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MULTI FINELINE ELECTRONIX INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) You should read this discussion together with the financial statements, related
notes and other financial information included in this Annual Report. The
following discussion may contain predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties,
including those discussed under Part I, Item 1-A-"Risk Factors" and elsewhere in
this Annual Report. These risks could cause our actual results to differ
materially from any future performance suggested below.
Overview
We are a global provider of high-quality, technologically advanced flexible
printed circuits and value-added component assembly solutions to the electronics
industry. We believe that we are one of a limited number of manufacturers that
provide a seamless, integrated flexible printed circuit and assembly solution
from design and application engineering and prototyping through high-volume
fabrication, component assembly and testing. We target our solutions within the
electronics market and, in particular, our solutions enable our customers to
achieve a desired size, shape, weight or functionality of the device. Current
examples of applications for our products include mobile phones, smartphones,
tablets, consumer products, portable bar code scanners, computer/data storage
and medical devices. We provide our solutions to original equipment
manufacturers ("OEMs") such as Apple, Inc., and to electronic manufacturing
services ("EMS") providers such as Foxconn Electronics, Inc., Jabil Circuit,
Inc., and Flextronics International Ltd. Our business model, and the way we
approach the markets which we serve, is based on value added engineering and
providing technology solutions to our customers facilitating the miniaturization
of portable electronics. We currently rely on a core mobility end-market for
nearly all of our revenue. We believe this dynamic market offers fewer, but
larger, opportunities than other electronic markets do, and changes in market
leadership can occur with little to no warning. Through early supplier
involvement with customers, we look to assist in the development of new designs
and processes for the manufacturing of their products and, through value added
component assembly of components on flex, seek to provide a higher level of
product within their supply chain structure. This approach is relatively unique
and may or may not always fit with the operating practices of all OEMs. Our
ability to add to our customer base may have a direct impact on the relative
percentage of each customer's revenue to total revenues during any reporting
period.
We typically have numerous programs in production at any particular time, the
life cycle for which is typically around one year. The programs' prices are
subject to intense negotiation and are determined on a program by program basis,
dependent on a wide variety of factors, including without limitation, expected
volumes, assumed yields, material costs, actual yields, and the amount of third
party components within the program. Our profitability is dependent upon how we
perform against our targets and the assumptions on which we base our prices for
each particular program. Our volumes, margins and yields also vary from program
to program and, given various factors and assumptions on which we base our
prices, are not necessarily indicative of our profitability. In fact, some
lower-priced programs have higher margins while other higher-priced programs
have lower margins. Given that the programs in production vary from period to
period and the pricing and margins between programs vary widely, volumes are not
necessarily indicative of our performance. For example, we could experience an
increase in volumes for a particular program during a particular period, but
depending on that program's margins and yields and the other programs in
production during that period, those higher volumes may or may not result in an
increase in overall profitability.
From our inception in 1984 until 1989, we were engaged primarily in the
manufacturing of flexible printed circuits for military and aerospace
applications. In early 1990, we began to develop the concept of attaching
components on flexible printed circuits for Motorola. Through these early
efforts, we developed the concept of the value-added approach with respect to
integrating our design engineering expertise with our component assembly
capabilities. This strategy has enabled us to capitalize on two trends over the
course of the 1990s, the outsourcing by OEMs of their manufacturing needs and
the shift of manufacturing facilities outside of the United States. In 1994, we
formed a wholly owned Chinese subsidiary to better serve customers that have
production facilities in Asia and provide a cost-effective, high-volume
production platform for the manufacture of our products. Our Chinese subsidiary
provides a complete range of capabilities and services to support our global
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customer base, including design engineering and high-volume production of
single-sided, double-sided and multi-layer flexible printed circuits and
component assemblies. In fiscal 2002, we formed a second wholly owned subsidiary
in China to further expand our flexible printed circuit manufacturing and
assembly capacity and we merged these two subsidiaries into one in fiscal 2010.
In addition, we formed another wholly owned subsidiary in Chengdu, China, and in
fiscal 2011, completed construction on our third and fourth manufacturing
facilities in China as part of our continued capacity expansion initiative.
