e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
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þ
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 29, 2008
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Commission File
Number: 0-31285
TTM TECHNOLOGIES,
INC.
(Exact name of registrant as
specified in its charter)
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DELAWARE
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91-1033443
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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2630 South Harbor Boulevard, Santa Ana, California 92704
(Address of principal executive
offices)
(714) 327-3000
(Registrants 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 þ No o
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):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o (Do
not check if a smaller reporting company)
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Smaller reporting
Company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
Number of shares of common stock, $0.001 par value, of
registrant outstanding at October 31, 2008: 42,808,630
TTM
TECHNOLOGIES, INC.
As of
September 29, 2008 and December 31, 2007
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(Unaudited)
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September 29,
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December 31,
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2008
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2007
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(In thousands)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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115,470
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$
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18,681
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Short-term investments
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19,522
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Accounts receivable, net of allowances of $5,177 and $5,704,
respectively
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115,265
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118,581
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Inventories
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76,964
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65,675
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Prepaid expenses and other current assets
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4,129
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3,665
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Income taxes receivable
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2,237
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Asset held for sale
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5,000
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5,000
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Deferred income taxes
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6,089
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6,097
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Total current assets
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342,439
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219,936
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Property, plant and equipment, net of accumulated depreciation
of $91,297 and $76,135, respectively
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121,260
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123,647
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Debt issuance costs, net
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5,479
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2,195
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Goodwill
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131,187
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130,126
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Definite-lived intangibles, net
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19,314
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22,128
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Deferred income taxes
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6,151
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Deposits and other non current assets
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1,250
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766
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$
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627,080
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$
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498,798
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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48,055
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$
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53,632
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Accrued salaries, wages and benefits
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23,987
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21,601
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Current portion long-term debt
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40,000
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Other accrued expenses
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4,448
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5,864
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Total current liabilities
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76,490
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121,097
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Convertible senior notes
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175,000
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Long-term debt, less current portion
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45,000
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Deferred income taxes
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1,688
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Other long-term liabilities
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2,176
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2,419
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Total long-term liabilities
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177,176
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49,107
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Stockholders equity:
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Common stock, $0.001 par value; 100,000 shares
authorized, 42,809 and 42,380 shares issued and
outstanding, as of September 29, 2008 and December 31,
2007, respectively
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43
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42
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Additional paid-in capital
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182,540
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173,365
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Retained earnings
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187,611
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154,337
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Accumulated other comprehensive income
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3,220
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850
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Total stockholders equity
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373,414
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328,594
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$
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627,080
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$
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498,798
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See accompanying notes to consolidated condensed financial
statements.
2
TTM
TECHNOLOGIES, INC.
For the
Quarter and Three Quarters Ended September 29, 2008 and
October 1, 2007
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Quarter Ended
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Three Quarters Ended
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September 29,
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October 1,
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September 29,
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October 1,
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2008
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2007
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2008
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2007
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(Unaudited)
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(In thousands, except per share data)
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Net sales
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$
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169,019
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$
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163,079
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$
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516,065
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$
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501,992
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Cost of goods sold
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136,873
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131,834
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409,737
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406,480
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Gross profit
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32,146
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31,245
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106,328
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95,512
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Operating (income) expenses:
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Selling and marketing
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7,552
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7,101
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23,016
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22,212
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General and administrative
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8,138
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7,951
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25,168
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24,183
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Amortization of definite-lived intangibles
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951
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1,019
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2,848
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3,090
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Metal reclamation
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(3,700
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Total operating expenses
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16,641
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16,071
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47,332
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49,485
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Operating income
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15,505
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15,174
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58,996
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46,027
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Other income (expense):
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Interest expense
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(1,556
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(2,628
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(6,679
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(11,094
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Interest income
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702
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194
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1,147
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1,227
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Other, net
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(384
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127
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(1,388
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89
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Total other expense, net
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(1,238
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(2,307
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(6,920
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(9,778
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Income before income taxes
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14,267
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12,867
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52,076
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36,249
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Income tax provision
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(4,809
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(4,666
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(18,802
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(13,399
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Net income
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$
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9,458
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$
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8,201
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$
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33,274
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$
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22,850
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Basic earnings per share
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$
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0.22
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$
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0.19
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$
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0.78
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$
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0.54
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Diluted earnings per share
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$
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0.22
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$
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0.19
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$
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0.77
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$
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0.54
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See accompanying notes to consolidated condensed financial
statements.
3
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Three Quarters Ended
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September 29,
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October 1,
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2008
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2007
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(Unaudited)
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(In thousands)
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Cash flows from operating activities:
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Net income
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$
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33,274
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$
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22,850
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Depreciation of property, plant and equipment
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15,897
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17,241
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Amortization of definite-lived intangible assets
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2,936
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3,187
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Amortization of debt issuance costs
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2,466
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2,963
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Non-cash interest imputed on other long-term liabilities
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94
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91
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Excess income tax benefit from common stock options exercised
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(217
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)
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(264
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)
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Deferred income taxes
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5,399
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2,204
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Stock-based compensation
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3,861
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2,467
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Net loss (gain) on sale of property, plant and equipment
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147
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(180
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Other
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(4
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Changes in operating assets and liabilities:
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Accounts receivable, net
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4,478
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10,127
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Inventories
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(10,761
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)
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873
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Prepaid expenses and other
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(439
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)
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506
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Income taxes receivable
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2,237
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(662
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Accounts payable
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(8,416
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)
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792
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Accrued salaries, wages and benefits and other accrued expenses
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1,904
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(5,254
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Net cash provided by operating activities
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52,860
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56,937
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Cash flows from investing activities:
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Purchase of property, plant and equipment and equipment deposits
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(12,182
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(11,345
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Proceeds from sale of property, plant and equipment
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136
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1,298
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Redesignation of cash and cash equivalents to short-term
investments
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(19,522
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)
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Proceeds from redemptions of held-to-maturity short-term
investments
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11,000
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Net cash (used in) provided by investing activities
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(31,568
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953
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Cash flows from financing activities:
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Principal payments on long-term debt and capitalized leased
obligations
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(85,000
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)
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(91,705
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)
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Proceeds from the issuance of convertible senior notes
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175,000
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Proceeds from exercise of common stock options
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2,421
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1,203
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Payment of debt issuance costs
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(5,751
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)
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(223
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Proceeds from warrants
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26,197
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Payment of convertible note hedge
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(38,257
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)
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Excess income tax benefit from common stock options exercised
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217
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|
264
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Net cash provided by (used in) financing activities
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74,827
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(90,461
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Effect of foreign currency exchange rates on cash and cash
equivalents
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|
670
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226
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Net increase (decrease) in cash and cash equivalents
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96,789
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(32,345
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)
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Cash and cash equivalents at beginning of period
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18,681
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|
59,660
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Cash and cash equivalents at end of period
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$
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115,470
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$
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27,315
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Supplemental cash flow information:
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Cash paid for interest
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$
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3,169
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$
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7,546
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Cash paid for income taxes
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10,905
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11,597
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Supplemental disclosures of non-cash investing and financing
activities:
As of September 29, 2008, accrued purchases of equipment
totaled $1,964.
The Company recognized an unrealized loss on derivative
instruments of $108 and $300 net of tax, for the three
quarters ended September 29, 2008 and October 1, 2007,
respectively.
Effective January 1, 2007, the Company adopted the
provisions of Financial Account Standards Board issued
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, (FIN 48). As a result of the
implementation of FIN 48, we recognized a $338 decrease to
our liability for unrecognized tax benefits, and a corresponding
increase to our January 1, 2007 accumulated retained
earnings beginning balance.
See accompanying notes to consolidated condensed financial
statements.
4
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|
(1)
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Nature of
Operations and Basis of Presentation
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TTM Technologies, Inc. (the Company) is a manufacturer of
complex printed circuit boards used in sophisticated electronic
equipment and provides backplane and sub-system assembly
services for both standard and specialty products in defense and
commercial operations. The Company sells to a variety of
customers located both within and outside of the United States
of America. The Companys customers include both original
equipment manufacturers (OEMs) and electronic manufacturing
services (EMS) companies. The Companys OEM customers often
direct a significant portion of their purchases through EMS
companies.
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. 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 Companys 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 Companys consolidated condensed
financial statements and accompanying notes. Actual results
could differ materially from those estimates. The Company uses a
13-week fiscal quarter accounting period with the first quarter
ending on the Monday closest to April 1 and the fourth quarter
always ending on December 31. The third quarters ended
September 29, 2008 and October 1, 2007 each contained
91 days. The three quarters ended September 29, 2008
and October 1, 2007 contained 273 and 274 days,
respectively.
Certain reclassifications of prior years amounts have been
made to conform with the current year presentation.
|
|
(2)
|
Short-term
Investments
|
Short-term investments are comprised of an investment in The
Reserve Primary Fund (Primary Fund), a money market fund that
has suspended redemptions and is being liquidated. In accordance
with Statement of Financial Accounting Standards No. 115
Accounting for Certain Investments in Debt and Equity
Securities, (SFAS 115), we recorded these investments
as trading securities and at fair market value on the
Companys consolidated condensed balance sheet. These
securities, classified as trading, will be marked to market each
reporting period. Additionally, due to the uncertainty
associated with the ultimate recovery of the funds invested,
mark to market losses may be realized.
At September 29, 2008, the fair value of the Companys
investment in the Primary Fund was $19,522. The cost of this
investment was $20,101. In mid-September 2008, the net asset
value of the Primary Fund decreased below $1 per share as a
result of the Primary Funds valuing at zero its holding of
debt securities issued by Lehman Brothers Holdings, Inc., which
filed bankruptcy on September 15, 2008. Accordingly, the
Company recorded a $579 loss, included in other, net in the
Companys consolidated condensed statement of operations,
to recognize its pro rata share of the estimated loss in this
investment.
The Company has requested redemption of its investment in the
Primary Fund. The Company expects distribution to occur as the
Primary Funds assets mature or are sold. In addition, the
Primary Fund has announced that it has applied to participate in
the United States Department of Treasury Money Market
Fund Guarantee Program (Guarantee Program), participation
in which is subject to the approval of the Treasury Department.
Even if the Primary Fund is allowed to participate in the
Guarantee Program, the effect on the Companys investment
is
5
TTM
TECHNOLOGIES, INC.
Notes to
Consolidated Condensed Financial Statements
(Continued)
uncertain. Accordingly, the Company has reclassified its
investment from cash and cash equivalent to short-term
investments on the Companys consolidated condensed balance
sheet.
Subsequent to September 29, 2008, the Company received
partial distribution of its investment in the Primary Fund in
the amount of $10,210.
Inventories as of September 29, 2008 and December 31,
2007 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 29,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
27,137
|
|
|
$
|
23,386
|
|
Work-in-process
|
|
|
43,820
|
|
|
|
35,700
|
|
Finished goods
|
|
|
6,007
|
|
|
|
6,589
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
76,964
|
|
|
$
|
65,675
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
Goodwill
and Definite-lived Intangibles
|
As of September 29, 2008 goodwill by operating segment and
the components of definite-lived intangibles were as follows:
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
December 31,
|
|
|
Currency
|
|
|
September 29,
|
|
|
|
2007
|
|
|
Rate Change
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
PCB Manufacturing
|
|
$
|
117,018
|
|
|
$
|
|
|
|
$
|
117,018
|
|
Backplane Assembly
|
|
|
13,108
|
|
|
|
1,061
|
|
|
|
14,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
130,126
|
|
|
$
|
1,061
|
|
|
$
|
131,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill in the Backplane Assembly operating segment includes
the activity related to a foreign subsidiary which operates in a
currency other than the U.S. dollar and therefore reflects
a foreign currency rate change.
Definite-lived
Intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
Net
|
|
|
Average
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Currency
|
|
|
Carrying
|
|
|
Amortization
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Rate Change
|
|
|
Amount
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
(Years)
|
|
|
September 29, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic customer relationships
|
|
$
|
35,429
|
|
|
$
|
(16,458
|
)
|
|
$
|
256
|
|
|
$
|
19,227
|
|
|
|
12.0
|
|
Customer backlog
|
|
|
70
|
|
|
|
(71
|
)
|
|
|
1
|
|
|
|
|
|
|
|
0.7
|
|
Licensing agreements
|
|
|
350
|
|
|
|
(263
|
)
|
|
|
|
|
|
|
87
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,849
|
|
|
$
|
(16,792
|
)
|
|
$
|
257
|
|
|
$
|
19,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The definite-lived intangibles related to strategic customer
relationships and customer backlog include activity related to a
foreign subsidiary which operates in a currency other than the
U.S. dollar and therefore reflect a foreign currency rate
change.
6
TTM
TECHNOLOGIES, INC.
Notes to
Consolidated Condensed Financial Statements
(Continued)
Amortization expense was $981 and $1,058 for the quarter ended
September 29, 2008 and October 1, 2007, respectively,
and $2,936 and $3,187 for the three quarters ended
September 29, 2008 and October 1, 2007, 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 est. 2008
|
|
$
|
980
|
|
2009
|
|
|
3,499
|
|
2010
|
|
|
3,166
|
|
2011
|
|
|
3,019
|
|
2012
|
|
|
2,754
|
|
|
|
|
|
|
|
|
$
|
13,418
|
|
|
|
|
|
|
|
|
(5)
|
Convertible
Senior Notes
|
In May 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 will be payable semiannually in arrears on May 15 and
November 15 of each year, beginning November 15, 2008. The
Convertible Notes are senior unsecured obligations and will rank
equally to the Companys future unsecured senior
indebtedness and senior in right of payment to any of the
Companys future subordinated indebtedness. The Company
received proceeds of $169,249 after the deduction of offering
expenses of $5,751. These offering expenses are being amortized
to interest expense over the term of the Convertible Notes.
