efficiency, work flow and quality of work of our operations; and

 

regulations regarding the use of OSVs in China could cause us to be forced to stop using, or limit the percentage of our workforce provided by, OSVs with little or no notice, which could negatively affect our ability to produce product for our customers.

Our manufacturing capacity may be interrupted, limited or delayed if we cannot maintain sufficient utility sources in China.

The flexible printed circuit fabrication process requires a stable utility source. We have periodically experienced and expect to continue to experience insufficient supplies of electrical power from time to time, especially during the warmer summer months in China. In addition, China has instituted energy conservation regulations which ration the amount of electricity that may be used by enterprises such as ours. Although we have purchased a few generators and could lease additional generators, such generators do not produce sufficient electricity supply to run our manufacturing facilities and they are costly to operate. Power or steam interruptions, electricity shortages, the cost of diesel fuel to run our back-up generators or government intervention, particularly in the form of rationing, are factors that could restrict our access to electricity at our Chinese manufacturing facilities. Any such insufficient access to electricity, gas, steam or other utility could affect our ability to manufacture and related costs. Any such shortages could result in delays in our shipments to our customers and, potentially, the loss of customer orders and penalties from such customers for the delay.

Our global operations expose us to additional risk and uncertainties.

We have operations in a number of countries, including the United States, China and Singapore. Our global operations may be subject to risks that may limit our ability to operate our business. We manufacture the bulk of our products in China and sell our products globally, which exposes us to a number of risks which can arise from international trade transactions, local business practices and cultural considerations, including:

 

political unrest, terrorism and economic or financial instability;

 

restrictions on our ability to repatriate earnings;

 

unexpected changes in regulatory requirements and uncertainty related to developing legal and regulatory systems related to economic and business activities, real property ownership and application of contract rights;

 

nationalization programs that may be implemented by foreign governments;

 

import-export regulations;

 

difficulties in enforcing agreements and collecting receivables;

 

difficulties in ensuring compliance with the laws and regulations of multiple jurisdictions, including complying with local employment and overtime regulations, which regulations could affect our ability to quickly ramp production;

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difficulties in ensuring that health, safety, environmental and other working conditions are properly implemented and/or maintained by the local office, the failure of which could require us to close our factories on little or no notice;

 

changes in labor practices, including wage inflation, frequent and extremely high increases in the minimum wage, labor unrest and unionization policies;

 

limited intellectual property protection;

 

longer payment cycles by international customers;

 

currency exchange fluctuations;

 

inadequate local infrastructure and disruptions of service from utilities or telecommunications providers, including electricity shortages;

 

transportation delays and difficulties in managing international distribution channels;

 

difficulties in staffing foreign subsidiaries and in managing an expatriate workforce;

 

potentially adverse tax consequences;

 

differing employment practices and labor issues;

 

the occurrence of natural disasters, such as earthquakes, floods or other acts of force majeure; and

 

public health emergencies such as SARS, avian flu and swine flu.

We also face risks associated with currency exchange and convertibility, inflation and repatriation of earnings as a result of our foreign operations. In some countries, economic, monetary and regulatory factors could affect our ability to convert funds to U.S. dollars or move funds from accounts in these countries. We are also vulnerable to appreciation or depreciation of foreign currencies against the U.S. dollar. Although we have significant operations in Asia, a substantial portion of transactions are denominated in U.S. dollars, including approximately 90% of the total shipments made to foreign manufacturers during the fiscal year 2014. The remaining balance of our net sales is primarily denominated in Chinese Renminbi (“RMB”). As a result, as appreciation against the U.S. dollar increases, it will result in an increase in the cost of our business expenses in China. Further, downward fluctuations in the value of foreign currencies relative to the U.S. dollar may make our products less price competitive than local solutions. Although we have recently benefited from foreign exchange rates, unfavorable movements in the exchange rates could adversely impact our financial condition. From time to time, we may engage in currency hedging activities, but such activities may not be able to limit the impact or risks of currency fluctuations.

In addition, our activities in China are subject to administrative review and approval by various national and local agencies of China’s government. Given the changes occurring in China’s legal and regulatory structure, we may not be able to secure required governmental approval for our activities or facilities, or the government may not apply real property or contract rights in the same manner as one may expect in other jurisdictions.

From time to time, we restructure our manufacturing capacity, and we may have difficulty managing these changes.

From time to time, we engage in a number of manufacturing expansion and contraction projects, based on the then-current and forecasted needs of our business. In addition, from time to time, we engage in international restructuring efforts in order to better align our business functions with our international operations and transition to other lower cost locations in continuation of our cost reduction efforts.

Our management team may have difficulty managing our manufacturing capacity and transition projects or otherwise managing any growth or downsizing in our business that we may experience. Risks associated with right-sizing our manufacturing capacity may include those related to:

 

managing multiple, concurrent capacity expansion or reduction projects;

 

managing the reduction of employee headcount for facilities where we reduce or cease our activities;

 

accurately predicting any increases or decreases in demand for our products and managing our manufacturing capacity appropriately;

 

under-utilized capacity, particularly during the start-up phase of a new manufacturing facility and the effects on our gross margin of under-utilization;

 

managing increased employment costs and scrap rates often associated with periods of growth or contraction;

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implementing, integrating and improving operational and financial systems, procedures and controls, including our computer systems;

 

construction delays, equipment delays or shortages, labor shortages and disputes and production start-up problems; and

 

cost overruns and charges related to our expansion or contraction of activities.

Our management team may not be effective in restructuring our manufacturing facilities, and our systems, procedures and controls may not be adequate to support such changes in manufacturing capacity. Any inability to manage changes in our manufacturing capacity may harm our profitability and growth.

