10-K 1 d298318d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 2, 2017

Commission file number 0-31285

 

 

TTM TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   91-1033443

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

1665 Scenic Avenue Suite 250,
Costa Mesa, California
 

92626

(Zip Code)

(Address of Principal Executive Offices)  

(714) 327-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $0.001 par value

  Nasdaq Global Select Market

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☑      No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ☐      No  ☑

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  ☑      No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☐      No  ☑

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☑

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.

 

Large accelerated filer  ☐

   Accelerated filer  ☑    Non-accelerated filer  ☐    Smaller reporting company  ☐
  

(Do not check if a smaller reporting company)

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

The aggregate market value of Common Stock held by non-affiliates of the registrant (based on the closing price of the registrant’s Common Stock as reported on the Nasdaq Global Select Market on June 27, 2016, the last business day of the most recently completed second fiscal quarter), was $502,753,884. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates of the registrant. Such determination should not be deemed to be an admission that such officers, directors, or 10% beneficial owners are, in fact, affiliates of the registrant.

As of February 17, 2017, there were outstanding 100,405,573 shares of the registrant’s Common Stock, $0.001 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its 2017 Annual Meeting of Stockholders are incorporated by reference into Part III of this report. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.

 

 

 


Table of Contents

TTM TECHNOLOGIES, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

PART I   

ITEM 1.

   BUSINESS      3   

ITEM 1A.

   RISK FACTORS      15   

ITEM 1B.

   UNRESOLVED STAFF COMMENTS      35   

ITEM 2.

   PROPERTIES      36   

ITEM 3.

   LEGAL PROCEEDINGS      37   

ITEM 4.

   MINE SAFETY DISCLOSURES      37   
PART II   

ITEM 5.

   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES      37   

ITEM 6.

   SELECTED FINANCIAL DATA      39   

ITEM 7.

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      42   

ITEM 7A.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      55   

ITEM 8.

   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA      57   

ITEM 9.

   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE      57   

ITEM 9A.

   CONTROLS AND PROCEDURES      58   

ITEM 9B.

   OTHER INFORMATION      58   
PART III   

ITEM 10.

   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE      59   

ITEM 11.

   EXECUTIVE COMPENSATION      59   

ITEM 12.

   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS      59   

ITEM 13.

   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE      59   

ITEM 14.

   PRINCIPAL ACCOUNTING FEES AND SERVICES      59   
PART IV   

ITEM 15.

   EXHIBITS, FINANCIAL STATEMENT SCHEDULES      59   

SIGNATURES

     65   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     66   

 

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PART I

Statement Regarding Forward-Looking Statements

This report on Form 10-K contains forward-looking statements regarding future events or our future financial and operational performance. Forward-looking statements include statements regarding markets for our products; trends in net sales, gross profits and estimated expense levels; liquidity and anticipated cash needs and availability; and any statement that contains the words “anticipate,” “believe,” “plan,” “forecast,” “foresee,” “estimate,” “project,” “expect,” “seek,” “target,” “intend,” “goal” and other similar expressions. The forward-looking statements included in this report reflect our current expectations and beliefs, and we do not undertake publicly to update or revise these statements, even if experience or future changes make it clear that any projected results expressed in this annual report or future quarterly reports to stockholders, press releases or company statements will not be realized. In addition, the inclusion of any statement in this report does not constitute an admission by us that the events or circumstances described in such statement are material. Furthermore, we wish to caution and advise readers that these statements are based on assumptions that may not materialize and may involve risks and uncertainties, many of which are beyond our control that could cause actual events or performance to differ materially from those contained or implied in these forward-looking statements. These risks and uncertainties include the business and economic risks described in “Item 1A — Risk Factors”.

Unless otherwise indicated or unless the context requires otherwise, all references to time periods refer to our fiscal year, and all reference to “TTM,” “our company,” “we,” “us,” “our,” and similar names refer to TTM Technologies, Inc. and its subsidiaries.

 

ITEM 1. BUSINESS

General

We are a leading global printed circuit board (PCB) manufacturer, focusing on quick-turn and volume production of technologically complex PCBs and electro-mechanical solutions (E-M Solutions). We are the largest PCB manufacturer in North America and one of the largest PCB manufacturers in the world, in each case based on revenue, according to the 2015 rankings from N.T. Information LTD (NTI). In 2016 we generated $2.5 billion in net sales and ended the year with approximately 28,360 employees worldwide. We operate a total of 25 specialized facilities in North America and China. We focus on providing time-to-market and volume production of advanced technology products and offer a one-stop manufacturing solution to our customers from engineering support to prototype development through final mass production. This one-stop manufacturing solution allows us to align technology development with the diverse needs of our customers and to enable them to reduce the time required to develop new products and bring them to market. We serve a diversified customer base consisting of approximately 1,500 customers in various markets throughout the world, including networking/communications infrastructure products, smartphones and touchscreen tablets, as well as aerospace and defense, automotive components, high-end computing and medical, industrial and instrumentation related products. Our customers include both original equipment manufacturers (OEMs) and electronic manufacturing services (EMS) providers.

As a result of our acquisition of Viasystems Group, Inc. (Viasystems), we now manage our worldwide operations based on two reportable operating segments: (1) PCB, which consists of 13 domestic PCB fabrication plants, including a facility that provides follow-on value-added services primarily for one of the PCB fabrication plants; eight PCB fabrication plants in China and one in Canada, and (2) E-M Solutions, which consists of three custom electronic assembly plants in China. Each segment operates predominantly in the same industries with production facilities that produce customized products for our customers and use similar means of product distribution.

Additional information on our operating segments and product information is contained in Note 18 of the Notes to Consolidated Financial Statements.

 

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Acquisition of Viasystems Group, Inc.

On May 31, 2015, we completed the acquisition of Viasystems, for total consideration of $248.8 million in cash and 15.1 million shares of TTM common stock with a fair value of $149.0 million, and thereby acquired all of the outstanding shares of capital stock and other equity rights of Viasystems. Additionally, in connection with the completion of the acquisition, we assumed and refinanced Viasystems’ debt, which was approximately $669.0 million as of May 31, 2015. Viasystems was a worldwide provider of complex multi-layer rigid, flexible, and rigid-flex PCBs and custom electronic assemblies. The acquisition has increased our revenue base and brought more diversity to our business, particularly with the addition of the automotive end market to the markets we serve. The acquisition of Viasystems has had and will continue to have a significant effect on our operations and financial results, which demonstrates the benefits of diversification along with our strong operational execution and realization of synergies from the transaction.

