10-Q 1 mflx-10q_20140331.htm 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended March 31, 2014

OR

¨

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

For the transition period from              to             

Commission file number 000-50812

 

MULTI-FINELINE ELECTRONIX, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

95-3947402

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

8659 Research Drive

Irvine, CA 92618

(Address of principal executive offices, Zip Code)

(949) 453-6800

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨ (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, as of April 30, 2014 was 24,135,975.

 

 

 

 

 

 


 

Multi-Fineline Electronix, Inc.

Index

 

 

 

 

 


 

PART I. FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements

MULTI-FINELINE ELECTRONIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

(unaudited)

 

ASSETS

March 31, 2014

 

 

September 30, 2013

 

Cash and cash equivalents

$

124,562

 

 

$

105,150

 

Accounts receivable, net of allowances of  $2,376 and $4,281

   at March 31, 2014 and September 30, 2013, respectively

 

75,451

 

 

 

132,247

 

Inventories

 

57,780

 

 

 

86,853

 

Deferred taxes

 

4,887

 

 

 

5,909

 

Income tax receivable

 

3,385

 

 

 

2,535

 

Assets held for sale

 

9,569

 

 

 

-

 

Other current assets

 

9,989

 

 

 

8,821

 

Total current assets

 

285,623

 

 

 

341,515

 

Property, plant and equipment, net

 

197,598

 

 

 

244,056

 

Land use rights

 

6,620

 

 

 

7,703

 

Deferred taxes

 

7,848

 

 

 

11,685

 

Other assets

 

4,725

 

 

 

5,255

 

Total assets

$

502,414

 

 

$

610,214

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Accounts payable

$

111,859

 

 

$

166,474

 

Accrued liabilities

 

36,058

 

 

 

31,459

 

Income taxes payable

 

1,893

 

 

 

1,027

 

Total current liabilities

 

149,810

 

 

 

198,960

 

Other long-term liabilities

 

20,579

 

 

 

19,063

 

Total liabilities

 

170,389

 

 

 

218,023

 

Commitments and contingencies (Note 2)

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

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

   shares authorized at March 31, 2014 and September 30,

   2013, respectively; 0 and 0 shares issued and outstanding

   at March 31, 2014 and September 30, 2013, respectively

 

-

 

 

 

-

 

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

   100,000,000 shares authorized at March 31, 2014 and

   September 30, 2013, respectively; 24,093,475 and 24,082,802

   shares issued and outstanding at March 31, 2014 and

   September 30, 2013, respectively

 

2

 

 

 

2

 

Additional paid in capital

 

92,513

 

 

 

90,857

 

Retained earnings

 

190,961

 

 

 

252,656

 

Accumulated other comprehensive income

 

48,549

 

 

 

48,676

 

Total stockholders' equity

 

332,025

 

 

 

392,191

 

Total liabilities and stockholders' equity

$

502,414

 

 

$

610,214

 

 

 

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

 

 

 

1


 

MULTI-FINELINE ELECTRONIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

Three Months Ended

March 31,

 

 

Six Months Ended

March 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net sales

$

117,793

 

 

$

173,674

 

 

$

329,465

 

 

$

463,324

 

Cost of sales

 

130,765

 

 

 

189,207

 

 

 

339,941

 

 

 

454,154

 

Gross (loss) profit

 

(12,972

)

 

 

(15,533

)

 

 

(10,476

)

 

 

9,170

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

1,496

 

 

 

1,782

 

 

 

2,951

 

 

 

3,815

 

Sales and marketing

 

4,353

 

 

 

4,712

 

 

 

10,261

 

 

 

11,249

 

General and administrative

 

3,634

 

 

 

4,295

 

 

 

6,977

 

 

 

9,967

 

Impairment and restructuring

 

24,798

 

 

 

-

 

 

 

24,798

 

 

 

-

 

Total operating expenses

 

34,281

 

 

 

10,789

 

 

 

44,987

 

 

 

25,031

 

Operating loss

 

(47,253

)

 

 

(26,322

)

 

 

(55,463

)

 

 

(15,861

)

Other income and expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

246

 

 

 

86

 

 

 

455

 

 

 

156

 

Interest expense

 

(217

)

 

 

(138

)

 

 

(339

)

 

 

(249

)

Other (expense) income, net

 

116

 

 

