Workflow
TTM Technologies(TTMI) - 2021 Q1 - Quarterly Report

PART I: FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Presents TTM Technologies, Inc.'s unaudited Q1 2020 consolidated condensed financial statements, covering balance sheets, operations, comprehensive loss, equity, cash flows, and detailed notes Consolidated Condensed Balance Sheets The consolidated condensed balance sheets show a slight decrease in total assets and stockholders' equity from December 30, 2019, to March 30, 2020, while current assets increased significantly due to assets held for sale Consolidated Condensed Balance Sheets Key Metrics | Metric | March 30, 2020 (In thousands) | December 30, 2019 (In thousands) | | :----------------------------------- | :----------------------------- | :------------------------------ | | Total Assets | $3,524,118 | $3,560,933 | | Total Current Assets | $1,751,787 | $1,342,684 | | Current Assets Held for Sale | $522,974 | $67,572 | | Total Liabilities | $2,246,918 | $2,281,896 | | Total Stockholders' Equity | $1,277,200 | $1,279,037 | Consolidated Condensed Statements of Operations For the quarter ended March 30, 2020, the company reported a net loss of $1.174 million, an improvement from the $3.252 million net loss in the prior year, with net sales decreasing but income from discontinued operations providing a positive contribution Consolidated Condensed Statements of Operations Key Metrics | Metric | Quarter Ended March 30, 2020 (In thousands) | Quarter Ended April 1, 2019 (In thousands) | | :------------------------------------------ | :------------------------------------ | :----------------------------------- | | Net sales | $497,646 | $536,445 | | Gross profit | $81,342 | $98,826 | | Operating income | $16,182 | $30,116 | | Net (loss) income from continuing operations | $(3,220) | $6,238 | | Income (loss) from discontinued operations, net of income taxes | $2,046 | $(9,490) | | Net loss | $(1,174) | $(3,252) | | Basic loss per share | $(0.01) | $(0.03) | | Diluted loss per share | $(0.01) | $(0.03) | Consolidated Condensed Statements of Comprehensive Loss The company reported a comprehensive loss of $6.672 million for the quarter ended March 30, 2020, an increase from $4.153 million in the prior year, primarily driven by higher net unrealized losses on cash flow hedges and foreign currency translation adjustments Consolidated Condensed Statements of Comprehensive Loss Key Metrics | Metric | Quarter Ended March 30, 2020 (In thousands) | Quarter Ended April 1, 2019 (In thousands) | | :-------------------------------- | :------------------------------------ | :----------------------------------- | | Net loss | $(1,174) | $(3,252) | | Other comprehensive loss, net of tax | $(5,498) | $(901) | | Comprehensive loss, net of tax | $(6,672) | $(4,153) | Consolidated Condensed Statements of Stockholders' Equity Stockholders' equity slightly decreased from December 30, 2019, to March 30, 2020, primarily due to the net loss and other comprehensive loss, partially offset by stock-based compensation Consolidated Condensed Statements of Stockholders' Equity Key Metrics | Metric | December 30, 2019 (In thousands) | March 30, 2020 (In thousands) | | :-------------------------------- | :----------------------------- | :---------------------------- | | Total Stockholders' Equity | $1,279,037 | $1,277,200 | | Net loss | $(1,174) | $(1,174) | | Other comprehensive loss | $(5,498) | $(5,498) | | Stock-based compensation | $4,835 | $4,835 | Consolidated Condensed Statements of Cash Flows Net cash provided by operating activities decreased in Q1 2020 compared to Q1 2019, while investing activities shifted from a net use to a net provision of cash, largely due to a refundable deposit related to the Mobility business unit sale, and financing activities had no cash flow impact in Q1 2020 Consolidated Condensed Statements of Cash Flows Key Metrics | Metric | Quarter Ended March 30, 2020 (In thousands) | Quarter Ended April 1, 2019 (In thousands) | | :------------------------------------------ | :------------------------------------ | :----------------------------------- | | Net cash provided by operating activities | $27,913 | $36,924 | | Net cash provided by (used in) investing activities | $2,891 | $(28,446) | | Net cash used in financing activities | $— | $(30,010) | | Net increase (decrease) in cash and cash equivalents | $30,283 | $(21,141) | | Cash and cash equivalents at end of period | $361,992 | $185,228 | Notes to Consolidated Condensed Financial Statements This section provides detailed notes on TTM Technologies, Inc.'s operations, accounting policies, discontinued operations, debt, and other financial instruments, supporting the unaudited consolidated condensed financial statements (1) Nature of Operations and Basis of Presentation TTM Technologies, Inc. manufactures PCBs, backplane assemblies, E-M Solutions, and RF/microwave components for diverse markets, with Mobility reclassified as discontinued operations and R&D expenses reclassified - TTM Technologies, Inc. is a leading global PCB manufacturer, focusing on quick-turn and volume production of technologically complex PCBs, backplane assemblies, E-M Solutions, and RF/microwave components22 - The company serves diversified markets including aerospace and defense, automotive, medical, industrial, and networking/communications23 - The Mobility business unit was sold on April 17, 2020, and its results are classified as discontinued operations for all presented periods25 - Research and development expenses are now presented as a separate line item on the consolidated condensed statements of operations, previously included in general and administrative expense27 Recently Adopted and Issued Accounting Standards The company adopted ASU 2016-13 (Credit Losses) as of December 31, 2019, with no material impact, is evaluating ASU 2020-04 (Reference Rate Reform), and does not expect a material impact from ASU 2019-12 (Income Taxes) or ASU 2018-14 (Defined Benefit Plans) - Adopted ASU 2016-13 (Credit Losses) as of December 31, 2019, with no material impact on financial statements29 - Evaluating ASU 2020-04 (Reference Rate Reform) for potential impact on financial statements30 - Does not anticipate a material impact from ASU 2019-12 (Income Taxes) or ASU 2018-14 (Defined Benefit Plans)3132 (2) Discontinued Operations The Mobility business unit was sold on April 17, 2020, for a base purchase price of $550 million in cash, plus an estimated $95 million in certain accounts receivable, with its results classified as discontinued operations, shifting from a net loss in Q1 2019 to a net income in Q1 2020 - Sale of Mobility business unit completed on April 17, 2020, for a base purchase price of $550 million in cash, plus an estimated $95 million in certain accounts receivable33 - Mobility business unit results are classified as discontinued operations due to strategic shift34 (2) Discontinued Operations Key Metrics | Metric | Quarter Ended March 30, 2020 (In thousands) | Quarter Ended April 1, 2019 (In thousands) | | :------------------------------------------ | :------------------------------------ | :----------------------------------- | | Net sales | $113,174 | $83,755 | | Gross profit | $4,749 | $(10,141) | | Operating income (loss) | $1,441 | $(12,626) | | Income (loss) from discontinued operations, net of income taxes | $2,046 | $(9,490) | | Basic earnings (loss) per share | $0.02 | $(0.09) | (2) Discontinued Operations Key Metrics | Assets Held for Sale | March 30, 2020 (In thousands) | December 30, 2019 (In thousands) | | :-------------------------------- | :----------------------------- | :------------------------------ | | Total assets classified as held for sale | $522,974 | $493,169 | | Total liabilities classified as held for sale | $170,735 | $186,921 | (3) Leases The company leases manufacturing plants, offices, and equipment, with operating lease costs increasing in Q1 2020 compared to Q1 2019, and a weighted average remaining lease term of 4.2 years with a discount rate of 3.24% as of March 30, 2020 (3) Leases Key Metrics | Lease Expense Component | Quarter Ended March 30, 2020 (In thousands) | Quarter Ended April 1, 2019 (In thousands) | | :------------------------ | :------------------------------------ | :----------------------------------- | | Operating lease cost | $2,481 | $2,032 | | Variable lease cost | $106 | $159 | | Short-term lease cost | $229 | $41 | (3) Leases Key Metrics | Lease Metric | March 30, 2020 | | :-------------------------- | :------------- | | Weighted average remaining lease term | 4.2 years | | Weighted average discount rate | 3.24% | (4) Revenues The company expects to recognize 44% of its long-term contract revenue within the next twelve months, with 98% of total revenue from products and services transferred over time in Q1 2020, and Aerospace and Defense becoming the largest end market - Approximately 44% of remaining performance obligations for long-term contracts are expected to be recognized as revenue over the next twelve months44 - Revenue from products and services transferred over time accounted for 98% of total revenue for Q1 2020 (97% in Q1 2019)45 (4) Revenues Key Metrics | End Market | Q1 2020 Net Sales (In thousands) | Q1 2019 Net Sales (In thousands) | | :------------------------------ | :----------------------------- | :----------------------------- | | Aerospace and Defense | $184,451 | $164,801 | | Automotive | $68,884 | $101,358 | | Networking/Communications | $79,875 | $107,362 | | Total Net Sales | $497,646 | $536,445 | (5) Composition of Certain Consolidated Condensed Financial Statement Captions Inventories increased slightly from December 30, 2019, to March 30, 2020, primarily due to an increase in raw materials, while property, plant, and equipment, net, saw a minor decrease over the same period (5) Composition of Certain Consolidated Condensed Financial Statement Captions Key Metrics | Inventory Component | March 30, 2020 (In thousands) | December 30, 2019 (In thousands) | | :------------------ | :----------------------------- | :------------------------------ | | Raw materials | $108,770 | $97,660 | | Work-in-process | $8,709 | $10,898 | | Finished goods | $3,470 | $5,195 | | Total Inventories | $120,949 | $113,753 | (5) Composition of Certain Consolidated Condensed Financial Statement Captions Key Metrics | Property, Plant & Equipment, Net | March 30, 2020 (In thousands) | December 30, 2019 (In thousands) | | :------------------------------- | :----------------------------- | :------------------------------ | | Total Property, Plant and Equipment, net | $666,611 | $678,201 | (6) Goodwill Goodwill remained stable at $706.524 million as of March 30, 2020, with all goodwill related to the PCB reportable segment (6) Goodwill Key Metrics | Goodwill Component | March 30, 2020 (In thousands) | December 30, 2019 (In thousands) | | :----------------- | :----------------------------- | :------------------------------ | | Goodwill | $946,191 | $946,191 | | Accumulated impairment loss | $(171,400) | $(171,400) | | Goodwill in assets held for sale | $(68,267) | $(68,267) | | Total Goodwill | $706,524 | $706,524 | - All goodwill relates to the Company's PCB reportable segment49 (7) Definite-lived Intangibles Net definite-lived intangibles decreased to $314.735 million as of March 30, 2020, from $325.680 million at December 30, 2019, primarily due to amortization, with Q1 2020 amortization expense of $10.945 million (7) Definite-lived Intangibles Key Metrics | Intangible Asset | March 30, 2020 Net Carrying Amount (In thousands) | December 30, 2019 Net Carrying Amount (In thousands) | | :----------------------- | :------------------------------------------ | :------------------------------------------- | | Customer relationships | $276,635 | $284,998 | | Technology | $38,100 | $31,436 | | Acquired intangibles from acquisition in 2019 | N/A | $9,246 | | Total Definite-lived Intangibles, net | $314,735 | $325,680 | - Amortization expense was $10.945 million for the quarter ended March 30, 2020, and $17.331 million for the quarter ended April 1, 201950 (7) Definite-lived Intangibles Key Metrics | Year | Estimated Aggregate Amortization (In thousands) | | :---------------- | :------------------------------------ | | Remaining 2020 | $32,836 | | 2021 | $41,344 | | 2022 | $38,793 | | 2023 | $36,838 | | 2024 | $29,812 | | Thereafter | $135,112 | | Total | $314,735 | (8) Long-term Debt and Letters of Credit Total long-term debt, net of discount and issuance costs, was $1,229.372 million as of March 30, 2020, with the company planning to use cash proceeds from the Mobility business unit sale for debt repayment and reinvestment, and remaining in compliance with all debt covenants (8) Long-term Debt and Letters of Credit Key Metrics | Debt Type | Principal Outstanding as of March 30, 2020 (In thousands) | Interest Rate as of March 30, 2020 | | :-------------------------------- | :------------------------------------------ | :--------------------------------- | | Term Loan due September 2024 | $805,879 | 3.48% | | Senior Notes due October 2025 | $375,000 | 5.63% | | Convertible Senior Notes due December 2020 | $249,975 | 1.75% | | U.S. ABL Revolving Loan due June 2024 | $40,000 | 2.23% | | Asia ABL Revolving Loan due June 2024 | $30,000 | 2.38% | | Total Principal Outstanding | $1,500,854 | | | Long-term debt, net of discount and issuance costs | $1,229,372 | | - The Company plans to use cash proceeds from the sale of the Mobility business unit for debt repayment and reinvestment53 - The Company was in compliance with all debt covenants under the Term Loan, Senior Notes, and ABL Revolving Loans as of March 30, 20205455 (9) Income Taxes The effective tax rate is influenced by tax rates in China, Hong Kong, and the U.S., as well as credits, deductions, and valuation allowances, with a net discrete expense of $2.053 million recorded in Q1 2020 due to retroactive approval of High and New Tax Enterprise status in China and accrued interest on uncertain tax positions - Effective tax rate impacted by tax rates in China, Hong Kong, U.S. federal and state rates, credits, deductions, valuation allowances, and non-deductible items59 - Net discrete expense of $2.053 million in Q1 2020 due to retroactive approval of High and New Tax Enterprise status for two China subsidiaries and accrued interest on uncertain tax positions60 - Deferred tax liability recorded for expected repatriation of foreign subsidiary earnings to the U.S., but not for earnings being reinvested outside the U.S61 (10) Financial Instruments The company uses interest rate swaps to hedge LIBOR-based variable rate debt, with a notional amount of $400 million, and foreign currency forward contracts to mitigate foreign exchange rate risks, with the interest rate swap recorded as a $19.341 million liability as of March 30, 2020, and increasing interest expense by $1.175 million in Q1 2020 - Uses a four-year pay-fixed (2.84%), receive floating (1-month LIBOR) interest rate swap with a notional amount of $400 million to hedge interest rate risk63 - As of March 30, 2020, the fair value of the interest rate swap was a liability of $19.341 million, increasing interest expense by $1.175 million in Q1 202064 - Enters into foreign currency forward contracts to mitigate foreign currency exchange rate risks, with notional amounts of approximately $787 thousand as of March 30, 202065 (11) Accumulated Other Comprehensive Loss Accumulated other comprehensive loss increased to $15.584 million as of March 30, 2020, from $10.086 million at December 30, 2019, primarily due to other comprehensive loss before reclassifications, particularly from cash flow hedges (11) Accumulated Other Comprehensive Loss Key Metrics | Component | December 30, 2019 (In thousands) | March 30, 2020 (In thousands) | | :-------------------------------- | :----------------------------- | :---------------------------- | | Foreign Currency Translation | $1,115 | $748 | | Pension Obligation | $(1,584) | $(1,557) | | (Losses) Gains on Cash Flow Hedges | $(9,617) | $(14,775) | | Total Accumulated Other Comprehensive Loss | $(10,086) | $(15,584) | - Expects approximately $6.564 million of accumulated other comprehensive loss to be reclassified into the statement of operations, net of tax, in the next twelve months68 (12) Significant Customers and Concentration of Credit Risk The company extends credit to customers globally and performs ongoing credit evaluations, with no single customer accounting for 10% or more of net sales for the quarters ended March 30, 2020, and April 1, 2019 - No customers accounted for 10% or more of net sales for the quarters ended March 30, 2020, and April 1, 201971 - Customer concentration is measured based on OEM companies, as they are the ultimate end customers71 (13) Fair Value Measures 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, while the carrying amounts of short-term financial instruments approximate their fair values - Fair value of derivative instruments determined using pricing models based on LIBOR swap rate, foreign currency exchange rates, and other observable market data (Level 2 inputs)74 - Fair value of long-term debt estimated based on quoted market prices or discounting using current market rates for similar debt (Level 2 inputs)75 - Carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to short-term maturities76 (14) Commitments and Contingencies The company is involved in various legal matters considered normal for its business, and while the outcome is difficult to predict, any reasonably possible loss is not expected to be material to the financial condition - The company is subject to various legal matters, which are considered normal for its business activities78 - The amount of any reasonably possible loss for known matters is not expected to be material to the company's financial condition78 (15) (Loss) Earnings Per Share Basic and diluted loss per share from continuing operations was $(0.03) for Q1 2020, compared to earnings per share of $0.06 for Q1 2019, with potential common shares excluded from diluted EPS calculation in Q1 2020 due to the net loss, making their impact anti-dilutive (15) (Loss) Earnings Per Share Key Metrics | Metric | Quarter Ended March 30, 2020 | Quarter Ended April 1, 2019 | | :------------------------------------------ | :--------------------------- | :-------------------------- | | Net (loss) income | $(3,220) | $6,238 | | Basic weighted average shares | 105,686 | 104,315 | | Basic (loss) earnings per share | $(0.03) | $0.06 | | Diluted (loss) earnings per share | $(0.03) | $0.06 | - Potential shares of common stock (stock options, RSUs, PRUs, Convertible Senior Notes) were not included in diluted EPS for Q1 2020 because the company incurred a net loss, making