UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 000-50812
MULTI-FINELINE ELECTRONIX, INC.
(Exact name of registrant as specified in its charter)
Delaware | 95-3947402 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
3140 East Coronado Street Anaheim, California | 92806 | |
(Address of principal executive offices) | (Zip Code) |
(714) 688-5201
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of Each Exchange on Which Registered | |
Common Stock, par value $0.0001 per share |
NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Note Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ |
Accelerated filer x | |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) |
Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of Common Stock held by non-affiliates of the registrant (based upon the closing sale price per share of Common Stock on the NASDAQ Global Select Market on March 31, 2011) was $257,393,689. Shares held by each executive officer, director and by each person that owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrants Common Stock, $0.0001 par value, as of October 31, 2011 was 24,051,090.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors and Section 16(a) Beneficial Ownership Reporting Compliance), 11, 12 (as to Beneficial Ownership), 13 and 14 of Part III incorporate by reference information from the registrants proxy statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the registrants 2012 Annual Meeting of Stockholders expected to be held in March 2012.
Multi-Fineline Electronix, Inc.
Index
PART I | ||||||
Item 1. |
Business | 1 | ||||
Item 1A. |
Risk Factors | 13 | ||||
Item 2. |
Properties | 26 | ||||
Item 3. |
Legal Proceedings | 26 | ||||
PART II | ||||||
Item 5. |
27 | |||||
Item 6. |
Selected Consolidated Financial Data | 29 | ||||
Item 7. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 30 | ||||
Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk | 44 | ||||
Item 8. |
Financial Statements and Supplementary Data | 45 | ||||
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 78 | ||||
Item 9A. |
Controls and Procedures | 78 | ||||
Item 9B. |
Other Information | 79 | ||||
PART III | ||||||
Item 10. |
Directors, Executive Officers and Corporate Governance | 80 | ||||
Item 11. |
Executive Compensation | 80 | ||||
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
80 | ||||
Item 13. |
Certain Relationships, Related Transactions, and Director Independence | 80 | ||||
Item 14. |
Principal Accountant Fees and Services | 81 | ||||
PART IV | ||||||
Item 15. |
Exhibits, Financial Statement Schedules | 82 | ||||
Signatures | 85 |
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 1Business, Item 1.ARisk Factors and Item 7Managements 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 identified below, and those discussed under Item 1.A. Risk Factors in this Annual Report, and such forward looking statements are qualified in their entirety by reference to the factors set forth in 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 worlds largest producers of flexible printed circuits and flexible circuit assemblies. With facilities in Anaheim, 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, we focus on applications where flexible printed circuits facilitate human interaction with an electronic device and are the enabling technology in achieving a desired size, shape, weight or functionality of the device. Current 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 Research In Motion Limited 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
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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 customers 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, 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 programs 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 quicker pace than many of our competitors. 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 in Malaysia: Multi-Fineline Electronix Malaysia Sdn. Bhd. (MFM); one located in Arizona: Aurora Optical, Inc. (Aurora Optical); and one located in Cambridge, England: MFLEX UK Limited, formerly known as Pelikon Limited (MFE); except where it is made clear that the term means only the parent company. In October 2011, we incorporated a wholly owned subsidiary located in Korea: MFLEX Korea Limited (MKR).
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Industry Background
We believe that the global market for flexible printed circuits will continue to grow over the coming years as consumers continue to demand smaller, more functional devices. Given inherent design and cost advantages of flexible printed circuits, they continue to be a favored solution for electronics manufacturers who are striving to increase the features and functionality of electronic devices while optimizing the size, shape and weight of such devices. Asia is one of the largest and fastest growing markets for flexible printed circuits, largely because of two trends that occurred in the early 1990s: the outsourcing by OEMs of their manufacturing needs and the shifting of manufacturing facilities from the United States to countries in Asia.
Historically, electronics manufacturers have relied upon rigid printed circuit boards to provide the electrical interconnections between the components in electronics devices. Rigid printed circuit boards consist of boards that contain multiple transistors, microprocessors and other components that are connected by copper wires embedded on the circuit board. Given that rigid printed circuit boards cannot bend or twist and are thicker and heavier than flexible circuit boards, they inherently limit the design options available to engineers. For example, in order to design and build flip-phone style feature phones, engineers had to create a method to connect the rigid printed circuit board in the base of the phone with the rigid printed circuit board in the screen. Copper wires could not be used because they are subject to failure as a result of stress from the constant bending and flexing of the wires; therefore, design engineers had to look to new materials to provide a means of electrical interconnection between the various components of the device.
To address this need, companies such as MFLEX began to design flexible printed circuits and flexible printed circuits containing components, or component assemblies, to serve as electrical interconnections. These flexible printed circuits can twist, bend and flex in a device while connecting the components of the device. In addition to these functionality advantages, flexible printed circuits and component assemblies enable OEMs and EMS providers to design and construct modular components that can be incorporated into the final product, which in turn reduce the complexity of the assembly of the final product, reduce the manufacturing costs and facilitate user interfacing with the electronic device. As a result, manufacturers can reduce the number of assembly operations required for a product and improve the efficiency of their supply chains.
We believe that the overall market for flexible printed circuits and component assemblies is poised for substantial growth over the next several years as a result of favorable technological and market developments, including:
| Miniaturization, Portability and Complexity of Electronic Devices. As electronic devices become more functional, complex and compact, product size becomes a principal design limitation. From an engineering standpoint, flexible printed circuits possess enhanced heat dissipation properties because they are thinner than rigid printed circuit boards and may provide higher signal integrity interconnection. As a result, the electronics industry has relied increasingly upon flexible printed circuits and component assemblies. For example, the placement of chips and user interface components, such as low profile switches, touch sensing related components, etc. on the flexible printed circuit enables OEMs to increase functionality and improve packaging characteristics while managing time-to-market for their products in an overall cost-effective manner. Moreover, as electronics companies develop increased functionality for semiconductors, the traditional packaging and mounting technologies are becoming obsolete. |
| Outsourcing. Electronics companies continue to rely heavily upon outsourcing to technically qualified, strategically located manufacturing partners that provide integrated, end-to-end flexible printed circuit and component assembly solutions comprised of design and application engineering, prototyping and competitive high-volume production services. By employing these end-to-end manufacturers, 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. The global demand for wireless communication and other consumer electronics products and the complexity of these devices are increasingly driving the demand for more complex flexible printed circuits and component assemblies. Electronics companies have discovered that they can increase the functionality of flexible printed circuits and reduce the number of required interconnects by mounting components, such as connectors, switches, resistors, capacitors, light emitting devices, integrated circuits and optical sensors, to the flexible printed circuits. We believe that the application of flex assemblies in wireless and other electronic devices is expanding rapidly, which 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 our competitive strengths, which differentiate us from other traditional contract manufacturers or others that might compete with us, include:
| Our Seamless and Efficient End-to-End Solution for Flexible Printed Circuit Applications. We provide a seamless, integrated end-to-end flexible printed circuit solution for our customers, ranging from design and application engineering, prototyping and high-volume manufacturing to turnkey component assembly and testing. By relying on a single provider for their flexible printed circuit requirements, our customers can benefit from opportunities for more robust product designs and process optimization during the development phase. This, in turn, frequently leads to production cost savings and quicker time-to-market. We possess the expertise and capabilities to provide a seamless, integrated end-to-end solution that provides our customers with the ability to leverage any one or more of our facilities to meet their global requirements. |
| Our Design and Application Engineering Expertise Supports Our Strong Customer Relationships. Our expertise in designing and manufacturing flexible printed circuits and component assemblies has enabled us to become a partner to our customers at the earliest stages of product development. We employ our design and application engineers as part of our sales process; therefore, our customers rely on us to assist them in the early design phase of their products. Early design participation enables us to gain intricate knowledge of our customers products and thereby provide value-added engineering support to them. Early design participation also enables our customers to achieve lower production costs through better product design for manufacturing and utilization of our flexible printed circuit assembly expertise. In addition, early design participation fosters strong relationships with our customers, often resulting in their reliance on our products and engineering support for the life of the specific application and subsequent generations of similar applications. We are also continuing to enhance our design and application engineering capabilities in China 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. |
| Our Manufacturing Capabilities. Our China manufacturing facilities are organized to ramp production of new products from prototype stage to high volume, while allowing us to consolidate the labor intensive aspects of high-volume manufacturing in a cost-efficient manner. Since 2000, we have expanded our manufacturing capacity in China by acquiring additional and technologically advanced machinery, and by expanding our manufacturing facilities. Our ongoing attention to integrating the manufacturing processes between our facilities 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. We expanded our manufacturing facilities and capital equipment at our manufacturing facility in China in October 2006 and further expanded our assembly operations to satellite facilities during fiscal 2009 and 2008, which increased our manufacturing capacities substantially in China, and enabled us to take on additional high-volume manufacturing programs. In fiscal 2011, we completed construction on a new flexible printed circuit manufacturing facility in Suzhou, China (MFC3), and completed construction for a flexible printed circuit assembly facility at MFLEX Chengdu. While we |
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believe our Chinese manufacturing facilities benefit the Company, they do subject us to additional risks inherent in international business, including, among others, those detailed under Item 1A, Risk Factors and Item 7A, Quantitative and Qualitative Disclosures About Market Risk. |
| Our Forward Integration in the Value Chain. We have implemented a strategy of upward integration focusing on the value-added services that we provide to our customers, design and application engineering and component assembly, rather than only concentrating on acquiring the capabilities to produce the materials used to manufacture flexible printed circuits. By employing suppliers to provide us with raw materials, we have avoided unnecessary capital equipment and research and development costs and have focused more intensely on the integral steps in the manufacturing process, from design and prototyping to high-volume manufacturing and component assembly. We believe the result of this strategy has been superior design and application engineering expertise, the ability to incorporate different materials options to better meet our customers requirements and strong customer relationships. |
| 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 customers product designs; responding to the trend of OEM outsourcing; identifying Chinas manufacturing capabilities; creating a seamless, integrated end-to-end solution in our Chinese operations to serve the needs of multinational OEMs and EMS providers; and adopting a forward integration strategy in order to focus on the engineering and assembly needs of our customers. |
Business Strategy
Our objective is to continue to expand our customer base and product offering by using our core technologies of high-quality, technologically advanced flexible printed circuits and assemblies. To achieve our objective, we intend to continue our pursuit of the following strategies:
| Provide an Integrated Solution to Our Customers. We intend to maintain our leadership in providing a complete end-to-end solution to our customers that includes design and application engineering, prototyping, high-volume manufacturing, materials acquisition, component assembly and testing. 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 that eliminates the need of our customers to negotiate with multiple vendors reduces the time-to-market for their products, and contributes to the growth of our market share. |
| 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 size, shape and weight are primary drivers of product development. |
| Expand Our Existing Expertise in the Design and Manufacture of Flexible Printed Circuit Technology. By expanding our market share in existing markets and partnering with customers in the early stage design of their products, we strive to both continue to expand our engineering and manufacturing |
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expertise and capabilities for applications and functionality for electronic product packaging technology and assist our customers in developing more efficient manufacturing processes for their products. We believe that we will be able to continue to capture market share in the sectors we serve and attract other companies from the electronics industry by utilizing our expertise in design and application engineering to expand product designs and applications for flexible printed circuit solutions in conjunction with our high-volume, cost-effective manufacturing capabilities. |
| Diversify Our End Customers. We primarily serve the mobility market. Mobility refers to an overall end-market of portable devices that provide access to data (content) and applications that were previously confined to the desktop, server, cloud or living room. We 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. |
| Increase Manufacturing Capacity and Capabilities. We continue to improve our manufacturing capabilities and expanding our engineering capabilities and manufacturing facilities in Asia, while enhancing capabilities and innovation in our research and development centers. In addition, three of our manufacturing facilities in China have been specifically designed and equipped for complex programs, which are flexible printed circuits with smaller features, and a high density of components and interconnection. This capability allows us to offer our customers an efficient, technologically advanced manufacturing process for complex flexible printed circuit fabrication. |
| Increase Intellectual Property Content of Our Products. We are investing in advanced technologies to be able to 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.
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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 micro electronic 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 frequently results in the customer placing our product designs on the customers design specifications and 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 OEMs product. Some examples of EMS providers we sell to include Foxconn and Flextronics. 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, 2011, approximately 94% of our net sales were to three customers in the aggregate. In addition, approximately 44%, 43% and 43% of our net sales in each of the fiscal years ended September 30, 2011, 2010 and 2009, respectively, were to one customer (not the same customer in each of the three years), and approximately 86%, 85% and 80% of our net sales were to the same two customers in each of the fiscal years ended September 30, 2011, 2010 and 2009, respectively.
Our net sales fluctuate from quarter to quarter as a result of changes in demand for our products. 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 generally experience 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. However, this pattern may not continue. 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.
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Our facilities in Asia enable us to manufacture products for shipment anywhere in the world. Information regarding shipments by geographical area is summarized below:
Fiscal Years Ended September 30, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
United States |
9 | % | 11 | % | 16 | % | ||||||
Mexico |
20 | % | 12 | % | 8 | % | ||||||
Canada |
3 | % | 7 | % | 6 | % | ||||||
China |
23 | % | 38 | % | 42 | % | ||||||
Hong Kong |
35 | % | 20 | % | 14 | % | ||||||
Singapore and Malaysia |
1 | % | 1 | % | 3 | % | ||||||
Europe |
9 | % | 6 | % | 11 | % | ||||||
Other foreign |
0 | % | 5 | % | 0 | % | ||||||
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Total |
100 | % | 100 | % | 100 | % | ||||||
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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 to assist in developing and integrating enabling technologies that add the highest value by providing electronic packaging solutions, which allow customer differentiation and market advantage. By utilizing market and product teams in each sector of the electronics industry that we target, we have successfully expanded our market penetration 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, 2011, 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 United States, Korea and China. We rely on these sales representatives to create, build and maintain our customer relationships.
As of September 30, 2011, our backlog, which constitutes customer orders placed with us that we believe to be firm but that have not yet shipped, was $168.0 million. We expect to ship this entire backlog during fiscal year 2012. 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, 2010 and 2009, our backlog was $259.5 million and $274.5 million, respectively.
Technology
We are a global provider of single, double-sided, multi-layer and air-gapped flexible printed circuit technology and component assemblies. Our process technology includes proprietary processes and chemical recipes, which coupled with our design expertise, unique customized fixtures and tooling 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.
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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. The combination of these two 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 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
We purchase raw circuit materials, process chemicals and various components from a limited number of outside sources, including E.I. DuPont de Nemours & Co., Mitsui Plastics, Arisawa Manufacturing Co., Ltd and Murata Electronics Trading. 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.
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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, Flextronics, Young Poong Electronics (Interflex), Foxconn Electronics, Inc., HI-P Shanghai Co. Ltd., Career Technologies, Sumitomo Electric, 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 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, 2011, we employed approximately 12,120 full-time employees and 3,800 contract employees. This includes approximately 80 full-time employees in the United States, approximately 11,980 full-time employees and 3,800 contract employees in China, and approximately 60 full-time employees in other locations.
We do not have employment agreements with any of our executive officers; however, we have entered into employment agreements with substantially all of our employees in China. In general, these employment agreements provide for either a one or two-year term.
A trade union was established at MFC on November 10, 2011. On the 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. We expect to enter into a collective labor contract with the trade union by the end of fiscal year 2012.
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.
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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 2012.
Executive Officers of the Registrant
The following table sets forth information about our executive officers as of October 31, 2011:
Name |
Age |
Position(s) | ||
Reza Meshgin |
48 | President and Chief Executive Officer | ||
Thomas Liguori |
53 | Executive Vice President and Chief Financial Officer | ||
Thomas Lee |
52 | Executive Vice President of OperationsProgram Management | ||
Christine Besnard |
41 | Executive Vice President, General Counsel and Secretary | ||
Lance Jin |
46 | Executive Vice President, Managing Director of MFLEX China |
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 Aurora Optical, MFCI, MFLEX Singapore, MFM and MFE, (b) director for MFC and MFLEX Chengdu, (c) chief executive officer and president at Aurora Optical, MFCI, MFLEX Singapore, MFC, MFLEX Chengdu, MKR and MFM, (d) executive chairman at MFE, and (e) representative director of 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 Doles operations in Europe, Africa and the Middle East, and as Vice President of Finance at Teledyne. Mr. Liguori holds a Bachelors in Business Administration, Summa Cum Laude, from Boston University and completed a Masters 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 Aurora Optical, MFCI, MFLEX Singapore, MFC, MFLEX Chengdu, MFM, MKR and MFE, (b) chief financial officer at Aurora Optical, 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. From May 2002 until March 2011, Mr. Lee served as our Executive Vice President of Operations. Since March 2011, Mr. Lee has
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served as our Executive Vice President of OperationsProgram Management. 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 of MSG, and (b) Executive VP of OperationsProgram Management of 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 bachelors 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 Aurora Optical, MFCI, MFC, MFLEX Chengdu, MFM, MKR and MFE and (b) secretary at Aurora Optical and 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 and was appointed Executive Vice President and Managing Director of MFLEX China in March 2011. In this role, he is responsible for MFLEX China Operations. Prior to joining MFLEX, Mr. Jin was responsible for business development at the China National Import/Export Corporation. Mr. Jin holds a bachelors degree in optical engineering from ZheJiang University in China and a Masters of Science in Optics and Fine Mechanics from the China Academy of Science. Mr. Jin has also received a Masters 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 SECs 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.
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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, 2011, 2010 and 2009, approximately 83%, 68% and 57%, respectively, of our net sales were derived from sales to companies that provide products or services into the smartphone industry; approximately 13%, 1% and 0%, respectively, of our net sales derived from sales were to companies that provide products or services into the tablet industry; and approximately 1%, 24% and 25%, respectively, of our net sales were derived from sales to companies that provide products or services into the consumer electronics industry (excluding tablets). In general, these industries are subject to economic cycles and periods of slowdown. Intense competition, relatively short product life cycles and significant fluctuations in product demand characterize these industries, and these industries 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 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 limited number of key customers and their subcontractors, including Apple Inc., Motorola, Inc. and Research in Motion Limited. In addition, a substantial portion of our sales to each customer is often tied to only one, or a small number, of programs. In the fiscal years ended September 30, 2011, 2010 and 2009 approximately 99%, 98% and 96% respectively, of our net sales were to only four customers in the aggregate. Approximately 44%, 43% and 43% of our net sales in each of the fiscal years ended September 30, 2011, 2010 and 2009, respectively, were to one customer (not the same customer in each of the three years) and approximately 86%, 85% and 80% of our net sales were to two of our customers in each of the three years, 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 customers 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.
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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 competitors 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, or changes regarding which of 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 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, included 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. 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.
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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. 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. 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 products life cycle, we rely primarily on higher sales volume and improving our manufacturing yield and productivity to reduce a products cost. If we cannot reduce our manufacturing costs as prices decline during a products 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
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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 be subject 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 and, from time to time we have experienced shortages of the components and raw materials used in the fabrication of our products. For example, in recent quarters we have experienced shortages in flexible printed circuit materials and have experienced component shortages, which resulted in delayed shipments to customers. We expect that these delays are likely to occur in the current or future periods for a variety of reasons, including but not limited to, recent natural disasters. In particular, we expect the flooding in Thailand to negatively affect our industrys supply chain and overall handset assembly volumes during the next several months. 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
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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 the formation 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, 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.
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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:
| political unrest, terrorism and economic or financial instability; |
| restrictions on our ability to repatriate earnings; |
| unexpected changes in regulatory requirements and uncertainty related to developing legal and regulatory systems related to economic and business activities, real property ownership and application of contract rights; |
| nationalization programs that may be implemented by foreign governments; |
| import-export regulations; |
| difficulties in enforcing agreements and collecting receivables; |
| difficulties in ensuring compliance with the laws and regulations of multiple jurisdictions; |
| difficulties in ensuring that health, safety, environmental and other working conditions are properly implemented and/or maintained by the local office; |
| changes in labor practices, including wage inflation, frequent and extremely high increases in the minimum wage, labor unrest and unionization policies; |
| limited intellectual property protection; |
| longer payment cycles by international customers; |
| currency exchange fluctuations; |
| inadequate local infrastructure and disruptions of service from utilities or telecommunications providers, including electricity shortages; |
| transportation delays and difficulties in managing international distribution channels; |
| difficulties in staffing foreign subsidiaries and in managing an expatriate workforce; |
| potentially adverse tax consequences; |
| differing employment practices and labor issues; |
| the occurrence of natural disasters, such as earthquakes, floods or other acts of force majeure; and |
| public health emergencies such as SARS, avian flu and Swine flu. |
We also face risks associated with currency exchange and convertibility, inflation and repatriation of earnings as a result of our foreign operations. In some countries, economic, monetary and regulatory factors could affect our ability to convert funds to U.S. dollars or move funds from accounts in these countries. We are also vulnerable to appreciation or depreciation of foreign currencies against the U.S. dollar. Although we have significant operations in Asia, a substantial portion of transactions are denominated in U.S. dollars, including approximately 96% of the total shipments made to foreign manufacturers during the fiscal year 2011. 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.
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In addition, our activities in China are subject to administrative review and approval by various national and local agencies of Chinas government. Given the changes occurring in Chinas 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. For example, in 2007 we were informed that one of our facilities in China no longer meets the current fire department regulations. If we were required to take corrective action, it could adversely affect our ability to maintain or expand our operations at that facility and/or increase our costs. In addition, certain of our insurance policies may be deemed to be ineffective without a current fire certificate.