United Engineers Limited is deemed to have an indirect beneficial ownership in approximately 61% of our outstanding common stock and is able to exert influence over us and our major corporate decisions.

United Engineers Limited (“UEL”) through its subsidiaries (which include WBL Corporation Limited (“WBL”) as result of UEL’s stock acquisition of WBL in 2013) (collectively the “UE Group”) is deemed to indirectly beneficially own approximately 61% of our outstanding common stock. As a result, the UE Group has influence over the composition of our board of directors and our management, operations and potential significant corporate actions. The board or executive management composition of the UE Group could change, and such change could affect the strategic direction of the UE Group and the way the UE Group influences our corporate actions. For example, although we have put in place several measures designed to limit the amount of influence the UE Group has over us (including a staggered board of directors, not allowing action by written consent of our stockholders and not allowing stockholders to call a special meeting), for so long as the UE Group continues to control more than a majority of our outstanding common stock, it will have the ability to control who is elected to our board of directors each year, and ultimately can change out our entire board in three years. Furthermore, the strategic direction of the UE Group may influence how, when and if the WBL Entities (defined below) elect to sell its stock in us under the Registration Statement on Form S-3 that has been filed by the Company and declared effective by the SEC to cover such sales.

In addition, for so long as WBL or its subsidiaries (collectively, the “WBL Entities”) effectively own at least one-third of our voting stock, it has the ability, through a stockholders’ agreement with us, to approve the appointment of any chief executive officer or the issuance of securities that would reduce the WBL Entities’ effective ownership of us to a level that is below a majority of our outstanding shares of common stock, as determined on a fully diluted basis. As a result, the WBL Entities could preclude us from engaging in an acquisition or other strategic opportunity that we may want to pursue if such acquisition or opportunity require the issuance of our common stock. This concentration of ownership may also discourage, delay or prevent a change of control of our company, which could deprive our other stockholders of an opportunity to receive a premium for their stock as part of a sale of our company, could harm the market price of our common stock and could impede the growth of our company. The UE Group could also sell a controlling interest in us, or a portion of their interest, to a third party, including a participant in our industry, which could adversely affect our operations or our stock price.

The UE Group and its representatives on our board of directors may have interests that conflict with, or are different from, the interests of our other stockholders. These conflicts of interest could include potential competitive business activities, corporate opportunities, indemnity arrangements, debt covenants, sales or distributions by the UE Group of our common stock and the exercise by the UE Group of its ability to influence our management and affairs. In general, our certificate of incorporation does not contain any provision that is designed to facilitate resolution of actual or potential conflicts of interest. If any conflict of interest is not resolved in a manner favorable to our stockholders, it could adversely affect our operations and our stockholders’ interests may be substantially harmed.

UEL may be unable to vote its shares in us on certain matters that require stockholder approval without obtaining approval from the stockholders of UEL and/or regulatory approval and it is possible that such stockholders or the relevant regulators may not approve the proposed corporate action.

UEL’s ordinary shares are listed on the Singapore Securities Exchange Trading Limited (the “Singapore Exchange”). Under the rules of the Singapore Exchange, when we submit a matter for the approval of our stockholders, UEL may be required to obtain the approval of its own respective stockholders for such action before UEL can vote its shares with respect to our proposal or dispose of our shares of common stock. Examples of corporate actions we may seek to take that may require UEL to obtain its stockholders’ approval may include certain amendments of our certificate of incorporation, an acquisition or a sale of our assets the value of which exceeds certain prescribed thresholds under the rules of the Singapore Exchange, and certain issuances of our capital stock. In addition, we have been advised that if UEL is in an “offer period” under the rules of the Singapore Exchange (for example, if there was a potential offer by a third party for UEL’s outstanding shares), then during the pendency of such offer period UEL may be prevented from doing anything that would constitute “frustration of the offer” without first obtaining (a) either the approval of its stockholders or the potential offeror and (b) the Singapore Securities Industry Council (the “SIC”). Any material acquisition by, or

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disposition of, one of UEL’s subsidiaries, including us, could be considered a “frustration of the offer,” and thus, approval by UEL’s stockholders/potential offeror and the SIC could first be required for UEL.

To obtain stockholder approval, UEL must prepare a circular describing the proposal, submit it to the Singapore Exchange for review and send the circular to its stockholders, which may take several weeks or longer. In addition, UEL is required under its corporate rules to give its stockholders advance notice of the meeting. Consequently, if we need to obtain our stockholders’ approval for a matter which also requires the approval of the stockholders of UEL, the process of seeking stockholder approval from UEL may delay our proposed action and it is possible that the stockholders of UEL may not approve our proposed corporate action. It is also possible that we might not be able to establish a quorum at our stockholder meeting if UEL is unable to vote at the meeting if the approval of the stockholders of UEL is not obtained. The rules of the Singapore Exchange that govern WBL and UEL are subject to revision from time to time, and policy considerations may affect rule interpretation and application. It is possible that any change to or interpretation of existing or future rules may be more restrictive and complex than the existing rules and interpretations.

Our business requires significant investments in capital equipment, facilities and technological improvements, and we may not be able to obtain sufficient funds to make such capital expenditures.

