Form 10-Q
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 |
For the quarterly period ended March 30, 2009
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 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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 has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes o 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
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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, $0.001 par value, of registrant outstanding at May 1, 2009:
43,113,905
TTM TECHNOLOGIES, INC.
Consolidated Condensed Balance Sheets
As of March 30, 2009 and December 31, 2008
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March 30, |
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December 31, |
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2009 |
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2008 |
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(Unaudited) |
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(In thousands) |
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As Adjusted |
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(Note 2) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
161,839 |
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$ |
148,465 |
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Short-term investments |
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2,322 |
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3,657 |
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Accounts receivable, net of allowances of $4,450 in 2009 and $4,911 in 2008 |
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108,157 |
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115,232 |
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Inventories |
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69,012 |
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71,011 |
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Prepaid expenses and other current assets |
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2,564 |
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2,581 |
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Income taxes receivable |
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3,575 |
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3,432 |
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Asset held for sale |
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3,250 |
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3,250 |
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Deferred income taxes |
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5,502 |
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5,502 |
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Total current assets |
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356,221 |
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353,130 |
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Property, plant and equipment, net of accumulated depreciation of $106,079 in 2009 and $100,911 in 2008 |
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112,187 |
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114,931 |
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Debt issuance costs, net |
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3,922 |
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4,044 |
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Deferred income taxes |
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32,862 |
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34,329 |
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Goodwill |
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14,121 |
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14,149 |
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Definite-lived intangibles, net of accumulated amortization of $18,695 in 2009 and $17,773 in 2008 |
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17,439 |
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18,330 |
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Deposits and other non-current assets |
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2,030 |
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1,327 |
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$ |
538,782 |
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$ |
540,240 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
45,437 |
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$ |
48,750 |
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Accrued salaries, wages and benefits |
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18,137 |
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21,596 |
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Other accrued expenses |
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4,136 |
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2,422 |
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Total current liabilities |
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67,710 |
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72,768 |
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Convertible senior notes, net of discount |
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136,118 |
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134,914 |
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Other long-term liabilities |
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2,571 |
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2,522 |
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Total long-term liabilities |
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138,689 |
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137,436 |
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Commitments and contingencies (Note 9) |
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Stockholders equity: |
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Common stock, $0.001 par value; 100,000 shares authorized, 43,111 and 42,811 shares issued and outstanding in 2009 and 2008, respectively |
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43 |
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43 |
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Additional paid-in capital |
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210,364 |
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209,401 |
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Retained earnings |
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118,853 |
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117,426 |
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Accumulated other comprehensive income |
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3,123 |
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3,166 |
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Total stockholders equity |
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332,383 |
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330,036 |
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$ |
538,782 |
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$ |
540,240 |
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See accompanying notes to consolidated condensed financial statements.
3
TTM TECHNOLOGIES, INC.
Consolidated Condensed Statements of Operations
For the Quarter Ended March 30, 2009 and March 31, 2008
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Quarter Ended |
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March 30, |
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March 31, |
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2009 |
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2008 |
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(Unaudited) |
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(In thousands, except per |
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share data) |
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Net sales |
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$ |
148,997 |
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$ |
174,071 |
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Cost of goods sold |
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124,720 |
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136,469 |
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Gross profit |
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24,277 |
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37,602 |
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Operating (income) expenses: |
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Selling and marketing |
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7,178 |
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7,714 |
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General and administrative |
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8,404 |
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8,205 |
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Amortization of definite-lived intangibles |
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860 |
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947 |
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Restructuring charges |
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2,460 |
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Impairment of long-lived assets |
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343 |
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Metal reclamation |
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(3,700 |
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Total operating expenses |
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19,245 |
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13,166 |
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Operating income |
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5,032 |
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24,436 |
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Other income (expense): |
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Interest expense |
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(2,715 |
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(1,835 |
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Interest income |
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99 |
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143 |
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Other, net |
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(108 |
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141 |
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Total other expense, net |
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(2,724 |
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(1,551 |
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Income before income taxes |
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2,308 |
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22,885 |
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Income tax provision |
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(881 |
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(8,513 |
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Net income |
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$ |
1,427 |
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$ |
14,372 |
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Basic earnings per share |
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$ |
0.03 |
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$ |
0.34 |
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Diluted earnings per share |
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$ |
0.03 |
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$ |
0.34 |
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See accompanying notes to consolidated condensed financial statements.
4
TTM TECHNOLOGIES, INC.
Consolidated Condensed Statements of Cash Flows
For the Quarter Ended March 30, 2009 and March 31, 2008
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Quarter Ended |
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March 30, |
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March 31, |
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2009 |
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2008 |
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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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$ |
1,427 |
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$ |
14,372 |
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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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4,874 |
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5,280 |
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Amortization of definite-lived intangible assets |
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888 |
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977 |
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Amortization of convertible notes debt discount and related debt issuance costs |
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1,325 |
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338 |
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Non-cash interest imputed on other long-term liabilities |
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38 |
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31 |
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Income tax benefit from restricted stock units released and common stock options exercised |
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644 |
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(31 |
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Deferred income taxes |
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1,494 |
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2,095 |
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Stock-based compensation |
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1,607 |
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991 |
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Impairment of long-lived assets |
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343 |
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Net (gain) loss on sale of property, plant and equipment |
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(8 |
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135 |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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7,035 |
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1,093 |
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Inventories |
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1,983 |
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(7,640 |
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Prepaid expenses and other current assets |
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17 |
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(468 |
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Income taxes receivable |
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(180 |
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2,237 |
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Accounts payable |
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(2,877 |
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6,282 |
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Accrued salaries, wages and benefits and other accrued expenses |
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(2,337 |
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1,089 |
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Net cash provided by operating activities |
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16,273 |
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26,781 |
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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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(3,589 |
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(3,514 |
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Proceeds from sale of property, plant and equipment |
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10 |
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65 |
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Proceeds from redemption of short-term investments |
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1,335 |
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Net cash used in investing activities |
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(2,244 |
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(3,449 |
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Cash flows from financing activities: |
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Principal payments on long-term debt |
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(10,000 |
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Proceeds from exercise of common stock options |
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120 |
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Excess income tax benefit from restricted stock units released and common stock options exercised |
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(644 |
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31 |
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Net cash used in financing activities |
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(644 |
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(9,849 |
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Effect of foreign currency exchange rates on cash and cash equivalents |
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(11 |
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405 |
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Net increase in cash and cash equivalents |
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13,374 |
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13,888 |
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Cash and cash equivalents at beginning of period |
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148,465 |
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18,681 |
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Cash and cash equivalents at end of period |
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$ |
161,839 |
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$ |
32,569 |
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Supplemental cash flow information: |
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Cash paid for interest |
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$ |
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$ |
1,515 |
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Cash paid for income taxes |
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208 |
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552 |
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Supplemental disclosures of non-cash investing and financing activities:
As of March 30, 2009 and March 31, 2008, accrued purchases of equipment totaled $1,064 and
$1,399, respectively.