Industry Overview

PCBs are manufactured in panels from sheets of laminated material. Each panel is typically subdivided into multiple PCBs, each consisting of a pattern of electrical circuitry etched from copper to provide an electrical connection between the components mounted to it. PCBs serve as the foundation for virtually all electronic products, including the electronic components integrated into automobiles, consumer electronics products (smartphones, and touchscreen tablets), high-end commercial electronic equipment (such as medical equipment and data communications routers, switches and servers) and aerospace and defense electronic systems.

In recent years, the demand for smaller sized electronic devices with more features and functionality has been increasing. Products designed to offer faster data transmission, thinner and more lightweight packaging, and reduced power consumption generally require increasingly complex PCBs to meet these criteria. By using High Density Interconnect (HDI) technology, circuit densities can be increased, thereby providing for smaller products with higher packaging densities. Furthermore, flexible printed circuit technology, which includes flexible circuits, rigid-flex circuits, and flexible circuit assemblies, can be found in small and lightweight end products, such as smartphones and touchscreen tablets and increasingly in other end markets such as automotive, industrial and aerospace and defense. We collectively refer to these new technologies as “advanced technologies,” and they have growth rates which are higher than conventional technologies. In addition, most of our markets have low volume requirements during the prototype stage that demand a highly flexible manufacturing environment which later transitions to a higher volume requirement during product ramp.

According to estimates in a November 2016 report by Prismark Partners LLC (Prismark Partners), worldwide demand for PCBs was approximately $55.3 billion in 2015. Of this worldwide demand for production in 2015, Prismark Partners reports that PCB production in the Americas accounted for approximately 5% (approximately $2.8 billion), PCB production in China accounted for approximately 48% (approximately $26.7 billion), and PCB production in the rest of the world accounted for approximately 47% (approximately $25.8 billion). According to the same report by Prismark Partners, worldwide demand for PCBs is forecast to grow at a 2.4% CAGR from 2016 to 2021 driven by above average growth expected in the automotive and aerospace and defense end markets offset by below average growth expected in the networking communications and computing end markets. While Prismark Partners expects long-term growth to occur in all PCB technologies, it forecasts more robust growth in the HDI, flexible and rigid-flex segments. This growth expectation stems from the increase in the number of applications that can utilize, and in many cases require, smaller, denser interconnects.

Industry Trends

We believe that several trends are impacting the PCB manufacturing industry which will benefit us in the future. These trends include:

Shorter electronic product life cycles.    Shorter electronic product life cycles which create opportunities for PCB manufacturers that can offer engineering support in the prototype stage and manufacturing scalability throughout the production life cycle.

 

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Increasing complexity of electronic products.    Increasing complexity of electronic products, which requires technologically complex PCBs that can accommodate higher speeds and component densities, including HDI, flexible, and substrate PCBs.

Increasing demand for sophisticated safety systems, automated driving, electric/hybrid vehicles and miniaturization of electronic devices in the automotive industry.    These trends are driving increasing electronic content and higher PCB usage in automobiles, particularly increased demand for advanced technologies like HDI, rigid-flex and complex conventional technologies such as radio-frequency (RF) for radar.

Increasing concentration of global PCB production in Asia.    In recent years, China has emerged as a global production center for electronics manufacturers. We believe that the expected continued concentration of consumer electronic production in China should result in additional commercial market share potential for PCB manufacturers with a strong presence and reputation in China.

Supply chain consolidation by commercial OEMs.    Supply chain consolidation by commercial OEMs, which we believe presents an opportunity for those PCB manufacturers that can offer one-stop manufacturing capabilities — from prototype to volume production.

Our Strategy

Our goal is to be the leading global provider of time-critical, one-stop manufacturing services for highly complex PCBs. Our core strategy includes the following elements:

Maintain our customer-driven culture and provide superior service to our customers in our core markets of networking communications, automotive, cellular phones, aerospace and defense, medical, industrial and instrumentation, and computing and storage.    Our customer-oriented culture is designed to achieve extraordinary service, competitive differentiation, and superior execution. Our customer-oriented strategies include engaging in co-development of new products, capturing new technology products for next generation equipment, and continuing investments to enhance our broad offering of PCB technologies. We believe our ability to anticipate and meet customers’ needs is critical to retaining existing customers and attracting leading companies as new customers.

Drive operational efficiency and productivity.    We are constantly focused on improving our operational execution to increase efficiency, productivity and yields. We strongly believe in the benefits of sharing best practices across our extensive manufacturing footprint and rely on stringent goals for throughput, quality and customer satisfaction to measure our effectiveness. The fast paced nature of our business requires a disciplined approach to manufacturing that is rooted in continuous improvement.

Accelerate customer and end-market diversification through strategic mergers and acquisitions.    We have a history of executing successful acquisitions that have been key to our growth and profitability. We continuously look for strategic opportunities that could facilitate our efforts to further diversify into other growing end markets including automotive, aerospace and defense and medical/industrial/instrumentation. Our recent acquisition of Viasystems, which has increased our diversification into the automotive and medical/industrial/instrumentation end markets, demonstrates the benefits of this strategy.

Accelerate our expansion into the automotive and other growing markets using our advanced technology position to differentiate our operations.    With rising requirements for faster data transmission, shrinking features (i.e., lightweight and thin), and lower power consumption, many PCB designs have migrated to more complex HDI PCBs from conventional multi-layer PCB technologies. This trend began with PCBs used in portable devices such as smartphones and touchscreen tablets but has become an increasing trend in other end markets, such as automotive, networking/communications, medical, and aerospace and defense. We are focused in particular on the automotive opportunity where the combination of our strength in highly reliable conventional PCBs and our advanced technology PCB product capabilities allows us to meet our automotive customers’ growing demand in such areas as infotainment, radar systems, and cameras for advanced driver assistance systems and electric vehicles. As our customers consolidate their supply chain, our objective is to differentiate ourselves as a strategic supplier with the technology breadth to meet most, if not all, of our automotive customers PCB requirements.

