Item 1. Business
Overview
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 Item 1 - “Business,” Item 1.A-“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 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 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,” “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 1.A. “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.
We are one of the world’s largest producers of flexible printed circuits and flexible circuit assemblies. With facilities in Irvine, California; Suzhou, China; Chengdu, China; Cambridge, England; Korea; Taiwan; 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 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 mobile phones, smartphones, tablets, consumer products, portable bar code scanners, computer/data storage and medical devices. We provide our solutions to original equipment manufacturers (“OEMs”) such as Apple, Inc. and to electronic manufacturing services (“EMS”) providers such as Foxconn Electronics, Inc., Jabil Circuit, Inc., and Flextronics International Ltd. Our business model, and the way we approach the markets which we serve, is based on value added engineering and providing technology solutions to our customers facilitating the miniaturization of portable electronics. We currently rely on a core mobility end-market for nearly all of our revenue. We believe this dynamic market offers fewer, but larger, opportunities than other electronic markets do, and changes in market leadership can occur with little to no warning. Through early supplier involvement with customers, we look to assist in the development of new designs and processes for the manufacturing of their products and, through value added component assembly of components on flex, we seek to provide a higher level
of product within their supply chain structure. This approach is relatively unique and may or may not always fit with the operating practices of all OEMs. Our ability to add to our customer base may have a direct impact on the relative percentage of each customer’s revenue to total revenues during any reporting period.
We are party to several contracts with our customers. These contracts generally provide that we will manufacture products for the customers against purchase orders delivered by the customers. The contracts provide for no 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 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 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, 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. 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 are not necessarily indicative of our 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.
Our growth has been due, in part, to our early supplier involvement allowing our engineers to gain an understanding of the application and use of the customers’ circuits. 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. 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: two located in the Peoples’ 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”) 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 Arizona: Aurora Optical, Inc. (“Aurora Optical”), which was dissolved in September 2012; one located in Cambridge, England: MFLEX UK Limited (“MFE”), formerly known as Pelikon Limited; and one located in Korea: MFLEX Korea, Ltd. (“MKR”); except where it is made clear that the term means only the parent company.
Industry Background
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 devices. Given their inherent
design and cost advantages, flexible printed circuits 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, 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 microprocessors and other electrical components such as connectors, switches, resistors, capacitors and light-emitting devices into smaller, non-linear spaces. In the past, FPC technologies and material sets were reserved for specialty uses, as they were difficult and costly to produce.
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 increasingly portable and stylish 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, simplified 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 substantial growth over the next several years as a result of favorable technological and market developments, including:
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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 inherently better electrical performance than PCBs. The reasons are that the materials used in building FPCs offer better electrical signal integrity and better heat dissipation because 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.
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Outsourcing. Due to increasing complexity and miniaturization of smartphones and tablets, we believe electronics companies 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 FPC/A 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.
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Expanding Markets and Flexible Component Demand. Global demand for increasingly-complex portable computing and communication products are driving the demand for more complex FPCAs. We believe that the application of flex assemblies in wireless and other electronic devices is expanding, and the expansion of demand could result in significantly 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 competitive strengths that differentiate us from other contract manufacturers that might compete with us include:
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Our Seamless End-to-End Solution for Flexible Printed Circuit Applications. We provide a seamless, efficient and integrated end-to-end FPC and FPCA solution 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 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 possess the expertise and capabilities to provide a seamless, integrated, end-to-end mass production solution that provides our customers with the ability to leverage any one or more of our facilities to meet their global requirements.
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Our Design and Application Engineering Expertise. We assist customers at the earliest stages of product development with engineering expertise and a knowledge base of product applications. This level of experience and expertise, combined with early design-participation, 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 support for the life of a specific application and subsequent generations of similar applications. We are also continuing to enhance our design and application engineering capabilities in China, Korea, and Taiwan to best position us to provide an integrated end-to-end solution to the emerging domestic electronics markets in China and other parts of Asia.
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Our Manufacturing Capabilities. Our China manufacturing facilities are organized to ramp production of new products from prototype stage to high volume in a cost-efficient manner. Our ongoing efforts to expand 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 the market and lower the overall costs of our products. In recent years, we completed construction on a new FPC manufacturing facility in Suzhou, China (“MFC3”), and completed construction of a new FPCA facility at MFLEX Chengdu. We continue to add new, customized equipment that increases our capability and capacity to meet our customers’ technology needs. 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.”
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Our Management Experience and Expertise. Our management team has been with us for many years. During that time, our executive management has made a number of critical, strategic decisions that successfully managed our growth and profitability, 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; and creating a seamless, integrated end-to-end solution in our China operations to serve the needs of multinational OEMs and EMS providers.
Business Strategy
Our objective is to continue to expand our customer base and product offerings by using 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 objective, we intend to continue our pursuit of the following strategies:
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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. In addition, we intend to continue to leverage our value-added services, which include turnkey component assembly, to provide our customers with flexible printed circuit solutions designed and manufactured to maximize the reliability and functionality of their end products. By providing customers with a seamless, integrated and cost-efficient flexible printed circuit and component assembly solution, we believe this eliminates the need for our customers to negotiate with multiple vendors, reduces the time-to-market for their products and contributes to the growth of our market share.
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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.
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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.
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Diversify Our End Customers. We primarily serve the mobility market. Mobility refers to an overall end-market of portable devices that provides access to data (content) and applications that were previously confined to the desktop, server, cloud or living room. We plan to continue to leverage our internal sales force comprised of design and application engineers with our 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.
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Increase Manufacturing Capacity and Capabilities. We continue to invest in advanced manufacturing, automation and engineering capabilities in China. By continuing to expand these capabilities, we can offer our customers technologically advanced manufacturing process for complex FPC fabrication in mass production volumes.
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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 and module assembly solutions for a wide range of electronic applications. We offer products in a broad range of sectors, including mobile phones, smartphones, tablets, consumer products, portable bar code scanners, computer/data storage and medical 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 mobile phones and smartphones, tablets, consumer products, portable bar code scanners, computer/data storage and medical 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.
We generally work with OEMs in the design of their products, and the OEMs subsequently either purchase our products directly or instruct the EMS providers to purchase our products to be incorporated into the OEM’s product. Some examples of EMS providers we sell to include Foxconn Electronics, Inc. and Flextronics International Ltd. 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 come from the EMS providers.
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 September 30, 2012, approximately 94% of our net sales were to three customers in the aggregate. In addition, approximately 74%, 44% and 43% of our net sales were to the same one customer in each of the fiscal years ended September 30, 2012, 2011 and 2010, respectively, and approximately 90%, 86% and 85% of our net sales were to the same two customers in each of the fiscal years ended September 30, 2012, 2011 and 2010, respectively.
Our net sales fluctuate from quarter to quarter as a result of changes in demand for our products from our customer base. Over recent years, we have experienced a strong first fiscal quarter, followed by reduced net sales in the second fiscal quarter, as a result of partial seasonality of our major customers and the markets that we serve. Our major customers provide consumer-related products that historically have experienced their highest sales activity during the calendar year-end holiday season. As a result, we typically experience a decline in our second 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.
Our facilities in Asia enable us to manufacture products for shipment anywhere in the world. Information regarding shipments by geographical area is summarized below:
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, by providing electronic packaging solutions 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 September 30, 2012, we engaged the services of non-exclusive sales representatives to provide customer contacts and market our products directly to our global customer base. These sales representatives were located throughout the North America, Europe and Asia. We rely on these sales representatives to create, build and maintain our customer relationships.
As of September 30, 2012, our backlog, which constitutes customer orders placed with us that we believe to be firm but that have not yet shipped, was $271.3 million. We expect to ship this entire backlog during fiscal year 2013. 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. As of September 30, 2011 and 2010, our backlog was $168.0 million and $259.5 million, respectively.
Technology
We are a global provider of single, double-sided, multi-layer and air-gapped flexible 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 continually are 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 process.
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 decreases, 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.
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 (“HDI”) 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.
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
regularly 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 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 customer’s programs. We expect that 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. 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.
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; price; 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., Flextronics International Ltd., Interflex Co. Ltd., Zhen Ding Technology Holding Ltd., HI-P (Shanghai) Technology Co. Ltd., Career Technology (MFG) Co. Ltd., 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. This market paradigm may provide a barrier to our competitors in the markets in which we compete. However, it may also present an obstacle to our entry into other markets. 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 September 30, 2012, we employed approximately 10,960 full-time employees, of which approximately 50 were in the United States, approximately 10,850 were in China and approximately 60 were in other locations. We also employed approximately 12,510 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 renewed for a one, two or three year term. Starting in 2008, the employment agreements for employees in China are for an indefinite period when 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 3 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 uncertainties associated with environmental contamination, there can be no assurance that the costs of any remediation will not harm our business, financial condition or results of operations.
We believe we have been 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 with respect to products or activities to which they have not previously been applied. For this reason, we implemented procedures designed to minimize the negative impacts and reduce potential financial risks arising from environmental issues. Compliance with more stringent laws or regulations, or more vigorous enforcement policies of regulatory agencies could require substantial expenditures by us and could 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 in the fiscal year 2013.
Executive Officers of the Registrant
The following table sets forth information about our executive officers as of October 31, 2012:
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, MFM and MFE, (b) director for MFLEX, MFC and MFLEX Chengdu, (c) chief executive officer and president at MFCI, MFLEX Singapore, MFC, MFLEX Chengdu, MKR and MFM, (d) executive chairman at MFE, and (e) representative director for MKR.
Thomas Liguori joined us as Chief Financial Officer and Executive Vice President in February 2008. Prior to joining us, Mr. Liguori served as Chief Financial Officer at Hypercom, Inc. from November 2005 to February 2008, where he designed and built the global finance and administration functions. From February 2005 to November 2005, Mr. Liguori served as Vice President, Finance and Chief Financial Officer at Iomega Corporation, a publicly traded provider of storage and network security solutions, and from April 2000 to February 2005, as Chief Financial Officer at Channell Commercial Corporation, a publicly traded provider of designer and manufacturer of telecommunications equipment. Prior to that time, Mr. Liguori served as Chief Financial Officer of Dole Europe for Dole Food Company, serving as the top-ranking financial and IT executive in Dole’s operations in Europe, Africa and the Middle East, and as Vice President of Finance at Teledyne. Mr. Liguori holds a Bachelor’s in Business Administration, Summa Cum Laude, from Boston University and completed a Master’s in Business Administration in Finance, Summa Cum Laude, from Arizona State University. He is a Certified Management Accountant and a Certified Financial Manager. Mr. Liguori holds the following positions at our wholly owned subsidiaries: (a) director for MFCI, MFLEX Singapore, MFC, MFLEX Chengdu, MFM, MKR and MFE, (b) chief financial officer at MFCI, MFLEX Singapore, MFM, MKR and MFE and (c) legal representative for MFLEX Singapore in China for our two Chinese subsidiaries.
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 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. 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 MSG, and (b) executive vice president of operations-program management at MKR.
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. In October 2008, Mr. Jin was appointed as our Vice President and Managing Director, Operations, was appointed Executive Vice President and Managing Director of MFLEX China in March 2011 and transitioned to Executive Vice President of Business Development in October 2012. In this role, he is responsible for handling all sales, business development, new customer accounts and program management. 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 holds the following positions at our wholly owned subsidiaries: (a) director for MFC and MFLEX Chengdu and (b) legal representative in China for our two Chinese subsidiaries.
Available Information
We file reports with the Securities and Exchange Commission (“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. 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.
Item 1A.
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 Business
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 years ended September 30, 2012, 2011 and 2010, approximately 69%, 83% and 68%, respectively, of our net sales were derived from sales to companies for products or services into our smartphone sector; approximately 27%, 13% and 1%, respectively, of our net sales derived from sales were to companies for products or services into our tablet sector; and approximately 2%, 1% and 24%, respectively, of our net sales were derived from sales to companies for products or services into our consumer electronics sector (excluding tablets). 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, 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 products manufactured by or on behalf of a very limited number of key customers and their subcontractors, including Apple Inc. and Research in Motion Limited. In addition, a substantial portion of our sales to each customer is often tied to only one program or a small number of programs. In the fiscal years ended September 30, 2012, 2011 and 2010, approximately 94%, 94% and 94%, respectively, of our net sales were to only three customers in the aggregate. Approximately 74%, 44% and 43% of our net sales were to the same one customer in each of the fiscal years ended September 30, 2012, 2011 and 2010, respectively, and approximately 90%, 86% and 85% of our net sales were to the same two customers in each of the fiscal years ended September 30, 2012, 2011 and 2010, respectively. The loss of a major customer or a significant reduction in sales to a major customer, including due to the lack of commercial success, a product failure of a customer’s program upon which we were relying or limited flex content in a program on which we were relying, would seriously harm our business. Although we are continuing our efforts to reduce dependence on a limited number of customers, net sales attributable to a limited number of customers and their subcontractors are expected to continue to represent a substantial portion of our business for the foreseeable future.
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 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 flex 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 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 and/or increase our expenses.
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 with little or no advance notice to us, and we believe customers are doing so with increased frequency. These changes may be for a variety of reasons, including changes in their prospects, the success of their products in the market, reliance on a new vendor and the overall economic forecast. 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. 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 have recently seen an increase in the use of hubs by our customers, and our hub balances have been growing. 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. 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. 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, 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 and the underutilization of our manufacturing capacity if we decline other potential orders because we expect to use our capacity to produce 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, including maintaining or establishing close relationships with customers in markets in which we compete, we may not be able to grow or maintain our market share or net sales.
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 products’ 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 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 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. These trends and factors may harm our business and make it more difficult to compete effectively.
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. Recent pronouncements by the World Health Organization listing mobile phone use as possibly carcinogenic may 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, and our net sales and profitability would be negatively affected.