The Company recognized an unrealized loss on derivative instruments of $471, net of tax for
the quarter ended March 31, 2008.
See accompanying notes to consolidated condensed financial statements.
5
TTM TECHNOLOGIES, INC.
Notes to Consolidated Condensed Financial Statements
(unaudited)
(Dollars and shares in thousands, except per share data)
(1) Nature of Operations and Basis of Presentation
TTM Technologies, Inc. (the Company or TTM) is a manufacturer of complex printed circuit
boards (PCBs) 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 quarter ended March 30,
2009 and March 31, 2008 contained 89 days and 91 days, respectively.
6
TTM TECHNOLOGIES, INC.
Notes to Consolidated Condensed Financial Statements - (Continued)
(2) Change in Method of Accounting for Convertible Senior Notes
On January 1, 2009, the Company adopted the provisions of Financial Accounting Standards Board
(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. Upon adoption, FSP APB 14-1 requires retrospective application
back to the issuance date of convertible debt, which for the Company was May 2008. As a result of
retrospective application the Company recorded a decrease in retained earnings of $1,641 primarily
reflecting the after-tax impact of higher interest expense for the year ended December 31, 2008
as summarized below:
Balance Sheet
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December 31, 2008 |
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Adjusted as |
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As |
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a result of |
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Originally |
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Effect of |
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the Adoption |
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Reported |
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Change |
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of APB 14-1 |
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Debt issuance costs, net |
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5,297 |
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(1,253 |
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4,044 |
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Deferred income taxes |
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49,183 |
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(14,854 |
) |
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34,329 |
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Deposits and other non-current assets |
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1,230 |
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97 |
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1,327 |
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Total Assets |
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$ |
556,250 |
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$ |
(16,010 |
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$ |
540,240 |
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Other accrued expenses |
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2,385 |
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37 |
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2,422 |
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Convertible senior notes, net of discount |
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175,000 |
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(40,086 |
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134,914 |
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Total Liabilities |
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250,253 |
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(40,049 |
) |
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210,204 |
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Additional paid-in capital |
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183,721 |
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|
25,680 |
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|
209,401 |
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Retained earnings |
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|
119,067 |
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(1,641 |
) |
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117,426 |
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Total stockholders equity |
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305,997 |
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|
24,039 |
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330,036 |
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$ |
556,250 |
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$ |
(16,010 |
) |
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$ |
540,240 |
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Further, the implementation of FSP APB 14-1 increased interest expense by approximately
$1,096, decreased net income by $678, and decreased basic and dilutive earnings per share by $0.02
for the quarter ended March 30, 2009. The adoption of FSP APB
14-1 did not affect interest expense, net income
or earnings per share for the quarter ended March 31, 2008 as the Company did not enter into the
convertible debt arrangement until May 2008. See Note 5.
(3) 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. The Company
records these investments as trading securities and at fair market value in accordance with
Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities, (SFAS 115).
7
TTM TECHNOLOGIES, INC.
Notes to Consolidated Condensed Financial Statements - (Continued)
The Company has requested redemption of its remaining investment in the Primary Fund and
during the first quarter of 2009 received an additional distribution of funds in the amount of
$1,335. The Company expects continued distribution to occur as the Primary Funds assets mature or
are sold. The Company expects to receive substantially all of its remaining holdings in the Primary
Fund. The Company classified its investment in the Primary Fund as a short-term investment on the
Companys condensed consolidated balance sheet at March 30, 2009 and December 31, 2008. At March
30, 2009 and December 31, 2008, the fair value of the Companys remaining investment in the Primary
Fund was $2,322 and $3,657, respectively. See Note 8.
Subsequent to March 30, 2009, the Company received an additional distribution of funds in the
amount of $903.
(4) Inventories
Inventories as of March 30, 2009 and December 31, 2008 consist of the following:
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March 30, |
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December 31, |
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2009 |
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2008 |
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|
|
(In thousands) |
|
Raw materials |
|
$ |
26,226 |
|
|
$ |
25,998 |
|
Work-in-process |
|
|
34,766 |
|
|
|
36,290 |
|
Finished goods |
|
|
8,020 |
|
|
|
8,723 |
|
|
|
|
|
|
|
|
|
|
$ |
69,012 |
|
|
$ |
71,011 |
|
|
|
|
|
|
|
|
(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 is 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 rank equally to the Companys future unsecured senior indebtedness and
senior in right of payment to any of the Companys future subordinated indebtedness. The
Convertible Notes are accounted for in accordance with FSP APB 14-1 by separately accounting for
the liability and equity components of convertible debt as described in Note 2.
The Company received proceeds of $169,249 after the deduction of offering expenses of $5,751
upon issuance of the Convertible Notes. In accordance with FSP ABP 14-1, the Company allocated the
Convertible Notes offering costs to the liability and equity components in proportion to the
allocation of proceeds and accounted for them as debt issuance costs and equity issuance costs,
respectively. At March 30, 2009 and December 31, 2008 the following summarizes the liability and
equity components of the Convertible Notes:
|
|
|
|
|
|
|
|
|
|
|
March 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Liability components: |
|
|
|
|
|
|
|
|
Convertible Notes |
|
$ |
175,000 |
|
|
$ |
175,000 |
|
Less: Convertible Notes unamortized discount |
|
|
(38,882 |
) |
|
|
(40,086 |
) |
|
|
|
|
|
|
|
Convertible Notes, net of discount |
|
$ |
136,118 |
|
|
$ |
134,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity components: |
|
|
|
|
|
|
|
|
Additional paid-in capital: |
|
|
|
|
|
|
|
|
Embedded conversion option Convertible Notes |
|
$ |
43,000 |
|
|
$ |
43,000 |
|
Embedded conversion option Convertible Notes issuance costs |
|
|
(1,413 |
) |
|
|
(1,413 |
) |
|
|
|
|
|
|
|
|
|
$ |
41,587 |
|
|
$ |
41,587 |
|
|
|
|
|
|
|
|
At March 30, 2009 and December 31, 2008, remaining unamortized debt issuance costs were $3,922
and $4,044, respectively, and are being amortized to interest expense over the term of the
Convertible Notes. At March 30, 2009 the remaining amortization period for the unamortized
Convertible Note discount and debt issuance costs was 6.13 years.