To remain competitive we must continue to make significant investments in capital equipment, facilities and technological improvements. We expect that substantial capital may be required to expand our manufacturing capacity and fund working capital requirements in the future. In addition, we expect that new technology requirements may increase the capital intensity of our business. We may need to raise additional funds through further debt or equity financings in order to fund our anticipated growth and capital expenditures, and we may not be able to raise additional capital on reasonable terms, or at all, particularly given our recent financial performance. If we are unable to obtain sufficient capital in the future, we may have to curtail our capital expenditures. Any curtailment of our capital expenditures could result in a reduction in net sales, reduced quality of our products, increased manufacturing costs for our products, harm to our reputation, reduced manufacturing efficiencies or other harm to our business. Furthermore, our board has authorized a stock repurchase program, and may authorize additional stock repurchases in the future, and the funds we expend for any such repurchase may later be needed for the operation of our business.

In addition, under our stockholder agreement with the WBL Entities, approval from a “WBL Director” on our board (as defined in such agreement) is required for the issuance of securities that would reduce its effective ownership of us to below a majority of the outstanding shares of our common stock as determined on a fully diluted basis. If such approval is required for a proposed financing, it is possible that we may not be able to obtain the approval for the financing and we may not be able to complete the transaction, which could make it more difficult to obtain sufficient funds to operate and expand our business.

We are subject to covenants in our credit agreements and any failure to comply with such covenants could result in our being unable to borrow under the agreements and other negative consequences.

Our credit agreements contain customary covenants. There can be no assurance that we will be able to comply with any borrowing conditions or other covenants in our current or future credit agreements. Our failure to comply with these covenants could cause us to be unable to borrow under the agreements and may constitute an event of default which, if not cured or waived, could result in the acceleration of the maturity of any indebtedness then outstanding under that, or other, credit agreements, which would require us to pay all amounts outstanding. Due to our cash and cash equivalent position and the fact that we have no long-term borrowings currently outstanding under our lines, we do not currently anticipate that our failure to comply with any of the covenants under our credit lines would have a significant impact on our ability to meet our financial obligations in the near term. Termination of one of our credit lines because of a failure to comply with such covenants, however, would be a disclosable event and may be perceived negatively. Such perception could adversely affect the market price for our common stock and our ability to obtain financing in the future.

Tax positions we have taken may be challenged and we are subject to the risk of changing income tax rates and laws.

From time to time, we may be subject to various types of tax audits, during which tax positions we have taken may be challenged and overturned. If this were to occur, our tax rates could significantly increase and we may be required to pay significant back taxes, interests and/or penalties. The outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income tax in the period such resolution occurs. Any significant proposed adjustments could have a material adverse effect on our results of operations, cash flows and financial position if not resolved favorably.

In addition, a change in tax laws, treaties or regulations, or their interpretation, of any country in which we operate could result in a higher tax rate. For example, there has been increased scrutiny by the U.S. government on tax positions taken, and during February 2015, the United States Department of the Treasury issued a high-level outline of proposed modifications to international tax

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laws for the fiscal year 2016. If any of these, or similar, proposals are passed, our statements of financial position and results of operations could be negatively impacted.

If we fail to secure or protect our intellectual property rights, competitors may be able to use our technologies, which could weaken our competitive position and harm our business.

We rely primarily on trade secrets and confidentiality procedures relating to our manufacturing processes to protect our proprietary rights. Despite our efforts, these measures can only provide limited protection. Unauthorized third parties may try to copy or reverse engineer portions of our products or otherwise obtain and use our intellectual property. If we fail to protect our proprietary rights adequately, our competitors could offer similar products using processes or technologies developed by us, potentially harming our competitive position. In addition, other parties may independently develop similar or competing technologies.

We also rely on patent protection for some of our intellectual property. Our patents may be expensive to obtain and there is no guarantee that either our current or future patents will provide us with any competitive advantages. A third party may challenge the validity of our patents, or circumvent our patents by developing competing products based on technology that does not infringe our patents. Further, patent protection is not available at all in certain countries and some countries that do allow registration of patents do not provide meaningful redress for patent violations. As a result, protecting intellectual property in those countries is difficult, and competitors could sell products in those countries that have functions and features that would otherwise infringe on our intellectual property. If we fail to protect our intellectual property rights adequately, our competitors may gain access to our technology and our business may be harmed.

We may be sued by third parties for alleged infringement of their proprietary rights.

From time to time, we have received, and expect to continue to receive, notices of claims of infringement, misappropriation or misuse of other parties’ proprietary rights. We could also be subject to claims arising from the allocation of intellectual property rights among us and our customers. Any claims brought against us or our customers, with or without merit, could be time-consuming and expensive to litigate or settle, and could divert management attention away from our business plan. Adverse determinations in litigation could subject us to significant liability and could result in the loss of our proprietary rights. A successful lawsuit against us could also force us to cease selling or require us to redesign any products or marks that incorporate the infringed intellectual property. In addition, we could be required to seek a license from the holder of the intellectual property to use the infringed technology, and it is possible that we may not be able to obtain a license on reasonable terms, or at all. If we fail to develop a non-infringing technology on a timely basis or to license the infringed technology on acceptable terms, our business, financial condition and results of operations could be harmed.

Complying with environmental laws and regulations or the environmental policies of our customers may increase our costs and reduce our profitability, and constrain our ability to expand in the locations where we current manufacture.

We are subject to a variety of environmental laws and regulations relating to the storage, discharge, handling, emission, generation, manufacture, use and disposal of chemicals, solid and hazardous waste and other toxic and hazardous materials used in the manufacture of flexible printed circuits and component assemblies in our facilities in the United States, Europe and Asia. In addition, certain of our customers have, or in the future may have, environmental policies with which we are required to comply that are more stringent than applicable laws and regulations. For example, certain of our customers are requesting that we voluntarily disclose data regarding our environmental discharge with the Institute of Public and Environmental Affairs (“IPE”), which is a non-governmental organization in China. A significant portion of our manufacturing operations are located in China, where we are subject to constantly evolving environmental regulation, including its revised Environmental Protection Law, effective January 1, 2015, and where certain jurisdictions have restricted granting additional licenses for manufacturing the types of products we produce. In addition, we are often required to obtain reports from our suppliers regarding the materials they provide to us. The costs of complying with any change in, or interpretation of, such regulations or customer policies and the costs of remedying potential violations or resolving enforcement actions that might be initiated by governmental entities could be substantial.