Recently, the earthquake, tsunami and subsequent problems affecting nuclear power plants in Japan have dramatically impacted Japans manufacturing capacity. The ultimate effect of these issues is still uncertain. 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. Even if supply is not interrupted or delayed, 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. Our customers outside of Japan may be unable to produce finished products as a result of Japanese-related supply chain disruptions. Our customers might then cancel orders for our products, which could materially affect our revenues and profitability.
We are in the process of increasing our manufacturing capacity, and we may have difficulty managing these changes.
We are engaged in a number of manufacturing expansion projects, including new manufacturing facilities in Chengdu, China. 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:
| managing multiple, concurrent major manufacturing expansion projects; |
| hiring and retaining employees, particularly in China; |
| accurately predicting any increases or decreases in demand for our products and managing our manufacturing capacity appropriately; |
| under-utilized capacity, particularly during the start-up phase of a new manufacturing facility and the effects on our gross margin of under-utilization; |
| managing increased employment costs and scrap rates often associated with periods of growth; |
| implementing, integrating and improving operational and financial systems, procedures and controls, including our computer systems; |
| construction delays, equipment delays or shortages, labor shortages and disputes and production start-up problems; |
| cost overruns and charges related to our expansion activities; and |
| 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.
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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, and we expect to be a principal subsidiary of WBL for the foreseeable future. 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. 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 new chief executive officer or the issuance of securities that would reduce WBLs 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 to a third party, including a participant in our industry, or buy additional shares of our stock.
WBL and its designees 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, 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, 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 WBLs stockholders or the relevant regulators may not approve the proposed corporate action.
WBLs 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
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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 WBLs stockholder approval may delay our proposed action and it is possible that WBLs 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, WBLs 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 WBLs 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 global credit market crisis and economic weakness 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, the Internal Revenue Service is currently examining the Companys income tax return for fiscal 2007 and any significant proposed adjustments could have a material adverse effect on our results of operations, financial position and cash flows 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
21
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.
In addition, 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 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
22
our operations 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 and certain provisions of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act may soon require us to report on conflict metals used in our products and the due diligence plan we put in place to track whether such metals originate from the Democratic Republic of Congo and/or other conflict areas of the world. 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.
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:
| difficulties in integrating operations, technologies, accounting and personnel; |
| problems maintaining uniform standards, procedures, controls and policies; |
| difficulties in supporting and transitioning customers of our acquired companies; |
| diversion of financial and management resources from existing operations; |
| risks associated with entering new markets in which we have no or limited prior experience; |
| potential loss of key employees; and |
| inability to generate sufficient revenues to offset acquisition or start-up costs. |
Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial results. In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted, which could affect the market price of our stock. As a result, if we fail to properly evaluate acquisitions or partnerships, we may not achieve the anticipated benefits of any such acquisitions or partnerships, and we may incur costs in excess of what we anticipate.
We face potential risks associated with loss, theft or damage of our property or 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,
23
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 12 month period from October 1, 2010 through September 30, 2011, our common stock price closed between $17.35 and $29.88 per share. Factors that could affect the trading price of our common stock include, but are not limited to:
| fluctuations in our financial results; |
| the limited size of our public float; |
| announcements of technological innovations or events affecting companies in our industry; |
| changes in the estimates of our financial results; |
| changes in the recommendations of any securities analysts that elect to follow our common stock; and |
| market conditions in our industry, the industries of our customers and the economy as a whole. |
In addition, although we have approximately 24.0 million shares of common stock outstanding as of September 30, 2011, 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
24
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.
Because we do not intend to pay dividends, our stockholders will benefit from an investment in our common stock only if our stock price appreciates in value.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of an investment in our common stock will depend entirely upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which it was purchased.
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Item 2. | Properties. |
The following is a summary of our material properties at September 30, 2011:
Function |
Location | Square Feet | Lease Expiration Dates | |||
Executive offices, research and development | Anaheim, California | Owned95,732 | N/A | |||
MFLEX UK LimitedEngineering and research and development of segmented electroluminescent printed displays and SmartInk® technologies | Cambridge, United Kingdom |
Leased8,075 | April 2013 | |||
MFLEX Suzhou Co., Ltd.Engineering, circuit fabrication and assembly (Dongwu Road) | Suzhou, China | Land use rights 31,600 |
2050* | |||
Leased10,007 | October 2011 | |||||
MFLEX Suzhou Co., Ltd.Engineering, circuit fabrication and assembly (Nanhu Road) | Suzhou, China | Land use rights 394,700 |
2053* | |||
Leased199,952 | May 2012 | |||||
MFLEX Suzhou Co., Ltd.Circuit fabrication (Shanfeng Road) | Suzhou, China | Land use rights 621,000 |
2058* | |||
MFLEX Suzhou Co., Ltd.Circuit assembly | Puzhuang, China | Land use rights 720,200 |
2052* | |||
Owned127,000 | N/A | |||||
MFLEX Chengdu Co., Ltd.Circuit assembly | Chengdu, China | Land use rights 259,600 |
2059* | |||
Multi-Fineline Electronix Singapore Pte. Ltd.Regional office | Singapore | Leased7,000 | March 2013 | |||
MFLEX Korea, Ltd.Regional office | Suwon, Korea | Leased554 | July 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. | 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.
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Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market for Common Stock
Our common stock, par value $0.0001, is traded on the NASDAQ Global Select Market (Nasdaq) under the symbol MFLX. The following table sets forth, for the periods indicated, the high and low sales prices for our common stock on Nasdaq, as reported in its consolidated transaction reporting system:
Fiscal 2011 | Fiscal 2010 | |||||||||||||||
High | Low | High | Low | |||||||||||||
First quarter |
$ | 26.87 | $ | 21.37 | $ | 29.55 | $ | 24.85 | ||||||||
Second quarter |
$ | 29.99 | $ | 25.50 | $ | 29.57 | $ | 20.52 | ||||||||
Third quarter |
$ | 29.35 | $ | 20.01 | $ | 27.79 | $ | 21.51 | ||||||||
Fourth quarter |
$ | 22.16 | $ | 17.03 | $ | 26.97 | $ | 19.49 |
Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents stock repurchases by month during fiscal 2011:
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs |
||||||||||||
10/01/2010 10/31/2010 |
42,823 | $ | 21.58 | 42,823 | 0 | (1) | ||||||||||
09/01/2011 09/30/2011 |
50,000 | $ | 20.14 | 50,000 | 1,050,000 | (2) | ||||||||||
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Total |
92,823 | $ | 20.79 | 92,823 | ||||||||||||
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(1) | On December 5, 2008, our Board of Directors approved the establishment of a share repurchase program for up to 2,250,000 shares in the aggregate of our common stock on the open market; this amount represented approximately nine percent of our common stock outstanding as of November 30, 2008, as reported on our Form 10-K filed with the SEC on December 9, 2008. Stock repurchases under this program could be made from time to time, based on market conditions and other factors, including price, regulatory requirement and capital availability. As of September 30, 2011, we had repurchased a total of 2,250,000 shares for a total value of $48.4 million pursuant to 10b5-1 plans under such share repurchase program. |
(2) | Our Board of Directors also 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; this amount represented approximately five percent of our common stock outstanding as of September 30, 2011. On September 2, 2011, we entered into a 10b5-1 Repurchase Plan Agreement providing for the repurchase of up to 500,000 of such shares. As of September 30, 2011, under such 10b5-1 Repurchase Plan Agreement, we had repurchased a total of 50,000 shares for a total value of $1.0 million. |
Holders of Record
Stockholders of record on September 30, 2011 totaled approximately 27. 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.
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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, 2006 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.
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Item 6. | Selected Consolidated Financial Data |
The following selected consolidated financial data is qualified by reference to, and should be read in conjunction with, Managements Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report and the Consolidated Financial Statements and related notes included in Item 8 of this Annual Report. The selected consolidated statements of income data for the fiscal years ended September 30, 2011, 2010 and 2009 and selected consolidated balance sheet data as of September 30, 2011 and 2010 are derived from audited consolidated financial statements included elsewhere in this Annual Report. The selected consolidated statements of income data for the fiscal years ended September 30, 2008 and 2007 and selected consolidated balance sheet data as of September 30, 2009, 2008 and 2007 were derived from audited consolidated financial statements not included in this Annual Report. Our historical results are not necessarily indicative of our future results.
Fiscal Years Ended September 30, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
(in thousands, except shares, per share data and ratios) | ||||||||||||||||||||
Consolidated Statement of Income Data: |
||||||||||||||||||||
Net sales |
$ | 831,561 | $ | 791,339 | $ | 764,432 | $ | 728,805 | $ | 508,147 | ||||||||||
Cost of sales |
726,850 | 678,294 | 653,568 | 611,517 | 461,376 | |||||||||||||||
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|
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Gross profit |
104,711 | 113,045 | 110,864 | 117,288 | 46,771 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Research and development |
10,485 | 14,455 | 5,505 | 2,470 | 2,499 | |||||||||||||||
Sales and marketing |
25,189 | 24,086 | 22,146 | 17,957 | 12,544 | |||||||||||||||
General and administrative |
18,788 | 21,625 | 25,486 | 30,518 | 24,216 | |||||||||||||||
Impairment and restructuring |
4,186 | 11,376 | 328 | 2,180 | | |||||||||||||||
Terminated acquisition expenses |
| | | | 7,821 | |||||||||||||||
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Total operating expenses |
58,648 | 71,542 | 53,465 | 53,125 | 47,080 | |||||||||||||||
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|
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Operating income (loss) |
46,063 | 41,503 | 57,399 | 64,163 | (309 | ) | ||||||||||||||
Other income (expense), net: |
||||||||||||||||||||
Interest income |
875 | 535 | 767 | 1,687 | 1,540 | |||||||||||||||
Interest expense |
(472 | ) | (782 | ) | (768 | ) | (106 | ) | (311 | ) | ||||||||||
Other income (expense), net |
564 | 472 | (1,358 | ) | (2,742 | ) | 200 | |||||||||||||
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Income before income taxes |
47,030 | 41,728 | 56,040 | 63,002 | 1,120 | |||||||||||||||
(Provision for) benefit from income taxes |
(9,157 | ) | (11,953 | ) | (9,972 | ) | (22,523 | ) | 1,918 | |||||||||||
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|
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Net income |
$ | 37,873 | $ | 29,775 | $ | 46,068 | $ | 40,479 | $ | 3,038 | ||||||||||
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Net income per share: |
||||||||||||||||||||
Basic |
$ | 1.58 | $ | 1.18 | $ | 1.84 | $ | 1.63 | $ | 0.12 | ||||||||||
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Diluted |
$ | 1.56 | $ | 1.16 | $ | 1.81 | $ | 1.59 | $ | 0.12 | ||||||||||
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Shares used in computing net income per share: |
||||||||||||||||||||
Basic |
24,027,179 | 25,203,445 | 25,026,039 | 24,828,732 | 24,520,040 | |||||||||||||||
Diluted |
24,335,819 | 25,607,249 | 25,453,390 | 25,433,676 | 25,164,401 | |||||||||||||||
Consolidated Balance Sheet Data: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 97,890 | $ | 99,875 | $ | 139,721 | $ | 62,090 | $ | 27,955 | ||||||||||
Working capital |
$ | 159,065 | $ | 166,021 | $ | 202,036 | $ | 133,900 | $ | 107,481 | ||||||||||
Total assets |
$ | 625,745 | $ | 562,321 | $ | 525,930 | $ | 487,610 | $ | 377,287 | ||||||||||
Current ratio |
1.8 | 1.9 | 2.4 | 1.8 | 1.8 | |||||||||||||||
Long-term debt |
$ | | $ | | $ | 10,852 | $ | | $ | | ||||||||||
Stockholders equity |
$ | 416,083 | $ | 361,532 | $ | 358,988 | $ | 310,318 | $ | 250,006 |
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Item 7. | Managements 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 Item 1.ARisk 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, we focus on applications where flexible printed circuits facilitate human interaction with an electronic device and are the enabling technology in achieving a desired size, shape, weight or functionality of the device. Current 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 Research In Motion Limited 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 customers 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 programs 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
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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 have formed another wholly owned subsidiary in Chengdu, China, and in fiscal 2011, we 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, 2011, 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 United States, Korea, and China. 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 Anaheim, 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 represented 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 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 in countries in which we produce, as well as market wage rate increases 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, market studies and promotional and marketing brochures.
General and Administrative
General and administrative expense primarily included personnel-related and travel costs associated with finance/accounting, tax, internal audit, legal, human resources, information services and executive personnel along with other expenses related to external accounting, legal and professional expenses, business insurance, management information systems, investor relations, Board of Directors and other corporate office expenses.
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Impairment and Restructuring
Asset impairment is the difference between the fair market value, based on the estimated future cash flows of the underlying assets, and the carrying value, or net book value, of 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 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 short-term investments.
Interest Expense
Interest expense consisted of expense incurred on our previously held long-term debt, unused line fees on our revolving facilities and interest related to our deferred financing costs.
Other Income (Expense), Net
Other income (expense), net, consisted primarily of the gain or loss on our previously held auction rate securities investments, 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 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 Managements 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. 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 those related to inventories, income taxes, accounts receivable allowances 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:
| 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 |
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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. |
| 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. |
| 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.
| 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. |
| 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. |
| 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. |
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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.
| 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.
| 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 units 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 and stock appreciation rights granted to employees based on the grant date fair value. Our assessment of the estimated fair value of the stock options 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 granted. Generally, our calculation of the fair value for options granted under the revised 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 stock appreciation rights are estimated based on the historical turnover of our employees. The fair value of restricted stock units 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 since the date of our Initial Public Offering (IPO); |
(b) | expected dividends, which are zero, as we do not currently anticipate issuing dividends; |
(c) | expected life of the stock option, which is estimated based on the historical stock option and stock appreciation right exercise behavior of our employees; and |
(d) | risk free interest rate 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 awards 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 an award that has a market condition will be recognized if the requisite service period is fulfilled, even if the market condition is never satisfied.
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.
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Results of Operations
The following table sets forth our Statement of Operations data, expressed as a percentage of net sales for the periods indicated.
Fiscal Years Ended September 30, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of sales |
87.4 | 85.7 | 85.5 | |||||||||
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Gross profit |
12.6 | 14.3 | 14.5 | |||||||||
Operating expenses: |
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Research and development |
1.3 | 1.8 | 0.7 | |||||||||
Sales and marketing |
3.0 | 3.0 | 2.9 | |||||||||
General and administrative |
2.3 | 2.7 | 3.3 | |||||||||
Impairment and restructuring |
0.5 | 1.5 | 0.1 | |||||||||
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Total operating expenses |
7.1 | 9.0 | 7.0 | |||||||||
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Operating income |
5.5 | 5.3 | 7.5 | |||||||||
Other income (expense), net: |
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Interest income |
0.1 | 0.1 | 0.1 | |||||||||
Interest expense |
(0.0 | ) | (0.1 | ) | (0.1 | ) | ||||||
Other income (expense), net |
0.0 | 0.0 | (0.2 | ) | ||||||||
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Income before income taxes |
5.6 | 5.3 | 7.3 | |||||||||
Provision for income taxes |
(1.1 | ) | (1.5 | ) | (1.3 | ) | ||||||
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Net income |
4.5 | % | 3.8 | % | 6.0 | % | ||||||
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Fiscal Year Ended September 30, 2011 Compared to Fiscal Year Ended September 30, 2010
Net Sales. Net sales increased to $831.6 million in fiscal 2011 versus $791.3 million in fiscal 2010. The increase of $40.3 million, or 5.1%, was primarily due to growth in smartphone and tablet programs, partially offset by declines in consumer electronics programs, as further quantified below.
Net sales into the smartphones sector increased to $686.0 million in fiscal 2011, from $541.3 million in fiscal 2010. The increase of $144.7 million, or 26.7%, was due to higher demand for smartphones from two of our key customers in this sector. For fiscal 2011 and 2010, the smartphones sector accounted for approximately 83% and 68% of total sales, respectively.
Net sales into the tablets sector increased to $110.4 million for fiscal 2011, versus $7.9 million for fiscal 2010. The increase of $102.5 million in sales into the tablets sector 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 the tablets sector began to ramp in the 2nd fiscal quarter of 2010 and continued to grow through fiscal 2011. For fiscal 2011 and 2010, the tablets sector accounted for approximately 13% and 1% of total sales, respectively.
Net sales into the consumer electronics sector (which excludes sales into the tablets sector) were $8.5 million in fiscal 2011, versus $191.9 million in fiscal 2010. The decrease in sales into the consumer electronics sector was due to one of our customers programs, which incorporates our flex assembly, reaching the end of its life cycle. Shipments into the consumer electronics sector accounted for approximately 1% and 24% of total net sales for fiscal 2011 and 2010, respectively. There is no indication that this will change in the near term.
Cost of Sales and Gross Profit. Cost of sales as a percentage of net sales increased to 87.4% for fiscal 2011 versus 85.7% for fiscal 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
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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 versus $113.0 million in the prior year, or 7.3%. As a percentage of net sales, gross profit decreased to 12.6% for fiscal year 2011 from 14.3% in the prior fiscal year.
Research and Development. Research and development expense decreased to $10.5 million in fiscal 2011, from $14.5 million in the comparable period of the prior year, a decrease of 27.6%. The decrease was primarily due to our decision to realign our global research and development activities in Anaheim, CA 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 fiscal 2011, from $24.1 million in fiscal 2010, an increase of 4.6%. The increase is primarily attributable to increased sales commissions due to higher sales volume. As a percentage of net sales, sales and marketing expense remained flat in fiscal 2011 when compared to fiscal 2010.
General and Administrative. General and administrative expense decreased by $2.8 million to $18.8 million in fiscal 2011, from $21.6 million in fiscal 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% of net sales in fiscal 2011 from 2.7 % in fiscal 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 fiscal 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 fiscal 2011 were attributable primarily to asset impairments related to certain of our properties in Arizona and Anaheim due to market decline in commercial real estate values in fiscal 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. We anticipate that our restructuring plan covering the above elements will result in an estimated $2.3 million in annual cost savings beginning in fiscal 2012 on a pre-tax basis.
During fiscal 2010, we recorded a net restructuring charge of $11.4 million, primarily to consolidate our global operations and to improve our cost structure. The $11.4 million consisted of $2.6 million attributable to asset impairments and one-time termination benefits charges relating to our plant closure in Malaysia, $3.9 million attributable to asset impairments, one-time termination benefits and other restructuring charges relating to our closure of one of our facilities in Anaheim as part of a strategic effort to move more functions, specifically low volume production and process research and development associated with our flex and flex assembly processes, to Asia, and $0.6 million consisting of one-time termination benefits and other restructuring-related charges as a result of our decision to align our United Kingdom research and development efforts with those in Anaheim and China, as well as to reduce costs.
Interest Income (Expense), Net. Interest income (expense), net increased to a net income of $0.4 million in fiscal 2011 from a net expense of $0.2 million in fiscal 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 fiscal 2011, from income of $0.5 million in fiscal 2010.
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Income Taxes. The effective tax rate for fiscal 2011 was 19.5% versus 28.6% for fiscal 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. We expect future tax rates to vary if current tax regulations change.
Guidance
Net Sales. For our first quarter of fiscal 2012, we expect net sales to range between $200 to $230 million based on the projected product mix and sales volume.
Cost of Sales and Gross Profit. For our first quarter of fiscal 2012, we expect gross margin to range between 10% and 11% based on the projected product mix and sales volume. Gross margins will continue to be constrained in the first quarter of fiscal 2012 as we are maintaining our increased capacity levels at the request of our customers, though flooding in Thailand is adding significant uncertainty to near term industry component supply and handset volumes. However, we expect sales to increase as we move through 2012, and we continue to believe that at revenues of $250 million per quarter, a gross margin of 13% or higher is achievable.
Operating Expenses. We expect operating expenses to be approximately $14 million during the first fiscal quarter of 2012.
Income Taxes. We expect the effective tax rate, on average, to be in the low 20% range going forward.
Capital Expenditures. For fiscal 2012, we are anticipating approximately $55 to $60 million in capital expenditures for normal equipment replacement and investments in automation to reduce labor costs.
These projections are subject to substantial uncertainty. See Item 1A of Part I, Risk Factors.
Fiscal Year Ended September 30, 2010 Compared to Fiscal Year Ended September 30, 2009
Net Sales. Net sales increased $26.9 million to $791.3 million in fiscal 2010 versus $764.4 million in fiscal 2009. Of our four major customers in fiscal 2010, we noted increases in net sales to one major customer, with an offsetting decrease in sales to another major customer. However, we also added a new customer that contributed to an increase in sales in fiscal 2010. Unit volume shipments increased in fiscal 2010. In general, there was increased pricing pressure from customers, as well as a lower dollar value of flex assemblies in one high volume program.
Net sales into the consumer electronics sector were $191.9 million in fiscal 2010 versus $190.0 million in fiscal 2009. Shipments into the consumer electronics sector accounted for approximately 24% and 25% of total net sales for the fiscal years ended September 30, 2010 and 2009, respectively.
Net sales into the wireless sector, which includes wireless handsets, increased to $578.1 million in fiscal 2010, from $547.9 million in fiscal 2009. The increase of $30.2 million, or 5.5%, versus fiscal 2009 was primarily due to the aforementioned addition of a new major customer. In fiscal 2010 and 2009, the wireless sector was comprised of both smart phones and feature phones, which accounted for approximately 97% and 3%, and 77% and 23% of total sales into the wireless sector, respectively. Sales into the wireless sector comprised approximately 73% and 72% of total net sales for fiscal 2010 and 2009, respectively.