Additionally, the Company recognized total interest expense, before consideration of
capitalized interest, on the Convertible Notes in the amount of $2,747 for the quarter ended March
30, 2009 consisting of $1,422 for the contractual coupon interest, $1,204 for the amortization of
the Convertible Notes debt discount, and $121 for the amortization of debt issuance costs. The
amortization of the Convertible Notes debt discount and debt issuance costs are based
on an effective interest rate of 8.37%. The inception of the Convertible Notes was May 2008 and
therefore there was no Convertible Notes interest expense recognized for the quarter ended March
31, 2008.
8
TTM TECHNOLOGIES, INC.
Notes to Consolidated Condensed Financial Statements - (Continued)
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 March 30, 2009, 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.
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 shares 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.
9
TTM TECHNOLOGIES, INC.
Notes to Consolidated Condensed Financial Statements - (Continued)
(6) Comprehensive Income
The components of accumulated other comprehensive income generally include foreign currency
translation adjustments and unrealized gains and losses on effective cash flow hedges. The
computation of comprehensive income was as follows:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
March 30, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Net income |
|
$ |
1,427 |
|
|
$ |
14,372 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of a tax benefit of $26 and net of tax expense of $620
for the quarter ended March 30, 2009 and March 31, 2008, respectively |
|
|
(43 |
) |
|
|
1,050 |
|
Unrealized loss on effective cash flow hedges, net of $278 of tax for the quarter ended March 31, 2008 |
|
|
|
|
|
|
(471 |
) |
|
|
|
|
|
|
|
Total other comprehensive (loss) income, net of tax |
|
|
(43 |
) |
|
|
579 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
1,384 |
|
|
$ |
14,951 |
|
|
|
|
|
|
|
|
(7) Restructuring Charges and Impairment of Long-lived Assets
On January 15, 2009, the Company announced its plan to close its Redmond, Washington facility
and lay off approximately 370 employees at this site. In addition, the Company laid off about 140
employees at various other U.S. facilities on January 15, 2009. The Company has recorded $2,460 in
separation costs related to this restructuring. These separation charges have been classified as
restructuring charges in the consolidated condensed statement of operations. As of March 30, 2009
approximately 56 employees had yet to be separated. The Company expects the remaining employees to
be separated and remaining accrued restructuring costs to be utilized by the second quarter of
2009. Accrued restructuring costs are included as a component of accrued salaries, wages and
benefits in the consolidated condensed balance sheet.
The below table shows the utilization of the accrued restructuring costs during the quarter
ended March 30, 2009:
|
|
|
|
|
|
|
(In thousands) |
|
Accrued at December 31, 2008 |
|
$ |
|
|
Estimated severance charges |
|
|
2,460 |
|
Amount paid |
|
|
(2,170 |
) |
|
|
|
|
Accrued at March 30, 2009 |
|
$ |
290 |
|
|
|
|
|
Additionally, the Company recorded the further impairment of certain long-lived assets for its
Redmond, Washington facility in the amount of $343 as part of its closure. The Redmond,
Washington facility is part of the PCB Manufacturing segment. These charges are presented as
impairment of long-lived assets in the consolidated condensed statement of operations.
(8) Fair Value Measures
Fair Value of Financial Instruments
The carrying amount and estimated fair value of our financial instruments at March 30, 2009
and December 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
|
(In thousands) |
|
Short-term investments |
|
$ |
2,322 |
|
|
$ |
2,322 |
|
|
$ |
3,657 |
|
|
$ |
3,657 |
|
Convertible senior notes |
|
|
136,118 |
|
|
|
110,966 |
|
|
|
134,914 |
|
|
|
87,553 |
|
The fair value of the convertible senior notes was estimated based on quoted market prices at
the end of the reporting period.
10
TTM TECHNOLOGIES, INC.
Notes to Consolidated Condensed Financial Statements - (Continued)
Fair Value Measures
On 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. On January 1, 2009 the Company
implemented the remaining provisions of SFAS 157 for non-financial assets and non-financial
liabilities, which did not have a material impact on the Companys consolidated financial position.
SFAS 157 establishes the following hierarchy for categorizing inputs used to measure fair
value:
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 Unobservable inputs in which there is little or no market data, which require the
reporting unit to develop its own assumptions.
At March 30, 2009, the following financial asset was measured at fair value on a recurring
basis using the type of inputs shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 30, |
|
|
Fair Value Measurements Using: |
|
|
|
2009 |
|
|
Level 1 Inputs |
|
|
Level 2 Inputs |
|
|
Level 3 Inputs |
|
|
|
(In thousands) |
|
Short-term investments |
|
$ |
2,322 |
|
|
|
|
|
|
|
|
|
|
$ |
2,322 |
|
The Company values its short-term investments using the market approach, which utilizes prices
and other relevant information generated by market transactions involving identical or similar
comparable investments.
|
|
|
|
|
Fair Value Measurement using Significant Unobservable Inputs (Level 3) |
|
(In thousands) |
|
Beginning balance at December 31, 2008 |
|
$ |
3,657 |
|
Transfers to level 3 |
|
|
|
|
Settlement |
|
|
(1,335 |
) |
Changes in fair value included in earnings |
|
|
|
|
|
|
|
|
Ending balance at March 30, 2009 |
|
$ |
2,322 |
|
|
|
|
|
The majority of the Companys non-financial instruments, which include goodwill, intangible
assets, inventories and property, plant and equipment, are not required to be carried at fair value
on a recurring basis. However, if certain triggering events occur (or at least annually for
goodwill) such that a non-financial instrument is required to be evaluated for impairment, a
resulting asset impairment would require that the non-financial instrument be recorded at the lower
of its historical cost or its fair value.