their impact anti-dilutive8184 (16) Stock-Based Compensation Stock-based compensation expense increased to $4.835 million in Q1 2020 from $3.926 million in Q1 2019, primarily impacting general and administrative expenses, with total unrecognized compensation costs as of March 30, 2020, at $17.655 million, and a weighted average recognition period of 1.4 years for RSU awards (16) Stock-Based Compensation Key Metrics | Expense Category | Quarter Ended March 30, 2020 (In thousands) | Quarter Ended April 1, 2019 (In thousands) | | :----------------------------- | :------------------------------------ | :----------------------------------- | | Cost of goods sold | $854 | $705 | | Selling and marketing | $469 | $466 | | General and administrative | $3,512 | $2,755 | | Total Stock-based compensation expense | $4,835 | $3,926 | (16) Stock-Based Compensation Key Metrics | Award Type | Unrecognized Stock-Based Compensation Cost (In thousands) | Remaining Weighted Average Recognition Period (In years) | | :----------------- | :------------------------------------------ | :------------------------------------------------------- | | RSU awards | $16,352 | 1.4 | | PRU awards | $1,090 | 1.2 | | Stock options | $213 | 1.5 | | Total | $17,655 | | (17) Segment Information The company operates in two reportable segments: PCB and E-M Solutions, with total net sales decreasing by 7.2% in Q1 2020, driven by a 41.2% decline in E-M Solutions sales and a 3.6% decrease in PCB sales, and operating segment income also decreased, with E-M Solutions reporting a loss - The company has two reportable segments: PCB and E-M Solutions88 (17) Segment Information Key Metrics | Segment | Q1 2020 Net Sales (In thousands) | Q1 2019 Net Sales (In thousands) | | :-------------- | :----------------------------- | :----------------------------- | | PCB | $467,430 | $485,067 | | E-M Solutions | $30,216 | $51,378 | | Total net sales | $497,646 | $536,445 | (17) Segment Information Key Metrics | Segment | Q1 2020 Operating Segment Income (Loss) (In thousands) | Q1 2019 Operating Segment Income (Loss) (In thousands) | | :-------------- | :------------------------------------------ | :------------------------------------------ | | PCB | $61,626 | $70,494 | | E-M Solutions | $(4,329) | $1,179 | | Corporate | $(30,170) | $(24,226) | | Total operating segment income | $27,127 | $47,447 | (18) Related Party Transactions The company's foreign subsidiaries purchased laminate and prepreg from related parties, where a Board member holds an equity interest, totaling $6.272 million in Q1 2020 - Foreign subsidiaries purchased laminate and prepreg from related parties (where a Board member holds an equity interest) for $6.272 million in Q1 2020 and $8.312 million in Q1 201992 (19) Subsequent Events On April 17, 2020, the company completed the sale of its Mobility business unit for $550 million cash plus an estimated $95 million in accounts receivable, and on April 29, 2020, announced a restructuring of the E-M Solutions business unit, involving the discontinuation of two facilities and integration of one into PCB operations, with estimated shutdown costs of $17 million and non-cash asset impairments of $8 million - Completed the sale of its Mobility business unit on April 17, 2020, for a base purchase price of $550 million in cash, plus an estimated $95 million in accounts receivable96 - Announced restructuring of E-M Solutions business unit on April 29, 2020, discontinuing operations at two Chinese facilities (SH E-MS and SZ) and integrating one (SH BPA) into PCB operations97 - Estimated cash outlay for severance and other shutdown costs is approximately $17 million, and non-cash asset impairments are estimated at $8 million, to be incurred over the next 12 to 15 months97 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 condition and results of operations, highlighting the impact of the COVID-19 pandemic, the sale of the Mobility business unit, and the restructuring of E-M Solutions, detailing revenue and gross margin declines, changes in operating expenses, and the company's liquidity position, emphasizing the sufficiency of current resources for the next twelve months despite ongoing economic uncertainties COMPANY OVERVIEW TTM Technologies is a global leader in PCB manufacturing, offering quick-turn and volume production of complex PCBs, backplane assemblies, and RF/microwave components, providing a one-stop design, engineering, and manufacturing solution to a diverse customer base across aerospace and defense, automotive, medical, industrial, and networking/communications markets - TTM Technologies is a leading global PCB manufacturer, specializing in quick-turn and volume production of complex PCBs, backplane assemblies, and electro-mechanical solutions (E-M Solutions), as well as RF and microwave components99 - The company offers a one-stop design, engineering, and manufacturing solution to a diversified customer base of approximately 1,200 customers99 - Key markets include aerospace and defense, automotive components, medical, industrial and instrumentation, and networking/communications infrastructure products99 RECENT DEVELOPMENTS The COVID-19 pandemic caused business disruptions, particularly in China, and poses significant macroeconomic, operational, and supply chain risks, while the company completed the sale of its Mobility business unit on April 17, 2020, for $550 million cash plus $95 million in accounts receivable, and approved a restructuring plan for the E-M Solutions business unit - The COVID-19 pandemic caused business disruption in China starting January 2020 and escalated globally by March 2020, creating significant uncertainty and risks100 - Completed the sale of the Mobility business unit on April 17, 2020, for a base purchase price of $550.0 million in cash, with an estimated $95.0 million in cash from excluded accounts receivable101 - Approved a restructuring plan for the E-M Solutions business unit on April 28, 2020, discontinuing operations at two Chinese facilities (SH E-MS and SZ) and integrating SH BPA into PCB operations102 FINANCIAL OVERVIEW The Mobility business unit's results are reported as discontinued operations, with sales to the top ten customers accounting for 42% of net sales in Q1 2020, and