Cost of Sales and Gross Profit. Cost of sales as a percentage of net sales increased to 85.7% for fiscal 2010 versus 85.5% for fiscal 2009. The increase in cost of sales as a percentage of net sales of 0.2% was primarily attributable to the increase of material content from new programs in the current fiscal year of approximately 190 basis points, which was largely offset by improved labor and overhead efficiencies. Gross profit increased to
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$113.0 million in the fiscal year ended September 30, 2010 versus $110.9 million in the prior year, or 1.9%. As a percentage of net sales, gross profit decreased to 14.3% for fiscal year 2010 from 14.5% in the prior fiscal year.
Research and Development. Research and development expense increased to $14.5 million in fiscal 2010, from $5.5 million in the comparable period of the prior year, an increase of 163.6%. The increase was primarily due to an increase in emphasis on our research and development activities at our facilities in Anaheim, CA and in the United Kingdom. Much of the effort in our research and development activities was to develop keypad technology. Toward the end of fiscal 2010, we realigned our global research and development activities in Anaheim, CA and the United Kingdom by transitioning to lower cost China and reduced the spending on keypad technology.
Sales and Marketing. Sales and marketing expense increased by $2.0 million to $24.1 million in fiscal 2010, from $22.1 million in fiscal 2009, an increase of 9.0%. The increase is primarily attributable to a compensation and benefits expense increase of $1.1 million as a result of headcount growth to expand our customer base and geographic coverage and an increase of $0.9 million related to higher sales support costs. As a percentage of net sales, sales and marketing expense increased to 3.0% versus 2.9% in the prior fiscal year.
General and Administrative. General and administrative expense decreased by $3.9 million to $21.6 million in fiscal 2010, from $25.5 million in fiscal 2009, a decrease of 15.3%. The decrease was primarily attributable to reductions in our audit and professional fees, and to a lesser extent, travel and communications expenses in fiscal 2010. As a percentage of net sales, general and administrative expense decreased to 2.7% of net sales in fiscal 2010 from 3.3% in fiscal 2009, attributable to the favorable leveraging impact on our operating expenses from the increased net sales.
Impairment and Restructuring. During fiscal 2010, we recorded a net restructuring charge of $11.4 million, primarily to consolidate our global operations and to improve our cost structure. The $11.4 million consisted of $2.6 million attributable to asset impairments and one-time termination benefits charges relating to our plan to close our facility in Malaysia in order to move the related functions to China as part of our continuing cost reduction efforts, $3.9 million attributable to asset impairments, one-time termination benefits and other restructuring charges relating to our plan to close one of our facilities in Anaheim as part of a strategic effort to move more functions, specifically low volume production and process research and development associated with our flex and flex assembly processes, to Asia, and $0.6 million consisting of one-time termination benefits and other restructuring-related charges as a result of our decision to align our United Kingdom research and development efforts with those in Anaheim and China, as well as to reduce costs.
In the fourth quarter of fiscal 2010, we conducted a review of our United Kingdom operations (MFE) due to concerns that progress of the technology being developed by MFE, which is related to keypads, was slower than expected and commercialization was farther into the future than originally anticipated. As a result, we determined to allocate financial resources to other products/technologies and limit future investment in this keypad technology. Accordingly, an impairment test was performed to determine whether the undiscounted future cash flows that would be provided by the intangible assets related to this keypad technology were greater than the carrying value. As a result of the impairment test, we recorded a non-cash charge of $4.3 million to fully impair these intangible assets as of September 30, 2010.
Interest Income (Expense), Net. Interest income (expense), net increased to a net expense of $0.2 million in fiscal 2010 from $0.0 million in fiscal 2009. The increase is primarily attributable to a decrease in interest income as a result of the decrease in our cash balance as well as lower average interest rates throughout the fiscal year. Interest expense remained flat in fiscal 2010 when compared to fiscal 2009.
Other Income (Expense), Net. Other income (expense), net increased to income of $0.5 million in fiscal 2010, from expense of $1.4 million in fiscal 2009. The increased income and reduced expense was primarily attributable to a decrease in net losses from foreign exchange due to the movement of the U.S. dollar versus the
39
RMB and other foreign currencies. In addition, other expense in fiscal 2009 included $1.1 million of impairment associated with the decline in value of our auction rate securities which were sold at par value during fiscal 2010.
Income Taxes. The effective tax rate for fiscal 2010 was 28.6% versus 17.8% for fiscal 2009. The increase 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. In addition, the lower effective tax rate in the prior fiscal year was mainly due to a discrete tax benefits of $3.4 million which resulted from the expiration of a statute of limitation related to an international tax position and $1.1 million due to re-measurement of a liability associated with an international tax position. We also recognized a discrete tax expense during fiscal 2009 of $1.2 million due to a change in tax regulations enacted and effective during 2009.
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 $184,994, $141,830 and $109,529 for the fiscal years ended September 30, 2011, 2010 and 2009, 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:
Fiscal Years Ended September 30, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(dollars in thousands) | ||||||||||||
Net cash provided by operating activities |
$ | 60,365 | $ | 66,872 | $ | 113,137 | ||||||
Net cash used in investing activities |
$ | (63,394 | ) | $ | (59,134 | ) | $ | (31,794 | ) | |||
Net cash used in financing activities |
$ | (1,876 | ) | $ | (48,526 | ) | $ | (3,688 | ) | |||
Cash and cash equivalents at year end |
$ | 97,890 | $ | 99,875 | $ | 139,721 | ||||||
Days sales outstanding |
64.9 | 63.4 | 68.7 | |||||||||
Days inventory outstanding |
40.6 | 33.8 | 30.3 | |||||||||
Days payable outstanding |
79.2 | 74.2 | 69.2 | |||||||||
Net working capital days |
26.3 | 23.0 | 29.8 |
Changes in the principal components of operating cash flows in our 2011 fiscal year were as follows:
| Our net accounts receivable increased to $150.5 million at September 30, 2011 from $149.5 million for the prior fiscal year, or 0.7%. The increase in accounts receivable was primarily due to increased sales, coupled with our days sales outstanding increasing by two days to 65 days primarily as the result of changes in payment terms with certain customers and not a result of any liquidity issues with our customers. Our net inventory balances increased to $87.2 million as of September 30, 2011 from $76.9 million as of September 30, 2010, an increase of 13.4%. Days in inventory increased seven days to 41 days primarily as 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. Our accounts payable increased to $162.8 million as of September 30, 2011 from $156.9 million as of September 30, 2010, an increase of 3.8%, mainly as a result of more favorable vendor payment terms. |
40
| Depreciation expense was $44.6 million for fiscal 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 2011 fiscal year were as follows:
| Net cash used in investing activities was $63.4 million for fiscal 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. |
| Net cash used in financing activities was approximately $1.9 million for fiscal 2011 and consisted of repurchases of common stock of $1.9 million and $1.3 million of cash used to net share settle equity awards, 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 2010 fiscal year were as follows:
| 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. |
| Depreciation and amortization expense was $44.5 million for fiscal 2010 versus $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 2010 fiscal year were as follows:
| 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. |
| 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 cash used to net share settle equity awards 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. |
Changes in the principal components of operating cash flows in our 2009 fiscal year were as follows:
| Our net accounts receivable decreased to $129.3 million at September 30, 2009 from $162.4 million for the prior fiscal year, or 20.4%. The decrease in outstanding accounts receivable is attributable to a decrease in days sales outstanding due to improved customer payment terms and collections. Our net inventory balances decreased to $50.3 million at September 30, 2009 from $59.8 million for the prior |
41
fiscal year, a decrease of 15.9%. Inventory decreased as a result of activities in our manufacturing operations to reduce cycle times and the implementation of just in time supplier inventory stocking initiatives, partially offset by increased inventory purchased at year end in support of higher anticipated business volumes. Our accounts payable decreased to $122.5 million at September 30, 2009 from $128.6 million in the prior fiscal year, a decrease of 4.7%, as a result of the just in time purchases previously mentioned. |
| Depreciation and amortization expense was $40.8 million for fiscal 2009 versus $31.2 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 2009 fiscal year were as follows:
| Net cash used in investing activities was $31.8 million for fiscal 2009. Capital expenditures included cash purchases of $32.0 million of capital equipment and other assets, which were primarily related to our manufacturing capacity expansion in China. As of September 30, 2009, we had outstanding purchase commitments, which exclude amounts already recorded on the Consolidated Balance Sheets, totaling $49.5 million. |
| Net cash used in financing activities was $3.7 million for fiscal 2009 and consisted of cash generated of $2.1 million of income tax benefit related to the exercise of stock options, $3.5 million of proceeds from the exercise of stock options, $0.9 million of debt issuance costs, offset by cash used for the repurchase of common stock of $8.4 million. Our loans payable and borrowings outstanding against credit facilities were zero at September 30, 2009 and 2008. |
Capital Commitments
As of September 30, 2011, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commissions (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, 2011, and the effect those obligations are expected to have on our liquidity and cash flow in future periods (in thousands):
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations |
Total | Less than 1 year |
1 to 3 years |
3 to 5 years |
More than 5 years |
|||||||||||||||
Operating leases |
2,986 | 1,506 | 1,480 | | | |||||||||||||||
Purchase obligations |
8,068 | 8,068 | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total contractual obligations |
$ | 11,054 | $ | 9,574 | $ | 1,480 | $ | | $ | | ||||||||||
|
|
|
|
|
|
|
|
|
|
As of September 30, 2011, we had purchase obligations, which exclude amounts already recorded on the Consolidated Balance Sheets, of $8.1 million which were primarily related to expansion activities at various facilities.
As of September 30, 2011, we recorded $15.1 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.
In November 2008, we entered into a Share Purchase Agreement (the Pelikon Agreement) with MFLEX Singapore, one of our wholly owned subsidiaries and Pelikon (now referred to as MFE) to acquire all of the issued ordinary shares of Pelikon, a privately held technology company. Pursuant to the terms of the Pelikon Agreement, in consideration for the purchase of the issued ordinary shares of Pelikon, MFLEX Singapore issued unsecured promissory notes in an aggregate principal amount equal to $10.4 million. In March 2010, we repaid
42
the entire balance of the promissory notes, plus the accrued interest thereon. In addition, MFLEX Singapore could have been required to pay contingent consideration not to exceed $7.2 million in calendar 2010, based on MFE achieving certain stipulated shipment volumes. However, no contingent consideration was ultimately due or paid under the terms of the promissory notes.
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (FASB) issued revised authoritative guidance that modifies goodwill impairment testing by providing entities with an option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amendments are effective for fiscal years beginning after December 15, 2011 (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 June 2011, the FASB issued revised authoritative guidance that requires all non-owner changes in stockholders 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 is not expected to 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 GAAP and International Financial Reporting Standards (IFRS). The amendments are effective for interim and annual periods beginning after December 15, 2011 (which is January 1, 2012 for MFLEX) and are to be applied prospectively. Early application by public entities 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 December 2010, the FASB issued revised authoritative guidance that modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that goodwill impairment exists. An entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The revised guidance was adopted during our second fiscal quarter of 2011. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.
In January 2010, the FASB issued revised authoritative guidance that requires more robust disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2 and 3. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009 (which is January 1, 2010 for MFLEX) except for the disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years (which was January 1, 2011 for MFLEX). The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.
43
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, 2011, no amounts were outstanding under our loan agreements with Bank of America, 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 $796.7 million, or 96%, of total shipments to these foreign manufacturers during fiscal 2011 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 6.54 RMB per U.S. dollar for fiscal 2011. To date, we attempt to manage our working capital in a manner to minimize foreign currency exposure and from time to time, we 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, 2011, we had outstanding deliverable forward contracts with notional amounts aggregating to approximately 31.9 million RMB (approximately $5.0 million U.S. dollars) and the recorded fair values of the associated liabilities were not material.
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.
44
Item 8. | Financial Statements and Supplementary Data |
MULTI-FINELINE ELECTRONIX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
45
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 financial statements present fairly, in all material respects, the financial position of Multi-Fineline Electronix, Inc. and its subsidiaries at September 30, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2011 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, 2011, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys 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 Managements Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Companys 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.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for other than temporary impairments in its auction rate securities in 2009.
A companys 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 companys 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 companys 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
Orange County, California
November 14, 2011
46
MULTI-FINELINE ELECTRONIX, INC.
(In Thousands, Except Share Data)
September 30, | ||||||||
2011 | 2010 | |||||||
ASSETS | ||||||||
Cash and cash equivalents |
$ | 97,890 | $ | 99,875 | ||||
Short-term investments |
| 14,991 | ||||||
Accounts receivable, net of allowances of $2,402 and $2,354 at September 30, 2011 and 2010, respectively |
150,507 | 149,469 | ||||||
Inventories |
87,166 | 76,933 | ||||||
Deferred taxes |
6,097 | 3,445 | ||||||
Income taxes receivable |
5,083 | 4,548 | ||||||
Assets held for sale |
| 2,958 | ||||||
Other current assets |
6,656 | 2,761 | ||||||
|
|
|
|
|||||
Total current assets |
353,399 | 354,980 | ||||||
Property, plant and equipment, net |
244,026 | 185,282 | ||||||
Land use rights |
6,831 | 3,461 | ||||||
Deferred taxes |
6,341 | 5,505 | ||||||
Goodwill |
7,537 | 7,537 | ||||||
Other assets |
7,611 | 5,556 | ||||||
|
|
|
|
|||||
Total assets |
$ | 625,745 | $ | 562,321 | ||||
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|
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LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Accounts payable |
$ | 162,790 | $ | 156,910 | ||||
Accrued liabilities |
27,936 | 27,077 | ||||||
Income taxes payable |
3,608 | 4,972 | ||||||
|
|
|
|
|||||
Total current liabilities |
194,334 | 188,959 | ||||||
Other liabilities |
15,328 | 11,830 | ||||||
|
|
|
|
|||||
Total liabilities |
209,662 | 200,789 | ||||||
Commitments and contingencies (Note 10) |
||||||||
Stockholders equity |
||||||||
Preferred stock, $0.0001 par value, 5,000,000 and 5,000,000 shares authorized at September 30, 2011 and 2010, respectively; 0 and 0 shares issued and outstanding at September 30, 2011 and 2010, respectively |
| | ||||||
Common stock, $0.0001 par value; 100,000,000 and 100,000,000 shares authorized at September 30, 2011 and 2010, respectively; 24,049,780 and 23,916,665 shares issued and outstanding at September 30, 2011 and 2010, respectively |
2 | 2 | ||||||
Additional paid-in capital |
87,577 | 85,150 | ||||||
Retained earnings |
288,702 | 250,829 | ||||||
Accumulated other comprehensive income |
39,802 | 25,551 | ||||||
|
|
|
|
|||||
Total stockholders equity |
416,083 | 361,532 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 625,745 | $ | 562,321 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
47
MULTI-FINELINE ELECTRONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share and Share Data)
Fiscal Years Ended September 30, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Net sales |
$ | 831,561 | $ | 791,339 | $ | 764,432 | ||||||
Cost of sales |
726,850 | 678,294 | 653,568 | |||||||||
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|
|||||||
Gross profit |
104,711 | 113,045 | 110,864 | |||||||||
Operating expenses: |
||||||||||||
Research and development |
10,485 | 14,455 | 5,505 | |||||||||
Sales and marketing |
25,189 | 24,086 | 22,146 | |||||||||
General and administrative |
18,788 | 21,625 | 25,486 | |||||||||
Impairment and restructuring |
4,186 | 11,376 | 328 | |||||||||
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|
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Total operating expenses |
58,648 | 71,542 | 53,465 | |||||||||
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|
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Operating income |
46,063 | 41,503 | 57,399 | |||||||||
Other income (expense), net: |
||||||||||||
Interest income |
875 | 535 | 767 | |||||||||
Interest expense |
(472 | ) | (782 | ) | (768 | ) | ||||||
Other income (expense), net |
564 | 472 | (1,358 | ) | ||||||||
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Income before income taxes |
47,030 | 41,728 | 56,040 | |||||||||
Provision for income taxes |
(9,157 | ) | (11,953 | ) | (9,972 | ) | ||||||
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Net income |
$ | 37,873 | $ | 29,775 | $ | 46,068 | ||||||
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Net income per share: |
||||||||||||
Basic |
$ | 1.58 | $ | 1.18 | $ | 1.84 | ||||||
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Diluted |
$ | 1.56 | $ | 1.16 | $ | 1.81 | ||||||
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Shares used in computing net income per share: |
||||||||||||
Basic |
24,027,179 | 25,203,445 | 25,026,039 | |||||||||
Diluted |
24,335,819 | 25,607,249 | 25,453,390 |
The accompanying notes are an integral part of these consolidated financial statements.
48
MULTI-FINELINE ELECTRONIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(In Thousands, Except Share Data)
Common Stock | Additional Paid-in Capital |
Treasury Stock |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total Stockholders Equity |
Comprehensive Income (Loss) |
||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||||
Balance at September 30, 2008 |
25,011,649 | $ | 2 | $ | 116,100 | $ | | $ | 172,770 | $ | 21,446 | $ | 310,318 | $ | 53,325 | |||||||||||||||||
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|
|||||||||||||||||
Exercise of stock options |
726,827 | | 3,482 | | | | 3,482 | | ||||||||||||||||||||||||
Stock-based compensation expense |
| | 3,437 | | | | 3,437 | | ||||||||||||||||||||||||
Stock-based compensation income tax benefits |
| | 2,131 | | | | 2,131 | | ||||||||||||||||||||||||
Net income |
| | | | 46,068 | | 46,068 | 46,068 | ||||||||||||||||||||||||
Translation adjustment |
| | | | | (254 | ) | (254 | ) | (254 | ) | |||||||||||||||||||||
Cumulative effect of adoption of new investment pronouncement |
| | | | 2,216 | (2,216 | ) | | | |||||||||||||||||||||||
Unrealized gain on investments |
| | | | | 569 | 569 | 569 | ||||||||||||||||||||||||
Reclassification adjustment for losses realized |
| | | | | 1,647 | 1,647 | 1,647 | ||||||||||||||||||||||||
Repurchase of common stock |
(562,500 | ) | | | (8,410 | ) | | | (8,410 | ) | | |||||||||||||||||||||
Retirement of treasury shares |
| | (8,410 | ) | 8,410 | | | | | |||||||||||||||||||||||
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|
|||||||||||||||||
Balance at September 30, 2009 |
25,175,976 | $ | 2 | $ | 116,740 | $ | | $ | 221,054 | $ | 21,192 | $ | 358,988 | $ | 48,030 | |||||||||||||||||
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|
|||||||||||||||||
Exercise of stock options |
447,102 | | 1,910 | | | | 1,910 | | ||||||||||||||||||||||||
Stock-based compensation expense |
| | 5,792 | | | | 5,792 | | ||||||||||||||||||||||||
Stock-based compensation income tax benefits |
| | 1,069 | | | | 1,069 | | ||||||||||||||||||||||||
Net income |
| | | | 29,775 | | 29,775 | 29,775 | ||||||||||||||||||||||||
Translation adjustment |
| | | | | 4,359 | 4,359 | 4,359 | ||||||||||||||||||||||||
Tax withholdings for net share settlement of equity awards |
(61,736 | ) | | (1,302 | ) | | | | (1,302 | ) | | |||||||||||||||||||||
Repurchase of common stock |
(1,644,677 | ) | | | (39,059 | ) | | | (39,059 | ) | | |||||||||||||||||||||
Retirement of treasury shares |
| | (39,059 | ) | 39,059 | | | | | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance at September 30, 2010 |
23,916,665 | $ | 2 | $ | 85,150 | $ | | $ | 250,829 | $ | 25,551 | $ | 361,532 | $ | 34,134 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Exercise of stock options |
279,982 | | 1,250 | | | | 1,250 | | ||||||||||||||||||||||||
Stock-based compensation expense |
| | 4,303 | | | | 4,303 | | ||||||||||||||||||||||||
Stock-based compensation income tax benefits |
| | 133 | | | | 133 | | ||||||||||||||||||||||||
Net income |
| | | | 37,873 | | 37,873 | 37,873 | ||||||||||||||||||||||||
Translation adjustment |
| | | | | 14,251 | 14,251 | 14,251 | ||||||||||||||||||||||||
Tax withholdings for net share settlement of equity awards |
(54,044 | ) | | (1,328 | ) | | | | (1,328 | ) | | |||||||||||||||||||||
Repurchase of common stock |
(92,823 | ) | | | (1,931 | ) | | | (1,931 | ) | | |||||||||||||||||||||
Retirement of treasury shares |
| | (1,931 | ) | 1931 | | | | | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance at September 30, 2011 |
24,049,780 | $ | 2 | $ | 87,577 | $ | | $ | 288,702 | $ | 39,802 | $ | 416,083 | $ | 52,124 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
49
MULTI-FINELINE ELECTRONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Fiscal Years Ended September 30, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Cash flows from operating activities |
||||||||||||
Net income |
$ | 37,873 | $ | 29,775 | $ | 46,068 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
45,530 | 44,457 | 40,766 | |||||||||
Provision for doubtful accounts and returns |
9,925 | 7,781 | 2,489 | |||||||||
Deferred taxes |
(3,128 | ) | (1,644 | ) | 4,311 | |||||||
Stock-based compensation expense |
4,303 | 5,792 | 3,437 | |||||||||
Tax benefit on option exercises |
(133 | ) | (1,069 | ) | (2,131 | ) | ||||||
Asset impairments |
3,384 | 7,912 | 1,932 | |||||||||
Loss (gain) on disposal of equipment |
427 | (292 | ) | (194 | ) | |||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
(10,323 | ) | (28,023 | ) | 29,878 | |||||||
Inventories |
(1,560 | ) | (23,693 | ) | 7,719 | |||||||
Other current assets |
(3,157 | ) | (789 | ) | (183 | ) | ||||||
Other assets |
(5,215 | ) | 1,267 | 4,260 | ||||||||
Accounts payable |
(21,267 | ) | 8,284 | (12,644 | ) | |||||||
Accrued liabilities |
1,294 | 10,016 | (2,407 | ) | ||||||||
Income taxes payable |
(1,860 | ) | 4,533 | (6,292 | ) | |||||||
Other current liabilities |
| 292 | | |||||||||
Other liabilities |
4,272 | 2,273 | (3,872 | ) | ||||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
60,365 | 66,872 | 113,137 | |||||||||
Cash flows from investing activities |
||||||||||||
Sales of investments |
14,991 | 18,457 | 50 | |||||||||
Purchases of investments |
| (19,989 | ) | | ||||||||
Purchases of property and equipment |
(79,772 | ) | (59,923 | ) | (31,971 | ) | ||||||
Proceeds from sale of property and equipment |
1,387 | 2,321 | 796 | |||||||||
Change in restricted cash, net |
| | 203 | |||||||||
Acquisition of business, net of cash acquired |
| | (872 | ) | ||||||||
|
|
|
|
|
|
|||||||
Net cash used in investing activities |
(63,394 | ) | (59,134 | ) | (31,794 | ) | ||||||
Cash flows from financing activities |
||||||||||||
Income tax benefit related to stock option exercises |
133 | 1,069 | 2,131 | |||||||||
Tax withholdings for net share settlement of equity awards |
(1,328 | ) | (1,302 | ) | | |||||||
Repayments of long-term debt |
| (11,144 | ) | | ||||||||
Debt issuance costs |
| | (891 | ) | ||||||||
Proceeds from exercise of stock options |
1,250 | 1,910 | 3,482 | |||||||||
Repurchase of common stock |
(1,931 | ) | (39,059 | ) | (8,410 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash used in financing activities |
(1,876 | ) | (48,526 | ) | (3,688 | ) | ||||||
Effect of exchange rate changes on cash |
2,920 | 942 | (24 | ) | ||||||||
|
|
|
|
|
|
|||||||
Net (decrease) increase in cash |
(1,985 | ) | (39,846 | ) | 77,631 | |||||||
Cash and cash equivalents at beginning of fiscal year |
99,875 | 139,721 | 62,090 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents at end of fiscal year |
$ | 97,890 | $ | 99,875 | $ | 139,721 | ||||||
|
|
|
|
|
|
|||||||
Non-cash investing activities |
||||||||||||
Purchases of property and equipment |
$ | 33,965 | $ | 19,955 | $ | 6,349 | ||||||
Non-cash financing activities |
||||||||||||
Issuance of notes payable in connection with acquisition |
$ | | $ | | $ | 10,377 | ||||||
Supplemental disclosure |
||||||||||||
Cash paid for interest |
$ | 465 | $ | 784 | $ | 774 | ||||||
Cash paid for income taxes |
$ | 10,821 | $ | 6,653 | $ | 17,239 |
The accompanying notes are an integral part of these consolidated financial statements.