In the event of a violation, we may be required to halt one or more segments of our operations until such violation is cured or we may be fined by a customer. The costs of remedying violations or resolving enforcement actions that might be initiated by governmental authorities could be substantial. Any remediation of environmental contamination would involve substantial expense that could harm our results of operations. In addition, we cannot predict the nature, scope or effect of future regulatory or customer requirements to which our operations may be subject or the manner in which existing or future laws or customer policies will be administered or interpreted. Future regulations may be applied to materials, products or activities that have not been subject to regulation previously. The costs of complying with new or more stringent regulations or policies could be significant.

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Compliance with regulations and customer demands regarding “conflict minerals” could significantly increase costs and affect the manufacturing and sale of our products.

Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) required the SEC to establish disclosure and reporting requirements regarding specified minerals originating in the Democratic Republic of the Congo or an adjoining country that are necessary to the functionality or production of products manufactured by companies required to file reports with the SEC. The SEC adopted disclosure rules for companies that use conflict minerals in their products, with substantial supply chain verification requirements in the event that the materials come from, or could have come from such areas. These rules may affect sourcing at competitive prices and availability of sufficient quantities of minerals used in the manufacture of our products. In addition, certain of our customers have implemented conflict mineral programs which are more stringent than the Dodd-Frank Act. There are costs associated with complying with the disclosure and our customers’ requirements, such as costs related to determining the source of such minerals used in our products. Also, because our supply chain is complex, we may face commercial challenges if we are unable to sufficiently verify the origins for all metals used in our products through the due diligence procedures that we implement. Moreover, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict free which could place us at a competitive disadvantage if we are unable to do so.

Potential future acquisitions or strategic business alliances could be difficult to integrate, divert the attention of key management personnel, disrupt our business, dilute stockholder value and adversely affect our financial results.

As part of our business strategy, we intend to continue to consider acquisitions of, or business alliances with, companies, technologies and products that we feel could enhance our capabilities, complement our current products or expand the breadth of our markets or customer base. We have limited experience in acquiring or partnering with other businesses and technologies. Potential and completed acquisitions and strategic alliances involve numerous risks, including:

 

restrictions on our operating activities contained in the Merger Agreement;

 

difficulties in integrating operations, technologies, accounting and personnel;

 

problems maintaining uniform standards, procedures, controls and policies;

 

difficulties in supporting and transitioning customers of our acquired companies;

 

diversion of financial and management resources from existing operations;

 

potential costs incurred in executing on such a transaction, including any necessary debt or equity financing;

 

risks associated with entering new markets in which we have no or limited prior experience;

 

potential loss of key employees; and

 

inability to generate sufficient revenues to offset acquisition or start-up costs.

Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial results. In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted, which could affect the market price of our stock. As a result, if we fail to properly evaluate acquisitions or partnerships, we may not achieve the anticipated benefits of any such acquisitions or partnerships, and we may incur costs in excess of what we anticipate.

We face potential risks associated with loss, theft or damage of our property or the property of our customers.

Some of our customers have entrusted us with proprietary equipment, intellectual property or confidential information to be used in the design, manufacture and testing of the products we make for them. In addition, the products we make for our customers themselves often contain proprietary or confidential property of our customers. In some instances, we face potentially millions of dollars in financial exposure to those customers if such equipment, products, intellectual property or confidential information is leaked, lost, damaged or stolen. Although we take precautions against such leakage, loss, theft or damage and we may insure against a portion of these risks, such insurance is expensive, may not be applicable to any loss we may experience and, even if applicable, may not be sufficient to cover any such loss. Further, in addition to monetary penalties, a customer could cancel outstanding orders or not place future orders if such a loss was to occur.

Litigation may distract us from operating our business.

Litigation that may be brought by or against us could cause us to incur significant expenditures and distract our management from the operations and conduct of our business. Furthermore, there can be no assurance that we would prevail in such litigation or resolve such litigation on terms favorable to us, which may adversely affect our operations.

21


If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results.

Effective internal controls are necessary for us to provide reliable financial reports. This effort is made more challenging by our significant overseas operations. If we cannot provide reliable financial reports, our operating results could be misstated, current and potential stockholders could lose confidence in our financial reporting and the trading price of our stock could be negatively affected. There can be no assurance that our internal controls over financial processes and reporting will be effective in the future.

Risks Related to Our Common Stock

Sales of our common stock by our majority stockholder could depress the price of our common stock or weaken market confidence in our prospects.

We have filed a Registration Statement on Form S-3, covering the re-sale of all 14,817,052 of our shares held by the WBL Entities. The WBL Entities may sell all or part of the shares of our common stock that it owns (or distribute those shares to its shareholders). A large influx of shares of our common stock into the market as a result of such sales, or the mere perception that these sales could occur, could cause the market price of our common stock to decline, perhaps substantially, and may weaken market confidence in us or our prospects, which could have an adverse effect on our financial condition, results of operation or stock price. If there is a disposal by the WBL Entities of their shares of our common stock with value that exceeds certain prescribed thresholds and constitutes a major transaction under the rules of the Singapore Exchange, then such disposal may require the approval of the stockholders of UEL. The WBL Entities may be able to sell part of their shares of our common stock without requiring such stockholders’ approval if such thresholds are not met; however, even such sale could impact the market price of our common stock. Further, these sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

The trading price of our common stock is volatile.