Net Sales
We design and manufacture our products to customer specifications. As of
September 30, 2012, we engaged the services of certain non-exclusive sales
representatives to provide customer contacts and market our products directly to
our global customer base. These sales representatives were located throughout
the North America, Europe and Asia. The variety of products our customers
manufacture are referred to as programs. The majority of our sales are made to
customers outside of the United States, and therefore sales volumes may be
impacted by customer program and product mix changes and delivery schedule
changes imposed on us by our customers. All sales from our Irvine, California
executive office, Singapore regional office and our United Kingdom facility are
denominated in U.S. dollars. All sales from our China facilities are denominated
in U.S. dollars for sales outside China or RMB for sales made in China.
Cost of Sales
Cost of sales consisted of four major categories: material, overhead, labor and
purchased process services. Material cost relates primarily to the purchase of
copper foil, gold, polyimide substrates and electronic components. Overhead
costs included all materials and facility costs associated with manufacturing
support, processing supplies and expenses, support personnel costs, stock-based
compensation expense related to such personnel, utilities, amortization of
facilities and equipment and other related costs. Labor cost included the cost
of personnel related to the manufacture of the completed product. Purchased
process services related to the subcontracting of specific manufacturing
processes to outside contractors. Cost of sales may be impacted by timing of
wage increases at our manufacturing facilities, capacity utilization,
manufacturing yields, product mix and production efficiencies. Also, we may be
subject to increased costs as a result of changing material prices because we do
not have long-term fixed supply agreements, inflation may occur in countries in
which we produce and market wage rate increases may also occur in these
countries.
Research and Development
Research and development costs are incurred in the development of new products
and processes, including significant improvements and refinements to existing
products and processes and are expensed as incurred.
Sales and Marketing
Sales and marketing expense included commissions paid to sales representatives,
personnel-related and travel costs associated with sales and marketing, program
management, corporate development and engineering support groups, sales support,
trade shows, freight out, market studies and promotional and marketing
brochures.
General and Administrative
General and administrative expense primarily included personnel-related and
travel costs associated with finance/accounting, tax, internal audit, legal,
human resources, information services and executive personnel along with other
expenses related to external accounting, legal and professional expenses,
business insurance, management information systems, investor relations, Board of
Directors and other corporate office expenses.
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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 and recoveries related to the closure or
disposal of a business unit or location.
Interest Income
Interest income consisted of interest income earned on cash, cash equivalents
balances and previously held short-term investments.
Interest Expense
Interest expense consisted of expense incurred on unused line fees on our
revolving facilities, interest related to our deferred financing costs and
interest on our previously held long-term debt.
Other Income (Expense), Net
Other income (expense), net, consisted primarily of the gain or loss on foreign
currency exchange and the gain or loss on derivative financial instruments.
Provision for Income Taxes
We record a provision for income taxes based on the statutory rates applicable
in the countries in which we do business, subject to any tax holiday periods
granted by the respective governmental authorities. We account for income taxes
under the Financial Accounting Standards Board ("FASB") authoritative guidance
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
reporting and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Critical Accounting Policies and Estimates
This "Management's Discussion and Analysis of Financial Condition and Results of
Operations" section is based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America ("U.S. GAAP"). The preparation of consolidated
financial statements requires that we make estimates and judgments that affect
the reported amounts of assets, liabilities, net sales and expenses and related
disclosures. On an ongoing basis, we evaluate our estimates, including, but not
limited to, those related to inventories, income taxes, accounts receivable
allowance and warranty. We base our estimates on historical experience,
performance metrics and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results will differ from these
estimates under different assumptions or conditions.
We apply the following critical accounting policies in the preparation of our
consolidated financial statements:
• 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 unit's
carrying amount, including goodwill. We determine the fair value of each
reporting unit using the present value of expected future cash flows for that
reporting unit. If the carrying amount of a reporting unit exceeds its fair
value, then the amount of the impairment loss must be measured. The impairment
loss would be calculated by comparing the implied fair value of reporting unit
goodwill to its carrying amount. In calculating the implied fair value of
reporting unit goodwill, the fair value of the reporting unit is allocated to
all of the other assets and liabilities of that unit based on their fair values.
The excess of the fair value of a reporting unit over the amount assigned to its
other assets and liabilities is the implied fair value of goodwill. An
impairment loss would be recognized when the carrying amount of goodwill exceeds
its implied fair value. To date, we have had no impairments of goodwill.
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• Stock-Based Compensation. We recognize compensation expense related to
stock options, restricted stock units ("RSUs") and stock appreciation
rights ("SSARs") granted to employees based on the grant date fair value.