50
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%, 62% and 59% of the Companys outstanding common stock as of September 30, 2011, 2010 and 2009, respectively, 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 in Malaysia: Multi-Fineline Electronix Malaysia Sdn. Bhd. (MFM); one located in Arizona: Aurora Optical, Inc. (Aurora Optical); and one located in Cambridge, England: MFLEX UK Limited, formerly known as Pelikon Limited (MFE). In October 2011, the Company incorporated a wholly owned subsidiary located in Korea: MFLEX Korea Limited (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 (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 in the determination of accounts receivable allowances, valuation of inventory, warranty reserves, valuation of the Companys common stock options and stock appreciation rights and income tax contingencies. 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 as of September 30, 2010 and 2009 consisted of money market funds and United States treasury bills. No cash equivalents were recorded on the Companys consolidated balance sheets as of September 30, 2011.
Investments
As of September 30, 2010, the Companys short-term investments included United States treasury bills with an original maturity of more than three months. The amortized cost basis of the U.S. Treasury bills approximated
51
their aggregate fair value at September 30, 2010. All of the Companys investments are classified as available for sale and are stated at their aggregate fair value. No investments were recorded on the Companys consolidated balance sheets as of September 30, 2011.
Fair Value of Financial Instruments
The carrying amounts of certain of the Companys financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximated fair value due to their short maturities. Derivative financial instruments were recognized at fair value based on observable market-based inputs of foreign currency spot and forward rates quoted by major financial institutions.
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 Companys flexible printed circuit boards and related component assemblies were sold to a limited number of customers (Note 9). The Company does not require collateral and maintains reserves for potential credit losses. Such losses have historically not been material and have been within managements 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 Companys 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 quarterly 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 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 - 5 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
52
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, 2011, 2010 and 2009, the Company recorded non-cash charges of $3,384, $3,566 and $311 for long-lived assets impaired, respectively (Note 13).
Land Use Rights
Land use rights include long-term leaseholds of land for the Companys facilities located in China.
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 2011 and 2010, 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, 2011 and September 30, 2010, no impairments of goodwill were required.
Revenue Recognition
The Companys 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 Companys remaining obligation to its customer after delivery is limited to warranty on its product.
Shipping and Handling Costs
Shipping cost related to products shipped utilizing a customer specified shipping service is paid directly by the customer. Products that are not shipped utilizing customer shipping services are generally charged by the
53
Company to its customers and are included in net sales. Shipping and handling costs incurred by the Company are expensed as incurred and are recorded as a component of cost of sales.
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 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, 2011, 2010 and 2009, were as follows:
Balance at Beginning of Fiscal Year |
Warranty Expenditures |
Provision for Estimated Warranty Cost |
Balance at End of Fiscal Year |
|||||||||||||
Fiscal 2011 |
$ | 463 | $ | (1,137 | ) | $ | 953 | $ | 279 | |||||||
Fiscal 2010 |
$ | 541 | $ | (2,123 | ) | $ | 2,045 | $ | 463 | |||||||
Fiscal 2009 |
$ | 2,601 | $ | (5,026 | ) | $ | 2,966 | $ | 541 |
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.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity (net assets) of a business enterprise during the period from transactions and other events and circumstances from non-owner sources. The difference between net income and comprehensive income for the fiscal years ended September 30, 2011, 2010 and 2009 was comprised of the Companys foreign currency translation adjustment, unrealized gains on investments and a reclassification adjustment for losses realized.
As of September 30, 2011 and 2010, the Company had accumulated other comprehensive income of $39,802 and $25,551, respectively, related to foreign currency translation adjustments.
54
Foreign Currency
The functional currency of the Companys 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 when there is a receivable or payable denominated in other than the respective entitys functional currency. The Company records the changes in the exchange rate for these transactions in the consolidated statements of income. For the fiscal years ended September 30, 2011, 2010 and 2009, foreign exchange transaction gains and losses were included in other income (expense) and were net losses of $160, $1,077 and $889, respectively.
Derivative Financial Instruments
The Companys 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 recorded in the condensed 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 income. Realized gains (losses) will be recognized at maturity as other income (expense), net in the consolidated statements of income. The cash flows from derivative financial instruments are classified as cash flows from operating activities in the consolidated statements of cash flows. The Company recognized unrealized gains of $7 and $0 during fiscal years 2011 and 2010, respectively, and realized losses of $45 and $0 during fiscal years 2011 and 2010, respectively, related to derivative financial instruments. See Note 14 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 grant date price of the Companys common stock.
55
Net Income Per ShareBasic 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:
Fiscal Years Ended September 30, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Basic weighted-average number of common shares outstanding |
24,027,179 | 25,203,445 | 25,026,039 | |||||||||
Dilutive effect of potential common shares |
308,640 | 403,804 | 427,351 | |||||||||
|
|
|
|
|
|
|||||||
Diluted weighted-average number of common and potential common shares outstanding |
24,335,819 | 25,607,249 | 25,453,390 | |||||||||
|
|
|
|
|
|
|||||||
Potential common shares excluded from the per share computations their inclusion would be anti-dilutive |
284,094 | 154,873 | 193,893 | |||||||||
|
|
|
|
|
|
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (FASB) issued revised authoritative guidance that modifies goodwill impairment testing by providing entities with an option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amendments are effective for fiscal years beginning after December 15, 2011 (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 Companys 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 stockholders 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 the Company) and are to be applied retrospectively. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Companys 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 GAAP and International Financial Reporting Standards (IFRS). The amendments are effective for interim and annual periods beginning after December 15, 2011 (which is January 1, 2012 for the Company) and are to be applied prospectively. Early application by public entities is not permitted. The adoption of this guidance is not expected to have a material impact on the Companys consolidated financial position, results of operations or cash flows.
In December 2010, the FASB issued revised authoritative guidance that modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that goodwill impairment exists. An entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance which require that goodwill of a
56
reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The revised guidance was adopted during the Companys second fiscal quarter of 2011. The adoption of this guidance did not have a material impact on the Companys consolidated financial position, results of operations or cash flows.
In January 2010, the FASB issued revised authoritative guidance that requires more robust disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2 and 3. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009 (which is January 1, 2010 for the Company) except for the disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years (which was January 1, 2011 for the Company). The adoption of this guidance did not have a material impact on the Companys consolidated financial position, results of operations or cash flows.
2. Acquisition of Pelikon
In December 2008, the Company acquired Pelikon, now referred to as MFLEX UK Limited (MFE), which developed printed segmented electroluminescent display and keypad technologies primarily for use in smart phones, with the potential for future application to other electronic devices. The initial consideration for the purchase was $10,377, which consisted of notes payable to all former shareholders of MFE and notes payable to certain unsecured debt holders of MFE. In March 2010, the Company repaid the entire balance of the promissory notes, plus the accrued interest thereon.
The estimated fair values of the assets acquired and liabilities assumed based on the initial consideration at the date of acquisition was $11,249 and was allocated based upon the fair value of assets acquired and liabilities assumed. The consolidated financial statements for the fiscal years ended September 30, 2011, 2010 and 2009 include the results of operations of MFE commencing as of the acquisition date. The acquisition of MFE was not material to the historical consolidated financial position, results of operations or cash flows of the Company.
3. Related Party Transactions
During the fiscal years ended September 30, 2011, 2010 and 2009, the Company recognized revenue and recorded purchases from the following affiliated companies: (a) MFS Technology Pte. Ltd. (MFS); and (b) MFS Technologies (Hunan) Co. Ltd., a subsidiary of MFS. As discussed in Note 1, WBL owned approximately 62%, 62% and 59% of the Companys common stock as of September 30, 2011, 2010 and 2009, respectively. MFS is an indirect subsidiary of WBL.
Sales to and purchases from affiliates comprised the following:
Fiscal Years Ended September 30, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Sales to affiliates: |
||||||||||||
MFS Technologies (Hunan) Co. Ltd. |
$ | 8 | $ | 23 | $ | 471 | ||||||
|
|
|
|
|
|
|||||||
Purchases from affiliates: |
||||||||||||
MFS |
$ | | $ | 257 | $ | 5,452 | ||||||
|
|
|
|
|
|
Rent expense for the fiscal years ended September 30, 2011, 2010 and 2009 included related-party payments to various WBL subsidiaries of $217, $420 and $521, respectively. As of September 30, 2011, 2010 and 2009, the Company leased approximately seven thousand square feet of office space from WBL related parties.
57
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 our majority stockholder WBL. The property consists of land-use rights and building and had a total purchase price of 32,314 Chinese Renminbi (RMB) ($5,085 at September 30, 2011), of which 20,000 RMB ($3,147 at September 30, 2011) and 12,314 RMB ($1,938 at September 30, 2011) were allocated to the land-use rights and building, respectively. MFC previously leased such property from WBL.
4. Composition of Certain Balance Sheet Components
Inventories, net of related allowances, were comprised of the following:
September 30, | ||||||||
2011 | 2010 | |||||||
Raw materials and supplies |
$ | 27,735 | $ | 32,134 | ||||
Work-in-progress |
16,526 | 19,855 | ||||||
Finished goods |
42,905 | 24,944 | ||||||
|
|
|
|
|||||
$ | 87,166 | $ | 76,933 | |||||
|
|
|
|
Property, plant, and equipment, net, were comprised of the following:
September 30, | ||||||||
2011 | 2010 | |||||||
Land |
$ | 2,942 | $ | 3,730 | ||||
Building |
73,708 | 55,688 | ||||||
Machinery and equipment |
300,539 | 223,518 | ||||||
Computers and capitalized software |
11,184 | 12,106 | ||||||
Leasehold improvements |
15,270 | 16,550 | ||||||
Construction-in-progress |
27,795 | 23,886 | ||||||
|
|
|
|
|||||
$ | 431,438 | $ | 335,478 | |||||
Accumulated depreciation and amortization |
(187,412 | ) | (150,196 | ) | ||||
|
|
|
|
|||||
$ | 244,026 | $ | 185,282 | |||||
|
|
|
|
Depreciation expense for the fiscal years ended September 30, 2011, 2010 and 2009, was $45,530, $42,196 and $39,132, respectively.
Accrued liabilities were comprised of the following:
September 30, | ||||||||
2011 | 2010 | |||||||
Wages and compensation |
$ | 17,652 | $ | 17,909 | ||||
Other |
10,284 | 9,168 | ||||||
|
|
|
|
|||||
$ | 27,936 | $ | 27,077 | |||||
|
|
|
|
Other liabilities were comprised of the following:
September 30, | ||||||||
2011 | 2010 | |||||||
Liabilities on uncertain tax positions |
$ | 15,313 | $ | 11,829 | ||||
Deferred tax liabilities |
15 | 1 | ||||||
|
|
|
|
|||||
$ | 15,328 | $ | 11,830 | |||||
|
|
|
|
58
5. Goodwill and Intangible Assets
Goodwill
The Company records the excess of an acquisitions purchase price over the fair value of the identified assets and liabilities as goodwill. As of September 30, 2011 and 2010, the carrying amount of goodwill was $7,537.
Intangible Assets
As part of the acquisition 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 as of September 30, 2010.
Amortization of intangible assets was $0, $1,360 and $1,095 for the fiscal years ended September 30, 2011, 2010 and 2009, respectively. As of September 30, 2011, the Company did not record any intangible assets on its consolidated balance sheet.
6. Income Taxes
United States and foreign income (loss) before taxes were as follows:
Fiscal Years Ended September 30, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
United States |
$ | (2,551 | ) | $ | (979 | ) | $ | 11,595 | ||||
Foreign |
49,581 | 42,707 | 44,445 | |||||||||
|
|
|
|
|
|
|||||||
$ | 47,030 | $ | 41,728 | $ | 56,040 | |||||||
|
|
|
|
|
|
The provision for (benefit from) income taxes consisted of the following components:
Fiscal Years Ended September 30, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 2,487 | $ | 1,384 | $ | (1,275 | ) | |||||
State |
509 | 77 | 628 | |||||||||
Foreign |
9,633 | 12,227 | 4,224 | |||||||||
|
|
|
|
|
|
|||||||
$ | 12,629 | $ | 13,688 | $ | 3,577 | |||||||
|
|
|
|
|
|
|||||||
Deferred: |
||||||||||||
Federal |
$ | (766 | ) | $ | 1,087 | $ | 4,128 | |||||
State |
(383 | ) | (194 | ) | 204 | |||||||
Foreign |
(2,323 | ) | (2,628 | ) | 2,063 | |||||||
|
|
|
|
|
|
|||||||
(3,472 | ) | (1,735 | ) | 6,395 | ||||||||
|
|
|
|
|
|
|||||||
$ | 9,157 | $ | 11,953 | $ | 9,972 | |||||||
|
|
|
|
|
|
59
Deferred tax assets and (liabilities) comprised the following:
September 30, | ||||||||
2011 | 2010 | |||||||
Deferred tax assets: |
||||||||
Net operating loss |
$ | 11,615 | $ | 11,647 | ||||
Inventory |
1,577 | 1,081 | ||||||
Depreciation |
2,368 | 2,847 | ||||||
Stock-based compensation |
1,961 | 1,984 | ||||||
Asset impairment |
2,191 | 1,146 | ||||||
Accrued expenses |
4,703 | 2,065 | ||||||
Allowance for doubtful accounts |
268 | 258 | ||||||
Warranty reserve |
59 | 84 | ||||||
Capital loss carryforward |
331 | 342 | ||||||
Investments |
176 | 182 | ||||||
State taxes |
21 | | ||||||
Other |
199 | 42 | ||||||
|
|
|
|
|||||
Subtotal deferred tax assets |
25,469 | 21,678 | ||||||
Valuation allowance |
(12,527 | ) | (12,239 | ) | ||||
|
|
|
|
|||||
Total deferred tax assets |
12,942 | 9,439 | ||||||
|
|
|
|
|||||
Deferred tax liabilities: |
||||||||
Depreciation |
| (19 | ) | |||||
Amortization |
(519 | ) | (429 | ) | ||||
Put option |
| | ||||||
State taxes |
| (40 | ) | |||||
|
|
|
|
|||||
Total deferred tax liabilities |
(519 | ) | (488 | ) | ||||
|
|
|
|
|||||
Net deferred tax assets |
$ | 12,423 | $ | 8,951 | ||||
|
|
|
|
The Company established a valuation allowance of approximately $12,527 and $12,239 as of September 30, 2011 and 2010, respectively. The valuation allowance is comprised of net operating loss carryforwards, capital loss carryforwards and deferred income tax benefits attributable to the Companys investments and stock-based compensation. The valuation allowance increased by $1,122 due to MFE and MFMs current year net operating loss, increased $260 due to stock-based compensation, decreased by $370 due to change in statutory rates and decreased by $724 due to 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, 2011 and 2010, the Company had net operating loss carryforwards for state tax purposes of $5,371 and $4,047, respectively. In addition, the Company had net operating loss carryforwards for foreign tax purposes of approximately $43,683 and $42,858, respectively. The net operating loss carryforwards will begin to expire in 2016 for state and 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 $204, which will begin to expire in 2021.
60
The provision for (benefit from) income taxes differs from the amount obtained by applying the statutory tax rate as follows:
Fiscal Years Ended September 30, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Provision for income taxes at statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Increase (decrease) in taxes resulting from: |
||||||||||||
State taxes, net of federal benefit |
(0.3 | ) | 0.1 | 0.6 | ||||||||
Foreign rate variance |
(22.8 | ) | (20.6 | ) | (16.5 | ) | ||||||
Nondeductible expenses |
0.8 | 0.1 | 0.3 | |||||||||
Return to provision adjustments |
1.0 | | (1.2 | ) | ||||||||
Tax contingency reserve |
6.7 | 6.7 | (3.9 | ) | ||||||||
Valuation allowance |
0.6 | 8.2 | 2.3 | |||||||||
Other |
(1.5 | ) | (0.9 | ) | 1.2 | |||||||
|
|
|
|
|
|
|||||||
19.5 | % | 28.6 | % | 17.8 | % | |||||||
|
|
|
|
|
|
The Company currently enjoys tax incentives for certain of its Asia operations. One of the tax holidays was recently eliminated by taxing authorities due to a change in law. Certain Asia operations are subject to taxes at a rate of 10% of profits. 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, 2011, 2010 and 2009 would have been decreased to the pro forma amounts below:
Fiscal Years Ended September 30, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Net income, as reported |
$ | 37,873 | $ | 29,775 | $ | 46,068 | ||||||
Additional tax in China and Singapore |
(1,349 | ) | (1,951 | ) | (2,769 | ) | ||||||
|
|
|
|
|
|
|||||||
Pro forma net income |
$ | 36,524 | $ | 27,824 | $ | 43,299 | ||||||
Net income per share: |
||||||||||||
Basic, as reported |
$ | 1.58 | $ | 1.18 | $ | 1.84 | ||||||
Basic, pro forma |
$ | 1.52 | $ | 1.10 | $ | 1.73 | ||||||
Diluted, as reported |
$ | 1.56 | $ | 1.16 | $ | 1.81 | ||||||
Diluted, pro forma |
$ | 1.50 | $ | 1.09 | $ | 1.70 |
Undistributed earnings of the Companys foreign subsidiaries amounted to approximately $184,994, $141,830 and $109,529 for the fiscal years ended September 30, 2011, 2010 and 2009, respectively. Those earnings are considered to be permanently reinvested due to certain restrictions under local laws as well as the Companys 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:
Fiscal 2011 |
Fiscal 2010 |
|||||||
Unrecognized tax benefits at beginning of the year |
$ | 11,372 | $ | 9,106 | ||||
Increases for positions taken in current period |
2,984 | 3,264 | ||||||
Decreases for positions taken in prior period |
| | ||||||
Decreases for settlement with taxing authorities |
| (512 | ) | |||||
Decreases for lapse in applicable statute of limitations |
(2 | ) | (486 | ) | ||||
|
|
|
|
|||||
Unrecognized tax benefits at end of the year |
$ | 14,354 | $ | 11,372 | ||||
|
|
|
|
61
As of September 30, 2011, the liability for income taxes associated with uncertain tax positions increased to $14,354 from $11,372 as September 30, 2010. As of September 30, 2011 and September 30, 2010, these liabilities can be reduced by $4,817 and $4,723, respectively, from offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, state income taxes and timing adjustments. The net amount of $9,537 at September 30, 2011 and $6,649 at September 30, 2010, if recognized, would favorably affect the Companys effective tax rate. During the fiscal year ended September 30, 2011, the liability for income taxes associated with uncertain tax positions decreased by $2 due to an expiration of statute of limitation related to state tax position.