 

170

 

 

 

412

 

 

 

155

 

Loss before income taxes

 

(47,108

)

 

 

(26,204

)

 

 

(54,935

)

 

 

(15,799

)

(Provision for) benefit from income taxes

 

(5,308

)

 

 

2,325

 

 

 

(6,760

)

 

 

268

 

Net loss

 

(52,416

)

 

 

(23,879

)

 

 

(61,695

)

 

 

(15,531

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(2,310

)

 

 

662

 

 

 

(127

)

 

 

2,875

 

Total comprehensive net loss

$

(54,726

)

 

$

(23,217

)

 

$

(61,822

)

 

$

(12,656

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(2.18

)

 

$

(1.00

)

 

$

(2.56

)

 

$

(0.65

)

Diluted

$

(2.18

)

 

$

(1.00

)

 

$

(2.56

)

 

$

(0.65

)

Shares used in computing net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

24,090,754

 

 

 

23,798,587

 

 

 

24,087,306

 

 

 

23,796,966

 

Diluted

 

24,090,754

 

 

 

23,798,587

 

 

 

24,087,306

 

 

 

23,796,966

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

2


 

MULTI-FINELINE ELECTRONIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(unaudited)

 

 

Six Months Ended

March 31,

 

Cash flows from operating activities

2014

 

 

2013

 

Net loss

$

(61,695

)

 

$

(15,531

)

Adjustments to reconcile net loss to net cash

   provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

26,508

 

 

 

29,158

 

Deferred taxes

 

4,863

 

 

 

(106

)

Stock-based compensation expense

 

1,575

 

 

 

2,548

 

Income tax benefit related to stock option exercises

 

-

 

 

 

(29

)

Asset impairments

 

11,549

 

 

 

-

 

Gain on disposal of property, plant and equipment

 

(1,583

)

 

 

(124

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

56,805

 

 

 

63,898

 

Inventories

 

29,197

 

 

 

71,655

 

Other current assets

 

(1,330

)

 

 

4,351

 

Other assets

 

531

 

 

 

205

 

Accounts payable

 

(49,431

)

 

 

(56,422

)

Accrued liabilities

 

4,433

 

 

 

(19,439

)

Income taxes

 

4

 

 

 

(4,626

)

Other liabilities

 

1,703

 

 

 

477

 

Net cash provided by operating activities

 

23,129

 

 

 

76,015

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(10,410

)

 

 

(26,792

)

Proceeds from sale of equipment and assets held for sale

 

2,536

 

 

 

136

 

Government grants received

 

4,151

 

 

 

-

 

Net cash used in investing activities

 

(3,723

)

 

 

(26,656

)

Cash flows from financing activities

 

 

 

 

 

 

 

Income tax benefit related to stock option exercises

 

-

 

 

 

29

 

Tax withholdings for net share settlement of equity awards

 

(5

)

 

 

(803

)

Proceeds from exercise of stock options

 

94

 

 

 

597

 

Repurchase of common stock

 

-

 

 

 

(1,444

)

Net cash provided by (used in) financing activities

 

89

 

 

 

(1,621

)

Effect of exchange rate changes on cash

 

(83

)

 

 

(219

)

Net increase in cash

 

19,412

 

 

 

47,519

 

Cash and cash equivalents at beginning of period

 

105,150

 

 

 

82,322

 

Cash and cash equivalents at end of period

$

124,562

 

 

$

129,841

 

Non-cash investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

$

2,421

 

 

$

5,500

 

 

 

 

 

 

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

 

 

 

3


 

MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

1. Description of Business

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

United Engineers Limited (“UEL”) and its wholly owned subsidiary, UE Centennial Venture Pte. Ltd (“UECV”, and together with UEL, “UE”), through its affiliates and subsidiaries, beneficially owned approximately 62% of the Company’s outstanding common stock as of each of March 31, 2014 and September 30, 2013. This beneficial ownership of the Company’s common stock by UE provides these entities with control over the outcome of stockholder votes at the Company, except with respect to certain related-party transactions with UE or its subsidiaries, including WBL Corporation Limited (“WBL”), which require a separate vote of the non-UE stockholders.