The trading prices of the securities of technology companies, including the trading price of our common stock, have historically been highly volatile. During the 12-month period from January 1, 2015 to December 31, 2015, the high and low sales prices for our common stock were $10.61 and $26.05 per share. Factors that could affect the trading price of our common stock include, but are not limited to:

 

failure to complete the proposed Merger with DSBJ;

 

fluctuations in our financial results;

 

the limited size of our public float;

 

announcements of technological innovations or events affecting companies in our industry;

 

changes in the estimates of our financial results;

 

changes in the recommendations of any securities analysts that elect to follow our common stock; and

 

market conditions in our industry, the industries of our customers and the economy as a whole.

In addition, although we have approximately 24.5 million shares of common stock outstanding as of December 31, 2015, approximately 14.8 million of those shares are held by the WBL Entities. As a result, there is a limited public float in our common stock. If any of our significant stockholders were to decide to sell a substantial portion of its shares the trading price of our common stock could decline. See “Risk Factors—Sales of our common stock by our majority stockholder could depress the price of our common stock or weaken market confidence in our prospects” for more information.

If certain requirements are not met, the SEC could impose sanctions against China-based members of certain accounting firms’ networks, which could affect our ability to have those firms perform audits for us in the future.

From time to time, the SEC requests access to the audit documents of Chinese US-listed companies from their accountants. Many of the accounting firms, including the Chinese members of the so-called Big Four accounting firms’ networks, have historically refused to provide these records citing China’s state law which specifies that certain Chinese company records can be claimed as state secrets. In January 2014, an SEC Administrative Law judge made an initial decision which determined that the Chinese members of the Big Four firms’ networks, including PricewaterhouseCoopers Zhong Tian LLP (“PwC China”), among others, should be suspended from practicing before the SEC for a period of six months, which includes, but is not limited to, performing audits of subsidiaries of companies that are registered with the SEC. This decision was stayed pending review, and in February 2015, the SEC announced that it had come to a settlement with the China-based firms associated with the Big Four firms, which settlement imposed sanctions against the firms and provides the SEC with authority to impose a variety of remedial measures on the firms if future

22


document productions fail to meet specified criteria. Remedies for future non-compliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work.

We have substantial operations in China that are currently audited by PwC China, a member firm of the PwC network, of which our auditor, PricewaterhouseCoopers LLP, is also a member. If such a remedy was to be imposed on PwC China for failure to comply with the settlement, we could be unable to use PwC China, or any of the other affected accounting firms, to perform audits of our operations in China, and may have difficulty finding another firm with sufficient resources or experience to competently audit our Chinese entities. This could cause us to not meet our financial reporting obligations, which could negatively influence investor perceptions and cause a decline in our stock price.

Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management including, among other things, provisions providing for a classified board of directors, authorizing the board of directors to issue preferred stock and the elimination of stockholder voting by written consent. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may discourage, delay or prevent certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These provisions in our charter, bylaws and under Delaware law could discourage delay or prevent potential takeover attempts that stockholders may consider favorable.

 

 

23


Item 1B.

Unresolved Staff Comments

None.

 

Item 2.

Properties

The following is a summary of our material properties at December 31, 2015:

 

Entity

 

Function

 

Location

 

Square Feet (Building)

 

Lease Expiration Dates

Multi-Fineline Electronix, Inc.

 

Executive offices, research and development

 

Irvine, California

 

Leased—20,171

 

April 2018

MFLEX Suzhou Co., Ltd.

 

Engineering, circuit fabrication and assembly

 

Nanhu Road, Suzhou, China

 

Owned—566,108

 

2053*

MFLEX Suzhou Co., Ltd.

 

Circuit fabrication

 

Tangdong Road, Suzhou, China

 

Owned—594,254

 

2058*

MFLEX Chengdu Co., Ltd.

 

Circuit assembly (inactive)

 

Chengdu,
China

 

Owned—322,132

 

2059*

Multi-Fineline Electronix Singapore Pte. Ltd.

 

Regional office

 

Singapore

 

Leased—3,074

 

December 2017

 

 

*

We have several parcels that have land use rights expiring in 2053 and beyond. Under the terms of these land use rights, we paid an upfront fee for use of the parcel through expiration. We have no other financial obligations on these land use rights other than payments of real estate taxes.

We believe our facilities are adequate for our current needs and that suitable additional or substitute space will be available to accommodate potential foreseeable expansion of our operations or to move our operations in the event one or more of our short-term leases can no longer be renewed on commercially reasonable terms at the expiration of its term.

 

Item 3.

Legal Proceedings

From time to time, we may be a party to lawsuits in the ordinary course of business. These matters arise in the ordinary course and conduct of our business, and, at times, may arise as a result of our acquisitions and dispositions or as a result of our proposed acquisition by DSBJ. They may include, for example, commercial, intellectual property, environmental, securities, and employment matters and federal and state putative class action lawsuits challenging the proposed transaction with DSBJ. Some are expected to be covered, at least partly, by insurance. We intend to defend ourselves vigorously in such matters. We are currently not a party to any material legal proceedings.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

 

 

24


Part II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Common Stock

Our common stock, par value $0.0001, is traded on the NASDAQ Global Select Market (“Nasdaq”) under the symbol “MFLX.” The following table sets forth, for the periods indicated, the high and low sales prices for our common stock on Nasdaq, as reported in its consolidated transaction reporting system:

 

Fiscal Year Ended December 31, 2015

 

High

 

 

Low

 

First quarter, ended March 31, 2015

 

$

20.15

 