 

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Address customer needs in all stages of the product life cycle.    By providing a one-stop solution, we work to service our customers’ needs from the earliest stages of product development through volume production. We believe that by servicing our customers early in the development process, we are able to demonstrate our capabilities and establish an incumbent position early in the product development cycle, which translates into additional opportunities as our customers move into volume production. We believe our expertise is enhanced by our ability to deliver highly complex PCBs to customers in significantly compressed lead times. This rapid delivery service enables OEMs to develop sophisticated electronic products more quickly and reduce their time to market.

Deliver strong financial performance.    We aspire to deliver industry-leading financial performance. We expect to achieve this by servicing our customers’ needs in higher-growth end markets — meeting their product needs in a cost-efficient and effective manner. We believe that this strategy will allow us to generate strong cash flows, which will enable us to reduce financial leverage over time while at the same time providing us with the financial flexibility to continue to invest in our business.

Products and Services

We offer a wide range of PCB products and electro-mechanical solutions, including conventional PCBs, HDI PCBs, flexible PCBs, rigid-flex PCBs, custom assemblies and system integration, and IC substrates. We also offer certain value-added services to support our customers’ needs. These include design-for-manufacturability (DFM), PCB design, simulation and testing services, and quick turnaround (QTA) production. By offering this wide range of PCB products and complementary value-added services, we are able to provide our customers with a “one-stop” manufacturing solution for their PCB requirements. This differentiates us from our competition and enhances our relationships with our customers.

Conventional PCBs

A conventional PCB is made from a composite laminate that is metalized with a conductive material such as copper. The PCB is the basic platform used to interconnect components in most electronic products including computers, communications equipment, cellular phones, high-end consumer electronics, automotive controls, commercial aerospace and defense systems and medical and industrial equipment. Conventional PCBs can be classified as single-sided, double-sided and multi-layer boards.

We focus on higher layer count conventional PCBs. A multi-layer PCB can accommodate more complex circuitry than a single-sided or double-sided PCB and as such requires more sophisticated production techniques. The number of layers comprising a PCB often increases with the complexity of the end product. For example, a simple consumer device such as a garage door controller may use a single-sided or double-sided PCB, while a high-end network router or computer server may use a PCB with 30 or more layers.

RF and microwave circuits

We produce and test specialized circuits used in radio-frequency or microwave emission and collection applications. These products are typically used for radar, transmit/receive antennas and similar wireless applications. Markets for these products include automotive, defense, avionics, satellite, and commercial applications. The manufacture of these products requires advanced materials, equipment, and methods that are highly specialized and distinct from conventional printed circuit manufacturing techniques. We also offer specialized radio-frequency assembly and test services.

High density interconnect or HDI PCBs

Our facilities in North America and China also produce HDI PCBs, which are PCBs with higher interconnect density per unit area requiring more sophisticated technology and manufacturing processes for their production than conventional PCB products. HDI PCBs are boards with high-density characteristics including micro-sized holes, or microvias (diameter at or less than 0.15 mm), and fine line circuitry (circuit line width and spacing at or less than 0.075 mm) and are fabricated with thin high performance materials, thereby enabling more

 

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interconnection functions per unit area. HDI PCBs generally are manufactured using a sequential build-up process in which circuitry is formed in the PCB one layer at a time through successive drilling, plating and lamination cycles. In general, a board’s complexity is a function of interconnect and circuit density, layer count, laminate material type and surface finishes. As electronic devices have become smaller and more portable with higher functionality, demand for advanced HDI PCB products has increased dramatically. We define advanced HDI PCBs as those having more than one layer of microvia interconnection structure.

Flexible PCBs

Flexible PCBs are printed circuits produced on flexible films, allowing them to be folded or bent to fit the available space or allowing for application movement. We manufacture circuits on flexible substrates that can be installed in three-dimensional applications for electronic packaging systems. Use of flexible circuitry can enable improved reliability, improved electrical performance, reduced weight and reduced assembly costs when compared with traditional wire harness or ribbon cable packaging. Flexible PCBs can provide for flexible electronic connectivity of an electrical device’s apparatus such as printer heads, cameras, camcorders, TVs, mobile handsets, and tablets. For some of our flexible PCB customers, we also assemble components onto the flexible PCBs we manufacture.

Rigid-flex PCBs

Rigid-flex circuitry provides a simple means to integrate multiple PCB assemblies and other elements such as display, input or storage devices without wires, cables or connectors, replacing them with thin, light composites that integrate wiring in ultra-thin, flexible ribbons between rigid sections. In rigid-flex packaging, a flexible circuit substrate provides a backbone of wiring with rigid multilayer circuit sections built up as modules where needed.

Since the ribbons can be bent or folded, rigid-flex provides a means to compactly package electronics in three dimensions with dynamic or static bending functions as required, enabling miniaturization and thinness of product design. The simplicity of rigid-flex integration also generally reduces the number of parts and interconnections required, which can improve reliability. The increasing popularity of mobile electronics coupled with the design trend of developing increasingly thinner, lighter and more feature-rich products, is expected to further drive growth in the rigid-flex and flex sectors, where these PCBs are the backbone of miniaturization.

Rigid-flex technology is essential to a broad range of applications including aerospace and defense, industrial and transportation systems requiring high reliability; hand-held and wearable electronics such as mobile phones, video cameras and music players where thinness and mechanical articulation are essential; and ultra-miniaturized products such as headsets, medical implants and semiconductor packaging where size and reliability are paramount.

Custom assemblies and system integration

Our assembly facilities produce custom electronic assemblies as well as fully integrated electronic systems. Custom electronic assemblies refers to a variety of PCB assemblies such as backplane and midplane assemblies, flexible and rigid-flex assemblies and RF assemblies. Each of these assemblies involves mounting electronic components to a printed circuit board and then testing the assembly for electrical continuity. Our services also go beyond the PCB assembly to fully integrated systems. A fully integrated system often includes installing the PCB assembly into a metal enclosure and adding fans for cooling the system, a power supply and cable assemblies to create a fully assembled and tested system that will be shipped to our customers.

