Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

Form 10-Q

 

 

 

x

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

For the quarterly period ended July 1, 2013

Commission File Number: 0-31285

 

 

TTM TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   91-1033443

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1665 Scenic Avenue Suite 250, Costa Mesa, California 92626

(Address of principal executive offices)

(714) 327-3000

(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. (Check one):

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

Number of shares of common stock, $0.001 par value, of registrant outstanding at August 1, 2013: 82,628,048

 

 

 


Table of Contents

TABLE OF CONTENTS

 

 

     Page  

PART I: FINANCIAL INFORMATION

  

Item 1. Financial Statements (unaudited)

  

Consolidated Condensed Balance Sheets as of July 1, 2013 and December 31, 2012

     2   

Consolidated Condensed Statements of Operations for the quarter and two quarters ended July  1, 2013 and June 25, 2012

     3   

Consolidated Condensed Statements of Comprehensive Income for the quarter and two quarters ended July  1, 2013 and June 25, 2012

     4   

Consolidated Condensed Statements of Cash Flows for the two quarters ended July 1, 2013 and June  25, 2012

     5   

Notes to Consolidated Condensed Financial Statements

     6   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     18   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     25   

Item 4. Controls and Procedures

     25   

PART II: OTHER INFORMATION

  

Item 1. Legal Proceedings

     26   

Item 1A. Risk Factors

     26   

Item 6. Exhibits

     27   

SIGNATURES

     28   

 

1


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TTM TECHNOLOGIES, INC.

Consolidated Condensed Balance Sheets

 

     July 1,
2013
     December 31,
2012
 
    

(Unaudited)

(In thousands)

 

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 230,503       $ 285,433   

Accounts and notes receivable, net of allowance for bad debts of $796 in 2013 and $1,680 in 2012

     213,682         301,509   

Receivable from sale of assets

     113,371         —     

Accounts receivable due from related parties

     7,499         48   

Inventories

     135,500         146,012   

Prepaid expenses and other current assets

     29,018         32,610   
  

 

 

    

 

 

 

Total current assets

     729,573         765,612   

Property, plant and equipment, net

     775,822         833,678   

Goodwill and definite-lived intangibles, net

     44,418         49,104   

Deposits and other non-current assets

     29,661         28,568   
  

 

 

    

 

 

 

Total Assets

   $ 1,579,474       $ 1,676,962   
  

 

 

    

 

 

 

LIABILITIES AND EQUITY

     

Current liabilities:

     

Short-term debt, including current portion of long-term debt

   $ 48,104       $ 30,004   

Accounts payable

     169,313         186,745   

Payable for purchase of noncontrolling interest

     29,070         —     

Accounts payable due to related parties

     31,403         34,520   

Accrued salaries, wages and benefits

     41,572         43,282   

Equipment payable

     49,163         44,289   

Other accrued expenses

     36,546         31,040   
  

 

 

    

 

 

 

Total current liabilities

     405,171         369,880   
  

 

 

    

 

 

 

Convertible senior notes, net of discount

     160,928         157,533   

Long-term debt

     321,906         370,008   

Other long-term liabilities

     25,578         26,711   
  

 

 

    

 

 

 

Total long-term liabilities

     508,412         554,252   
  

 

 

    

 

 

 

Commitments and contingencies (Note 12)

     

Equity:

     

Common stock, $0.001 par value; 200,000 shares authorized, 82,607 and 81,937 shares issued and outstanding in 2013 and 2012, respectively

     83         82   

Additional paid-in capital

     549,961         546,029   

Retained earnings

     64,210         45,921   

Statutory surplus reserve

     15,166         15,166   

Accumulated other comprehensive income

     36,471         46,749   
  

 

 

    

 

 

 

Total TTM Technologies, Inc. stockholders’ equity

     665,891         653,947   

Noncontrolling interest

     —           98,883   
  

 

 

    

 

 

 

Total equity

     665,891         752,830   
  

 

 

    

 

 

 

Total Liabilities and Equity

   $ 1,579,474       $ 1,676,962   
  

 

 

    

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

2


Table of Contents

TTM TECHNOLOGIES, INC.

Consolidated Condensed Statements of Operations

For the Quarter and Two Quarters Ended July 1, 2013 and June 25, 2012

 

 

     Quarter Ended     Two Quarters Ended  
     July 1,
2013
    June 25,
2012
    July 1,
2013
    June 25,
2012
 
    

(Unaudited)

(In thousands, except per share data)

 

Net sales

   $ 338,021      $ 327,423      $ 663,413      $ 627,922   

Cost of goods sold

     289,564        272,732        564,226        516,753   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     48,457        54,691        99,187        111,169   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Selling and marketing

     9,559        9,008        18,749        17,630   

General and administrative

     26,141        23,453        52,699        45,588   

Amortization of definite-lived intangibles

     2,327        4,102        4,655        8,018   

Gain on sale of assets

     (17,917     —          (17,917     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     20,110        36,563        58,186        71,236   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     28,347        18,128        41,001        39,933   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest expense

     (5,923     (6,380     (12,201     (12,797

Other, net

     633        (188     1,634        1,399   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (5,290     (6,568     (10,567     (11,398
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     23,057        11,560        30,434        28,535   

Income tax provision

     (9,345     (4,009     (10,129     (8,652
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     13,712        7,551        20,305        19,883   

Less: Net (income) loss attributable to the noncontrolling interest

     (575     (141     (2,016     122   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to TTM Technologies, Inc. stockholders

   $ 13,137      $ 7,410      $ 18,289      $ 20,005   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to TTM Technologies, Inc. stockholders:

        

Basic earnings per share

   $ 0.16      $ 0.09      $ 0.22      $ 0.24   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.16      $ 0.09      $ 0.22      $ 0.24   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

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Table of Contents

TTM TECHNOLOGIES, INC.

Consolidated Condensed Statements of Comprehensive Income

For the Quarter and Two Quarters Ended July 1, 2013 and June 25, 2012

 

     Quarter Ended     Two Quarters Ended  
     July 1,
2013
    June 25,
2012
    July 1,
2013
    June 25,
2012
 
    

(Unaudited)

(In thousands)

 

Net income

   $ 13,712      $ 7,551      $ 20,305      $ 19,883   

Other comprehensive income, net of tax:

        

Foreign currency translation adjustments:

        

Unrealized gain (loss) during the period, net

     3,143        (5,942     5,676        (4,468

Less: gain realized in net earnings

     (14,266     —          (14,266     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net

     (11,123     (5,942     (8,590     (4,468
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses) on cash flow hedges:

        

Unrealized gain (loss) on effective cash flow hedges during the period, net

     184        349        (197     1,276   

Less: reclassification to earnings

     —          (17     —          (61
  

 

 

   

 

 

   

 

 

   

 

 

 

Net

     184        332        (197     1,215   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on available for sale securities:

        

Unrealized loss on available for sale securities during period

     (76     (162     (94     (122

Less: loss (gain) realized in net earnings

     4       —          4       (912
  

 

 

   

 

 

   

 

 

   

 

 

 

Net

     (72     (162     (90     (1,034
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax

     (11,011     (5,772     (8,877     (4,287
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     2,701        1,779        11,428        15,596   

Less: comprehensive (income) loss attributable to the noncontrolling interest

     (1,687     687        (3,417     729   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to TTM Technologies, Inc. stockholders

   $ 1,014      $ 2,466      $ 8,011      $ 16,325   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

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Table of Contents

TTM TECHNOLOGIES, INC.

Consolidated Condensed Statements of Cash Flows

For the Two Quarters Ended July 1, 2013 and June 25, 2012

 

     Two Quarters Ended  
     July 1,
2013
    June 25,
2012
 
     (Unaudited)  
     (In thousands)  

Cash flows from operating activities:

    

Net income

   $ 20,305      $ 19,883   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation of property, plant and equipment

     46,255        39,278   

Amortization of definite-lived intangible assets

     4,655        8,065   

Amortization of convertible notes discount, debt discount and debt issuance costs

     4,149        3,900   

Income tax benefit from restricted stock units released and common stock options exercised

     —          (619

Deferred income taxes

     1,531        2,704   

Stock-based compensation

     4,913        4,988   

Gain on sale of assets

     (17,917     —     

Net (gain) loss on sale of property, plant and equipment

     (63     902   

Net loss (gain) on sale of securities

     5        (816

Net unrealized (gain) loss on derivative assets and liabilities

     (517     1,257   

Unrealized foreign currency exchange loss (gain)

     835        (321

Changes in operating assets and liabilities, net of disposition:

    

Accounts and notes receivable, net

     (27,156     6,432   

Inventories

     (5,956     (2,523

Prepaid expenses and other current assets

     1,099        (7,446

Accounts payable

     24,474        2,080   

Accrued salaries, wages and benefits and other accrued expenses

     12,418        (5,455
  

 

 

   

 

 

 

Net cash provided by operating activities

     69,030        72,309   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Payments to noncontrolling interest

     (47,349     —     

Purchase of property, plant and equipment and equipment deposits

     (46,606     (59,700

Proceeds from sale of property, plant and equipment and assets held for sale

     133        149   

Proceeds from sale of securities

     12        2,898   
  

 

 

   

 

 

 

Net cash used in investing activities

     (93,810     (56,653
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net repayment of revolving loan

     (30,000 )     —     

Proceeds from long-term debt

     —         103,823   

Repayment of long-term debt

     —         (68,467

Proceeds from exercise of stock options

     38       89   

Excess tax benefits from stock awards exercised or released

     —         619   
  

 

 

   

 

 

 

Net cash (used) provided by financing activities

     (29,962     36,064   
  

 

 

   

 

 

 

Effect of foreign currency exchange rates on cash and cash equivalents

     (188     714   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (54,930     52,434   

Cash and cash equivalents at beginning of period

     285,433        196,052   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 230,503      $ 248,486   
  

 

 

   

 

 

 

Noncash transactions:

    

Receivable for net consideration on sale of assets

   $ 67,146      $ —     

Payable for purchase of noncontrolling interest

   $ 29,358      $ —     

Property, plant and equipment recorded in equipment and accounts payable

   $ 62,603      $ 73,623   

See accompanying notes to consolidated condensed financial statements.