revenue recognized primarily over time using the cost-to-cost method for custom electronic assemblies and at a point in time for wireless communication components, with detailed cost of goods sold and operating expenses - Results related to the Mobility business unit are reported as discontinued operations103 - Sales to the ten largest OEM customers accounted for 42% of net sales for Q1 2020 (41% for Q1 2019)104 FINANCIAL OVERVIEW Key Metrics | End Markets | March 30, 2020 | April 1, 2019 | | :-------------------------- | :------------- | :------------ | | Aerospace and Defense | 37 % | 31 % | | Automotive | 14 % | 19 % | | Networking/Communications | 16 % | 20 % | | Total | 100 % | 100 % | - Revenues are primarily derived from the sale of PCBs, custom electronic assemblies, and RF/microwave components, with revenue recognized progressively over time (cost-to-cost method) or at a point in time107108 CRITICAL ACCOUNTING POLICIES AND ESTIMATES The company's financial statements are prepared under U.S. GAAP, requiring management estimates and assumptions, with no material changes to critical accounting policies and estimates since December 30, 2019 - Financial statements are prepared in accordance with U.S. GAAP, requiring management estimates and assumptions113 - No material changes to critical accounting policies and estimates since December 30, 2019114 RESULTS OF OPERATIONS Net sales decreased by 7.2% to $497.6 million in Q1 2020, primarily due to a 41.2% reduction in E-M Solutions sales and a 3.6% decrease in PCB sales, with overall gross margin declining to 16.3% from 18.4%, impacted by lower volumes and additional inventory provisions, and general and administrative costs increasing due to acquisition/integration, bad debt, and consulting costs, while selling and marketing expenses decreased, resulting in a net loss from continuing operations of $(3.2) million RESULTS OF OPERATIONS Key Metrics | Metric (as % of Net Sales) | Quarter Ended March 30, 2020 | Quarter Ended April 1, 2019 | | :-------------------------------- | :--------------------------- | :-------------------------- | | Net sales | 100.0 % | 100.0 % | | Cost of goods sold | 83.7 % | 81.6 % | | Gross profit | 16.3 % | 18.4 % | | Total operating expenses | 13.0 % | 12.8 % | | Operating income | 3.3 % | 5.6 % | | Net (loss) income from continuing operations | (0.6) % | 1.2 % | - Total net sales decreased $38.8 million (7.2%) to $497.6 million in Q1 2020, driven by a $21.2 million (41.2%) decrease in E-M Solutions and a $17.6 million (3.6%) decrease in PCB sales116 - Overall gross margin decreased to 16.3% in Q1 2020 from 18.4% in Q1 2019, primarily due to lower volumes in commercially focused facilities and lower sales in E-M Solutions117 - General and administrative expenses increased $4.4 million to $34.7 million in Q1 2020, primarily due to increased acquisition/integration, bad debt, and consulting costs120 - The company recorded a net loss from continuing operations of $(3.2) million for Q1 202012 Liquidity and Capital Resources The company's primary liquidity sources are cash from operations, debt issuance, and revolving credit facilities, with cash flow from continuing operations decreasing to $6.6 million in Q1 2020, net cash used in investing activities for continuing operations at $23.9 million, and cash and cash equivalents of $361.9 million as of March 30, 2020, with $325.5 million held by foreign subsidiaries, and expects 2020 net capital expenditures to be $100-120 million, believing existing liquidity will be sufficient for the next twelve months despite ongoing economic uncertainties - Principal sources of liquidity are cash from operations, debt issuance, and borrowings under the Revolving Credit Facility125 - Cash flow provided by operating activities for continuing operations was $6.6 million in Q1 2020, down from $9.1 million in Q1 2019126 - Net cash used in investing activities for continuing operations was approximately $23.9 million in Q1 2020127 - As of March 30, 2020, cash and cash equivalents were approximately $361.9 million, with $325.5 million held by foreign subsidiaries128 - 2020 net capital expenditures and asset acquisitions are expected to be in the range of $100.0 million to $120.0 million129 - Believes existing cash resources and liquidity will be sufficient for working capital requirements for at least the next twelve months, but warns of potential impacts from COVID-19130 Long-term Debt and Letters of Credit As of March 30, 2020, total outstanding debt, net of discount and issuance costs, was $1,479.3 million, comprising Term Loan, Senior Notes, Convertible Senior Notes, and ABL Revolving Loans, with the company in compliance with all debt covenants - Outstanding debt, net of discount and debt issuance costs, was $1,479.3 million as of March 30, 2020131 - Debt includes a $805.9 million Term Loan, $369.9 million Senior Notes, $241.8 million Convertible Senior Notes, $40.0 million U.S. ABL, and $30.0 million Asia ABL131 - The company was in compliance with all covenants under its Term Loan Facility, Senior Notes Facility, and ABL Revolving Loans as of March 30, 2020132 Contractual Obligations and Commitments There were no material changes to contractual obligations and commitments outside the ordinary course of business since December 30, 2019 - No material changes to contractual obligations and commitments since December 30, 2019134 Off Balance Sheet Arrangements The company does not have relationships with unconsolidated entities or financial partnerships for off-balance sheet arrangements and does not engage in trading activities involving non-exchange traded contracts, thus not materially exposed to related risks - Does not have relationships with unconsolidated entities or financial partnerships for off-balance sheet arrangements135 - Not materially exposed to financing, liquidity, market, or credit risk from such arrangements135 Seasonality The company typically experiences seasonal fluctuations in the first quarter due to Chinese New Year holidays, leading to lower net sales from manufacturing facility shutdowns - Historically experiences seasonal fluctuations in the first quarter due to Chinese New Year holidays, resulting in lower net sales136 Recently Issued Accounting