We must develop and adopt new technology and manufacture new products and product features in order to remain competitive, 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 products and product features to meet our customers’ needs, including advanced technologies such as high density interconnect. However, any new technology and products adopted or developed by us may not be selected by existing or potential customers. Our 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 choose to focus on new technology or a standard that is ultimately not accepted by the industry and/or does not become the industry standard, we may be unable to sell those products. If we are unable to obtain customer qualifications for new products or product features, cannot qualify our products for high-volume production quantities or do not execute our operational and strategic plans for new products or advanced technologies in a timely manner, our net sales 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.
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 customer’s programs. We expect that 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. 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 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 are experiencing increased 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 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 work 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, 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 manufacturing capacity may be interrupted, limited or delayed if we cannot maintain sufficient sources of electricity in China.
The flexible printed circuit fabrication process requires a stable source of electricity. As our production capabilities increase in China and our business grows, our requirements for a stable source of electricity in China will grow substantially. 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 recently instituted energy conservation regulations which ration the amount of electricity that may be used by enterprises such as ours. Although we have purchased several generators, such generators do not produce sufficient electricity supply to run our manufacturing facilities and they are costly to operate. Power 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, and 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, Korea, Taiwan, the United Kingdom 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 that can arise from international trade transactions, local business practices and cultural considerations, including:
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political unrest, terrorism and economic or financial instability;
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restrictions on our ability to repatriate earnings;
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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;
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nationalization programs that may be implemented by foreign governments;
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import-export regulations;
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difficulties in enforcing agreements and collecting receivables;
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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;
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changes in labor practices, including wage inflation, frequent and extremely high increases in the minimum wage, labor unrest and unionization policies;
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limited intellectual property protection;
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longer payment cycles by international customers;
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currency exchange fluctuations;
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inadequate local infrastructure and disruptions of service from utilities or telecommunications providers, including electricity shortages;
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transportation delays and difficulties in managing international distribution channels;
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difficulties in staffing foreign subsidiaries and in managing an expatriate workforce;
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potentially adverse tax consequences;
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differing employment practices and labor issues;
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the occurrence of natural disasters, such as earthquakes, floods or other acts of force majeure; and
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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 97% of the total shipments made to foreign manufacturers during the fiscal year 2012. The balance of our net sales is 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. 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.
During last year, the earthquake, tsunami and subsequent problems affecting nuclear power plants in Japan have dramatically impacted Japan’s manufacturing capacity. Japanese industry supplies a significant portion of certain items essential to the flexible circuit board manufacturing process and may be adversely affected by these issues. As a result, our ability to produce and deliver products to our customers could be adversely affected. In addition, shortages of key items may result in price increases, which our suppliers may seek to pass on to us. This could also affect our profitability.
From time to time, we increase our manufacturing capacity, and we may have difficulty managing these changes.
From time to time, we engage in a number of manufacturing expansion projects. In addition, we have been engaged in an international restructuring effort to first transition and then expand various business functions to our offices in Singapore, in order to better align these activities with our international operations and to transition certain production and process research and development to China in continuation of our cost reduction efforts. These efforts require significant investment by us, and have in the past and could continue to result in increased expenses and inefficiencies and reduced gross margins.
Our management team may have difficulty managing our manufacturing expansion and transition projects or otherwise managing any growth in our business that we may experience. Risks associated with managing expansion and growth may include those related to:
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managing multiple, concurrent major manufacturing expansion projects;
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hiring and retaining employees, particularly in China;
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accurately predicting any increases or decreases in demand for our products and managing our manufacturing capacity appropriately;
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under-utilized capacity, particularly during the start-up phase of a new manufacturing facility and the effects on our gross margin of under-utilization;
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managing increased employment costs and scrap rates often associated with periods of growth;
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implementing, integrating and improving operational and financial systems, procedures and controls, including our computer systems;
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construction delays, equipment delays or shortages, labor shortages and disputes and production start-up problems;
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cost overruns and charges related to our expansion activities; and
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managing expanding operations in multiple locations and multiple time zones.
Our management team may not be effective in expanding our manufacturing facilities and operations, and our systems, procedures and controls may not be adequate to support such expansion. Any inability to manage our growth may harm our profitability and growth.
If we encounter problems during the expansion and continuing expanded use of our operations management and information systems, we could experience a disruption of our operations and unanticipated increases in our costs.
We are in the process of expanding our information systems for certain of our China facilities. Any problems encountered in the expansion of these systems and continued use and reliance on such systems could result in material adverse consequences, including disruption of operations, loss of information and unanticipated increases in costs.
WBL Corporation Limited beneficially owns approximately 62% of our outstanding common stock and is able to exert influence over us and our major corporate decisions.
WBL Corporation Limited, together with its affiliates and subsidiaries (“WBL”) beneficially owns approximately 62% of our outstanding common stock. As a result of this ownership interest and the resulting influence over the composition of our board of directors, WBL has influence over our management, operations and potential significant corporate actions. WBL’s board or executive management composition could change, and such change could affect the way WBL influences our corporate actions. For example, so long as WBL 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. In addition, for so long as WBL effectively owns 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 WBL’s 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, WBL could preclude us from engaging in an acquisition or other strategic opportunity that we may want to pursue if such acquisition or opportunity required 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. WBL could also sell a controlling interest in us, or a portion of their shares, to a third party, including a participant in our industry, which could adversely affect our operations or our stock price.
WBL 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 WBL of our common stock and the exercise by WBL 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.
WBL is currently unable to vote its shares on specified matters that require stockholder approval without obtaining its own stockholders’ and regulatory approval and it is possible that WBL’s stockholders or the relevant regulators may not approve the proposed corporate action.
WBL’s ordinary shares are listed on the Singapore Securities Exchange Trading Limited (the “Singapore Exchange”). Under the rules of the Singapore Exchange, to the extent that we constitute a principal subsidiary of WBL as defined by the rules of the Singapore Exchange at any time that we submit a matter for the approval of our stockholders, WBL may be required to obtain the approval of its own stockholders for such action before it 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 WBL to obtain its stockholders’ approval include an amendment of our certificate of incorporation, a sale of all or substantially all of our assets, a merger or reorganization transaction, and certain issuances of our capital stock.
To obtain stockholder approval, WBL must prepare a circular describing the proposal, obtain approval from the Singapore Exchange and send the circular to its stockholders, which may take several weeks or longer. In addition, WBL is required under its corporate rules to give its stockholders advance notice of the meeting. Consequently, if we need to obtain the approval of WBL at a time in which we qualify as a principal subsidiary (including this year), the process of seeking WBL’s stockholder approval may delay our proposed action and it is possible that WBL’s stockholders 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 WBL was unable to vote at the meeting as a result of the Singapore Exchange rules. The rules of the Singapore Exchange that govern WBL 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 will be required to expand our manufacturing capacity and fund working capital requirements for our anticipated growth. 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 the current uncertainty in global credit markets. 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.
In addition, WBL’s approval 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 WBL’s approval is required for a proposed financing, it is possible that it may not approve 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.
The uncertainty regarding the status of the global credit market and overall global economic stagnation may adversely affect our earnings, liquidity and financial condition.
In recent years, global financial and credit markets have been, and continue to be, unstable and unpredictable. In addition, worldwide economic conditions have been weak and have had an effect on consumer spending. The instability of the markets and weakness of the economy could affect the demand for our customers’ products, the amount, timing and stability of their orders to us, the financial strength of our customers and suppliers, their ability or willingness to do business with us, our willingness to do business with them, interest rates, and/or our suppliers’ and customers’ ability to fulfill their obligations to us. These factors could adversely affect our operations, earnings and financial condition.
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. For example, on August 1, 2012, we received a Revenue Agent Report (the “Report”) from the Internal Revenue Service (“IRS”) relating to its examination of our income tax returns for fiscal years 2007 and 2008. In the Report, the IRS proposed adjustments primarily related to our valuation of intellectual property and intercompany cost sharing arrangement. The proposed adjustments would result in approximately $120 million of additional taxable income for those two years. Management believes there are numerous errors in the Report, does not agree with the proposed adjustments and has vigorously contested the proposed adjustments. After reviewing the Report, management continues to believe that an adequate provision has been made for all of our uncertain tax positions. However, 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 in February 2011, the United States Department of the Treasury issued a high-level outline of proposed modifications to international tax laws for fiscal year 2012. If any of these, or similar, proposals are passed, our statements of financial position and results of operations could be negatively impacted.
Also, a number of countries in which we are located allow for tax holidays or provide other tax incentives to attract and retain business. For example, we currently enjoy tax incentives for our facility in Singapore. However, any tax holiday or incentive we have could be challenged, modified or even eliminated by taxing authorities or changes in law. In addition, the tax laws and rates in certain jurisdictions in which we operate (China, for example) can change with little or no notice, and any such change may even apply retroactively. Any of such changes could adversely affect our effective tax rate.
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.
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 may in the future, have environmental policies with which we are required to comply that are more stringent than applicable laws and regulations. A significant portion of our manufacturing operations are located in China, where we are
subject to constantly evolving environmental regulation. The costs of complying with any change in 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.
Compliance with new 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 2012 (the Dodd-Frank Act), required the SEC to establish new 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 final rules implementing these requirements, as released recently by the SEC could affect sourcing at competitive prices and availability in sufficient quantities of minerals used in the manufacture of our products. In addition, there will be costs associated with complying with the disclosure 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 and otherwise may become obliged to publicly disclose those efforts with regard to conflict minerals. 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 partnerships 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 partnerships 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 partnerships involve numerous risks, including:
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difficulties in integrating operations, technologies, accounting and personnel;
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problems maintaining uniform standards, procedures, controls and policies;
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difficulties in supporting and transitioning customers of our acquired companies;
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diversion of financial and management resources from existing operations;
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potential costs incurred in executing on such a transaction, including any necessary debt or equity financing;
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risks associated with entering new markets in which we have no or limited prior experience;
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potential loss of key employees; and
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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 property of our customers.
Some of our customers have entrusted us with proprietary equipment or intellectual property to be used in the design, manufacture and testing of the products we make for them. In some instances, we face potentially millions of dollars in financial exposure to those customers if such equipment or intellectual property is lost, damaged or stolen. Although we take precautions against such 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, deductibles for such insurance may be substantial and may adversely affect our operations if we were to experience a loss, even if insured.
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.
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
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 twelve month period from October 1, 2011 through September 30, 2012, our common stock price closed between $19.06 and $29.51 per share. Factors that could affect the trading price of our common stock include, but are not limited to:
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fluctuations in our financial results;
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the limited size of our public float;
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announcements of technological innovations or events affecting companies in our industry;
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changes in the estimates of our financial results;
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changes in the recommendations of any securities analysts that elect to follow our common stock; and
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market conditions in our industry, the industries of our customers and the economy as a whole.
In addition, although we have approximately 23.8 million shares of common stock outstanding as of September 30, 2012, approximately 14.8 million of those shares are held by WBL. 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.
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.
Item 2.
Item 2. Properties
The following is a summary of our material properties at September 30, 2012:
* We have several parcels that have land use rights expiring in 2050 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 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.
Item 3. Legal Proceedings
From time to time, we may be party to lawsuits in the ordinary course of business. We are currently not a party to any material legal proceedings.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
Part II
Item 5.
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:
Issuer Purchases of Equity Securities
The following table presents stock repurchases by month during fiscal 2012:
(1) Our Board of Directors has provided a committee with the discretion to execute a share repurchase program for up to 1,100,000 shares in the aggregate of our common stock on the open market. These shares represented approximately five percent of our common stock outstanding as of September 30, 2012. On September 2, 2011, we entered into a 10b5-1 Repurchase Plan Agreement under the committee’s discretion, which expired on June 2, 2012, and provided for the repurchase of up to 500,000 of such shares. As of September 30, 2012, a total of 488,400 of such shares were repurchased under such 10b5-1 Repurchase Plan Agreement at a weighted-average purchase price of $20.17 per share, for a total value of $9,853. All repurchased shares were retired and the excess of the repurchase price over par value was booked as an adjustment to additional paid-in capital in the periods in which the respective shares were retired.
Holders of Record
Stockholders of record on September 30, 2012 totaled approximately 21. 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 expect to retain our earnings, if any, for the growth and development of our business.
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 September 30, 2007 in each of our common stock, the NASDAQ Index and the NASDAQ Electronic 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.
Item 6.
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data 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
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 1 - A-“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
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 mobile phones, smartphones, tablets, consumer products, portable bar code scanners, computer/data storage and medical devices. We provide our solutions to original equipment manufacturers (“OEMs”) such as Apple, Inc., and to electronic manufacturing services (“EMS”) providers such as Foxconn Electronics, Inc., Jabil Circuit, Inc., and Flextronics International Ltd. Our business model, and the way we approach the markets which we serve, is based on value added engineering and providing technology solutions to our customers facilitating the miniaturization of portable electronics. We currently rely on a core mobility end-market for nearly all of our revenue. We believe this dynamic market offers fewer, but larger, opportunities than other electronic markets do, and changes in market leadership can occur with little to no warning. Through early supplier involvement with customers, we look to assist in the development of new designs and processes for the manufacturing of their products and, through value added component assembly of components on flex, seek to provide a higher level of product within their supply chain structure. This approach is relatively unique and may or may not always fit with the operating practices of all OEMs. Our ability to add to our customer base may have a direct impact on the relative percentage of each customer’s revenue to total revenues during any reporting period.
We typically have numerous programs in production at any particular time, the life cycle for which is typically around one year. The programs’ prices are subject to intense negotiation and are determined on a program by program basis, dependent on a wide variety of factors, including without limitation, expected volumes, assumed yields, material costs, actual yields, 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. 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 are not necessarily indicative of our 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.
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 for Motorola. 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 has 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. Our Chinese subsidiary provides 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 fiscal 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 fiscal 2010. In addition, we formed another wholly owned subsidiary in Chengdu, China, and in fiscal 2011, completed construction on our third and fourth manufacturing facilities in China as part of our continued capacity expansion initiative.