IC substrates

IC substrates provide mechanical support and electrical interconnect for very small ICs (integrated circuits or semiconductors) and up to comparatively larger PCBs for assembly into electronic end products such as memory modules, cellular phones, digital cameras, automotive GPS and engine controls. IC substrates, also known as chip carriers, are highly miniaturized circuits manufactured by a process largely similar to that for PCBs but requiring the use of ultra-thin materials and including micron-scale features, because they must bridge

 

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the gap between sub-micron IC features and millimeter scale PCBs. Consequently, IC substrates are generally manufactured in a semiconductor-grade clean room environment to ensure products are free of defects and contamination.

Quick turnaround services

We refer to our rapid delivery services as “quick turnaround” or “QTA”, because we provide custom-fabricated PCBs to our customers within as little as 24 hours to ten days. As a result of our ability to rapidly and reliably respond to the critical time requirements of our customers, we generally receive premium pricing for our QTA services as compared to standard lead time prices.

 

   

Prototype production.    In the design, testing, and launch phase of a new electronic product’s life cycle, our customers typically require limited quantities of PCBs in a very short period of time. We satisfy this need by manufacturing prototype PCBs in small quantities, with delivery times ranging from as little as 24 hours to ten days.

 

   

Ramp-to-volume production.    After a product has successfully completed the prototype phase, our customers introduce the product to the market and require larger quantities of PCBs in a short period of time. This transition stage between low-volume prototype production and volume production is known as ramp-to-volume. Our ramp-to-volume services typically include manufacturing up to a few hundred PCBs per order with delivery times ranging from five to 15 days.

Thermal management

Increased component density on circuit boards often requires improved thermal dissipation to reduce operating temperatures. We produce printed circuits with heavy copper cores and both embedded and press-fit coins. In addition, we produce PCBs with electrically passive heat sinks laminated externally on a circuit board or between two circuit boards, as well as PCBs with electrically active thermal cores.

Manufacturing Technologies

The market for our products is characterized by rapidly evolving technology. In recent years, the trend in the electronic products industry has been to increase the speed, complexity, and performance of components while reducing their size. We believe our technological capabilities allow us to address the needs of manufacturers to bring complicated electronic products to market faster.

To manufacture PCBs, we generally receive circuit designs directly from our customers in the form of computer data files, which we review to ensure data accuracy and product manufacturability. Processing these computer files with computer aided manufacturing (CAM) technology, we generate images of the circuit patterns that we then physically develop on individual layers, using advanced photographic processes. Through a variety of plating and etching processes, we selectively add and remove conductive materials to form horizontal layers of thin circuitry, which are separated by electrical insulating material. A multilayer circuit board is produced by laminating together multiple layers of circuitry, using intense heat and pressure under vacuum. Vertical connections between layers are achieved by drilling and plating through small holes, called vias. Vias are made by highly specialized drilling equipment capable of achieving extremely fine tolerances with high accuracy. We specialize in high layer count PCBs with extremely fine geometries and tolerances. Because of the tolerances involved, we employ clean rooms in certain manufacturing processes where tiny particles might otherwise create defects on the circuit patterns. We also use automated optical inspection systems and electrical testing systems to ensure consistent quality of the circuits we produce.

We believe that our highly specialized equipment and advanced manufacturing processes enable us to reliably produce PCBs with the following characteristics:

 

   

High layer count.    Manufacturing PCBs with a large number of layers is difficult to accomplish due to the accumulation of manufacturing tolerances and registration systems required. In our PCB operating segment, we regularly manufacture PCBs with more than 30 layers on a quick-turn and volume basis. Approximately 14% of our 2016 PCB net sales involved the manufacture of PCBs with at least 18 layers or more, compared to 13% in 2015.

 

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Blind and buried vias.    Vias are drilled holes that provide electrical connectivity between layers of circuitry in a PCB. Blind vias connect the surface layer of the PCB to an internal layer and terminate at the internal layer. Buried vias are holes that do not reach either surface of the PCB but allow inner layers to be interconnected. Products with blind and buried vias can be made thinner, smaller, lighter and with higher component density and more functionality than products with traditional vias.

 

   

Microvias.    HDI technology utilizes microvias, which are small vias with diameters generally less than 0.005 inches after plating. Advanced HDI products may also require the microvias to be fully filled using a specialized plating process so that additional microvia structures can be stacked to form more complex interconnections. These microvias consume much less space on the layers they connect, thereby providing for greater wiring densities and flexibility, and also providing closer spacing of components and their attachment pads. The fabrication of PCBs with microvias requires specialized equipment, such as laser drills, and highly developed process knowledge. Applications such as handheld wireless devices employ microvias to obtain a higher degree of functionality from a given surface area.

 

   

Embedded passives.    Embedded passive technology involves embedding either capacitive or resistive elements inside the PCB, which allows for removal of passive components from the surface of the PCB and thereby leaves more surface area for active components. Use of this technology provides greater surface area for surface-mounted ICs and better signal performance, as well as increased functionality of products with higher component density.

 

   

Fine line traces and spaces.    Traces are the connecting copper lines between the different components of the PCB, and spaces are the distances between traces. The smaller the traces and the tighter the spaces, the higher the density of the PCB and the greater the expertise required to achieve a desired final yield performance level. We are able to manufacture PCBs with traces and spaces less than 0.002 inches.

 

   

High aspect ratios.    The aspect ratio is the ratio between the thickness of the PCB and the diameter of a drilled hole. As the aspect ratio increases, it becomes increasingly more difficult to consistently and reliably form, electroplate and finish all the holes on a PCB. In production, we are able to provide aspect ratios of up to 30:1.

 

   

Thin core processing.    A core is the basic inner-layer building block material from which PCBs are constructed. A core consists of a flat sheet of material comprised of glass-reinforced resin with copper foil laminated on either side. The thickness of inner-layer cores is typically determined by the overall thickness of the PCB and the number of layers required. The demand for thinner cores derives from the requirements for thinner PCBs, higher layer counts and various electrical parameters. Core thickness in our PCBs ranges from as little as 0.002 inches up to 0.062 inches.