Our assessment of the estimated fair value of the stock options and SSARs
granted is affected by our stock price as well as assumptions regarding a
number of complex and subjective variables and the related tax impact. We
utilize the Black-Scholes model to estimate the fair value of stock
options and SSARs granted. Generally, our calculation of the fair value
for stock options and SSARs granted under the relevant FASB authoritative
guidance is similar to the calculation of fair value under the original
guidance with the exception of the treatment of forfeitures. Expected
forfeitures of stock options and SSARs are estimated based on the
historical turnover of our employees. The fair value of RSUs granted is
based on the grant date price of our common stock.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. This model also requires the input of highly subjective
assumptions including:
(a) the expected volatility of our common stock price, which we
determine based on historical volatility of our common stock;
(b) expected dividends, which are zero, as we do not currently
anticipate issuing dividends;
(c) expected life of the stock option and SSAR, which is estimated
based on the historical stock option and SSAR exercise behavior of
our employees; and
(d) risk free interest rate, which is based on observed interest rates
(zero coupon U.S. Treasury debt securities) appropriate for the
expected holding period.
An award with a market condition is accounted for and measured differently than
an award that has a performance or service condition. The effect of a
market-based valuation is reflected in the award's fair value on the grant date
(e.g., a discount may be taken when estimating the fair value of an RSU to
reflect the market condition). The fair value may be lower than the fair value
of an identical award that has only a service or performance condition because
those awards will not include a discount on the fair value. All compensation
costs for awards that have only a market condition will be recognized if the
requisite service period is fulfilled, even if the market condition is never
satisfied.
In the future, we may elect to use different assumptions under the Black-Scholes
valuation model or a different valuation model, which could result in a
significantly different impact on our net income or loss.
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Results of Operations
The following table sets forth our consolidated statements of income data,
expressed as a percentage of net sales for the periods indicated.
Fiscal Years Ended September 30,
2012 2011 2010
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 89.9 87.4 85.7
Gross profit 10.1 12.6 14.3
Operating expenses:
Research and development 0.9 1.3 1.8
Sales and marketing 3.0 3.0 3.0
General and administrative 2.4 2.3 2.7
Impairment and restructuring (0.3 ) 0.5 1.5
Total operating expenses 6.0 7.1 9.0
Operating income 4.1 5.5 5.3
Other income (expense), net:
Interest income 0.2 0.1 0.1
Interest expense (0.1 ) (0.0 ) (0.1 )
Other income (expense), net 0.2 0.0 0.0
Income before income taxes 4.4 5.6 5.3
Provision for income taxes (0.8 ) (1.1 ) (1.5 )
Net income 3.6 % 4.5 % 3.8 %
Fiscal Year Ended September 30, 2012 Compared to Fiscal Year Ended September 30,
2011
Net Sales. Net sales decreased to $818.9 million in the fiscal year ended
September 30, 2012, from $831.6 million in the fiscal year ended September 30,
2011. The decrease of $12.7 million, or 1.5%, was primarily due to decreased net
sales into our smartphone sector, partially offset by increased net sales into
our tablet and consumer electronics sectors, as further quantified below.
Net sales into our smartphones sector decreased to $564.5 million in the fiscal
year ended September 30, 2012, from $686.0 million in the fiscal year ended
September 30, 2011. The decrease of $121.5 million, or 17.7%, was primarily due
to lower sales volumes to one of our major customers. For the fiscal years ended
September 30, 2012 and 2011, our smartphones sector accounted for approximately
69% and 83% of total net sales, respectively.
Net sales into our tablets sector increased to $219.6 million in the fiscal year
ended September 30, 2012, from $110.4 million in fiscal 2011. The increase of
$109.2 million, or 98.9%, was primarily due to increased volumes of 103% as a
result of increased demand for products from one of our key customers in this
sector. Average selling prices were relatively flat year over year in this
sector. For the fiscal years ended September 30, 2012 and 2011, our tablets
sector accounted for approximately 27% and 13% of total net sales, respectively.
Net sales into our consumer electronics sector increased to $15.2 million in the
fiscal year ended September 30, 2012, from $8.5 million in the fiscal year ended
September 30, 2011. The increase of $6.7 million, or 78.8%, was primarily due to
higher sales volumes for one of our customer's programs. For the fiscal years
ended September 30, 2012 and 2011, our consumer electronics sector accounted for
approximately 2% and 1% of total net sales, respectively.