 

$

10.61

 

Second quarter, ended June 30, 2015

 

$

26.05

 

 

$

18.05

 

Third quarter, ended September 30, 2015

 

$

22.28

 

 

$

15.06

 

Fourth quarter, ended December 31, 2015

 

$

25.62

 

 

$

16.56

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2014

 

High

 

 

Low

 

Quarter ended December 31, 2014

 

$

11.35

 

 

$

8.11

 

 

 

 

 

 

 

 

 

 

Fiscal Year Ended September 30, 2014

 

High

 

 

Low

 

First quarter, ended December 31, 2013

 

$

16.32

 

 

$

12.12

 

Second quarter, ended March 31, 2014

 

$

15.30

 

 

$

12.56

 

Third quarter, ended June 30, 2014

 

$

13.18

 

 

$

9.62

 

Fourth quarter, ended September 30, 2014

 

$

11.47

 

 

$

9.33

 

 

 

 

 

 

 

 

 

 

Fiscal Year Ended September 30, 2013

 

High

 

 

Low

 

First quarter, ended December 31, 2012

 

$

23.10

 

 

$

15.12

 

Second quarter, ended March 31, 2013

 

$

22.88

 

 

$

14.24

 

Third quarter, ended June 30, 2013

 

$

16.22

 

 

$

13.89

 

Fourth quarter, ended September 30, 2013

 

$

17.43

 

 

$

14.55

 

 

Issuer Purchases of Equity Securities

Not applicable.

Holders of Record

Stockholders of record on December 31, 2015 totaled approximately 14. Because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners represented by these stockholders of record.

Dividends

We have never declared or paid any cash dividend on our common stock, nor do we currently intend to pay any cash dividend on our common stock in the foreseeable future. We currently expect to retain our earnings for the growth and development of our business.


25


Stock Performance Graph

The following graph shows the cumulative total stockholder return (change in stock price plus reinvested dividends) assuming the investment of $100 on December 31, 2010 in each of our common stock, the NASDAQ Index and the NASDAQ Electrical Components Index. The comparisons in the table are required by the SEC and are not intended to forecast or be indicative of possible future performance of our common stock. This Stock Price Performance Graph is not deemed to be “soliciting material” or “filed” with the SEC under the Securities Exchange Act of 1934, and is not incorporated by reference in any past or future filing by us under the Securities Exchange Act of 1934 or the Securities Act of 1933, unless it is specifically referenced.

 

Securities Authorized for Issuance Under Equity Compensation Plans

Information regarding the securities authorized for issuance under our equity compensation plans can be found under Item 12 of this Annual Report.

 


26


Item 6.

Selected Financial Data

The following tables include selected summary financial data for the twelve months ended December 31, 2015 and 2014, the three months ended December 31, 2014 and 2013, and each of the last four fiscal years ended September 30. The data below is qualified by reference to, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of this Annual Report and the Consolidated Financial Statements and related notes included in Part II, Item 8 of this Annual Report. Our historical results are not necessarily indicative of our future results.

 

 

Twelve Months Ended

December 31,

 

 

Three Months Ended

December 31,

 

 

Fiscal Years Ended

September 30,

 

 

2015

 

 

2014

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

 

 

 

 

 

unaudited

 

 

 

 

 

 

unaudited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except shares, per share data and ratios)

 

Consolidated Statements of Income

   Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

636,599

 

 

$

631,484

 

 

$

210,003

 

 

$

211,672

 

 

$

633,153

 

 

$

787,644

 

 

$

818,932

 

 

$

831,561

 

Cost of sales

 

556,543

 

 

 

603,644

 

 

 

179,516

 

 

 

209,176

 

 

 

633,304

 

 

 

788,774

 

 

 

736,241

 

 

 

726,850

 

Gross profit (loss)

 

80,056

 

 

 

27,840

 

 

 

30,487

 

 

 

2,496

 

 

 

(151

)

 

 

(1,130

)

 

 

82,691

 

 

 

104,711

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

5,062

 

 

 

5,883

 

 

 

1,397

 

 

 

1,455

 

 

 

5,941

 

 

 

7,776

 

 

 

7,615

 

 

 

10,485

 

Sales and marketing

 

14,718

 

 

 

17,926

 

 

 

4,819

 

 

 

5,908

 

 

 

19,015

 

 

 

22,720

 

 

 

24,457

 

 

 

25,189

 

General and administrative

 

19,837

 

 

 

16,753

 

 

 

4,675

 

 

 

3,343

 

 

 

15,421

 

 

 

17,118

 

 

 

19,839

 

 

 

18,788

 

Stock-based compensation expense

   resulting from change in control

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,582

 

 

 

 

 

 

 

Impairment and restructuring

   (recoveries) expenses

 

(1,757

)

 

 

33,543

 

 

 

(396

)

 

 

 

 

 

33,939

 

 

 

7,537

 

 

 

(2,468

)

 

 

4,186

 

Total operating expenses

 

37,860

 

 

 

74,105

 

 

 

10,495

 

 

 

10,706

 

 

 

74,316

 

 

 

64,733

 

 

 

49,443

 

 

 

58,648

 

Operating income (loss)

 

42,196

 

 

 

(46,265

)

 

 

19,992

 

 

 

(8,210

)

 

 

(74,467

)

 

 

(65,863

)

 

 

33,248

 

 

 

46,063

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

1,722

 

 

 

1,055

 

 

 

239

 

 

 

209

 

 

 

1,025

 

 

 

727

 

 

 

1,352

 

 

 

875

 

Interest expense

 

(367

)

 

 

(446

)

 

 

(71

)

 

 

(122

)

 

 