Conversion
At any time prior to November 15, 2014, holders may convert
their Convertible Notes into cash and, if applicable, into
shares of the Companys common stock based on a conversion
rate of 62.6449 shares of the Companys common stock
per $1 principal amount of Convertible Notes, subject to
adjustment, under the following circumstances: (1) during
any calendar quarter beginning after June 30, 2008 (and
only during such calendar quarter), if the last reported sale
price of our common stock for at least 20 trading days during
the 30 consecutive trading days ending on the last trading day
of the immediately preceding calendar quarter is greater than or
equal to 130% of the applicable conversion price on each
applicable trading day of such preceding calendar quarter;
(2) during the five business day period after any 10
consecutive trading day period in which the trading price per
note for each day of that 10 consecutive trading day period was
less than 98% of the product of the last reported sale price of
our common stock and the conversion rate on such day; or
(3) upon the occurrence of specified corporate transactions
described in the prospectus supplement. As of September 29,
2008, none of the conversion criteria had been met.
On or after November 15, 2014 until the close of business
on the third scheduled trading day preceding the maturity date,
holders may convert their notes at any time, regardless of the
foregoing circumstances. Upon conversion, for each $1 principal
amount of notes, the Company will pay cash for the lesser of the
conversion value or $1 and shares of our common stock, if any,
based on a daily conversion value calculated on a proportionate
basis for each day of the 60 trading day observation period.
Additionally, in the event of a fundamental change as defined in
the prospectus supplement, or other conversion rate adjustments
such as share splits or combinations, other distributions of
shares, cash or other assets to stockholders, including
self-tender transactions (Other Conversion Rate Adjustments),
the conversion rate may be modified to adjust the number of
shares per $1 principal amount of the notes.
The maximum number of shares issuable upon conversion, including
the effect of a fundamental change and subject to Other
Conversion Rate Adjustments, would be 13,978.
7
TTM
TECHNOLOGIES, INC.
Notes to
Consolidated Condensed Financial Statements
(Continued)
Note
Repurchase
The Company is not permitted to redeem the Convertible Notes at
any time prior to maturity. In the event of a fundamental change
or certain default events, as defined in the prospectus
supplement, prior to November 15, 2014, holders may require
the Company to repurchase for cash all or a portion of their
Convertible Notes at a price equal to 100% of the principal
amount, plus any accrued and unpaid interest.
Convertible
Note Hedge and Warrant Transaction
In connection with the issuance of the Convertible Notes, the
Company entered into a convertible note hedge and warrant
transaction (Call Spread Transaction), with respect to the
Companys common stock. The convertible note hedge, which
cost an aggregate $38,257 and was recorded, net of tax, as a
reduction of additional paid-in capital, consists of the
Companys option to purchase up to 10,963 common stock
shares at a price of $15.96 per share. This option expires on
May 15, 2015 and can only be executed upon the conversion
of the above mentioned Convertible Notes. Additionally, the
Company sold warrants to purchase 10,963 of the Companys
common stock at a price of $18.15. This warrant transaction
expires on August 17, 2015. The proceeds from the sale of
warrants of $26,197 was recorded as an addition to additional
paid-in capital. The Call Spread Transaction has no effect on
the terms of the Convertible Notes and reduces potential
dilution by effectively increasing the conversion price of the
Convertible Notes to $18.15 per share of the Companys
common stock.
The following table summarizes the long-term debt of the Company
as of September 29, 2008 and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
September 29,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Senior secured term loan
|
|
$
|
|
|
|
$
|
85,000
|
|
Less current maturities
|
|
|
|
|
|
|
(40,000
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
$
|
|
|
|
$
|
45,000
|
|
|
|
|
|
|
|
|
|
|
In May 2008, the Company paid in full all outstanding balances,
terminated all letter of credit arrangements and the related
interest rate swap associated with the Credit Agreement
consisting of a $200,000 senior secured term loan and a $40,000
senior secured revolving loan facility. The Company has no
further obligation or commitment related to this Credit
Agreement. Upon termination of the interest rate swap, the
Company realized a loss on settlement of $1,194 for the three
quarters ended September 29, 2008. The loss was recorded as
a component of other, net in the accompanying consolidated
condensed statements of operations. Additionally, the impact of
the interest rate swap to interest expense during the quarter
and three quarters ended September 29, 2008 was a charge of
$-0- and $331, respectively. For the quarter and three quarters
ended October 1, 2007, the Company recognized a benefit of
$23 and $66 to interest expense, respectively.
Effective January 1, 2007, the Company adopted FIN 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109. Upon adoption
of FIN 48, the Company recorded a decrease in the liability
for unrecognized tax benefits of $338 and an increase to
retained earnings of $338 representing the cumulative effect of
the change in accounting principle. No change was recorded in
the deferred income tax asset accounts. As of September 29,
2008 and December 31, 2007, unrecognized income tax
benefits totaled approximately $114 and $373, respectively. The
decrease in unrecognized tax benefits, which reduced the
effective income tax rate, was due to the lapse of statute of
limitations during the third quarter ended September 29,
2008. Of the remaining amount, approximately $114 (net of the
federal benefit on state income tax matters) carried in other
8
TTM
TECHNOLOGIES, INC.
Notes to
Consolidated Condensed Financial Statements
(Continued)
long-term
liabilities represents the amount of unrecognized tax benefits
that would, if recognized, reduce the Companys effective
income tax rate in any future periods. The Company does not
expect its unrecognized tax benefits to change significantly
over the next 12 months.
The Company and its subsidiaries are subject to
U.S. federal, state, local,
and/or
foreign income tax, and in the normal course of business its
income tax returns are subject to examination by the relevant
taxing authorities. The State of California Franchise Tax Board
has completed audits of the Companys income tax returns
for the 2000 2001 years. The State of Florida
Department of Revenue has completed audits of the Companys
income tax returns for the 2003 2005 years. As
of September 29, 2008, the 2002 2007 tax years
remain subject to examination in the U.S. federal tax,
various state tax and foreign jurisdictions.
The components of accumulated other comprehensive income
generally include foreign currency translation adjustments and
realized and unrealized gains and losses on effective cash flow
hedges. The computation of comprehensive income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Three Quarters Ended
|
|
|
|
September 29,
|
|
|
October 1,
|
|
|
September 29,
|
|
|
October 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
9,458
|
|
|
$
|
8,201
|
|
|
$
|
33,274
|
|
|
$
|
22,850
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of $108 and $117
of tax for the quarter ended September 29, 2008 and
October 1, 2007, respectively, and $1,026 and $335 for the
three quarters ended September 29, 2008 and October 1,
2007, respectively
|
|
|
163
|
|
|
|
194
|
|
|
|
1,726
|
|
|
|
559
|
|
Unrealized loss on effective cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on effective cash flow hedges net of tax benefit
of $197 for the quarter ended October 1, 2007, and $64 and
$176 for the three quarters ended September 29, 2008 and
October 1, 2007, respectively
|
|
|
|
|
|
|
(329
|
)
|
|
|
(108
|
)
|
|
|
(300
|
)
|
Less: reclassification adjustment for losses realized in net
earnings net of tax of $442 for the three quarters ended
September 29, 2008
|
|
|
|
|
|
|
|
|
|
|
752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
(329
|
)
|
|
|
644
|
|
|
|
(300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of tax
|
|
|
163
|
|
|
|
(135
|
)
|
|
|
2,370
|
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
9,621
|
|
|
$
|
8,066
|
|
|
$
|
35,644
|
|
|
$
|
23,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective January 1, 2008, the Company prospectively
implemented the provisions of Statement of Financial Accounting
Standards No. 157, Fair Value Measures,
(SFAS 157) for financial assets and financial
liabilities reported or disclosed at fair value. As permitted by
Financial Accounting Standards Board Staff Position
No. FAS 157-2,
the Company elected to defer implementation of the provisions of
SFAS 157 for non-financial assets and non-financial
liabilities until January 1, 2009, except for non-financial
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually).
SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value
measurements. The disclosures focus on the inputs used to
measure fair value.
9
TTM
TECHNOLOGIES, INC.
Notes to
Consolidated Condensed Financial Statements
(Continued)
SFAS 157 establishes the following hierarchy for
categorizing these inputs:
Level 1 Quoted market prices in active markets
for identical assets or liabilities;
Level 2 Significant other observable inputs
(e.g. quoted prices for similar items in active markets, quoted
prices for identical or similar items in markets that are not
active, inputs other than quoted prices that are observable such
as interest rate and yield curves, and market-corroborated
inputs); and
Level 3 Significant unobservable inputs.
At September 29, 2008, the following financial asset was
measured at fair value on a recurring basis using the type of
inputs shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29,
|
|
|
Fair Value Measurements Using:
|
|
|
|
2008
|
|
|
Level 1 Inputs
|
|
|
Level 2 Inputs
|
|
|
Level 3 Inputs
|
|
|
|
(In thousands)
|
|
|
Short-term Investments
|
|
$
|
19,522
|
|
|
|
|
|
|
|
|
|
|
$
|
19,522
|
|
|
|
|
|
|
Fair Value Measurement using Significant Unobservable Inputs
(Level 3)
|
|
|
|
|
|
(In thousands)
|
|
|
Beginning balance at December 31, 2007
|
|
$
|
|
|
Transfers to level 3
|
|
|
20,101
|
|
Changes in fair value included in earnings
|
|
|
(579
|
)
|
|
|
|
|
|
Ending balance at September 29, 2008
|
|
$
|
19,522
|
|
|
|
|
|
|
Losses included in earnings attributable to change in unrealized
losses relating to assets still held at September 29, 2008
|
|
$
|
(579
|
)
|
|
|
|
|
|
|
|
(10)
|
Commitments
and Contingencies
|
Legal
Matters
Prior to the Companys acquisition of Tyco Printed Circuit
Group (PCG) in October 2006, PCG made legal commitments to the
U.S. Environmental Protection Agency (U.S. EPA) and
the State of Connecticut regarding settlement of enforcement
actions against the PCG operations in Connecticut. On
August 17, 2004, PCG was sentenced for Clean Water Act
violations and was ordered to pay a $6,000 fine and an
additional $3,700 to fund environmental projects designed to
improve the environment for Connecticut residents. In September
2004, PCG agreed to a stipulated judgment with the Connecticut
Attorney Generals office and the Connecticut Department of
Environmental Protection (DEP) under which PCG paid a $2,000
civil penalty and agreed to implement capital improvements of
$2,400 to reduce the volume of rinse water discharged from its
manufacturing facilities in Connecticut. The obligations to the
U.S. EPA include the fulfillment of a Compliance Management
Plan until at least July 2009. The obligations to Connecticut
DEP include the installation of rinse water recycling systems at
the Stafford, Connecticut, facilities. As of September 29,
2008, one recycling system was complete and placed into
operation, and approximately $480 remains to be expended in the
form of capital improvements to meet the second rinse water
recycling system requirement. The Company has assumed these
legal commitments as part of its purchase of PCG. Failure to
meet either commitment could result in further costly
enforcement actions, including exclusion from participation in
federal contracts.
The Company is subject to various other legal matters, which it
considers normal for its business activities. While the Company
currently believes that the amount of any ultimate potential
loss for known matters would not be material to the
Companys 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 Companys
10
TTM
TECHNOLOGIES, INC.
Notes to
Consolidated Condensed Financial Statements
(Continued)
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
September 29, 2008 and December 31, 2007.
Environmental
Matters
The process to manufacture printed circuit boards requires
adherence to city, county, state and federal 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 been required to engage in certain
minor corrective activities. There can be no assurance that
violations will not occur in the future.
The Company is involved in various stages of investigation and
cleanup related to environmental remediation matters at two
Connecticut sites, and the ultimate cost of site cleanup is
difficult to predict given the uncertainties regarding the
extent of the required cleanup, the interpretation of applicable
laws and regulations, and alternative cleanup methods. The
Company has also investigated a third Connecticut site as a
result of the PCG acquisition under Connecticuts Land
Transfer Act. The Company concluded that it was probable that it
would incur remedial costs of approximately $862 and $879 as of
September 29, 2008 and December 31, 2007,
respectively, the liability for which is included in other
long-term liabilities. This accrual was discounted at 8% per
annum based on the Companys best estimate of the
liability, which the Company estimated as ranging from $839 to
$1,274 on an undiscounted basis. The liabilities recorded do not
take into account any claims for recoveries from insurance or
third parties and none are estimated. These costs are mostly
comprised of estimated consulting costs to evaluate potential
remediation requirements, completion of the remediation, and
monitoring of results achieved. As of September 29, 2008,
the Company anticipates paying these costs ratably over the next
12 to 84 months, which timeframes vary by site. Subject to
the imprecision in estimating future environmental remediation
costs, 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.
Standby
Letter of Credit
The Company maintains a $1,000 standby letter of credit related
to the lease of one of its production facilities. The standby
letter of credit expires on May 1, 2009.
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 three quarters
ended September 29, 2008 and October 1, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Three Quarters Ended
|
|
|
|
September 29,
|
|
|
October 1,
|
|
|
September 29,
|
|
|
October 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net income
|
|
$
|
9,458
|
|
|
$
|
8,201
|
|
|
$
|
33,274
|
|
|
$
|
22,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares issued
|
|
|
42,805
|
|
|
|
42,260
|
|
|
|
42,637
|
|
|
|
42,203
|
|
Dilutive effect of options
|
|
|
377
|
|
|
|
365
|
|
|
|
362
|
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
43,182
|
|
|
|
42,625
|
|
|
|
42,999
|
|
|
|
42,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
|
$
|
0.19
|
|
|
$
|
0.78
|
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
|
|
$
|
0.22
|
|
|
$
|
0.19
|
|
|
$
|
0.77
|
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
TTM
TECHNOLOGIES, INC.
Notes to
Consolidated Condensed Financial Statements
(Continued)
Stock options and restricted stock units to purchase 1,532 and
1,661 shares of common stock for the quarter ended
September 29, 2008 and October 1, 2007, respectively,
and 1,848 and 2,014 shares of common stock for the three
quarters ended September 29, 2008 and October 1, 2007,
respectively, were not considered in calculating diluted
earnings per share because the effect would be anti-dilutive.