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Cost of Sales and Gross Profit. Cost of sales as a percentage of net sales
increased to 89.9% in the fiscal year ended September 30, 2012, from 87.4% in
the fiscal year ended September 30, 2011. The increase in cost of sales as a
percentage of net sales of 2.5% was primarily attributable to increased wage and
benefit costs in China accounting for approximately 115 basis points, higher
utilities and manufacturing costs as a result of our capacity expansion
accounting for approximately 110 basis points, appreciation of the RMB
accounting for approximately 95 basis points, increased depreciation accounting
for approximately 90 basis points as a result of the capacity expansion
previously mentioned and increased yield loss, particularly in the fourth fiscal
quarter of 2012, related to a new program launch accounting for approximately 40
basis points. These increases were partially offset by lower material costs due
to changes in program mix year over year accounting for approximately 200 basis
points. Gross profit decreased to $82.7 million in the fiscal year ended
September 30, 2012, from $104.7 million in the fiscal year ended September 30,
2011, or 21.0%. As a percentage of net sales, gross profit decreased to 10.1%
for the fiscal year ended September 30, 2012, from 12.6% for the fiscal year
ended September 30, 2011.
Research and Development. Research and development expense decreased by $2.9
million to $7.6 million in the fiscal year ended September 30, 2012, from $10.5
million in the fiscal year ended September 30, 2011, a decrease of 27.6%. The
decrease was primarily due to our decision to realign our global research and
development activities in the United States and the United Kingdom and move
certain research and development to China, where labor costs are lower. As a
percentage of net sales, research and development expense decreased to 0.9% for
the fiscal year ended September 30, 2012, from 1.3% in the fiscal year ended
September 30, 2011.
Sales and Marketing. Sales and marketing expense decreased by $0.7 million to
$24.5 million in the fiscal year ended September 30, 2012, from $25.2 million in
the fiscal year ended September 30, 2011, a decrease of 2.8%. The decrease was
primarily attributable to lower variable expenses due to sales mix. As a
percentage of net sales, sales and marketing expense remained flat in the fiscal
year ended September 30, 2012 when compared to the fiscal year ended
September 30, 2011.
General and Administrative. General and administrative expense increased by $1.0
million to $19.8 million in the fiscal year ended September 30, 2012, from $18.8
million in the fiscal year ended September 30, 2011, an increase of 5.3%. The
increase was attributable primarily to increases in third party professional
fees associated with projects undertaken to evaluate various business
opportunities. As a percentage of net sales, general and administrative expense
increased to 2.4% for the fiscal year ended September 30, 2012, from 2.3% in the
fiscal year ended September 30, 2011.
Impairment and Restructuring. During the fiscal year ended September 30, 2012,
we recorded a net restructuring gain of $2.5 million, which consisted primarily
of a gain on sale of our previously impaired properties in Arizona and
California.
Interest Income (Expense), Net. Interest income (expense), net increased to a
net income of $0.8 million in the fiscal year ended September 30, 2012, from a
net income of $0.4 million in the fiscal year ended September 30, 2011, an
increase of $0.4 million. The increase was primarily as a result of increased
interest rates on our cash held by foreign institutions.
Other Income (Expense), Net. Other income (expense), net increased to income of
$1.7 million in the fiscal year ended September 30, 2012, from income of $0.6
million in the fiscal year ended September 30, 2011, an increase of $1.1
million. The increase in income was primarily attributable to fluctuations from
foreign exchange due to the movement of the U.S. dollar versus the RMB and other
foreign currencies, as well as gains from foreign currency programs (such as
forward contracts) to help mitigate the risk of foreign currency movements.
Income Taxes. The effective tax rate for the fiscal year ended September 30,
2012 and 2011 was 17.4% and 19.5%, respectively.
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Guidance
Net Sales. For our first quarter of fiscal 2013, we expect net sales to be
between $260 to $280 million based on the projected product mix and sales
volume.
Cost of Sales and Gross Profit. For our first quarter of fiscal 2013, we expect
gross margin to be between 10% and 12% based on the projected product mix and
sales volume.
Operating Expenses. We expect operating expenses to be approximately $13 to $14
million during the first fiscal quarter of 2013.
Income Taxes. We expect the effective tax rate, on average, to be in the high
teens going forward.
Capital Expenditures. For fiscal 2013, we are anticipating approximately $80 to
$85 million in capital expenditures for normal equipment replacement,
investments in automation to reduce labor costs and program-specific equipment
upgrades.