 

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Table of Contents

TTM TECHNOLOGIES, INC.

Notes to Consolidated Condensed Financial Statements

(Unaudited)

(Dollars and shares in thousands, except per share data)

(1) Nature of Operations and Basis of Presentation

TTM Technologies, Inc. (the Company or TTM) is a leading global provider of time-critical and technologically complex printed circuit board (PCB) products and backplane assemblies (PCBs populated with electronic components), which serve as the foundation of sophisticated electronic products. The Company provides advanced technology products and offers a one-stop manufacturing solution to customers from engineering support to prototype development through final volume production. The Company serves a diversified customer base in various markets throughout the world, including manufacturers of networking/communications infrastructure products, touch screen tablets and smartphones. The Company also serves high-end computing, commercial aerospace, defense, and industrial/medical industries. The Company’s customers include both original equipment manufacturers (OEMs) and electronic manufacturing services (EMS) providers.

The accompanying consolidated condensed financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These consolidated condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position, the results of operations and cash flows of the Company for the periods presented. It is suggested that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s most recent Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated condensed financial statements and accompanying notes. Actual results could differ materially from those estimates. Beginning January 1, 2013, the Company uses a 13-week fiscal quarter accounting period with the first quarter ending on the last Monday closest to April 1 and the fourth quarter always ending on December 31. The second quarters ended July 1, 2013 and June 25, 2012 each contained 91 days. The two quarters ended July 1, 2013 and June 25, 2012 contained 182 and 177 days, respectively.

(2) Noncontrolling Interest Holdings

On June 17, 2013, the Company completed the sale of its 70.2% controlling equity interest in Dongguan Shengyi Electronics Ltd. (SYE) to its noncontrolling partner, Shengyi Technology Co. Ltd. (Sytech), for 702,000 Chinese RMB or $114,495. The Company recognized a gain on the sale of SYE of $17,917 and recorded a receivable for the total consideration in the amount of $114,495. Consideration net of cash sold was $67,146. In connection with the SYE transaction, the Company was also required to settle an intercompany balance owed to SYE in the amount of $40,670, which the Company paid in cash during the quarter ended July 1, 2013.

Additionally, the Company acquired Sytech’s 20.0% noncontrolling equity interest in Dongguan Meadville Circuits Ltd. (DMC) for 180,000 Chinese RMB or $29,358. The Company recorded a payable for the purchase price amount of $29,358 as well as an increase to additional paid-in capital for the difference between the purchase price and the carrying value of the noncontrolling interest for $70.

The total cash expected to be received in the third quarter of 2013 is approximately $80,000 (net proceeds of $85,137 less transaction related taxes). Both SYE and DMC plants manufacture conventional PCBs and are located in Dongguan, China.

(3) Inventories

Inventories as of July 1, 2013 and December 31, 2012 consist of the following:

 

           July 1,      
2013
     December 31,
2012
 
     (In thousands)  

Inventories:

     

Raw materials

   $ 44,167       $ 46,893   

Work-in-process

     53,291         45,822   

Finished goods

     38,042         53,297   
  

 

 

    

 

 

 
   $ 135,500       $ 146,012   
  

 

 

    

 

 

 

 

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Table of Contents

TTM TECHNOLOGIES, INC.

Notes to Consolidated Condensed Financial Statements – (Continued)

 

(4) Definite-lived Intangibles

As of July 1, 2013 and December 31, 2012, the components of definite-lived intangibles were as follows:

 

     Gross
Amount
     Accumulated
Amortization
    Accumulated
Impairment
    Foreign
Currency
Translation
Adjustment
     Net
Carrying
Amount
     Weighted
Average
Amortization
Period
 
     (In thousands)      (years)  

July 1, 2013:

               

Strategic customer relationships

   $ 120,427       $ (64,121   $ (28,935   $ 438       $ 27,809         9.2   

Trade name

     10,302         (5,817     —          14         4,499         6.0   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    
   $ 130,729       $ (69,938   $ (28,935   $ 452       $ 32,308      
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    
     Gross
Amount
     Accumulated
Amortization
    Accumulated
Impairment
    Foreign
Currency
Translation
Adjustment
     Net
Carrying
Amount
     Weighted
Average
Amortization
Period
 
     (In thousands)      (years)  

December 31, 2012:

               

Strategic customer relationships

   $ 120,427       $ (60,322   $ (28,935   $ 415       $ 31,585         9.2   

Trade name

     10,302         (4,915     —          12         5,399         6.0   

Licensing agreements

     350         (350     —          —           —           3.0   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    
   $ 131,079       $ (65,587   $ (28,935   $ 427       $ 36,984      
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

The July 1, 2013 and December 31, 2012 definite-lived intangible balances include foreign currency translation adjustments related to foreign subsidiaries which operate in currencies other than the U.S. Dollar.

Definite-lived intangibles are generally amortized using the straight line method of amortization over the useful life, with the exception of the strategic customer relationship intangibles, which are amortized using an accelerated method of amortization based on estimated cash flows. Amortization expense was $2,327 and $4,120 for the quarters ended July 1, 2013 and June 25, 2012, respectively, and $4,655 and $8,065 for the two quarters ended July 1, 2013 and June 25, 2012, respectively. Amortization expense related to acquired licensing agreements is classified as cost of goods sold.

Estimated aggregate amortization for definite-lived intangible assets for the next five years is as follows:

 

     (In thousands)  

Remaining 2013

   $ 4,662   

2014

     8,372   

2015

     7,483   

2016

     4,124   

2017

     3,901   
  

 

 

 
   $ 28,542   
  

 

 

 

(5) Long-term Debt and Letters of Credit

The following table summarizes the long-term debt of the Company as of July 1, 2013 and December 31, 2012.

 

     Average Effective
Interest Rate
as of
July 1,
2013
  July 1,
2013
    Average Effective
Interest Rate
as of
December 31,
2012
  December 31,
2012
 
         (In thousands)         (In thousands)  

Term loan due September 2016

   2.58%   $ 370,000      2.59%   $ 370,000   

Revolving loan due March 2016

   —       —        2.59%     30,000   

Other

   6.00%     10      6.00%     12   
    

 

 

     

 

 

 
       370,010          400,012   

Less: Current maturities

       (48,104       (30,004
    

 

 

     

 

 

 

Long-term debt, less current maturities

     $ 321,906        $ 370,008   
    

 

 

     

 

 

 

 

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Table of Contents

TTM TECHNOLOGIES, INC.

Notes to Consolidated Condensed Financial Statements – (Continued)

 

The calendar maturities of long-term debt through 2016 and thereafter are as follows:

 

     (In thousands)  

2014

   $ 96,206   

2015

     96,204   

2016

     177,600   
  

 

 

 
   $ 370,010   
  

 

 

 

At July 1, 2013 and December 31, 2012, the remaining unamortized debt issuance costs included in other non-current assets was $2,345 and $2,755, respectively, and is amortized to interest expense over the term of the Company’s credit agreement entered into in September 2012 (Credit Agreement) using the effective interest rate method. At July 1, 2013, the remaining amortization period for the unamortized debt issuance costs was 3.0 years.

The Company is also required to pay a commitment fee of 0.50% per annum on any unused portion of the loan and letters of credit facility granted under the Credit Agreement. The Company incurred commitment fees related to unused borrowing availability under the Revolver facility of $95 and $41 for the quarter ended July 1, 2013 and June 25, 2012, respectively, and $191 and $98 for the two quarters ended July 1, 2013 and June 25, 2012, respectively. As of July 1, 2013, the Term Loan under the Credit Agreement of $370,000, of which $48,100 is due for repayment in March 2014 and is included as short-term debt and $321,900 is included as long-term debt, was outstanding; none of the Revolver under the Credit Agreement, and $52,679 of the Letters of Credit Facility under the Credit Agreement were outstanding. Available borrowing capacity under the Revolving Loan was $90,000 at July 1, 2013.

Additionally, the Company is party to a revolving loan credit facility with a lender in the People’s Republic of China (PRC). Under this arrangement, the lender has made available to the Company approximately $46,800 in unsecured borrowing with all terms of the borrowing to be negotiated at the time the revolver is drawn upon. There are no commitment fees on the unused portion of the revolver and this arrangement expires in December 2013. As of July 1, 2013, the revolver had not been drawn upon.

Other Letters of Credit

In addition to the letters of credit obtained pursuant to the Credit Agreement, the Company maintains several unused letters of credit for an aggregate amount of $3,454, which expire between December 31, 2013 and February 28, 2014.

(6) Convertible Senior Notes

In 2008, the Company issued 3.25% Convertible Senior Notes (Convertible Notes) due May 15, 2015, in a public offering for an aggregate principal amount of $175,000. The Convertible Notes bear interest at a rate of 3.25% per annum. Interest is payable semiannually in arrears on May 15 and November 15 of each year. The Convertible Notes are senior unsecured obligations and rank equally to the Company’s future unsecured senior indebtedness and senior in right of payment to any of the Company’s future subordinated indebtedness. The liability and equity components of the Convertible Notes are separately accounted for in a manner that reflects the Company’s non-convertible debt borrowing rate when interest costs are recognized.