Additionally, for the quarter and three quarters ended
September 29, 2008, the effect of 10,963 shares of
common stock related to the Companys Convertible Notes and
the effect of 21,926 of warrants to purchase shares of the
Companys common stock were not included in the computation
of dilutive earnings per share because the conversion or
purchase criteria had not been met as of September 29, 2008.
|
|
(12)
|
Stock-Based
Compensation
|
For the quarters ended September 29, 2008 and
October 1, 2007, the Company recorded $961 and $638,
respectively, of stock-based compensation expense, net of tax.
For the three quarters ended September 29, 2008 and
October 1, 2007, the Company recorded $2,522 and $1,768,
respectively, of stock-based compensation expense, net of tax.
Stock-based compensation expense is recognized in the
accompanying consolidated condensed statements of operations as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Three Quarters Ended
|
|
|
|
September 29,
|
|
|
October 1,
|
|
|
September 29,
|
|
|
October 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cost of goods sold
|
|
$
|
388
|
|
|
$
|
258
|
|
|
$
|
1,011
|
|
|
$
|
700
|
|
Selling and marketing
|
|
|
116
|
|
|
|
55
|
|
|
|
307
|
|
|
|
153
|
|
General and administrative
|
|
|
888
|
|
|
|
609
|
|
|
|
2,543
|
|
|
|
1,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense recognized
|
|
|
1,392
|
|
|
|
922
|
|
|
|
3,861
|
|
|
|
2,467
|
|
Income tax benefit recognized
|
|
|
(431
|
)
|
|
|
(284
|
)
|
|
|
(1,339
|
)
|
|
|
(699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense after income taxes
|
|
$
|
961
|
|
|
$
|
638
|
|
|
$
|
2,522
|
|
|
$
|
1,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company did not grant any stock option awards during the
quarter ended September 29, 2008 and granted 110 stock
option awards during the three quarters ended September 29,
2008 with an estimated weighted average fair value per share
option of $6.81. No stock options were granted by the Company
for the quarter and three quarters ended October 1, 2007.
The fair value for stock options granted is calculated using the
Black-Scholes option-pricing model on the date of grant. For the
three quarters ended September 29, 2008 the following
assumptions were used in determining the fair value:
|
|
|
|
|
Risk-free interest rate
|
|
|
2.9
|
%
|
Dividend yield
|
|
|
|
%
|
Expected volatility
|
|
|
69
|
%
|
Expected term in months
|
|
|
66
|
|
The Company determines the expected term of its stock option
awards separately for employees and directors based on a
periodic review of its historical stock option exercise
experience. This calculation excludes pre-vesting forfeitures
and uses assumed future exercise patterns to account for option
holders expected exercise and post-vesting termination
behavior for outstanding stock options over their remaining
contractual terms. Expected volatility is calculated by
weighting the Companys historical stock price to calculate
expected volatility over the expected term of each grant. The
risk-free interest rate for the expected term of each option
granted is based on the U.S. Treasury yield curve in effect
at the time of grant. As of September 29, 2008, $2,751 of
total unrecognized compensation cost related to stock options is
expected to be recognized over a weighted-average period of
0.9 year.
12
TTM
TECHNOLOGIES, INC.
Notes to
Consolidated Condensed Financial Statements
(Continued)
Additionally, the Company also granted 2 and 1 restricted stock
units for the quarters ended September 29, 2008 and
October 1, 2007, respectively, and 504 and 500 for the
three quarters ended September 29, 2008 and October 1,
2007, respectively. The units granted were estimated to have a
weighted-average fair value per unit of $11.25 and $10.62 for
the quarters ended September 29, 2008 and October 1,
2007, respectively, and $11.46 and $10.70 for the three quarters
ended September 29, 2008 and October 1, 2007,
respectively. The fair value for restricted stock units granted
during the period is based on the closing share price on the
date of grant. As of September 29, 2008, $6,078 of total
unrecognized compensation cost related to restricted stock units
is expected to be recognized over a weighted-average period of
1 year.
|
|
(13)
|
Concentration
of Credit Risk
|
In the normal course of business, the Company extends credit to
its customers, which are concentrated primarily in the computer
and electronics instrumentation and aerospace/defense
industries, and some of which are located outside the United
States. The Company performs ongoing credit evaluations of
customers and does not require collateral. The Company also
considers the credit risk profile of the entity from which the
receivable is due in further evaluating collection risk.
As of September 29, 2008 and December 31, 2007, the
Companys 10 largest customers in the aggregate accounted
for 53% and 49%, respectively, of total accounts receivable. If
one or more of the Companys significant customers were to
become insolvent or were otherwise unable to pay for the
manufacturing services provided, it would have a material
adverse effect on the Companys financial condition and
results of operations.
The operating segments reported below are the Companys
segments for which separate financial information is available
and upon which operating results are evaluated by the chief
operating decision maker on a timely basis to assess performance
and to allocate resources. The Company has two reportable
segments: PCB Manufacturing and Backplane Assembly. These
reportable segments are each managed separately as they
distribute and manufacture distinct products with different
production processes. Each reportable segment operates
predominately in the same industry with production facilities
that produce similar customized products for its customers and
use similar means of product distribution. PCB Manufacturing
fabricates printed circuit boards, and Backplane Assembly is a
contract manufacturing business that specializes in assembling
backplanes and sub-system assemblies.
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-company transactions, including sales
of PCBs from the PCB Manufacturing segment to the Backplane
Assembly segment, have been eliminated.
13
TTM
TECHNOLOGIES, INC.
Notes to
Consolidated Condensed Financial Statements
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Three Quarters Ended
|
|
|
|
September 29,
|
|
|
October 1,
|
|
|
September 29,
|
|
|
October 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCB Manufacturing
|
|
$
|
148,003
|
|
|
$
|
140,514
|
|
|
$
|
446,304
|
|
|
$
|
431,316
|
|
Backplane Assembly
|
|
|
29,254
|
|
|
|
30,679
|
|
|
|
92,984
|
|
|
|
96,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
177,257
|
|
|
|
171,193
|
|
|
|
539,288
|
|
|
|
527,816
|
|
Inter-company sales
|
|
|
(8,238
|
)
|
|
|
(8,114
|
)
|
|
|
(23,223
|
)
|
|
|
(25,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
169,019
|
|
|
$
|
163,079
|
|
|
$
|
516,065
|
|
|
$
|
501,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Segment Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCB Manufacturing
|
|
$
|
14,312
|
|
|
$
|
13,899
|
|
|
$
|
54,771
|
|
|
$
|
42,285
|
|
Backplane Assembly
|
|
|
2,144
|
|
|
|
2,294
|
|
|
|
7,073
|
|
|
|
6,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating segment income
|
|
|
16,456
|
|
|
|
16,193
|
|
|
|
61,844
|
|
|
|
49,117
|
|
Amortization of intangibles
|
|
|
(951
|
)
|
|
|
(1,019
|
)
|
|
|
(2,848
|
)
|
|
|
(3,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
15,505
|
|
|
|
15,174
|
|
|
|
58,996
|
|
|
|
46,027
|
|
Total other expense
|
|
|
(1,238
|
)
|
|
|
(2,307
|
)
|
|
|
(6,920
|
)
|
|
|
(9,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
14,267
|
|
|
$
|
12,867
|
|
|
$
|
52,076
|
|
|
$
|
36,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys customers include both OEMs and EMS
companies. The Companys OEM customers often direct a
significant portion of their purchases through EMS companies.
For the quarter and three quarters ended September 29, 2008
one customer accounted for approximately 12% and 13% of net
sales, respectively. For the quarter and three quarters ended
October 1, 2007 one customer accounted for 10% of net
sales. Sales to our 10 largest customers for the quarter ended
September 29, 2008 and October 1, 2007 were 51%
and 45%, respectively. Sales to our 10 largest customers for the
three quarters ended September 29, 2008 and October 1,
2007 were 50% and 44% of net sales, respectively. The loss of
one or more major customers or a decline in sales to the
Companys major customers would have a material adverse
effect on the Companys financial condition and results of
operations.
During the first quarter of 2008, the Company recognized $3,700
of income related to a pricing reconciliation of metal
reclamation activity attributable to a single vendor. As a
result of the pricing reconciliation, the Company discovered
that the vendor had inaccurately compensated the Company for
gold reclamations over the last several years.
14
|
|
Item 2.
|
Managements
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.
This discussion and analysis should be read in conjunction with
Managements 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, 2007, filed with the
Securities and Exchange Commission.
Overview
We are a one-stop provider of time-critical and technologically
complex printed circuit boards (PCBs) and backplane assemblies,
which serve as the foundation of sophisticated electronic
products. We serve high-end commercial and aerospace/defense
markets including the networking/communications
infrastructure, high-end computing, defense, and
industrial/medical markets which are characterized
by high levels of complexity and moderate production volumes.
Our customers include original equipment manufacturers (OEMs),
electronic manufacturing services (EMS) providers, and
aerospace/defense companies. Our time-to-market and high
technology focused manufacturing services enable our customers
to reduce the time required to develop new products and bring
them to market.
We measure customers as those companies that have placed at
least two orders in the preceding
12-month
period. We had approximately 900 customers as of
September 29, 2008 and October 1, 2007. Sales to our
10 largest customers accounted for 51% of our net sales in the
third quarter ended September 29, 2008, and 45% of our net
sales in the third quarter ended October 1, 2007. Sales to
our 10 largest customers for the three quarters ended
September 29, 2008 and October 1, 2007 were 50% and
44% of net sales, respectively. We sell to OEMs both directly
and indirectly through EMS companies. Sales attributable to our
five largest OEM customers accounted for approximately 30% and
25% of our net sales in the quarter ended September 29,
2008 and October 1, 2007, respectively.
The following table shows the percentage of our net sales
attributable to each of the principal end markets we served for
the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Three Quarters Ended
|
|
|
|
September 29,
|
|
|
October 1,
|
|
|
September 29,
|
|
|
October 1,
|
|
End Markets(1)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Networking/Communications
|
|
|
39
|
%
|
|
|
40
|
%
|
|
|
41
|
%
|
|
|
42
|
%
|
Aerospace/Defense
|
|
|
39
|
|
|
|
32
|
|
|
|
36
|
|
|
|
30
|
|
Computing/Storage/Peripherals
|
|
|
11
|
|
|
|
13
|
|
|
|
11
|
|
|
|
13
|
|
Medical/Industrial/Instrumentation/Other
|
|
|
11
|
|
|
|
15
|
|
|
|
12
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Sales to EMS companies are classified by the end markets of
their OEM customers. |
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 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. Quick-turn orders decreased from approximately
13% of net PCB sales for the quarter ended October 1,
2007 to 11% of net PCB sales for the quarter ended
September 29, 2008, partially due to the increasingly
complex nature of our quick-turn work, which requires more time
to manufacture, thereby extending some of these orders beyond
the 10 day delivery window. We also deliver a large
percentage of compressed lead-time work with
15
lead times of 11 to 20 days. We 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 primarily from the sale of printed circuit
boards 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 and 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 approximately 2% of gross
sales. We provide our customers a limited right of return for
defective printed circuit boards 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 do not participate in any significant long-term contracts
with suppliers, and, generally, we believe there are a number of
potential suppliers for the raw materials and components 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 as well as 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, and bad debt expense.
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.
Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Management has discussed the development, selection, and
disclosure of these estimates with the audit committee of our
board of directors. Actual results may differ from these
estimates under different assumptions or conditions.
Accounting policies for which significant judgments and
estimates are made include asset valuation related to bad debts
and inventory obsolescence; sales returns and allowances;
impairment of long-lived assets, including goodwill and
intangible assets; realizability of deferred tax assets;
determining stock-based compensation expense, self-insured
medical reserves, asset retirement obligations, and
environmental liabilities.
Allowance
for Doubtful Accounts
We provide customary credit terms to our customers and generally
do not require collateral. We perform ongoing credit evaluations
of the financial condition of our customers and maintain an
allowance for doubtful accounts based upon historical
collections experience and expected collectibility of accounts.
Our actual bad debts may differ from our estimates.
Inventories
In assessing the realization of inventories, we are required to
make judgments as to future demand requirements and compare
these with current and committed inventory levels. Provision is
made to reduce excess and obsolete inventories to their
estimated net realizable value. Our inventory requirements may
change based on our
16
projected customer demand, changes due to market conditions,
technological and product life cycle changes, longer or shorter
than expected usage periods, and other factors that could affect
the valuation of our inventories. We maintain certain finished
goods inventories near certain key customer locations in
accordance with agreements. Although this inventory is typically
supported by valid purchase orders, should these customers
ultimately not purchase these inventories, our results of
operations and financial condition would be adversely affected.
Revenue
Recognition
We derive revenues primarily from the sale of printed circuit
boards and backplane assemblies using customer-supplied
engineering and design plans and recognize revenues when
persuasive evidence of a sales arrangement exists, the sales
terms are fixed and determinable, title and risk of loss have
transferred, and collectibility is reasonably
assured generally when products are shipped to the
customer. We provide our customers a limited right of return for
defective printed circuit boards and backplane assemblies. We
accrue an estimated amount for sales returns and allowances at
the time of sale based on historical information. To the extent
actual experience varies from our historical experience,
revisions to these allowances may be required.
Long-lived
Assets
We have significant long-lived tangible and intangible assets
consisting of property, plant and equipment, definite-lived
intangibles, and goodwill. We review these assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. In
addition, we perform an impairment test related to goodwill at
least annually. Our goodwill and intangibles are largely
attributable to our acquisitions of other businesses. During the
fourth quarter 2007, we performed an impairment assessment of
our goodwill, which requires the use of a fair-value based
analysis and determined that no impairment existed. At
September 29, 2008, there were no indications that the
carrying amount of long-lived tangible assets, definite-lived
intangible assets and goodwill may not be recoverable. If future
market conditions continue to deteriorate, such events and
circumstances may necessitate our review of the recoverability
of long-lived assets.