These projections are subject to substantial uncertainty. See Item 1A of Part I,
"Risk Factors".
Fiscal Year Ended September 30, 2011 Compared to Fiscal Year Ended September 30,
2010
Net Sales. Net sales increased to $831.6 million in the fiscal year ended
September 30, 2011, from $791.3 million in the fiscal year ended September 30,
2010. The increase of $40.3 million, or 5.1%, was primarily due to increased net
sales into our smartphone and tablet sectors, partially offset by decreased net
sales into our consumer electronics sector, as further quantified below.
Net sales into our smartphones sector increased to $686.0 million in the fiscal
year ended September 30, 2011, from $541.3 million in the fiscal year ended
September 30, 2010. The increase of $144.7 million, or 26.7%, was due to higher
sales volumes to two of our major customers in this sector. For the fiscal years
ended September 30, 2011 and 2010, our smartphones sector accounted for
approximately 83% and 68% of total sales, respectively.
Net sales into our tablets sector increased to $110.4 million for the fiscal
year ended September 30, 2011, from $7.9 million for the fiscal year ended
September 30, 2010. The increase of $102.5 million was primarily due to higher
content on average of 350% coupled with higher volume of 540% as a result of
increased demand for products from one of our key customers in this sector.
Sales into our tablets sector began to ramp in the second fiscal quarter of 2010
and continued to grow through fiscal 2011. For the fiscal years ended
September 30, 2011 and 2010, our tablets sector accounted for approximately 13%
and 1% of total net sales, respectively.
Net sales into our consumer electronics sector decreased to $8.5 million in the
fiscal year ended September 30, 2011, from $191.9 million in the fiscal year
ended September 30, 2010. The decrease was primarily due to one of our
customer's programs, which incorporates our flex assembly, reaching the end of
its life cycle. Shipments into our consumer electronics sector accounted for
approximately 1% and 24% of total net sales for the fiscal years ended
September 30, 2011 and 2010, respectively.
Cost of Sales and Gross Profit. Cost of sales as a percentage of net sales
increased to 87.4% for the fiscal year ended September 30, 2011, from 85.7% for
the fiscal year ended September 30, 2010. The increase in cost of sales as a
percentage of net sales of 1.7% was primarily attributable to the appreciation
of the Chinese Yuan accounting for approximately 110 basis points, wage rate and
benefits increases in China accounting for approximately 200 basis points,
increased depreciation expenses accounting for approximately 30 basis points,
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and decreased other costs accounting for approximately 170 basis points. Gross
profit decreased to $104.7 million in the fiscal year ended September 30, 2011,
from $113.0 million in the fiscal year ended September 30, 2010, or 7.3%. As a
percentage of net sales, gross profit decreased to 12.6% for the fiscal year
ended September 30, 2011 from 14.3% in the fiscal year ended September 30, 2010.
Research and Development. Research and development expense decreased to $10.5
million in the fiscal year ended September 30, 2011, from $14.5 million in the
fiscal year ended September 30, 2010, a decrease of 27.6%. The decrease was
primarily due to our decision to realign our global research and development
activities in California and the United Kingdom and move certain research and
development to China, where labor costs are lower.
Sales and Marketing. Sales and marketing expense increased by $1.1 million to
$25.2 million in the fiscal year ended September 30, 2011, from $24.1 million in
the fiscal year ended September 30, 2010, an increase of 4.6%. The increase was
primarily attributable to increased sales commissions due to higher sales
volume. As a percentage of net sales, sales and marketing expense remained flat
in the fiscal year ended September 30, 2011 when compared to the fiscal year
ended September 30, 2010.
General and Administrative. General and administrative expense decreased by $2.8
million to $18.8 million in the fiscal year ended September 30, 2011, from $21.6
million in the fiscal year ended September 30, 2010, a decrease of 13.0%. The
decrease was attributable to a $1.5 million reduction in stock-based
compensation expense primarily related to the reversal of expenses for
performance-based awards that were deemed not probable to vest, a reduction of
$0.2 million in wages and benefits as part of our fiscal 2010 restructurings, a
decrease of $0.6 million of audit, tax and legal fees, a reduction of $0.3
million in insurance costs and a net decrease of $0.2 million in other general
and administrative expenses. As a percentage of net sales, general and
administrative expense decreased to 2.3% for the fiscal year ended September 30,
2011, from 2.7% in the fiscal year ended September 30, 2010, attributable to the
favorable leveraging impact on our operating expenses from the increased net
sales and the decreases described above.