During the first quarter of 2009, the Company reviewed for impairment the book value of its
Redmond, Washington production facility assets which may not be recoverable as a result of the
facilitys closure. The Company evaluates regularly whether events and circumstances have
occurred that indicate possible impairment and relies on a number of factors, including operating
results, business plans, economic projections, and anticipated future cash flows. During the
quarter ended March 30, 2009, certain production facility assets were impaired by $343 and the
carrying value of such assets were reduced to their fair value. As the primary determination of
fair value was managements review of current auction rates of similar assets, the resulting fair
value is considered a Level 2 input.
11
TTM TECHNOLOGIES, INC.
Notes to Consolidated Condensed Financial Statements - (Continued)
(9) Commitments and Contingencies
Legal Matters
Prior to the Companys acquisition of Tyco Printed Circuit Group LP (PCG), it 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 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 March 30, 2009, one
recycling system was complete and placed into operation, and approximately $739 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 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 March 30, 2009 and December 31, 2008.
Environmental Matters
The process to manufacture PCBs 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 at various production sites. The Company currently estimates that it will
incur total remediation costs of $1,326 over the next 12 to 84 months related to three Connecticut
production sites and a Washington production site.
The Company is in various stages of investigation and cleanup related to environmental
remediation matters for two Connecticut sites and is investigating a third Connecticut site. 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 third Connecticut site is being investigated under Connecticuts Land Transfer
Act. The Company concluded that it was probable that it would incur remedial costs for these sites
of approximately $934 and $908 as of March 30, 2009 and December 31, 2008, 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.
Additionally, the Company discovered copper contamination in the soil and groundwater at its Washington facility that exceeded state and
city standard levels. The Company engaged a consultant to investigate
the underlying soil and groundwater and determined that such contamination was limited. The Company
is taking voluntary cleanup actions to remediate both the soil and groundwater and has accrued $392
for such remediation costs as of March 30, 2009.
The liabilities recorded do not take into account any claims for recoveries from insurance or
third parties and none are anticipated. 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 March 30, 2009, 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 Letters of Credit
The Company maintains two letters of credit: a $1,000 standby letter of credit expiring
February 28, 2010 related to the lease of one of its production facilities and a $764 standby
letter of credit expiring December 31, 2009 associated with its insured workers compensation
program.
12
TTM TECHNOLOGIES, INC.
Notes to Consolidated Condensed Financial Statements - (Continued)
(10) Earnings Per Share
The following is a reconciliation of the numerator and denominator used to calculate basic
earnings per share and diluted earnings per share for the quarter ended March 30, 2009 and March
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
March 30,
2009 |
|
|
March 31,
2008 |
|
|
|
(In thousands, except per share |
|
|
|
amounts) |
|
Net income |
|
$ |
1,427 |
|
|
$ |
14,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
42,880 |
|
|
|
42,429 |
|
Dilutive effect of options and restricted stock units |
|
|
339 |
|
|
|
307 |
|
|
|
|
|
|
|
|
Diluted shares |
|
|
43,219 |
|
|
|
42,736 |
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.03 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
Dilutive |
|
$ |
0.03 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
For the quarters ended March 30, 2009 and March 31, 2008, stock options and restricted stock
units to purchase 2,515 and 2,472 shares of common stock, respectively, were not considered in
calculating diluted earnings per share because the options exercise price or the total expected
proceeds under the treasury stock method for stock options or restricted stock units was greater
than the average market price of common shares during the quarter and, therefore, the effect would
be anti-dilutive.
Additionally, for the quarter ended March 30, 2009, the effect of 10,963 shares of common
stock related to the Companys Convertible Notes and the effect of 21,926 warrants to purchase
shares of the Companys common stock were not included in the computation of dilutive earnings per
share because the conversion price of the Convertible Notes and the strike price of the warrants to
purchase the Companys common stock were greater than the average market price of common shares
during the quarter and, therefore, the effect would be anti-dilutive.
In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities, (FSP EITF
03-6-1). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and, therefore, need to be included in
the earnings allocation in computing earnings per share (EPS) under the two-class method described
in paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share. FSP EITF 03-6-1 is
effective for fiscal years beginning on or after December 15, 2008. All prior period EPS data
presented after adoption is to be adjusted retrospectively to conform with the provisions of FSP
EITF 03-6-1. Adoption of FSP EITF 03-6-1 on January 1, 2009 had no impact on the Companys results
of operations and financial position as the Companys restricted stock units are not considered
participating securities.
(11) Stock-Based Compensation
For the quarters March 30, 2009 and March 31, 2008, the Company recorded $1,081 and $676,
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 |
|
|
|
March 30, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Cost of goods sold |
|
$ |
419 |
|
|
$ |
233 |
|
Selling and marketing |
|
|
145 |
|
|
|
73 |
|
General and administrative |
|
|
1,043 |
|
|
|
685 |
|
|
|
|
|
|
|
|
Stock-based compensation expense recognized |
|
|
1,607 |
|
|
|
991 |
|
Income tax benefit recognized |
|
|
(526 |
) |
|
|
(315 |
) |
|
|
|
|
|
|
|
Total stock-based compensation expense after income taxes |
|
$ |
1,081 |
|
|
$ |
676 |
|
|
|
|
|
|
|
|
13
TTM TECHNOLOGIES, INC.
Notes to Consolidated Condensed Financial Statements - (Continued)
The Company granted 28 and 110 stock option awards during the quarters ended March 30, 2009
and March 31, 2008, respectively, with an estimated weighted average fair value per share option of
$3.11 and $6.81, respectively. The fair value for stock options
granted is calculated using the Black-Scholes option-pricing model on the date of grant. For
the quarters ended March 30, 2009 and March 31, 2008 the following assumptions were used in
determining the fair value:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
March 30, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Risk-free interest rate |
|
|
1.9 |
% |
|
|
2.9 |
% |
Dividend yield |
|
|
|
% |
|
|
|
% |
Expected volatility |
|
|
59 |
% |
|
|
69 |
% |
Expected term in months |
|
|
66 |
|
|
|
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 March 30, 2009, $1,960 of total
unrecognized compensation cost related to stock options is expected to be recognized over a
weighted-average period of 0.7 years.
Additionally, the Company granted 644 and 474 restricted stock units for the quarters ended
March 30, 2009 and March 31, 2008, respectively. The units granted were estimated to have a
weighted-average fair value per unit of $4.34 and $11.31 for the quarters ended March 30, 2009 and
March 31, 2008, 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 March 30, 2009, $6,763 of total
unrecognized compensation cost related to restricted stock units is expected to be recognized over
a weighted-average period of 1.0 year.