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 $397 and $252 of interest for the fiscal years ended September 30, 2011 and 2010, respectively. The accrued interest decreased by $1 due to the decrease in unrecognized tax benefits stated above. In total, the Company has recognized a liability of $735 for interest as of September 30, 2011.
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. federal and various state, 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 MFC2s income tax returns for tax years 2005 through 2007. The Company is also under examination by California Franchise Tax Board for fiscal year 2009.
The Internal Revenue Service (IRS) is currently examining the Companys income tax return for fiscal year 2007. As of September 30, 2011, the IRS has raised questions primarily related to transfer pricing. Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Companys tax audits are resolved in a manner not consistent with managements 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 Companys results of operations, cash flows and financial position if not resolved favorably. 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.
7. Lines of Credit
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 ($31,472 at September 30, 2011). 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 Peoples 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 ($23,604 each at September 30, 2011). 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
62
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 (each, a Borrower, and collectively, the Borrowers) entered into a Loan and Security Agreement (the Agreement) with Bank of America, N.A., as a lender and agent (BOA), for a senior revolving credit facility (the Facility) in an amount up to $30,000, which may be increased to $60,000 at the Companys discretion upon satisfaction of certain additional requirements (the Revolver Commitment). The parties have entered into five amendments to the Agreement, including an amendment on August 27, 2009, to make certain adjustments to the amount available for borrowing under the Facility and the definition of Eligible Account (as defined in such amendment). The second amendment was effective on February 15, 2010 and amended the definition of Permitted Debt to allow the Borrowers additional aggregate debt during the Borrowers transitioning of their credit lines from certain financial institutions in China to different financial institutions in China. The third amendment was effective March 17, 2010 and made changes to the definition of Restricted Investment to amend the amount that may be invested in MFM and MFE to fund operating expenses. Covenants related to availability, collateral and other events are also imposed on the Company and its foreign subsidiaries in the Agreement. The fourth amendment was entered into on August 18, 2010, and increased the dollar amount of shares that could be repurchased by the Company. The fifth amendment was effective on September 1, 2011, and again increased the dollar amount of shares that could be repurchased by the Company and also allowed MFLEX Singapore to write off its intercompany loans made to MFM.
Availability under the Facility for each Borrower will be an amount equal to the lesser of: (1) 85% of the eligible accounts receivable attributable to such Borrower minus the Availability Block (as defined in the Amendment), which amount could be as high as $10,000 and as low as $0 depending on the amount of cash and cash equivalents on deposit with BOA, or (2) the Revolver Commitment minus the Availability Reserve (as defined in the Agreement) to the extent attributable to such Borrower in BOAs discretion.
Amounts outstanding under the Facility will bear interest at a rate equal to LIBOR or SIBOR/Singapore Swap Rate, as Borrower may elect from time to time, plus the Applicable Margin (as defined in the Agreement). The Facility has a three year term, subject to earlier termination by Borrowers at their discretion or by BOA upon occurrence of an event of default.
As collateral for its obligations under the Facility, the Company has granted BOA a security interest in all the assets of Multi-Fineline Electronix, Inc. and MFLEX Singapore (which does not include assets of any foreign subsidiary that is treated as a corporation for U.S. federal income tax purposes), except for its equipment, real property and intellectual property and 34% of the voting stock of each of its foreign subsidiaries. As collateral for its obligations under the facility, MFLEX Singapore has granted BOA a security interest in all of its assets, except for its equipment, real property and intellectual property. The Company has also guaranteed all of MFLEX Singapores obligations under the Agreement.
The Agreement imposes customary affirmative, negative and financial covenants on the Borrowers and their subsidiaries. The negative covenants impose limitations on, among other things, the Companys ability to make distributions on its capital stock or repurchase equity interests unless certain requirements are met, with limited exceptions. The financial covenants require that the Borrowers maintain a Fixed Charge Coverage Ratio (as defined in the Agreement) of 1.0 for each period of 12 fiscal months ending on or after June 30, 2009. However, the financial covenants are only applicable if the aggregate availability is less than 20% of the Revolver Commitment.
The Agreement also contains customary events of default including defaults related to the following, among other things: failure to make payments; breach of a representation or warranty; covenant breaches; judgments or loss or theft of collateral in excess of specified amounts; injunction or governmental pronouncement preventing
63
the operation of the Borrowers business; criminal indictment of any Borrower or senior officer; change of control; insolvency; and Employee Retirement Income Security Act (ERISA) violations. An event of default is also triggered if the Singapore Minister of Finance declares MFLEX Singapore to be a declared company under the Singapore Companies Act. A declared company is one over which the Minister of Finance may exercise certain powers to investigate such company to protect the public, shareholders or creditors. Upon the occurrence and continuance of an event of default, BOA may, without notice or demand, declare all obligations under the Facility immediately due and payable, terminate or reduce the Revolver Commitment, adjust the borrowing base or proceed against the collateral, among other rights and remedies.
A summary of the lines of credit is as follows:
Amounts Available at | Amounts Outstanding at | |||||||||||||||
September 30, 2011 |
September 30, 2010 |
September 30, 2011 |
September 30, 2010 |
|||||||||||||
Line of credit (ABC) |
$ | 31,472 | $ | 29,846 | $ | | $ | | ||||||||
Line of credit (CCB) |
47,208 | 44,768 | | | ||||||||||||
Line of credit (BOA) |
22,285 | 30,000 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 100,965 | $ | 104,614 | $ | | $ | | |||||||||
|
|
|
|
|
|
|
|
As of September 30, 2011, the Company was in compliance with all covenants under its lines of credit.
8. Segment Information
Based on the evaluation of the Companys internal financial information, management believes that the Company operates in one reportable segment which is primarily engaged in the engineering, design and manufacture of flexible circuit boards along with related component assemblies. Between fiscal years 2009 and 2011, the Company operated in four geographical areas: United States, China, Singapore and Other (which included Malaysia 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 Companys geographic segments are presented on a basis consistent with the consolidated financial statements. For the fiscal years ended September 30, 2010 and 2009, net sales increased in Singapore and decreased in the United States primarily as a result of a reorganization of international operations which consolidated customer service, invoicing, and various program management and selling activities to Singapore. Segment net sales and assets amounts include intra-company product sales transactions and subsidiary investment amounts, respectively, which are offset in the elimination line.
64
Financial information by geographic segment is as follows:
Fiscal Years Ended September 30, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Net sales |
||||||||||||
United States |
$ | 24,417 | $ | 61,489 | $ | 261,760 | ||||||
China |
780,814 | 685,121 | 517,773 | |||||||||
Singapore |
794,048 | 752,951 | 490,648 | |||||||||
Other |
374 | 724 | 1,112 | |||||||||
Eliminations |
(768,092 | ) | (708,946 | ) | (506,861 | ) | ||||||
|
|
|
|
|
|
|||||||
Total |
$ | 831,561 | $ | 791,339 | $ | 764,432 | ||||||
|
|
|
|
|
|
|||||||
Operating income (loss) |
||||||||||||
United States |
$ | (13,849 | ) | $ | (14,490 | ) | $ | 117 | ||||
China |
21,941 | 25,639 | 27,894 | |||||||||
Singapore |
42,547 | 47,894 | 36,411 | |||||||||
Other |
(3,613 | ) | (17,971 | ) | (7,133 | ) | ||||||
Eliminations |
(963 | ) | 431 | 110 | ||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 46,063 | $ | 41,503 | $ | 57,399 | ||||||
|
|
|
|
|
|
|||||||
Depreciation and amortization |
||||||||||||
United States |
$ | 3,626 | $ | 4,295 | $ | 3,498 | ||||||
China |
41,596 | 37,648 | 35,656 | |||||||||
Singapore |
97 | 58 | 30 | |||||||||
Other |
211 | 2,456 | 1,582 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 45,530 | $ | 44,457 | $ | 40,766 | ||||||
|
|
|
|
|
|
Fiscal Years Ended September 30, | ||||||||
2011 | 2010 | |||||||
Long-lived assets |
||||||||
United States |
$ | 10,794 | $ | 15,513 | ||||
China |
239,519 | 171,925 | ||||||
Singapore |
248 | 273 | ||||||
Other |
296 | 1,032 | ||||||
|
|
|
|
|||||
Total |
$ | 250,857 | $ | 188,743 | ||||
|
|
|
|
Fiscal Years Ended September 30, | ||||||||
2011 | 2010 | |||||||
Total assets |
||||||||
United States |
$ | 167,813 | $ | 192,559 | ||||
China |
389,807 | 285,945 | ||||||
Singapore |
293,146 | 268,186 | ||||||
Other |
4,716 | 5,873 | ||||||
Eliminations |
(229,737 | ) | (190,242 | ) | ||||
|
|
|
|
|||||
Total |
$ | 625,745 | $ | 562,321 | ||||
|
|
|
|
65
9. Significant Concentrations
Customers
Net sales to the Companys largest Original Equipment Manufacturer (OEM) customers, inclusive of net sales made to their designated sub-contractors, are presented below.
Fiscal Years Ended September 30, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Net sales |
||||||||||||
OEMA |
8 | % | 8 | % | 6 | % | ||||||
OEMB |
0 | % | 1 | % | 10 | % | ||||||
OEMC |
44 | % | 43 | % | 37 | % | ||||||
OEMD |
43 | % | 42 | % | 43 | % | ||||||
OEME |
5 | % | 4 | % | 1 | % |
Net sales direct to the Companys largest customers, exclusive of OEM subcontractor relationship, which accounted for more than 10% of the Companys net sales, and accounts receivable from such customers are presented below. The customers consist principally of major electronic companies or electronics company sub-contractors.
Fiscal Years Ended September 30, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Net sales |
||||||||||||
Customer2 |
0 | % | 10 | % | 12 | % | ||||||
Customer3 |
23 | % | 18 | % | 12 | % | ||||||
Customer4 |
0 | % | 24 | % | 25 | % | ||||||
Customer5 |
13 | % | 16 | % | 17 | % |
Fiscal Years Ended September 30, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Accounts Receivable |
||||||||||||
Customer1 |
11 | % | 8 | % | 6 | % | ||||||
Customer2 |
24 | % | 24 | % | 11 | % | ||||||
Customer3 |
39 | % | 17 | % | 16 | % | ||||||
Customer4 |
0 | % | 2 | % | 30 | % | ||||||
Customer5 |
1 | % | 16 | % | 11 | % |
Geographic
Information regarding net sales by geographical area based on the location of the customer is summarized below:
Fiscal Years Ended September 30, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
United States |
$ | 62,007 | $ | 86,050 | $ | 124,627 | ||||||
Mexico |
165,190 | 99,309 | 57,450 | |||||||||
Canada |
26,543 | 52,635 | 43,270 | |||||||||
China |
190,097 | 303,040 | 321,657 | |||||||||
Hong Kong |
289,615 | 159,930 | 106,480 | |||||||||
Malaysia |
3,938 | 1,575 | 18,596 | |||||||||
Other Asia-Pacific |
17,440 | 35,889 | 7,280 | |||||||||
Europe |
76,711 | 51,151 | 84,927 | |||||||||
Other foreign |
20 | 1,760 | 145 | |||||||||
|
|
|
|
|
|
|||||||
$ | 831,561 | $ | 791,339 | $ | 764,432 | |||||||
|
|
|
|
|
|
66
Sales to customers in Other Asia-Pacific countries noted above included Singapore, Japan, Thailand, Taiwan, and Korea. Sales to customers in Europe included the Netherlands, Austria, Sweden, Hungary, Denmark, Italy, Scotland, Germany, France 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, 2011, 2010 and 2009, 83%, 68% and 57% of net sales, respectively, were derived from sales to companies that provide products or services into the smartphone industry, 13%, 1%, and 0% of net sales, respectively, were derived from sales were to companies that provide products or services into the tablet industry, and 1%, 24% and 25% 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.
10. Commitments and Contingencies
Operating Leases
The Company leases its facilities and certain assets under non-cancelable operating leases which expire at various dates through 2014. Future minimum lease payments under non-cancelable operating leases at September 30, 2011 are as follows:
Fiscal Years Ending September 30, |
Future Minimum Lease Payments |
|||
2012 |
$ | 1,506 | ||
2013 |
852 | |||
2014 |
628 | |||
|
|
|||
Total |
$ | 2,986 | ||
|
|
Total rent expense was $2,243, $1,783 and $1,877 for the fiscal years ended September 30, 2011, 2010 and 2009, 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 Companys 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 its various facilities, which totaled $8,068 and $38,054 as of September 30, 2011 and 2010, respectively.
Pursuant to the laws applicable to the Peoples Republic of Chinas Foreign Investment Enterprises, the Companys 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, 2011, 2010 and 2009 were $16,255, $13,386 and $11,056, respectively.
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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 Companys products, warranty guarantees to customers related to products sold and indemnities to the Companys 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.
11. Stock-Based Compensation
2004 Stock Incentive Plan
In June 2004, the Company adopted the 2004 Stock Incentive Plan (the 2004 Plan), which is administered by the Companys 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. Options granted 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 Companys capital stock (a 10% owner). 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 Companys 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 Companys common stock on the date the 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 Companys assessment of the estimated fair value of the stock options granted is affected by the Companys 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 granted. Expected forfeitures of stock options are estimated based on the historical turnover of the Companys employees. The fair value of restricted stock units granted is based on the grant date price of the Companys 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 the Companys common stock price, which the Company determines based on historical volatility of the Companys 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, which is estimated based on the historical stock option exercise behavior of the Companys 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. |
No stock options were granted during the fiscal year ended September 30, 2011.
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Stock Options
Stock option activity for the fiscal year ended September 30, 2011 under the 2004 Plan is summarized as follows:
Number of Shares |
Weighted- Average Exercise Price |
Aggregate Intrinsic Value |
Weighted- Average Remaining Contractual Life |
|||||||||||||
Options outstanding at September 30, 2010 |
328,599 | $ | 11.57 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
(89,619 | ) | 13.94 | |||||||||||||
Forfeited |
(2,700 | ) | 10.00 | |||||||||||||
|
|
|||||||||||||||
Options outstanding and exercisable at September 30, 2011 |
236,280 | $ | 10.69 | $ | 2,200 | 2.7 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Vested and expected to vest at September 30, 2011 |
236,280 | $ | 10.69 | $ | 2,200 | 2.7 | ||||||||||
|
|
|
|
|
|
|
|
During the fiscal years ended September 30, 2011, 2010 and 2009, the Company recognized compensation costs of $0, $0 and $288, respectively, related to stock options. The aggregate intrinsic value of stock options exercised was $1,346, $3,302 and $7,370 during the fiscal years ended September 30, 2011, 2010 and 2009, respectively. No unearned compensation existed as of September 30, 2011 related to non-vested stock options.
Service and Performance-Based Restricted Stock Units
During the fiscal years ended September 30, 2011, 2010 and 2009, the Company granted service-based restricted stock units (RSU or RSUs) equal to 218,727, 153,991 and 260,050 shares, respectively, of the Companys common stock. These grants were made under the 2004 Plan to certain employees (including executive officers) and directors at no cost to such individual. Each RSU represents one hypothetical share of the Companys common stock, without voting or dividend rights. The RSUs granted to employees vest over a period of three years with one-third vesting on each of the anniversary dates of the grant date. Unearned compensation related to the RSUs was determined based on the fair value of the Companys common stock on the date of grant and is amortized to 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 per the related FASB authoritative guidance. 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 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
69
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 Companys 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 a market condition is accounted for and measured differently than an award that has a performance or service condition. The effect of a market condition is reflected in the awards 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 an award that has a market condition will be recognized if the requisite service period is fulfilled, even if the market condition is never satisfied. The 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:
November 2010 Awards |
Russell 2000 Index Benchmark Inputs |
|||||||
Expected stock return/discount rate1 |
0.64 | % | 0.64 | % | ||||
Dividend yield |
0.00 | % | 0.00 | % | ||||
Volatility2 |
65.00 | % | 25.00 | % | ||||
Test start date3 |
9/30/2010 | 9/30/2010 | ||||||
Common share price3 |
$ | 21.99 | $ | 676.14 | ||||
Expected vesting period (in years) |
3.00 | N/A |
1 | The expected stock return/discount rate was based on the yield to maturity of short-term government bonds over the expected term as of the grant dates. |
2 | 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. |
3 | The common stock price input at the grant date was based on the closing price for the Companys 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 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. 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.
On June 11, 2008, the Administrator approved the grant of 22,000 performance-based RSUs. These performance-based RSUs vest upon the achievement of defined performance objectives pertaining to each grant, with vesting to occur between the date of grant and June 30, 2011. During fiscal 2009, 12,000 of the performance-based RSUs were deemed to not meet the Probability Threshold regarding the defined performance
70
objectives. During the three months ended December 31, 2009, the Company determined that the vesting of the remaining 10,000 performance-based RSUs were deemed to not meet the Probability Threshold regarding the defined performance objectives, and as a result, the Company reversed $148 of compensation expense. No changes in the probability of achievement of the performance objectives were noted since the period ended December 31, 2009.
RSU activity for the fiscal year ended September 30, 2011 under the 2004 Plan is summarized as follows:
Number of Shares |
Weighted- Average Grant-Date Fair Value |
|||||||
Nonvested shares outstanding at September 30, 2010 |
479,019 | $ | 21.68 | |||||
Granted |
313,606 | 22.33 | ||||||
Vested |
(190,363 | ) | 19.46 | |||||
Forfeited |
(59,320 | ) | 23.00 | |||||
|
|
|||||||
Nonvested shares outstanding at September 30, 2011 |
542,942 | $ | 22.69 | |||||
|
|
The Company recognized compensation costs related to RSUs of $3,262, $4,842 and $2,996 during the fiscal years ended September 30, 2011, 2010 and 2009, respectively. The weighted-average grant-date fair value of nonvested RSUs granted during the fiscal years ended September 30, 2011, 2010 and 2009 was $22.33, $25.94 and $14.14, respectively. The weighted-average fair value of RSUs vested during the fiscal years ended September 30, 2011, 2010 and 2009 was $19.46, $17.92 and $20.96, respectively. Unearned compensation of $5,049 existed as of September 30, 2011 related to nonvested RSUs, which will be recognized into expense over the weighted-average remaining contractual life of the nonvested RSUs of 1.2 years.
Stock Appreciation Rights
During fiscal year 2011, the Administrator approved the grant of stock appreciation rights (SSAR or 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 Companys common stock on each applicable grant date as reported on the NASDAQ Global Select Market. The Companys 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).
On November 15, 2010, the Administrator approved the grant of 125,780 SSARs (the November 2010 SSARs). The November 2010 SSARs vest over a period of three years with one-third vesting on each November 15, 2011, 2012 and 2013, and will expire on November 14, 2020. The grant date fair value of the November 2010 SSARs was estimated at $10.22 using the Black-Scholes valuation pricing model assuming a risk-free interest rate of 0.78%, zero expected dividends, expected volatility of 66.81% and an expected term of 3.3 years.
On November 16, 2009, the Administrator granted 154,940 stock appreciation rights (SSAR or SSARs) to be settled in the Companys common stock (the November 2009 SSARs), for certain employees (including executive officers) under the 2004 Plan. These November 2009 SSARs will vest and be exercisable on November 16, 2012, and will expire on November 15, 2019. Each SSAR has a base appreciation amount that is equal to the closing price of a share of the Companys common stock on each applicable grant date as reported on the NASDAQ Global Select Market. The November 2009 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). The grant date-fair value of the November 2009 SSARs was estimated at $12.44 using the Black-Scholes valuation pricing model assuming a risk-free interest rate of 2.18%, zero expected dividends, expected volatility of 71.05% and an expected term of 3.0 years.
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On December 5, 2008, the Administrator approved defined dollar value SSARs to be settled in Company common stock of $2,225, for certain employees, including executive officers, under the 2004 Plan (the December 2008 SSARs). These SSARs were granted in four tranches (on December 5, 2008 and March 5, June 5 and September 4, 2009, subject to certain requirements being meteach a grant date), will vest and be exercisable on December 5, 2011, and will expire December 4, 2018. Each SSAR has a base appreciation amount that is equal to the closing price of a share of the Companys common stock on each applicable grant date as reported on the NASDAQ Global Select Market. The number of SSARs received by each participant, on each grant date, was determined by dividing one-fourth of the defined dollar value set for each grantee by the closing price of a share of the Companys common stock on the applicable grant date, rounded down to the nearest whole number of shares. If a participant terminates service with the Company prior to December 5, 2011, all of that participants SSAR awards will be forfeited and cancelled.
The December 2008 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. The grant date fair value of the December 2008 SSARs was estimated using the Black-Scholes valuation pricing model with the following assumptions:
December 5, 2008 |
March 5, 2009 |
June 5, 2009 |
September 4, 2009 |
|||||||||||||
Risk-free interest rate |
1.61 | % | 1.96 | % | 2.56 | % | 2.46 | % | ||||||||
Expected dividends |
| | | | ||||||||||||
Expected volatility |
73.55 | % | 73.53 | % | 73.05 | % | 72.00 | % | ||||||||
Expected term (in months) |
36 | 33 | 30 | 27 | ||||||||||||
Grant date fair value |
$ | 5.26 | $ | 6.00 | $ | 9.95 | $ | 12.21 | ||||||||
Total December 2008 SSARs granted |
51,692 | 43,794 | 25,396 | 19,460 |
Upon exercise, each SSAR will be settled in the Companys 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. Future compensation expense will be equal to the whole number of shares issued multiplied by the fair market value per share on the exercise date.