Net Sales
We design and manufacture our products to customer specifications. As of September 30, 2012, we engaged the services of certain non-exclusive sales representatives to provide customer contacts and market our products directly to our global customer base. These sales representatives were located throughout the North America, Europe and Asia. The variety of products our customers manufacture are referred to as programs. The majority of our sales are made to customers outside of the United States, and therefore sales volumes may be impacted by customer program and product mix changes and delivery schedule changes imposed on us by our customers. All sales from our Irvine, California executive office, Singapore regional office and our United Kingdom facility 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 cost relates 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 cost included the cost of personnel related to the manufacture of the completed product. Purchased process services 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 commissions paid to sales representatives, personnel-related and travel costs associated with sales and marketing, program management, corporate development and engineering support groups, sales support, trade shows, freight out, 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.
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 the assets. 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 of interest income earned on cash, cash equivalents balances and previously held short-term investments.
Interest Expense
Interest expense consisted of expense incurred on unused line fees on our revolving facilities, interest related to our deferred financing costs and interest on our previously held long-term debt.
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.
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 accounting principles generally accepted in the United States of America (“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.
We apply the following critical accounting policies in the preparation of our consolidated financial statements:
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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 revenues net of an allowance for returns, refunds and credits, which we estimate based on historical experience.
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Inventories. We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly review our inventory and record a provision for excess or obsolete inventory based primarily on historical usage and our estimate of expected and future product demand. Our estimates of future product demand will differ from actual demand; therefore, our estimates of the provision required for excess and obsolete inventory may change, which we will record in the period such determination is made.
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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 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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Accounts Receivable Allowance. We perform ongoing credit evaluations of our customers and adjust credit limits and their credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based on our historical experience, our anticipation of uncollectible amounts and any specific customer collection issues that we have identified. While our credit losses historically have been within our expectations and the allowance provided, we may not continue to experience the same credit loss rates that we have in the past. The majority of our receivables are concentrated in relatively few customers; therefore, a significant change in the liquidity or financial position of any one customer could make it more difficult for us to collect our accounts receivable and require us to increase our allowance for doubtful accounts.
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Warranty Reserves. Our warranty period is generally twelve months, though can be as long as thirty-six months, depending on the related product. We provide a warranty reserve for estimated product warranty costs at the time the net sales are recognized. While we engage in quality programs and processes, up to and including the final product, our warranty obligation is affected by product failure rates, the cost of the failed product and the inbound and outbound freight costs incurred in replacing defective parts. We continuously monitor and analyze product returns for warranty and maintain a reserve for the related warranty costs based on historical experience and assumptions. If actual failure rates and the resulting cost of replacement vary from our historically based estimates, revisions to the estimated warranty reserve would be required.
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Long-Lived Asset Impairment. We test for impairment whenever circumstances or events may affect the recoverability of long-lived assets. The evaluation is primarily dependent on the estimated future cash flows of the assets and the fair value of these items, as determined by management based on a number of estimates, including future cash flow projections, discount rates and terminal values. In determining these estimates, management considered internally generated information and information obtained from discussions with market participants. The determination of fair value requires significant judgment both by management and outside experts engaged to assist in this process.
The impairment test for long-lived assets is a two-step process. The first step is to assess if events or changes in circumstances have affected the recoverability of long-lived assets. If management believes that recoverability has been affected, then step two requires management to calculate the undiscounted future cash flow related to the asset or asset group and to compare the cash flow to the carrying value of the asset or asset group. If undiscounted future cash flows exceed the carrying value, there is no impairment.
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Restructuring Charges. We recognize restructuring charges related to plans to close or consolidate duplicate manufacturing and administrative facilities. In connection with these activities, we record restructuring charges for employee termination and relocation costs and other exit-related costs.
The recognition of restructuring charges requires that we make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned exit activity. To the extent that actual results differ from these estimates and assumptions, we may be required to revise the estimates of future liabilities, requiring the recognition of additional restructuring charges or the reduction of liabilities already recognized. Such changes to previously estimated amounts may be material to the consolidated financial statements. At the end of each reporting period, we evaluate the remaining accrued balances to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with developed exit plans.
In conjunction with the closure of certain of our facilities during the reporting periods, we estimated the restructuring costs that would result from the closures. Those costs included, but were not limited to, (a) termination benefits provided to current employees that are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred compensation contract, (b) costs to terminate a contract that is not a capital lease, and (c) costs to consolidate facilities or relocate employees. Based on our analysis and review of the relevant FASB authoritative guidance, we recorded pre-tax restructuring charges composed of severance, relocation, and other costs related to the closure of these facilities, as well as severance costs as a result of a reduction in force at certain of our other facilities.
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Goodwill. We evaluate the carrying value of goodwill during the fourth quarter of each fiscal year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: (i) a significant adverse change in legal factors or in business climate, (ii) unanticipated competition, or (iii) an adverse action or assessment by a regulator. In performing the impairment review, we determine the carrying amount of each reporting unit by assigning assets and liabilities, including the existing goodwill, to those reporting units. A reporting unit is defined as an operating segment or one level below an operating segment. A component of an operating segment is deemed a reporting unit if the component constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that component.
To evaluate whether goodwill is impaired, we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. We determine the fair value of each reporting unit using the present value of expected future cash flows for that reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. To date, we have had no impairments of goodwill.
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Stock-Based Compensation. We recognize compensation expense related to stock options, restricted stock units (“RSUs”) and stock appreciation rights (“SSARs”) granted to employees based on the grant date fair value. Our assessment of the estimated fair value of the stock options and SSARs granted is affected by our stock price as well as assumptions regarding a number of complex and subjective variables and the related tax impact. We utilize the Black-Scholes model to estimate the fair value of stock options and SSARs granted. Generally, our calculation of the fair value for stock options and SSARs granted under the relevant FASB authoritative guidance is similar to the calculation of fair value under the original guidance with the exception of the treatment of forfeitures. Expected forfeitures of stock options and SSARs are estimated based on the historical turnover of our employees. The fair value of RSUs granted is based on the grant date price of our common stock.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including:
(a) the expected volatility of our common stock price, which we determine based on historical volatility of our common stock;
(b) expected dividends, which are zero, as we do not currently anticipate issuing dividends;
(c) expected life of the stock option and SSAR, which is estimated based on the historical stock option and SSAR exercise behavior of our employees; and
(d) risk free interest rate, which is based on observed interest rates (zero coupon U.S. Treasury debt securities) appropriate for the expected holding period.
An award with a market condition is accounted for and measured differently than an award that has a performance or service condition. The effect of a market-based valuation is reflected in the award’s fair value on the grant date (e.g., a discount may be taken when estimating the fair value of an RSU to reflect the market condition). The fair value may be lower than the fair value of an identical award that has only a service or performance condition because those awards will not include a discount on the fair value. All compensation costs for awards that have only a market condition will be recognized if the requisite service period is fulfilled, even if the market condition is never satisfied.
In the future, we may elect to use different assumptions under the Black-Scholes valuation model or a different valuation model, which could result in a significantly different impact on our net income or loss.
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.
Fiscal Year Ended September 30, 2012 Compared to Fiscal Year Ended September 30, 2011
Net Sales. Net sales decreased to $818.9 million in the fiscal year ended September 30, 2012, from $831.6 million in the fiscal year ended September 30, 2011. The decrease of $12.7 million, or 1.5%, was primarily due to decreased net sales into our smartphone sector, partially offset by increased net sales into our tablet and consumer electronics sectors, as further quantified below.
Net sales into our smartphones sector decreased to $564.5 million in the fiscal year ended September 30, 2012, from $686.0 million in the fiscal year ended September 30, 2011. The decrease of $121.5 million, or 17.7%, was primarily due to lower sales volumes to one of our major customers. For the fiscal years ended September 30, 2012 and 2011, our smartphones sector accounted for approximately 69% and 83% of total net sales, respectively.
Net sales into our tablets sector increased to $219.6 million in the fiscal year ended September 30, 2012, from $110.4 million in fiscal 2011. The increase of $109.2 million, or 98.9%, was primarily due to increased volumes of 103% as a result of increased demand for products from one of our key customers in this sector. Average selling prices were relatively flat year over year in this sector. For the fiscal years ended September 30, 2012 and 2011, our tablets sector accounted for approximately 27% and 13% of total net sales, respectively.
Net sales into our consumer electronics sector increased to $15.2 million in the fiscal year ended September 30, 2012, from $8.5 million in the fiscal year ended September 30, 2011. The increase of $6.7 million, or 78.8%, was primarily due to higher sales volumes for one of our customer’s programs. For the fiscal years ended September 30, 2012 and 2011, our consumer electronics sector accounted for approximately 2% and 1% of total net sales, respectively.
Cost of Sales and Gross Profit. Cost of sales as a percentage of net sales increased to 89.9% in the fiscal year ended September 30, 2012, from 87.4% in the fiscal year ended September 30, 2011. The increase in cost of sales as a percentage of net sales of 2.5% was primarily attributable to increased wage and benefit costs in China accounting for approximately 115 basis points, higher utilities and manufacturing costs as a result of our capacity expansion accounting for approximately 110 basis points, appreciation of the RMB accounting for approximately 95 basis points, increased depreciation accounting for approximately 90 basis points as a result of the capacity expansion previously mentioned and increased yield loss, particularly in the fourth fiscal quarter of 2012, related to a new program launch accounting for approximately 40 basis points. These increases were partially offset by lower material costs due to changes in program mix year over year accounting for approximately 200 basis points. Gross profit decreased to $82.7 million in the fiscal year ended September 30, 2012, from $104.7 million in the fiscal year ended September 30, 2011, or 21.0%. As a percentage of net sales, gross profit decreased to 10.1% for the fiscal year ended September 30, 2012, from 12.6% for the fiscal year ended September 30, 2011.
Research and Development. Research and development expense decreased by $2.9 million to $7.6 million in the fiscal year ended September 30, 2012, from $10.5 million in the fiscal year ended September 30, 2011, a decrease of 27.6%. The decrease was primarily due to our decision to realign our global research and development activities in the United States and the United Kingdom and move certain research and development to China, where labor costs are lower. As a percentage of net sales, research and development expense decreased to 0.9% for the fiscal year ended September 30, 2012, from 1.3% in the fiscal year ended September 30, 2011.
Sales and Marketing. Sales and marketing expense decreased by $0.7 million to $24.5 million in the fiscal year ended September 30, 2012, from $25.2 million in the fiscal year ended September 30, 2011, a decrease of 2.8%. The decrease was primarily attributable to lower variable expenses due to sales mix. As a percentage of net sales, sales and marketing expense remained flat in the fiscal year ended September 30, 2012 when compared to the fiscal year ended September 30, 2011.
General and Administrative. General and administrative expense increased by $1.0 million to $19.8 million in the fiscal year ended September 30, 2012, from $18.8 million in the fiscal year ended September 30, 2011, an increase of 5.3%. The increase was attributable primarily to increases in third party professional fees associated with projects undertaken to evaluate various business opportunities. As a percentage of net sales, general and administrative expense increased to 2.4% for the fiscal year ended September 30, 2012, from 2.3% in the fiscal year ended September 30, 2011.
Impairment and Restructuring. During the fiscal year ended September 30, 2012, we recorded a net restructuring gain of $2.5 million, which consisted primarily of a gain on sale of our previously impaired properties in Arizona and California.
Interest Income (Expense), Net. Interest income (expense), net increased to a net income of $0.8 million in the fiscal year ended September 30, 2012, from a net income of $0.4 million in the fiscal year ended September 30, 2011, an increase of $0.4 million. The increase was primarily as a result of increased interest rates on our cash held by foreign institutions.
Other Income (Expense), Net. Other income (expense), net increased to income of $1.7 million in the fiscal year ended September 30, 2012, from income of $0.6 million in the fiscal year ended September 30, 2011, an increase of $1.1 million. The increase in income was primarily attributable to fluctuations from foreign exchange due to the movement of the U.S. dollar versus the RMB and other foreign currencies, as well as gains from foreign currency programs (such as forward contracts) to help mitigate the risk of foreign currency movements.
Income Taxes. The effective tax rate for the fiscal year ended September 30, 2012 and 2011 was 17.4% and 19.5%, respectively.
Guidance
Net Sales. For our first quarter of fiscal 2013, we expect net sales to be between $260 to $280 million based on the projected product mix and sales volume.
Cost of Sales and Gross Profit. For our first quarter of fiscal 2013, we expect gross margin to be between 10% and 12% based on the projected product mix and sales volume.
Operating Expenses. We expect operating expenses to be approximately $13 to $14 million during the first fiscal quarter of 2013.
Income Taxes. We expect the effective tax rate, on average, to be in the high teens going forward.
Capital Expenditures. For fiscal 2013, we are anticipating approximately $80 to $85 million in capital expenditures for normal equipment replacement, investments in automation to reduce labor costs and program-specific equipment upgrades.
These projections are subject to substantial uncertainty. See Item 1A of Part I, “Risk Factors”.
Fiscal Year Ended September 30, 2011 Compared to Fiscal Year Ended September 30, 2010
Net Sales. Net sales increased to $831.6 million in the fiscal year ended September 30, 2011, from $791.3 million in the fiscal year ended September 30, 2010. The increase of $40.3 million, or 5.1%, was primarily due to increased net sales into our smartphone and tablet sectors, partially offset by decreased net sales into our consumer electronics sector, as further quantified below.
Net sales into our smartphones sector increased to $686.0 million in the fiscal year ended September 30, 2011, from $541.3 million in the fiscal year ended September 30, 2010. The increase of $144.7 million, or 26.7%, was due to higher sales volumes to two of our major customers in this sector. For the fiscal years ended September 30, 2011 and 2010, our smartphones sector accounted for approximately 83% and 68% of total sales, respectively.