 

   

Advanced hole fill processes.    Our advanced hole fill processes provide designers the opportunity to increase the density of component placements by reducing the surface area required to place many types of components. In traditional design, components are routed from their surface interfaces through via connections in order to access power and ground connections and the internal circuitry used to connect to other discrete components. Our advanced hole fill processes provide methods to allow for vias to be placed inside their respective surface mount pads by filling the vias with a thermoset epoxy and plating flat copper surface mount pads directly over the filled hole.

 

   

Advanced materials.    We manufacture circuit boards using a wide variety of advanced dielectric materials. These high-performance materials offer electrical, thermal, and long-term reliability advantages over conventional materials but are more difficult to manufacture. We are certified by Underwriters Laboratories to manufacture PCBs using many types and combinations of these specialty materials. This broad offering allows us to manufacture PCBs for a wide array of end-use applications, including highly complex PCBs for niche and high-end commercial and aerospace and defense markets.

 

   

Quick Turn Manufacturing:    In addition, in circumstances where our customers require time critical engineering and manufacturing services, we are able to meet our customers’ need with our quick-turn manufacturing capabilities.

 

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Customers and Markets

Our customers include both OEMs and EMS companies that primarily serve the automotive, networking/communications, cellular phone, computing, aerospace and defense, and medical/industrial/instrumentation end markets of the electronics industry. Included in the end markets that our OEM and EMS customers serve is the U.S. government. As a result, we are a supplier, primarily as a subcontractor, to the U.S. government.

The following table shows the percentage of our net sales in each of the principal end markets we served for the periods indicated:

 

End Markets(1)(2)

   2016     2015(4)     2014  

Aerospace and Defense

     15     14     16

Automotive(2)

     20        13        2   

Cellular Phone(3)

     14        21        23   

Computing/Storage/Peripherals(3)

     12        12        13   

Medical/Industrial/Instrumentation

     14        13        10   

Networking/Communications

     23        25        33   

Other(2)(3)

     2        2        3   
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

 

(1) Sales to EMS companies are classified by the end markets of their OEM customers.
(2) Certain reclassifications of prior year end market percentages have been made to conform to the current year presentation. Beginning 2015, Automotive has been reclassified from the Other end market.
(3) Smartphones are included in the Cellular Phone end market, tablets are included in the Computing/Storage/Peripherals end market and other mobile devices such as e-readers are included in the Other end market.
(4) Amounts include 211 days of activity of Viasystems, which we acquired on May 31, 2015.

Sales attributable to our five largest OEM customers, which can vary from year to year, collectively accounted for 33%, 37%, and 44%, of our net sales in fiscal years 2016, 2015 and 2014, respectively, as a result of our diversification. Our five largest OEM customers in 2016 were, in alphabetical order, Apple Inc., Autoliv Inc., Cisco Systems, Inc., Huawei Technology Co. Ltd., and Robert Bosch GmbH. For the fiscal year 2016, Apple accounted for 15% of our net sales. Sales attributed to OEMs include sales made through EMS providers. Sales to EMS providers comprised approximately 35%, 35%, and 39% of our net sales in fiscal years 2016, 2015 and 2014, respectively. Although our contractual relationships are with the EMS companies, we typically negotiate price and volume requirements directly with the OEMs. In addition, we are on the approved vendor lists of several of our EMS providers. This positions us to participate in business that is awarded at the discretion of the EMS provider.

During fiscal years 2016, 2015 and 2014, our net sales by country invoiced were as follows:

 

Country

   2016     2015     2014  

United States

     44     46     43

China

     26        26        27   

Other

     30        28        30   
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

Other than in the United States and China, we do not conduct business in any country in which our net sales exceed 10% of our total net sales for the fiscal years 2016, 2015 and 2014.

Our sales and marketing strategy focuses on building long-term relationships with our customers’ engineering and new product introduction personnel early in the product development phase, frequently through strategic account management teams. As the product moves from the prototype stage through ramp-to-volume and volume production, we shift our focus to the customers’ procurement departments in order to capture sales at each point in the product’s life cycle.

 

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Our staff of engineers, sales support personnel, and managers assists our sales representatives in advising customers with respect to manufacturing feasibility, design review, and technological capabilities through direct communication and visits. We combine our sales efforts with customer service at each facility to better serve our customers. Each large customer is typically assigned an account manager to coordinate all of the Company’s services across all of our facilities. Additionally, the largest and most strategic customers are also supported by select program management and engineering teams. Our global sales force is comprised of direct sales personnel, complemented by commission-based independent representatives, and supports customers throughout North America, Europe, Asia and the Middle East.

Our North America footprint comprises a significant amount of our PCB operating segment with fourteen PCB fabrication plants located in California, Colorado, Connecticut, Ohio, Oregon, Utah, Virginia, Wisconsin and Ontario, Canada. The footprint includes a facility that provides follow-on value-added assembly services primarily to our Connecticut PCB fabrication plant. In addition, we operate a North America based outsourcing operation that provides brokered sourcing of lower cost, off-shore PCB companies as an additional option for our customers.

Our China footprint includes facilities from both our PCB and E-M Solutions operating segments with eight PCB fabrication plants located in Hong Kong, Huiyang, Dongguan, Guangzhou, Shanghai, and Zhongshan China, and three custom assembly and system integration operations in Shanghai and Shenzhen China.

For information regarding credit to customers, see Note 11 of the Notes to Consolidated Financial Statements.

For information about net sales, income before income taxes, depreciation, total assets and capital expenditures of each of our segments, and geographical information, including net sales to customers and long-lived assets, see Note 18 of the Notes to Consolidated Financial Statements.

Suppliers

The primary raw materials we use in PCB manufacturing include copper-clad laminate, chemical solutions such as copper and gold for plating operations, photographic film, carbide drill bits, and plastic for testing fixtures. Although we have preferred suppliers for some raw materials used in the manufacture of PCBs, most of our raw materials are generally readily available in the open market from numerous other potential suppliers.