 

2. Basis of Presentation

Principles of Consolidation

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

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s 2013 Annual Report on Form 10-K. The financial information presented in the accompanying statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the periods indicated. All such adjustments are of a normal recurring nature. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Operating results for the three and six months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2014. Unless otherwise indicated, the financial information in these notes is presented in thousands (except per share amounts).

Fair Value Measurements

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

 

 

 

4


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

 

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

 

 

Fair Value Measurements of Assets and Liabilities

on a Recurring Basis as of

March 31, 2014

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds (cash and cash equivalents)

$

14,800

 

 

$

-

 

 

$

-

 

Forward contracts (accrued liabilities)

 

-

 

 

 

471

 

 

 

-

 

 

$

14,800

 

 

$

471

 

 

$

-

 

 

 

Fair Value Measurements of Assets and Liabilities

on a Recurring Basis as of

September 30, 2013

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds (cash and cash equivalents)

$

14,141

 

 

$

-

 

 

$

-

 

Forward contracts (other current assets)

 

-

 

 

 

179

 

 

 

-

 

Forward contracts (accrued liabilities)

 

-

 

 

 

(34

)

 

 

-

 

 

$

14,141

 

 

$

145

 

 

$

-

 

 

As of March 31, 2014, assets held for sale were measured at fair value on a non-recurring basis for the Company's single reporting unit. Based on the relevant FASB guidance, the carrying value of assets held for sale was written down to $9,569 after recording a non-cash impairment charge of $11,549 during the three months ended March 31, 2014 (refer to Note 8). The fair value of the assets was determined using Level 3 unobservable inputs not corroborated by market data, consisting of third-party offers for the building and equipment. Below is a summary of the Company’s assets measured at fair value on a non-recurring basis as of March 31, 2014:

 

 

Fair Value Measurements of Assets 
on a Non-Recurring Basis as of
March 31, 2014

 

 

Level 1

 

Level 2

 

Level 3

 

Building and equipment (assets held for sale)

  $

 —  

  $

 —  

  $

 9,569

 

 

 

 

 

 

 

 

  $

 —  

  $

—  

  $

9,569

 

 

 

 

 

 

 

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

Inventories

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

 

 

March 31,

2014

 

 

September 30,

2013

 

Raw materials and supplies

$

15,260

 

 

$

27,080

 

Work-in-progress

 

14,316

 

 

 

20,965

 

Finished goods

 

28,204

 

 

 

38,808

 

 

$

57,780

 

 

$

86,853

 

 

5


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

 

Property, Plant and Equipment

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

 

 

March 31,

2014

 

 

September 30,

2013

 

Building

$

52,598

 

 

$

68,679

 

Machinery and equipment

 

353,678

 

 

 

406,010

 

Computers and capitalized software

 

12,663

 

 

 

13,014

 

Leasehold improvements

 

14,284

 

 

 

14,145

 

Construction-in-progress

 

2,262

 

 

 

5,307

 

 

$

435,485

 

 

$

507,155

 

Accumulated depreciation and amortization

 

(237,887

)

 

 

(263,099

)

 

$

197,598

 

 

$

244,056

 

 

Accrued Liabilities

Accrued liabilities were composed of the following:

 

March 31,

2014

 

 

September 30,

2013

Wages and compensation

$

10,109

 

 

$

16,822

Restructuring expenses¹

 

7,771

 

 

 

-

Other accrued expenses

 

18,178

 

 

 

14,637

 

$

36,058

 

 

$

31,459

1 

Refer to Note 8 for further information on the Company’s impairment and restructuring activities during the three months ended March 31, 2014.

Product Warranty Accrual

Changes in the product warranty accrual for the three months ended March 31, 2014 and 2013 were as follows:

 

 

Balance at

January 1

 

 

Warranty

Expenditures

 

 

Provision for

Estimated

Warranty Cost

 

 

Balance at

March 31

 

Fiscal 2014

$

1,452

 

 

$

(1,234

)

 

$

1,596

 

 

$

1,814

 

Fiscal 2013

$

315

 

 

$

(425

)

 

$

333

 

 

$

223

 

Changes in the product warranty accrual for the six months ended March 31, 2014 and 2013 were as follows:

 

 

Balance at

October 1

 

 

Warranty

Expenditures

 

 

Provision for

Estimated

Warranty Cost

 

 

Balance at

March 31

 

Fiscal 2014

$

1,076

 

 

$

(2,245

)

 

$

2,983

 