Net sales into our tablets sector increased to $110.4 million for the fiscal year ended September 30, 2011, from $7.9 million for the fiscal year ended September 30, 2010. The increase of $102.5 million was primarily due to higher content on average of 350% coupled with higher volume of 540% as a result of increased demand for products from one of our key customers in this sector. Sales into our tablets sector began to ramp in the second fiscal quarter of 2010 and continued to grow through fiscal 2011. For the fiscal years ended September 30, 2011 and 2010, our tablets sector accounted for approximately 13% and 1% of total net sales, respectively.
Net sales into our consumer electronics sector decreased to $8.5 million in the fiscal year ended September 30, 2011, from $191.9 million in the fiscal year ended September 30, 2010. The decrease was primarily due to one of our customer’s programs, which incorporates our flex assembly, reaching the end of its life cycle. Shipments into our consumer electronics sector accounted for approximately 1% and 24% of total net sales for the fiscal years ended September 30, 2011 and 2010, respectively.
Cost of Sales and Gross Profit. Cost of sales as a percentage of net sales increased to 87.4% for the fiscal year ended September 30, 2011, from 85.7% for the fiscal year ended September 30, 2010. The increase in cost of sales as a percentage of net sales of 1.7% was primarily attributable to the appreciation of the Chinese Yuan accounting for approximately 110 basis points, wage rate and benefits increases in China accounting for approximately 200 basis points, increased depreciation expenses accounting for approximately 30 basis points,
and decreased other costs accounting for approximately 170 basis points. Gross profit decreased to $104.7 million in the fiscal year ended September 30, 2011, from $113.0 million in the fiscal year ended September 30, 2010, or 7.3%. As a percentage of net sales, gross profit decreased to 12.6% for the fiscal year ended September 30, 2011 from 14.3% in the fiscal year ended September 30, 2010.
Research and Development. Research and development expense decreased to $10.5 million in the fiscal year ended September 30, 2011, from $14.5 million in the fiscal year ended September 30, 2010, a decrease of 27.6%. The decrease was primarily due to our decision to realign our global research and development activities in California and the United Kingdom and move certain research and development to China, where labor costs are lower.
Sales and Marketing. Sales and marketing expense increased by $1.1 million to $25.2 million in the fiscal year ended September 30, 2011, from $24.1 million in the fiscal year ended September 30, 2010, an increase of 4.6%. The increase was primarily attributable to increased sales commissions due to higher sales volume. As a percentage of net sales, sales and marketing expense remained flat in the fiscal year ended September 30, 2011 when compared to the fiscal year ended September 30, 2010.
General and Administrative. General and administrative expense decreased by $2.8 million to $18.8 million in the fiscal year ended September 30, 2011, from $21.6 million in the fiscal year ended September 30, 2010, a decrease of 13.0%. The decrease was attributable to a $1.5 million reduction in stock-based compensation expense primarily related to the reversal of expenses for performance-based awards that were deemed not probable to vest, a reduction of $0.2 million in wages and benefits as part of our fiscal 2010 restructurings, a decrease of $0.6 million of audit, tax and legal fees, a reduction of $0.3 million in insurance costs and a net decrease of $0.2 million in other general and administrative expenses. As a percentage of net sales, general and administrative expense decreased to 2.3% for the fiscal year ended September 30, 2011, from 2.7% in the fiscal year ended September 30, 2010, attributable to the favorable leveraging impact on our operating expenses from the increased net sales and the decreases described above.
Impairment and Restructuring. During the fiscal year ended September 30, 2011, we recorded net restructuring charges of $4.2 million as part of additional efforts to consolidate our global operations and to improve our cost structure. Impairment and restructuring expenses in the fiscal year ended September 30, 2011 were attributable primarily to asset impairments related to certain of our properties in Arizona and California due to market decline in commercial real estate values in the fiscal year ended September 30, 2011 of approximately $3.2 million, coupled with a reduction in force at our corporate headquarters which resulted in termination benefits and other charges of approximately $1.0 million.
Interest Income (Expense), Net. Interest income (expense), net increased to a net income of $0.4 million in the fiscal year ended September 30, 2011 from a net expense of $0.2 million in the fiscal year ended September 30, 2010 primarily as a result of increased interest rates on our cash held by foreign institutions.
Other Income (Expense), Net. Other income (expense), net increased to income of $0.6 million in the fiscal year ended September 30, 2011, from income of $0.5 million in the fiscal year ended September 30, 2010.
Income Taxes. The effective tax rate for the fiscal year ended September 30, 2011 was 19.5% and was 28.6% for the fiscal year ended September 30, 2010. The decrease was primarily a result of the reorganization of international operations to further strengthen our Asian operations. The higher effective tax rate in the prior fiscal year was primarily due to the establishment of valuation allowances on net operating losses related to our Malaysia and United Kingdom operations as a result of plans to restructure the entities.
Liquidity and Capital Resources
Our principal sources of liquidity have been cash provided by operations and our ability to borrow under our various credit facilities. Our principal uses of cash have been to finance working capital, facility expansions,
stock repurchases and other capital expenditures. We anticipate these uses will continue to be our principal uses of cash in the future. Global financial and credit markets have been volatile in recent years, and future adverse conditions of these markets could negatively affect our ability to secure funds or raise capital at a reasonable cost, if needed.
We believe that funds generated from our operations and available from our borrowing facilities will be sufficient to fund current business operations as well as anticipated growth over at least the next fiscal year, without the need to repatriate earnings. Undistributed earnings of our foreign subsidiaries amounted to approximately $217,255, $184,994 and $141,830 for the fiscal years ended September 30, 2012, 2011 and 2010, respectively.
The following table sets forth, for the years indicated, our net cash flows provided by (used in) operating, investing and financing activities, our period-end cash and cash equivalents and certain other operating measures:
Changes in the principal components of operating cash flows in our fiscal year ended September 30, 2012 were as follows:
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Our net accounts receivable increased to $165.4 million as of September 30, 2012 from $150.5 million as of September 30, 2011, or 9.9%, primarily due to increase sales in our fourth fiscal quarter of 2012 versus the same period in the prior year. Due to the timing of new program ramps, a substantial portion of our fourth fiscal quarter revenues were recognized late in the quarter, which resulted in a large accounts receivable balance not due until the first fiscal quarter of 2013. Our net inventory balance increased to $124.8 million as of September 30, 2012 versus $87.2 million as of September 30, 2011. The increase was primarily the result of customer requests to stock finished goods inventory at our hub locations that are close in proximity to Electronic Manufacturing Services (“EMS”) facilities where the end product handset or tablet is assembled in preparation for our increased volume during our first fiscal quarter of 2013. Our accounts payable balance increased to $199.7 million as of September 30, 2012 from $162.8 million as of September 30, 2011, an increase of 22.7%. The increase in accounts payable was primarily the result of the timing of inventory purchases and more favorable vendor payment terms. Purchases increased towards the end of our fourth fiscal quarter of 2012 to support increased production volumes and the corresponding payables are not due until the latter half of the first quarter of fiscal 2013.
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Depreciation and amortization expense was $53.1 million for the fiscal year ended September 30, 2012, versus $45.5 million for the comparable period of the prior year, an increase of $7.6 million. This was primarily due to an increased fixed asset base in manufacturing operations in China.
Our principal investing and financing activities in our fiscal year ended September 30, 2012 were as follows:
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Net cash used in investing activities was $74.6 million for the fiscal year ended September 30, 2012. Capital expenditures included cash purchases of $86.1 million of capital equipment and other assets, which were primarily related to our manufacturing capacity expansion in China. Proceeds from sales of
equipment and assets held for sale of $11.4 million was primarily due to cash proceeds of $7.5 million and $1.9 million from the sale of our corporate headquarters previously located in Anaheim, California and our former Aurora Optical facility in Arizona, respectively.
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Net cash used in financing activities was $9.6 million for the fiscal year ended September 30, 2012 and consisted primarily of repurchases of common stock of $8.8 million and $1.1 million of tax withholdings for net share settlements of equity awards to employees. Our loans payable and borrowings outstanding against credit facilities were zero at September 30, 2012 and September 30, 2011.
Changes in the principal components of operating cash flows in our fiscal year ended September 30, 2011 were as follows:
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Our net accounts receivable increased to $150.5 million as of September 30, 2011 from $149.5 million as of September 30, 2010, or 0.7%. The increase in accounts receivable was primarily due to increased sales as the result of changes in payment terms with certain customers. Our net inventory balance increased to $87.2 million as of September 30, 2011 versus $76.9 million as of September 30, 2010, primarily as the result of customer requests to stock finished goods inventory at our hub locations that are close in proximity to EMS facilities where the end product handset or tablet is assembled. Our accounts payable balance increased to $162.8 million as of September 30, 2011 from $156.9 million as of September 30, 2010, an increase of 3.8%. The increase in accounts payable was primarily the result of more favorable vendor payment terms.
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Depreciation expense was $44.6 million for the fiscal year ended September 30, 2011, versus $42.2 million for the comparable period of the prior year, primarily due to an increased fixed asset base in manufacturing operations in China and partially offset by dispositions of equipment associated with our restructuring activities in the United Kingdom, Malaysia and Anaheim. Amortization expense was $0.9 million for fiscal 2011, versus $2.3 million for the comparable period of the prior year mainly due to the decision to fully impair our intangibles assets as of September 30, 2010.
Our principal investing and financing activities in our fiscal year ended September 30, 2011 were as follows:
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Net cash used in investing activities was $63.4 million for the fiscal year ended September 30, 2011. Capital expenditures included cash purchases of $79.8 million of capital equipment and other assets, which were primarily related to our manufacturing capacity expansion in China. In addition, United States treasury bills amounting to $15.0 million were redeemed during the first fiscal quarter of 2011. As of September 30, 2011, we had outstanding purchase commitments, which exclude amounts already recorded on the Consolidated Balance Sheets, totaling $8.1 million primarily related to capital projects at our various facilities.
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Net cash used in financing activities was approximately $1.9 million for the fiscal year ended September 30, 2011 and consisted of repurchases of common stock of $1.9 million and $1.3 million of tax withholdings for net share settlement of equity awards to employees, partially offset by $1.3 million of proceeds from exercise of stock options and income tax benefit related to stock option exercises. Our loans payable and borrowings outstanding against credit facilities were zero at September 30, 2011 and September 30, 2010.
Changes in the principal components of operating cash flows in our fiscal year ended September 30, 2010 were as follows:
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Our net accounts receivable increased to $149.5 million at September 30, 2010 from $129.3 million for the prior fiscal year, or 15.6%. The increase in outstanding accounts receivable is mainly attributable to increases in customer shipments during the fourth fiscal quarter of 2010. Our net inventory balances
increased to $76.9 million at September 30, 2010 from $50.3 million for the prior fiscal year, an increase of 52.9%. Inventory increased primarily as a result of increased customer hub inventory activities. Our accounts payable increased to $156.9 million at September 30, 2010 from $122.5 million in the prior fiscal year, an increase of 28.1%, as a result of increased business volumes as well as lengthened payment terms with our suppliers.
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Depreciation and amortization expense was $44.5 million for fiscal 2010 from $40.8 million in the prior fiscal year due to the increased fixed asset base, mainly at our manufacturing facilities in China.
Our principal investing and financing activities in our fiscal year ended September 30, 2010 were as follows:
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Net cash used in investing activities was $59.1 million for fiscal 2010. Capital expenditures included cash purchases of $59.9 million of capital equipment and other assets, which were primarily related to our manufacturing capacity expansion in China. As of September 30, 2010, we had outstanding purchase commitments, which exclude amounts already recorded on the Consolidated Balance Sheets, totaling $38.1 million.
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Net cash used in financing activities was $48.5 million for fiscal 2010 and consisted of repurchases of common stock of $39.1 million, $1.3 million of tax withholdings for net share settlement of equity awards to employees and repayments on our long-term debt of $11.1 million, partially offset by cash generated of $1.1 million of income tax benefit related to the exercise of stock options and $1.9 million of proceeds from the exercise of stock options. Our loans payable and borrowings outstanding against credit facilities were zero at September 30, 2010 and 2009.
Capital Commitments
As of September 30, 2012, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s (“SEC”) Regulation S-K. The following summarizes our contractual obligations, excluding accrued taxes related to uncertain tax positions and amounts already recorded on the Consolidated Balance Sheets, at September 30, 2012, and the effect those obligations are expected to have on our liquidity and cash flow in future periods (in thousands):
As of September 30, 2012, we had purchase obligations of $9.1 million, which exclude amounts already recorded on the Consolidated Balance Sheets, which were primarily related to expansion activities at our various facilities and commitments for material purchases.
As of September 30, 2012, we recorded $16.7 million in long-term liabilities for accrued taxes related to uncertain tax positions. We are not able to reasonably estimate the timing of the long-term payments, or the amount by which our liability will increase or decrease over time; therefore, the liability on uncertain tax positions has not been included in the contractual obligations table.
Recent Accounting Pronouncements
In July 2012, the FASB issued revised authoritative guidance that is intended to reduce the cost and complexity of the impairment test for indefinite-lived intangible assets by providing an entity with the option to first assess qualitatively whether it is necessary to perform the impairment test that is currently in place. An
entity would not be required to quantitatively calculate the fair value of an indefinite-lived intangible asset unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments are effective for interim and annual periods beginning after September 15, 2012 (which is October 1, 2012 for MFLEX). Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In December 2011, the FASB issued revised authoritative guidance that deferred the effective date for amendments to the presentation of reclassification adjustments out of other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. The amendments are effective for interim and annual periods beginning after December 2011 (which was January 1, 2012 for MFLEX). The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.
In December 2011, the FASB issued revised authoritative guidance that requires an entity to disclose information about offsetting and related arrangements on its financial position. This includes the effect or potential effect of rights of offset associated with an entity’s recognized assets and recognized liabilities and requires improved information about financial instruments and derivative instruments that are subject to an enforceable master netting arrangement or similar arrangement. The amendments are effective for annual periods beginning on or after January 1, 2013 (which is October 1, 2013 for MFLEX) and retrospective disclosure is required for all comparative periods presented. Early adoption is not permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In June 2011, the FASB issued revised authoritative guidance that requires all non-owner changes in stockholder’s equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. The amendments are effective for annual periods beginning after December 15, 2011 (which is October 1, 2012 for MFLEX) and are to be applied retrospectively. Early adoption is permitted. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.