Standards Information on recently adopted and issued accounting standards, including adoption dates and expected effects, is provided in Note 1 to the Consolidated Condensed Financial Statements - Refer to Note 1 for details on recently adopted and issued accounting standards137 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate and foreign currency exchange rate risks, which it manages through derivative financial instruments like interest rate swaps and foreign currency forward contracts, monitoring these positions to ensure adequacy and effectiveness, acknowledging that hedging may not fully offset adverse impacts Interest Rate Risks The company is exposed to interest rate risk from LIBOR-based variable rate debt, with an interest rate swap with a notional amount of $400 million effectively fixing a portion of this debt, and as of March 30, 2020, 68.3% of total debt was fixed-rate, and a 100 basis point change in variable rates would alter annual interest cost by $4.7 million, with the potential phase-out of LIBOR by end of 2021 possibly requiring renegotiation of debt terms - Exposed to interest rate risk from fluctuations in LIBOR interest rates on variable rate debt142 - Entered into a four-year pay-fixed (2.84%), receive floating (1-month LIBOR) interest rate swap for $400.0 million, expiring June 1, 2022, to hedge interest rate risk143 - As of March 30, 2020, approximately 68.3% of total debt was based on fixed rates144 - A 100 basis point change in variable rates would cause annual interest cost to change by $4.7 million144 - The potential phase-out of LIBOR by the end of 2021 may require renegotiation of debt terms145 Foreign Currency Risks The company faces foreign currency risks from transactions denominated in non-functional currencies and translation adjustments, primarily with the Chinese Renminbi (RMB), using foreign currency forward contracts to mitigate these risks, with notional amounts of approximately $0.8 million as of March 30, 2020 - Exposed to foreign currency exchange rate risks from transactions in non-functional currencies and translation adjustments, primarily the Chinese Renminbi (RMB)146 - Enters into foreign currency forward contracts to mitigate the impact of changes in foreign currency exchange rates147 - Notional amount of foreign exchange contracts was approximately $0.8 million as of March 30, 2020147 Debt Instruments As of March 30, 2020, the company's debt instruments included $875.879 million in US$ Variable Rate debt and $624.975 million in US$ Fixed Rate debt, totaling $1,500.854 million in principal outstanding, with the weighted average interest rate for variable rate debt at 3.39% and for fixed rate debt at 4.08% Debt Instruments Key Metrics | Debt Type | Total Principal Outstanding (In thousands) | Fair Market Value (In thousands) | Weighted Average Interest Rate | | :---------------- | :----------------------------------- | :------------------------------- | :----------------------------- | | US$ Variable Rate | $875,879 | $776,152 | 3.39% | | US$ Fixed Rate | $624,975 | $588,196 | 4.08% | | Total | $1,500,854 | $1,364,348 | | Interest Rate Swap Contracts As of March 30, 2020, the fair value of the interest rate swap was a liability of $19.341 million, and for Q1 2020, the average interest payout rate was 2.84% ($2.871 million payout), and the average interest received rate was 2.15% ($1.696 million received) - Fair value of the interest rate swap was a liability of $19.341 million as of March 30, 2020150 Interest Rate Swap Contracts Key Metrics | Metric | Quarter Ended March 30, 2020 | | :------------------------ | :--------------------------- | | Average interest payout rate | 2.84% | | Interest payout amount | $(2,871) | | Average interest received rate | 2.15% | | Interest received amount | $1,696 | Item 4. Controls and Procedures Management, with CEO and CFO participation, evaluated the effectiveness of disclosure controls and procedures as of March 30, 2020, concluding they were effective in providing reasonable assurance for timely and accurate information disclosure, with no material changes in internal control over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 30, 2020, providing reasonable assurance for timely and accurate information disclosure - CEO and CFO concluded that disclosure controls and procedures were effective as of March 30, 2020, providing reasonable assurance for timely and accurate information disclosure151 Changes in Internal Control Over Financial Reporting There were no material changes in internal control over financial reporting during the quarter ended March 30, 2020 - No material changes in internal control over financial reporting during the quarter ended March 30, 2020153 PART II: OTHER INFORMATION Item 1. Legal Proceedings The company is involved in routine legal proceedings, and while outcomes are uncertain, any reasonably possible or probable loss is not expected to be material to its financial statements - The company is subject to various legal matters arising in the ordinary course of business156 - The amount of any reasonably possible or probable loss for known matters is not believed to be material to the financial statements156 Item 1A. Risk Factors Outlines significant risks to the company's business, financial condition, and operations, covering global pandemics, international issues, economic uncertainties, industry challenges, debt, and regulatory compliance Risks Related to our Business This section details various risks inherent to the company's business, including global pandemics, international operations, economic uncertainties, industry-specific challenges, debt, operational dependencies, and regulatory compliance issues Global pandemic and other similar risks, including without limitation, coronavirus (COVID-19), which could materially adversely af ect our business, financial condition, and results of operations Global pandemics like COVID-19 can disrupt business operations, supply chains, and demand, leading to increased costs, reduced sales, and potential lawsuits, with the duration and severity of these impacts being uncertain - Global pandemics (e.g., COVID-19) can disrupt business, supply chains, and demand, leading to increased costs, reduced sales, and potential