We use an estimate of the future undiscounted net cash flows in
measuring whether our long-lived tangible assets and
definite-lived intangible assets are recoverable. If forecasts
and assumptions used to support the realizability of our
long-lived assets change in the future, significant impairment
charges could result that would adversely affect our results of
operations and financial condition.
Income
Taxes
Deferred income tax assets are reviewed for recoverability, and
valuation allowances are provided, when necessary, to reduce
deferred tax assets to the amounts expected to be realized. At
September 29, 2008 and December 31, 2007, we had net
deferred income tax assets of $12.2 million and
$4.4 million, respectively. In addition, we record income
tax provision or benefit during interim periods at a rate that
is based on expected results for the full year. If future
changes in market conditions cause actual results for the year
to be more or less favorable than those expected, adjustments to
the effective income tax rate could be required.
Stock-Based
Awards
We adopted the fair value recognition provisions of
SFAS No. 123R, Share-Based Payments,
(SFAS 123R) using the modified prospective transition
method. Under this method we recognize compensation expense net
of an estimated forfeiture rate and only recognize compensation
cost for those shares expected to vest over the requisite
service period of the award using a straight-line method.
We estimate the value of stock-based restricted stock unit
awards on the date of grant using the closing share price. We
estimate the value of stock-based option awards on the date of
grant using the Black-Scholes option pricing model. Calculating
the fair value of stock-based option payment awards requires the
input of highly subjective assumptions, including the expected
term of the share-based payment awards and expected stock price
volatility. The expected term represents the average time that
options that vest are expected to be outstanding. The expected
volatility rates are estimated based on a weighted average of
the historical volatilities of our common stock. The assumptions
used in calculating the fair value of share-based payment awards
represent our best
17
estimates, but these estimates involve inherent uncertainties
and the application of our judgment. As a result, if factors
change and we use different assumptions, our stock-based
compensation expense could be materially different in the
future. In addition, we are required to estimate the expected
forfeiture rate and only recognize expense for those shares
expected to vest. We have currently estimated our forfeiture
rate to be 8 percent. If our actual forfeiture rate is
materially different from our estimate, the stock-based
compensation expense could be significantly different from what
we have recorded in the current period. For the quarters ended
September 29, 2008 and October 1, 2007, stock-based
compensation expense was $1.0 million and
$0.6 million, respectively, net of tax. For the three
quarters ended September 29, 2008 and October 1, 2007,
stock-based compensation expense was $2.5 million and
$1.8 million, respectively, net of tax. At
September 29, 2008, total unrecognized estimated
compensation expense related to non-vested stock options was
$2.8 million, which is expected to be recognized over a
weighted-average period of 0.9 year. At September 29,
2008, $6.1 million of total unrecognized compensation cost
related to restricted stock units is expected to be recognized
over a weighted-average period of 1 year.
Self
Insurance
We are self-insured for group health insurance benefits provided
to our employees, and we purchase insurance to protect against
claims at the individual and aggregate level. The insurance
carrier adjudicates and processes employee claims and is paid a
fee for these services. We reimburse our insurance carrier for
paid claims subject to variable monthly limitations. We estimate
our exposure for claims incurred but not paid at the end of each
reporting period and use historical information supplied by our
insurance carrier and broker on an annual basis to estimate our
liability for these claims. This liability is subject to an
aggregate stop-loss that varies based on employee enrollment and
factors that are established at each annual contract renewal.
Our actual claims experience may differ from our estimates.
Asset
Retirement Obligation and Environmental
Liabilities
We establish liabilities for the costs of asset retirement
obligations when a legal or contractual obligation exists to
dispose of or restore an asset upon its retirement and the
timing and cost of such work is reasonably estimable. We record
such liabilities only when such timing and costs are reasonably
determinable. In addition, we accrue an estimate of the costs of
environmental remediation for work at identified sites where an
assessment has indicated it is probable that cleanup costs are
or will be required and may be reasonably estimated. In making
these estimates, we consider information that is currently
available, existing technology, enacted laws and regulations,
and our estimates of the timing of the required remedial
actions, and we discount these estimates at 8 percent. We
also are required to estimate the amount of any probable
recoveries, including insurance recoveries.
Results
of Operations
Quarter
and Three Quarters Ended September 29, 2008 Compared to
Quarter and Three Quarters Ended October 1, 2007
There were 91 days in both of the quarters ended
September 29, 2008 and October 1, 2007 and 273 and
274 days in the three quarters ended September 29,
2008 and October 1, 2007, respectively.
18
The following table sets forth statement of operations data
expressed as a percentage of net sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Three Quarters Ended
|
|
|
|
September 29,
|
|
|
October 1,
|
|
|
September 29,
|
|
|
October 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
81.0
|
|
|
|
80.8
|
|
|
|
79.4
|
|
|
|
81.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
19.0
|
|
|
|
19.2
|
|
|
|
20.6
|
|
|
|
19.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (income) expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
4.5
|
|
|
|
4.4
|
|
|
|
4.5
|
|
|
|
4.4
|
|
General and administrative
|
|
|
4.8
|
|
|
|
4.9
|
|
|
|
4.9
|
|
|
|
4.8
|
|
Amortization of definite-lived intangibles
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
0.6
|
|
Metal reclamation
|
|
|
|
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9.8
|
|
|
|
9.9
|
|
|
|
9.2
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
9.2
|
|
|
|
9.3
|
|
|
|
11.4
|
|
|
|
9.2
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(0.9
|
)
|
|
|
(1.6
|
)
|
|
|
(1.3
|
)
|
|
|
(2.2
|
)
|
Interest income
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.3
|
|
Other, net
|
|
|
(0.2
|
)
|
|
|
0.1
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(0.7
|
)
|
|
|
(1.4
|
)
|
|
|
(1.3
|
)
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
8.5
|
|
|
|
7.9
|
|
|
|
10.1
|
|
|
|
7.3
|
|
Income tax provision
|
|
|
(2.9
|
)
|
|
|
(2.9
|
)
|
|
|
(3.7
|
)
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
5.6
|
%
|
|
|
5.0
|
%
|
|
|
6.4
|
%
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has two reportable segments: PCB Manufacturing and
Backplane Assembly. These reportable segments are managed
separately because they distribute and manufacture distinct
products with different production processes. PCB Manufacturing
fabricates printed circuit boards. Backplane Assembly is a
contract manufacturing business that specializes in assembling
backplanes into sub-assemblies and other complete electronic
devices. PCB Manufacturing customers are either EMS or OEM
companies, while Backplane Assembly customers are usually OEMs.
Our Backplane Assembly segment includes our Hayward, California
and Shanghai, China plants and our Ireland sales and
distribution infrastructure. Our PCB Manufacturing segment is
composed of eight domestic PCB fabrication plants, and a
facility which provides follow on value-added services primarily
for one of the PCB Manufacturing plants. The following table
compares net sales by reportable segment for the quarters and
three quarters ended September 29, 2008, and
October 1, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Three Quarters Ended
|
|
|
|
September 29,
|
|
|
October 1,
|
|
|
September 29,
|
|
|
October 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCB Manufacturing
|
|
$
|
148,003
|
|
|
$
|
140,514
|
|
|
$
|
446,304
|
|
|
$
|
431,316
|
|
Backplane Assembly
|
|
|
29,254
|
|
|
|
30,679
|
|
|
|
92,984
|
|
|
|
96,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
177,257
|
|
|
|
171,193
|
|
|
|
539,288
|
|
|
|
527,816
|
|
Inter-company sales
|
|
|
(8,238
|
)
|
|
|
(8,114
|
)
|
|
|
(23,223
|
)
|
|
|
(25,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
169,019
|
|
|
$
|
163,079
|
|
|
$
|
516,065
|
|
|
$
|
501,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Net
Sales
Net sales increased $5.9 million, or 3.6%, from
$163.1 million for the quarter ended October 1, 2007
to $169.0 million for the quarter ended September 29,
2008 due to increased demand from aerospace/defense customers.
PCB sales volume decreased approximately 9%, however, prices
rose approximately 11% due to a shift in production mix toward
more high technology production. Our quick-turn production,
which we measure as orders placed and shipped within
10 days, decreased from 13% of net PCB sales for the
quarter ended October 1, 2007 to 11% of net PCB
sales for the quarter ended September 29, 2008. The
increasingly complex nature of our quick-turn work requires more
time to manufacture, thereby extending some of these orders
beyond the 10-day delivery window.
Net sales increased $14.1 million, or 2.8%, from
$502.0 million for the three quarters ended October 1,
2007 to $516.1 million for the three quarters ended
September 29, 2008 due to increased demand from
aerospace/defense customers, partially offset by the closure of
our Dallas, Oregon facility in April 2007. The Dallas, Oregon
facility contributed approximately $11.8 million of revenue
to the PCB Manufacturing segment during the three quarters ended
2007. Excluding revenue derived from our Dallas, Oregon
facility, the $25.9 million revenue improvement reflects
increased net sales at our other PCB Manufacturing facilities,
partially offset by lower net sales in our Backplane Assembly
operations. PCB sales volume declined approximately 9% for the
three quarters ended September 29, 2008 as compared to the
three quarters ended October 1, 2007. Prices rose
approximately 13% due to a shift in production mix toward more
high technology production. Our quick-turn production, which we
measure as orders placed and shipped within 10 days,
decreased from 15% of net PCB sales for the three quarters
ended October 1, 2007 to 12% of net PCB sales for the
three quarters ended September 29, 2008. The increasingly
complex nature of our quick-turn work requires more time to
manufacture, thereby extending some of these orders beyond the
10-day delivery window.
Cost
of Goods Sold
Cost of goods sold increased $5.1 million, or 3.9%, from
$131.8 million for the quarter ended October 1, 2007
to $136.9 million for the quarter ended September 29,
2008. Cost of goods sold increased mainly due to increased
sales. As a percentage of net sales, cost of goods sold
increased from 80.8% for the quarter ended October 1, 2007
to 81.0% for the quarter ended September 29, 2008,
primarily due to higher repair and maintenance expenses.
Cost of goods sold increased $3.2 million, or 0.8%, from
$406.5 million for the three quarters ended October 1,
2007 to $409.7 million for the three quarters ended
September 29, 2008. Cost of goods sold increased for the
three quarters ended September 29, 2008 mainly due to
increased sales. For the three quarters ended September 29,
2008 cost of goods sold, as a percentage of sales, decreased to
79.4% from 81.0% for the three quarters ended October 1,
2007, primarily due to higher pricing.
Gross
Profit
As a result of the foregoing, gross profit increased
$0.9 million, or 2.9%, from $31.2 million for the
quarter ended October 1, 2007 to $32.1 million for the
quarter ended September 29, 2008 with gross margin
decreasing from 19.2% for the quarter ended October 1, 2007
to 19.0% for the quarter ended September 29, 2008. Gross
margin decreased slightly as a result of higher repair and
maintenance expenses in the quarter ended September 29,
2008.
Additionally, gross profit increased $10.8 million, or
11.3%, from $95.5 million for the three quarters ended
October 1, 2007 to $106.3 million for the three
quarters ended September 29, 2008 with gross margin
increasing from 19.0% for the three quarters ended
October 1, 2007 to 20.6% for the three quarters ended
September 29, 2008. The change in our gross margin for the
three quarters ended September 29, 2008 was primarily due
to a shift in production mix toward more high technology
production and higher pricing.
Printed circuit board manufacturing is a multi-step process that
requires a certain level of equipment and staffing for even
minimal production volumes. As production increases, our
employees are able to work more efficiently and produce more
printed circuit boards without incurring proportionally more
costs. However, at higher capacity utilization rates, additional
employees and capital may be required.
20
Selling
and Marketing Expenses
Selling and marketing expenses increased $0.5 million, or
7.0%, from $7.1 million for the quarter ended
October 1, 2007 to $7.6 million for the quarter ended
September 29, 2008. Additionally, selling and marketing
expenses increased $0.8 million, or 3.6%, from
$22.2 million for the three quarters ended October 1,
2007 to $23.0 million for the three quarters ended
September 29, 2008. The increase for the quarter and three
quarters ended September 29, 2008 is primarily due to
increased labor expenses and higher commission expense for
increased sales. As a percentage of net sales, selling and
marketing expenses remained consistent at 4.5% for the quarter
and three quarters ended September 29, 2008 compared to
4.4% for the quarter and three quarters ended October 1,
2007.
General
and Administrative Expense
General and administrative expenses increased $0.1 million
from $8.0 million, or 4.9% of net sales, for the quarter
ended October 1, 2007 to $8.1 million, or 4.8% of net
sales, for the quarter ended September 29, 2008. The
increase in expenses resulted primarily from higher incentive
bonus expense and stock-based compensation expense for
restricted stock and stock option awards, offset by lower
accounting costs.
General and administrative expenses increased $1.0 million
from $24.2 million, or 4.8% of net sales, for the three
quarters ended October 1, 2007 to $25.2 million, or
4.9% of net sales, for the three quarters ended
September 29, 2008. The increase in expenses resulted
primarily from higher incentive bonus expense and stock-based
compensation expense for restricted stock and stock option
awards, partially offset by lower accounting, consulting, and
bad debt expenses.
Amortization
of Definite-lived Intangibles
Amortization expense related to definite-lived intangibles
remained consistent at $1.0 million, for both quarters
ended October 1, 2007 and September 29, 2008.
Additionally, amortization expense related to definite-lived
intangibles decreased $0.3 million from $3.1 million
for the three quarters ended October 1, 2007 to
$2.8 million for the three quarters ended
September 29, 2008. The decrease in amortization expense
for the quarter and three quarter period is primarily due to the
gradual decline in strategic customer relationship intangibles
related to the PCG acquisition in October 2006.