The primary raw materials we use in backplane assemblies and other PCB assemblies are manufactured components such as PCBs, connectors, capacitors, resistors, diodes and integrated circuits, many of which are custom made and controlled by our customers’ approved vendors. These components for backplane assemblies and other PCB assemblies in some cases have limited or sole sources of supply. For example, in some instances, our customers will require us to use a specific component from a particular supplier or require us to use a component provided by the customer itself, in which case we may have a single or limited number of suppliers for these specific components. The backplane assemblies, PCB assemblies and precision metal fabricated chassis and enclosures produced by us may be incorporated into a fully integrated and tested system delivered to our customer. These products often incorporate procured power, thermal, interconnect and mechanical components sourced from customer directed or our selected suppliers.

We typically use just-in-time procurement practices to maintain our raw materials inventory at low levels and work closely with our suppliers to obtain technologically advanced raw materials. In addition, we periodically seek alternative supply sources to ensure that we are receiving competitive pricing and service. Adequate amounts of all raw materials have been available in the past, and we believe this availability will continue into the foreseeable future.

Competition

Despite industry consolidation, the PCB industry remains fragmented and characterized by intense competition. There are several competitive factors our customers consider when choosing their supplier including, but not limited to, pricing, service, support, reliability, and quality production. Our principal PCB and substrate competitors include AT&S (Austria Technologie & Systemtechnik AG), Chin Poon Industrial Co., Ltd., Compeq Manufacturing Co., Ltd., IBIDEN Co., Ltd., ISU Petasys Co., Ltd., Multek Corporation, Sanmina

 

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Corporation, Tripod Technology Corp., Unimicron Technology Corp., and Wus Printed Circuit Co., Ltd. Our principal E-M Solutions competitors include Amphenol Corporation, Flex, Jabil Circuit, Inc. and Sanmina Corporation.

We believe we compete favorably based on the following key competitive strengths:

Leading global PCB manufacturer.    The Company is one of the largest and most diversified PCB manufacturers in the world and enjoys significant economies of scale, with net sales in excess of $2.5 billion for fiscal 2016. The PCB industry is highly fragmented with the top 20 PCB providers comprising approximately 47% of market share in 2015, according to NTI. As our customers consolidate their supply base, we offer the technology breadth and scale to emerge as a preferred partner.

Breadth of technology and products.    We offer a wide range of PCB products and electro-mechanical solutions, including HDI PCBs, conventional PCBs, flexible PCBs, rigid-flex PCBs, custom assemblies, and IC substrates. We also offer certain value-added services to support our customers’ needs. These include design for manufacturability, or DFM, PCB layout design, simulation and testing services, and quick turnaround, or QTA, services. By providing these value-added services to customers, we are able to provide our customers with a “one-stop” manufacturing solution, which we believe enhances our relationships with our customers.

Diversified business model.    Our sales are diversified by the well-balanced portfolio of end markets which we serve and by the customers we sell to within those end markets. We believe this diversity reduces our exposure to, and reliance on, any single end market or customer. We enjoy a large and diverse customer base with over 1,500 customers, as well as long-term relationships in excess of ten years with our ten largest customers. For fiscal 2016, net sales to our top five customers represented approximately 33% of our total net sales. Furthermore, for fiscal 2016, our largest five customers are not concentrated in any single end market, but rather are represented across four of our end markets.

Focused on attractive growth end markets including automotive with a favorable growth outlook and dependence on sophisticated product capabilities.    We believe that our global manufacturing footprint and breadth of capabilities enables us to serve several of the key end markets for the PCB industry. The automotive industry in particular provides an opportunity for us as we combine our traditional market strength in core automotive engine controls with the advanced technologies we offer for growing requirements in safety systems, automated driving and infotainment.

One-stop solution for customers with low volume, high-mix capabilities and an ability to seamlessly transition volume requirements to Asia.    We are capable of providing a one-stop manufacturing solution to our customers from engineering support and prototype development through final volume production around the globe. This one-stop manufacturing solution allows us to better serve our customers, many of whom are based in time-critical high growth markets, enabling our customers to reduce the time required to develop new products and bring them to market. We utilize a facility specialization strategy in which each customer is directed to the facility best suited to the customer’s product type, delivery time, complexity and volume needs, which enables us to reduce the time from order placement to delivery. As our customers ramp to volume, we are positioned to seamlessly transition them to one of our volume facilities in China.

Leading aerospace and defense supplier.    We provide the aerospace and defense industry with products in North America from our broad North American footprint. We have passed OEM and government certification processes, and administrative requirements associated with participation in government and commercial aerospace programs. When supplying various departments and agencies of the U.S. government, we are required to maintain facility security clearances under the National Industrial Security Program Operating Manual and International Traffic in Arms Regulations. Along with supply of traditional PCBs, we offer our engineering services and assembly capabilities which allow us to bring additional value to our customers.

In addition, we believe our continuous evaluation and early adoption of new manufacturing and production technologies give us a competitive advantage. We believe that our ability to manufacture PCBs using advanced technologies, including our HDI, flexible PCBs and substrate capabilities, provides us with a competitive advantage over manufacturers that do not possess this advanced technology expertise. Our future success will depend in large part on our ability to maintain and enhance our manufacturing capabilities and production technologies.

 

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Seasonality

Orders for our products generally correspond to the production schedules of our customers. We historically experience higher net sales in the third and fourth quarters due to end customer demand in the fourth quarter for consumer electronics products. Seasonal fluctuations also include the Chinese New Year holidays in the first quarter, which typically results in lower net sales. We attribute this decline to shutdowns of our customers’ and our own China based manufacturing facilities surrounding the Chinese New Year public holidays, which normally occur in January or February of each year.

Backlog

Backlog consists of purchase orders received, including, in some instances, demand agreements released for production under customer contracts. We obtain firm purchase orders from our customers for all products. However, for some of these purchase orders, customers do not make firm schedules for delivery more than 90 days in advance. Therefore, we measure backlog as orders with deliveries scheduled over the next 90 days. At January 2, 2017, total backlog was $405.3 million, compared with $365.8 million at the end of 2015. Substantially all backlog at January 2, 2017 is expected to be converted to sales in the first quarter of 2017. Additionally, we typically experience a higher amount of backlog in the second half of the year due to increased end customer demand for consumer electronics products in the fourth quarter, which is consistent with our seasonal patterns as discussed above.