The Company has allocated the Convertible Notes offering costs to the liability and equity components in proportion to the allocation of proceeds and accounted for them as debt issuance costs and equity issuance costs, respectively. At July 1, 2013 and December 31, 2012, the following summarizes the liability and equity components of the Convertible Notes:

 

     July 1,
2013
    December 31,
2012
 
     (In thousands)  

Liability components:

    

Convertible Notes

   $ 175,000      $ 175,000   

Less: Convertible Notes unamortized discount

     (14,072     (17,467
  

 

 

   

 

 

 

Convertible Notes, net of discount

   $ 160,928      $ 157,533   
  

 

 

   

 

 

 

Equity components:

    

Additional paid-in capital:

    

Embedded conversion option — Convertible Notes

   $ 43,000      $ 43,000   

Embedded conversion option — Convertible Notes issuance costs

     (1,413     (1,413
  

 

 

   

 

 

 
   $ 41,587      $ 41,587   
  

 

 

   

 

 

 

 

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TTM TECHNOLOGIES, INC.

Notes to Consolidated Condensed Financial Statements – (Continued)

 

At July 1, 2013 and December 31, 2012, remaining unamortized debt issuance costs included in other non-current assets were $1,419 and $1,762, respectively. The debt issuance costs and debt discount are being amortized to interest expense over the term of the Convertible Notes using the effective interest rate method. At July 1, 2013, the remaining amortization period for the unamortized Convertible Note discount and debt issuance costs was 1.9 years.

The components of interest expense resulting from the Convertible Notes for the quarter and two quarters ended July 1, 2013 and June 25, 2012 are as follows:

 

     Quarter Ended      Two Quarters Ended  
     July 1,
2013
     June 25,
2012
     July 1,
2013
     June 25,
2012
 
     (In thousands)  

Contractual coupon interest

   $ 1,422       $ 1,422       $ 2,844       $ 2,844   

Amortization of Convertible Notes debt discount

     1,715         1,578         3,395         3,123   

Amortization of debt issuance costs

     174         159         343         315   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,311       $ 3,159       $ 6,582       $ 6,282   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the quarter and two quarters ended July 1, 2013 and June 25, 2012, the amortization of the Convertible Notes debt discount and debt issuance costs is based on an effective interest rate of 8.37%.

(7) Income Taxes

The Company’s effective tax rate was 40.5% and 34.7% for the quarters ended July 1, 2013 and June 25, 2012, respectively. The Company’s tax rate increased during the second quarter ended July 1, 2013 primarily due to the gain on sale of assets as discussed in Note 2, and the increase in income earned in higher tax jurisdictions.

The Company’s effective tax rate was 33.3% and 30.3% for the two quarters ended July 1, 2013 and June 25, 2012, respectively. The Company’s tax rate increased during the two quarters ended July 1, 2013 primarily due to the gain on sale of assets as discussed in Note 2 and an increase in income earned in higher tax jurisdictions, offset by the recognition of discrete tax benefits resulting from the extension of federal research and development credit laws, and from the approval of a research and development deduction in China.

The Company’s effective tax rate is primarily impacted by the U.S. federal income tax rate, apportioned state income tax rates, tax rates in China and Hong Kong, generation of other credits and deductions available to the Company, and certain non-deductible items. The Company’s effective tax rate will generally differ from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from the Company’s operations in lower-tax jurisdictions in China. Certain foreign losses generated are not more than likely to be realizable, and thus, no income tax benefit has been recognized on these losses. The Company’s foreign earnings attributable to the Asia Pacific operating segment will be permanently reinvested in such foreign jurisdictions and, therefore, no deferred tax liabilities for U.S. income taxes on undistributed earnings are recorded.

(8) Financial Instruments

Derivatives

Interest Rate Swaps

The Company’s business is exposed to interest rate risk resulting from fluctuations in interest rates on certain variable rate LIBOR debt. Increases in interest rates would increase interest expenses relating to the outstanding variable rate borrowings of certain foreign subsidiaries and increase the cost of debt. Fluctuations in interest rates can also lead to significant fluctuations in the fair value of the debt obligations.

In 2011, the Company entered into a two-year pay-fixed, receive floating (1-month LIBOR), amortizing interest rate swap arrangement with an initial notional amount of $146,500, which expired on April 16, 2013. Under the terms of the interest rate swap, the Company would pay a fixed rate of 2.50% and would receive floating 1-month LIBOR during the swap period. The Company had designated this interest rate swap as a cash flow hedge during the quarter and two quarters ended June 25, 2012 and the interest rate swap increased interest expense by $676 and $1,285, respectively. The Company did not designate this interest rate swap as a cash flow hedge for the quarter and two quarters ended July 1, 2013 as the borrowings attributable to this interest rate swap were paid in full in September 2012. The change in the fair value of this interest rate swap is recorded as other, net in the consolidated condensed statement of operations.

 

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TTM TECHNOLOGIES, INC.

Notes to Consolidated Condensed Financial Statements – (Continued)

 

Foreign Exchange Contracts

The Company enters into foreign currency forward contracts to mitigate the impact of changes in foreign currency exchange rates and to reduce the volatility of purchases and other obligations generated in currencies other than the functional currencies. The Company’s foreign subsidiaries may at times purchase forward exchange contracts to manage their foreign currency risks in relation to certain purchases of machinery denominated in foreign currencies other than the Company’s foreign functional currency. The notional amount of the foreign exchange contracts at July 1, 2013 and December 31, 2012 was approximately $29,698 and $28,259, respectively. The Company has designated certain of these foreign exchange contracts as cash flow hedges.

The fair values of derivative instruments in the consolidated condensed balance sheet are as follows:

 

          Asset / (Liability) Fair
Value
 
    

Balance Sheet

Location

         July 1,      
2013
    December 31,
2012
 
          (In thousands)  

Cash flow derivative instruments designated as hedges:

       

Foreign exchange contracts

   Prepaid expenses and other current assets    $ 150      $ —     

Foreign exchange contracts

   Deposits and other non-current assets      85        103   

Foreign exchange contracts

   Other accrued expenses      (443     (34

Foreign exchange contracts

   Other long-term liabilities      (4     (84

Cash flow derivative instruments not designated as hedges:

       

Foreign exchange contracts

   Prepaid expenses and other current assets      19        17   

Foreign exchange contracts

   Deposits and other non-current assets      82        —     

Foreign exchange contracts

   Other accrued expenses      (1,018     (831

Interest rate swap

   Other accrued expenses      —          (620
     

 

 

   

 

 

 
      $ (1,129   $ (1,449
     

 

 

   

 

 

 

The following table provides information about the amounts recorded in accumulated other comprehensive income related to derivatives designated as cash flow hedges, as well as the amounts recorded in each caption in the consolidated condensed statement of operations when derivative amounts are reclassified out of accumulated other comprehensive income:

 

        Quarter Ended   
          July 1, 2013      June 25, 2012  
          Effective Portion      Ineffective
Portion
     Effective Portion     Ineffective
Portion
 
     Financial
Statement
Caption
   Gain/(Loss)
Recognized in
Other
Comprehensive
Income
    Gain/(Loss)
Reclassified
into
Income
     Gain/(Loss)
Reclassified
into
Income
     Gain/(Loss)
Recognized in
Other
Comprehensive
Income
    Gain/(Loss)
Reclassified
into
Income
    Gain/(Loss)
Recognized
into
Income
 
     (In thousands)  

Cash flow hedge:

                 

Interest rate swap

   Interest expense    $ —        $ —         $ —         $ 631      $ (676   $ —     

Foreign currency forward

   Other, net      184        —           —           (177     —          —     
     

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
      $ 184      $ —         $ —         $ 454      $ (676   $ —     
     

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
        Two Quarters Ended   
          July 1, 2013      June 25, 2012  
          Effective Portion      Ineffective
Portion
     Effective Portion     Ineffective
Portion
 
     Financial
Statement
Caption
   Gain/(Loss)
Recognized in
Other
Comprehensive
Income
    Gain/(Loss)
Reclassified
into
Income
     Gain/(Loss)
Reclassified
into
Income
     Gain/(Loss)
Recognized in
Other
Comprehensive
Income
    Gain/(Loss)
Reclassified
into
Income
    Gain/(Loss)
Recognized
into
Income
 
     (In thousands)  

Cash flow hedge:

                 

Interest rate swap

   Interest expense    $ —        $ —         $ —         $ 1,000      $ (1,285   $ —     

Foreign currency forward

   Other, net      (197     —           —           441        —          —     
     

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
      $ (197   $ —         $ —         $ 1,441      $ (1,285   $ —     
     

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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TTM TECHNOLOGIES, INC.

Notes to Consolidated Condensed Financial Statements – (Continued)

 

The following table provides a summary of the activity associated with the designated cash flow hedges reflected in accumulated other comprehensive income for the two quarters ended July 1, 2013 and June 25, 2012:

 

     Two Quarters Ended  
     July 1,
2013
    June 25,
2012
 
     (In thousands)  

Beginning balance unrealized loss, net of tax

   $ (15   $ (3,262

Changes in fair value, net of tax

     (197     1,276   

Reclassification to earnings

     —          (61
  

 

 

   

 

 

 

Ending balance unrealized loss, net of tax

   $ (212   $ (2,047
  

 

 

   

 

 

 

The Company expects that substantially all of the accumulated other comprehensive income will be reclassified into the statement of operations, net of tax, in the next 12 months.