Metal
Reclamation
During the first quarter of 2008, we recognized
$3.7 million of income related to a pricing reconciliation
of metal reclamation activity attributable to a single vendor.
As a result of the pricing reconciliation, we discovered that
the vendor had inaccurately compensated us for gold reclamations
over the last several years. While pricing reconciliations of
this nature occur periodically, we do not expect to recognize a
similar amount in future periods.
Other
Income (Expense)
Other expense, net decreased $1.1 million from
$2.3 million for the quarter ended October 1, 2007 to
$1.2 million for the quarter ended September 29, 2008.
The net decrease in expense consists of a $1.1 million
decrease in interest expense, offset by an increase of
$0.5 million in interest income and higher expense in
other, net of $0.5. Interest expense includes debt service
interest costs and the amortization of related debt issuance
costs. Debt service interest and related debt issuance costs for
the quarter ended September 29, 2008 decreased by $0.8 and
$0.3 million, respectively, as a result of overall lower
interest rates on outstanding Convertible Notes for the quarter
ended September 29, 2008 as compared to the interest rates
related to the Credit Agreement for the quarter ended
October 1, 2007 and by the decrease of debt issuance costs,
primarily driven by a longer amortization period related to the
Convertible Notes. Interest income increased as a result of
higher cash and cash equivalent balances earning interest for
the quarter ended September 29, 2008 as compared to the
quarter ended October 1, 2007. Other, net expense consists
primarily of a $0.6 million estimated loss on a money
market fund that suspended redemptions and is being liquidated.
Other expense decreased by $2.9 million from
$9.8 million for the three quarters ended October 1,
2007 to $6.9 million for the three quarters ended
September 29, 2008. The net decrease consists of a
$4.4 million decrease in
21
interest expense, offset by a $1.5 million increase in
other, net. Interest expense for the three quarters includes
debt service interest costs and the amortization of related debt
issuance costs. Debt service interest and related debt issuance
costs for the three quarters ended September 29, 2008
decreased by $3.9 and $0.5 million, respectively as
compared to the three quarters ended October 1, 2007,
resulting from a combination of overall lower outstanding Credit
Agreement debt balances in 2008, our repayment in full of the
Credit Agreement in May 2008 and lower interest rates on
outstanding Convertible Notes issued in May 2008. This decrease
was offset by the increase in other, net expense of
$1.5 million primarily related to the realized loss on the
settlement of a derivative of $1.2 million during the
quarter ended June 30, 2008 associated with the repayment
in full of the credit Agreement and the $0.6 million
estimated loss on a money market fund that suspended redemptions
and is being liquidated.
Income
Tax Provision
The provision for income taxes increased $0.1 million from
$4.7 million for the quarter ended October 1, 2007 to
$4.8 million for the quarter ended September 29, 2008.
Our effective tax rate was 33.7% in the quarter ended
September 29, 2008 and 36.3% for the quarter ended
October 1, 2007. Additionally, the provision for income
taxes increased $5.4 million from $13.4 million for
the three quarters ended October 1, 2007 to
$18.8 million for the three quarters ended
September 29, 2008. Our effective tax rate was 36.1% in the
three quarters ended September 29, 2008 and 37.0% for the
three quarters ended October 1, 2007. The increase in the
provision is due to the increase in pretax income. The decrease
in our effective tax rate is due to additional state tax credits
and the decrease in liability for unrecognized tax benefits. Our
effective tax rate is primarily impacted by the federal income
tax rate, apportioned state income tax rates, utilization of
other credits and deductions available to us, and certain
non-deductible items.
Liquidity
and Capital Resources
Our principal sources of liquidity have been cash provided by
operations, the issuance of Convertible Senior Notes
(Convertible Notes), and employee exercises of stock options.
Our principal uses of cash have been to meet debt service
requirements, finance capital expenditures, and fund working
capital requirements. We anticipate that servicing debt, funding
working capital requirements, financing capital expenditures,
and potential acquisitions will continue to be the principal
demands on our cash in the future.
As of September 29, 2008, we had net working capital of
approximately $265.9 million, compared to
$98.8 million as of December 31, 2007. The increase in
working capital is primarily attributable to the growth in cash
balances resulting from the Convertible Notes offering during
the second quarter of 2008.
Our 2008 capital expenditure plan is expected to total
approximately $15 million and will fund capital equipment
purchases to increase capacity and expand our technological
capabilities at certain of our facilities.
The following table provides information on contractual
obligations as of September 29, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations(1)(2)
|
|
Total
|
|
|
Less than 1 Year
|
|
|
1 - 3 Years
|
|
|
4 - 5 Years
|
|
|
After 5 Years
|
|
|
Operating leases
|
|
$
|
6,795
|
|
|
$
|
2,983
|
|
|
$
|
2,126
|
|
|
$
|
584
|
|
|
$
|
1,102
|
|
Debt obligations
|
|
|
175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,000
|
|
Interest on debt obligations
|
|
|
39,828
|
|
|
|
5,703
|
|
|
|
11,375
|
|
|
|
11,375
|
|
|
|
11,375
|
|
Purchase obligations
|
|
|
2,899
|
|
|
|
2,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
224,522
|
|
|
$
|
11,585
|
|
|
$
|
13,501
|
|
|
$
|
11,959
|
|
|
$
|
187,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
FIN 48 unrecognized tax
benefits of $0.1 million are not included in the table
above as we are not sure when the amount will be paid.
|
|
(2)
|
|
Environmental liabilities of
$0.9 million, not included in the table above, are accrued
and recorded as long-term liabilities in the consolidated
balance sheet.
|
In connection with the 2006 PCG acquisition, the Company is
involved in various stages of investigation and cleanup related
to environmental remediation at two Connecticut sites and is
obligated to investigate a third Connecticut site. The Company
currently estimates that it will incur remediation costs of
$0.9 million over the next 12 to 84 months related to
these matters. In addition, the Company has obligations to the
Connecticut Department of Environmental Protection to make
certain environmental asset improvements to the waste water
treatment systems
22
in two Connecticut plants. These costs are estimated to be
$0.5 million and have been considered in our capital
expenditures plan for 2008. Lastly, we are required to maintain
a compliance management plan through July 2009 under a
compliance agreement with the U.S. Environmental Protection
Agency, that we assumed from Tyco.
Based on our current level of operations, we believe that cash
generated from operations, proceeds from the issuance of
Convertible Notes and available cash will be adequate to meet
our currently anticipated debt service, capital expenditure, and
working capital needs for the next 12 months. Our principal
liquidity needs for periods beyond the next 12 months are
to meet debt service requirements, including interest payments,
as well as for other contractual obligations as indicated in our
contractual obligations table above and for capital purchases
under our annual capital expenditure plan.
Net cash provided by operating activities was $52.9 million
for the three quarters ended September 29, 2008, compared
to $56.9 million for the three quarters ended
October 1, 2007. Our operating cash flow of
$52.9 million for the three quarters ended
September 29, 2008 reflects net income of
$33.3 million, $21.3 million of depreciation and
amortization, $3.9 million of stock-based compensation, and
a decrease in net deferred income tax assets of
$5.4 million, offset by a net increase in working capital
of $11.0 million.
Net cash used in investing activities was $31.6 million for
the three quarters ended September 29, 2008, compared to
cash provided of $1.0 million for the three quarters ended
October 1, 2007. For the three quarters ended
September 29, 2008, we made purchases of approximately
$12.2 million of property, plant, and equipment and
redesignated $19.5 million from cash and cash equivalents
to short-term investments.
At September 29, 2008, the fair value of our investment in
The Reserve Primary Fund (Primary Fund), a money market fund
that has suspended redemptions and is being liquidated, was
$19.5 million. We have requested redemption of our
investment in the Primary Fund and expect distribution to occur
as the Primary Funds assets mature or are sold. On
October 31, 2008, we received a partial distribution of
$10.2 million. While we expect to receive substantially all
of our current holdings in the Primary Fund, we cannot predict
when the remaining amount will be received.
Net cash provided by financing activities was $74.8 million
for the three quarters ended September 29, 2008, compared
to a use of cash of $90.5 million for the three quarters
ended October 1, 2007. This primarily reflects cash
proceeds from the issuance of Convertible Notes of
$175.0 million, proceeds from warrants of
$26.2 million and exercises of employee stock options of
$2.4 million, partially offset by debt repayment of
$85.0 million, payment for the convertible note hedge of
$38.3 million and debt issuance costs of $5.8 million.
In May 2008, we issued 3.25% Convertible Notes due
May 15, 2015, in a public offering with an aggregate
principal amount of $175.0 million. The Convertible Notes
bear interest at a rate of 3.25% per annum. Interest will be
payable semiannually in arrears on May 15 and November 15 of
each year, beginning November 15, 2008. The Convertible
Notes are senior unsecured obligations and will rank equally to
our future unsecured senior indebtedness and senior in right of
payment to any of our future subordinated indebtedness. We
received proceeds of $169.2 million after the deduction of
offering expenses of $5.8 million. These offering expenses
are being amortized to interest expense over the term of the
Convertible Notes.
At any time prior to November 15, 2014, holders may convert
their Convertible Notes into cash and, if applicable, into
shares of our common stock based on a conversion rate of
62.6449 shares of our common stock per $1,000 principal
amount of Convertible Notes, subject to adjustment, under the
following circumstances: (1) during any calendar quarter
beginning after June 30, 2008 (and only during such
calendar quarter), if the last reported sale price of our common
stock for at least 20 trading days during the 30 consecutive
trading days ending on the last trading day of the immediately
preceding calendar quarter is greater than or equal to 130% of
the applicable conversion price on each applicable trading day
of such preceding calendar quarter; (2) during the five
business day period after any 10 consecutive trading day period
in which the trading price per note for each day of that 10
consecutive trading day period was less than 98% of the product
of the last reported sale price of our common stock and the
conversion rate on such day; or (3) upon the occurrence of
specified corporate transactions described in the prospectus
supplement. As of September 29, 2008, none of the
conversion criteria had been met.
On or after November 15, 2014 until the close of business
on the third scheduled trading day preceding the maturity date,
holders may convert their notes at any time, regardless of the
foregoing circumstances. Upon
23
conversion, for each $1,000 principal amount of notes, we will
pay cash for the lesser of the conversion value or $1,000 and
shares of our common stock, if any, based on a daily conversion
value calculated on a proportionate basis for each day of the 60
trading day observation period. Additionally, in the event of a
fundamental change as defined in the prospectus supplement, or
other conversion rate adjustments such as share splits or
combinations, other distributions of shares, cash or other
assets to stockholders, including self-tender transactions
(Other Conversion Rate Adjustments), the conversion rate maybe
modified to adjust the number of shares per $1,000 principal
amount of the notes.
The maximum number of shares issuable upon conversion, including
the effect of a fundamental change and subject to Other
Conversion Rate Adjustments, would be approximately
14 million.
We are not permitted to redeem the notes at any time prior to
maturity. In the event of a fundamental change or certain
default events, as defined in the prospectus supplement, prior
to November 15, 2014, holders may require us to repurchase
for cash all or a portion of their notes at a price equal to
100% of the principal amount, plus any accrued and unpaid
interest.
In connection with the issuance of the Convertible Notes, we
entered into a convertible note hedge and warrant transaction
(Call Spread Transaction), with respect to our common stock. The
convertible note hedge, which cost an aggregate
$38.3 million and was recorded, net of tax, as a reduction
of additional paid-in capital, consists of our option to
purchase up to 11.0 million common stock shares at a price
of $15.96 per share. This option expires on May 15, 2015
and can only be executed upon the conversion of the above
mentioned Convertible Notes. Additionally, we sold warrants for
the option to purchase 11.0 million of our common stock at
a price of $18.15 per share. The warrants expire on
August 17, 2015. The proceeds from the sale of warrants of
$26.2 million was recorded as an addition to additional
paid-in capital. The Call Spread Transaction has no effect on
the terms of the Convertible Notes and reduces potential
dilution by effectively increasing the conversion price of the
Convertible Notes to $18.15 per share of our common stock.
As of September 29, 2008, we had outstanding a
$1.0 million standby letter of credit related to the lease
of one of our production facilities. The standby letter of
credit expires on May 1, 2009.
Impact of
Inflation
We believe that our results of operations are not dependent upon
moderate changes in the inflation rate as we expect that we
generally will be able to pass along component price increases
to our customers.
Fair
Value of Financial Instruments
The carrying amount and estimated fair value of our financial
instruments at September 29, 2008 and December 31,
2007 were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2008
|
|
|
December 31, 2007
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Short-term investments
|
|
$
|
19,522
|
|
|
$
|
19,522
|
|
|
|
|
|
|
|
|
|
Convertible senior notes
|
|
|
175,000
|
|
|
|
150,133
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
$
|
85,000
|
|
|
$
|
84,150
|
|
Interest rate swap derivative
|
|
|
|
|
|
|
|
|
|
|
1,021
|
|
|
|
1,021
|
|
The carrying amount of the our derivative financial instruments
were adjusted to fair value and represent the amount we would
pay/receive to terminate the derivative taking into account
current market quotes and the current creditworthiness of the
counterparty. The fair value of the convertible senior notes and
the long-term debt was estimated based on quoted market prices
at the end of the reporting period.
Recent
Accounting Pronouncements
In September 2008, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position
FAS 133-1
and
FIN 45-4,
Disclosures about Credit Derivatives and Certain Guarantees:
An Amendment of FASB Statement
24
No. 133 and FASB Interpretation No. 45; and
Clarification of the Effective Date of FASB Statement
No. 16
(FSP 133-1
and
FIN 45-4).
