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TTM Technologies(TTMI) - 2020 Q3 - Quarterly Report

PART I: FINANCIAL INFORMATION This section presents the unaudited consolidated condensed financial statements, management's discussion, and market risk disclosures Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated condensed financial statements of TTM Technologies, Inc. for the quarter and three quarters ended September 30, 2019, and October 1, 2018, including balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, revenue disaggregation, debt, and other financial captions Consolidated Condensed Balance Sheets The balance sheet shows a slight increase in total assets and stockholders' equity from December 31, 2018, to September 30, 2019, driven by higher cash and accounts receivable, while total liabilities remained relatively stable | Metric (In thousands) | Sep 30, 2019 | Dec 31, 2018 | | :-------------------- | :----------- | :----------- | | Cash and cash equivalents | $316,589 | $256,360 | | Accounts receivable, net | $529,942 | $523,165 | | Total current assets | $1,277,835 | $1,206,914 | | Total assets | $3,498,358 | $3,457,503 | | Total current liabilities | $666,673 | $673,214 | | Long-term debt, net | $1,472,578 | $1,462,425 | | Total stockholders' equity | $1,247,353 | $1,227,087 | Consolidated Condensed Statements of Operations Net sales and net income decreased significantly for both the quarter and three quarters ended September 30, 2019, compared to the prior year, indicating a challenging operating environment | Metric (In thousands, except per share data) | Q3 2019 | Q3 2018 | YTD Q3 2019 | YTD Q3 2018 | | :----------------------------------------- | :----------- | :----------- | :----------- | :----------- | | Net sales | $716,817 | $755,837 | $1,970,055 | $2,136,306 | | Gross profit | $103,834 | $129,584 | $277,134 | $334,402 | | Operating income | $36,361 | $54,550 | $70,695 | $116,285 | | Net income | $15,870 | $27,001 | $16,042 | $121,102 | | Basic earnings per share | $0.15 | $0.26 | $0.15 | $1.17 | | Diluted earnings per share | $0.14 | $0.22 | $0.15 | $0.98 | Consolidated Condensed Statements of Comprehensive Income (Loss) Comprehensive income saw a notable decrease for both the quarter and three quarters ended September 30, 2019, primarily due to increased other comprehensive losses, particularly from net unrealized losses on cash flow hedges | Metric (In thousands) | Q3 2019 | Q3 2018 | YTD Q3 2019 | YTD Q3 2018 | | :-------------------- | :----------- | :----------- | :----------- | :----------- | | Net income | $15,870 | $27,001 | $16,042 | $121,102 | | Other comprehensive (loss) income, net of tax | $(2,256) | $1,157 | $(7,965) | $(1,284) | | Comprehensive income, net of tax | $13,614 | $28,158 | $8,077 | $119,818 | Consolidated Condensed Statements of Stockholders' Equity Stockholders' equity increased from December 31, 2018, to September 30, 2019, primarily due to retained earnings from net income and stock-based compensation, despite an increase in accumulated other comprehensive loss | Metric (In thousands) | Dec 31, 2018 | Sep 30, 2019 | | :-------------------- | :----------- | :----------- | | Total Stockholders' Equity | $1,227,087 | $1,247,353 | | Retained Earnings | $433,008 | $449,050 | | Accumulated Other Comprehensive Loss | $(3,920) | $(11,885) | - Stock-based compensation contributed $3,926 thousand, $3,602 thousand, and $4,662 thousand to additional paid-in capital for the periods ending April 1, July 1, and September 30, 2019, respectively18 Consolidated Condensed Statements of Cash Flows Net cash provided by operating activities significantly increased for the three quarters ended September 30, 2019, compared to the prior year, while net cash used in investing activities decreased substantially due to the absence of a major acquisition | Metric (In thousands) | YTD Q3 2019 | YTD Q3 2018 | | :-------------------- | :----------- | :----------- | | Net cash provided by operating activities | $181,789 | $121,370 | | Net cash used in investing activities | $(88,990) | $(712,521) | | Net cash (used in) provided by financing activities | $(31,649) | $391,057 | | Net increase (decrease) in cash and cash equivalents | $60,229 | $(201,374) | | Cash and cash equivalents at end of period | $316,589 | $207,952 | Notes to Consolidated Condensed Financial Statements These notes provide detailed explanations and disclosures for the consolidated condensed financial statements, covering the company's operations, significant accounting policies, recent accounting standard adoptions, revenue recognition, goodwill, intangible assets, debt, income taxes, financial instruments, customer concentrations, fair value measures, commitments, contingencies, earnings per share, stock-based