lawsuits159161 - Impacts include failure of third parties, supply chain risks, reduced workforces, temporary business closures, reduced demand, and government restrictions161 We serve customers and have manufacturing facilities outside the United States and are subject to the risks characteristic of international operations, including recently imposed tarif s International operations, particularly in Asia and Canada, expose the company to risks such as governmental controls, unstable regulatory environments, currency fluctuations, inflation, political unrest, and increased tariffs, which could negatively impact revenue and profitability Our operations in China subject us to risks and uncertainties relating to the laws and regulations of China Operations in China are subject to risks from an evolving legal system, uncertain enforcement of laws, and potential changes in government policies, which could adversely affect foreign investors and lead to protracted litigation or non-compliance with new rules Uncertainty and adverse changes in the economy and financial markets could have an adverse impact on our business and operating results Economic uncertainty can lead to decreased demand for products, pressure to reduce prices, increased financing costs, and higher losses from bad debts, all of which could negatively impact financial performance We participate in the competitive, cyclical automotive industry, which is subject to strict quality control standards. Failure to meet quality standards may adversely af ect our business, financial condition and results of operations The company's sales to the cyclical telecommunications and automotive industries are subject to intense competition and demand fluctuations, and failure to meet strict automotive quality standards could lead to loss of customers, inability to regain business, and potential indemnification for warranty and recall costs We have pursued and intend to continue to pursue potential divestitures of assets and acquisitions of other businesses and may encounter risks associated with these activities, which could harm our business and operating results Divestitures and acquisitions carry risks such as integration difficulties, diversion of management attention, unforeseen expenses, loss of key employees or customers, insufficient revenues, and potential tax burdens or dis-synergies, with acquisitions of high-tech companies being inherently risky and potentially unsuccessful If we are unable to maintain satisfactory capacity utilization rates, our business, financial condition, and results of operations would be materially adversely af ected Maintaining satisfactory capacity utilization is crucial due to high fixed operating costs, and decreases in utilization, caused by lower demand or inability to meet customer requirements, can significantly reduce gross margins, with persistent excess capacity potentially leading to facility closures, layoffs, restructuring charges, and supply disruptions We have substantial outstanding indebtedness, and our outstanding indebtedness could adversely impact our liquidity and flexibility in obtaining additional financing, our ability to fulfill our debt obligations and our financial condition and results of operations The company has substantial debt, including Term Loan, Senior Notes, and Convertible Senior Notes, leading to significant debt service obligations, which could limit liquidity, reduce cash for operations and investments, impair future financing, increase vulnerability to economic downturns, and place the company at a competitive disadvantage, with failure to comply with restrictive covenants potentially accelerating debt repayment We have a significant amount of goodwill and other intangible assets on our consolidated condensed balance sheet. If our goodwill or other intangible assets become impaired in the future, we would be required to record a non-cash charge to earnings, which may be material and would also reduce our stockholders' equity As of March 30, 2020, the company had $1,021.3 million in goodwill and definite-lived intangible assets, and impairment of these assets, triggered by reduced future cash flow expectations or stock price decline, would result in material non-cash charges to earnings and reduced stockholders' equity We rely on suppliers and equipment manufacturers for the timely delivery of raw materials, components, equipment and spare parts used in manufacturing our PCBs and E-M Solutions. If a raw material supplier or equipment manufacturer goes bankrupt, liquidates, consolidates out of existence or fails to satisfy our product quality standards, it could harm our ability to purchase new manufacturing equipment, service the equipment we have, or timely produce our products, thereby af ecting our customer relationships The company's ability to produce products depends on timely delivery of raw materials, components, equipment, and spare parts, and supplier consolidations, bankruptcies, or quality failures can lead to adverse pricing, supply shortages, production delays, and negatively impact customer relationships and financial results Our results of operations are often subject to demand fluctuations and seasonality. With a high level of fixed operating costs, even small revenue shortfalls would decrease our gross margins Operating results fluctuate due to demand variability, seasonality (e.g., Chinese New Year), and customer inventory practices, and high fixed costs mean that unexpected revenue shortfalls can significantly decrease gross margins, with past results not necessarily indicating future performance Despite our current level of indebtedness, we and our subsidiaries may decide to incur substantially more debt. This could further exacerbate the risks to our financial condition described above The company may incur substantial additional debt, despite existing restrictions, which could intensify current debt-related risks and further strain financial condition A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital A downgrade or withdrawal of the company's non-investment grade debt rating could increase borrowing costs and limit access to additional debt financing Possible replacement of the LIBOR benchmark interest rate may have an impact on