SSARs activity for the fiscal year ended September 30, 2011 under the 2004 Plan is summarized as follows:
Number of Shares |
Weighted- Average Exercise Price |
Aggregate Intrinsic Value |
Weighted- Average Remaining Contractual Life |
|||||||||||||
SSARs outstanding at September 30, 2010 |
295,282 | $ | 21.16 | |||||||||||||
Granted |
125,780 | 22.17 | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
(50,659 | ) | 21.60 | |||||||||||||
|
|
|||||||||||||||
SSARs outstanding at September 30, 2011 |
370,403 | $ | 21.44 | $ | 685 | 8.2 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
SSARs expected to vest after September 30, 2011 |
358,347 | $ | 21.37 | $ | 680 | 8.2 | ||||||||||
|
|
|
|
|
|
|
|
The Company recognized compensation costs of $1,041, $951 and $153 during the fiscal years ended September 30, 2011, 2010 and 2009, respectively, related to SSARs. No SSARs were exercised or were exercisable during the fiscal years ended September 30, 2011, 2010 or 2009. Unearned compensation as of September 30, 2011 was $1,443 related to non-vested SSARs, which will be recognized into expense over a weighted-average period of 1.1 years.
72
12. 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 Companys common stock on the open market. These shares represented approximately five percent of the Companys common stock outstanding as of September 30, 2011. On September 2, 2011, the Company entered into a 10b5-1 Repurchase Plan Agreement providing for the repurchase of up to 500,000 of such shares. As of September 30, 2011, 50,000 shares were repurchased under such 10b5-1 Repurchase Plan Agreement, at a weighted-average purchase price of $20.14 per share, for a total value of $1,007. All of the repurchased shares were subsequently retired as of September 30, 2011, and the excess of the repurchase price over par value was booked as an adjustment to additional paid-in capital.
On December 5, 2008, the Board approved the establishment of a share repurchase program (the 2008 Repurchase Program) for up to 2,250,000 shares in the aggregate of the Companys common stock on the open market. As of September 30, 2011, the Company had repurchased and subsequently retired all of the shares in the 2008 Repurchase Program. The excess of the repurchase price over par value was booked as an adjustment to additional paid-in capital. The shares were repurchased at a weighted-average purchase price of $21.52 per share, for a total value of $48,415 pursuant to established 10b5-1 plans.
13. Impairment and Restructuring
Anaheim, California (Fiscal years 2011 and 2010)
During the fourth fiscal quarter of 2011, the Company made the determination to reduce headcount at the Company headquarters. Based on the Companys evaluation of the recoverability of impacted long-lived assets, pre-tax asset impairment charges of $204 were recorded during fiscal 2011, all of which was 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. The total amount expected to be incurred in connection with the further alignment of its organization in Anaheim was approximately $1,006 as of September 30, 2011, all of which was recorded during fiscal 2011.
During the fourth fiscal quarter of 2011, the Company committed to a plan to move corporate headquarters to another smaller location in Orange County, California. Based on the Companys 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. The fair value of the long-lived assets was determined based on quoted market prices for similar assets. The total amount expected to be incurred in connection with the planned relocation of the Companys corporate headquarters was approximately $1,494 as of September 30, 2011, all of which was recorded during fiscal 2011.
During the third fiscal quarter of 2011, the Company evaluated a Company-owned building in Anaheim 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 Companys 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 Companys flex and flex assembly processes, to Asia. Based on the Companys 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
73
restructuring-related charges of $1,161 were recorded during fiscal 2010. The total amount expected to be incurred in connection with the closure of the facility in Anaheim was approximately $3,913, all of which was recorded during fiscal 2010.
Tucson, Arizona (Fiscal years 2011 and 2009)
During the third and fourth fiscal quarters of 2011, due to the continued decline in the real estate market, the Company completed a long-lived asset impairment analysis on its Tucson, Arizona facility which was closed during fiscal 2008, as part of Aurora Optical.
Based on an arms-length offer for the former Aurora Optical facility received and a decline in market value and other related adjustments, the Company recorded impairment charges of $328 during fiscal year 2009. The added charges resulted primarily from a drop in commercial real estate values since the original impairment was recorded as of September 30, 2008. Based on further market decline in commercial real estate values in fiscal 2011, the Company recorded non-cash impairment charges of $1,727 during fiscal 2011 and classified the facility under Other Assets on the consolidated balance sheet. No impairment and restructuring charges related to the Companys Tucson, Arizona facility were recorded during fiscal 2010.
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. The total amount incurred in connection with the United Kingdom restructuring was approximately $570, all of which was recorded during fiscal 2010.
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 Companys 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. The total amount incurred in connection with the closure of the facility in Malaysia was approximately $2,548, all of which was 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, 2011:
One-Time Termination Benefits |
Other | Total | ||||||||||
Accrual balance as of September 30, 2010 |
$ | 547 | $ | 502 | $ | 1,049 | ||||||
Restructuring charges |
802 | | 802 | |||||||||
Utilization |
(524 | ) | (507 | ) | (1,031 | ) | ||||||
Adjustments |
(23 | ) | 5 | (18 | ) | |||||||
|
|
|
|
|
|
|||||||
Accrual balance as of September 30, 2011 |
$ | 802 | $ | | $ | 802 | ||||||
|
|
|
|
|
|
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14. 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 Companys 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, the Company enters into certain 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 condensed consolidated balance sheets. As of September 30, 2011, the aggregate notional amount of the Companys outstanding foreign currency forward contracts is summarized below:
Currency |
Buy/Sell | Foreign Currency Amount |
Notional Contract Value in USD |
|||||||||
Foreign currency non-hedge derivatives: |
||||||||||||
RMB |
Buy | ¥ | 31,877 | $ | 5,000 |
The changes in fair value of the Companys derivative instruments are recognized in earnings during the period of change as other income (expense), net in the condensed consolidated statements of operations. The Company recognized realized losses of $45 during fiscal 2011 and $0 during fiscal 2010, respectively, related to settlement of forward contracts. The Company also recognized unrealized gains of $7 during fiscal year 2011 and $0 during fiscal year 2010, respectively, related to outstanding forward contracts. See Note 15 for further information on fair value measurements.
15. Fair Value Measurements
Per FASB authoritative guidance, the Company classifies and discloses the fair value of 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
75
Recurring basis measurements
For recognition purposes, on a recurring basis, the Companys assets and liabilities related to derivative financial instruments are measured at fair value at the end of each reporting period. The fair value as of September 30, 2011 was determined based on Level 2 inputs, which consist of observable market-based inputs of foreign currency spot and forward rates quoted by major financial institutions. The Companys derivative financial instruments measured at fair value on a recurring basis subject to the disclosure requirements as defined under the FASB authoritative accounting guidance were as follows:
Fair Value Measurements of Assets and Liabilities on a Recurring Basis as of September 30, 2011 |
||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||
Other current assets: |
||||||||||||
Forward contracts |
| $ | 7 | | ||||||||
|
|
|
|
|
|
|||||||
$ | | $ | 7 | $ | | |||||||
|
|
|
|
|
|
There were no assets and liabilities measured at fair value on a recurring basis as of September 30, 2010.
Non-recurring basis measurements
For recognition purposes, on a non-recurring basis, the Company measures certain of its long-lived assets at fair value. 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.
The Company measured certain of its long-lived assets at fair value based on Level 3 inputs, which consist 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 an impairment charge of $687 included in earnings for the fiscal year ended September 30, 2011.
Fair Value Measurements of Assets and Liabilities on a Non-Recurring Basis as of September 30, 2011 |
||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||
Long-lived assets: |
||||||||||||
Fixed Assets |
$ | | $ | 6,490 | $ | 65 | ||||||
Other Assets |
$ | | $ | 1,232 | $ | | ||||||
|
|
|
|
|
|
|||||||
$ | | $ | 7,722 | $ | 65 | |||||||
|
|
|
|
|
|
The fair value as of September 30, 2010 was determined based on Level 3 inputs, which consist 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 a carrying amount of $3,827, which were written down to their fair value of $261, resulting in an impairment charge of $3,566 included in earnings for the fiscal year ended September 30, 2010.
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
76
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, the fair value was determined using Level 3 inputs, which consisted of testing to determine whether the undiscounted future cash flows that would be provided by the intangible assets were greater than the carrying value. The intangible assets had a carrying amount of $4,345, and were written down to their fair value of $0, resulting in impairment charges of $4,345 included in earnings for the fiscal year ended September 30, 2010.
Fair Value Measurements of Assets and Liabilities on a Non-Recurring Basis as of September 30, 2010 |
||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||
Long-lived assets: |
||||||||||||
Fixed Assets |
$ | | $ | | $ | 261 | ||||||
|
|
|
|
|
|
|||||||
$ | | $ | | $ | 261 | |||||||
|
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16. Subsequent Events
In October 2011, the Company provided notice that it was terminating the Agreement by and among the Borrowers, various subsidiaries of the Borrowers, various financial institutions that are parties thereto (collectively, the Lenders) and BOA, as agent (the Agent) for the Lenders. The Agreement provided the Borrowers with a three year revolving credit facility in an amount up to $30 million. At the time of the notice, there were no borrowings outstanding under the Agreement. The Borrowers provided ninety days written notice as required by the Agreement, and accordingly, the termination will be effective on January 19, 2012 (the Termination Date). On the Termination Date, the Borrowers shall pay the Agent $75 as an early termination fee, together with all other amounts as may then be owing in connection with the Agreement. The Company is currently negotiating a credit facility to replace the Agreement and expects to execute such new credit facility on or about the Termination Date. However, there can be no assurance that the Company will be able to replace the terminated credit facility.
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The following table presents the Companys 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.
For the Quarters
Ended (Unaudited) |
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September 30, 2011 |
June 30, 2011 |
March 31, 2011 |
December 31, 2010 |
September 30, 2010 |
June 30, 2010 |
March 31, 2010 |
December 31, 2009 |
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(in thousands, except per share data) | ||||||||||||||||||||||||||||||||
Net sales |
$ | 191,499 | $ | 191,838 | $ | 207,070 | $ | 241,154 | $ | 226,715 | $ | 181,049 | $ | 154,075 | $ | 229,498 | ||||||||||||||||
Cost of sales |
172,330 | 168,525 | 179,315 | 206,680 | 194,688 | 158,808 | 131,772 | 193,025 | ||||||||||||||||||||||||
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Gross profit |
19,169 | 23,313 | 27,755 | 34,474 | 32,027 | 22,241 | 22,303 | 36,473 | ||||||||||||||||||||||||
Operating expenses: |
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Research and development |
2,525 | 2,378 | 2,831 | 2,751 | 3,717 | 4,442 | 3,462 | 2,835 | ||||||||||||||||||||||||
Sales and marketing |
5,930 | 5,512 | 6,314 | 7,433 | 6,458 | 5,088 | 5,855 | 6,685 | ||||||||||||||||||||||||
General and administrative |
5,320 | 3,800 | 4,618 | 5,050 | 6,016 | 4,834 | 4,892 | 5,883 | ||||||||||||||||||||||||
Impairment and restructuring |
3,187 | 999 | | | 6,111 | 3,328 | 1,937 | | ||||||||||||||||||||||||
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Total operating expenses |
16,962 | 12,689 | 13,763 | 15,234 | 22,302 | 17,692 | 16,146 | 15,403 | ||||||||||||||||||||||||
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Operating income |
2,207 | 10,624 | 13,992 | 19,240 | 9,725 | 4,549 | 6,157 | 21,070 | ||||||||||||||||||||||||
Other income (expense), net: |
||||||||||||||||||||||||||||||||
Interest income |
224 | 213 | 215 | 223 | 165 | 168 | 116 | 86 | ||||||||||||||||||||||||
Interest expense |
(124 | ) | (123 | ) | (109 | ) | (116 | ) | (115 | ) | (121 | ) | (269 | ) | (277 | ) | ||||||||||||||||
Other income (expense), net |
222 | 261 | 246 | (165 | ) | (267 | ) | 242 | 308 | 190 | ||||||||||||||||||||||
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Income before income taxes |
2,529 | 10,975 | 14,344 | 19,182 | 9,508 | 4,838 | 6,312 | 21,069 | ||||||||||||||||||||||||
Provision for income taxes |
(152 | ) | (2,157 | ) | (2,767 | ) | (4,081 | ) | (3,371 | ) | (2,456 | ) | (1,370 | ) | (4,756 | ) | ||||||||||||||||
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Net income |
$ | 2,377 | $ | 8,818 | $ | 11,577 | $ | 15,101 | $ | 6,137 | $ | 2,382 | $ | 4,942 | $ | 16,313 | ||||||||||||||||
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Net income per share: |
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Basic |
$ | 0.10 | $ | 0.37 | $ | 0.48 | $ | 0.63 | $ | 0.25 | $ | 0.09 | $ | 0.19 | $ | 0.65 | ||||||||||||||||
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Diluted |
$ | 0.10 | $ | 0.36 | $ | 0.48 | $ | 0.62 | $ | 0.25 | $ | 0.09 | $ | 0.19 | $ | 0.63 | ||||||||||||||||
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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. | Controls and Procedures |
Managements 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
78
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 ControlIntegrated Framework. Based on this assessment and on the criteria in Internal ControlIntegrated Framework, management has concluded that our internal control over financial reporting was effective as of September 30, 2011.
The effectiveness of the Companys internal control over financial reporting as of September 30, 2011 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, 2011 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 SECs 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 as of September 30, 2011.
Item 9B. | Other Information. |
On November 14, 2011, the special compensation committee of our Board, comprised solely of independent, non-employee members of our compensation committee, approved a fiscal year 2012 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, fifty-five percent for Mr. Liguori and fifty percent for Mr. Lee, Ms. Besnard and Mr. Jin, of such executives 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.
79
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 2012 Annual Meeting of Stockholders expected to be held in March of 2012, which we refer to as our 2012 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 2012 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. The Code of Ethics is included as Exhibit 14.1 to this Annual Report. 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 Philippe Lemaitre (Chairperson), 62 years of age, Donald Schwanz, 67 years of age, Sam Yau, 63 years of age, and Kheng-Joo Khaw, 63 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. Lemaitre qualifies as an audit committee financial expert for audit committee member purposes within the meaning of such regulations.
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 2012 Proxy Statement under the captions Director Compensation, Executive Compensation and Director CompensationCompensation Committee Interlocks and Insider Participation.
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 2012 Proxy Statement, and is incorporated herein by reference.
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 2012 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 2012 Proxy Statement, and is incorporated herein by reference.
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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 FirmPrincipal Accountant Fees and Services and Ratification of Appointment of Independent Registered Public Accounting FirmPre-Approval Policies and Procedures in our 2012 Proxy Statement and is incorporated herein by reference.
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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 IIValuation 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:
3.2(1) | Restated Certificate of Incorporation of the Company. | |
3.4(2) | Amended and Restated Bylaws of the Company. | |
4.1(1) | Form of Common Stock Certificate. | |
10.1(1)(3) | Form of Indemnification Agreement between the Company and its officers, directors and agents. | |
10.3(4)(3) | 2004 Stock Incentive Plan of the Company, as amended and restated. | |
10.20(5) | Amended and Restated Stockholders Agreement dated October 25, 2005 between Multi-Fineline Electronix, Inc., Wearnes Technology Pte. Ltd, United Wearnes Technology Pte. Ltd., and WBL Corporation Limited. | |
10.45(6)(3) | Form of Stock Appreciation Rights Agreement. | |
10.47(7) | Master Development and Supply Agreement by and between Apple Computer, Inc. and Multi-Fineline Electronix, Inc. dated June 22, 2006. | |
10.51(8) | Loan and Security Agreement by and among Multi-Fineline Electronix, Inc., Multi-Fineline Electronix Singapore Pte. Ltd., and Bank of America, N.A. dated February 12, 2009. | |
10.56(9) | Amendment No. 1 to Loan and Security Agreement by and among Multi-Fineline Electronix, Inc., Multi-Fineline Electronix Singapore Pte. Ltd., and Bank of America, N.A. dated August 27, 2009. | |
10.57(10)(3) | Form of Restricted Stock Unit Agreement. | |
10.60(11) |
Line of Credit Agreement between Multi-Fineline Electronix (Suzhou) Co., Ltd., and China Construction Bank, Suzhou Industry Park Sub-Branch dated March 29, 2010. | |
10.61(11) |
Facility Offer Letter between Multi-Fineline Electronix (Suzhou) Co., Ltd., and China Construction Bank, Suzhou Industry Park Sub-Branch dated March 29, 2010. | |
10.62(11) |
Line of Credit Agreement between Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd., and China Construction Bank, Suzhou Industry Park Sub-Branch dated March 29, 2010. | |
10.63(11) |
Facility Offer Letter between Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd., and China Construction Bank, Suzhou Industry Park Sub-Branch dated March 29, 2010. |
82
10.65(12) |
Amendment No. 2 to Loan and Security Agreement by and among Multi-Fineline Electronix, Inc., Multi-Fineline Electronix Singapore Pte. Ltd., and Bank of America, N.A. dated February 15, 2010. | |
10.66(12) |
Amendment No. 3 to Loan and Security Agreement by and among Multi-Fineline Electronix, Inc., Multi-Fineline Electronix Singapore Pte. Ltd., and Bank of America, N.A. dated March 17, 2010. | |
10.67(13) | Line of General Credit Agreement between MFLEX Suzhou Co., Ltd. And Agricultural Bank of China, Suzhou Wuzhong Sub-branch dated July 31, 2010. | |
10.68(13) | Facility Offer Letter between MFLEX Suzhou Co., Ltd., and Agricultural Bank of China, Suzhou Wuzhong Sub-branch dated July 31, 2010. | |
10.69(14) | Amendment No. 4 and Waiver to Loan and Security Agreement by and among Multi-Fineline Electronix, Inc., Multi-Fineline Electronix Singapore Pte. Ltd., and Bank of America, N.A. dated August 18, 2010. | |
10.70(15) | Agreement for Sales of Buildings in Stock by and between Wearnes Global (Suzhou) Co., Ltd. and MFLEX Suzhou Co., Ltd. dated January 6, 2011. | |
10.71(15) | Supplemental Agreement to Agreement for Sales of Buildings in Stock by and between Wearnes Global (Suzhou) Co., Ltd. and MFLEX Suzhou Co., Ltd. dated January 6, 2011. | |
10.72(15) | Guarantee Letter by Wearnes Global (Suzhou) Co., Ltd. dated January 6, 2011. | |
10.73(15) | Agreement on the Escrow of Transaction Funds for Building Stock (Fund Trusteeship Agreement) by and among Wearnes Global (Suzhou) Co., Ltd., MFLEX Suzhou Co., Ltd. and Wuzhong District Real Estate Transaction Management Center executed January 19, 2011 and dated January 18, 2011. | |
10.74(16) | Second Supplemental Agreement to Agreement for Sales of Buildings in Stock by and between Wearnes Global (Suzhou) Co., Ltd and MFLEX Suzhou Co., Ltd. dated March 31, 2011. | |
10.75* | Amendment No.5 to Loan and Security Agreement by and among Multi-Fineline Electronix, Inc., Multi-Fineline Electronix Singapore Pte. Ltd., and Bank of America, N.A. dated September 1, 2011. | |
14.1(10) | Code of Ethics for Senior Officers. | |
21.1* | List of Subsidiaries of Registrant. | |
23.1* | Consent of PricewaterhouseCoopers LLP. | |
24.1* | Power of Attorney (see signature page of this Annual Report). | |
31.1* | Section 302 Certification by the Companys chief executive officer. | |
31.2* | Section 302 Certification by the Companys principal financial officer. | |
32.1* | Section 906 Certification by the Companys chief executive officer and principal financial officer. | |
101.INS** | XBRL Instance Document. | |
101.SCH** | XBRL Taxonomy Extension Schema Document. | |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF** | XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB** | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document. |
* | Filed herewith |
** | Furnished, not filed |
83
(1) | Incorporated by reference to exhibits (with same exhibit numbers) to the Companys 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 Companys Current Report on Form 8-K filed with the SEC on December 4, 2009. |
(3) | Indicates management contract or compensatory plan. |
(4) | Incorporated by reference to exhibit (as Exhibit A) to the Companys Proxy Statement for its 2010 Annual Meeting of Stockholders on Form DEF 14A filed with the SEC on January 20, 2011. |
(5) | Incorporated by reference to exhibit (with same exhibit number) to the Companys Current Report on Form 8-K filed with the SEC on October 25, 2005 (File No. 000-50812). |
(6) | Incorporated by reference to exhibit (with same exhibit number) to the Companys Annual Report on Form 10-K filed with the SEC for the year ended September 30, 2008. |
(7) | Incorporated by reference to exhibit (with same exhibit number) to the Companys Annual Report on Form 10-K filed with the SEC for the year ended September 30, 2008. Confidential treatment has been granted for certain portions of this agreement. |
(8) | Incorporated by reference to exhibit (with same exhibit number) to the Companys Quarterly Report on Form 10-Q filed with the SEC for the quarter ended March 31, 2009. Confidential treatment has been granted for certain portions of this agreement. |
(9) | Incorporated by reference to exhibit (with same exhibit number) to the Companys Annual Report on Form 10-K filed with the SEC for the year ended September 30, 2009. Confidential treatment has been granted for certain portions of this agreement. |
(10) | Incorporated by reference to exhibits (with same exhibit numbers) to the Companys Annual Report on Form 10-K filed with the SEC for the year ended September 30, 2009. |
(11) | Incorporated by reference to exhibits (with same exhibit numbers) to the Companys Current Report on Form 8-K filed with the SEC on April 1, 2010. |
(12) | Incorporated by reference to exhibits (with same exhibit numbers) to the Companys Quarterly Report on Form 10-Q filed with the SEC for the quarter ended March 31, 2010. |
(13) | Incorporated by reference to exhibits (with same exhibit numbers) to the Companys Quarterly Report on Form 10-Q filed with the SEC for the quarter ended June 30, 2010. |
(14) | Incorporated by reference to exhibits (with same exhibit numbers) to the Companys Quarterly Report on Form 10-K filed with the SEC for the quarter ended September 30, 2010. |
(15) | Incorporated by reference to exhibits (with same exhibit numbers) to the Companys Quarterly Report on Form 10-Q filed with the SEC for the quarter ended December 31, 2010. |
(16) | Incorporated by reference to exhibits (with same exhibit numbers) to the Companys Quarterly Report on Form 10-Q filed with the SEC for the quarter ended March 31, 2011. |
(c) Financial Statement Schedules: Schedule II- Valuation and Qualifying Accounts
84
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.