Intellectual Property

We believe our business depends on the effectiveness of our fabrication techniques and our ability to continue to improve our manufacturing processes. We have limited patent or trade secret protection for our manufacturing processes. We rely on the collective experience of our employees in the manufacturing process to ensure that we continuously evaluate and adopt the new technologies available in our industry. In addition, we depend on training, recruiting, and retaining our employees, who are required to have sufficient know-how to operate advanced equipment and to conduct complicated manufacturing processes.

National Security Matters

A portion of our business consists of manufacturing defense and defense-related items for various departments and agencies of the U.S. government, including the U.S. Department of Defense, or the DoD, which requires that we maintain facility security clearances under the National Industrial Security Program Operating Manual, or NISPOM. The NISPOM requires that a corporation with significant foreign ownership maintaining a facility security clearance take steps to mitigate foreign control or influence, referred to as “FOCI.” Pursuant to these laws and regulations, effective October 2010, we entered into a Special Security Agreement (SSA) with the DoD; Su Sih (BVI) Limited, or Su Sih (a significant foreign owner of our capital stock); and Mr. Tang Hsiang Chien (as the beneficial owner of Su Sih). The purpose of the SSA is to deny Mr. Tang, Su Sih, and other persons affiliated with our China operations, unauthorized access to classified and export controlled unclassified information and to mitigate any influence over our business or management in a manner that could result in the compromise of classified information or could adversely affect the performance of classified contracts.

Other Governmental Regulations

Our operations, particularly those in North America, are subject to a broad range of regulatory requirements relating to export control, environmental compliance, waste management, and health and safety matters. In particular, we are subject to the following:

 

   

U.S. Department of State regulations, including the Arms Export Control Act (AECA) and International Traffic In Arms Regulations (ITAR) located at 22 CFR Parts 120-130;

 

   

U.S. Department of Commerce regulations, including the Export Administration Regulations (EAR) located at 15 CFRParts 730-744;

 

   

Office of Foreign Asset Control (OFAC) regulations located at 31 CFR Parts 500-599;

 

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U.S. Occupational Safety and Health Administration (OSHA), and state OSHA and Department of Labor laws pertaining to health and safety in the workplace;

 

   

U.S. Environmental Protection Agency regulations pertaining to air emissions; waste water discharges; and the use, storage, discharge, and disposal of hazardous chemicals used in the manufacturing processes; the reporting of chemical releases to the environment; and the reporting of chemicals manufactured in by-products that are beneficially recycled;

 

   

Department of Homeland Security regulations regarding the storage of certain chemicals of interest;

 

   

corresponding state laws and regulations, including site investigation and remediation;

 

   

corresponding U.S. county and city agencies;

 

   

corresponding regulations and agencies in China for our Chinese facilities;

 

   

material content directives and laws that ban or restrict certain hazardous substances in products sold in member states of the European Union, China, other countries and jurisdictions;

 

   

SEC rules that require reporting of the use of certain metals from “conflict minerals” originating in the Democratic Republic of the Congo and the 9 countries surrounding it pursuant to Section 1502 of the Dodd-Frank Act; and

 

   

reporting requirements of the California Transparency in Supply Chains Act of 2010 that requires reporting on efforts to eradicate slavery and human trafficking in retailers’ and manufacturers’ supply chains.

The process to manufacture PCBs requires adherence to city, county, state, federal and foreign environmental regulations regarding the storage, use, handling and disposal of chemicals, solid wastes and other hazardous materials, as well as compliance with air quality standards and chemical use reporting. We believe that our facilities in the United States comply in all material respects with applicable environmental laws and regulations. In China, governmental authorities are taking various steps to tighten the rules and regulations governing environmental issues. An update to Chinese environmental waste water law was issued in late 2012, allowing for an interim period in which plants subject to such laws may install equipment that meets the new regulatory regime. Our plants in China are not yet in full compliance with the current environmental regulations. We believe we have developed plans acceptable to the Chinese government, and we are in the process of implementing these plans. We do not anticipate any immediate risk of government fines or temporary closure of Chinese plants. We have established and enacted an investment plan related to the efforts to come into full compliance with the new regulations. There can be no assurance that violations will not occur in the future.

Employees

As of January 2, 2017, we had approximately 28,360 employees. Of our employees, approximately 26,400 were involved in manufacturing and engineering, 690 worked in sales and marketing, and approximately 1,270 worked in accounting, systems and other support capacities. None of our U.S. employees are represented by unions. In China, approximately 19,275 employees are members of the All-China Federation of Trade Unions and accordingly are considered to be represented by a labor union. We have not experienced any labor problems resulting in a work stoppage and we believe that we have good relations with our employees.

Availability of Reports Filed with the Securities and Exchange Commission

We are a Delaware corporation founded in 1998, with our principal executive offices located at 1665 Scenic Avenue, Suite 250, Costa Mesa, CA 92626. Our telephone number is (714) 327-3000. Our website address is www.ttm.com. Information included on our website is not incorporated into this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available without charge on our website at www.ttm.com/investors/investor_sec.aspx, as soon as reasonably practicable after they are filed electronically with the Securities and Exchange Commission (SEC). Copies are also available without charge by (i) telephonic request by calling our Investor Relations Department at (714) 327-3000, (ii) e-mail request to investor@ttmtech.com, or (iii) a written request to TTM Technologies, Inc., Attention: Investor Relations, 1665 Scenic Avenue, Suite 250, Costa Mesa, CA 92626.

 

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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. The risk factors described below are not the only ones we face. Risks and uncertainties not known to us currently, or that may appear immaterial, also may have a material adverse effect on our business, financial condition, and results of operations.

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 annual report or future quarterly reports to stockholders, press releases, or oral statements, whether in presentations, responses to questions, or otherwise.

Risks Related to our Business

We have substantial outstanding indebtedness, and our outstanding indebtedness could adversely impact our liquidity and flexibility in obtaining additional financing, our ability to fulfill our debt obligations and our financial condition and results of operations.