In May 2011, the FASB issued revised authoritative guidance that resulted in common principles and requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value” in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). The amendments are effective for interim and annual periods beginning after December 15, 2011 (which was January 1, 2012 for MFLEX) and were to be applied prospectively. Early application by public entities was not permitted. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk represents the risk of loss arising from adverse changes in liquidity, market rates and foreign exchange rates. At September 30, 2012, no amounts were outstanding under our loan agreements with Bank of China Co., Ltd., JPMorgan Chase Bank, N.A., Agricultural Bank of China or China Construction Bank. The amounts outstanding under these loan agreements at any time may fluctuate and we may, from time to time, be subject to refinancing risk. We do not believe that a change of 100 basis points in interest would have a material effect on our results of operations or financial condition based on our current borrowing level.
Foreign Currency Risk
We derive a substantial portion of our sales outside of the U.S. Approximately $792.4 million, or 97%, of total shipments to these foreign manufacturers during fiscal 2012 were made in U.S. dollars with the remaining balance of our net sales denominated in RMB. We currently have a significant portion of our expenses, more
specifically cost of sales, denominated in RMB, whereby a significant appreciation or depreciation in the RMB could materially affect our reported expenses in U.S. dollars. The exchange rate for the RMB to the U.S. dollar has been an average of 6.32 RMB per U.S. dollar for fiscal 2012. To date, we attempt to manage our working capital in a manner to minimize foreign currency exposure and from time to time, we may engage in currency hedging activities through use of forward contracts, but such activities may not be able to limit the risks of currency fluctuations and we continue to be vulnerable to appreciation or depreciation of foreign currencies against the U.S. dollar. At September 30, 2012, we had no outstanding forward contracts.
Liquidity Risk
We believe our anticipated cash flows from operations are sufficient to fund our operations, including capital expenditure requirements, through at least the next fiscal year. If there was a need for additional cash to fund our operations, we would access our global credit lines.
Item 8.
Item 8. Financial Statements and Supplementary Data
MULTI-FINELINE ELECTRONIX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Multi-Fineline Electronix, Inc:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows present fairly, in all material respects, the financial position of Multi-Fineline Electronix, Inc. and its subsidiaries at September 30, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing under Item 8 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statements, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Irvine, California
November 16, 2012
MULTI-FINELINE ELECTRONIX, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
The accompanying notes are an integral part of these consolidated financial statements.
MULTI-FINELINE ELECTRONIX, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands, Except Per Share and Share Data)
The accompanying notes are an integral part of these consolidated financial statements.
MULTI-FINELINE ELECTRONIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands, Except Share Data)
The accompanying notes are an integral part of these consolidated financial statements.
MULTI-FINELINE ELECTRONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
MULTI-FINELINE ELECTRONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share and Share Data)
1. Basis of Presentation and Significant Accounting Policies
Description of the Company
Multi-Fineline Electronix, Inc. (“MFLEX” or the “Company”) was incorporated in 1984 in the State of California and reincorporated in the State of Delaware in June 2004. The Company is primarily engaged in the engineering, design and manufacture of flexible printed circuit boards along with related component assemblies.
Affiliates and subsidiaries of WBL Corporation Limited (collectively “WBL”), a Singapore company, beneficially owned approximately 62% of the Company’s outstanding common stock as of September 30, 2012 and 2011, which provides WBL with control over the outcome of stockholder votes, except with respect to certain related-party transactions.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company has two wholly owned subsidiaries located in China: MFLEX Suzhou Co., Ltd. (“MFC”) formerly known as Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd. (“MFC2”) and into which Multi-Fineline Electronix (Suzhou) Co., Ltd (“MFC1”) 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 Arizona: Aurora Optical, Inc. (“Aurora Optical”), which was dissolved in September 2012; one located in Cambridge, England: MFLEX UK Limited (“MFE”), formerly known as Pelikon Limited; and one located in Korea: MFLEX Korea, Ltd. (“MKR”). All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used, including, but not limited to, those related to inventories, income taxes, accounts receivable allowance and warranty. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents consisted of money market funds as of September 30, 2012 and no cash equivalents were recorded on the Company’s consolidated balance sheets as of September 30, 2011.
Fair Value Measurements
Per Financial Accounting Standards Board (“FASB”) authoritative guidance, the Company classifies and discloses the fair value of certain of its assets and liabilities in one of the following three categories:
Level 1: quoted market prices in active markets for identical assets and liabilities
Level 2: observable market based inputs or unobservable inputs that are corroborated by market data
Level 3: unobservable inputs that are not corroborated by market data
The carrying amounts of certain of the Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities approximated fair value due to their short maturities. The fair value of the Company’s money market funds of $12,037 and $0 were measured using Level 1 fair value inputs and were recorded as cash and cash equivalents in the Consolidated Balance Sheet as of September 30, 2012 and 2011, respectively. The fair value of the Company’s derivative assets of $0 and $7 were measured using Level 2 fair value inputs, which consisted of observable market-based inputs of foreign currency spot and forward rates quoted by major financial institutions, and were recorded as other current assets in the consolidated balance sheet as of September 30, 2012 and 2011, respectively. No derivative assets or liabilities were recorded on the Company’s Consolidated Balance Sheet as of September 30, 2012.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consisted primarily of cash, to the extent balances exceeded limits that were insured by the Federal Deposit Insurance Corporation or the equivalent government body in other countries, and accounts receivable. Credit risk exists because the Company’s flexible printed circuit boards and related component assemblies were sold to a limited number of customers during the reporting periods herein (Note 8). The Company does not require collateral and maintains reserves for potential credit losses. Such losses have historically been immaterial and have been within management’s expectations.
Accounts Receivable
The Company records revenues in accordance with the terms of the sale, which is generally at shipment. Accounts receivable are recorded at the invoiced amount, and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in existing accounts receivable and the allowance is determined based on historical write-off experience as well as specific identification of credit issues with invoices. The Company reviews the allowance for doubtful accounts monthly (or more often, if necessary), and past due balances over 90 days and over a specified amount are reviewed individually for collectability. All other balances are reviewed on an aggregate basis. Account balances are charged against the allowance if and when the Company determines it is probable that the receivable will not be collected. The Company does not have any off-balance sheet credit exposure related to its customers.
Inventories
Inventories are stated at the lower of cost or market, with cost being determined on a first-in, first-out basis. The Company records a provision for excess and obsolete inventory based on historical usage and expected future product demand.
Property, Plant and Equipment
Property, plant, and equipment are stated at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets as follows:
Buildings and building improvements
20 - 39 years
Machinery and equipment
3 - 10 years
Furniture and fixtures
5 years
Computers and capitalized software
3 - 5 years
Leasehold improvements
Shorter of 15 years or life of lease
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted cash flows attributable to such assets, including any cash flows upon
their eventual disposition, to their carrying value. If the carrying value of the assets exceeds the forecasted undiscounted cash flows, then the assets are written down to their fair value. During the fiscal years ended September 30, 2012, 2011 and 2010, the Company recorded restructuring asset (recoveries) impairments of ($2,468), $3,384 and $3,566 for long-lived assets, respectively (Note 12).
Land Use Rights
Land use rights include long-term leaseholds of land for the Company’s facilities located in China. The Company paid an upfront fee for use of the land use rights and amortizes the expense through expiration.
Goodwill
The Company records the assets acquired and liabilities assumed in business combinations at their respective fair values at the date of acquisition, with any excess purchase price recorded as goodwill. Valuation of intangible assets entails significant estimates and assumptions including, but not limited to, determining the timing and expected costs to complete development projects, estimating future cash flows from product sales, developing appropriate discount rates, estimating probability rates for the successful completion of development projects, continuation of customer relationships and renewal of customer contracts, and approximating the useful lives of the intangible assets acquired.
The Company reviews the recoverability of the carrying value of goodwill on an annual basis during its fourth fiscal quarter, or more frequently when an event occurs or circumstances change to indicate that an impairment of goodwill has possibly occurred. The determination of whether any potential impairment of goodwill exists is based upon a comparison of the fair value of the reporting unit to the carrying value of the underlying net assets of such reporting unit. If the fair value of the reporting unit is less than the carrying value of the underlying net assets, goodwill is deemed impaired and an impairment loss is recorded to the extent that the carrying value of goodwill exceeds the difference between the fair value of the reporting unit and the fair value of all its underlying identifiable assets and liabilities. The Company has determined that it has one reporting unit for evaluating its goodwill for impairment.
During the fourth quarter of fiscal 2012 and 2011, the Company performed its annual goodwill impairment test and noted that the fair value of the reporting unit exceeded the carrying value of the underlying net assets. Therefore, as of September 30, 2012 and September 30, 2011, no impairments of goodwill were required.
Revenue Recognition
The Company’s revenues, which the Company refers to as net sales, net of allowance for returns, refunds and credits, which are estimated based on historical experience, are generated from the sale of flexible printed circuit boards and related component assemblies, which are sold to original equipment manufacturers and electronic manufacturing services providers to be included in other electronic products. The Company recognizes revenue when there is persuasive evidence of an arrangement with the customer that states 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 accounts receivable is reasonably assured. The Company does not have any post-shipment obligations (e.g., installation or training) or multiple-element arrangements. The Company’s remaining obligation to its customer after delivery is limited to warranty on its product.
Product Warranty Accrual
The Company typically warrants its products for up to 36 months. The standard warranty requires the Company to replace defective products returned to the Company at no cost to the customer. The Company records an estimate for warranty related costs at the time revenue is recognized based on historical amounts incurred for warranty expense and historical warranty return rates. The warranty accrual is included in accrued liabilities in the accompanying consolidated balance sheets.
Changes in the product warranty accrual for the fiscal years ended September 30, 2012, 2011 and 2010, were as follows:
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.
Income Taxes
Income taxes are computed using the asset and liability method. Under this method, deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the tax bases and financial reporting amounts of existing assets and liabilities. Valuation allowances are established when it is more likely than not that such deferred tax assets will not be realized. The Company does not file a consolidated return with its foreign wholly owned subsidiaries.
The Company has a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities, based on the technical merits of the position. The amount recognized is measured as the largest amount of benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefit in income tax expense.
Foreign Currency
The functional currency of the Company’s foreign subsidiaries is either the local currency or if the predominant transaction currency is “United States dollars”, then United States dollars will be the functional currency. Balances are translated into United States dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for each period for income statement amounts. Currency translation adjustments are recorded in accumulated other comprehensive income, a component of stockholders’ equity.
Foreign currency transactions occur primarily when there is a receivable or payable denominated in other than the respective entity’s functional currency. The Company records the changes in the exchange rate for these transactions in the consolidated statements of comprehensive income. For the fiscal years ended September 30, 2012, 2011 and 2010, foreign exchange transaction gains and losses were included in other income (expense), net and were net losses of $69, $160 and $1,077, respectively.
Derivative Financial Instruments
The Company’s derivative financial instruments are designated to economically hedge the exposure of future cash flows denominated in non-U.S. dollar currency. Derivative financial instruments are measured at fair value and are recorded in the consolidated balance sheets as either assets or liabilities. Changes in the fair value of the derivative financial instruments are recorded each period in the consolidated statements of income or other
comprehensive income, depending on whether the derivative instruments are designated as part of the hedge transaction, and if so, the type of hedge transaction.
The Company evaluates its derivative financial instruments as either cash flow hedges (forecasted transactions), fair value hedges (changes in fair value related to recognized assets or liabilities) or derivative financial instruments that do not qualify for hedge accounting. To qualify for hedge accounting, a derivative financial instrument must be highly effective in mitigating the designated risk of the hedged item. For derivative financial instruments that do not qualify for hedge accounting, changes in the fair value are reported in current period earnings.
The Company designates its derivative financial instruments as non-hedge derivatives and records its foreign currency forward contracts as either assets or liabilities in the consolidated balance sheets. Changes in the fair value of the derivative financial instruments that arise due to fluctuations in the forward exchange rates are recognized in earnings each period as other income (expense), net in the consolidated statements of comprehensive income. Realized gains (losses) will be recognized at maturity as other income (expense), net in the consolidated statements of comprehensive income. The cash flows from derivative financial instruments are classified as cash flows from operating activities in the consolidated statements of cash flows. As of September 30, 2012, no derivative assets or liabilities were recorded on the Company’s Consolidated Balance Sheet. See Note 13 for further information on derivative financial instruments.
Accounting for Stock-Based Compensation
The Company recognizes compensation expense for all stock-based payment arrangements, net of an estimated forfeiture rate and generally recognizes compensation cost for those shares expected to vest over the requisite service period of the award. For stock options and stock appreciation rights, the Company generally determines the grant date fair value using the Black-Scholes option-pricing model which requires the input of certain assumptions, including the expected life of the stock-based payment awards, stock price volatility and interest rates. For restricted stock unit valuation, the Company determines the fair value using the closing price of the Company’s common stock on the date of grant.
Net Income Per Share-Basic and Diluted
Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. In computing diluted earnings per share, the weighted average number of shares outstanding is adjusted to reflect the effect of potentially dilutive securities. The impact of potentially dilutive securities is determined using the treasury stock method.