(12) 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 March 30, 2009 and December 31, 2008, the Companys 10 largest customers in the
aggregate accounted for 57% and 58%, 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.
(13) Segment Information
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.
14
TTM TECHNOLOGIES, INC.
Notes to Consolidated Condensed Financial Statements - (Continued)
The Company evaluates segment performance based on operating segment income, which is
operating income before amortization of intangibles. Interest expense and interest income are not
presented by segment since they are not included in the measure of segment profitability reviewed
by the chief operating decision maker. All inter-company transactions, including sales of PCBs from
the PCB Manufacturing segment to the Backplane Assembly segment, have been eliminated.
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
March 30, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Net Sales: |
|
|
|
|
|
|
|
|
PCB Manufacturing |
|
$ |
132,277 |
|
|
$ |
148,705 |
|
Backplane Assembly |
|
|
24,908 |
|
|
|
32,570 |
|
|
|
|
|
|
|
|
Total sales |
|
|
157,185 |
|
|
|
181,275 |
|
Inter-company sales |
|
|
(8,188 |
) |
|
|
(7,204 |
) |
|
|
|
|
|
|
|
Total net sales |
|
$ |
148,997 |
|
|
$ |
174,071 |
|
|
|
|
|
|
|
|
Operating Segment Income: |
|
|
|
|
|
|
|
|
PCB Manufacturing |
|
$ |
4,400 |
|
|
$ |
22,679 |
|
Backplane Assembly |
|
|
1,492 |
|
|
|
2,704 |
|
|
|
|
|
|
|
|
Total operating segment income |
|
|
5,892 |
|
|
|
25,383 |
|
Amortization of intangibles |
|
|
(860 |
) |
|
|
(947 |
) |
|
|
|
|
|
|
|
Total operating income |
|
|
5,032 |
|
|
|
24,436 |
|
Total other expense |
|
|
(2,724 |
) |
|
|
(1,551 |
) |
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
2,308 |
|
|
$ |
22,885 |
|
|
|
|
|
|
|
|
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 ended March 30, 2009, no one customer accounted for 10% of net sales. For the
quarter ended March 31, 2008, one customer accounted for approximately 13% of net sales. Sales to
our 10 largest customers for the quarter ended March 30, 2009 and March 31, 2008 were 53% and 48%,
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.
(14) Metal Reclamation
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.
15
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, 2008, 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, defense, high-end computing, 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. As of March 30, 2009, we had approximately 790 customers and approximately 900 as
of March 31, 2008. Sales to our 10 largest customers accounted for 53% of our net sales in the
first quarter ended March 30, 2009 and 48% of our net sales in the first quarter ended March 31,
2008. We sell to OEMs both directly and indirectly through EMS companies. Sales attributable to our
five largest OEM customers accounted for approximately 35% and 29% of our net sales in the
quarters ended March 30, 2009 and March 31, 2008, 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 |
|
|
|
March 30, |
|
|
March 31, |
|
End Markets(1) |
|
2009 |
|
|
2008 |
|
Networking/Communications |
|
|
33 |
% |
|
|
42 |
% |
Aerospace/Defense |
|
|
45 |
|
|
|
34 |
|
Computing/Storage/Peripherals |
|
|
12 |
|
|
|
12 |
|
Medical/Industrial/Instrumentation/Other |
|
|
10 |
|
|
|
12 |
|
|
|
|
|
|
|
|
Total |
|
|
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 12% of PCB revenue in the first quarter of 2008 to 10% of PCB
revenue in the first quarter of 2009 due to higher demand for our standard lead-time and high
technology production services. We also deliver a large percentage of compressed lead-time work
with 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 less than 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.
16
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 we believe there are a number of potential suppliers for the raw materials we use.
Selling and marketing expenses consist primarily of salaries and commissions paid to our
internal sales force and independent sales representatives, salaries paid to our sales support
staff, stock-based compensation expense 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; and determining stock-based compensation expense, self-insured 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 projected customer demand, 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 with those
customers. 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.
17
Long-lived Assets
We have significant long-lived tangible and intangible assets consisting of property, plant
and equipment, assets held for sale, 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. We have two reporting units, which are also our operating
segments, and both contained goodwill prior to our 2008 annual impairment testing.
During the fourth quarter 2008, we performed our annual impairment assessment of goodwill,
which requires the use of a fair-value based analysis. We determined the fair value of our
operating segments based on discounted cash flows and market approach analyses and considered
factors such as a weakening economy, reduced expectations for future cash flows coupled with a
decline in the market price of our stock and market capitalization for a sustained period, as
indicators for potential goodwill impairment. In conjunction with our annual assessment of
goodwill, we also assessed other long-lived assets, specifically definite-lived intangibles and
property, plant and equipment, for potential impairment given similar impairment indicators. The
completion of our impairment assessment determined that the carrying value of our goodwill and
certain long-lived assets at production facilities exceeded their fair value. As a result, charges
were recorded to adjust goodwill and long-lived assets to their fair value as of December 31, 2008.
There were no events or changes in circumstances in the first quarter of 2009 to indicate that the
carrying amount of such assets may not be recoverable, with the exception of assets related to the
closure of our Redmond, Washington production facility. We recorded an additional
impairment of certain long-lived assets for our Redmond, Washington production facility in the amount of
$0.3 million as of March 30, 2009.
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 goodwill and other 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
March 30, 2009 and December 31, 2008, we had net deferred income tax assets of $38.4 million and
$39.8 million, respectively, and no valuation allowance. Should our expectations of taxable income
change in future periods, it may be necessary to establish a valuation allowance, which could
affect our results of operations in the period such a determination is made. 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 we reestablish a valuation allowance subsequent to March 30, 2009, and then
determine that it is more likely than not that some or all of our deferred income tax assets would
be realizable in an amount greater than what already is recorded, we would reverse all or a portion
of valuation allowance in the period the determination is made. 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.