Impairment and Restructuring. During the fiscal year ended September 30, 2011,
we recorded net restructuring charges of $4.2 million as part of additional
efforts to consolidate our global operations and to improve our cost structure.
Impairment and restructuring expenses in the fiscal year ended September 30,
2011 were attributable primarily to asset impairments related to certain of our
properties in Arizona and California due to market decline in commercial real
estate values in the fiscal year ended September 30, 2011 of approximately $3.2
million, coupled with a reduction in force at our corporate headquarters which
resulted in termination benefits and other charges of approximately $1.0
million.
Interest Income (Expense), Net. Interest income (expense), net increased to a
net income of $0.4 million in the fiscal year ended September 30, 2011 from a
net expense of $0.2 million in the fiscal year ended September 30, 2010
primarily as a result of increased interest rates on our cash held by foreign
institutions.
Other Income (Expense), Net. Other income (expense), net increased to income of
$0.6 million in the fiscal year ended September 30, 2011, from income of $0.5
million in the fiscal year ended September 30, 2010.
Income Taxes. The effective tax rate for the fiscal year ended September 30,
2011 was 19.5% and was 28.6% for the fiscal year ended September 30, 2010. The
decrease was primarily a result of the reorganization of international
operations to further strengthen our Asian operations. The higher effective tax
rate in the prior fiscal year was primarily due to the establishment of
valuation allowances on net operating losses related to our Malaysia and United
Kingdom operations as a result of plans to restructure the entities.
Liquidity and Capital Resources
Our principal sources of liquidity have been cash provided by operations and our
ability to borrow under our various credit facilities. Our principal uses of
cash have been to finance working capital, facility expansions,
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stock repurchases and other capital expenditures. We anticipate these uses will
continue to be our principal uses of cash in the future. Global financial and
credit markets have been volatile in recent years, and future adverse conditions
of these markets could negatively affect our ability to secure funds or raise
capital at a reasonable cost, if needed.
We believe that funds generated from our operations and available from our
borrowing facilities will be sufficient to fund current business operations as
well as anticipated growth over at least the next fiscal year, without the need
to repatriate earnings. Undistributed earnings of our foreign subsidiaries
amounted to approximately $217,255, $184,994 and $141,830 for the fiscal years
ended September 30, 2012, 2011 and 2010, respectively.
The following table sets forth, for the years indicated, our net cash flows
provided by (used in) operating, investing and financing activities, our
period-end cash and cash equivalents and certain other operating measures:
Fiscal Years Ended September 30,
2012 2011 2010
(dollars in thousands)
Net cash provided by operating activities $ 68,283 $ 60,365 $ 66,872
Net cash used in investing activities $ (74,606 ) $ (63,394 ) $ (59,134 )
Net cash used in financing activities $ (9,630 ) $ (1,876 ) $ (48,526 )
Cash and cash equivalents at year end $ 82,322 $ 97,890 $ 99,875
Days sales outstanding 69.4 64.9 63.4
Days inventory outstanding 51.8 40.6 33.8
Days payable outstanding 88.6 79.2 74.2
Net working capital days 32.6 26.3 23.0
Changes in the principal components of operating cash flows in our fiscal year
ended September 30, 2012 were as follows:
• Our net accounts receivable increased to $165.4 million as of
September 30, 2012 from $150.5 million as of September 30, 2011, or 9.9%,
primarily due to increase sales in our fourth fiscal quarter of 2012
versus the same period in the prior year. Due to the timing of new program
ramps, a substantial portion of our fourth fiscal quarter revenues were
recognized late in the quarter, which resulted in a large accounts
receivable balance not due until the first fiscal quarter of 2013. Our net
inventory balance increased to $124.8 million as of September 30, 2012
versus $87.2 million as of September 30, 2011. The increase was primarily
the result of customer requests to stock finished goods inventory at our
hub locations that are close in proximity to Electronic Manufacturing
Services ("EMS") facilities where the end product handset or tablet is
assembled in preparation for our increased volume during our first fiscal
quarter of 2013. Our accounts payable balance increased to $199.7 million
as of September 30, 2012 from $162.8 million as of September 30, 2011, an
increase of 22.7%. The increase in accounts payable was primarily the
result of the timing of inventory purchases and more favorable vendor
payment terms. Purchases increased towards the end of our fourth fiscal
quarter of 2012 to support increased production volumes and the
corresponding payables are not due until the latter half of the first
quarter of fiscal 2013.