The following table presents a reconciliation of basic and diluted shares:
Recent Accounting Pronouncements
In July 2012, the FASB issued revised authoritative guidance that is intended to reduce the cost and complexity of the impairment test for indefinite-lived intangible assets by providing an entity with the option to first assess qualitatively whether it is necessary to perform the impairment test that is currently in place. An entity would not be required to quantitatively calculate the fair value of an indefinite-lived intangible asset unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments are effective for interim and annual periods beginning after September 15, 2012 (which is October 1, 2012 for the Company). Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In December 2011, the FASB issued revised authoritative guidance that deferred the effective date for amendments to the presentation of reclassification adjustments out of other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. The amendments are effective for interim and annual periods beginning after December 2011 (which was January 1, 2012 for the Company). The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In December 2011, the FASB issued revised authoritative guidance that requires an entity to disclose information about offsetting and related arrangements on its financial position. This includes the effect or potential effect of rights of offset associated with an entity’s recognized assets and recognized liabilities and requires improved information about financial instruments and derivative instruments that are subject to an enforceable master netting arrangement or similar arrangement. The amendments are effective for annual periods beginning on or after January 1, 2013 (which is October 1, 2013 for the Company) and retrospective disclosure is required for all comparative periods presented. Early adoption is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In June 2011, the FASB issued revised authoritative guidance that requires all non-owner changes in stockholder’s equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. The amendments were effective for annual periods beginning after December 15, 2011 (which is October 1, 2012 for the Company) and are to be applied retrospectively. Early adoption is permitted. The guidance was adopted by the Company in fiscal 2012 and did not have a material impact on its consolidated financial position, results of operations or cash flows.
In May 2011, the FASB issued revised authoritative guidance that resulted in common principles and requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value” in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). The amendments were effective for interim and annual periods beginning after December 15, 2011 (which was January 1, 2012 for the Company) and were to be applied prospectively. Early application by public entities was not permitted. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
2. Related Party Transactions
Rent expense for the fiscal years ended September 30, 2012, 2011 and 2010 included related-party payments to various WBL subsidiaries of $133, $217 and $420, respectively. As of September 30, 2012, 2011 and 2010, the Company leased approximately seven thousand square feet of office space from WBL related parties.
During the second fiscal quarter of 2011, MFC entered into an agreement to purchase property located in Suzhou, China from Wearnes Global (Suzhou) Co., Ltd., a subsidiary of the Company’s majority stockholder
WBL. The property consists of land-use rights and building and had a total purchase price of 32,314 Chinese Renminbi (“RMB”) ($5,096 at September 30, 2012), of which 22,481 RMB ($3,545 at September 30, 2012) and 9,833 RMB ($1,551 at September 30, 2012) were subsequently allocated to the land-use rights and building, respectively. MFC previously leased such property from WBL.
3. Composition of Certain Balance Sheet Components
Inventories, net of related allowances, were comprised of the following:
Property, plant, and equipment, net, were comprised of the following:
Depreciation expense for the fiscal years ended September 30, 2012, 2011 and 2010, was $52,249, $44,641 and $42,196, respectively.
Accrued liabilities were comprised of the following:
Other liabilities were comprised of the following:
4. Goodwill and Intangible Assets
Goodwill
The Company records the excess of an acquisition’s purchase price over the fair value of the identified assets and liabilities as goodwill. As of September 30, 2012 and 2011, the carrying amount of goodwill was $7,537.
Intangible Assets
As part of the acquisition of Pelikon Limited (now part of MFE) in fiscal 2009, the Company recorded intangible assets of $6,800 related to purchased technology. The Company historically assessed the valuation of its intangible assets whenever events or changes in circumstances indicated that the carrying value may not have been recoverable. In the fourth quarter of fiscal 2010, the Company conducted a review of its MFE operations due to declines in sales forecasts, technical issues encountered in commercializing the technology and the overall success of the technology being slower to achieve than originally expected. As a result, the Company determined to allocate financial resources to other products/technologies and limit future investment in MFE. Accordingly, an impairment test was performed to determine whether the undiscounted future cash flows that would be provided by the intangible assets were greater than the carrying value. As a result of the impairment test, the Company recorded a non-cash charge of $4,345 to fully impair its intangible assets during fiscal 2010.
Amortization of intangible assets was $0, $0 and $1,360 for the fiscal years ended September 30, 2012, 2011 and 2010, respectively. As of September 30, 2012, the Company did not record any intangible assets on its consolidated balance sheet.
5. Income Taxes
United States and foreign income (loss) before taxes were as follows:
The provision for (benefit from) income taxes consisted of the following components:
Deferred tax assets and (liabilities) comprised the following:
The Company established a valuation allowance of approximately $12,334 and $12,527 as of September 30, 2012 and 2011, respectively. The valuation allowance is comprised of net operating loss carryforwards, capital loss carryforwards and deferred income tax benefits attributable to the Company’s investments. The valuation allowance decreased by $193 due to an increase of $65 in MFE’s current year net operating loss, a decrease of $260 in stock-based compensation and an increase of $2 in return to provision adjustments. There is uncertainty regarding the future realization of these deferred tax assets and management has determined that more likely than not it will not receive future tax benefits from these assets.
As of September 30, 2012 and 2011, the Company had net operating loss carryforward for federal tax purposes of $2,083 and $0, respectively. The Company had net operating loss carryforwards for state tax purposes of $7,693 and $5,371, respectively. In addition, the Company had net operating loss carryforwards for foreign tax purposes of approximately $47,580 and $43,683, respectively. The net operating loss carryforwards will begin to expire in 2033 for federal tax purposes. The net operating loss carryforwards will begin to expire in 2016 for state and may be carried forward indefinitely for foreign tax purposes. The foreign net operating loss includes pre-acquisition net operating loss from MFE in the amount of $23,479. Due to a change of ownership of MFE, utilization of the pre-acquisition net operating loss may be limited if MFE experiences a change in the nature or conduct of the business. In addition, the Company had foreign tax credit carryforwards of $620, which will begin to expire in 2021.
The provision for (benefit from) income taxes differs from the amount obtained by applying the statutory tax rate as follows:
The Company currently enjoys tax incentives for certain of its Asia operations. Certain Asia operations are subject to taxes at a rate lower than the statutory rates. However, these tax holidays and tax incentives may be challenged, modified or even eliminated by taxing authorities or change in law.
Had the Company not received the tax incentive for its operations in Asia, net income for the fiscal years ended September 30, 2012, 2011 and 2010 would have been decreased to the pro forma amounts as illustrated below:
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $217,255, $184,994 and $141,830 for the fiscal years ended September 30, 2012, 2011 and 2010, respectively. Those earnings are considered to be permanently reinvested due to certain restrictions under local laws as well as the Company’s plans to reinvest such earnings for future expansion in certain foreign jurisdictions. Accordingly, no provision for U.S. federal and state taxes has been provided thereon. Upon repatriation of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes payable to the foreign country. It is not practical to estimate the amount of unrecognized deferred U.S. taxes on those undistributed earnings.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:
As of September 30, 2012, the liability for income taxes associated with uncertain tax positions increased to $15,423 from $14,354 as September 30, 2011. As of September 30, 2012 and September 30, 2011, these liabilities can be reduced by $4,907 and $4,817, respectively, primarily from offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments. The resulting net amount of $10,516 at September 30, 2012 and $9,537 at September 30, 2011, if recognized, would favorably affect the Company’s effective tax rate. The Company anticipates that there will be changes to the unrecognized tax benefit associated with uncertain tax positions due to the expiration of statutes of limitation, payment of tax on amended returns, audit settlements and other changes in reserves. However, due to the uncertainty regarding the timing of these events, a current estimate of the range of changes that may occur within the next twelve months cannot be made.
The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. Related to the unrecognized tax benefits noted above, the Company accrued $533 and $397 of interest for the fiscal years ended September 30, 2012 and 2011, respectively. In total, the Company has recognized a liability of $1,268 for interest as of September 30, 2012.
The Company and its subsidiaries conduct business globally and, as a result, it or one or more of its subsidiaries file income tax returns in the U.S. (both federal and in various states), local and foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal tax examinations for years through fiscal 2006. With limited exceptions, the Company is no longer subject to state and foreign income tax examinations by taxing authorities for years through fiscal 2004. The Chinese tax authority is currently auditing MFC1 and MFC2’s income tax returns for tax years 2005 through 2007.
The Internal Revenue Service (“IRS”) is currently examining the Company’s income tax returns for fiscal years 2007 through 2010. On August 1, 2012, the Company received a Revenue Agent Report (the “Report”) from the IRS relating to its examination of the Company’s income tax returns for fiscal years 2007 and 2008. In the Report, the IRS has proposed adjustments primarily related to the Company’s valuation of intellectual property and intercompany cost sharing arrangement. The proposed adjustments would result in approximately $120 million of additional taxable income for those two years. Management believes there are numerous errors in the Report, does not agree with the proposed adjustments and has contested the proposed adjustments with the IRS Appeals Office. After reviewing the Report, management continues to believe that an adequate provision has been made for all of the Company’s uncertain tax positions. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. Any significant proposed adjustments could have a material adverse effect on the Company’s results of operations, cash flows and financial position if not resolved favorably.
6. Lines of Credit
In March 2012, MFLEX Chengdu entered into a Line of Credit Agreement (the “MCH Credit Line”) with Bank of China Co., Ltd. Chengdu Development West Zone Sub-Branch (“BC”), providing for a line of credit to MFLEX Chengdu in an amount of $11,000 (69,751 RMB at September 30, 2012). MFLEX Chengdu and BC have also entered into a Facility Offer Letter (the “Facility Offer Letter”) which sets forth basic pricing and favorable pricing negotiated by BC and MFLEX Chengdu. The loan interest rate for U.S. dollar borrowings under the MCH Credit Line shall not be lower than the one-year LIBOR rate plus 550 basis points. The basis points shall be negotiated by the parties based on the lending cost in the Chinese market for U.S. dollars on the day the loan is made. The MCH Credit Line matured in October 2012.
In January 2012, MFLEX Singapore entered into a Facility Agreement (the “Facility Agreement”) with JPMorgan Chase Bank, N.A., Singapore Branch, as mandated lead arranger, the financial institutions from time to time party thereto, as lenders (the “Lenders”), and JPMorgan Chase Bank, N.A. acting through its Hong Kong Branch (“JPM”), as facility agent and as security agent. The Facility Agreement provides for a three-year, revolving credit facility, under which MFLEX Singapore may obtain loans and other financial accommodations
in an aggregate principal amount of up to $50,000. The obligations of MFLEX Singapore under the Facility Agreement are (i) secured by MFLEX Singapore’s physical assets, book debt, and bank accounts; (ii) secured by the stock in MFLEX Singapore held by its parent company, MFCI; and (iii) guaranteed by the Company pursuant to a Parent Guaranty. Borrowings under the Facility Agreement will bear interest at a rate per annum equal to the sum of (a) the applicable margin, which initially is equal to 1.50 percent per annum, subject to adjustment in accordance with the Facility Agreement and (b) the bank’s cost of funds, which approximates SIBOR. All outstanding principal, and accrued and unpaid interest, under the Facility Agreement will be due and payable in January, 2015, the termination date of the Facility Agreement.
In July 2010, MFC entered into a credit line agreement with Agricultural Bank of China, Suzhou Wuzhong Sub-branch (“ABC”), which provides for a borrowing facility for 200,000 RMB ($31,541 at September 30, 2012). The line of credit will mature in July 2013 and interest on the credit line agreement for U.S. dollar lending will be calculated as LIBOR plus a mutually determined number of basis points. The basis points will be determined according to the U.S. dollar lending cost in the Chinese domestic market. For RMB lending, the interest rate is 90% of the basic rate issued by the People’s Bank of China (“PBOC”) on the loan start date, and the basic interest rate may be adjusted once per year if the PBOC adjusts the basic rate.
In March 2010, MFC1 and MFC2 entered into credit line agreements with China Construction Bank, Suzhou Industry Park Sub-Branch (“CCB”), which provide for two borrowing facilities for 150,000 RMB each ($23,656 each at September 30, 2012). The lines of credit will mature in March 2013. Interest on the credit line agreements for U.S. dollar lending will be calculated as LIBOR plus a mutually determined number of basis points, and may be adjusted once per quarter for changes in LIBOR. The basis points will be determined according to the U.S. dollar lending cost in the China interbank borrowing market. For RMB lending, the interest rate is 90% of the basic rate issued by the PBOC on the loan start date, and the basic rate may be adjusted once per year if the PBOC adjusts the basic rate.
In February 2009, the Company and MFLEX Singapore entered into a Loan and Security Agreement with Bank of America, N.A. (“BOA”), as a lender and agent, for a senior revolving credit facility in an amount up to $30,000, which may be increased to $60,000 at the Company’s discretion upon satisfaction of certain additional requirements. The line of credit was terminated by the Company in January 2012.
A summary of the lines of credit is as follows:
As of September 30, 2012, the Company was in compliance with all covenants under its lines of credit.
7. Segment Information
Based on the evaluation of the Company’s internal financial information, management believes that the Company operates in one reportable segment. The Company is primarily engaged in the engineering, design and manufacture of flexible circuit boards along with related component assemblies. Between fiscal years 2010 and 2012, the Company operated in four geographical areas: United States, China, Singapore and Other (which
includes Malaysia, Korea and the United Kingdom). Net sales are presented based on the country in which the sales originate, which is where the legal entity is domiciled. The financial results of the Company’s geographic segments are presented on a basis consistent with the consolidated financial statements. Segment net sales and assets amounts include intra-company product sales transactions and subsidiary investment amounts, respectively, which are offset in the elimination line.
Financial information by geographic segment is as follows:
8. Significant Concentrations
Customers
Net sales to the Company’s largest Original Equipment Manufacturer (“OEM”) customers, inclusive of net sales made to their designated sub-contractors, are presented below.
Net sales direct to the Company’s largest customers, exclusive of OEM subcontractor relationship, which accounted for more than 10% of the Company’s net sales, and accounts receivable from such customers are presented below. The customers consist principally of major electronic companies or electronics company sub-contractors.
Geographic
Information regarding net sales by geographical area based on the location of the customer is summarized below:
Sales to customers in Other Asia-Pacific countries noted above included Singapore, Japan, Taiwan, Vietnam and Korea. Sales to customers in Europe included the Netherlands, Austria, Sweden, Hungary, Germany, and the United Kingdom.
Industry
Beginning in the second fiscal quarter of 2011, the Company elected to disclose net sales information for the tablets sector separate from the consumer electronics sector. Amounts set forth below reflect this reclassification.