(497

)

 

 

(487

)

 

 

(555

)

 

 

(472

)

Other income (expense), net

 

5,303

 

 

 

1,401

 

 

 

199

 

 

 

296

 

 

 

1,498

 

 

 

1,002

 

 

 

1,656

 

 

 

564

 

Income (loss) before income

   taxes

 

48,854

 

 

 

(44,255

)

 

 

20,359

 

 

 

(7,827

)

 

 

(72,441

)

 

 

(64,621

)

 

 

35,701

 

 

 

47,030

 

Provision for income taxes

 

3,772

 

 

 

15,023

 

 

 

4,384

 

 

 

1,452

 

 

 

12,091

 

 

 

910

 

 

 

6,216

 

 

 

9,157

 

Net income (loss)

$

45,082

 

 

$

(59,278

)

 

$

15,975

 

 

$

(9,279

)

 

$

(84,532

)

 

$

(65,531

)

 

$

29,485

 

 

$

37,873

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.85

 

 

$

(2.45

)

 

$

0.66

 

 

$

(0.39

)

 

$

(3.50

)

 

$

(2.74

)

 

$

1.24

 

 

$

1.58

 

Diluted

$

1.79

 

 

$

(2.45

)

 

$

0.65

 

 

$

(0.39

)

 

$

(3.50

)

 

$

(2.74

)

 

$

1.22

 

 

$

1.56

 

Shares used in computing net income

   (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

24,366,503

 

 

 

24,169,129

 

 

 

24,267,567

 

 

 

24,083,932

 

 

 

24,122,843

 

 

 

23,897,651

 

 

 

23,782,540

 

 

 

24,027,179

 

Diluted

 

25,247,873

 

 

 

24,169,129

 

 

 

24,624,368

 

 

 

24,083,932

 

 

 

24,122,843

 

 

 

23,897,651

 

 

 

24,077,479

 

 

 

24,335,819

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

214,234

 

 

$

132,382

 

 

$

132,382

 

 

$

111,887

 

 

$

98,667

 

 

$

105,150

 

 

$

82,322

 

 

$

97,890

 

Working capital

$

223,549

 

 

$

162,611

 

 

$

162,611

 

 

$

147,149

 

 

$

143,752

 

 

$

142,555

 

 

$

155,869

 

 

$

159,065

 

Total assets

$

501,460

 

 

$

527,387

 

 

$

527,387

 

 

$

619,227

 

 

$

519,449

 

 

$

610,214

 

 

$

696,410

 

 

$

625,745

 

Current ratio

 

2.7

 

 

 

1.9

 

 

 

1.9

 

 

 

1.7

 

 

 

1.8

 

 

 

1.7

 

 

 

1.7

 

 

 

1.8

 

Long-term debt

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Stockholders’ equity

$

361,082

 

 

$

328,460

 

 

$

328,460

 

 

$

385,769

 

 

$

310,325

 

 

$

392,191

 

 

$

441,989

 

 

$

416,083

 

 

27


Item 7.

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

You should read this discussion together with the financial statements, related notes and other financial information included in this Annual Report. The following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under Part I, Item 1A“Risk Factors” and elsewhere in this Annual Report. These risks could cause our actual results to differ materially from any future performance suggested below.

Overview

Proposed Acquisition by DSBJ

On February 4, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Suzhou Dongshan Precision Manufacturing Co., Ltd., a company organized under the laws of the People’s Republic of China (“DSBJ”), and Dragon Electronix Merger Sub Inc., a Delaware corporation and indirect wholly owned subsidiary of DSBJ (“Merger Sub”), under which Merger Sub will be merged with and into our company (the “Merger”), with us continuing after the Merger as the surviving corporation and indirect subsidiary of DSBJ. The Merger Agreement has been unanimously approved by our Board of Directors.

Under the terms of the Merger Agreement, our stockholders will receive $23.95 in cash for each share of common stock held at the close of the transaction. The proposed transaction values our equity at approximately $610.0 million, on a fully diluted basis. Consummation of the Merger is expected to occur in the third quarter of 2016 and is subject to approval by our stockholders and DSBJ’s stockholders, certain regulatory approvals and other closing conditions.

Additional information about the merger and the terms of the Merger Agreement can be found in the Current Report on Form 8-K filed by us under Item 1.01 of that Form 8-K on February 4, 2016, including the full text of the Merger Agreement filed as Exhibit 2.1 to that Form 8-K. Our stockholders are urged to read all relevant documents filed with the Securities and Exchange Commission (“SEC”) because they contain important information about the proposed transaction. Investors and security holders are able to obtain the documents free of charge at the SEC’s web site, http://www.sec.gov, or for free from us by contacting (949) 453-6800 or through the investor relations section of our website (http://www.mflex.com).

Business 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, connected home devices, medical and automotive industry applications 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. 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 net sales. 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 net sales to total net sales 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 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 six months of production are the most critical in terms of growth and profitability opportunities.

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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.

Net Sales

We design and manufacture our products to customer specifications. Throughout 2015, we engaged the services of certain non-exclusive sales representatives located throughout North America and Asia to provide customer contacts and market our products directly to our global customer base. The varieties of products our customers manufacture are referred to as programs. The majority of our sales is made to customers outside of the United States, and therefore sales volumes may be impacted by customer program and product mix changes as well as delivery schedule changes imposed on us by our customers. All sales from our Irvine, California executive office and Singapore regional office are denominated in U.S. dollars. All sales from our China facilities are denominated in U.S. dollars for sales outside China or RMB for sales made in China.