FSP 133-1
and
FIN 45-4
amend FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, to require disclosures
by sellers of credit derivatives, including credit derivatives
embedded in a hybrid instrument; amend FASB Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, to require an additional disclosure
about the current status of the payment/performance risk of a
guarantee and further clarify the effective date of FASB
Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities. FSP 133-1 and FIN
45-4 shall be effective for financial statements issued for
fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years, with early adoption
prohibited. The adoption of the provisions of
FSP 133-1
and
FIN 45-4
is not anticipated to materially impact our consolidated
financial position and results of operations.
In June 2008, the Emerging Issue Task Force issued EITF
No. 08-3,
Accounting by Lessees for Maintenance Deposits
(EITF 08-3).
EITF 08-3
clarifies how a lessee shall account for a maintenance deposit
under an arrangement accounted for as a lease and its
accounting for maintenance deposits paid under an arrangement
accounted for as a lease that are refunded only if the lessee
performs specified maintenance activities.
EITF 08-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. We are currently evaluating the
impact of adopting the provisions of
EITF 08-3
on our lease arrangements.
In May 2008, the FASB issued FASB Staff Position APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement), (FSP APB
14-1). FSP
APB 14-1
specifies that issuers of convertible debt instruments that may
be settled in cash upon conversion (including partial cash
settlement) should separately account for the liability and
equity components in a manner that will reflect the
entitys nonconvertible debt borrowing rate when interest
cost is recognized in subsequent periods. FSP APB
14-1 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. We are currently evaluating the
impact of adopting the provisions of FSP ABP
14-1 for our
current Convertible Notes.
In April 2008, the FASB issued FASB Staff Position
142-3,
Determination of the Useful Life of Intangible Assets,
(FSP 142-3).
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets.
FSP 142-3 shall be effective for financial statements
issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years, with early
adoption prohibited. The adoption of the provisions of
FSP 142-3
is not anticipated to materially impact our consolidated
financial position and results of operations.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of Statement of
Financial Accounting Standards No. 133,
(SFAS 161). This statement is intended to improve
transparency in financial reporting by requiring enhanced
disclosures of an entitys financial position, financial
performance, and cash flow. SFAS 161 applies to derivative
instruments within the scope of Statement of Financial
Accounting Standards 133, Accounting for Derivative
Instruments and Hedging Activities, (SFAS 133) as
well as related hedged items, bifurcated derivatives, and
non-derivative instruments that are designated and qualify as
hedging instruments. Entities with instruments subject to
SFAS 161 must provide more robust qualitative disclosure
and expanded quantitative disclosures. SFAS 161 is
effective prospectively for financial statements issued for
fiscal years and interim periods beginning after
November 15, 2008, with early application permitted. We are
currently evaluating the disclosure implication of the statement.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (revised 2007), Business
Combinations, (SFAS 141(R)). SFAS 141(R) changes
the requirements for an acquirers recognition and
measurement of the assets acquired and the liabilities assumed
in a business combination. SFAS 141(R) is effective for
annual periods beginning after December 15, 2008 and should
be applied prospectively for all business combinations entered
into after the date of adoption. We expect the impact of
adopting SFAS 141(R) will depend on future acquisitions.
25
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160, Noncontrolling Interests
in Consolidated Financial Statements an amendment of
ARB No. 51, (SFAS 160). SFAS 160 requires
(i) that noncontrolling (minority) interests be reported as
a component of shareholders equity, (ii) that net
income attributable to the parent and to the noncontrolling
interest be separately identified in the consolidated statement
of operations, (iii) that changes in a parents
ownership interest while the parent retains its controlling
interest be accounted for as equity transactions, (iv) that
any retained noncontrolling equity investment upon the
deconsolidation of a subsidiary be initially measured at fair
value, and (v) that sufficient disclosures are provided
that clearly identify and distinguish between the interests of
the parent and the interests of the noncontrolling owners.
SFAS 160 is effective for annual periods beginning after
December 15, 2008 and should be applied prospectively.
However, the presentation and disclosure requirements of the
statement shall be applied retrospectively for all periods
presented. The adoption of the provisions of Statement
No. 160 is not anticipated to materially impact our
consolidated financial position and results of operations.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements, (SFAS 157), which defines fair value,
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS 157 applies
under other accounting pronouncements that require or permit
fair value measurements and does not require any new fair value
measurements. The provisions of SFAS 157 were originally to
be effective beginning January 1, 2008. Subsequently, the
FASB provided for a one-year deferral of the provisions of
SFAS 157 for non-financial assets and liabilities that are
recognized or disclosed at fair value in the consolidated
financial statements on a non-recurring basis. We are currently
evaluating the impact of adopting the provisions of
SFAS 157 for non-financial assets and liabilities that are
recognized or disclosed on a non-recurring basis.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Interest Rate Risk. Our interest income is
more sensitive to fluctuation in the general level of
U.S. interest rates than to changes in rates in other
markets. Changes in U.S. interest rates affect the interest
earned on cash and cash equivalents. Our outstanding debt bears
a fixed interest rate and therefore is not subject to the
effects of interest rate fluctuation.
Foreign Currency Exchange Risk. We are subject
to risks associated with transactions that are denominated in
currencies other than the U.S. dollar, as well as the
effects of translating amounts denominated in a foreign currency
to the U.S. dollar as a normal part of the reporting
process. Our Chinese operations utilize the Chinese Yuan or RMB
as the functional currency, which results in the Company
recording a translation adjustment that is included as a
component of accumulated other comprehensive income within
stockholders equity. Net foreign currency transaction
gains and losses on transactions denominated in currencies other
than the U.S. dollar were not material during the quarter
and three quarters ended September 29, 2008 and
October 1, 2007. We currently do not utilize any derivative
instruments to hedge foreign currency risks.
|
|
Item 4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures.
We maintain a system of disclosure controls and procedures for
financial reporting to give reasonable assurance that
information required to be disclosed in our reports submitted
under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange
Commission, (SEC). These controls and procedures also give
reasonable assurance that information required to be disclosed
in such reports is accumulated and communicated to management to
allow timely decisions regarding required disclosures.
Our Chief Executive Officer, (CEO), and Chief Financial Officer,
(CFO), together with management, conducted an evaluation of the
effectiveness of our disclosure controls and procedures as of
September 29, 2008, pursuant to
Rules 13a-15
of 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) are effective.
26
Changes
in Internal Control over Financial Reporting.
There has been no change in our internal control over financial
reporting that occurred during the quarter ended
September 29, 2008 that has materially affected or is
reasonably likely to materially affect our internal control over
financial reporting.
Inherent
Limitations on Effectiveness of Controls
Our management, including our principal executive officer and
chief financial officer, does not expect that our disclosure
controls or our internal control 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
systems objectives will be met. The design of a control
system must reflect 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 misstatements due to error
or fraud will not occur or that all control issues and instances
of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls also can be
circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in
part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls
effectiveness to future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions
or deterioration in the degree of compliance with policies or
procedures.
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.
Prior to our acquisition of Printed Circuit Group (PCG) in
October 2006, PCG made legal commitments to the
U.S. Environmental Protection Agency (U.S. EPA) and
the State of Connecticut regarding settlement of enforcement
actions against the PCG operations in Connecticut. On
August 17, 2004, PCG was sentenced for Clean Water Act
violations and was ordered to pay a $6 million fine and an
additional $3.7 million to fund environmental projects
designed to improve the environment for Connecticut residents.
In September 2004, PCG agreed to a stipulated judgment with the
Connecticut Attorney Generals office and the Connecticut
Department of Environmental Protection (DEP) under which PCG
paid a $2 million civil penalty and agreed to implement
capital improvements of $2.4 million to reduce the volume
of rinse water discharged from its manufacturing facilities in
Connecticut. The obligations to the U.S. EPA and
Connecticut DEP include the fulfillment of a Compliance
Management Plan until at least July 2009 and installation of
rinse water recycling systems at the Stafford, Connecticut,
facilities. As of September 29, 2008, one recycling system
was completed and placed into operation, and approximately
$0.5 million remains to be expended in the form of capital
improvements to meet the second rinse water recycling system
requirement. We have assumed these legal commitments as part of
our purchase of PCG. Failure to meet either commitment could
result in further costly enforcement actions, including
exclusion from participation in federal contracts.
An investment in our common stock involves a high degree of
risk. You should carefully consider the factors described below,
in addition to those discussed elsewhere in this report, in
analyzing an investment in our common stock. If any of the
events described below 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 following risk factors and uncertainties
could cause our actual results to differ materially from those
projected in our forward-looking statements, whether made in
this
Form 10-Q
or the other documents we file
27
with the SEC, or our annual or quarterly reports to
stockholders, future press releases, or orally, whether in
presentations, responses to questions, or otherwise.
Risks
Related to Our Company
We are
heavily dependent upon the worldwide electronics industry, which
is characterized by significant economic cycles and fluctuations
in product demand. A significant downturn in the electronics
industry could result in decreased demand for our manufacturing
services and could lower our sales and gross
margins.
A majority of our revenues are generated from the electronics
industry, which is characterized by intense competition,
relatively short product life cycles, and significant
fluctuations in product demand. Furthermore, the industry is
subject to economic cycles and recessionary periods and would be
negatively affected by contraction in the U.S. economy or
in the worldwide electronics market. Moreover, due to the
uncertainty in the end markets served by most of our customers,
we have a low level of visibility with respect to future
financial results. The current credit crisis and related turmoil
in the financial system has negatively impacted the global
economy and could result in a significant downturn in the
electronics industry. A lasting economic recession, excess
manufacturing capacity, or a decline in the electronics industry
could negatively affect our business, results of operations, and
financial condition. A decline in our sales could harm our
profitability and results of operations and could require us to
record an additional valuation allowance against our deferred
tax assets or recognize an impairment of our long-lived assets,
including goodwill and other intangible assets.
The
global financial crisis may impact our business and financial
condition in ways that we currently cannot
predict.
The continued credit crisis and related turmoil in the global
financial system has had and may continue to have an impact on
our business and financial condition. For example, we are
currently unable to access cash invested in our Reserve Primary
Fund, a money market fund that has suspended redemptions and is
being liquidated. We had invested approximately
$20.1 million in this fund, which had a fair value of
$19.5 million at September 29, 2008. Despite making
redemption requests for the entire amount of our investment, we
have only received a partial distribution of $10.2 million
as of October 31, 2008. While we expect to receive
substantially all of our current holdings in this fund, we
cannot predict when this will occur or the amount we will
ultimately receive.
In addition to the impact that the global financial crisis has
already had on us, we may face significant challenges if
conditions in the financial markets do not improve or continue
to worsen. For example, continuation of the credit crisis could
adversely impact overall demand in the electronics industry,
which could have a negative effect on our revenues and
profitability. In addition, our ability to access the capital
markets may be severely restricted at a time when we would like,
or need, to do so, which could have an impact on our flexibility
to react to changing economic and business conditions or our
ability to pursue acquisitions.
Our
acquisition strategy involves numerous risks.
As part of our business strategy, we expect that we will
continue to grow by pursuing acquisitions of businesses,
technologies, assets, or product lines that complement or expand
our business. Risks related to an acquisition may include:
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|
|
the potential inability to successfully integrate acquired
operations and businesses or to realize anticipated synergies,
economies of scale, or other expected value;
|
|
|
|
diversion of managements attention from normal daily
operations of our existing business to focus on integration of
the newly acquired business;
|
|
|
|
unforeseen expenses associated with the integration of the newly
acquired business;
|
|
|
|
difficulties in managing production and coordinating operations
at new sites;
|
|
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the potential loss of key employees of acquired operations;
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the potential inability to retain existing customers of acquired
companies when we desire to do so;
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insufficient revenues to offset increased expenses associated
with acquisitions;
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the potential decrease in overall gross margins associated with
acquiring a business with a different product mix;
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the inability to identify certain unrecorded liabilities;
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the potential need to restructure, modify, or terminate customer
relationships of the acquired company;
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an increased concentration of business from existing or new
customers; and
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the potential inability to identify assets best suited to our
business plan.
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Acquisitions may cause us to:
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enter lines of business
and/or
markets in which we have limited or no prior experience;
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issue debt and be required to abide by stringent loan covenants;
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assume liabilities;
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record goodwill and
non-amortizable
intangible assets that will be subject to impairment testing and
potential periodic impairment charges;
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become subject to litigation and environmental issues;
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incur unanticipated costs;
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incur large and immediate write-offs;
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issue common stock that would dilute our current
stockholders percentage ownership; and
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incur substantial transaction-related costs, whether or not a
proposed acquisition is consummated.
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Acquisitions of high technology companies are inherently risky,
and no assurance can be given that our recent or future
acquisitions will be successful and will not harm our business,
operating results, or financial condition. Failure to manage and
successfully integrate acquisitions we make could harm our
business and operating results in a material way. Even when an
acquired company has already developed and marketed products,
product enhancements may not be made in a timely fashion. In
addition, unforeseen issues might arise with respect to such
products after the acquisition.
During
periods of excess global printed circuit board manufacturing
capacity, our gross margins may fall and/or we may have to incur
restructuring charges if we choose to reduce the capacity of or
close any of our facilities.
When we experience excess capacity, our sales revenues may not
fully cover our fixed overhead expenses, and our gross margins
will fall. In addition, we generally schedule our quick-turn
production facilities at less than full capacity to retain our
ability to respond to unexpected additional quick-turn orders.
However, if these orders are not received, we may forego some
production and could experience continued excess capacity.
If we conclude we have significant, long-term excess capacity,
we may decide to permanently close one or more of our
facilities, and lay off some of our employees. Closures or
lay-offs could result in our recording restructuring charges
such as severance, other exit costs, and asset impairments.
We
face a risk that capital needed for our business and to repay
our debt obligations will not be available when we need it.
Additionally, our leverage and our debt service obligations may
adversely affect our cash flow.
As of September 29, 2008, we had total indebtedness of
approximately $175 million, which represented approximately
32% of our total capitalization.