our financial condition or results of operations The planned phase-out of LIBOR by the end of 2021 could require renegotiation of capital securities and credit instruments, potentially affecting the company's cost of capital and net investment income, with uncertain future impacts We are exposed to the credit risk of some of our customers and to credit exposures in weakened markets The company faces credit risk from customers, especially during economic downturns, and from a limited number of EMS providers through which OEMs direct sales, with insolvency or inability to pay by significant customers potentially materially adversely affecting financial results We depend upon a relatively small number of OEM customers for a large portion of our sales, and a decline in sales to major customers would materially adversely af ect our business, financial condition, and results of operations A significant portion of sales comes from a small number of OEM customers (top five accounted for 28% in Q1 2020), and loss of or decline in sales to these key customers, or their inability to meet payment obligations, would materially adversely affect the business We are heavily dependent upon the worldwide electronics industry, which is characterized by economic cycles and fluctuations in product demand. A downturn in the electronics industry or prolonged global economic crisis could result in decreased demand for our manufacturing services and materially adversely af ect our business, financial condition, and results of operations The company's revenue is largely tied to the electronics industry, which is highly competitive, cyclical, and has short product life cycles, and downturns or crises in this industry can significantly decrease demand for manufacturing services, impacting financial results with low visibility into future performance Our manufacturing processes depend on the collective industry experience of our employees. If a significant number of these employees were to leave us, it could limit our ability to compete ef ectively and could materially adversely af ect our business, financial condition, and results of operations The company relies on the collective experience of its manufacturing employees, as patent protection is limited, and significant employee attrition, particularly in China, could hinder technological innovation, impact yield and costs, and reduce competitive effectiveness Changes in prices or availability of raw materials could have a material adverse ef ect on our business, financial condition, and results of operations and reduce our gross margins Fluctuations in prices or availability of raw materials (e.g., fiberglass, copper, chemicals, precious metals) and components can increase production costs and reduce gross margins, and supply limitations could impact the ability to meet customer demand, negatively affecting financial results We depend on the U.S. government for a significant portion of our business, which involves unique risks. Changes in government defense spending or regulations could have a material adverse ef ect on our business, financial condition, and results of operations A significant portion of revenue (37% in Q1 2020) comes from products ultimately sold to the U.S. government, exposing the company to risks from federal budget processes, strategic plan changes, contract terminations, and sequestration, with changes to the U.S. Munitions List potentially increasing competition from overseas manufacturers We may be unable to hire and retain suf ficient qualified personnel, and the loss of any of our key executive of icers could materially adversely af ect our business, financial condition, and results of operations Future success depends on attracting and retaining highly skilled managerial and professional personnel, especially in engineering and sales/marketing, and intense competition for these employees and the potential loss of key executive officers or acquired company management could materially harm the business Increasingly, our customers are requesting that we enter into supply agreements with them that have restrictive terms and conditions. These agreements typically include provisions that increase our financial exposure, which could result in significant costs to us Customer supply agreements often lack volume commitments but include restrictive terms that increase exposure to product liability and sales returns, and limit operational/pricing flexibility, potentially leading to higher costs and adverse impacts on cash flow and financial results We may need additional capital in the future to fund investments in our operations, refinance our indebtedness, and to maintain and grow our business, and such capital may not be available on a timely basis, on acceptable terms, or at all The capital-intensive business requires continuous investment, and if operating cash flows are insufficient, additional funds may be needed for capital expenditures, debt refinancing, and growth, with inability to secure such capital on favorable terms potentially materially adversely affecting the business The Company may experience cash flow volatility Cash flows fluctuate due to factors like client engagement types, seasonality, labor and raw material costs, product demand, billing cycles, and foreign exchange rates, and such volatility could impair the ability to meet financial obligations Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly Variable rate debt (Term Loan, ABLs) exposes the company to interest rate risk, and while an interest rate swap mitigates some risk, increases in rates would still raise debt service obligations, reducing net income and cash flows We are subject to risks of currency fluctuations The company holds cash and assets in foreign currencies, primarily RMB, exposing it to exchange rate fluctuations that can affect balance sheet values, repatriation amounts, and revenues/costs, with China's currency controls adding further risk [If we are unable to respond to rapid technological change and process development, we may not be able to compete ef ectively](index=39&type=section&id=If%20we%20are%20unable%20to%20respond%20to%20rapid%20technological%20change%20and%20process%20development,%20we%20may%20not%20be%20able%20to%20compete%20