The net gain (loss) recognized in other, net in the consolidated condensed statement of operations on derivative instruments not designated as hedges is as follows:

 

     Quarter Ended     Two Quarters Ended  
     July 1,
2013
    June 25,
2012
    July 1,
2013
    June 25,
2012
 
     (In thousands)  

Derivative instruments not designated as hedges:

        

Interest rate swap

   $ 143      $ 129      $ 620      $ 229   

Foreign exchange contracts

     (134     (972     (665     (730
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 9      $ (843   $ (45   $ (501
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Instruments

The carrying amount and estimated fair value of the Company’s financial instruments at July 1, 2013 and December 31, 2012 were as follows:

 

     July 1, 2013      December 31, 2012  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 
     (In thousands)  

Available for sale securities

   $ 282       $ 282       $ 390       $ 390   

Derivative assets, current

     169         169         17         17   

Derivative liabilities, current

     1,461         1,461         1,485         1,485   

Derivative assets, non-current

     167         167         103         103   

Derivative liabilities, non-current

     4         4         84         84   

Long-term debt

     370,010         364,998         400,012         400,012   

Convertible senior notes

     160,928         176,680         157,533         176,680   

The fair value of available for sale securities was determined using quoted market prices for the securities on an active exchange.

The fair value of the derivative instruments was determined using pricing models developed based on the LIBOR swap rate, foreign currency exchange rates, and other observable market data, including quoted market prices, as appropriate. The values were adjusted to reflect nonperformance risk of both the counterparty and the Company, as necessary.

The fair value of the long-term debt was estimated based on discounting the par value of the debt over its life for the difference between the debt stated interest rate and current market rates for similar debt at July 1, 2013 and December 31, 2012, which are considered Level 2 inputs.

The fair value of the convertible senior notes was estimated based on quoted market prices of the securities on an active exchange, which are considered Level 1 inputs.

 

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TTM TECHNOLOGIES, INC.

Notes to Consolidated Condensed Financial Statements – (Continued)

 

At July 1, 2013 and December 31, 2012, the Company’s other financial instruments included cash and cash equivalents, accounts receivable, notes receivable, accounts payable and equipment payables. Due to short-term maturities, the carrying amount of these instruments approximates fair value.

(9) Accumulated Other Comprehensive Income

The following provides a summary of the components of accumulated other comprehensive income, net of tax as of July 1, 2013 and December 31, 2012:

 

     July 1,
2013
    December 31,
2012
 
     (In thousands)  

Foreign currency translation, net of taxes of $3,005 for 2013 and $2,959 for 2012

   $ 36,786      $ 46,777   

Unrealized losses related to cash flow hedges

     (212     (15

Unrealized losses related to available for sale securities

     (103     (13
  

 

 

   

 

 

 
   $ 36,471      $ 46,749   
  

 

 

   

 

 

 

The following provides a summary of reclassifications out of accumulated other comprehensive income, net of tax for the quarter and two quarters ended July 1, 2013:

 

          Amount Reclassified from
Accumulated Other Comprehensive
Income
 
          July 1, 2013  

Details about Accumulated Other Comprehensive Income
Components

  

Statement of Operations Location

   Quarter
Ended
    Two Quarters
Ended
 
          (In thousands)  

Gain on foreign currency translation

   Gain on sale of assets    $ (14,266   $ (14,266
  

Tax

     —          —     
     

 

 

   

 

 

 
  

Net of tax

   $ (14,266   $ (14,266
     

 

 

   

 

 

 

Loss on available for sale securities

   Other, net    $ 4      $ 4   
  

Tax

     —          —     
     

 

 

   

 

 

 
  

Net of tax

   $ 4      $ 4   
     

 

 

   

 

 

 

(10) Significant Customers and Concentration of Credit Risk

In the normal course of business, the Company extends credit to its customers, which are concentrated primarily in the computer, networking, communications and aerospace/defense industries. Most customers are located outside the United States, with the exception of aerospace/defense. The Company performs ongoing credit evaluations of customers, does not require collateral and considers the credit risk profile of the entity from which the receivable is due in further evaluating collection risk.

As of July 1, 2013 and December 31, 2012, the Company’s 10 largest customers in the aggregate accounted for 55% and 54%, respectively, of total accounts receivable.

The Company’s customers include both OEMs and EMS companies. The Company’s OEM customers often direct a significant portion of their purchases through EMS companies. While the Company’s customers include both OEM and EMS providers, the Company measures customer concentration based on OEM companies, as they are the ultimate end customers.

For the quarter ended July 1, 2013 and June 25, 2012, one customer, Apple, accounted for approximately 14% and 10%, respectively, of the Company’s net sales. For the two quarters ended July 1, 2013 and June 25, 2012, one customer, Apple, accounted for approximately 14% and 12%, respectively, of the Company’s net sales.

 

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Table of Contents

TTM TECHNOLOGIES, INC.

Notes to Consolidated Condensed Financial Statements – (Continued)

 

(11) Fair Value Measures

The Company measures at fair value its financial and non-financial assets by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability.

At July 1, 2013 and December 31, 2012, the following financial assets and liabilities were measured at fair value on a recurring basis using the type of inputs shown:

 

     July 1,
2013
     Fair Value Measurements Using:  
        Level 1 Inputs      Level 2 Inputs      Level 3 Inputs  
     (In thousands)  

Money market funds

   $ 66,701       $ 66,701         —          —    

Available for sale securities

     282         282         —          —    

Foreign exchange derivative assets

     336         —        $ 336         —     

Foreign exchange derivative liabilities

     1,465         —           1,465         —     
     December 31,
2012
     Fair Value Measurements Using:  
        Level 1 Inputs      Level 2 Inputs      Level 3 Inputs  
     (In thousands)  

Money market funds

   $ 132,242       $ 132,242         —           —     

Available for sale securities

     390         390         —           —     

Foreign exchange derivative assets

     120         —         $ 120         —     

Interest rate swap derivative liabilities

     620         —           620         —     

Foreign exchange derivative liabilities

     949         —           949         —     

There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs for the quarter or two quarters ended July 1, 2013 and June 25, 2012.

(12) Commitments and Contingencies

Legal Matters

The Company is subject to various legal matters, which it considers normal for its business activities. While the Company currently believes that the amount of any reasonably possible or probable loss for known matters would not be material to the Company’s financial condition, the outcome of these actions is inherently difficult to predict. In the event of an adverse outcome, the ultimate potential loss could have a material adverse effect on the Company’s financial condition or results of operations in a particular period. The Company has accrued amounts for its loss contingencies which are probable and estimable at July 1, 2013 and December 31, 2012. However, these amounts are not material to the consolidated condensed financial statements of the Company.

Environmental Matters

The process to manufacture PCBs requires adherence to city, county, state, federal and foreign environmental regulations regarding the storage, use, handling and disposal of chemicals, solid wastes and other hazardous materials as well as air quality standards. Management believes that its facilities comply in all material respects with environmental laws and regulations. The Company has in the past received certain notices of violations and has implemented certain required minor corrective activities. There can be no assurance that violations will not occur in the future. The Company does not expect the outcome of the environmental remediation matters, either individually or in the aggregate, to have a material adverse effect on its financial position, results of operations, or cash flows.

 

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Table of Contents

TTM TECHNOLOGIES, INC.

Notes to Consolidated Condensed Financial Statements – (Continued)

 

(13) Earnings Per Share

The following is a reconciliation of the numerator and denominator used to calculate basic earnings per share and diluted earnings per share for the quarter and two quarters ended July 1, 2013 and June 25, 2012:

 

     Quarter Ended      Two Quarters Ended  
     July 1,
2013
     June 25,
2012
     July 1,
2013
     June 25,
2012
 
     (In thousands, except per share amounts)  

Net income attributable to TTM Technologies, Inc. stockholders

   $ 13,137       $ 7,410       $ 18,289       $ 20,005   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     82,595         81,895         82,373         81,661   

Dilutive effect of performance-based stock units, restricted stock units and stock options

     380         372         535         587   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted shares

     82,975         82,267         82,908         82,248   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share attributable to TTM Technologies, Inc. stockholders:

           

Basic

   $ 0.16       $ 0.09       $ 0.22       $ 0.24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.16       $ 0.09       $ 0.22       $ 0.24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Performance-based stock units, restricted stock units and stock options to purchase 2,162 and 1,819 shares of common stock, respectively, for the quarter ended July 1, 2013 and June 25, 2012, and 2,335 and 1,727 of common stock for the two quarters ended July 1, 2013 and June 25, 2012, respectively, were not considered in calculating diluted earnings per share because the options’ exercise prices or the total expected proceeds under the treasury stock method for performance-based stock units, restricted stock units or stock options was greater than the average market price of common shares during the period and, therefore, the effect would be anti-dilutive.

Additionally, for the quarter and two quarters ended July 1, 2013, the effect of 10,963 shares of common stock related to the Company’s Convertible Notes were not included in the computation of dilutive earnings per share because the conversion price of the Convertible Notes and the strike price of the warrants to purchase the Company’s common stock were greater than the average market price of common shares during the quarter, and therefore, the effect would be anti-dilutive.

(14) Stock-Based Compensation

Stock-based compensation expense is recognized in the accompanying consolidated condensed statements of operations as follows:

 

     Quarter Ended     Two Quarters Ended  
     July 1,
2013
    June 25,
2012
    July 1,
2013
    June 25,
2012
 
     (In thousands)  

Cost of goods sold

   $ 254      $ 265      $ 557      $ 576   

Selling and marketing

     335        118        697        232   

General and administrative

     1,994        2,400        3,659        4,180   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense recognized

     2,583        2,783        4,913        4,988   

Income tax benefit recognized

     (684     (691     (1,181     (1,270
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense after income taxes

   $ 1,899      $ 2,092      $ 3,732      $ 3,718   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

14


Table of Contents

TTM TECHNOLOGIES, INC.