29
Our indebtedness could have significant negative consequences,
including:
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increasing our vulnerability to general adverse economic and
industry conditions,
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limiting our ability to obtain additional financing,
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requiring the use of a substantial portion of any cash flow from
operations to service our indebtedness, thereby reducing the
amount of cash flow available for other purposes, including
capital expenditures,
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limiting our flexibility in planning for, or reacting to,
changes in our business and the industry in which we
compete, and
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placing us at a possible competitive disadvantage to less
leveraged competitors and competitors that have better access to
capital resources.
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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 could harm our results of operations.
A small number of customers are responsible for a significant
portion of our sales. Our five largest OEM customers accounted
for approximately 30% of our net sales for the quarter ended
September 29, 2008 and approximately 25% of our net sales
for the quarter ended October 1, 2007. Sales attributed to
OEMs include both direct sales as well as sales that the OEMs
place through EMS providers. Our customer concentration could
fluctuate, depending on future customer requirements, which will
depend in large part on market conditions in the electronics
industry segments in which our customers participate. The loss
of one or more significant customers or a decline in sales to
our significant customers could harm our business, results of
operations, and financial condition and lead to declines in the
trading price of our common stock. In addition, we generate
significant accounts receivable in connection with providing
manufacturing services to our customers. If one or more of our
significant customers were to become insolvent or were otherwise
unable to pay for the manufacturing services provided by us, our
results of operations would be harmed.
We
compete against manufacturers in Asia, where production costs
are lower. These competitors may gain market share in our key
market segments, which may have an adverse effect on the pricing
of our products.
We may be at a competitive disadvantage with respect to price
when compared to manufacturers with lower-cost facilities in
Asia and other locations. We believe price competition from
printed circuit board manufacturers in Asia and other locations
with lower production costs may play an increasing role in the
market. Although we do have a backplane assembly facility in
China, we do not have offshore facilities for PCB fabrication in
lower-cost locations such as Asia. While historically our
competitors in these locations have produced less
technologically advanced printed circuit boards, they continue
to expand their capacity and capabilities with advanced
equipment to produce higher technology printed circuit boards.
In addition, fluctuations in foreign currency exchange rates may
benefit these offshore competitors. As a result, these
competitors may gain market share, which may force us to lower
our prices, reducing our gross margins.
A
trend toward consolidation among our customers could adversely
affect our business.
Recently, some of our large customers have consolidated and
further consolidation of customers may occur. Depending on which
organization becomes the controller of the supply chain function
following the consolidation, we may not be retained as a
preferred or approved supplier. In addition, product duplication
could result in the termination of a product line that we
currently support. While there is potential for increasing our
position with the combined customer, there does exist the
potential for decreased revenue if we are not retained as a
continuing supplier. We also face the risk of increased pricing
pressure from the combined customer because of its increased
market share.
30
Our
failure to comply with the requirements of environmental laws
could result in litigation, fines and revocation of permits
necessary to our manufacturing processes. Failure to operate in
conformance with environmental laws could lead to debarment from
our participation in federal government contracts.
Our operations are regulated under a number of federal, state,
local, and foreign environmental and safety laws and regulations
that govern, among other things, the discharge of hazardous
materials into the air and water, as well as the handling,
storage, and disposal of such materials. These laws and
regulations include the Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act, the Superfund Amendment
and Reauthorization Act, the Comprehensive Environmental
Response, Compensation and Liability Act, and the Federal Motor
Carrier Safety Improvement Act as well as analogous state,
local, and foreign laws. Compliance with these environmental
laws is a major consideration for us because our manufacturing
processes use and generate materials classified as hazardous,
such as ammoniacal and cupric etching solutions, copper, nickel
and other plating baths. Because we use hazardous materials and
generate hazardous wastes in our manufacturing processes, we may
be subject to potential financial liability for costs associated
with the investigation and remediation of our own sites, or
sites at which we have arranged for the disposal of hazardous
wastes, if such sites become contaminated. Even if we fully
comply with applicable environmental laws and are not directly
at fault for the contamination, we may still be liable. The
wastes we generate include spent ammoniacal and cupric etching
solutions, metal stripping solutions, waste acid solutions,
waste alkaline cleaners, waste oil, and waste waters that
contain heavy metals such as copper, tin, lead, nickel, gold,
silver, cyanide, and fluoride; and both filter cake and spent
ion exchange resins from equipment used for
on-site
waste treatment.
We are also required to obtain permits from governmental
authorities for certain operations, including waste water
discharge. We cannot assure you that we have been or will be at
all times in complete compliance with such laws, regulations and
permits. Any material violations of environmental laws or
environmental permits by us could subject us to fines,
penalties, and other sanctions, including the revocation of our
effluent discharge permits, which could require us to cease or
limit production at one or more of our facilities, and harm our
business, results of operations, and financial condition. Even
if we ultimately prevail, environmental lawsuits against us
would be time consuming and costly to defend.
Prior to our acquisition of the PCG business, PCG made legal
commitments to the U.S. Environmental Protection Agency and
to the State of Connecticut regarding settlement of enforcement
actions related to the PCG operations in Connecticut. The
obligations include fulfillment of a Compliance Management Plan
through at least July 2009 and installation of two rinse water
recycling systems at the Stafford, Connecticut facilities. (One
was completed as of September 29, 2008.) Failure to meet
either commitment could result in further costly enforcement
actions, including exclusion from participation in defense and
other federal contracts, which would materially harm our
business, results of operations, and financial condition.
Environmental laws also could become more stringent over time,
imposing greater compliance costs and increasing risks and
penalties associated with violation. We operate in
environmentally sensitive locations, and we are subject to
potentially conflicting and changing regulatory agendas of
political, business, and environmental groups. Changes or
restrictions on discharge limits, emissions levels, material
storage, handling, or disposal might require a high level of
unplanned capital investment or global relocation. It is
possible that environmental compliance costs and penalties from
new or existing regulations may harm our business, results of
operations, and financial condition.
We are increasingly required to certify compliance to various
material content restrictions in our products based on laws of
various jurisdictions or territories such as the Restriction of
Hazardous Substances (RoHS) and Registration, Evaluation,
Authorization and Restriction of Chemicals (REACH) directives in
the European Union and Chinas RoHS legislation. New York
City has adopted identical restrictions and many
U.S. states are considering similar rules and legislation.
In addition, we must also certify as to the non-applicability to
the EUs Waste Electrical and Electronic Equipment
directive for certain products that we manufacture. As with
other types of product certifications that we routinely provide,
we may incur liability and pay damages if our products do not
conform to our certifications.
31
We are
exposed to the credit risk of some of our customers and to
credit exposures in weakened markets.
Most of our sales are on an open credit basis, with
standard industry payment terms. We monitor individual customer
payment capability in granting such open credit arrangements,
seek to limit such open credit to amounts we believe the
customers can pay, and maintain reserves we believe are adequate
to cover exposure for doubtful accounts. During periods of
economic downturn in the electronics industry and the global
economy, our exposure to credit risks from our customers
increases. Although we have programs in place to monitor and
mitigate the associated risks, such programs may not be
effective in reducing our credit risks.
Our 10 largest customers accounted for approximately 51% of our
net sales for the quarter ended September 29, 2008 and
approximately 45% of our net sales for the quarter ended
October 1, 2007. Additionally, our OEM customers often
direct a significant portion of their purchases through a
relatively limited number of EMS companies. Our contractual
relationship is often with the EMS companies, who are obligated
to pay us for our products. Because we expect our OEM customers
to continue to direct our sales to EMS companies, we expect to
continue to be subject to this credit risk with a limited number
of EMS customers. If one or more of our significant customers
were to become insolvent or were otherwise unable to pay us, our
results of operations would be harmed.
Some of our customers are EMS companies located abroad. Our
exposure has increased as these foreign customers continue to
expand. With the primary exception of sales from our facility in
China and a portion of sales from our Ireland sales office, our
foreign sales are denominated in U.S. dollars and are
typically on the same open credit basis and terms
described above. Our foreign receivables were approximately 15%
of our net accounts receivable as of September 29, 2008 and
are expected to continue to grow as a percentage of our total
receivables. We do not utilize credit insurance as a risk
management tool.
We
rely on suppliers for the timely delivery of raw materials and
components used in manufacturing our printed circuit boards and
backplane assemblies, and an increase in industry demand or the
presence of a shortage for these raw materials or components may
increase the price of these raw materials or components and
reduce our gross margins. If a raw material supplier fails to
satisfy our product quality standards, it could harm our
customer relationships.
To manufacture printed circuit boards, we use raw materials such
as laminated layers of fiberglass, copper foil, chemical
solutions, gold, and other commodity products, which we order
from our suppliers. Although we have preferred suppliers for
most of these raw materials, the materials we use are generally
readily available in the open market, and numerous other
potential suppliers exist. In the case of backplane assemblies,
components include connectors, sheet metal, capacitors,
resistors and diodes, many of which are custom made and
controlled by our customers approved vendors. These
components for backplane assemblies in some cases have limited
or sole sources of supply. From time to time, we may experience
increases in raw material or component prices, based on demand
trends, which can negatively affect our gross margins. In
addition, consolidations and restructuring in our supplier base
may result in adverse materials pricing due to reduction in
competition among our suppliers. Furthermore, if a raw material
or component supplier fails to satisfy our product quality
standards, it could harm our customer relationships. Suppliers
may from time to time extend lead times, limit supplies, or
increase prices, due to capacity constraints or other factors,
which could harm our ability to deliver our products on a timely
basis. We have recently experienced an increase in the price we
pay for gold. In general, we are able to pass this price
increase on to our customers, but we cannot be certain we will
continue to be able to do so in the future.
If we
are unable to respond to rapid technological change and process
development, we may not be able to compete
effectively.
The market for our manufacturing services is characterized by
rapidly changing technology and continual implementation of new
production processes. The future success of our business will
depend in large part upon our ability to maintain and enhance
our technological capabilities, to manufacture products that
meet changing customer needs, and to successfully anticipate or
respond to technological changes on a cost-effective and timely
basis. We expect that the investment necessary to maintain our
technological position will increase as customers make demands
for products and services requiring more advanced technology on
a quicker turnaround basis. We may not be able to raise
additional funds in order to respond to technological changes as
quickly as our competitors.
32
In addition, the printed circuit board industry could encounter
competition from new or revised manufacturing and production
technologies that render existing manufacturing and production
technology less competitive or obsolete. We may not respond
effectively to the technological requirements of the changing
market. If we need new technologies and equipment to remain
competitive, the development, acquisition, and implementation of
those technologies and equipment may require us to make
significant capital investments.
Competition
in the printed circuit board market is intense, and we could
lose market share if we are unable to maintain our current
competitive position in end markets using our quick-turn, high
technology and high-mix manufacturing services.
The printed circuit board industry is intensely competitive,
highly fragmented, and rapidly changing. We expect competition
to continue, which could result in price reductions, reduced
gross margins, and loss of market share. Our principal North
American PCB competitors include Coretec, DDi, Endicott
Interconnect Technologies, FTG, ISU/Petasys, Merix, Pioneer
Circuits, and Sanmina-SCI. Our principal international PCB
competitors include Elec & Eltek, Hitachi, Ibiden,
ISU/Petasys and Multek. Our principal assembly competitors
include Amphenol, Sanmina-SCI, Simclar, TT Electronics, and Via
Systems. In addition, we increasingly compete on an
international basis, and new and emerging technologies may
result in new competitors entering our markets.
Some of our competitors and potential competitors have
advantages over us, including:
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greater financial and manufacturing resources that can be
devoted to the development, production, and sale of their
products;
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more established and broader sales and marketing channels;
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more manufacturing facilities worldwide, some of which are
closer in proximity to OEMs;
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manufacturing facilities that are located in countries with
lower production costs;
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lower capacity utilization, which in peak market conditions can
result in shorter lead times to customers;
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ability to add additional capacity faster or more efficiently;
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preferred vendor status with existing and potential customers;
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greater name recognition; and
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larger customer bases.
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In addition, these competitors may respond more quickly to new
or emerging technologies, or adapt more quickly to changes in
customer requirements, and devote greater resources to the
development, promotion, and sale of their products than we do.
We must continually develop improved manufacturing processes to
meet our customers needs for complex products, and our
manufacturing process technology is generally not subject to
significant proprietary protection. During recessionary periods
in the electronics industry, our strategy of providing
quick-turn services, an integrated manufacturing solution, and
responsive customer service may take on reduced importance to
our customers. As a result, we may need to compete more on the
basis of price, which could cause our gross margins to decline.
Periodically, printed circuit board manufacturers and backplane
assembly providers experience overcapacity. Overcapacity,
combined with weakness in demand for electronic products,
results in increased competition and price erosion for our
products.
Our
quarterly 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 and potentially cause the trading price of our
common stock to decline.
Our quarterly results of operations fluctuate for a variety of
reasons, including:
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timing of orders from and shipments to major customers;
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the levels at which we utilize our manufacturing capacity;
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price competition;
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changes in our mix of revenues generated from quick-turn versus
standard delivery time services;
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expenditures, charges or write-offs, including those related to
acquisitions, facility restructurings, or asset
impairments; and
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expenses relating to expanding existing manufacturing facilities.
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A significant portion of our operating expenses is relatively
fixed in nature, and planned expenditures are based in part on
anticipated orders. Accordingly, unexpected revenue shortfalls
may decrease our gross margins. In addition, we have experienced
sales fluctuations due to seasonal patterns in the capital
budgeting and purchasing cycles, as well as inventory management
practices of our customers and the end markets we serve. In
particular, the seasonality of the computer industry and
quick-turn ordering patterns affects the overall printed circuit
board industry. These seasonal trends have caused fluctuations
in our quarterly operating results in the past and may continue
to do so in the future. Results of operations in any quarterly
period should not be considered indicative of the results to be
expected for any future period. In addition, our future
quarterly operating results may fluctuate and may not meet the
expectations of securities analysts or investors. If this
occurs, the trading price of our common stock likely would
decline.