During the fiscal years ended September 30, 2012, 2011 and 2010, 69%, 83% and 68% of net sales, respectively, were derived from sales to companies that provide products or services into the smartphone industry, 27%, 13%, and 1% of net sales, respectively, were derived from sales were to companies that provide products or services into the tablet industry, and 2%, 1% and 24% of net sales, respectively, were derived from sales to companies that provide products into the consumer electronics industry. All of these industries are subject to economic cycles and have experienced periods of slowdown in the past.
9. Commitments and Contingencies
Operating Leases
The Company leases certain of its facilities and certain assets under non-cancelable operating leases which expire at various dates through 2017. Future minimum lease payments under non-cancelable operating leases at September 30, 2012 are as follows:
Total rent expense was $2,297, $2,243 and $1,783 for the fiscal years ended September 30, 2012, 2011 and 2010, respectively.
Litigation
The Company is involved in litigation from time to time in the ordinary course of business. Management does not believe the outcome of any currently pending matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Other Commitments
The Company had outstanding purchase and other commitments, which exclude amounts already recorded on the Consolidated Balance Sheets. The outstanding purchase and other commitments were primarily related to capital projects at the Company’s various facilities and commitments for material purchases, which totaled $9,092 and $8,068 as of September 30, 2012 and 2011, respectively.
Pursuant to the laws applicable to the Peoples’ Republic of China’s Foreign Investment Enterprises, the Company’s two wholly owned subsidiaries in China, MFC and MFLEX Chengdu, are restricted from paying cash dividends on 10% of after-tax profit, subject to certain cumulative limits. These restrictions on net income for the fiscal years ended September 30, 2012, 2011 and 2010 were $17,741, $16,255 and $13,386, respectively.
Indemnification
In the normal course of business, the Company provides indemnification and guarantees of varying scope to customers and others. These indemnities include among other things, intellectual property indemnities to customers in connection with the sale of the Company’s products, warranty guarantees to customers related to products sold and indemnities to the Company’s directors and officers to the maximum extent permitted by Delaware law. The duration of these indemnities and guarantees varies, and, in certain cases, is indeterminate. Historically, costs related to these indemnification provisions have not been significant, and with the exception of the warranty accrual (see Note 1), no liabilities have been recorded for these indemnification provisions.
10. Stock-Based Compensation
In June 2004, the Company adopted the 2004 Stock Incentive Plan (the “2004 Plan”), which is administered by the Company’s board of directors (“Board”) or a committee thereof (the “Administrator”). The 2004 Plan provides for the granting of stock options, stock appreciation rights, restricted share awards and restricted stock units to employees, directors (including non-employee directors), advisors and consultants. Grants under the 2004 Plan vest and expire based on periods determined by the Administrator, but in no event can the expiration date be later than ten years from the date of grant (five years after the date of grant if the grant is an incentive stock option to an employee who owns more than 10% of the total combined voting power of all classes of the Company’s capital stock (a “10% owner”)). Grants of stock options may be either incentive stock options or nonqualified stock options. The per share exercise price on an incentive stock option shall not be less than 100% of the fair market value of the Company’s common stock on the date the option is granted (110% of the fair market value if the grant is to a 10% owner). The per share exercise price of a nonqualified stock option shall not be less than 85% of the fair market value of the Company’s common stock on the date the stock option is granted. A total of 3,976,400 shares of common stock have been authorized for issuance and reserved under the 2004 Plan, as amended and restated to date.
The Company’s assessment of the estimated fair value of stock options and stock appreciation rights granted is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables and the related tax impact. The Company utilizes the Black-Scholes option valuation model to estimate the fair value of stock options and stock appreciation rights granted. Expected forfeitures are estimated based on the
historical turnover of the Company’s employees. The fair value of restricted stock units granted is based on the closing price of the Company’s common stock on the date of grant.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including:
(a) the expected volatility of the Company’s common stock price, which the Company determines based on historical volatility of the Company’s common stock;
(b) expected dividends, which are zero, as the Company does not currently anticipate issuing dividends;
(c) the expected term of the stock option or SSAR, which is estimated based on the historical stock option and SSAR exercise behavior of the Company’s employees; and
(d) the risk free interest rate, which is based on observed interest rates (zero coupon U.S. Treasury debt securities) appropriate for the expected holding period.
Stock Options
Stock option activity for the fiscal year ended September 30, 2012 under the 2004 Plan is summarized as follows:
Stock option details for the fiscal years ended September 30, 2012, 2011 and 2010 are summarized as follows:
No unearned compensation existed as of September 30, 2012 related to stock options.
Service and Performance-Based Restricted Stock Units
During the fiscal years ended September 30, 2012, 2011 and 2010, the Company granted service-based restricted stock units (“RSUs”) under the 2004 Plan to certain employees (including executive officers) and
directors at no cost to such individuals. Each RSU represents one hypothetical share of the Company’s common stock, without voting or dividend rights. The RSUs granted to employees generally vest over a period of three years with one-third vesting on each of the anniversary dates of the grant date. Total compensation cost related to RSUs is determined based on the fair value of the Company’s common stock on the date of grant and is amortized into expense over the vesting period using the straight-line method.
The Company also grants performance-based RSUs to certain employees (including executive officers) from time to time, under the 2004 Plan. For such performance-based RSUs, the Company records share-based compensation cost based on the grant-date fair value and the probability that the performance metrics will be achieved. Management generally considers the probability that the performance metrics will be achieved to be a 70% chance or greater (“Probability Threshold”). At the end of each reporting period, the Company evaluates the awards to determine if the related performance metrics meet the Probability Threshold. If the Company determines that the vesting of any of the outstanding performance-based RSUs does not meet the Probability Threshold, the compensation expense related to those performance-based RSUs is reversed in the period in which this determination is made. However, if at a future date conditions have changed and the Probability Threshold is deemed to be met, the previously reversed stock compensation expense, as well as all subsequent projected stock compensation expense through the date of evaluation, is recognized in the period in which this new determination is made.
On November 14, 2011, the Administrator approved the grant of 110,046 performance-based RSUs (the “November 2011 Awards”). The November 2011 Awards vest upon the achievement of defined performance objectives pertaining to each grant, with vesting to occur on or about November 30, 2014. During the fourth fiscal quarter of 2012, the Company determined that, while the performance conditions of the November 2011 Awards are still potentially achievable, the level of probability of achievement was deemed to be less than the Probability Threshold and as a result, the Company reversed $410 of compensation costs related to these awards.
On November 15, 2010, the Administrator approved the grant of 94,879 performance-based RSUs (the “November 2010 Awards”). The November 2010 Awards vest upon the achievement of defined performance and market objectives pertaining to each grant, with vesting to occur on or about November 30, 2013. Two-thirds of the November 2010 Awards contained performance conditions whereby the Company recorded share-based compensation cost based on the grant-date fair value and the probability of achievement under the Probability Threshold.
One-third of the November 2010 Awards contained both market and performance conditions, whereby the market condition was measured by determining the Company’s total shareholder return (“TSR”) for the three year period beginning fiscal 2011 through fiscal 2013 versus the TSR of the Russell 2000 Index for the same period. An award with both market and performance conditions is accounted for and measured differently than an award that has solely a performance or service condition. The effect of a market condition is reflected in the award’s fair value on the grant date (e.g., a discount may be taken when estimating the fair value of an RSU to reflect the market condition). The fair value may be lower than the fair value of an identical award that has only a service or performance condition because those awards will not include a discount on the fair value. The estimated per share fair value of the portion of the November 2010 Awards containing both market and performance conditions was $16.47 utilizing the following weighted-average assumptions:
The expected stock return/discount rate was based on the yield to maturity of short-term government bonds over the expected term as of the grant dates.
Volatilities are selected as of fiscal year end dates for the Company given the vesting provisions are based on the TSR over a fiscal period.
The common stock price input at the grant date was based on the closing price for the Company’s common stock and the Russell 2000 Index as of September 30, 2010, which was $21.99 and $676.14, respectively. The Company selected the September 30, 2010 prices given that the measurement period for the vesting objective started on September 30, 2010.
During the fourth fiscal quarter of 2012, the one-third of the November 2010 Awards which contained both market and performance conditions were still potentially achievable, however, the level of probability of achievement was deemed to be less than the Probability Threshold and as a result, the Company reversed $236 of compensation costs related to these awards.
During the third fiscal quarter of 2011, the two-thirds of the November 2010 Awards which contained only performance conditions were still potentially achievable, however, the level of probability of achievement was deemed to be less than the Probability Threshold and as a result, the Company reversed $216 of compensation costs related to these awards.
On November 16, 2009, the Administrator approved the grant of 117,826 performance-based RSUs (the “November 2009 Awards”). These performance-based RSUs vest upon the achievement of defined performance objectives pertaining to each grant, with vesting to occur on or about November 30, 2012. During the third fiscal quarter of 2011, the Company determined that, while the performance conditions of the November 2009 Awards are still potentially achievable, the level of probability of achievement was deemed to be less than the Probability Threshold and as a result, the Company reversed $1,251 of compensation costs related to these awards.
RSU activity for the fiscal year ended September 30, 2012 under the 2004 Plan is summarized as follows:
RSU details for the fiscal years ended September 30, 2012, 2011 and 2010 are summarized as follows:
Unearned compensation as of September 30, 2012 was $4,069 related to non-vested RSUs, which will be recognized into expense over the weighted-average remaining contractual life of the non-vested RSUs of 1.1 years.
Stock Appreciation Rights
During the fiscal years ended September 30, 2012, 2011 and 2010, the Administrator approved the grant of stock appreciation rights (“SSARs”) to be settled in Company common stock. These grants were made under the 2004 Plan to certain employees (including executive officers) at no cost to such individual. Each SSAR has a base appreciation amount that is equal to the closing price of a share of the Company’s common stock on each applicable grant date as reported on the NASDAQ Global Select Market. The SSARs granted to employees generally vest either over a period of three years with one-third vesting on each of the anniversary dates of the grant date or may vest completely on the third anniversary date of the grant date and have a contractual life of 10 years. The Company’s SSARs are treated as equity awards and are measured using the initial compensation element of the award at the time of grant and the expense is recognized over the requisite service period (the vesting period) with an exercise price equal to the stock price on the date of grant. Upon exercise, each SSAR will be settled in the Company’s common stock. Whole Company shares will be issued based on the percentage of share appreciation between the weighted-average price per share for all grant dates and the fair market value per share on the exercise date, multiplied by the number of SSARs units being exercised. Total compensation cost related to SSARs is recognized over the vesting period and is determined based on the whole number of shares issued multiplied by the grant date fair value.
The grant date fair values of the SSARs granted during each of the fiscal years ended September 30, 2012, 2011 and 2010 were estimated using the Black-Scholes valuation pricing model with the following assumptions:
SSARs activity for the fiscal year ended September 30, 2012 under the 2004 Plan is summarized as follows:
SSARs details for the fiscal years ended September 30, 2012, 2011 and 2010 are summarized as follows:
Unearned compensation as of September 30, 2012 was $1,144 related to non-vested SSARs, which will be recognized into expense over a weighted-average period of 1.2 years.
11. Share Repurchase Program
The Board has provided a committee with the discretion to execute a share repurchase program (the “Current Repurchase Program”) for up to 1,100,000 shares in the aggregate of the Company’s common stock on the open market. These shares represented approximately five percent of the Company’s common stock outstanding as of September 30, 2012. On September 2, 2011, the Company entered into a 10b5-1 Repurchase Plan Agreement, which expired on June 2, 2012 and provided for the repurchase of up to 500,000 of such shares. As of September 30, 2012, a total of 488,400 of such shares were repurchased under such 10b5-1 Repurchase Plan Agreement, at a weighted-average purchase price of $20.17 per share, for a total value of $9,853. All of the repurchased shares were retired and the excess of the repurchase price over par value was booked as an adjustment to additional paid-in capital in the fiscal years in which the respective shares were retired.
12. Impairment and Restructuring
California (Fiscal Years 2012, 2011 and 2010)
During the fourth fiscal quarter of 2011, the Company committed to a plan to relocate its corporate headquarters to a smaller location in Orange County, California (the “Relocation Plan”). Based on the Company’s evaluation of the recoverability of impacted long-lived assets, pre-tax asset impairment charges of $1,494 were recorded during fiscal 2011, including $1,011 of land and building and $483 of machinery and equipment. In fiscal 2012, as a result of the Relocation Plan, the Company completed the sale of certain of its machinery and equipment and incurred relocation costs and recorded net gains of $717 during the third fiscal quarter of 2012. During the second fiscal quarter of 2012, the Company completed the sale of its corporate headquarters in Anaheim, California which was previously classified as assets held for sale as of December 31, 2011. The completion of the sale resulted in a net gain of $1,067 which was recorded during the second fiscal quarter of 2012 as a reduction of impairment and restructuring in the consolidated statements of comprehensive income.
During the fourth fiscal quarter of 2011, the Company made the determination to reduce headcount at the Company headquarters. Based on the Company’s evaluation of the recoverability of impacted long-lived assets, pre-tax asset impairment charges of $204 were recorded during fiscal 2011, all of which were related to machinery and equipment. The fair value of the long-lived assets was determined based on quoted market prices for similar assets. In addition, pre-tax one-time termination benefits charges of $802 were recorded during fiscal 2011.
During the third fiscal quarter of 2011, the Company evaluated a Company-owned building in Anaheim, California under the “Long-Lived Assets to Be Disposed of by Sale” classification, and determined that the building should be classified as assets held for sale as of June 30, 2011. Based on the Company’s evaluation of the recoverability of the impacted long-lived assets, a pre-tax impairment charge of $92 was recorded in the third fiscal quarter of 2011. During the fourth quarter of fiscal 2011, the Company completed the sale of the facility, resulting in a net gain on sale of $133 which was recorded during fiscal 2011.