 

$

1,814

 

Fiscal 2013

$

346

 

 

$

(826

)

 

$

703

 

 

$

223

 

 

6


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

 

Net Income Per Share—Basic and Diluted

The following table presents a reconciliation of basic and diluted shares for the three and six months ended March 31, 2014 and 2013:

 

 

Three Months Ended

March 31,

 

 

Six Months Ended

March 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Basic weighted-average number of common shares outstanding

 

24,090,754

 

 

 

23,798,587

 

 

 

24,087,306

 

 

 

23,796,966

 

Dilutive effect of potential common shares

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Diluted weighted-average number of common and potential

    common shares outstanding

 

24,090,754

 

 

 

23,798,587

 

 

 

24,087,306

 

 

 

23,796,966

 

Potential common shares excluded from the per share

    computations as the effect of their inclusion would not

    be dilutive

 

934,394

 

 

 

831,603

 

 

 

870,692

 

 

 

838,621

 

 

Commitments and Contingencies

Litigation

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

Other Commitments

The Company has outstanding purchase and other commitments, which exclude amounts already recorded on the Condensed Consolidated Balance Sheets. The outstanding purchase commitments to acquire capital assets and other materials and services totaled $7,889 and $6,454 as of March 31, 2014 and September 30, 2013, respectively.

Pursuant to the laws applicable to the People’s Republic of China’s Foreign Investment Enterprises, the Company’s two wholly owned subsidiaries in China, MFC and MFLEX Chengdu, are restricted from paying cash dividends on 10% of after-tax statutory profit, subject to certain cumulative limits. These restrictions as of March 31, 2014 and September 30, 2013 were $19,825 and $19,838, respectively.

Significant Concentrations

 

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

 

 

Three Months Ended

March 31,

 

 

Six Months Ended

March 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Smartphones

 

74

%

 

 

65

%

 

 

74

%

 

 

67

%

Tablets

 

11

%

 

 

28

%

 

 

15

%

 

 

26

%

Consumer electronics

 

10

%

 

 

5

%

 

 

8

%

 

 

6

%

 

 


7


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

 

3. Lines of Credit

During July 2013, MFC entered into a Line of General Credit Agreement (the “MFC Credit Line”) with Agricultural Bank of China, Suzhou Wuzhong Sub-branch (“ABC”), providing for a line of credit to MFC in an amount of 200,000 Chinese Renminbi (“RMB”) ($32,509 at March 31, 2014). The MFC Credit Line became effective on July 31, 2013 and will mature on July 30, 2016.

During May 2013, MFC entered into a Line of Credit Agreement (the “CCB Credit Line”) with China Construction Bank, Suzhou Industry Park Sub-Branch (“CCB”), which provides for a borrowing facility for 300,000 RMB ($48,764 at March 31, 2014). The CCB Credit Line will mature on May 5, 2016.

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

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

A summary of the lines of credit is as follows:

 

 

Amounts Available at

 

 

Amounts Outstanding at

 

 

March 31,

2014

 

 

September 30,

2013

 

 

March 31,

2014

 

 

September 30,

2013

 

Line of credit (ABC)

$

32,509

 

 

$

32,531

 

 

$

-

 

 

$

-

 

Line of credit (CCB)

 

48,764

 

 

 

48,796

 

 

 

-

 

 

 

-

 

Line of credit (BC)

 

-

 

 

 

11,000

 

 

 

-

 

 

 

-

 

Line of credit (JPM)

 

-

 

 

 

50,000

 

 

 

-

 

 

 

-

 

 

$

81,273

 

 

$

142,327

 

 

$

-

 

 

$

-

 

 

As of March 31, 2014, the Company was in compliance with all applicable financial covenants.