Multi-Fineline Electronix, Inc. a Delaware Corporation | ||||||
Date: | November 14, 2011 | By: | /S/ REZA MESHGIN | |||
Reza Meshgin | ||||||
President and Chief Executive Officer |
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.
Name |
Title |
Date | ||
/S/ PHILIPPE LEMAITRE Philippe Lemaitre |
Chairman of the Board of Directors |
November 14, 2011 | ||
/S/ REZA MESHGIN Reza Meshgin |
President, Chief Executive Officer and Director (Principal Executive Officer) |
November 14, 2011 | ||
/S/ THOMAS LIGUORI Thomas Liguori |
Chief Financial Officer and Executive Vice President (Principal Financial and Accounting Officer) | November 14, 2011 | ||
/S/ KHENG-JOO KHAW Kheng-Joo Khaw |
Director | November 14, 2011 | ||
/S/ LINDA LIM, PH.D. Linda Lim, Ph.D. |
Director | November 14, 2011 | ||
/S/ DONALD SCHWANZ Donald Schwanz |
Director | November 14, 2011 | ||
/S/ CHOON SENG TAN Choon Seng Tan |
Director | November 14, 2011 | ||
/S/ SEE MENG WONG See Meng Wong |
Director | November 14, 2011 | ||
/S/ SAM YAU Sam Yau |
Director | November 14, 2011 |
85
MULTI-FINELINE ELECTRONIX, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2011, 2010 AND 2009
(In Thousands)
Allowance for Doubtful Accounts |
Balance at Beginning of Year |
Additions Charged to Operations |
Deductions (Write-offs) |
Balance at End of Year |
||||||||||||
Fiscal 2011 |
$ | 2,354 | $ | 9,926 | $ | (9,878 | ) | $ | 2,402 | |||||||
Fiscal 2010 |
$ | 2,152 | $ | 7,780 | $ | (7,578 | ) | $ | 2,354 | |||||||
Fiscal 2009 |
$ | 1,520 | $ | 2,489 | $ | (1,857 | ) | $ | 2,152 |
Valuation Allowance on Deferred Tax Assets |
Balance at Beginning of Year |
Additions Charged to Operations |
Deductions (Write-offs) |
Balance at End of Year |
||||||||||||
Fiscal 2011 |
$ | 12,239 | $ | 1,382 | $ | (1,094 | ) | $ | 12,527 | |||||||
Fiscal 2010 |
$ | 8,791 | $ | 3,493 | $ | (45 | ) | $ | 12,239 | |||||||
Fiscal 2009 |
$ | 962 | $ | 8,285 | $ | (456 | ) | $ | 8,791 |
86
EXHIBIT INDEX
3.2(1) | Restated Certificate of Incorporation of the Company. | |
3.4(2) | Amended and Restated Bylaws of the Company. | |
4.1(1) | Form of Common Stock Certificate. | |
10.1(1)(3) | Form of Indemnification Agreement between the Company and its officers, directors and agents. | |
10.3(4)(3) | 2004 Stock Incentive Plan of the Company, as amended and restated. | |
10.20(5) | Amended and Restated Stockholders Agreement dated October 25, 2005 between Multi-Fineline Electronix, Inc., Wearnes Technology Pte. Ltd, United Wearnes Technology Pte. Ltd., and WBL Corporation Limited. | |
10.45(6)(3) | Form of Stock Appreciation Rights Agreement. | |
10.47(7) | Master Development and Supply Agreement by and between Apple Computer, Inc. and Multi-Fineline Electronix, Inc. dated June 22, 2006. | |
10.51(8) | Loan and Security Agreement by and among Multi-Fineline Electronix, Inc., Multi-Fineline Electronix Singapore Pte. Ltd., and Bank of America, N.A. dated February 12, 2009. | |
10.56(9) | Amendment No. 1 to Loan and Security Agreement by and among Multi-Fineline Electronix, Inc., Multi-Fineline Electronix Singapore Pte. Ltd., and Bank of America, N.A. dated August 27, 2009. | |
10.57(10)(3) | Form of Restricted Stock Unit Agreement. | |
10.60(11) | Line of Credit Agreement between Multi-Fineline Electronix (Suzhou) Co., Ltd., and China Construction Bank, Suzhou Industry Park Sub-Branch dated March 29, 2010. | |
10.61(11) | Facility Offer Letter between Multi-Fineline Electronix (Suzhou) Co., Ltd., and China Construction Bank, Suzhou Industry Park Sub-Branch dated March 29, 2010. | |
10.62(11) | Line of Credit Agreement between Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd., and China Construction Bank, Suzhou Industry Park Sub-Branch dated March 29, 2010. | |
10.63(11) | Facility Offer Letter between Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd., and China Construction Bank, Suzhou Industry Park Sub-Branch dated March 29, 2010. | |
10.65(12) | Amendment No. 2 to Loan and Security Agreement by and among Multi-Fineline Electronix, Inc., Multi-Fineline Electronix Singapore Pte. Ltd., and Bank of America, N.A. dated February 15, 2010. | |
10.66(12) | Amendment No. 3 to Loan and Security Agreement by and among Multi-Fineline Electronix, Inc., Multi-Fineline Electronix Singapore Pte. Ltd., and Bank of America, N.A. dated March 17, 2010. | |
10.67(13) | Line of General Credit Agreement between MFLEX Suzhou Co., Ltd. And Agricultural Bank of China, Suzhou Wuzhong Sub-branch dated July 31, 2010. | |
10.68(13) | Facility Offer Letter between MFLEX Suzhou Co., Ltd., and Agricultural Bank of China, Suzhou Wuzhong Sub-branch dated July 31, 2010. | |
10.69(14) | Amendment No. 4 and Waiver to Loan and Security Agreement by and among Multi-Fineline Electronix, Inc., Multi-Fineline Electronix Singapore Pte. Ltd., and Bank of America, N.A. dated August 18, 2010. | |
10.70(15) | Agreement for Sales of Buildings in Stock by and between Wearnes Global (Suzhou) Co., Ltd. and MFLEX Suzhou Co., Ltd. dated January 6, 2011. |
87
10.71(15) | Supplemental Agreement to Agreement for Sales of Buildings in Stock by and between Wearnes Global (Suzhou) Co., Ltd. and MFLEX Suzhou Co., Ltd. dated January 6, 2011. | |
10.72(15) | Guarantee Letter by Wearnes Global (Suzhou) Co., Ltd. dated January 6, 2011. | |
10.73(15) | Agreement on the Escrow of Transaction Funds for Building Stock (Fund Trusteeship Agreement) by and among Wearnes Global (Suzhou) Co., Ltd., MFLEX Suzhou Co., Ltd. and Wuzhong District Real Estate Transaction Management Center executed January 19, 2011 and dated January 18, 2011. | |
10.74(16) | Second Supplemental Agreement to Agreement for Sales of Buildings in Stock by and between Wearnes Global (Suzhou) Co., Ltd and MFLEX Suzhou Co., Ltd. dated March 31, 2011. | |
10.75* | Amendment No. 5 to Loan and Security Agreement by and among Multi-Fineline Electronix, Inc., Multi-Fineline Electronix Singapore Pte. Ltd., and Bank of America, N.A. dated September 1, 2011. | |
14.1(10) | Code of Ethics for Senior Officers. | |
21.1* | List of Subsidiaries of Registrant. | |
23.1* | Consent of PricewaterhouseCoopers LLP. | |
24.1* | Power of Attorney (see signature page of this Annual Report). | |
31.1* | Section 302 Certification by the Companys chief executive officer. | |
31.2* | Section 302 Certification by the Companys principal financial officer. | |
32.1* | Section 906 Certification by the Companys chief executive officer and principal financial officer. | |
101.INS** | XBRL Instance Document. | |
101.SCH** | XBRL Taxonomy Extension Schema Document. | |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF** | XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB** | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document. |
* | Filed herewith |
** | Furnished, not filed |
(1) | Incorporated by reference to exhibits (with same exhibit numbers) to the Companys 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 Companys Current Report on Form 8-K filed with the SEC on December 24, 2009. |
(3) | Indicates management contract or compensatory plan. |
(4) | Incorporated by reference to exhibit (as Exhibit A) to the Companys Proxy Statement for its 2010 Annual Meeting of Stockholders on Form DEF 14A filed with the SEC on January 20, 2011. |
(5) | Incorporated by reference to exhibit (with same exhibit number) to the Companys Current Report on Form 8-K filed with the SEC on October 25, 2005 (File No. 000-50812). |
(6) | Incorporated by reference to exhibit (with same exhibit number) to the Companys Annual Report on Form 10-K filed with the SEC for the year ended September 30, 2008. |
88
(7) | Incorporated by reference to exhibit (with same exhibit number) to the Companys Annual Report on Form 10-K filed with the SEC for the year ended September 30, 2008. Confidential treatment has been granted for certain portions of this agreement. |
(8) | Incorporated by reference to exhibit (with same exhibit number) to the Companys Quarterly Report on Form 10-Q filed with the SEC for the quarter ended March 31, 2009. Confidential treatment has been granted for certain portions of this agreement. |
(9) | Incorporated by reference to exhibit (with same exhibit number) to the Companys Annual Report on Form 10-K filed with the SEC for the year ended September 30, 2009. Confidential treatment has been granted for certain portions of this agreement. |
(10) | Incorporated by reference to exhibits (with same exhibit numbers) to the Companys Annual Report on Form 10-K filed with the SEC for the year ended September 30, 2009. |
(11) | Incorporated by reference to exhibits (with same exhibit numbers) to the Companys Current Report on Form 8-K filed with the SEC on April 1, 2010. |
(12) | Incorporated by reference to exhibits (with same exhibit numbers) to the Companys Quarterly Report on Form 10-Q filed with the SEC for the quarter ended March 31, 2010. |
(13) | Incorporated by reference to exhibits (with same exhibit numbers) to the Companys Quarterly Report on Form 10-Q filed with the SEC for the quarter ended June 30, 2010. |
(14) | Incorporated by reference to exhibits (with same exhibit numbers) to the Companys Quarterly Report on Form 10-K filed with the SEC for the quarter ended September 30, 2010. |
(15) | Incorporated by reference to exhibits (with same exhibit numbers) to the Companys Quarterly Report on Form 10-Q filed with the SEC for the quarter ended December 31, 2010. |
(16) | Incorporated by reference to exhibits (with same exhibit numbers) to the Companys Quarterly Report on Form 10-Q filed with the SEC for the quarter ended March 31, 2011. |
89
Exhibit 10.75
AMENDMENT NO. 5 AND CONSENT
TO
LOAN AGREEMENT
AMENDMENT NO. 5 AND CONSENT TO LOAN AGREEMENT, dated as of September 14, 2011 (this Agreement), among MULTI-FINELINE ELECTRONIX, INC., a Delaware corporation (U.S. Borrower), MULTI-FINELINE ELECTRONIX SINGAPORE PTE. LTD., a Singapore corporation (Singapore Borrower, and together with U.S. Borrower, collectively, Borrowers), the various Subsidiaries (such capitalized term and all other capitalized terms not defined herein shall have the meanings provided for in Article I) of the Borrowers that are parties hereto, the various financial institutions that are parties hereto (collectively, Lenders), and BANK OF AMERICA, N.A., a national banking association, as agent for the Lenders (Agent).
W I T N E S S E T H:
WHEREAS, the Borrowers, the Lenders and the Agent are parties to the Loan and Security Agreement, dated as of February 12, 2009, as amended (the Existing Loan Agreement), and the other Loan Documents; and
WHEREAS, Section 10.2.6(g) of the Credit Agreement requires that MFlex Malaysia repay in cash the intercompany loans made by the Borrowers to it, which intercompany loans are, as of the date hereof, in the approximate aggregate principal amount of $6,500,000; and
WHEREAS, the Borrowers have requested that, as of the Effective Date, the Existing Loan Agreement be amended as herein provided and they be permitted to write-off of the intercompany loans referred to in the preceding recital; and
WHEREAS, the Lenders are willing, subject to the terms and conditions hereinafter set forth, to make such amendments and grant such consent;
NOW, THEREFORE, in consideration of the agreements herein contained, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Certain Definitions. The following terms (whether or not underscored) when used in this Agreement shall have the following meanings:
Agent: defined in the preamble.
Agreement: is defined in the preamble.
Amended Loan Agreement: the Existing Loan Agreement as amended by this Agreement as of the Effective Date.
Borrowers: defined in the preamble.
Effective Date: defined in Section 6.1.
Existing Loan Agreement: defined in the first recital.
Lenders: defined in the preamble.
Singapore Borrower: defined in the preamble.
U.S. Borrower: defined in the preamble.
SECTION 1.2. Other Definitions. Unless otherwise defined or the context otherwise requires, terms used herein (including in the preamble and recitals hereto) have the meanings provided for in the Existing Loan Agreement.
ARTICLE II
AMENDMENTS
Effective on (and subject to the occurrence of) the Effective Date, the Existing Loan Agreement is amended as follows:
SECTION 2.1. Amendments to Section 10.2.3. Section 10.2.3 of the Existing Loan Agreement is amended in the entirety as follows:
10.2.3. Distributions; Upstream Payments. (a) Declare or make any Distributions, except (i) Upstream Payments; (ii) U.S. Borrower may make Distributions if (A) no Default or Event of Default has occurred and is continuing or would result therefrom, (B) the Aggregate Availability after giving effect to any such Distribution is not less than 20% of the Revolver Commitments, (C) the Fixed Charge Coverage Ratio after giving effect to any such Distribution is, at any time on or before March 31, 2009, at least 0.90 to 1.0 or, at any time thereafter, not less than 1.0 to 1.0, and (D) the aggregate amount of such Distributions (x) made at any one time or as part of a series of related Distributions shall not exceed $5,000,000 in the aggregate or (y) since the Closing Date shall not exceed $10,000,000 in the aggregate; and (iii) U.S. Borrower may purchase its Equity Interests from its shareholders if: (A) no Default or Event of Default has occurred and is continuing or would result therefrom, (B) Adjusted Cash Liquidity prior to any such repurchase is not less than $20,000,000, (C) the Adjusted Fixed Charge Coverage Ratio after giving effect to any such repurchase is not less than 0.60 to 1.0, and (D) the aggregate amount of all such repurchases since the Closing Date does not exceed $64,000,000; or (b) create or suffer to exist any encumbrance or restriction on the ability of a Subsidiary to make any
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Upstream Payment, except for restrictions under the Loan Documents, under Applicable Law or in effect on the Closing Date as shown on Schedule 9.1.16.
SECTION 2.2. Amendments to Section 10.2.6. Clause (g) of Section 10.2.6 of the Existing Loan Agreement is amended in the entirety to read [Intentionally Omitted].
ARTICLE III
CONSENT
Effective on (and subject to the occurrence of) the Effective Date, the Lenders consent to the write-off of the intercompany loans made by the Borrowers to MFlex Malaysia.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
In order to induce the Lenders to make the amendments provided for in Article II and the consent provided for in Article III, each Borrower hereby (a) represents and warrants that (i) each of the representations and warranties of the Obligors contained in the Loan Agreement and in the other Loan Documents is true and correct as of the date hereof as if made on the date hereof (except, if any such representation and warranty relates to an earlier date, such representation and warranty shall be true and correct as of such earlier date) and (ii) no Default or Event of Default has occurred and is continuing and (b) agrees that the incorrectness in any material respect of any representation and warranty contained in the preceding clause (a) shall constitute an immediate Event of Default. Without limiting the foregoing, each Borrower hereby (i) ratifies and confirms all of the terms, covenants and conditions set forth in the Loan Documents and hereby agrees that it remains unconditionally liable to the Agent and the Lenders in accordance with the respective terms, covenants and conditions set forth in the Loan Documents, and all the Collateral thereto in favor of the Agent and each Lender continues unimpaired and in full force and effect, and (ii) waives all defenses, claims, counterclaims, rights of recoupment or set-off against any of its Obligations.
ARTICLE V
ACKNOWLEDGMENT OF SUBSIDIARIES
By executing this Agreement, each Subsidiary of a Borrower that is a party hereto hereby confirms and agrees that each Loan Document to which it is a party is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects, except that on and after the Effective Date each reference therein to the Loan Agreement shall refer to the Loan Agreement after giving effect to this Agreement. Without limiting the foregoing, each such Subsidiary waives all defenses, claims, counterclaims, rights of recoupment or set-off with respect to any of such Subsidiarys Obligations.
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ARTICLE VI
CONDITIONS TO EFFECTIVENESS; EXPIRATION
SECTION 6.1. Effective Date. This Agreement shall become effective as of September 1, 2011 (herein called the Effective Date) if the conditions set forth in this Section have been satisfied.
SECTION 6.1.1 Execution of Agreement. The Agent shall have received counterparts of this Agreement duly executed and delivered on behalf of each Borrower, each of its Subsidiaries that are parties hereto, the Agent and all the Required Lenders.
SECTION 6.1.2 Representations and Warranties. The representations and warranties made by each Borrower pursuant to Article III as of the Effective Date shall be true and correct.
SECTION 6.2. Expiration. If the conditions set forth in Sections 6.1.1 and 6.1.2 have not been satisfied on or prior to September 30, 2011 the agreements of the parties contained in this Agreement shall, unless otherwise agreed by all the Lenders, terminate immediately on such date and without further action.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. Cross-References. References in this Agreement to any Article or Section are, unless otherwise specified, to such Article or Section of this Agreement.
SECTION 7.2. Loan Document Pursuant to Amended Loan Agreement. This Agreement is a Loan Document executed pursuant to the Amended Loan Agreement. Except as expressly amended hereby, all of the representations, warranties, terms, covenants and conditions contained in the Existing Loan Agreement and each other Loan Document shall remain unamended or otherwise unmodified and in full force and effect.
SECTION 7.3. Limitation of Amendments and Consent. The amendments set forth in Article II and the consent set forth in Article III shall be limited precisely as provided for herein and shall not be deemed to be a waiver of, amendment of, consent to or modification of any other term or provision of the Existing Loan Agreement or of any term or provision of any other Loan Document or of any transaction or further or future action on the part of either Borrower or any other Obligor which would require the consent of any of the Lenders under the Existing Loan Agreement or any other Loan Document.
SECTION 7.4. Counterparts. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement.
SECTION 7.5. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.
-4-
SECTION 7.6. Further Assurances. Each Borrower execute and deliver, and shall cause each other Obligor to execute and deliver, from time to time in favor of the Agent and the Lenders, such documents, agreements, certificates and other instruments as shall be necessary or advisable to effect the purposes of this Agreement.
SECTION 7.7. Costs and Expenses. Each Borrower agrees to pay all reasonable costs and expenses of the Agent (including the reasonable fees and out-of-pocket expenses of legal counsel of the Agent) that are incurred in connection with the execution and delivery of this Agreement and the other agreements and documents entered into in connection herewith.
SECTION 7.8. GOVERNING LAW; WAIVER OF JURY TRIAL; ENTIRE AGREEMENT. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EACH PERSON A PARTY HERETO KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY AGREEMENT OR DOCUMENT ENTERED INTO IN CONNECTION HEREWITH. THIS AGREEMENT CONSTITUTES THE ENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND SUPERSEDES ANY PRIOR AGREEMENT, WRITTEN OR ORAL, WITH RESPECT HERETO.
-5-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers hereunto duly authorized as of the day and year first above written.