Notes to Consolidated Condensed Financial Statements – (Continued)

 

Performance-based Restricted Stock Units

The Company maintains a long-term incentive program for executives that provides for the issuance of performance-based restricted stock units (PRUs), representing hypothetical shares of the Company’s common stock that may be issued. Under the PRU program, a target number of PRUs is awarded at the beginning of each three-year performance period. The number of shares of common stock released at the end of the performance period will range from zero to 2.4 times the target number depending on performance during the period. The performance metrics of the PRU program are based on (a) annual financial targets, which are based on revenue and EBITDA (earnings before interest, tax, depreciation, and amortization expense), each equally weighted, and (b) an overall modifier based on the Company’s total stockholder return (TSR) relative to the S&P SmallCap 600 for PRUs granted in 2011 and 2012, and, for PRUs granted in 2013, a group of peer companies selected by the Company’s compensation committee, over the three-year performance period.

The Company records stock-based compensation expense for PRU awards granted based on management’s periodic assessment of the probability of the PRU awards vesting. For the quarter and two quarters ended July 1, 2013, management determined that vesting of the PRU awards was probable. PRU activity for the two quarters ended July 1, 2013 was as follows:

 

     Shares  
     (In thousands)  

Outstanding target shares at December 31, 2012

     163   

Granted:

  

Third tranche of 2011 grant

     55   

Second tranche of 2012 grant

     71   

First tranche of 2013 grant

     127   

Change in units due to annual performance achievement

     42   

Forfeitures / cancellations

     (21
  

 

 

 

Outstanding target shares at July 1, 2013

     437   
  

 

 

 

The fair value for PRUs granted is calculated using a Monte Carlo simulation model, as the TSR modifier contains a market condition. For the quarter and two quarters ended July 1, 2013 and June 25, 2012, the following assumptions were used in determining the fair value:

 

     July  1,
20131
    June  25,
20122
 

Weighted-average fair value

   $ 6.79      $ 12.51   

Risk-free interest rate

     0.3     0.3

Dividend yield

     —          —     

Expected volatility

     49     55

Expected term in months

     25        23   

 

(1)

Reflects the weighted-averages for the third year of the three-year performance period applicable to PRUs granted in 2011, second year of the three-year performance period applicable to PRUs granted in 2012 and first year of the three-year performance period applicable to PRUs granted in 2013

(2)

Reflects the weighted-averages for the third year of the three-year performance period applicable to PRUs granted in 2010, second year of the three-year performance period applicable to PRUs granted in 2011 and first year of the three-year performance period applicable to PRUs granted in 2012

Restricted Stock Units

The Company granted 67 and 54 restricted stock units during the quarters ended July 1, 2013 and June 25, 2012, respectively, and 894 and 711 restricted stock units during the two quarters ended July 1, 2013 and June 25, 2012, respectively. The units granted have a weighted-average fair value per unit of $6.96 and $10.65 for the quarters ended July 1, 2013 and June 25, 2012, respectively, and $8.17 and $11.90 for the two quarters ended July 1, 2013 and June 25, 2012, respectively. The fair value for restricted stock units granted is based on the closing share price of the Company’s common stock on the date of grant.

Stock Options

The Company did not grant any stock option awards during the quarter or two quarters ended July 1, 2013 and June 25, 2012.

 

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TTM TECHNOLOGIES, INC.

Notes to Consolidated Condensed Financial Statements – (Continued)

 

Foreign Employee Share Awards

Prior to the Company’s acquisition from Meadville of the Asia Pacific operating segment in April 2010, there already existed a share award plan comprising of Meadville shares for the employees of the Asia Pacific operating segment. Following the acquisition, the unvested Meadville shares under the plan were converted to an equivalent amount of shares of TTM common stock plus cash. These awards vest over five tranches. Four tranches have vested as of July 1, 2013, and the remaining tranche will vest in 2014. The fair value, after adjustment for estimated forfeiture, that is attributed to post-combination service is recognized as an expense over the remaining vesting period and is included as a component of total stock-based compensation expense. At July 1, 2013 and December 31, 2012, there were approximately 16 and 32 shares in the employee share award grants outstanding, respectively.

Summary of Unrecognized Compensation Costs

The following is a summary of total unrecognized compensation costs as of July 1, 2013:

 

     Unrecognized
Stock-Based
Compensation Cost
     Remaining Weighted
Average
Recognition
Period
     (In thousands)      (years)

PRU awards

   $ 2,255       1.8

RSU awards

     11,703       1.4

Stock option awards

     156       1.0

Foreign employee share awards

     40       0.6
  

 

 

    
   $ 14,154      
  

 

 

    

(15) Segment Information

The operating segments reported below are the Company’s segments for which separate financial information is available and upon which operating results are evaluated by the chief operating decision maker to assess performance and to allocate resources. The Company manages its worldwide operations based on two geographic operating segments: 1) Asia Pacific, which consists of six PCB fabrication plants and one drilling facility, and 2) North America, which consists of seven domestic PCB fabrication plants, including a facility that provides follow-on value-added services primarily for one of the PCB fabrication plants, and one backplane assembly plant in Shanghai, China, which is managed in conjunction with the Company’s U.S. operations. Each segment operates predominantly in the same industry with production facilities that produce similar customized products for its customers and use similar means of product distribution.

 

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TTM TECHNOLOGIES, INC.

Notes to Consolidated Condensed Financial Statements – (Continued)

 

The Company evaluates segment performance based on operating segment income, which is operating income before amortization of intangibles. Interest expense and interest income are not presented by segment since they are not included in the measure of segment profitability reviewed by the chief operating decision maker. All inter-segment transactions have been eliminated.

 

 

     Quarter Ended     Two Quarters Ended  
     July 1, 2013     June 25, 2012     July 1, 2013     June 25, 2012  
     (In thousands)  

Net Sales:

        

Asia Pacific

   $ 209,631      $ 195,561      $ 412,214      $ 367,319   

North America

     129,669        132,309        253,258        262,333   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total sales

     339,300        327,870        665,472        629,652   

Inter-segment sales

     (1,279     (447     (2,059     (1,730
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 338,021      $ 327,423      $ 663,413      $ 627,922   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Segment Income:

        

Asia Pacific

   $ 23,642      $ 11,154      $ 34,767      $ 23,979   

North America

     7,032        11,076        10,889        23,972   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating segment income

     30,674        22,230        45,656        47,951   

Amortization of definite-lived intangibles

     (2,327     (4,102     (4,655     (8,018
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

     28,347        18,128        41,001        39,933   

Total other expense

     (5,290     (6,568     (10,567     (11,398
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 23,057      $ 11,560      $ 30,434      $ 28,535   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company accounts for inter-segment sales and transfers as if the sale or transfer were to third parties: at arms length and consistent with the Company’s revenue recognition policy. The inter-segment sales for the quarter and two quarters ended July 1, 2013 and June 25, 2012 are sales from the Asia Pacific operating segment to the North America operating segment.

(16) Related Party Transactions

In the normal course of business, the Company’s foreign subsidiaries purchase laminate and prepreg from related parties in which a significant shareholder of the Company holds an equity interest. The Company purchased laminate and prepeg from these related parties in the amount of $18,472 and $21,994 for the quarters ended July 1, 2013 and June 25, 2012, respectively, and $37,609 and $43,521 for the two quarters ended July 1, 2013 and June 25, 2012, respectively.

As mentioned in Note 2, the Company completed its sale of SYE during the second quarter ended July 1, 2013. The Company continues to sell PCBs to SYE. Sales to SYE for the quarter and two quarters ended July 1, 2013 were approximately $4,009. SYE will continue to be a related party as a significant shareholder of the Company holds an equity interest in the parent company of SYE.

A foreign subsidiary of the Company leases employee housing space to a related party. Additionally, the Company performs tooling and drilling services for another related party. The income for these activities was $69 and $50 for the quarters ended July 1, 2013 and June 25, 2012, respectively, and $128 and $98 for the two quarters ended July 1, 2013 and June 25, 2012, respectively.

At July 1, 2013 and December 31, 2012, the Company’s consolidated condensed balance sheet included $31,403 and $34,520, respectively, in accounts payable due to, and $7,499 and $48, respectively, in accounts receivable due from, related parties for the purchase of laminate and prepreg, sales of PCBs to SYE, and lease arrangements, as mentioned above.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated condensed financial statements and the related notes and the other financial information included in this Quarterly Report on Form 10-Q. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of specified factors, including those set forth in Item 1A “Risk Factors” of Part II below and elsewhere in this Quarterly Report on Form 10-Q and the factors in Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012.

This discussion and analysis should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our annual report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission.

OVERVIEW

We are a leading global provider of time-critical and technologically complex printed circuit board (PCB) products and backplane assemblies (PCBs populated with electronic components), which serve as the foundation of sophisticated electronic products. We provide our customers time-to-market and advanced technology products and offer a one-stop manufacturing solution to customers from engineering support to prototype development through final volume production. We serve a diversified customer base in various markets throughout the world, including manufacturers of networking/communications infrastructure products, touch screen tablets and smartphones. We also serve high-end computing, commercial aerospace/defense, and industrial/medical industries. Our customers include both original equipment manufacturers (OEMs) and electronic manufacturing services (EMS) providers.

Our Asia Pacific operating segment revenue experiences fluctuations caused in part, by seasonal patterns in the computer and cellular phone industry, which together have become a significant portion of the end markets we serve. This seasonality typically results in higher net sales in the third and fourth quarters due to end customer demand to meet fourth quarter sales of consumer electronics products.