compensation, segment information, related party transactions, and restructuring charges (1) Nature of Operations and Basis of Presentation TTM Technologies, Inc. is a global PCB manufacturer and designer of RF/microwave components, serving diverse markets. The financial statements are unaudited and prepared under U.S. GAAP, reflecting normal recurring adjustments. The company adopted new lease accounting standards (ASU 2016-02 and ASU 2018-11) on January 1, 2019, recognizing ROU assets and lease liabilities, with a cumulative effect adjustment to retained earnings - TTM Technologies, Inc. is a leading global printed circuit board (PCB) manufacturer, focusing on quick-turn and volume production of technologically complex PCBs, backplane assemblies, and electro-mechanical solutions (E-M Solutions), as well as a global designer and manufacturer of radio-frequency (RF) and microwave components and assemblies26 - The Company adopted the new lease standard (ASU 2016-02 and ASU 2018-11) as of January 1, 2019, utilizing the retrospective cumulative effect adjustment transition method, resulting in the recognition of $16,894 thousand in Operating lease right-of-use assets and $14,356 thousand in Operating lease liabilities on the January 1, 2019, consolidated condensed balance sheet3234 (2) Summary of Significant Accounting Policies The company's significant accounting policies include determining if an arrangement is a lease at inception, recognizing operating lease ROU assets and liabilities based on the present value of lease payments, and accounting for lease and non-lease components as a single lease component - Operating leases are included in operating lease ROU assets, other current liabilities, and operating lease liabilities on the consolidated condensed balance sheets42 - ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term, using the incremental borrowing rate when an implicit rate is not provided43 (3) Leases The company leases manufacturing plants, offices, and equipment, with operating lease costs of $2,362 thousand for Q3 2019 and $6,886 thousand for the three quarters ended September 30, 2019. As of September 30, 2019, operating lease ROU assets totaled $23,670 thousand and total operating lease liabilities were $23,891 thousand, with a weighted average remaining lease term of 4.5 years | Lease Expense Component (In thousands) | Q3 2019 | YTD Q3 2019 | | :------------------------------------- | :------ | :---------- | | Operating lease cost | $2,362 | $6,886 | | Variable lease cost | $4,675 | $6,677 | | Short-term lease cost | $369 | $750 | | Lease-Related Balance Sheet Information (In thousands) | Sep 30, 2019 | | :----------------------------------------------------- | :----------- | | Operating lease right-of-use assets | $23,670 | | Operating lease liabilities | $16,727 | | Total operating lease liabilities | $23,891 | | Weighted average remaining lease term | 4.5 years | | Weighted average discount rate | 3.96% | (4) Revenues The company's revenue is primarily recognized over time (98% for Q3 2019), with a small portion recognized at a point in time. Revenue disaggregation by end market shows Aerospace and Defense as the largest segment, with shifts in demand across various markets compared to the prior year - Revenue from products and services transferred to customers over time accounted for 98% of the Company's revenue for the quarter ended September 30, 2019, and 97% for the three quarters ended September 30, 201951 | End Market (In thousands) | Q3 2019 Total | Q3 2018 Total | YTD Q3 2019 Total | YTD Q3 2018 Total | | :------------------------ | :------------ | :------------ | :---------------- | :---------------- | | Aerospace and Defense | $171,904 | $160,189 | $512,272 | $446,360 | | Automotive | $117,952 | $115,957 | $326,571 | $388,020 | | Cellular Phone | $136,184 | $125,442 | $219,362 | $285,695 | | Computing/Storage/Peripherals | $84,501 | $108,049 | $260,709 | $307,097 | | Medical/Industrial/Instrumentation | $95,170 | $103,705 | $288,119 | $311,422 | | Networking/Communications | $94,791 | $126,912 | $312,056 | $352,277 | | Total | $716,817 | $755,837 | $1,970,055 | $2,136,306 | (5) Composition of Certain Consolidated Condensed Financial Statement Captions Inventories increased from $109,377 thousand at December 31, 2018, to $126,324 thousand at September 30, 2019, primarily driven by higher raw materials and finished goods. Property, plant and equipment, net, slightly decreased over the same period | Metric (In thousands) | Sep 30, 2019 | Dec 31, 2018 | | :-------------------- | :----------- | :----------- | | Inventories: | | | | Raw materials | $108,308 | $97,600 | | Work-in-process | $11,260 | $10,299 | | Finished goods | $6,756 | $1,478 | | Total Inventories | $126,324 | $109,377 | | Property, plant and equipment, net | $1,027,868 | $1,052,024 | (6) Goodwill Goodwill remained stable at $767,045 thousand as of September 30, 2019. The company performed a quantitative impairment analysis for its Communications and Computing and Automotive and Medical/Industrial/Instrumentation reporting units due to lower-than-anticipated results, concluding that fair value exceeded carrying value by 19% and 8%, respectively, thus no impairment was recognized | Goodwill (In thousands) | Sep 30, 2019 & Dec 31, 2018 | | :---------------------- | :-------------------------- | | Goodwill | $938,445 | | Accumulated impairment losses | $(171,400) | | Total | $767,045 | - The fair value of the Communications and Computing and Automotive and Medical/Industrial/Instrumentation reporting units exceeded their respective carrying values by 19% and 8%, respectively, as of September 30, 2019, following an impairment test triggered by lower-than-anticipated results5557 (7) Definite-lived Intangibles Definite-lived intangibles, primarily customer relationships and technology, decreased to $334,116 thousand as of September 30, 2019, from $375,923 thousand at December 31, 2018, due to ongoing amortization. Amortization expense for the three quarters ended September 30, 2019, was $41,807 thousand | Definite-lived Intangibles (In thousands) | Sep 30, 2019 Net Carrying Amount | Dec 31, 2018 Net Carrying Amount | | :---------------------------------------- | :------------------------------- | :------------------------------- | | Customer relationships | $301,501 | $80,112 (pre-acquisition) / $251,939 (acquired) | | Technology | $32,615 | $0 (pre-acquisition) / $36,155 (acquired) | | Total | $334,116 | $375,923 | - Amortization expense was $11,355 thousand for the quarter ended September 30, 2019, and $41,807 thousand for the three quarters ended September 30, 201960 (8) Long-term Debt and Letters of Credit Total long-term debt, net of discount and issuance costs, was $1,472,578 thousand as of September 30, 2019, slightly up from $1,462,425 thousand at December 31, 2018. This includes a Term Loan, Senior Notes, Convertible Senior Notes, and ABL Revolving Loans. The company amended its ABL facilities in June 2019, extending maturities and adjusting facility sizes | Debt Type (In thousands) | Sep 30, 2019 Principal Outstanding | Dec 31, 2018 Principal Outstanding | | :----------------------- | :------------------------------- | :------------------------------- | | Term Loan due Sep 2024 | $805,879 | $835,879 | | Senior Notes due Oct 2025 | $375,000 | $375,000 | | Convertible Senior Notes due Dec 2020 | $249,975 | $249,985 | | U.S. ABL Revolving Loan due Jun 2024 | $40,000 | $40,000 | | Asia ABL Revolving Loan due Jun 2024 | $30,000 | $30,000 | | Total Long-term Debt, net | $1,472,578 | $1,462,425 | - The U.S. ABL credit facility was amended to extend its maturity to June 2024, decrease the size to $150,000 thousand, and add a $100,000 thousand incremental facility71 - The Asia ABL credit facility was amended to extend maturity to June 2024 and add a $50,000 thousand incremental facility71 - Available borrowing capacity under the U.S. ABL and Asia ABL was $96,360 thousand and $95,478 thousand, respectively, as of September 30, 201974 (9) Income Taxes The effective tax rate is influenced by various factors including tax rates in China and Hong Kong, U.S. federal and state rates, and credits. For the three quarters ended September 30, 2019, the effective tax rate was impacted by a net discrete benefit of $2,067 thousand - The Company's effective tax rate is impacted by tax rates in China and Hong Kong, the U.S. federal income tax rate, apportioned state income tax rates, generation of credits and deductions, and changes in valuation allowances80 - For the three quarters ended September 30, 2019, the effective tax rate was impacted by a net discrete benefit of $2,067 thousand, related to accrued interest expense on uncertain tax positions and return to provision expense, offset by the release of uncertain tax positions81 (10) Financial Instruments The company uses interest rate swaps to hedge LIBOR-based variable rate debt and foreign currency forward contracts to mitigate foreign exchange rate risks. As of September 30, 2019, the fair value of the interest rate swap was a $14,013 thousand liability, and foreign exchange contracts had a net asset fair value of $25 thousand - The Company uses a four-year pay-fixed, receive floating (1-month LIBOR) interest rate swap with a notional amount of $400,000 thousand to hedge interest rate risk, paying a fixed rate of 2.84%84 | Derivative Instrument (In thousands) | Balance Sheet Location | Sep 30, 2019 Fair Value | Dec 31, 2018 Fair Value | | :----------------------------------- | :--------------------- | :---------------------- | :---------------------- | | Interest rate swap | Other long-term liabilities | $(14,013) | $(4,735) | | Foreign exchange contracts (net) | Prepaid expenses and other current assets / Other current liabilities | $25 | $(139) | - The interest rate swap increased interest expense by $1,308 thousand for the three quarters ended September 30, 20198589 (11) Accumulated Other Comprehensive Loss Accumulated other comprehensive loss increased significantly from $(3,920) thousand at December 31, 2018, to $(11,885) thousand at September 30, 2019, primarily due to increased losses on cash flow hedges | Component (In thousands) | Dec 31, 2018 | Sep 30, 2019 | | :----------------------- | :----------- | :----------- | | Foreign Currency Translation | $1,578 | $653 | | Pension Obligation | $(1,284) | $(1,288) | | Gains / (Losses) on Cash Flow Hedges | $(4,214) | $(11,250) | | Total | $(3,920) | $(11,885) | - The change in fair value loss, net of tax, for cash flow hedges was $(8,164) thousand for the three quarters ended September 30, 201989 (12) Significant Customers and Concentration of Credit Risk The company has significant customer concentration, with one customer accounting for approximately 20% of net sales for the quarter ended September 30, 2019, and 13% for the three quarters ended September 30, 2019 - One customer accounted for approximately 20% of the Company's net sales for the quarter ended September 30, 2019, and 13% for the three quarters ended September 30, 201995 (13) Fair Value Measures The fair value of financial instruments, including derivative liabilities and long-term debt, is determined using Level 2 inputs such as quoted market prices or discounting future cash flows with current market rates. Cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to short-term maturities | Financial Instrument (In thousands) | Sep 30, 2019 Fair Value | Dec 31, 2018 Fair Value | | :---------------------------------- | :---------------------- | :---------------------- | | Derivative liabilities, non-current | $14,013 | $4,735 | | Term Loan due Sep 2024 | $806,887 | $782,592 | | Senior Notes due Oct 2025 | $377,809 | $350,880 | | Convertible Senior Notes | $332,742 | $290,858 | | ABL Revolving Loans | $70,000 | $70,000 | - The fair value of derivative instruments and long-term debt is determined using Level 2 inputs, such as LIBOR swap rates, foreign currency exchange rates, and quoted market prices for similar debt9798 (14) Commitments and Contingencies The company is involved in various legal matters considered normal for its business. While the outcome is difficult to predict, management believes any reasonably possible loss for known matters would not be material to the financial condition - The Company believes that the amount of any reasonably possible loss for known legal matters would not be material to its financial condition, though the outcome is inherently difficult to predict103 (15) Earnings Per Share Basic earnings per share decreased to $0.15 for Q3 2019 from $0.26 for Q3 2018, and to $0.15 for the three quarters ended September 30, 2019, from $1.17 for the prior year period. Diluted EPS also saw a similar decline | Metric (In thousands, except per share amounts) | Q3 2019 | Q3 2018 | YTD Q3 2019 | YTD Q3 2018 | | :-------------------------------------------- | :------ | :------ | :---------- | :---------- | | Basic earnings per share | $0.15 | $0.26 | $0.15 | $1.17 | | Diluted earnings per share | $0.14 | $0.22 | $0.15 | $0.98 | | Basic weighted average shares | 105,492 | 103,676 | 105,092 | 103,246 | | Diluted shares | 132,412 | 136,435 | 106,065 | 134,871 | - Performance-based restricted stock units (PRUs), restricted stock units (RSUs), and stock options were excluded from diluted EPS computation if their impact was anti-dilutive104105106 (16) Stock-Based Compensation Stock-based compensation expense decreased to $4,662 thousand for Q3 2019 from $5,459 thousand for Q3 2018, and to $12,190 thousand for the three quarters ended September 30, 2019, from $14,948 thousand for the prior year period. The company maintains PRU and RSU programs, with unrecognized compensation costs totaling $26,017 thousand as of September 30, 2019 | Stock-Based Compensation Expense (In thousands) | Q3 2019 | Q3 2018 | YTD Q3 2019 | YTD Q3 2018 | | :---------------------------------------------- | :------ | :------ | :---------- | :---------- | | Cost of goods sold | $941 | $774 | $2,216 | $2,132 | | Selling and marketing | $593 | $520 | $1,455 | $1,439 | | General and administrative | $3,128 | $4,165 | $8,519 | $11,377 | | Total | $4,662 | $5,459 | $12,190 | $14,948 | | Unrecognized Compensation Costs (In thousands) | Sep 30, 2019 | | :--------------------------------------------- | :----------- | | RSU