China’s on a lot of people’s minds this summer.
None more so than executives and investors of Anaheim’s Multi-Fineline Electronix Inc., a circuit board maker that’s seen construction delays on a plant there and higher than expected costs.
The snags have derailed a run-up in shares of Multi-Fineline, which designs and makes flexible circuit boards for cell phones.
Earlier this summer, the company’s shares were up as much as 65% for the year. Last week, the stock was holding on to a more than 10% gain for the year with a market value of about $480 million.
Multi-Fineline’s shares took a tumble a few weeks ago, despite a big boost in June quarter revenue and expectations for sales growth in the current one.
Sales for the recently ended quarter were $168 million, up 61% from a year earlier and beating analysts’ expectations.
Multi-Fineline, known as M-Flex, swung to a profit of $9 million, reversing a loss of $7 million a year earlier. The profit was in line with expectations.
What Wall Street didn’t like was M-Flex’s profit margin, which shrank 17.6% from the prior quarter because of higher-than-expected costs associated with expanding production in China.
Shares slumped more than 30% on the news.
“We expect the stock to react negatively as investors digest the greater-than-anticipated gross margin degradation,” said Amit Daryanani, analyst at RBC Capital Markets Corp. in San Francisco. “The biggest issue is that they will have significantly higher sales, but we still don’t see the margin expansion that you’d expect.”
Part of the reason is that M-Flex has been spending cash to get a factory up and running and keep up with demand for phones from Apple Inc. and Blackberry maker Research in Motion Ltd.
M-Flex is in the midst of a plan to slowly close some U.S. plants and send the bulk of its manufacturing to China.
The company has been expanding and updating its operations in China and leasing other sites to keep up with demand.
M-Flex plans to close a plant in Tucson and move some of the operations to its headquarters in Anaheim.
The move, which is set to save the company about $2 million to $3 million a year, will have an initial price tag of about $2 million, a charge set to show up in the current quarter.
The Arizona plant designs and makes tiny lenses for digital cameras that go into phones. It also makes the plastic fittings that surround the lenses and get built into the phone.
About a dozen of the site’s 45 jobs are set to move to Anaheim, which functions as a design center that builds prototypes.
Back in China
Meanwhile, M-Flex is outfitting a 500,000-square-foot plant at its campus in Suzhou, China, where it’s had two factories since the 1990s.
Outfitting the latest plant is expected to cost about $70 million and be finished in about a year.
M-Flex also has a handful of what it calls “satellite” factories, which are leased.
The company had to lease another 60,000-square-foot satellite factory during the June quarter to keep up with demand and make up for delays in the building of its new one.
“We did take about a month or so more than we had anticipated,” Chief Executive Reza Meshgin said. “We decided to first take care of this one satellite facility so that we are covered in the short term.”
The company is spending $22 million to get the satellite facility up and running. Roughly $5 million of the cost was recorded in the June quarter. The balance is set to come in the current quarter.
“It takes time to make it suitable for the type of manufacturing that we do, including training and bringing in the right people and getting it up and running,” Meshgin said.
Workers at the satellite plant do finishing and final assembly and then ship circuit boards to customers, often in Asia.
M-Flex’s biggest task now is to remedy “the disconnect between the revenue growth and the profits,” analyst Daryanani said.
“The issue for the next two quarters is really not revenue growth,” he said. “They need more effective or efficient planning in terms of the production and how you load your manufacturing sites when ramping up.”
Meshgin, who earlier this year took over the top post from longtime leader turned chairman Phil Harding, is confident.
“We think our business is as strong as it has ever been,” he said. “We anticipate significantly higher revenue this quarter, even though our margins in terms of percentages are going to be similar to this quarter. Things are very good.”
The growing pains in China and the investor jitters are “a one or two quarter blip,” analyst Daryanani said.
“The margin stagnation we are seeing will go away once we get past the September quarter,” he said.