Because
we sell on a purchase order basis, we are subject to
uncertainties and variability in demand by our customers that
could decrease revenues and harm our operating
results.
We generally sell to customers on a purchase order basis rather
than pursuant to long-term contracts. Our quick-turn orders are
subject to particularly short lead times. Consequently, our
sales are subject to short-term variability in demand by our
customers. Customers submitting purchase orders may cancel,
reduce, or delay their orders for a variety of reasons. The
level and timing of orders placed by our customers may vary, due
to:
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customer attempts to manage inventory;
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changes in customers manufacturing strategies, such as a
decision by a customer to either diversify or consolidate the
number of printed circuit board manufacturers or backplane
assembly service providers used or to manufacture or assemble
its own products internally;
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variation in demand for our customers products; and
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changes in new product introductions.
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We have periodically experienced terminations, reductions, and
delays in our customers orders. Further terminations,
reductions, or delays in our customers orders could harm
our business, results of operations, and financial condition.
The
increasing prominence of EMS providers in the printed circuit
board industry could reduce our gross margins, potential sales,
and customers.
Sales to EMS providers represented approximately 50% of our net
sales in the third quarter ended September 29, 2008. Sales
to EMS providers include sales directed by OEMs as well as
orders placed with us at the EMS providers discretion. EMS
providers source on a global basis to a greater extent than
OEMs. The growth of EMS providers increases the purchasing power
of such providers and could result in increased price
competition or the loss of existing OEM customers. In addition,
some EMS providers, including some of our customers, have the
ability to directly manufacture printed circuit boards and
create backplane assemblies. If a significant number of our
other EMS customers were to acquire these abilities, our
customer base might shrink, and our sales might decline
substantially. Moreover, if any of our OEM customers outsource
the production of printed circuit boards and creation of
backplane assemblies to these EMS providers, our business,
results of operations, and financial condition may be harmed.
34
If
events or circumstances occur in our business that indicate that
our goodwill and definite-lived intangibles may not be
recoverable, we could have impairment charges that would
negatively affect our earnings.
As of September 29, 2008, our consolidated balance sheet
reflected $150.5 million of goodwill and definite-lived
intangible assets. We evaluate whether events and circumstances
have occurred that indicate the remaining balance of goodwill
and definite-lived intangible assets may not be recoverable. If
factors indicate that assets are impaired, we would be required
to reduce the carrying value of our goodwill and definite-lived
intangible assets, which could harm our results during the
periods in which such a reduction is recognized. Our goodwill
and definite-lived intangible assets may increase in future
periods if we consummate other acquisitions. Amortization or
impairment of these additional intangibles would, in turn, harm
our earnings.
Damage
to our manufacturing facilities due to fire, natural disaster,
or other events could harm our financial results.
We have U.S. manufacturing and assembly facilities in
California, Connecticut, Utah, Washington, and Wisconsin. We
also have an assembly facility in China. The destruction or
closure of any of our facilities for a significant period of
time as a result of fire; explosion; blizzard; act of war or
terrorism; or flood, tornado, earthquake, lightning, or other
natural disaster could harm us financially, increasing our costs
of doing business and limiting our ability to deliver our
manufacturing services on a timely basis.
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 effectively and could harm our financial
results.
We have limited patent or trade secret protection for our
manufacturing processes. We rely on the collective experience of
our employees involved in our manufacturing processes to ensure
we continuously evaluate and adopt new technologies in our
industry. Although we are not dependent on any one employee or a
small number of employees, if a significant number of our
employees involved in our manufacturing processes were to leave
our employment, and we were not able to replace these people
with new employees with comparable experience, our manufacturing
processes might suffer as we might be unable to keep up with
innovations in the industry. As a result, we may lose our
ability to continue to compete effectively.
We may
be exposed to intellectual property infringement claims by third
parties that could be costly to defend, could divert
managements attention and resources, and if successful,
could result in liability.
We could be subject to legal proceedings and claims for alleged
infringement by us of third-party proprietary rights, such as
patents, from time to time in the ordinary course of business.
It is possible that the circuit board designs and other
specifications supplied to us by our customers might infringe on
the patents or other intellectual property rights of third
parties, in which case our manufacture of printed circuit boards
according to such designs and specifications could expose us to
legal proceedings for allegedly aiding and abetting the
violation, as well as to potential liability for the
infringement. If we do not prevail in any litigation as a result
of any such allegations, our business could be harmed.
We
depend heavily on a single end customer, the U.S. government,
for a substantial portion of our business, including programs
subject to security classification restrictions on information.
Changes affecting the governments capacity to do business
with us or our direct customers or the effects of competition in
the defense industry could have a material adverse effect on our
business.
A significant portion of our revenues is derived from products
and services ultimately sold to the U.S. government and is
therefore affected by, among other things, the federal budget
process. We are a supplier, primarily as a subcontractor, to the
U.S. government and its agencies as well as foreign
governments and agencies. These contracts are subject to the
respective customers political and budgetary constraints
and processes, changes in customers short-range and
long-range strategic plans, the timing of contract awards, and
in the case of contracts with the U.S. government, the
congressional budget authorization and appropriation processes,
the governments
35
ability to terminate contracts for convenience or for default,
as well as other risks such as contractor suspension or
debarment in the event of certain violations of legal and
regulatory requirements. The termination or failure to fund one
or more significant contracts by the U.S. government could
have a material adverse effect on our business, results of
operations or prospects.
Our
business may suffer if any of our key senior executives
discontinues employment with us or if we are unable to recruit
and retain highly skilled engineering and sales
staff.
Our future success depends to a large extent on the services of
our key managerial employees. We may not be able to retain our
executive officers and key personnel or attract additional
qualified management in the future. Our business also depends on
our continuing ability to recruit, train, and retain highly
qualified employees, particularly engineering and sales and
marketing personnel. The competition for these employees is
intense, and the loss of these employees could harm our
business. Further, our ability to successfully integrate
acquired companies depends in part on our ability to retain key
management and existing employees at the time of the acquisition.
Increasingly,
our larger customers are requesting that we enter into supply
agreements with them that have increasingly restrictive terms
and conditions. These agreements typically include provisions
that increase our financial exposure, which could result in
significant costs to us.
Increasingly, our larger customers are requesting that we enter
into supply agreements with them. These agreements typically
include provisions that generally serve to increase our exposure
for product liability and warranty claims as
compared to our standard terms and conditions which
could result in higher costs to us as a result of such claims.
In addition, these agreements typically contain provisions that
seek to limit our operational and pricing flexibility and extend
payment terms, which can adversely impact our cash flow and
results of operations.
Our
backplane assembly operation serves customers and has a
manufacturing facility outside the United States and is
subject to the risks characteristic of international operations.
These risks include significant potential financial damage and
potential loss of the business and its assets.
Because we have manufacturing operations and sales offices
located in Asia and Europe, we are subject to the risks of
changes in economic and political conditions in those countries,
including but not limited to:
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managing international operations;
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export license requirements;
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fluctuations in the value of local currencies;
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labor unrest and difficulties in staffing;
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government or political unrest;
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longer payment cycles;
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language and communication barriers as well as time zone
differences;
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cultural differences;
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increases in duties and taxation levied on our products;
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imposition of restrictions on currency conversion or the
transfer of funds;
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limitations on imports or exports of our product offering;
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travel restrictions;
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expropriation of private enterprises; and
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the potential reversal of current favorable policies encouraging
foreign investment and trade.
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36
Our
operations in the Peoples Republic of China subject us to
risks and uncertainties relating to the laws and regulations of
the Peoples Republic of China.
Under its current leadership, the Chinese government has been
pursuing economic reform policies, including the encouragement
of foreign trade and investment and greater economic
decentralization. No assurance can be given, however, that the
government of the Peoples Republic of China (PRC) will
continue to pursue such policies, that such policies will be
successful if pursued, or that such policies will not be
significantly altered from time to time. Despite progress in
developing its legal system, the PRC does not have a
comprehensive and highly developed system of laws, particularly
with respect to foreign investment activities and foreign trade.
Enforcement of existing and future laws and contracts is
uncertain, and implementation and interpretation thereof may be
inconsistent. As the Chinese legal system develops, the
promulgation of new laws, changes to existing laws and the
preemption of local regulations by national laws may adversely
affect foreign investors. Further, any litigation in the PRC may
be protracted and result in substantial costs and diversion of
resources and management attention. In addition, some government
policies and rules are not timely published or communicated in
the local districts, if they are published at all. As a result,
we may operate our business in violation of new rules and
policies without having any knowledge of their existence. These
uncertainties could limit the legal protections available to us.
Products
we manufacture may contain design or manufacturing defects,
which could result in reduced demand for our services and
liability claims against us.
We manufacture products to our customers specifications,
which are highly complex and may contain design or manufacturing
errors or failures, despite our quality control and quality
assurance efforts. Defects in the products we manufacture,
whether caused by a design, manufacturing, or materials failure
or error, may result in delayed shipments, customer
dissatisfaction, a reduction or cancellation of purchase orders,
or liability claims against us. If these defects occur either in
large quantities or too frequently, our business reputation may
be impaired. Our sales mix has shifted towards standard delivery
time products, which have larger production runs, thereby
increasing our exposure to these types of defects. Since our
products are used in products that are integral to our
customers businesses, errors, defects, or other
performance problems could result in financial or other damages
to our customers beyond the cost of the printed circuit board,
for which we may be liable. Although our invoices and sales
arrangements generally contain provisions designed to limit our
exposure to product liability and related claims, existing or
future laws or unfavorable judicial decisions could negate these
limitation of liability provisions. Product liability litigation
against us, even if it were unsuccessful, would be time
consuming and costly to defend. Although we maintain technology
errors and omissions insurance, we cannot assure you that we
will continue to be able to purchase such insurance coverage in
the future on terms that are satisfactory to us, if at all.
We are
subject to risks of currency fluctuations.
A portion of our cash and other current assets is held in
currencies other than the U.S. dollar. As of
September 29, 2008, we had approximately $33.9 million
of current assets denominated in Chinese RMB. Changes in
exchange rates among other currencies and the U.S. dollar
will affect the value of these assets as translated to
U.S. dollars in our balance sheet. To the extent that we
ultimately decide to repatriate some portion of these funds to
the United States, the actual value transferred could be
impacted by movements in exchange rates. Any such type of
movement could negatively impact the amount of cash available to
fund operations or to repay debt.
We
export defense and commercial products from the United States to
other countries. If we fail to comply with export laws, we could
be subject to fines and other punitive actions.
Exports from the United States are regulated by the
U.S. Department of State and U.S. Department of
Commerce. Failure to comply with these regulations can result in
significant fines and penalties. Additionally, violations of
these laws can result in punitive penalties, which would
restrict or prohibit us from exporting certain products,
resulting in significant harm to our business.
37
Our
business has benefited from OEMs deciding to outsource their PCB
manufacturing and backplane assembly needs to us. If OEMs choose
to provide these services in-house or select other providers,
our business could suffer.
Our future revenue growth partially depends on new outsourcing
opportunities from OEMs. Current and prospective customers
continuously evaluate our performance against other providers.
They also evaluate the potential benefits of manufacturing their
products themselves. To the extent that outsourcing
opportunities are not available either due to OEM decisions to
produce these products themselves or to use other providers, our
future growth could be adversely affected.
We may
not be able to fully recover our costs for providing design
services to our customers, which could harm our financial
results.
Although we enter into design service activities with purchase
order commitments, the cost of labor and equipment to provide
these services may in fact exceed what we are able to fully
recover through purchase order coverage. We also may be subject
to agreements with customers in which the cost of these services
is recovered over a period of time or through a certain number
of units shipped as part of the ongoing product price. While we
may make contractual provisions to recover these costs in the
event that the product does not go into production, the actual
recovery can be difficult and may not happen in full. In other
instances, the business relationship may involve investing in
these services for a customer as an ongoing service not directly
recoverable through purchase orders. In any of these cases, the
possibility exists that some or all of these activities are
considered costs of doing business, are not directly
recoverable, and may adversely impact our operating results.
Unanticipated
changes in our tax rates or in our assessment of the
realizability of our deferred tax assets or exposure to
additional income tax liabilities could affect our operating
results and financial condition.
We are subject to income taxes in both the United States and
various foreign jurisdictions. Significant judgment is required
in determining our provision for income taxes and, in the
ordinary course of business, there are many transactions and
calculations in which the ultimate tax determination is
uncertain. Our effective tax rates could be adversely affected
by changes in the mix of earnings in countries and states with
differing statutory tax rates, changes in the valuation of
deferred tax assets and liabilities, changes in tax laws, as
well as other factors. Our tax determinations are regularly
subject to audit by tax authorities, and developments in those
audits could adversely affect our income tax provision. Although
we believe that our tax estimates are reasonable, the final
determination of tax audits or tax disputes may be different
from what is reflected in our historical income tax provisions,
which could affect our operating results.
If our
net earnings do not remain at or above recent levels, or we are
not able to predict with a reasonable degree of probability that
they will continue, we may have to record a valuation allowance
against our net deferred tax assets.
As of September 29, 2008, we had net deferred tax assets of
approximately $12.2 million. Based on our forecast for
future earnings, we believe we will utilize the deferred tax
asset in future periods. However, if our estimates of future
earnings are lower than expected, we may record a higher income
tax provision due to a write down of our net deferred tax
assets, which would reduce our earnings per share.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
Not Applicable
|
|
Item 3.
|
Defaults
Upon Senior Securities
|
Not Applicable
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
Not Applicable
38
|
|
Item 5.
|
Other
Information
|
Not Applicable
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibits
|
|
|
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.
|
39
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.
Kenton K. Alder
President and Chief Executive Officer
Dated: November 7, 2008
Steven W. Richards
Chief Financial Officer and Secretary
Dated: November 7, 2008
40
Exhibit Index
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibits
|
|
|
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.
|
41