awards | $23,494 | | PRU awards | $2,252 | | Stock options | $271 | | Total | $26,017 | (17) Segment Information The company operates in two reportable segments: PCB and E-M Solutions. Both segments experienced a decrease in net sales and operating segment income for the three quarters ended September 30, 2019, compared to the prior year, with PCB being the larger segment | Segment (In thousands) | Q3 2019 Net Sales | Q3 2018 Net Sales | YTD Q3 2019 Net Sales | YTD Q3 2018 Net Sales | | :--------------------- | :---------------- | :---------------- | :-------------------- | :-------------------- | | PCB | $649,104 | $696,356 | $1,791,047 | $1,967,832 | | E-M Solutions | $67,713 | $59,481 | $179,008 | $168,474 | | Total Net Sales | $716,817 | $755,837 | $1,970,055 | $2,136,306 | | | | | | | | Segment (In thousands) | Q3 2019 Operating Segment Income | Q3 2018 Operating Segment Income | YTD Q3 2019 Operating Segment Income | YTD Q3 2018 Operating Segment Income | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------------- | :----------------------------------- | | PCB | $73,230 | $98,039 | $182,761 | $242,467 | | E-M Solutions | $3,236 | $2,205 | $5,278 | $4,741 | | Corporate | $(28,750) | $(26,920) | $(75,537) | $(86,799) | | Total Operating Segment Income | $47,716 | $73,324 | $112,502 | $160,409 | (18) Related Party Transactions The company's foreign subsidiaries purchased laminate and prepreg from related parties, in which a board member holds an equity interest, totaling $8,005 thousand for Q3 2019 and $25,234 thousand for the three quarters ended September 30, 2019 | Related Party Purchases (In thousands) | Q3 2019 | Q3 2018 | YTD Q3 2019 | YTD Q3 2018 | | :------------------------------------- | :------ | :------ | :---------- | :---------- | | Laminate and prepreg | $8,005 | $10,437 | $25,234 | $35,695 | - Accounts payable due to related parties for these purchases were $10,290 thousand as of September 30, 2019122 (19) Restructuring Charges The company incurred $52 thousand in restructuring charges for Q3 2019 and $4,442 thousand for the three quarters ended September 30, 2019, primarily for employee separation/severance costs within the PCB segment. Accrued restructuring costs totaled $1,870 thousand as of September 30, 2019 | Restructuring Costs (In thousands) | Q3 2019 Total | YTD Q3 2019 Total | | :--------------------------------- | :------------ | :---------------- | | PCB Segment | $45 | $4,258 | | Corporate | $7 | $184 | | Total | $52 | $4,442 | | Accrued Restructuring Costs (In thousands) | Dec 31, 2018 | Sep 30, 2019 | | :----------------------------------------- | :----------- | :----------- | | Accrued at period end | $3,551 | $1,870 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and results of operations, highlighting key trends, recent developments, critical accounting policies, and liquidity. It details the decrease in net sales and gross margin, changes in operating expenses, and the impact of tax provisions, while also discussing cash flow dynamics and debt compliance COMPANY OVERVIEW TTM Technologies, Inc. is a global leader in PCB manufacturing and RF/microwave components, offering comprehensive design-to-production solutions to a diverse customer base across various markets, including aerospace and defense, automotive, and communications - TTM Technologies, Inc. is a leading global printed circuit board (PCB) manufacturer and a global designer and manufacturer of radio-frequency (RF) and microwave components and assemblies126 - The company serves approximately 1,700 customers in diverse markets including aerospace and defense, automotive, smartphones, high-end computing, medical, industrial, and networking/communications126 RECENT DEVELOPMENTS The company extended the maturity of its Chinese Revolver credit facility to July 2020, providing approximately $28 million in unsecured borrowing capacity - On July 18, 2019, the company extended the maturity of its revolving loan credit facility (Chinese Revolver) with a lender in China to July 2020, making approximately $28 million in unsecured borrowing available127 FINANCIAL OVERVIEW Sales to the top ten customers accounted for 52% of net sales for Q3 2019. Revenue is primarily recognized over time (98% for Q3 2019) using the cost-to-cost method. Key end markets include Aerospace and Defense (24% of Q3 2019 net sales) and Cellular Phone (19% of Q3 2019 net sales) - Sales to the ten largest customers accounted for 52% of net sales for the quarter ended September 30, 2019, and 48% for the three quarters ended September 30, 2019128 | End Market | Q3 2019 | Q3 2018 | YTD Q3 2019 | YTD Q3 2018 | | :-------------------------- | :------ | :------ | :---------- | :---------- | | Aerospace and Defense | 24 % | 21 % | 26 % | 