During the second fiscal quarter of 2010, the Company committed to close one of its facilities in Anaheim as part of a strategic effort to move more functions, specifically low volume production and process research and development associated with the Company’s flex and flex assembly processes, to Asia. Based on the Company’s evaluation of the recoverability of impacted long-lived assets, pre-tax asset impairment charges of $2,117 were recorded during fiscal 2010, including $1,480 of machinery and equipment and $637 of leasehold improvements. The fair value of the long-lived assets was determined based on quoted market prices for similar assets. In addition, a net gain on sale of assets of $578, pre-tax one-time termination benefits charges of $1,213 and other restructuring-related charges of $1,161 were recorded during fiscal 2010.
Arizona (Fiscal Years 2012 and 2011)
The Company evaluated its Tucson, Arizona facility, consisting of land and building (the “Tucson Facility”), under the “Long-Lived Assets to Be Disposed of by Sale” classification under the relevant FASB authoritative guidance. The Tucson Facility was closed during fiscal 2008 as part of the restructuring of Aurora Optical. Based on market declines in commercial real estate values in fiscal 2011, the Company recorded non-cash impairment charges of $1,727 during fiscal 2011. Based on an arms-length offer received during the second fiscal quarter of 2012, the Company recorded $1,231 as “Assets held for sale” related to such land and building. During the third fiscal quarter of 2012, the Company completed the sale of the Tucson Facility, which resulted in a net gain of $684 recorded during the third fiscal quarter of 2012 as a reduction of impairment and restructuring in the consolidated statements of comprehensive income.
United Kingdom (Fiscal Year 2010)
During the fourth fiscal quarter of 2010, the Company committed to a plan to align its United Kingdom research and development efforts with those in Anaheim and China, as well as to reduce costs. As a result, pre-tax charges of $570 were recorded during fiscal 2010, which consisted of one-time termination benefits and other restructuring-related charges.
Malaysia (Fiscal Year 2010)
During the third fiscal quarter of 2010, the Company committed to close its facility in Malaysia in order to move the related functions to China as part of its continuing cost reduction efforts. Based on the Company’s evaluation of the recoverability of impacted long-lived assets, a pre-tax asset impairment charge of $1,954 was recorded during fiscal 2010, including $1,507 of machinery and equipment and $447 of leasehold improvements. The fair value of the long-lived assets was determined based on quoted market prices for similar assets. In addition, pre-tax one-time termination benefits of $419 and other restructuring-related charges of $175 were recorded during fiscal 2010.
Restructuring Reserve Activity
The following table reflects the movement activity of the restructuring reserve for the fiscal year ended September 30, 2012:
No further charges are expected to be incurred in connection with any of the aforementioned restructuring activities.
Non-recurring Basis Fair Value Measurements
For recognition purposes, on a non-recurring basis, the Company measured certain of its long-lived assets at fair value as a result of events occurring as part of impairment and restructuring activities. As of September 30, 2012, no assets or liabilities were measured at fair value on a non-recurring basis. The fair values as of September 30, 2011 were determined based on both “Level 2” and “Level 3” inputs. The fair value of the “Level 2” assets was determined based on a current market value comparison analysis with similar assets in the area. The fair value less costs to sell including broker commissions, legal and title transfer fees and closing costs were incorporated to determine the fair value as of September 30, 2011. The long-lived assets had carrying amounts of $10,459, which were written down to their fair value of $7,722, resulting in impairment charges of $2,737 (of which $606 were estimated costs to sell) included in earnings for the fiscal year ended September 30, 2011.
As of September 30, 2011, the Company measured certain of its long-lived assets at fair value based on “Level 3” inputs, which consisted of unobservable inputs using a market approach, whereby reflecting the price that would be received for these assets in their current condition and location, including installation and transportation costs. The long-lived assets had carrying amounts of $752, which were written down to their fair value of $65, resulting in impairment charges of $687 included in earnings for the fiscal year ended September 30, 2011.
13. Derivative Financial Instruments
Foreign Currency Forward Contracts
The Company transacts business in various foreign countries and is therefore exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to purchases, obligations, and monetary assets and liabilities that are denominated in currencies other than the Company’s reporting currency. The Company has established foreign currency risk management programs to attempt to protect against volatility in the value of non-U.S. dollar denominated monetary assets and liabilities, and of future cash flows caused by changes in foreign currency exchange rates. As a result, from time to time, the Company enters into foreign currency forward contracts to hedge its aforementioned currency exposures.
The Company accounts for all of its derivative instruments in accordance with the relevant FASB authoritative accounting guidance for derivatives and hedges, which requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheets. No outstanding foreign currency forward contracts existed as of September 30, 2012.
The changes in fair value of the Company’s derivative instruments are recognized in earnings during the period of change as other income (expense), net in the consolidated statements of comprehensive income. The Company recognized gains (losses) of $270, ($38) and $0 during fiscal years 2012, 2011 and 2010, respectively, related to derivative financial instruments.
14. Quarterly Financial Summary Quarterly Financial Summary
The following table presents the Company’s unaudited quarterly consolidated income statement data for its previous eight quarters. These quarterly results include all adjustments consisting of normal recurring adjustments that the Company considers necessary for the fair presentation for the quarters presented and are not necessarily indicative of the operating results for any future period.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no changes in our independent registered public accounting firm or disagreements with such accountants on any matter of accounting principles or practices, financial statement disclosure or auditing scope of procedure.
Item 9A.
Item 9A. Controls and Procedures
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 (the “Exchange Act”) as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), conducted an assessment of the effectiveness of our internal control over financial reporting as of September 30, 2011. In making this assessment, management used the criteria set forth in the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) entitled “Internal Control-Integrated Framework.” Based on this assessment and on the criteria in Internal Control-Integrated Framework, management has concluded that our internal control over financial reporting was effective as of September 30, 2012.
The effectiveness of the Company’s internal control over financial reporting as of September 30, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified that occurred during the quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management including our CEO and CFO, as appropriate, to allow for timely decisions regarding required disclosure.
Based on an evaluation carried out as of the end of the period covered by this Annual Report, under the supervision and with the participation of our management, including our CEO and CFO, our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), are effective at the reasonable assurance level.
Item 9B.
Item 9B. Other Information
On November 13, 2012, the compensation committee of our Board, comprised solely of independent, non-employee directors, approved a fiscal year 2013 bonus plan, pursuant to which our named executive officers (“NEOs”) can obtain a cash bonus (“Bonus”), at a target level equal to one hundred percent for Mr. Meshgin, sixty-five percent for Mr. Liguori, fifty-five percent for Mr. Lee and Ms. Besnard and sixty percent for Mr. Jin, of such executive’s annual base salary. In certain specified circumstances, the Bonuses may exceed these percentages. The bonus plan includes net revenue, net income and cash conversion cycle metrics which must be met in order for the NEOs to be awarded the Bonuses.
Part III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item (with respect to our directors) will be contained in the section called “Election of Directors” in our definitive proxy statement to be filed with the SEC in connection with the solicitation of proxies for our 2013 Annual Meeting of Stockholders expected to be held in March 2013, which we refer to as our 2013 Proxy Statement, and is incorporated herein by reference. Certain information regarding our executive officers required by this item is set forth in Part I of this Annual Report under the caption “Executive Officers of the Registrant.”
The information required by this item regarding compliance with Section 16(a) of the Exchange Act will be contained in, and is hereby incorporated by reference to, our 2013 Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
We have adopted a Code of Ethics for Senior Officers (“Code of Ethics”), that applies to our CEO, President, CFO and other key management employees (including other senior financial officers) who have been identified by the board of directors. We have also adopted a Code of Business Conduct that applies to all of our employees, officers and directors. Each of the Code of Ethics and Code of Business Conduct may be found on our website at www.mflex.com. We will post (i) any waiver, if and when granted, to any provision of the Code of Ethics or Code of Business Conduct (for executive officers or directors) and (ii) any amendment to the Code of Ethics or Code of Business Conduct on our website.
We have a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are Sam Yau (Chairperson), 64 years of age, Philippe Lemaitre, 63 years of age, Donald Schwanz, 68 years of age, and Kheng-Joo Khaw, 64 years of age. All of such members meet the independence standards established by Nasdaq and the requirements under Section 10A of the Exchange Act for serving on an audit committee. Further, our board of directors has determined that Mr. Yau and Mr. Lemaitre qualify as “audit committee financial experts” for audit committee member purposes within the meaning of such regulations.
Item 11.
Item 11. Executive Compensation
The information required by this item regarding executive compensation will be contained in, and is hereby incorporated by reference to, our 2013 Proxy Statement under the captions “Director Compensation,” “Executive Compensation” and “Director Compensation-Compensation Committee Interlocks and Insider Participation.”
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item regarding equity compensation plans and security ownership of certain beneficial owners and management will be contained in the sections called “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our 2013 Proxy Statement, and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships, Related Transactions, and Director Independence
The information required by this item regarding certain relationships and related transactions will be contained under the caption “Certain Relationships and Related Transactions” in our 2013 Proxy Statement, and is incorporated herein by reference. The information required by this item regarding director independence will be contained under the caption “Election of Directors” in our 2013 Proxy Statement, and is incorporated herein by reference.
Item 14.
Item 14. Principal Accountant Fees and Services
The information required by this item will be contained under the captions “Ratification of Appointment of Independent Registered Public Accounting Firm-Principal Accountant Fees and Services” and “Ratification of Appointment of Independent Registered Public Accounting Firm-Pre-Approval Policies and Procedures” in our 2013 Proxy Statement and is incorporated herein by reference.
Part IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this report:
(1) Financial Statements:
All financial statements as set forth under Item 8 of this report.
(2) Supplementary Financial Statement Schedules:
Schedule II-Valuation and Qualifying Accounts.
All other schedules have been omitted for the reason that the required information is presented in the financial statements or notes thereto, the amounts involved are not significant or the schedules are not applicable.
(3) Exhibits
See Item 15(b) below. Each management contract or compensatory plan or arrangement required to be filed has been so identified.
(b) Exhibits:
* Filed herewith
** Furnished, not filed
(1) Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Registration Statement on Form S-1, as amended (File No. 333-114510) declared effective by the Securities and Exchange Commission (“SEC”), on June 24, 2004.
(2) Incorporated by reference to an exhibit (with same exhibit number) to the Company’s Current Report on Form 8-K filed with the SEC on December 8, 2009.
(3) Indicates management contract or compensatory plan.
(4) Incorporated by reference to exhibit (with same exhibit number) to the Company’s Current Report on Form 8-K filed with the SEC on October 25, 2005 (File No. 000-50812).
(5) Incorporated by reference to exhibit (with same exhibit number) to the Company’s Annual Report on Form 10-K filed with the SEC for the year ended September 30, 2008.
(6) Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Annual Report on Form 10-K filed with the SEC for the year ended September 30, 2009.
(7) Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Current Report on Form 8-K filed with the SEC on April 1, 2010.
(8) Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Quarterly Report on Form 10-Q filed with the SEC for the quarter ended June 30, 2010.
(9) Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Quarterly Report on Form 10-Q filed with the SEC for the quarter ended December 31, 2010.
(10) Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Quarterly Report on Form 10-Q filed with the SEC for the quarter ended March 31, 2011.
(11) Incorporated by reference to exhibits to the Company’s Current Reports on Form 8-K filed with the SEC on January 19, 2012.
(12) Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Current Report on Form 8-K filed with the SEC on March 27, 2012.
(13) Incorporated by reference to exhibit (with same exhibit number) to the Company’s Quarterly Report on Form 10-Q filed with the SEC for the quarter ended March 31, 2012. Confidential treatment has been granted for certain portions of this agreement.
(14) Incorporated by reference to exhibit (with same exhibit number) to the Company’s Quarterly Report on Form 10-Q filed with the SEC for the quarter ended June 30, 2012.
(c) Financial Statement Schedules: Schedule II- Valuation and Qualifying Accounts
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Reza Meshgin and Thomas Liguori, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
MULTI-FINELINE ELECTRONIX, INC.
Schedule SCHEDULE II-
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2012, 2011 AND 2010
(In Thousands)
EXHIBIT INDEX
* Filed herewith
** Furnished, not filed
(1) Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Registration Statement on Form S-1, as amended (File No. 333-114510) declared effective by the Securities and Exchange Commission (“SEC”), on June 24, 2004.
(2) Incorporated by reference to an exhibit (with same exhibit number) to the Company’s Current Report on Form 8-K filed with the SEC on December 8, 2009.
(3) Indicates management contract or compensatory plan.
(4) Incorporated by reference to exhibit (with same exhibit number) to the Company’s Current Report on Form 8-K filed with the SEC on October 25, 2005 (File No. 000-50812).
(5) Incorporated by reference to exhibit (with same exhibit number) to the Company’s Annual Report on Form 10-K filed with the SEC for the year ended September 30, 2008.
(6) Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Annual Report on Form 10-K filed with the SEC for the year ended September 30, 2009.
(7) Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Current Report on Form 8-K filed with the SEC on April 1, 2010.
(8) Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Quarterly Report on Form 10-Q filed with the SEC for the quarter ended June 30, 2010.
(9) Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Quarterly Report on Form 10-Q filed with the SEC for the quarter ended December 31, 2010.
(10) Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Quarterly Report on Form 10-Q filed with the SEC for the quarter ended March 31, 2011.
(11) Incorporated by reference to exhibits to the Company’s Current Reports on Form 8-K filed with the SEC on January 19, 2012.
(12) Incorporated by reference to exhibits (with same exhibit numbers) to the Company’s Current Report on Form 8-K filed with the SEC on March 27, 2012.
(13) Incorporated by reference to exhibit (with same exhibit number) to the Company’s Quarterly Report on Form 10-Q filed with the SEC for the quarter ended March 31, 2012. Confidential treatment has been granted for certain portions of this agreement.
(14) Incorporated by reference to exhibit (with same exhibit number) to the Company’s Quarterly Report on Form 10-Q filed with the SEC for the quarter ended June 30, 2012.