Share-Based Awards
We account for stock-based compensation under the provisions of Statement of Financial
Accounting Standards No. 123R, Share-Based Payments, (SFAS 123R). Under the fair value recognition
provisions of SFAS 123R, we recognize stock-based compensation 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 share-based restricted stock unit awards on the date of grant using
the closing share price. We estimate the value of share-based option awards on the date of grant
using the Black-Scholes option pricing model. Calculating the fair value of share-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
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. 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 March 30, 2009 and March 31, 2008,
share-based compensation expense was $1.1 million and $0.7 million, respectively, net of tax. At
March 30, 2009, total unrecognized estimated compensation expense related to non-vested stock
options was $2.0 million, which is expected to be recognized over a weighted-average period of 0.7
years. At March 30, 2009, $6.8 million of total unrecognized compensation cost related to
restricted stock units is expected to be recognized over a weighted-average period of 1.0 year.
18
Self Insurance
We are self-insured for group health insurance and workers compensation 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 carriers 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 carriers and brokers on an annual
basis to estimate our liability for these claims. This liability is subject to an aggregate
stop-loss that ranges between $100,000 and $250,000 per individual. Our actual claims experience
may differ from our estimates.
Asset Retirement Obligations 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 can be reasonably estimated. 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%. We also are required to estimate the amount of any probable
recoveries, including insurance recoveries.
Results of Operations
First Quarter 2009 Compared to the First Quarter 2008
There were 89 and 91 days in the first quarters of 2009 and 2008, respectively.
The following table sets forth statement of operations data expressed as a percentage of net
sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
March 30, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
83.7 |
|
|
|
78.4 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
16.3 |
|
|
|
21.6 |
|
|
|
|
|
|
|
|
Operating (income) expenses: |
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
4.8 |
|
|
|
4.4 |
|
General and administrative |
|
|
5.6 |
|
|
|
4.7 |
|
Amortization of definite-lived intangibles |
|
|
0.6 |
|
|
|
0.6 |
|
Restructuring charges |
|
|
1.7 |
|
|
|
|
|
Impairment of long-lived assets |
|
|
0.2 |
|
|
|
|
|
Metal reclamation |
|
|
|
|
|
|
(2.1 |
) |
|
|
|
|
|
|
|
Total operating expenses |
|
|
12.9 |
|
|
|
7.6 |
|
|
|
|
|
|
|
|
Operating income |
|
|
3.4 |
|
|
|
14.0 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(1.8 |
) |
|
|
(1.1 |
) |
Interest income |
|
|
0.1 |
|
|
|
0.1 |
|
Other, net |
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(1.8 |
) |
|
|
(0.9 |
) |
|
|
|
|
|
|
|
Income before income taxes |
|
|
1.6 |
|
|
|
13.1 |
|
Income tax provision |
|
|
(0.6 |
) |
|
|
(4.9 |
) |
|
|
|
|
|
|
|
Net income |
|
|
1.0 |
% |
|
|
8.2 |
% |
|
|
|
|
|
|
|
19
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 quarter
ended March 30, 2009, and March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
March 30, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Net sales: |
|
|
|
|
|
|
|
|
PCB Manufacturing |
|
$ |
132,277 |
|
|
$ |
148,705 |
|
Backplane Assembly |
|
|
24,908 |
|
|
|
32,570 |
|
|
|
|
|
|
|
|
Total sales |
|
|
157,185 |
|
|
|
181,275 |
|
Inter-company sales |
|
|
(8,188 |
) |
|
|
(7,204 |
) |
|
|
|
|
|
|
|
Total net sales |
|
$ |
148,997 |
|
|
$ |
174,071 |
|
|
|
|
|
|
|
|
Net Sales
Net sales decreased $25.1 million, or 14.4%, from $174.1 million in the first quarter 2008 to
$149.0 million in the first quarter 2009 due to reduced demand across nearly all production facilities resulting from a downturn in the
global economy and the shutdown of our Redmond, Washington
production facility. The $25.1 million revenue decline reflects lower demand mainly in our
commercial end markets in both our Backplane Assembly operations and our PCB Manufacturing
facilities. PCB volume declined approximately 26% due to reduced demand while prices rose
approximately 17% 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
12% of PCB sales in the first quarter 2008 to 10% of PCB sales in the first quarter 2009. 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 decreased $11.8 million, or 8.6%, from $136.5 million for the first quarter
2008 to $124.7 million for the first quarter 2009 due primarily
to the decline in PCB volume discussed above. The decrease in cost of
goods sold was mostly driven by lower direct material
costs associated with lower production volume. As a percentage of net sales, cost of goods sold
increased from 78.4% for the first quarter 2008 to 83.7% for the first quarter 2009, primarily due
to lower absorption of fixed costs on lower revenue and costs related to the shutdown of our
Redmond, Washington facility.
Gross Profit
As a result of the foregoing, gross profit decreased $13.3 million, or 35.4%, from $37.6
million for the first quarter 2008 to $24.3 million for the first quarter 2009. Our gross margin
decreased from 21.6% in the first quarter 2008 to 16.3% in the first quarter 2009. The decrease in
our gross margin was due to lower fixed cost absorption and costs related to the shutdown of our
Redmond, Washington facility.
Selling and Marketing Expenses
Selling and marketing expenses decreased $0.5 million, or 6.5%, from $7.7 million for the
first quarter 2008 to $7.2 million for the first quarter 2009, primarily due to reduced commissions
and travel expenses. As a percentage of net sales, selling and marketing expenses were 4.8% in the
first quarter 2009 as compared to 4.4% in the first quarter 2008. The
increase in selling and marketing expense as a percentage of sales
was primarily a result of lower absorption of
fixed selling costs and higher commission rates due to the higher complexity of product sold.
20
General and Administrative Expenses
General and administrative expenses increased $0.2 million from $8.2 million, or 4.7% of net
sales, for the first quarter 2008 to $8.4 million, or 5.6% of net sales, for the first quarter
2009. The increase in expenses as a percentage of net sales resulted primarily from higher accounting
and stock based compensation expense offset by lower incentive compensation expense. Professional
fees were higher in the first quarter 2009 due to the timing of year-end expenses.
Amortization of Definite-lived Intangibles
Amortization expense related to definite-lived intangibles remained consistent at $0.9 million
for both the first quarters of 2009 and 2008. The amortization expense primarily relates to the
strategic customer relationship intangibles acquired in the PCG acquisition in October 2006.
Restructuring Charges
Restructuring charges recorded in the first quarter 2009 related to separation costs
associated with the lay-off of approximately 510 employees, of which 370 employees are related to the
closure of the Redmond, Washington production facility and 140 employees are related to other U.S.
facilities. We expect to incur minimal additional separation or other exit costs related to this
restructuring in the second quarter of 2009.