Labor costs represent a significant portion of our total manufacturing costs. Our labor costs in the People’s Republic of China (PRC) have increased rapidly over the past several years and, in particular, the past two years, as a result of mandated increases in the minimum wage and increased compensation offered to our labor force due to the reduction of overtime hours that was implemented to meet standards required by some of our global customers. These increases in labor costs have reduced the gross and operating margins of our Asia Pacific operating segment. We believe annual labor rate increases will occur each year for the foreseeable future and may further reduce gross and operating margins in the Asia Pacific operating segment.

While our customers include both OEM and EMS companies, we measure customer concentration based on OEM companies as they are the ultimate end customers. Sales to our 10 largest OEM customers accounted for 52% and 44% of our net sales in the quarters ended July 1, 2013 and June 25, 2012, respectively. Sales to our 10 largest OEM customers accounted for 52% and 46% of our net sales for the two quarters ended July 1, 2013 and June 25, 2012, respectively.

The following table shows the percentage of our net sales attributable to each of the principal end markets we serve for the periods indicated.

 

 

     Quarter Ended     Two Quarters Ended  

End Markets(1)(3)

   July 1,
2013
    June 25,
2012
    July 1,
2013
    June 25,
2012
 

Aerospace/Defense

     16     16     16     16

Cellular Phone(2)

     17        14        17        13   

Computing/Storage/Peripherals(2)

     16        22        18        23   

Medical/Industrial/Instrumentation/Other

     8        9        8        10   

Networking/Communications

     38        32        36        32   

Other(2)

     5        7        5        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Sales to EMS companies are classified by the end markets of their OEM customers.

(2)

Smartphones are included in the Cellular Phone end market, tablet PCs are included in the Computing/Storage/Peripherals end market and other mobile devices such as e-readers are included in the Other end market.

(3)

Certain reclassifications of prior year end market percentages have been made to conform to the current year presentation. Beginning in the first quarter of 2013, we reclassified substrate PCBs, which were included in the Other end market, into the end markets that the substrate PCBs are sold into — predominantly Cellular Phone.

 

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For PCBs, we measure the time sensitivity of our products by tracking the quick-turn percentage of our work. We define quick-turn orders as those with delivery lead times of 10 days or less, which typically captures research and development, prototype, and new product introduction work, in addition to unexpected short-term demand among our customers. Generally, we quote prices after we receive the design specifications and the time and volume requirements from our customers. Our quick-turn services command a premium price as compared to standard lead-time products.

We also deliver a significant percentage of compressed lead-time work with lead times of 11 to 20 days. We typically receive a premium price for this work as well. Purchase orders may be cancelled prior to shipment. We charge customers a fee, based on percentage completed, if an order is cancelled once it has entered production. We derive revenues from the sale of PCBs and backplane assemblies using customer-supplied engineering and design plans. We recognize revenues when persuasive evidence of a sales arrangement exists, the sales terms are fixed or determinable, title and risk of loss have transferred, and collectibility is reasonably assured — generally when products are shipped to the customer. Net sales consist of gross sales less an allowance for returns, which typically has been less than 3% of gross sales. We provide our customers a limited right of return for defective PCBs and backplane assemblies. We record an estimated amount for sales returns and allowances at the time of sale based on historical information.

Cost of goods sold consists of materials, labor, outside services, and overhead expenses incurred in the manufacture and testing of our products as well as stock-based compensation expense. Many factors affect our gross margin, including capacity utilization, product mix, production volume, and yield. We generally do not participate in any significant long-term contracts with suppliers, and we believe there are a number of potential suppliers for the raw materials we use.

Selling and marketing expenses consist primarily of salaries and commissions paid to our internal sales force and independent sales representatives, salaries paid to our sales support staff, stock-based compensation expense and costs associated with marketing materials and trade shows. We generally pay higher commissions to our independent sales representatives for quick-turn work, which generally has a higher gross profit component than standard lead-time work.

General and administrative costs primarily include the salaries for executive, finance, accounting, information technology, facilities and human resources personnel, as well as insurance expenses, expenses for accounting and legal assistance, incentive compensation expense, stock-based compensation expense, bad debt expense, gains or losses on the sale or disposal of property, plant and equipment, and acquisition-related expenses.

Net loss (income) attributable to noncontrolling interest represents the portion of our operating results attributable to the noncontrolling shareholders in our Dongguan Shengyi Electronics Ltd, (SYE) and Dongguan Meadville Circuits Ltd. (DMC) operations. On June 17, 2013, we sold our controlling interest in SYE to the noncontrolling shareholder for $114.5 million. We also purchased the full noncontrolling interest in DMC from the noncontrolling shareholder for $29.4 million. As a result of these transactions, we no longer have a noncontrolling interest in our consolidated condensed financial statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated condensed financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities.

See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for further discussion of critical accounting policies and estimates. There were no material changes to our critical accounting policies and estimates since December 31, 2012.

 

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RESULTS OF OPERATIONS

There were 91 days in each of the second quarters ended July 1, 2013 and June 25, 2012, and 182 and 177 days in the two quarters ended July 1, 2013 and June 25, 2012, respectively. The following table sets forth the relationship of various items to net sales in our consolidated condensed statement of operations:

 

     Quarter Ended     Two Quarters Ended  
     July 1, 2013     June 25, 2012     July 1, 2013     June 25, 2012  

Net sales

     100.0     100.0     100.0     100.0

Cost of goods sold

     85.7        83.3        85.0        82.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     14.3        16.7        15.0        17.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Selling and marketing

     2.8        2.8        2.8        2.8   

General and administrative

     7.7        7.2        7.9        7.3   

Amortization of definite-lived intangibles

     0.7        1.2        0.8        1.2   

Gain on sale of assets

     (5.3     —          (2.7     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     5.9        11.2        8.8        11.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     8.4        5.5        6.2        6.4   

Other income (expense):

        

Interest expense

     (1.8     (1.9     (1.8     (2.1

Other, net

     0.2        (0.1     0.2        0.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (1.6     (2.0     (1.6     (1.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     6.8        3.5        4.6        4.5   

Income tax provision

     (2.7     (1.2     (1.5     (1.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     4.1        2.3        3.1        3.2   

Less: Net income attributable to noncontrolling interest

     (0.2     —          (0.3     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to TTM Technologies, Inc. stockholders

     3.9     2.3     2.8     3.2
  

 

 

   

 

 

   

 

 

   

 

 

 

We manage our worldwide operations based on two geographic operating segments: (1) Asia Pacific, which consists of six PCB fabrication plants and one drilling facility, and (2) North America, which consists of seven domestic PCB fabrication plants, including a facility that provides follow-on value-added services primarily for one of the PCB fabrication plants, and one backplane assembly plant in Shanghai, China, which is managed in conjunction with the Company’s U.S. operations. Each segment operates predominantly in the same industry with production facilities that produce similar customized products for its customers and use similar means of product distribution.

The following table compares net sales by reportable segment for the quarters and two quarters ended July 1, 2013 and June 25, 2012:

 

     Quarter Ended     Two Quarters Ended  
     July 1, 2013     June 25, 2012     July 1, 2013     June 25, 2012  
     (In thousands)  

Net Sales:

        

Asia Pacific

   $ 209,631      $ 195,561      $ 412,214      $ 367,319   

North America

     129,669        132,309        253,258        262,333   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total sales

     339,300        327,870        665,472        629,652   

Inter-segment sales

     (1,279     (447     (2,059     (1,730
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 338,021      $ 327,423      $ 663,413      $ 627,922   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Net Sales

Total net sales increased $10.6 million, or 3.2%, from $327.4 million for the second quarter of 2012 to $338.0 million for the second quarter of 2013. Net sales for the Asia Pacific segment, excluding inter-segment sales, increased $13.3 million, or 6.8%, from $195.1 million in the second quarter of 2012 to $208.4 million in the second quarter of 2013. This increase was primarily due to greater demand in our Networking/Communications end market and new customer programs in our Cellular Phone end market. The increase is also the result of an average PCB selling price increase of 12%, which was driven by increased layer count and product mix shift, partially offset by a 4% decrease in PCB shipments from the second quarter of 2012. Net sales for the North America segment decreased $2.6 million, or 2.0%, from $132.3 million in the second quarter of 2012 to $129.7 million in the second quarter of 2013. This decrease was primarily due to lower demand in our Computing/Storage/Peripherals end market, partially offset by an increase in our Networking/Communications and Aerospace/Defense end markets. This resulted in lower volume for our backplane assembly and PCB products. Demand for backplane assemblies decreased 8% and PCB sales volume decreased 11%. This was partially offset by a 13% increase in the average PCB selling price primarily due to product mix.

Total net sales increased $35.5 million, or 5.7%, from $627.9 million for the first two quarters of 2012 to $663.4 million for the first two quarters of 2013. Net sales for the Asia Pacific segment, excluding inter-segment sales, increased $44.6 million, or 12.2%, from $365.6 million in the first two quarters of 2012 to $410.2 million in the first two quarters of 2013. This increase was primarily due to new customer programs in our Cellular Phone end market and greater demand in our Networking/Communications end market, resulting in a 4% increase in PCB shipments from the first two quarters of 2012. The average PCB selling price increased by 8%, which was driven by increased layer count and product mix shift. Net sales for the North America segment decreased $9.0 million, or 3.4%, from $262.3 million in the first two quarters of 2012 to $253.3 million in the first two quarters of 2013. This decrease was primarily due to lower demand in our Computing/Storage/Peripherals and Medical/Industrial/Instrumentation end markets, partially offset by an increase in our Aerospace/Defense end market. This resulted in a 13% decline in PCB sales volume, partially offset by a 12% increase in the average PCB selling price, primarily due to product mix, and by a 3% decrease in demand for backplane assemblies from the first two quarters of 2012.