 

 

8


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

4. Segment Information

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

Financial information by geographic segment is as follows:

 

 

Three Months Ended

March 31,

 

 

Six Months Ended

March 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

3,519

 

 

$

2,973

 

 

$

8,629

 

 

$

5,855

 

China

 

110,559

 

 

 

138,704

 

 

 

338,016

 

 

 

441,160

 

Singapore

 

94,239

 

 

 

169,586

 

 

 

288,264

 

 

 

454,687

 

Other

 

3,244

 

 

 

411

 

 

 

4,953

 

 

 

464

 

Eliminations

 

(93,768

)

 

 

(138,000

)

 

 

(310,397

)

 

 

(438,842

)

Total

$

117,793

 

 

$

173,674

 

 

$

329,465

 

 

$

463,324

 

Operating (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

(2,045

)

 

$

(1,599

)

 

$

(3,723

)

 

$

(4,194

)

China

 

(20,170

)

 

 

(12,963

)

 

 

(8,561

)

 

 

(1,998

)

Singapore

 

(24,333

)

 

 

(12,094

)

 

 

(42,612

)

 

 

(11,461

)

Other

 

(1,070

)

 

 

(718

)

 

 

(1,655

)

 

 

(1,534

)

Eliminations

 

365

 

 

 

1,052

 

 

 

1,088

 

 

 

3,326

 

Total

$

(47,253

)

 

$

(26,322

)

 

$

(55,463

)

 

$

(15,861

)

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

327

 

 

$

647

 

 

$

674

 

 

$

1,297

 

China

 

13,292

 

 

 

14,015

 

 

 

25,718

 

 

 

27,717

 

Singapore

 

33

 

 

 

36

 

 

 

66

 

 

 

59

 

Other

 

35

 

 

 

42

 

 

 

50

 

 

 

85

 

Total

$

13,687

 

 

$

14,740

 

 

$

26,508

 

 

$

29,158

 

 

 

March 31,

2014

 

 

September 30,

2013

 

Total assets

 

 

 

 

 

 

 

United States

$

138,750

 

 

$

136,299

 

China

 

350,371

 

 

 

403,824

 

Singapore

 

233,630

 

 

 

295,714

 

Other

 

10,480

 

 

 

2,022

 

Eliminations

 

(230,817

)

 

 

(227,645

)

Total

$

502,414

 

 

$

610,214

 

 

 

 

 

9


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

5. Stock-Based Compensation

2014

Equity Incentive Plan

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

Service and Performance-Based Restricted Stock Units

During the three and six months ended March 31, 2014 and 2013, the Company granted service-based restricted stock units (“RSUs”) under the 2004 Plan and 2014 Plan to certain employees (including executive officers) and directors at no cost to such individual. Each RSU represents one hypothetical share of the Company’s common stock, without voting or dividend rights. The RSUs granted to employees generally vest over a period of three years with one-third vesting on each of the anniversary dates of the grant date. Total compensation cost related to RSUs is determined based on the fair value of the Company’s common stock on the date of grant and is amortized into expense over the vesting period using the straight-line method.

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

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

Approximately two-fifths of the November 2013 Awards and the December 2013 Awards contained performance conditions whereby the Company recorded stock-based compensation cost based on the grant-date fair value and the probability that the performance metrics will be achieved. At the end of each reporting period, the Company evaluates the probability that the performance-based RSUs will vest. As of March 31, 2014, the Company considers the vesting of the November 2013 Awards and the December 2013 Awards to be probable.

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

10


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

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

 

 

November 2013
Awards

 

Nasdaq Total Return
Index Benchmark
Inputs

 

December 2013
Awards

 

Nasdaq Total Return
Index Benchmark
Inputs

 

Expected stock return/ discount rate1

 

0.65

%

 

0.65

%

 

0.70

%

 

0.70

%

Dividend yield

 

—  

 

 

—  

 

 

—  

 

 

—  

 

Volatility2

 

40.0

%

 

20.0

%

 

40.0

%

 

20.0

%

Grant date

 

11/30/2013

 

 

11/30/2013

 

 

12/19/2013

 

 

12/19/2013

 

Three-month average
share price
3

  $

14.60

 

  $

4,194.45

 

  $

14.60

 

  $

4,194.45

 

Expected vesting period
(in years)

 

3.1

 

 

N/A

 

 

3.0

 

 

N/A

 

Correlation

 

0.48

 

 

0.48

 

 

0.48

 

 

0.48

 

Fair value per share

  $

8.28

 

 

N/A

 

  $

6.70

 

 

N/A

 

1 

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

2 

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

3 

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

RSU activity for the six months ended March 31, 2014 under the 2004 Plan and 2014 Plan is summarized as follows:

 

 

Number of

Shares

 

 

Weighted

-Average

Grant-Date

Fair Value

 

Non-vested shares outstanding at September 30, 2013

 

336,374

 

 

$

17.55

 