• Depreciation and amortization expense was $53.1 million for the fiscal
year ended September 30, 2012, versus $45.5 million for the comparable
period of the prior year, an increase of $7.6 million. This was primarily
due to an increased fixed asset base in manufacturing operations in China.
Our principal investing and financing activities in our fiscal year ended
September 30, 2012 were as follows:
• Net cash used in investing activities was $74.6 million for the fiscal
year ended September 30, 2012. Capital expenditures included cash
purchases of $86.1 million of capital equipment and other assets, which
were primarily related to our manufacturing capacity expansion in China.
Proceeds from sales of
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equipment and assets held for sale of $11.4 million was primarily due to
cash proceeds of $7.5 million and $1.9 million from the sale of our
corporate headquarters previously located in Anaheim, California and our
former Aurora Optical facility in Arizona, respectively.
• Net cash used in financing activities was $9.6 million for the fiscal year
ended September 30, 2012 and consisted primarily of repurchases of common
stock of $8.8 million and $1.1 million of tax withholdings for net share
settlements of equity awards to employees. Our loans payable and
borrowings outstanding against credit facilities were zero at
September 30, 2012 and September 30, 2011.
Changes in the principal components of operating cash flows in our fiscal year
ended September 30, 2011 were as follows:
• Our net accounts receivable increased to $150.5 million as of
September 30, 2011 from $149.5 million as of September 30, 2010, or 0.7%.
The increase in accounts receivable was primarily due to increased sales
as the result of changes in payment terms with certain customers. Our net
inventory balance increased to $87.2 million as of September 30, 2011
versus $76.9 million as of September 30, 2010, primarily as the result of
customer requests to stock finished goods inventory at our hub locations
that are close in proximity to EMS facilities where the end product
handset or tablet is assembled. Our accounts payable balance increased to
$162.8 million as of September 30, 2011 from $156.9 million as of
September 30, 2010, an increase of 3.8%. The increase in accounts payable
was primarily the result of more favorable vendor payment terms.
• Depreciation expense was $44.6 million for the fiscal year ended
September 30, 2011, versus $42.2 million for the comparable period of the
prior year, primarily due to an increased fixed asset base in
manufacturing operations in China and partially offset by dispositions of
equipment associated with our restructuring activities in the United
Kingdom, Malaysia and Anaheim. Amortization expense was $0.9 million for
fiscal 2011, versus $2.3 million for the comparable period of the prior
year mainly due to the decision to fully impair our intangibles assets as
of September 30, 2010.
Our principal investing and financing activities in our fiscal year ended
September 30, 2011 were as follows:
• Net cash used in investing activities was $63.4 million for the fiscal
year ended September 30, 2011. Capital expenditures included cash
purchases of $79.8 million of capital equipment and other assets, which
were primarily related to our manufacturing capacity expansion in China.
In addition, United States treasury bills amounting to $15.0 million were
redeemed during the first fiscal quarter of 2011. As of September 30,
2011, we had outstanding purchase commitments, which exclude amounts
already recorded on the Consolidated Balance Sheets, totaling $8.1 million
primarily related to capital projects at our various facilities.
• Net cash used in financing activities was approximately $1.9 million for
the fiscal year ended September 30, 2011 and consisted of repurchases of
common stock of $1.9 million and $1.3 million of tax withholdings for net
share settlement of equity awards to employees, partially offset by $1.3
million of proceeds from exercise of stock options and income tax benefit
related to stock option exercises. Our loans payable and borrowings
outstanding against credit facilities were zero at September 30, 2011 and
September 30, 2010.
Changes in the principal components of operating cash flows in our fiscal year
ended September 30, 2010 were as follows:
• 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
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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
from $40.8 million in the prior fiscal year due to the increased fixed
asset base, mainly at our manufacturing facilities in China.
Our principal investing and financing activities in our fiscal year ended
September 30, 2010 were as follows:
• 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 tax withholdings for net share settlement of equity awards to
employees and repayments on our long-term debt of $11.1 million, partially
offset by cash generated of $1.1 million of income tax benefit related to
the exercise of stock options and $1.9 million of proceeds from the
exercise of stock options. Our loans payable and borrowings outstanding
against credit facilities were zero at September 30, 2010 and 2009.