BORROWERS: | ||
MULTI-FINELINE ELECTRONIX, INC. | ||
By: | /s/ Tom Liguori | |
Name: | Tom Liguori | |
Title: | Executive Vice President & CFO | |
MULTI-FINELINE ELECTRONIX SINGAPORE PTE. LTD. | ||
By: | /s/ Tom Liguori | |
Name: | Tom Liguori | |
Title: | Chief Financial Officer |
-6-
AGENT AND LENDERS: | ||
BANK OF AMERICA, N.A., | ||
as Agent and Lender | ||
By: | /s/ Carlos Gil | |
Name: Carlos Gil | ||
Title: Vice President |
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SUBSIDIARIES: | ||
AURORA OPTICAL, INC. | ||
By: | /s/ Tom Liguori | |
Name: Tom Liguori | ||
Title: Chief Financial Officer | ||
M-FLEX CAYMAN ISLANDS, INC. | ||
By: | /s/ Tom Liguori | |
Name: Tom Liguori | ||
Title: Chief Financial Officer | ||
MFLEX UK LIMITED | ||
By: | /s/ Tom Liguori | |
Name: Tom Liguori | ||
Title: Chief Financial Officer |
-8-
Exhibit 21.1
LIST OF SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary |
State or Jurisdiction of Incorporation or Organization | |
MFLEX Suzhou Co., Ltd. | Peoples Republic of China | |
MFLEX Chengdu Co., Ltd. | Peoples Republic of China | |
Aurora Optical, Inc. | Delaware | |
M-Flex Cayman Islands, Inc. | Cayman Islands | |
Multi-Fineline Electronix Singapore Pte. Ltd. | Singapore | |
Multi-Fineline Electronix Malaysia Sdn Bhd | Malaysia | |
MFLEX UK Limited | England and Wales | |
MFLEX Korea Ltd. | Korea |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No.333-174898) of Multi-Fineline Electronix, Inc. of our report dated November 14, 2011 relating to the financial statements, financial statement schedules and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Orange County, California
November 14, 2011
Exhibit 31.1
CERTIFICATION
I, Reza Meshgin, certify that:
1. I have reviewed this Annual Report on Form 10-K of Multi-Fineline Electronix, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Dated: November 14, 2011 | By: | /S/ REZA MESHGIN | ||
Reza Meshgin | ||||
President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Thomas Liguori, certify that:
1. I have reviewed this Annual Report on Form 10-K of Multi-Fineline Electronix, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Dated: November 14, 2011 | By: | /S/ THOMAS LIGUORI | ||
Thomas Liguori | ||||
Chief Financial Officer and Executive Vice President |
Exhibit 32.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18. U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K (the Report) of Multi-Fineline Electronix, Inc. (the Company) for the period ended September 30, 2011, as filed with the Securities and Exchange Commission on the date hereof, Reza Meshgin, as Chief Executive Officer of the Company, and Thomas Liguori, as Chief Financial Officer of the Company, each hereby certifies, to the best of his respective knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: November 14, 2011 | /S/ REZA MESHGIN |
/S/ THOMAS LIGUORI | ||
Reza Meshgin President and Chief Executive Officer |
Thomas Liguori Chief Financial Officer and Executive Vice President |
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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data | Sep. 30, 2011 | Sep. 30, 2010 |
---|---|---|
Consolidated Balance Sheets [Abstract] | ||
Accounts receivable, allowances | $ 2,402 | $ 2,354 |
Preferred stock, par value | $ 0.0001 | $ 0.0001 |
Preferred stock, shares authorized | 5,000,000 | 5,000,000 |
Preferred stock, shares issued | 0 | 0 |
Preferred stock, shares outstanding | 0 | 0 |
Common stock, par value | $ 0.0001 | $ 0.0001 |
Common stock, shares authorized | 100,000,000 | 100,000,000 |
Common stock, shares issued | 24,049,780 | 23,916,665 |
Common stock, shares outstanding | 24,049,780 | 23,916,665 |
Consolidated Statements Of Operations (USD $) In Thousands, except Share data | 12 Months Ended | ||
---|---|---|---|
Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2009 | |
Consolidated Statements Of Operations [Abstract] | |||
Net sales | $ 831,561 | $ 791,339 | $ 764,432 |
Cost of sales | 726,850 | 678,294 | 653,568 |
Gross profit | 104,711 | 113,045 | 110,864 |
Operating expenses: | |||
Research and development | 10,485 | 14,455 | 5,505 |
Sales and marketing | 25,189 | 24,086 | 22,146 |
General and administrative | 18,788 | 21,625 | 25,486 |
Impairment and restructuring | 4,186 | 11,376 | 328 |
Total operating expenses | 58,648 | 71,542 | 53,465 |
Operating income | 46,063 | 41,503 | 57,399 |
Other income (expense), net: | |||
Interest income | 875 | 535 | 767 |
Interest expense | (472) | (782) | (768) |
Other income (expense), net | 564 | 472 | (1,358) |
Income before income taxes | 47,030 | 41,728 | 56,040 |
Provision for income taxes | (9,157) | (11,953) | (9,972) |
Net income | $ 37,873 | $ 29,775 | $ 46,068 |
Net income per share: | |||
Basic | $ 1.58 | $ 1.18 | $ 1.84 |
Diluted | $ 1.56 | $ 1.16 | $ 1.81 |
Shares used in computing net income per share: | |||
Basic | 24,027,179 | 25,203,445 | 25,026,039 |
Diluted | 24,335,819 | 25,607,249 | 25,453,390 |
Quarterly Financial Summary | 12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Quarterly Financial Summary [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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.
|
Document And Entity Information (USD $) | 12 Months Ended | ||
---|---|---|---|
Sep. 30, 2011 | Oct. 31, 2011 | Mar. 31, 2011 | |
Document And Entity Information [Abstract] | |||
Document Type | 10-K | ||
Amendment Flag | false | ||
Document Period End Date | Sep. 30, 2011 | ||
Entity Central Index Key | 0000830916 | ||
Document Fiscal Year Focus | 2011 | ||
Document Fiscal Period Focus | FY | ||
Entity Well-known Seasoned Issuer | No | ||
Entity Voluntary Filers | No | ||
Entity Current Reporting Status | Yes | ||
Entity Public Float | $ 257,393,689 | ||
Entity Registrant Name | MULTI FINELINE ELECTRONIX INC | ||
Current Fiscal Year End Date | --09-30 | ||
Entity Filer Category | Accelerated Filer | ||
Trading Symbol | mflx | ||
Entity Common Stock, Shares Outstanding | 24,051,090 |
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Income Taxes [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Taxes | 6. 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 $12,527 and $12,239 as of September 30, 2011 and 2010, 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 and stock-based compensation. The valuation allowance increased by $1,122 due to MFE and MFM's current year net operating loss, increased $260 due to stock-based compensation, decreased by $370 due to change in statutory rates and decreased by $724 due to 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, 2011 and 2010, the Company had net operating loss carryforwards for state tax purposes of $5,371 and $4,047, respectively. In addition, the Company had net operating loss carryforwards for foreign tax purposes of approximately $43,683 and $42,858, respectively. The net operating loss carryforwards will begin to expire in 2016 for state and 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 $204, 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. One of the tax holidays was recently eliminated by taxing authorities due to a change in law. Certain Asia operations are subject to taxes at a rate of 10% of profits. 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, 2011, 2010 and 2009 would have been decreased to the pro forma amounts below:
Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $184,994, $141,830 and $109,529 for the fiscal years ended September 30, 2011, 2010 and 2009, 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, 2011, the liability for income taxes associated with uncertain tax positions increased to $14,354 from $11,372 as September 30, 2010. As of September 30, 2011 and September 30, 2010, these liabilities can be reduced by $4,817 and $4,723, respectively, from offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, state income taxes and timing adjustments. The net amount of $9,537 at September 30, 2011 and $6,649 at September 30, 2010, if recognized, would favorably affect the Company's effective tax rate. During the fiscal year ended September 30, 2011, the liability for income taxes associated with uncertain tax positions decreased by $2 due to an expiration of statute of limitation related to state tax position. 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 $397 and $252 of interest for the fiscal years ended September 30, 2011 and 2010, respectively. The accrued interest decreased by $1 due to the decrease in unrecognized tax benefits stated above. In total, the Company has recognized a liability of $735 for interest as of September 30, 2011. 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. federal and various state, 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 Company is also under examination by California Franchise Tax Board for fiscal year 2009. The Internal Revenue Service ("IRS") is currently examining the Company's income tax return for fiscal year 2007. As of September 30, 2011, the IRS has raised questions primarily related to transfer pricing. Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. 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. 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. |
Stock-Based Compensation | 12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Stock-Based Compensation [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-Based Compensation | 11. Stock-Based Compensation 2004 Stock Incentive Plan 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. Options granted 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"). 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 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 the stock options 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 granted. Expected forfeitures of stock options are estimated based on the historical turnover of the Company's employees. The fair value of restricted stock units granted is based on the grant date price of the Company's 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:
No stock options were granted during the fiscal year ended September 30, 2011.
Stock Options Stock option activity for the fiscal year ended September 30, 2011 under the 2004 Plan is summarized as follows:
During the fiscal years ended September 30, 2011, 2010 and 2009, the Company recognized compensation costs of $0, $0 and $288, respectively, related to stock options. The aggregate intrinsic value of stock options exercised was $1,346, $3,302 and $7,370 during the fiscal years ended September 30, 2011, 2010 and 2009, respectively. No unearned compensation existed as of September 30, 2011 related to non-vested stock options. Service and Performance-Based Restricted Stock Units During the fiscal years ended September 30, 2011, 2010 and 2009, the Company granted service-based restricted stock units ("RSU" or "RSUs") equal to 218,727, 153,991 and 260,050 shares, respectively, of the Company's common stock. These grants were made under the 2004 Plan to certain employees (including executive officers) and directors at no cost to such individual. Each RSU represents one hypothetical share of the Company's common stock, without voting or dividend rights. The RSUs granted to employees vest over a period of three years with one-third vesting on each of the anniversary dates of the grant date. Unearned compensation related to the RSUs was determined based on the fair value of the Company's common stock on the date of grant and is amortized to 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 per the related FASB authoritative guidance. 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 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 a market condition is accounted for and measured differently than an award that has 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. All compensation costs for an award that has a market condition will be recognized if the requisite service period is fulfilled, even if the market condition is never satisfied. The 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:
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. 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. On June 11, 2008, the Administrator approved the grant of 22,000 performance-based RSUs. These performance-based RSUs vest upon the achievement of defined performance objectives pertaining to each grant, with vesting to occur between the date of grant and June 30, 2011. During fiscal 2009, 12,000 of the performance-based RSUs were deemed to not meet the Probability Threshold regarding the defined performance objectives. During the three months ended December 31, 2009, the Company determined that the vesting of the remaining 10,000 performance-based RSUs were deemed to not meet the Probability Threshold regarding the defined performance objectives, and as a result, the Company reversed $148 of compensation expense. No changes in the probability of achievement of the performance objectives were noted since the period ended December 31, 2009. RSU activity for the fiscal year ended September 30, 2011 under the 2004 Plan is summarized as follows:
The Company recognized compensation costs related to RSUs of $3,262, $4,842 and $2,996 during the fiscal years ended September 30, 2011, 2010 and 2009, respectively. The weighted-average grant-date fair value of nonvested RSUs granted during the fiscal years ended September 30, 2011, 2010 and 2009 was $22.33, $25.94 and $14.14, respectively. The weighted-average fair value of RSUs vested during the fiscal years ended September 30, 2011, 2010 and 2009 was $19.46, $17.92 and $20.96, respectively. Unearned compensation of $5,049 existed as of September 30, 2011 related to nonvested RSUs, which will be recognized into expense over the weighted-average remaining contractual life of the nonvested RSUs of 1.2 years. Stock Appreciation Rights During fiscal year 2011, the Administrator approved the grant of stock appreciation rights ("SSAR" or "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 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). On November 15, 2010, the Administrator approved the grant of 125,780 SSARs (the "November 2010 SSARs"). The November 2010 SSARs vest over a period of three years with one-third vesting on each November 15, 2011, 2012 and 2013, and will expire on November 14, 2020. The grant date fair value of the November 2010 SSARs was estimated at $10.22 using the Black-Scholes valuation pricing model assuming a risk-free interest rate of 0.78%, zero expected dividends, expected volatility of 66.81% and an expected term of 3.3 years. On November 16, 2009, the Administrator granted 154,940 stock appreciation rights ("SSAR" or "SSARs") to be settled in the Company's common stock (the "November 2009 SSARs"), for certain employees (including executive officers) under the 2004 Plan. These November 2009 SSARs will vest and be exercisable on November 16, 2012, and will expire on November 15, 2019. 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 November 2009 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). The grant date-fair value of the November 2009 SSARs was estimated at $12.44 using the Black-Scholes valuation pricing model assuming a risk-free interest rate of 2.18%, zero expected dividends, expected volatility of 71.05% and an expected term of 3.0 years.
On December 5, 2008, the Administrator approved defined dollar value SSARs to be settled in Company common stock of $2,225, for certain employees, including executive officers, under the 2004 Plan (the "December 2008 SSARs"). These SSARs were granted in four tranches (on December 5, 2008 and March 5, June 5 and September 4, 2009, subject to certain requirements being met—each a "grant date"), will vest and be exercisable on December 5, 2011, and will expire December 4, 2018. 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 number of SSARs received by each participant, on each grant date, was determined by dividing one-fourth of the defined dollar value set for each grantee by the closing price of a share of the Company's common stock on the applicable grant date, rounded down to the nearest whole number of shares. If a participant terminates service with the Company prior to December 5, 2011, all of that participant's SSAR awards will be forfeited and cancelled. The December 2008 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. The grant date fair value of the December 2008 SSARs was estimated using the Black-Scholes valuation pricing model with the following assumptions:
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. Future compensation expense will be equal to the whole number of shares issued multiplied by the fair market value per share on the exercise date. SSARs activity for the fiscal year ended September 30, 2011 under the 2004 Plan is summarized as follows:
The Company recognized compensation costs of $1,041, $951 and $153 during the fiscal years ended September 30, 2011, 2010 and 2009, respectively, related to SSARs. No SSARs were exercised or were exercisable during the fiscal years ended September 30, 2011, 2010 or 2009. Unearned compensation as of September 30, 2011 was $1,443 related to non-vested SSARs, which will be recognized into expense over a weighted-average period of 1.1 years. |
Acquisition Of Pelikon | 12 Months Ended |
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Sep. 30, 2011 | |
Acquisition Of Pelikon [Abstract] | |
Acquisition Of Pelikon | 2. Acquisition of Pelikon In December 2008, the Company acquired Pelikon, now referred to as MFLEX UK Limited ("MFE"), which developed printed segmented electroluminescent display and keypad technologies primarily for use in smart phones, with the potential for future application to other electronic devices. The initial consideration for the purchase was $10,377, which consisted of notes payable to all former shareholders of MFE and notes payable to certain unsecured debt holders of MFE. In March 2010, the Company repaid the entire balance of the promissory notes, plus the accrued interest thereon. The estimated fair values of the assets acquired and liabilities assumed based on the initial consideration at the date of acquisition was $11,249 and was allocated based upon the fair value of assets acquired and liabilities assumed. The consolidated financial statements for the fiscal years ended September 30, 2011, 2010 and 2009 include the results of operations of MFE commencing as of the acquisition date. The acquisition of MFE was not material to the historical consolidated financial position, results of operations or cash flows of the Company. |
Segment Information | 12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Segment Information [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Information | 8. Segment Information Based on the evaluation of the Company's internal financial information, management believes that the Company operates in one reportable segment which is primarily engaged in the engineering, design and manufacture of flexible circuit boards along with related component assemblies. Between fiscal years 2009 and 2011, the Company operated in four geographical areas: United States, China, Singapore and Other (which included Malaysia 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. For the fiscal years ended September 30, 2010 and 2009, net sales increased in Singapore and decreased in the United States primarily as a result of a reorganization of international operations which consolidated customer service, invoicing, and various program management and selling activities to Singapore. 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:
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Impairment And Restructuring | 12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Impairment And Restructuring [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impairment And Restructuring | 13. Impairment and Restructuring Anaheim, California (Fiscal years 2011 and 2010) 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 was 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. The total amount expected to be incurred in connection with the further alignment of its organization in Anaheim was approximately $1,006 as of September 30, 2011, all of which was recorded during fiscal 2011. During the fourth fiscal quarter of 2011, the Company committed to a plan to move corporate headquarters to another smaller location in Orange County, California. 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. The fair value of the long-lived assets was determined based on quoted market prices for similar assets. The total amount expected to be incurred in connection with the planned relocation of the Company's corporate headquarters was approximately $1,494 as of September 30, 2011, all of which was recorded during fiscal 2011. During the third fiscal quarter of 2011, the Company evaluated a Company-owned building in Anaheim 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. The total amount expected to be incurred in connection with the closure of the facility in Anaheim was approximately $3,913, all of which was recorded during fiscal 2010. Tucson, Arizona (Fiscal years 2011 and 2009) During the third and fourth fiscal quarters of 2011, due to the continued decline in the real estate market, the Company completed a long-lived asset impairment analysis on its Tucson, Arizona facility which was closed during fiscal 2008, as part of Aurora Optical. Based on an arms-length offer for the former Aurora Optical facility received and a decline in market value and other related adjustments, the Company recorded impairment charges of $328 during fiscal year 2009. The added charges resulted primarily from a drop in commercial real estate values since the original impairment was recorded as of September 30, 2008. Based on further market decline in commercial real estate values in fiscal 2011, the Company recorded non-cash impairment charges of $1,727 during fiscal 2011 and classified the facility under Other Assets on the consolidated balance sheet. No impairment and restructuring charges related to the Company's Tucson, Arizona facility were recorded during fiscal 2010. 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. The total amount incurred in connection with the United Kingdom restructuring was approximately $570, all of which was recorded during fiscal 2010. 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. The total amount incurred in connection with the closure of the facility in Malaysia was approximately $2,548, all of which was 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, 2011:
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Significant Concentrations [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Significant Concentrations | 9. 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, Thailand, Taiwan, and Korea. Sales to customers in Europe included the Netherlands, Austria, Sweden, Hungary, Denmark, Italy, Scotland, Germany, France 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, 2011, 2010 and 2009, 83%, 68% and 57% of net sales, respectively, were derived from sales to companies that provide products or services into the smartphone industry, 13%, 1%, and 0% of net sales, respectively, were derived from sales were to companies that provide products or services into the tablet industry, and 1%, 24% and 25% 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. |
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Lines Of Credit [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Lines Of Credit | 7. Lines of Credit 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 ($31,472 at September 30, 2011). 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 ($23,604 each at September 30, 2011). 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 (each, a "Borrower," and collectively, the "Borrowers") entered into a Loan and Security Agreement (the "Agreement") with Bank of America, N.A., as a lender and agent ("BOA"), for a senior revolving credit facility (the "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 "Revolver Commitment"). The parties have entered into five amendments to the Agreement, including an amendment on August 27, 2009, to make certain adjustments to the amount available for borrowing under the Facility and the definition of Eligible Account (as defined in such amendment). The second amendment was effective on February 15, 2010 and amended the definition of "Permitted Debt" to allow the Borrowers additional aggregate debt during the Borrowers' transitioning of their credit lines from certain financial institutions in China to different financial institutions in China. The third amendment was effective March 17, 2010 and made changes to the definition of "Restricted Investment" to amend the amount that may be invested in MFM and MFE to fund operating expenses. Covenants related to availability, collateral and other events are also imposed on the Company and its foreign subsidiaries in the Agreement. The fourth amendment was entered into on August 18, 2010, and increased the dollar amount of shares that could be repurchased by the Company. The fifth amendment was effective on September 1, 2011, and again increased the dollar amount of shares that could be repurchased by the Company and also allowed MFLEX Singapore to write off its intercompany loans made to MFM. Availability under the Facility for each Borrower will be an amount equal to the lesser of: (1) 85% of the eligible accounts receivable attributable to such Borrower minus the Availability Block (as defined in the Amendment), which amount could be as high as $10,000 and as low as $0 depending on the amount of cash and cash equivalents on deposit with BOA, or (2) the Revolver Commitment minus the Availability Reserve (as defined in the Agreement) to the extent attributable to such Borrower in BOA's discretion. Amounts outstanding under the Facility will bear interest at a rate equal to LIBOR or SIBOR/Singapore Swap Rate, as Borrower may elect from time to time, plus the Applicable Margin (as defined in the Agreement). The Facility has a three year term, subject to earlier termination by Borrowers at their discretion or by BOA upon occurrence of an event of default. As collateral for its obligations under the Facility, the Company has granted BOA a security interest in all the assets of Multi-Fineline Electronix, Inc. and MFLEX Singapore (which does not include assets of any foreign subsidiary that is treated as a corporation for U.S. federal income tax purposes), except for its equipment, real property and intellectual property and 34% of the voting stock of each of its foreign subsidiaries. As collateral for its obligations under the facility, MFLEX Singapore has granted BOA a security interest in all of its assets, except for its equipment, real property and intellectual property. The Company has also guaranteed all of MFLEX Singapore's obligations under the Agreement. The Agreement imposes customary affirmative, negative and financial covenants on the Borrowers and their subsidiaries. The negative covenants impose limitations on, among other things, the Company's ability to make distributions on its capital stock or repurchase equity interests unless certain requirements are met, with limited exceptions. The financial covenants require that the Borrowers maintain a Fixed Charge Coverage Ratio (as defined in the Agreement) of 1.0 for each period of 12 fiscal months ending on or after June 30, 2009. However, the financial covenants are only applicable if the aggregate availability is less than 20% of the Revolver Commitment. The Agreement also contains customary events of default including defaults related to the following, among other things: failure to make payments; breach of a representation or warranty; covenant breaches; judgments or loss or theft of collateral in excess of specified amounts; injunction or governmental pronouncement preventing the operation of the Borrowers' business; criminal indictment of any Borrower or senior officer; change of control; insolvency; and Employee Retirement Income Security Act ("ERISA") violations. An event of default is also triggered if the Singapore Minister of Finance declares MFLEX Singapore to be a "declared company" under the Singapore Companies Act. A "declared company" is one over which the Minister of Finance may exercise certain powers to investigate such company to protect the public, shareholders or creditors. Upon the occurrence and continuance of an event of default, BOA may, without notice or demand, declare all obligations under the Facility immediately due and payable, terminate or reduce the Revolver Commitment, adjust the borrowing base or proceed against the collateral, among other rights and remedies. A summary of the lines of credit is as follows:
As of September 30, 2011, the Company was in compliance with all covenants under its lines of credit. |
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