21 % | | Automotive | 17 | 15 | 17 | 18 | | Cellular Phone | 19 | 17 | 11 | 13 | | Computing/Storage/Peripherals | 12 | 14 | 13 | 14 | | Medical/Industrial/Instrumentation | 13 | 14 | 15 | 15 | | Networking/Communications | 13 | 17 | 16 | 17 | | Other | 2 | 2 | 2 | 2 | | Total | 100 % | 100 % | 100 % | 100 % | - Revenue is recognized progressively over time based on the cost-to-cost method for PCB and custom electronic assemblies, and at a point in time for wireless communications components132133 CRITICAL ACCOUNTING POLICIES AND ESTIMATES The company's critical accounting policies and estimates remained largely unchanged since December 31, 2018, except for estimates used in the quantitative goodwill impairment analysis. This analysis, performed due to lower-than-anticipated results in certain reporting units, confirmed that fair values exceeded carrying values, thus no impairment was recorded - No material changes to critical accounting policies and estimates since December 31, 2018, except for estimates used in the quantitative goodwill impairment analysis performed as of September 30, 2019139 - A quantitative goodwill impairment analysis was performed for the Communications and Computing ($39.3 million goodwill) and Automotive and Medical/Industrial/Instrumentation ($185.5 million goodwill) reporting units due to lower-than-anticipated results and sales declines140 - Based on discounted cash flow and market analyses, the fair value of these reporting units exceeded their respective carrying values by 19% and 8%, indicating no impairment142 RESULTS OF OPERATIONS Net sales decreased by 5.2% for Q3 2019 and 7.8% for the first three quarters of 2019, primarily due to lower demand in commercial end markets for the PCB segment. Gross margin declined to 14.5% for Q3 2019. Operating expenses saw minor changes, while other expense, net, decreased in Q3 2019 due to foreign currency gains. Income tax provision increased significantly for the first three quarters of 2019 due to the absence of a prior year valuation allowance release | Metric (as % of Net Sales) | Q3 2019 | Q3 2018 | YTD Q3 2019 | YTD Q3 2018 | | :------------------------- | :------ | :------ | :---------- | :---------- | | Net sales | 100.0 % | 100.0 % | 100.0 % | 100.0 % | | Cost of goods sold | 85.5 | 82.9 | 85.9 | 84.3 | | Gross profit | 14.5 | 17.1 | 14.1 | 15.7 | | Operating income | 5.1 | 7.1 | 3.6 | 5.4 | | Net income | 2.2 % | 3.6 % | 0.8 % | 5.7 % | - Total net sales decreased by $39.0 million (5.2%) to $716.8 million for Q3 2019 and by $166.2 million (7.8%) to $1,970.1 million for the first three quarters of 2019, primarily driven by lower demand in Networking/Communications, Computing/Storage/Peripherals, and Automotive end markets for the PCB segment145146 - Overall gross margin decreased to 14.5% for Q3 2019 (from 17.1% in Q3 2018) and to 14.1% for the first three quarters of 2019 (from 15.7% in the prior year), mainly due to lower volumes in commercially focused facilities147148 - Capacity utilization in Asia and North America PCB facilities declined in Q3 2019 compared to Q3 2018 (Asia: 71% vs 80%; North America: 57% vs 60%) due to decreased sales in commercial end markets149 - Other expense, net, decreased by $7.6 million in Q3 2019 due to higher foreign currency gains from the depreciation of the Chinese Renminbi (RMB)154 - The income tax provision increased by $57.7 million for the first three quarters of 2019, primarily due to the absence of a $74.6 million valuation allowance release in the prior year156 Liquidity and Capital Resources The company's liquidity is primarily from operations and debt. Cash flow from operating activities increased to $181.8 million for the first three quarters of 2019, while cash used in investing activities significantly decreased due to no major acquisitions. Net cash used in financing activities was $31.6 million, mainly for debt repayment. The company held $316.6 million in cash and cash equivalents, with $250.7 million held by foreign subsidiaries - Principal sources of liquidity are cash from operations, Convertible Senior Notes, Term Loan, Senior Notes, and Revolving Credit Facility borrowings158 - Cash flow provided by operating activities increased to $181.8 million for the first three quarters of 2019, up from $121.4 million in the same period in 2018, primarily due to lower investment in working capital159 - Net cash used in investing activities was $89.0 million for the first three quarters of 2019, significantly lower than $712.5 million in 2018, which included the Anaren acquisition160 - Net cash used in financing activities was $31.6 million for the first three quarters of 2019, mainly for long-term debt repayment161 - As of September 30, 2019, cash and cash equivalents totaled $316.6 million, with