Impairment of Long-lived Assets
Impairment of long-lived assets in the first quarter 2009 related to the closure of
the Redmond, Washington production facility. We do not expect to incur any additional impairment
charges related to this closure.
Metal Reclamation
During the first quarter 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 increased $1.1 million from $1.6 million in the first quarter 2008 to $2.7
million in the first quarter 2009. The increase is primarily the result of the implementation of
Financial Accounting Standards Board 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). The implementation of FSP APB 14-1 increased our convertible senior notes (Convertible
Notes) interest expense by approximately $1.1 million, or $0.7 million net of tax. Convertible Notes were issued in May 2008.
Income Tax Provision
The provision for income taxes decreased $7.6 million from $8.5 million for the first quarter
2008 to $0.9 million for the first quarter 2009 due to lower pretax income. Our effective tax rate
was 38.2% in the first quarter 2009 and 37.2% in the first quarter 2008. 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 Notes, and exercises of employee 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.
21
As of March 30, 2009, we had net working capital of approximately $288.5 million, compared to
$280.4 million as of December 31, 2008. The slight increase in working capital is primarily
attributable to the growth in cash balances attributable to earnings.
Our
annual 2009 capital expenditure plan is expected to total approximately $13 million and will fund
capital equipment purchases to expand our technological capabilities throughout our facilities and
replace aging equipment.
The following table provides information on contractual obligations as of March 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
|
After |
|
Contractual Obligations(1)(2) |
|
Total |
|
|
1 Year |
|
|
1 - 3 Years |
|
|
4 - 5 Years |
|
|
5 Years |
|
|
|
(In thousands) |
|
Debt obligations |
|
$ |
175,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
175,000 |
|
Interest on debt obligations |
|
|
36,969 |
|
|
|
5,688 |
|
|
|
11,375 |
|
|
|
11,375 |
|
|
|
8,531 |
|
Operating leases |
|
|
6,254 |
|
|
|
3,074 |
|
|
|
1,735 |
|
|
|
425 |
|
|
|
1,020 |
|
Purchase obligations |
|
|
1,520 |
|
|
|
1,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
219,743 |
|
|
$ |
10,282 |
|
|
$ |
13,110 |
|
|
$ |
11,800 |
|
|
$ |
184,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $1.3 million, not included in the table
above, are accrued and recorded as liabilities in the consolidated
balance sheet. |
We are involved in various stages of investigation and cleanup related to environmental
remediation at various production sites. We currently estimate that we will incur remediation costs
of $1.3 million over the next 12 to 84 months related to three Connecticut production sites and a
Washington production site.
We are involved in various stages of investigation and cleanup related to environmental
remediation matters for two Connecticut sites and we are investigating a third Connecticut site.
We currently estimate that we will incur remediation costs of $0.8 million to $1.3 million. In addition, we have obligations to
the Connecticut DEP to make certain environmental asset improvements to the waste water treatment
systems in two Connecticut plants. These costs are estimated to be $0.7 million and have been
considered in our capital expenditure plan for 2009. Lastly, we are required to maintain a
compliance management plan through July 2009 under a compliance agreement with the U.S. EPA that we
assumed from Tyco.
Additionally, we discovered copper contamination in the soil and groundwater at our Washington facility that exceeded state and
city standards. We engaged a consultant to investigate the underlying
soil and groundwater and determined that such contamination was limited. We are taking voluntary
cleanup actions to remediate both soil and groundwater and have accrued $0.4 million for such
remediation costs.
Based on our current level of operations, we believe that cash generated from operations,
available cash and the proceeds from the issuance of Convertible Notes will be adequate to meet our
currently anticipated debt service, capital expenditures, and working capital needs for the next
12 months and beyond. Our principal liquidity needs for periods beyond the next 12 months are to
meet debt service requirements 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 $16.3 million in the first quarter 2009,
compared to $26.8 million in the first quarter 2008. Our first quarter 2009 operating cash flow of
$16.3 million primarily reflects net income of $1.4 million, $0.3 million of impairment of
long-lived assets, $7.1 million of depreciation and amortization, $1.6 million of stock-based
compensation, a decrease in net deferred income tax assets of $1.5 million, increase of income tax
benefit from restricted stock units released and common stock exercised of $0.6 million and a net
decrease in working capital of $3.6 million.
Net cash used in investing activities was $2.2 million in the first quarter 2009, compared to
$3.4 million in the first quarter 2008. In the first quarter 2009, we made purchases of
approximately $3.6 million of property, plant, and equipment offset by the proceeds from the
redemption of short-term investments of $1.3 million.
22
Net cash used in financing activities was $0.6 million in the first quarter 2009, compared to
$9.8 million in the first quarter 2008. This use of cash primarily reflects the excess income tax
benefit from restricted stock units released and common stock options exercised.
In May 2008, we issued our Convertible Notes 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 is 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 and are accounted for in accordance with FSP APB 14-1 by separately
accounting for the liability and equity components of convertible debt. We received proceeds of
$169.2 million after the deduction of offering expenses of $5.8 million. At March 30, 2009 the
remaining amortization period for the unamortized Convertible Note discount in the amount of $38.9
million and debt issuance costs of $3.9 million was 6.13 years. The amortization of the Convertible
Notes debt discount and unamortized debt issuance costs are based on an effective interest rate of
8.37%.
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 related to
the Convertible Notes, which can be found on the SECs website at www.sec.gov. As of March 30,
2009, 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 $1,000 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 may be 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 shares.
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
shares of common stock 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 Convertible Notes. Additionally, we sold warrants for
the option to purchase 11.0 million shares 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 March 30, 2009, we had two outstanding standby letters of credit: a $1.0 million standby
letter of credit expiring February 28, 2010 related to the lease of one of our production
facilities and a $0.8 million standby letter of credit expiring December 31, 2009 associated with
our workers compensation insurance program.
On January 15, 2009, we announced a plan to close our Redmond, Washington facility and laid
off approximately 370 employees at this site. In addition, we laid off about 140 employees
at various other U.S. facilities. As of March 30, 2009, we have recorded $2.5 million in separation
costs related to this restructuring, while approximately 56 employees are yet to be separated. We
expect the remaining employees to be separated and accrued restructuring costs in the amount
of $0.3 million to be utilized by the second quarter of 2009.