Capital Commitments
As of September 30, 2012, we had no off-balance sheet arrangements as defined in
Item 303(a)(4) of the Securities and Exchange Commission's ("SEC") Regulation
S-K. The following summarizes our contractual obligations, excluding accrued
taxes related to uncertain tax positions and amounts already recorded on the
Consolidated Balance Sheets, at September 30, 2012, and the effect those
obligations are expected to have on our liquidity and cash flow in future
periods (in thousands):
Payments Due by Period
Less than 1 to 3 3 to 5 More than
Contractual Obligations Total 1 year years years 5 years
Operating leases $ 3,423 $ 2,095 $ 1,320 $ 8 $ -
Purchase obligations 9,092 9,092 - - -
Total contractual obligations $ 12,515 $ 11,187 $ 1,320 $ 8 $ -
As of September 30, 2012, we had purchase obligations of $9.1 million, which
exclude amounts already recorded on the Consolidated Balance Sheets, which were
primarily related to expansion activities at our various facilities and
commitments for material purchases.
As of September 30, 2012, we recorded $16.7 million in long-term liabilities for
accrued taxes related to uncertain tax positions. We are not able to reasonably
estimate the timing of the long-term payments, or the amount by which our
liability will increase or decrease over time; therefore, the liability on
uncertain tax positions has not been included in the contractual obligations
table.
Recent Accounting Pronouncements
In July 2012, the FASB issued revised authoritative guidance that is intended to
reduce the cost and complexity of the impairment test for indefinite-lived
intangible assets by providing an entity with the option to first assess
qualitatively whether it is necessary to perform the impairment test that is
currently in place. An
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entity would not be required to quantitatively calculate the fair value of an
indefinite-lived intangible asset unless the entity determines that it is more
likely than not that its fair value is less than its carrying amount. The
amendments are effective for interim and annual periods beginning after
September 15, 2012 (which is October 1, 2012 for MFLEX). Early adoption is
permitted. The adoption of this guidance is not expected to have a material
impact on our consolidated financial position, results of operations or cash
flows.
In December 2011, the FASB issued revised authoritative guidance that deferred
the effective date for amendments to the presentation of reclassification
adjustments out of other comprehensive income by component in both the statement
in which net income is presented and the statement in which other comprehensive
income is presented. The amendments are effective for interim and annual periods
beginning after December 2011 (which was January 1, 2012 for MFLEX). The
adoption of this guidance did not have a material impact on our consolidated
financial position, results of operations or cash flows.
In December 2011, the FASB issued revised authoritative guidance that requires
an entity to disclose information about offsetting and related arrangements on
its financial position. This includes the effect or potential effect of rights
of offset associated with an entity's recognized assets and recognized
liabilities and requires improved information about financial instruments and
derivative instruments that are subject to an enforceable master netting
arrangement or similar arrangement. The amendments are effective for annual
periods beginning on or after January 1, 2013 (which is October 1, 2013 for
MFLEX) and retrospective disclosure is required for all comparative periods
presented. Early adoption is not permitted. The adoption of this guidance is not
expected to have a material impact on our consolidated financial position,
results of operations or cash flows.
In June 2011, the FASB issued revised authoritative guidance that requires all
non-owner changes in stockholder's equity be presented either in a single
continuous statement of comprehensive income or in two separate but consecutive
statements. In the two-statement approach, the first statement should present
total net income and its components followed consecutively by a second statement
that should present total other comprehensive income, the components of other
comprehensive income and the total of comprehensive income. The amendments are
effective for annual periods beginning after December 15, 2011 (which is
October 1, 2012 for MFLEX) and are to be applied retrospectively. Early adoption
is permitted. The adoption of this guidance did not have a material impact on
our consolidated financial position, results of operations or cash flows.
In May 2011, the FASB issued revised authoritative guidance that resulted in
common principles and requirements for measuring fair value and for disclosing
information about fair value measurements, including a consistent meaning of the
term "fair value" in accordance with U.S. GAAP and International Financial
Reporting Standards ("IFRS"). The amendments are effective for interim and
annual periods beginning after December 15, 2011 (which was January 1, 2012 for
MFLEX) and were to be applied prospectively. Early application by public
entities was not permitted. The adoption of this guidance did not have a
material impact on our consolidated financial position, results of operations or
cash flows.
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