approximately $250.7 million held by foreign subsidiaries162 Long-term Debt and Letters of Credit As of September 30, 2019, the company had $1,472.6 million in outstanding debt and was in compliance with all covenants under its Term Loan Facility, Senior Notes Facility, and ABL Revolving Loans - Outstanding debt, net of discount and debt issuance costs, was $1,472.6 million as of September 30, 2019164 - The company was in compliance with all covenants under its Term Loan Facility, Senior Notes Facility, and ABL Revolving Loans as of September 30, 2019165 Contractual Obligations and Commitments There were no material changes to contractual obligations and commitments outside the ordinary course of business since December 31, 2018, other than those related to the adoption of the new lease accounting standard - No material changes to contractual obligations and commitments since December 31, 2018, except for changes related to the adoption of the new lease accounting standard167 Off Balance Sheet Arrangements The company does not have any material off-balance sheet arrangements or relationships with unconsolidated entities that would expose it to significant financing, liquidity, market, or credit risks - The company does not have any relationships with unconsolidated entities or financial partnerships for off-balance sheet arrangements168 Seasonality The company typically experiences higher net sales in the third and fourth quarters due to consumer electronics demand and lower sales in the first quarter due to Chinese New Year holidays - Higher net sales are historically experienced in the third and fourth quarters due to end customer demand for consumer electronics products169 - Lower net sales typically occur in the first quarter due to Chinese New Year holidays, which cause shutdowns of manufacturing facilities169 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk from variable-rate debt and foreign currency exchange rate risk, primarily with the RMB. It uses derivative financial instruments, such as interest rate swaps and foreign currency forward contracts, to manage these exposures, but cannot guarantee full offset of adverse impacts Interest rate risk The company is exposed to interest rate risk on its LIBOR-based variable rate debt. It uses a $400 million interest rate swap to fix a portion of this debt at 2.84%. A 100 basis point change in variable rates would alter annual interest cost by $4.8 million - The company's interest expense is sensitive to fluctuations in LIBOR interest rates173 - A four-year pay-fixed, receive floating (1-month LIBOR) interest rate swap with a notional amount of $400.0 million was entered into on May 15, 2018, fixing a portion of variable rate debt at 2.84%174 - As of September 30, 2019, approximately 68.3% of total debt was based on fixed rates, and a 100 basis point change in variable rates would cause an annual interest cost change of $4.8 million176 Foreign currency risks The company is exposed to foreign currency exchange rate risks, primarily with the Chinese Renminbi (RMB), affecting operational costs and balance sheet translation. It uses foreign currency forward contracts to mitigate risks related to certain machinery purchases, with a notional amount of $2.5 million as of September 30, 2019 - Primary foreign exchange exposure is to the Chinese Renminbi (RMB), affecting employee-related costs, foreign currency denominated purchases, and translation of balance sheet accounts177 - Foreign currency forward contracts are used to mitigate the impact of changes in foreign currency exchange rates, with a notional amount of approximately $2.5 million as of September 30, 2019178 Debt Instruments The company's debt instruments as of September 30, 2019, include $875.9 million in US$ Variable Rate debt and $625.0 million in US$ Fixed Rate debt, with a weighted average interest rate of 4.43% and 4.08% respectively | Debt Type | Total (In thousands) | Fair Market Value (In thousands) | Weighted Average Interest Rate | | :----------- | :------------------- | :------------------------------- | :----------------------------- | | US$ Variable Rate | $875,879 | $876,887 | 4.43% | | US$ Fixed Rate | $624,975 | $710,551 | 4.08% | | Total | $1,500,854 | $1,587,438 | | Interest Rate Swap Contracts As of September 30, 2019, the interest rate swap contracts had an average interest payout rate of 2.84% and an average interest received rate of 2.41%, resulting in a fair value loss of $14,013 thousand | Interest Rate Swap Metrics | Value | | :------------------------- | :---- | | Average interest payout rate | 2.84% | | Interest payout amount (In thousands) | $(8,612) | | Average interest received rate | 2.41% | | Interest received amount (In thousands) | $7,304 | | Fair value loss as of