23
Off Balance Sheet Arrangements
We do not currently have, nor have we ever had, any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as structured finance or special
purpose entities, which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage
in trading activities involving non-exchange traded contracts. As a result, we are not materially
exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in
these relationships.
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 continue to pass along component
price increases to our customers.
Recently Issued Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board issued FASB Staff Position No.
107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, (FSP FAS 107-1
and APB 28-1). FSP FAS 107-1 and APB 28-1 amend FASB Statement No. 107, Disclosures about Fair
Value of Financial Instruments and APB Opinion No. 28, Interim Financial Reporting. FSP FAS 107-1
and APB 28-1 require disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements. The provisions of
FSP FAS 107-1 and APB 28-1 are effective for interim reporting periods ending after June 15, 2009
with early adoption permitted for periods ending after March 15, 2009. The adoption of the
provisions of FSP FAS 107-1 and APB 28-1 are not anticipated to materially impact our
consolidated financial position or results of operation.
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
quarters ended March 30, 2009 and March 31, 2008. 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 March 30, 2009, pursuant to Rules 13a-15(e) 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.
24
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 March 30, 2009 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.
25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Prior to our acquisition of PCG in October 2006, PCG made legal commitments to the 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 March 30, 2009, one
recycling system was completed and placed into operation, and approximately $0.7 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.
ITEM 1A. RISK FACTORS
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
report or the other documents we file with the SEC, or our annual or quarterly reports to
stockholders, future press releases, or orally, whether in presentations, responses to questions,
or otherwise.
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 has been negatively affected by the current contraction in the U.S. economy and 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 the electronics industry. A lasting
economic recession, excess manufacturing capacity, or a prolonged 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 the Reserve Primary Fund, a money market fund that has suspended
redemptions and is being liquidated. The fair value of our remaining investment in the Reserve
Primary Fund was $2.3 million at March 30, 2009. We expect to receive substantially all of our
current holdings in the Reserve Primary Fund. Subsequent to March 30, 2009, we received an
additional distribution of funds in the amount of $0.9 million.
26
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.
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 March 30, 2009, we had total indebtedness of approximately $175.0 million, which represented approximately 34% of our total capitalization.
Our indebtedness could have significant negative consequences, including:
|
|
|
increasing our vulnerability to general adverse economic and industry conditions; |
|
|
|
limiting our ability to obtain additional financing; |
|
|
|
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; |
|
|
|
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. |
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:
|
|
|
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; |
|
|
|
the potential loss of key employees of acquired operations; |
|
|
|
the potential inability to retain existing customers of acquired companies when we desire
to do so; |
|
|
|
insufficient revenues to offset increased expenses associated with acquisitions; |
27
|
|
|
the potential decrease in overall gross margins associated with acquiring a business with
a different product mix; |
|
|
|
the inability to identify certain unrecorded liabilities; |
|
|
|
the potential need to restructure, modify, or terminate customer relationships of the
acquired company; |
|
|
|
an increased concentration of business from existing or new customers; and |
|
|
|
the potential inability to identify assets best suited to our business plan. |
Acquisitions may cause us to:
|
|
|
enter lines of business and/or markets in which we have limited or no prior experience; |
|
|
|
issue debt and be required to abide by stringent loan covenants; |
|
|
|
record goodwill and non-amortizable intangible assets that will be subject to impairment
testing and potential periodic impairment charges; |
|
|
|
become subject to litigation and environmental issues; |
|
|
|
incur unanticipated costs; |
|
|
|
incur large and immediate write-offs; |
|
|
|
issue common stock that would dilute our current stockholders percentage ownership; and |
|
|
|
incur substantial transaction-related costs, whether or not a proposed acquisition is
consummated. |
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.
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 35% and 29% of our
net sales for the quarters ended
March 30, 2009 and March 31, 2008, respectively. 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.
28
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, which would reduce 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.
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. 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.
Any material violations of environmental laws or failure to maintain required environmental
permits 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 our PCG business, PCG made legal commitments to the U.S. EPA 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. 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.
29
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.
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.
30
Our 10 largest customers accounted for approximately 53% and 48% of our net sales for the
quarters ended March 30, 2009 and March 31, 2008, respectively. 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 22% of our net accounts receivable as of March 30, 2009 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.
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, Firan Technology Group, 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 Viasystems. In addition, we increasingly compete on an
international basis, and new and emerging technologies may result in new competitors entering our
markets.
31
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 |
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 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 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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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. |
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 operating results in the past and may continue to
do so in the future. Results of operations in any 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.
32
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. |
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 45% and 55% of our net
sales for the quarters
ended March 30, 2009 and March 31, 2008, respectively. 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 PCBs and creation of backplane assemblies to these EMS providers, our
business, results of operations, and financial condition may be harmed.
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 March 30, 2009, our consolidated condensed balance sheet reflected $31.6 million of goodwill and
definite-lived intangible assets. We evaluate whether events and circumstances have occurred, such
the potential for reduced expectations for future cash flows coupled with further decline in the
market price of our stock and market capitalization that may indicate that 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,
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, 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.
33
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 resulting from 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 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.
34
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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language and communication barriers as well as time zone 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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expropriation of private enterprises; and |
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the potential reversal of current favorable policies encouraging foreign investment and
trade. |
Our operations in the Peoples Republic of China (PRC) 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 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.
35
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 March 30, 2009, we had approximately $34.3 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.
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 financial results and 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.
36
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 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 March 30, 2009, we had net deferred tax assets of approximately $38.4 million. Based on
our forecast for future taxable 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.
37
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
Item 5. Other Information
Not Applicable
Item 6. Exhibits
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Exhibit |
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Exhibits |
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31.1 |
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CEO Certification Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
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31.2 |
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CFO Certification Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
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32.1 |
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CEO Certification Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
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32.2 |
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CFO Certification Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
38
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.
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TTM Technologies, Inc.
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/s/ Kenton K. Alder
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Kenton K. Alder |
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President and Chief Executive Officer |
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Dated: May 11, 2009
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/s/ Steven W. Richards
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Steven W. Richards |
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Chief Financial Officer and Secretary |
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Dated: May 11, 2009
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EXHIBIT INDEX
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Exhibit |
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Number |
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Exhibits |
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31.1 |
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CEO Certification Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
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31.2 |
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CFO Certification Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
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32.1 |
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CEO Certification Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
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32.2 |
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CFO Certification Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
40