Gross Profit

Gross profit decreased $6.2 million, or 11.3%, from $54.7 million for the second quarter of 2012 to $48.5 million for the second quarter of 2013. Overall gross margin decreased from 16.7% for the second quarter of 2012 to 14.3% for the second quarter of 2013. Gross profit for the Asia Pacific segment decreased $4.3 million, or 14.2%, from $30.2 million for the second quarter of 2012 to $25.9 million for the second quarter of 2013. Gross margin decreased from 15.5% for the second quarter of 2012 to 12.4% for the second quarter of 2013 primarily due to higher labor costs, increased equipment related expenses, and a $2.0 million product quality issue, partially offset by lower direct material content. Gross profit for the North America segment decreased $1.9 million, or 7.8%, from $24.5 million for the second quarter of 2012 to $22.6 million for the second quarter of 2013. Gross margin decreased from 18.5% for the second quarter of 2012 to 17.4% for the second quarter of 2013 primarily due to higher labor expense, higher direct material content and lower cost absorption due to lower production volumes.

Gross profit decreased $12.0 million, or 10.8%, from $111.2 million for the first two quarters of 2012 to $99.2 million for the first two quarters of 2013. Overall gross margin decreased from 17.7% for the first two quarters of 2012 to 15.0% for the first two quarters of 2013. Gross profit for the Asia Pacific segment decreased $2.7 million, or 4.5%, from $60.1 million for the first two quarters of 2012 to $57.4 million for the first two quarters of 2013. Gross margin decreased from 16.4% for the first two quarters of 2012 to 14.0% for the first two quarters of 2013 primarily due to higher labor costs, increased equipment related expenses, and a $2.0 million product quality issue. Gross profit for the North America segment decreased $9.3 million, or 18.2%, from $51.1 million for the first two quarters of 2012 to $41.8 million for the first two quarters of 2013. Gross margin decreased from 19.5% for the first two quarters of 2012 to 16.5% for the first two quarters of 2013, primarily due to higher labor expense, higher direct material content and lower cost absorption due to lower production volumes.

Selling and Marketing Expenses

Selling and marketing expenses increased $0.6 million, or 6.7%, from $9.0 million for the second quarter of 2012 to $9.6 million for the second quarter of 2013. As a percentage of net sales, selling and marketing expenses were 2.8% for both of the second quarters of 2012 and 2013. Selling and marketing expenses increased $1.1 million, or 6.3%, from $17.6 million for the first two quarters of 2012 to $18.7 million for the first two quarters of 2013. As a percentage of net sales, selling and marketing expenses were 2.8% for the first two quarters of 2012 and 2013. The increase in selling and marketing expenses for the quarter and two quarters ended July 1, 2013 is primarily due to an increase in labor costs and stock-based compensation expense.

 

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General and Administrative Expense

General and administrative expenses increased $2.6 million from $23.5 million, or 7.2% of net sales, for the second quarter of 2012 to $26.1 million, or 7.7% of net sales, for the second quarter of 2013. General and administrative expenses increased $7.1 million from $45.6 million, or 7.3% of net sales, for the first two quarters of 2012 to $52.7 million, or 7.9% of net sales, for the first two quarters of 2013. The increase in expense primarily relates to higher labor costs in China and an increase in incentive compensation expense.

Other Income (Expense)

Other expense, net decreased $1.3 million from $6.6 million for the second quarter of 2012 to $5.3 million for the second quarter of 2013. The decrease in other expense, net was primarily due to a decrease in interest expense by $0.5 million, combined with a $0.9 million increase in foreign currency transaction and derivative gains. The decrease in interest expense is due to the lower notional amount and expiration of our interest rate swap in April 2013.

Other expense, net decreased $0.8 million from $11.4 million for the first two quarters of 2012 to $10.6 million for the first two quarters of 2013. The decrease in other expense, net was primarily due to a decrease in interest expense by $0.6 million, a $1.2 million increase in foreign currency transaction and derivative gains, offset by the absence of a $0.8 million realized gain on available for sale securities during 2012. The decrease in interest expense is due to the lower notional amount and expiration of our interest rate swap in April 2013.

Income Taxes

The provision for income taxes increased $5.3 million from $4.0 million for the second quarter of 2012 to $9.3 million for the second quarter of 2013. Our effective tax rate was 34.7% for the second quarter of 2012 and 40.5% for the second quarter of 2013. The increase in our effective tax rate is primarily due to the gain on sale of assets in one of our foreign operations and an increase in income earned in higher tax jurisdictions.

The provision for income taxes increased $1.4 million from $8.7 million for the two quarters of 2012 to $10.1 million for the two quarters of 2013. Our effective tax rate was 30.3% for the first two quarters of 2012 and 33.3% for the first two quarters of 2013. The increase in our effective tax rate is primarily due to the gain on sale of assets in one of our foreign operations and an increase in income earned in higher tax jurisdictions, offset by the impact of discrete tax benefits from the extension of the federal research and development credit laws, and the approval of a research and development deduction in China.

Our effective tax rate is primarily impacted by the U.S. federal income tax rate, apportioned state income tax rates, tax rates in China and Hong Kong, generation of other credits and deductions available to us, and certain non-deductible items. Certain foreign losses generated are not more likely than not to be realizable, and thus no income tax benefit has been recognized on these losses. Additionally, as of July 1, 2013 and December 31, 2012, we had net deferred income tax assets of approximately $9.4 million and $13.5 million, respectively. As of the end of the second quarter of 2013, based on our forecast for future taxable earnings, we believe it is more likely than not that we will utilize the deferred income tax assets in future periods. In the third quarter of 2013, however, a state law was enacted that will significantly reduce the carryforward period of certain tax credits. As a result, we anticipate the need to establish a valuation allowance in the third quarter of 2013 of approximately $3.6 million on our state tax credit carryforwards which will reduce the net deferred income tax assets to the amount that is more likely than not to be realized. Furthermore, an unrecognized tax benefit of approximately $0.8 million is expected to be recognized in the third quarter of 2013 due to the settlement of a tax position which had been under examination by the Internal Revenue Service.

Liquidity and Capital Resources

Our principal sources of liquidity have been cash provided by operations, and the issuance of term and revolving debt and Convertible Notes. Our principal uses of cash have been to finance capital expenditures, meet debt service requirements, fund working capital requirements and finance acquisitions. We anticipate that servicing debt, financing capital expenditures, funding working capital requirements, and acquisitions will continue to be the principal demands on our cash in the future.

As of July 1, 2013, we had net working capital of approximately $324.4 million compared to $395.7 million as of December 31, 2012. This decrease in working capital is primarily attributable to a reduction in debt and the repayment of an intercompany balance owed to SYE as of July 1, 2013.

As of July 1, 2013, we had cash and cash equivalents of approximately $230.5 million, of which approximately $107.0 million was held by our foreign subsidiaries. Of the cash and cash equivalents held by our foreign subsidiaries as of July 1, 2013, $105.4 million was located in Asia and $1.6 million was located in European countries. Cash and cash equivalents located in our Asia Pacific operating segment are expected to be used in local operations. Cash and cash equivalents located in our backplane assembly facility in Shanghai, China, as well as in Europe, which are managed in conjunction with our U.S. operations, are expected to be repatriated and will be subject to U.S. income tax. As of July 1, 2013, approximately $14.1 million of cash and cash equivalents was located in our Shanghai, China backplane assembly plant. Other than the cash and cash equivalents located in our Shanghai backplane assembly and our European locations, we do not currently expect to repatriate earnings from our foreign subsidiaries.

 

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Our 2013 capital expenditure plan is expected to total approximately $114 million (of which approximately $95 million relates to our Asia Pacific operating segment). The expenditures will fund capital equipment purchases to increase production capacity, especially for advanced HDI and substrate manufacturing, comply with increased environmental regulations, replace aging equipment, and expand our technological capabilities.

On June 17, 2013, we completed the sale of our 70.2% controlling equity interest in SYE to our noncontrolling partner, Shengyi Technology Co. Ltd. (Sytech), for 702 million Chinese RMB or $114.5 million. We recognized a gain on the sale of SYE of $17.9 million and recorded a receivable for the total consideration in the amount of $114.5 million. Consideration net of cash sold was $67.2 million. In connection with the SYE transaction, we also were required to settle an intercompany balance owed to SYE in the amount of $40.7 million, which we paid during the quarter ended July 1, 2013.

Additionally, we acquired Sytech’s 20.0% noncontrolling equity interest in DMC for 180 million Chinese RMB or $29.4 million. We recorded a payable for the purchase price amount of $29.4 million.

The total cash expected to be received in the third quarter of 2013 is approximately $80.0 million (net proceeds of $85.1 million less transaction related taxes). Both SYE and DMC manufacture conventional PCBs and are located in Dongguan, China.

Credit Agreement

We are party to a facility agreement (Credit Agreement) consisting of a $370.0 million senior secured Term Loan, a $90.0 million senior secured Revolving Loan and a secured $80.0 million Letters of Credit Facility. The Term Loan and Letters of Credit Facility will mature on September 14, 2016, and the Revolving Loan will mature on March 14, 2016. The Credit Agreement is secured by substantially all of the assets of our Asia Pacific operating segment and is senior to all our other debt, including the Convertible Notes. We have fully and unconditionally guaranteed the full and punctual payment of all obligations of the Asia Pacific operating segment under the Credit Agreement.

Borrowings under the Credit Agreement bear interest at a floating rate of LIBOR (term election by us) plus an interest margin of 2.38%. At July 1, 2013, the weighted average interest rate on the outstanding borrowings under the Credit Agreement was 2.58%.