Sep 30, 2019 (In thousands) | $(14,013) | Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2019. The company is also continuing to implement an enterprise resource planning (ERP) system, which has led to changes in internal controls over financial reporting, but no other material changes occurred during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2019, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely182 - The company is expanding its enterprise resource planning (ERP) system, which has resulted in changes to processes, procedures, and internal controls over financial reporting, including the implementation of additional controls184 - No other changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the quarter ended September 30, 2019185 PART II: OTHER INFORMATION This section details legal proceedings, comprehensive risk factors, and a list of exhibits filed with the report Item 1. Legal Proceedings The company is subject to various legal proceedings in the ordinary course of business. While outcomes are difficult to predict, management believes any reasonably possible or probable loss for known matters would not be material to the financial statements - The company is subject to various legal proceedings arising in the ordinary course of business187 - Management believes that the amount of any reasonably possible or probable loss for known matters would not be material to the company's financial statements187 Item 1A. Risk Factors This section outlines significant risks that could materially affect the company's business, financial condition, and results of operations. These risks include those related to international operations, economic and industry-specific volatility, substantial indebtedness, potential goodwill impairment, supply chain dependencies, intense competition, technological changes, and compliance with various regulations Risks Related to our Business The company faces a wide array of business risks, including challenges from international operations (e.g., tariffs, regulatory instability), economic downturns, intense competition in the PCB market, and significant customer concentration. Other key risks involve substantial outstanding debt, potential impairment of goodwill, reliance on suppliers, the need for continuous technological adaptation, and the ability to attract and retain qualified personnel. Compliance with environmental laws, trade regulations, and the integration of acquisitions also pose material risks - The company has significant manufacturing operations and sales offices outside the United States, exposing it to risks such as tariffs, governmental controls, unstable regulatory environments, and fluctuations in local currencies190191192 - Uncertainty and adverse changes in the economy and financial markets could lead to a significant decline in demand for products and increase the cost of financing194 - The company has substantial outstanding indebtedness ($1.5 billion as of Sep 30, 2019), which could adversely impact liquidity, flexibility in obtaining additional financing, and ability to fulfill debt obligations200 - As of September 30, 2019, the consolidated balance sheet included $1,101.2 million of goodwill and definite-lived intangible assets, which are subject to impairment testing and potential non-cash charges to earnings204 - The company relies on a relatively small number of OEM customers for a large portion of its sales; one customer accounted for approximately 20% of net sales for Q3 2019212 - The PCB industry is intensely competitive, highly fragmented, and rapidly changing, leading to constant pricing pressure and potential loss of market share258268 - The company is subject to anti-corruption, anti-bribery, anti-kickback laws (e.g., FCPA), and export control laws (e.g., ITAR, EAR), with non-compliance potentially leading to fines, penalties, and reputational harm275276277 - Compliance with 'conflict minerals' rules (Dodd-Frank) results in additional costs and expenses for due diligence and potential reputational challenges if origins cannot be verified294 Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, CEO and CFO certifications (Sarbanes-Oxley Act), and Inline XBRL documents for financial data - Exhibits include the Registrant's Certificate of Incorporation and Bylaws, CEO and CFO Certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and Inline XBRL documents296 SIGNATURES The report is duly signed on November 7, 2019, by Thomas T. Edman, President and Chief Executive Officer, and Todd B. Schull, Executive Vice President and Chief Financial Officer, pursuant to the Securities Exchange Act of 1934 - The report was signed on November 7, 2019, by Thomas T. Edman (President and CEO) and Todd B. Schull (Executive Vice President and CFO)302