Granted

 

584,333

 

 

 

11.44

 

Vested

 

(1,745

)

 

 

13.57

 

Canceled

 

(33,675

)

 

 

16.14

 

Non-vested shares outstanding at March 31, 2014

 

885,287

 

 

$

13.58

 

 

RSU details for the three and six months ended March 31, 2014 and 2013 are summarized as follows:

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Service-based RSUs granted

 

49,116

 

 

 

26,620

 

 

 

322,488

 

 

 

205,811

 

Performance-based RSUs granted

 

-

 

 

 

-

 

 

 

261,845

 

 

 

72,031

 

Compensation cost recognized

$

954

 

 

$

977

 

 

$

1,575

 

 

$

1,986

 

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

$

13.89

 

 

$

15.27

 

 

$

11.44

 

 

$

18.18

 

Weighted-average grant-date fair value of RSUs vested

$

13.57

 

 

$

26.93

 

 

$

13.57

 

 

$

22.99

 

Aggregate intrinsic value of RSUs vested

$

25

 

 

$

328

 

 

$

25

 

 

$

2,512

 

 

Unearned compensation as of March 31, 2014 was $7,529 related to non-vested RSUs, which will be recognized into expense over the weighted-average remaining contractual life of the non-vested RSUs of 1.7 years.

11


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

Stock-based Compensation Expense Summary

The following table shows a summary of the stock-based compensation expense by expense type included in the Condensed Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2014 and 2013:

 

 

Three Months Ended

March 31,

 

 

Six Months Ended

March 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Cost of sales

$

62

 

 

$

133

 

 

$

117

 

 

$

266

 

Research and development

 

108

 

 

 

151

 

 

 

181

 

 

 

306

 

Sales and marketing

 

149

 

 

 

179

 

 

 

252

 

 

 

392

 

General and administrative

 

635

 

 

 

778

 

 

 

1,025

 

 

 

1,584

 

Total

$

954

 

 

$

1,241

 

 

$

1,575

 

 

$

2,548

 

 

 

6. Income Taxes

As of March 31, 2014, the Company recorded a liability for income taxes associated with uncertain tax positions of $15,666, of which $10,744, if recognized, would favorably affect the Company’s effective tax rate. As of September 30, 2013, the total liability for income taxes associated with uncertain tax positions was $15,425, of which $10,517, if recognized, would favorably affect the Company’s effective tax rate. The Company anticipates that there will be changes to the unrecognized tax benefit associated with uncertain tax positions due to the expiration of statutes of limitation, payment of tax on amended returns, audit settlements and other changes in reserves. However, due to the uncertainty regarding the timing of these events, other than the statute of limitation expiration, a current estimate of the range of changes that may occur within the next 12 months cannot be made.

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

The Company currently enjoys certain tax incentives for certain of its Asian operations. Certain Asian operations are subject to taxes at a rate lower than the statutory rates and for the three and six months ended March 31, 2014, the Company realized tax savings for these operations. However, these tax holidays and tax incentives may be challenged, modified or even eliminated by taxing authorities or changes in law. The tax incentives for the Company’s operations in Singapore expired on June 30, 2013.

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

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

The outcome of these tax audits cannot be predicted with certainty. If any issues raised in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, then the Company could be required to adjust its provision for income tax

12


MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(unaudited)

 

 

in the period such resolution occurs. Any significant adjustments from the tax authorities could have a material adverse effect on the Company’s results of operations, cash flows and financial position if not resolved favorably.

 

7. Derivative Financial Instruments

Foreign Currency Forward Contracts

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

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

As of March 31, 2014, the aggregate notional amount of the Company’s outstanding foreign currency forward contracts is summarized below:

 

Currency

 

Buy/
Sell

 

  

Foreign
Currency
Amount

 

  

Notional
Contract
Value in
USD

 

Foreign currency non-hedge derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

RMB

 

 

Buy

 

 

¥

244,736

 

 

$

40,000

 

The changes in fair value of the Company’s derivative instruments are recognized into earnings during the period of change as other income (expense), net in the Condensed Consolidated Statements of Comprehensive Income. The Company recognized net losses of $544 and $130 during the three and six months ended March 31, 2014 and $50 and $50 during the three and six months ended March 31, 2013, respectively, related to derivative financial instruments.

 

 

8. Impa