Cost of Sales

Cost of sales consisted of four major categories: material, overhead, labor and purchased process services. Material costs related primarily to the purchase of copper foil, gold, polyimide substrates and electronic components. Overhead costs included all materials and facility costs associated with manufacturing support, processing supplies and expenses, support personnel costs, stock-based compensation expense related to such personnel, utilities, amortization of facilities and equipment and other related costs. Labor costs included the cost of personnel related to the manufacture of the completed product. Purchased process services costs related to the subcontracting of specific manufacturing processes to outside contractors. Cost of sales may be impacted by timing of wage increases at our manufacturing facilities, capacity utilization, manufacturing yields, product mix and production efficiencies. Also, we may be subject to increased costs as a result of changing material prices because we do not have long-term fixed supply agreements, inflation may occur in countries in which we produce and market wage rate increases may also occur in these countries.

Research and Development

Research and development costs are incurred in the development of new products and processes, including significant improvements and refinements to existing products and processes and are expensed as incurred.

Sales and Marketing

Sales and marketing expense included personnel-related and travel costs associated with sales and marketing, program management, corporate development and engineering support groups, sales support, trade shows, freight out, costs to warehouse and manage hub inventories positioned near our customers, commissions paid to sales representatives, market studies and promotional and marketing brochures.

General and Administrative

General and administrative expense primarily included personnel-related and travel costs associated with finance/accounting, tax, internal audit, legal, human resources, information services and executive personnel along with other expenses related to external accounting, legal and professional expenses, business insurance, management information systems, investor relations, Board of Directors and other corporate office expenses.

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Impairment and Restructuring

Asset impairment is the difference between the fair market value, based on the estimated future cash flows of the underlying assets, and the carrying value, or net book value, of an asset group identified under accounting principles generally accepted in the United States of America (“U.S. GAAP”) to be impaired. Impairment occurs when the carrying value exceeds the fair market value of the underlying assets. Restructuring expense represents severance, relocation, and other costs and recoveries related to the closure or disposal of a business unit or location.

Interest Income

Interest income consisted primarily of interest income earned on cash and cash equivalents balances.

Interest Expense

Interest expense consisted of expense incurred on unused line fees on our revolving facilities, interest on short-term borrowings under our line of credit agreements and interest related to our deferred financing costs.

Other Income (Expense), Net

Other income (expense), net, consisted primarily of the gain or loss on foreign currency exchange and the gain or loss on derivative financial instruments, when applicable.

Provision for Income Taxes

We record a provision for income taxes based on the statutory rates applicable in the countries in which we do business, subject to any tax holiday periods granted by the respective governmental authorities. We account for income taxes under the Financial Accounting Standards Board (“FASB”) authoritative guidance which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

Critical Accounting Policies and Estimates

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including, but not limited to, those related to inventories, income taxes, accounts receivable allowance and warranty. We base our estimates on historical experience, performance metrics and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results will differ from these estimates under different assumptions or conditions.

Critical accounting policies for us include revenue recognition, inventories and income taxes. Refer to Note 1 “Basis of Presentation and Significant Accounting Policies” in the Notes to Consolidated Financial Statements for a complete list of our significant accounting policies.

 

Revenue Recognition. Revenues, which we refer to as net sales, are generated from the sale of flexible printed circuit boards and assemblies, which are sold to OEMs, subcontractors and EMS providers to be included in other electronic products. An EMS provider may or may not be an OEM subcontractor. We recognize revenue when there is persuasive evidence of an arrangement with the customer that includes a fixed or determinable sales price, when title and risk of loss transfers, when delivery of the product has occurred in accordance with the terms of the sale and collectability of the related account receivable is reasonably assured. Our remaining obligation to customers after delivery is limited to our warranty obligations on our product. We report sales net of refunds and credits and net of an accounts receivable allowance, which we estimate based on historical experience.

 

Inventories. We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the estimated market value of the inventory. We regularly review our inventory and write down our inventory based on historical usage and our estimate of expected and future product demand. Actual results may differ from our judgments, and additional write-downs may be required.

 

Income Taxes. We determine if our deferred tax assets and liabilities are realizable on an ongoing basis by assessing our need for a valuation allowance and by adjusting the amount of such allowance, as necessary. In determining whether a

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valuation allowance is required, we have considered taxable income in prior carry back years, expected future taxable income and the feasibility of tax planning initiatives. If we determine that it is more likely than not that we will realize certain of our deferred tax assets for which we previously provided a valuation allowance, an adjustment would be required to reduce the existing valuation allowance. Conversely, if we determine that we would not be able to realize our recorded net deferred tax asset, an adjustment to increase the valuation allowance would be charged to our results of operations in the period such conclusion was reached.

We operate within multiple domestic and foreign taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time for resolution. Although we believe that adequate consideration has been made for such issues, it is possible that the ultimate resolution of such issues could be significantly different than originally estimated.

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Results of Operations

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

 

 

Twelve Months Ended

December 31,

 

 

Three Months

Ended December 31,

 

 

Fiscal Years Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

2012

 

 

Net sales

 

100.0

 

%

 

100.0

 

%

 

100.0

 

%

 

100.0

 

%

 

100.0

 

%

 

100.0

 

%

 

100.0

 

%

Cost of sales

 

87.4

 

 

 

95.6

 

 

 

85.5

 

 

 

98.8

 

 

 

100.0

 

 

 

100.1

 

 

 

89.9

 

 

Gross profit (loss)

 

12.6

 

 

 

4.4

 

 

 

14.5

 

 

 

1.2

 

 

 

 

 

 

(0.1

)

 

 

10.1

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

0.8

 

 

 

0.9

 

 

 

0.7

 

 

 

0.7

 

 

 

0.9

 

 

 

1.0