Borrowings under the Credit Agreement are subject to certain financial and operating covenants that include maintaining maximum total leverage ratios and minimum net worth, current ratio, and interest coverage ratios for both the Company and our Asia Pacific operating segment. In addition, our Credit Agreement includes a covenant that the Principal Shareholders (as defined in the Shareholders Agreement dated April 9, 2010, as amended on September 14, 2012) will not reduce their shareholding below 15 percent of TTM’s issued shares. At July 1, 2013, we were in compliance with the covenants under the Credit Agreement.

We are required to pay a commitment fee of 0.50% per annum on any unused portion of the loan and letters of credit facility granted under the Credit Agreement. We incurred $0.1 million for the second quarter ended July 1, 2013 and $0.2 million for the two quarters ended July 1, 2013. As of July 1, 2013, the Term Loan of $370.0 million, of which $48.1 million is due for repayment in March 2014 and is included as short-term debt and $321.9 million is included as long-term debt, none of the Revolver, and $52.7 million of Letters of Credit were outstanding. Available borrowing capacity under the Revolving Loan was $90.0 million as of July 1, 2013.

Additionally, we are party to a revolving loan credit facility with a lender in the PRC. Under this arrangement, the lender has made available to us approximately $46.8 million in unsecured borrowing with all terms of the borrowing to be negotiated at the time the revolver is drawn upon. There are no commitment fees on the unused portion of the revolver and this arrangement expires in December 2013. As of July 1, 2013, the revolver had not been drawn upon.

Convertible Notes

In 2008, we issued $175.0 million of Convertible Notes. The Convertible Notes bear interest at a rate of 3.25% per annum. Interest is payable semiannually in arrears on May 15 and November 15 of each year. The Convertible Notes are senior unsecured obligations and rank equally to our future unsecured senior indebtedness and senior in right of payment to any of our future subordinated indebtedness.

Other Letters of Credit

In addition to the letters of credit obtained pursuant to the Credit Agreement, we maintain several unused letters of credit totaling $3.5 million, which expire between December 31, 2013 and February 28, 2014.

 

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Based on our current level of operations, we believe that cash generated from operations, cash on hand and cash available from borrowings under our existing credit arrangements will be adequate to meet our currently anticipated capital expenditure, debt service, working capital, and acquisition needs for the next 12 months.

Contractual Obligations and Commitments

The following table provides information on our contractual obligations as of July 1, 2013:

 

 

     Total      Less Than
1 Year
     1 - 3 Years      4 - 5 Years      After
5 Years
 
     (In thousands)  

Contractual Obligations(1)

      

Long-term debt obligations

   $ 370,010       $ 48,104       $ 192,406       $ 129,500       $ —     

Convertible debt obligations

     175,000         —           175,000         —           —     

Interest on debt obligations

     32,925         14,952         17,260         713         —     

Foreign currency forward contract liabilities

     1,465         1,461         4        —           —     

Equipment payables

     60,443         49,163         11,280         —           —     

Purchase obligations

     51,669         50,175         1,494         —           —     

Operating lease commitments

     7,546         2,337         2,953         1,586         670   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 699,058       $ 166,192       $ 400,397       $ 131,799       $ 670   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Unrecognized uncertain tax benefits of $4.5 million are not included in the table above as we have not determined when the amount will be paid.

Off Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As a result, we are not materially exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in these relationships.

Seasonality

As a result of the product and customer mix of our Asia Pacific operating segment, a portion of our revenue is subject to seasonal fluctuations. These fluctuations include seasonal patterns in the computer and cellular phone industry, which together have become a significant portion of the end markets we serve. This seasonality typically results in higher net sales in the third and fourth quarters due to end customer demand to meet fourth quarter sales of consumer electronics products. Seasonal fluctuations also include the Chinese New Year holidays in the first quarter, which typically results in lower net sales.

Impact of Inflation

We believe that our results of operations are not materially impacted by moderate changes in the inflation rate as we expect that we generally will be able to continue to pass along component price increases to our customers. Severe increases in inflation, however, could affect the global and U.S. economies and have an adverse impact on our business, financial condition and results of operations. In addition, we may not be able to pass along to our major customers significant increases in the costs of gold, copper and other commodities used in our products, which could have a material adverse impact on our gross profit margins.

Recently Issued Accounting Pronouncements

In March 2013, the Financial Accounting Standards Board (FASB) issued an update that would require a parent Company to release any related cumulative translation adjustment into net income when it ceases to have a controlling financial interest in a subsidiary, group of assets or business within a foreign entity. This update is effective for interim and annual periods beginning after December 15, 2013, with early adoption permitted. We adopted the amendment early, as permitted, on January 1, 2013, and our adoption did not have a material impact on our financial statements. See Note 2 and Note 9 to the consolidated condensed financial statements.

 

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In February 2013, the FASB issued an update that would require that an entity provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under accounting principles generally accepted in the United States of America (U.S. GAAP) to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This update does not change the current requirements for reporting net income or other comprehensive income in financial statements and is effective for interim and annual periods beginning after December 15, 2012, with early adoption permitted. We adopted the amendment on January 1, 2013, and our adoption did not have a material impact on our financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

In the normal course of business operations we are exposed to risks associated with fluctuations in interest rates and foreign currency exchange rates. We address these risks through controlled risk management that includes the use of derivative financial instruments to economically hedge or reduce these exposures. We do not enter into derivative financial instruments for trading or speculative purposes.

See Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for further discussion of market risks associated with interest rates and foreign currency exchange. Our exposure to foreign exchange risks has not changed materially since December 31, 2012.

See Liquidity and Capital Resources and Credit Agreement appearing in Item 2 of this Form 10-Q for further discussion of the Company’s financing facilities and capital structure. As of July 1, 2013, approximately 32.1% of our total debt was based on fixed rates. Based on our borrowings as of July 1, 2013, an assumed 1% change in variable rates would cause our annual interest cost to change by $3.7 million.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), together with management, evaluated the effectiveness of our disclosure controls and procedures as of July 1, 2013 pursuant to Rules 13a-15(e) of the Exchange Act of 1934, as amended (the Exchange Act). Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) were effective such that information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports, is recorded, processed, summarized and reported within the time frames specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended July 1, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our disclosure controls or our internal controls over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must acknowledge the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all issues and instances of fraud, if any, within the Company have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become a party to various legal proceedings arising in the ordinary course of our business. There can be no assurance that we will prevail in any such litigation. We believe that the amount of any reasonably possible or probable loss for known matters would not be material to our financial statements; however, the outcome of these actions is inherently difficult to predict. In the event of an adverse outcome, the ultimate potential loss could have a material adverse effect on our financial condition or results of operations and cash flows in a particular period.

Item 1A. Risk Factors

An investment in our common stock involves a high degree of risk. You should carefully consider the factors described below and in Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, in analyzing an investment in our common stock. If any of the risks in our Annual Report on Form 10-K occurs, our business, financial condition, and results of operations would likely suffer, the trading price of our common stock could fall, and you could lose all or part of the money you paid for our common stock.

In addition, the risk factors and uncertainties could cause our actual results to differ materially from those projected in our forward-looking statements, whether made in this report or the other documents we file with the SEC, or our annual or quarterly reports to stockholders, future press releases, or orally, whether in presentations, responses to questions, or otherwise.

On June 17, 2013, we completed two transactions with our minority partner, Sytech, to (i) sell our majority interest in SYE to Sytech, and (ii) acquire from Sytech its minority equity interest in DMC. Pursuant to the transfer agreement governing the sale of our majority interest in SYE, Sytech agreed to pay to us 702 million Chinese RMB, or $114.5 million, provided that Sytech may withhold from such payment an amount to cover our tax liability resulting from the sale under applicable law in the PRC. We are currently in discussions with Sytech and the local taxing authority to determine the appropriate amount of tax to be withheld. In the event the parties and the taxing authority settle on a higher amount of tax obligation than anticipated, the amount of proceeds we receive may be reduced and the gain we reported in our second quarter of 2013 results may be reduced. Additionally, if the discussions with Sytech and the local taxing authority take longer than expected to conclude, we may not receive the proceeds from the SYE transaction in the third quarter of 2013 as anticipated.

 

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Item 6. Exhibits

 

Exhibit

Number

  

Exhibits

  10.28    Equity Awards Amendment Agreement, dated April 24, 2013 by and between the Registrant and Kent Alder
  31.1    CEO Certification Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002.
  31.2    CFO Certification Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002.
  32.1    CEO Certification Pursuant to Section 906 of the Sarbanes — Oxley Act of 2002.
  32.2    CFO Certification Pursuant to Section 906 of the Sarbanes — Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Documents
101.DEF    XBRL Taxonomy Extension Definition Linkbase Documents
101.LAB    XBRL Taxonomy Extension Label Linkbase Documents
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Documents

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    

TTM Technologies, Inc.

       /s/    Kenton K. Alder        
     Kenton K. Alder

Dated: August 6, 2013

     Chief Executive Officer
       /s/    Todd B. Schull        
     Todd B. Schull

Dated: August 6, 2013

     Executive Vice President, Chief Financial Officer, Treasurer and Secretary

 

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EXHIBIT INDEX

 

Exhibit

Number

  

Exhibits

  10.28    Equity Awards Amendment Agreement, dated April 24, 2013 by and between the Registrant and Kent Alder
  31.1    CEO Certification Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002.
  31.2    CFO Certification Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002.
  32.1    CEO Certification Pursuant to Section 906 of the Sarbanes — Oxley Act of 2002.
  32.2    CFO Certification Pursuant to Section 906 of the Sarbanes — Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Documents
101.DEF    XBRL Taxonomy Extension Definition Linkbase Documents
101.LAB    XBRL Taxonomy Extension Label Linkbase Documents
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Documents

 

 

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