We have substantial debt and, as a result, we have significant debt service obligations. On May 31, 2015, we entered into a $950.0 million Term Loan Credit Agreement (Term Loan), a $150.0 million U.S. Asset-Based Lending Credit Agreement (U.S ABL), and a $150.0 million Asia Asset-Based Lending Credit Agreement (Asia ABL). We drew $80.0 million of the U.S. ABL at the closing of the acquisition of Viasystems. On September 27, 2016, we issued new $775.0 million Term B Loans (Term Loan B) at an interest rate of LIBOR plus 4.25%, a reduction of 75 basis points from our previous Term Loan, and repaid in full the remaining outstanding balance of the May 31, 2015 Term Loan. In addition, we and a number of our direct and indirect subsidiaries have various credit facilities, letters of credit and guarantee facilities. Such agreements also contain certain financial covenants which require us to maintain a specified consolidated leverage ratio and under the occurrence of certain events, a consolidated fixed charge coverage ratio.

Our indebtedness could have important consequences to us and our shareholders because in certain circumstances we may need to comply with the covenants in the agreements governing such indebtedness and dedicate funds to service our outstanding debt. For example, it could:

 

   

make it more difficult for us to satisfy our obligations with respect to our indebtedness, which could in turn result in an event of default on such indebtedness;

 

   

require us to use a substantial portion of our cash flow from operations for debt service payments, thereby reducing the availability of cash for working capital, capital expenditures, acquisitions and other general corporate purposes;

 

   

impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and other investments or general corporate purposes, which may limit our ability to execute our business strategy;

 

   

diminish our ability to withstand a downturn in our business, the industry in which we operate or the economy generally and restrict us from exploiting business opportunities or making acquisitions;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate or the general economy;

 

   

increase our vulnerability to general adverse economic and industry conditions, including movements in interest rates, which could result in increased borrowing costs;

 

   

limit management’s discretion in operating our business; and

 

   

place us at a competitive disadvantage as compared to our competitors that have less debt as it could limit our ability to capitalize on future business opportunities and to react to competitive pressures or adverse changes.

 

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We may be able to incur substantial additional debt in the future, some or all of which may be secured by a lien on our assets. If new debt or other liabilities or obligations are added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.

Servicing our debt requires a significant amount of cash and we may not be able to generate sufficient cash to service all of our debt and may be forced to take other actions to satisfy our obligations under our debt, which may not be successful.

For the year ended January 2, 2017, we made net debt principal payments totaling $217.6 million, representing normal scheduled principal payments as well as additional prepayments of principal. We are not required to make quarterly scheduled payments of the outstanding Term Loan B balance due to mandatory payments and optional loan prepayments applied to date. We may be required to make an additional principal payment on an annual basis, based on certain parameters defined in these agreements, which includes a secured leverage ratio.

Our ability to make scheduled payments on or to refinance our debt obligations and to fund planned capital expenditures and expansion efforts depends on our ability to generate cash in the future and our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain regulatory, competitive, financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our debt.

If we are unable to meet our debt service obligations, we may be forced to reduce or delay investments or to sell assets, seek additional capital (which could include obtaining additional equity capital on terms that may be onerous or highly dilutive) or restructure or refinance our debt. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our operating results and available cash may in the future be insufficient to meet our debt service obligations. We could face substantial liquidity challenges and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or, if consummated, the proceeds of such dispositions may not be adequate to meet any debt service obligations then due.

We have pursued and intend to continue to pursue acquisitions of other businesses and may encounter risks associated with these activities, which could harm our business and operating results.

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 management’s 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;

 

   

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;

 

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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;

 

   

assume liabilities; record goodwill and indefinite-lived intangible assets that will be subject to impairment testing and potential periodic impairment charges;

 

   

become subject to litigation and environmental issues, which include product material content certifications related to conflict minerals;

 

   

incur unanticipated costs;

 

   

incur large and immediate write-offs; 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. Failure to manage and successfully integrate acquisitions we make could have a material adverse effect on our business, financial condition, and results of operations. 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 any such acquisition.

Changes in tax laws could materially affect our financial position and results of operations.

The U.S. tax laws are subject to significant change. The current U.S. administration and key members of Congress have made public statements indicating that tax reform is a priority. Certain changes to U.S. tax laws including limitations on the ability to defer U.S. taxation on earnings outside of the United States until those earnings are repatriated to the United States, could affect the tax treatment of our earnings. Due to the large and expanding scale of our international business activities, many of these types of changes to the taxation of our activities could increase our worldwide effective tax rate and materially impact our financial position or results of operations.

Uncertainty and adverse changes in the economy and financial markets could have an adverse impact on our business and operating results.

Uncertainty or adverse changes in the economy could lead to a significant decline in demand for the end products manufactured by our customers, which, in turn, could result in a decline in the demand for our products and pressure to reduce our prices. Any decrease in demand for our products could have an adverse impact on our financial condition, operating results and cash flows. Uncertainty and adverse changes in the economy could also increase the cost and decrease the availability of potential sources of financing and increase our exposure to losses from bad debts, either of which could have a material adverse effect on our financial condition, operating results and cash flows.

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 January 2, 2017, we had an aggregate of approximately $111.7 million in current assets denominated in Chinese Renminbi (RMB) and the Hong Kong Dollar (HKD). 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 on 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. To the extent that we may have

 

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outstanding indebtedness denominated in the U.S. dollar or in the HKD, the depreciation of the RMB against the U.S. dollar or the HKD may have a material adverse effect on our business, financial condition, and results of operations (including the cost of servicing, and the value on our balance sheet of, the U.S. dollar and HKD-denominated indebtedness). Additionally, we have revenues and costs denominated in currencies other than the U.S. dollar (primarily the RMB). Fluctuations in the exchange rates between the U.S. dollar and the RMB could result in increases or decreases in our costs or revenues which could negatively impact our business, financial condition, and results of operations. Significant inflation or disproportionate changes in foreign exchange rates could occur as a result of general economic conditions, acts of war or terrorism, changes in governmental monetary or tax policy, or changes in local interest rates. The impact of future exchange rate fluctuations between the U.S. dollar and the RMB and the U.S. dollar and the HKD cannot be predicted. Further, China’s government imposes controls over the convertibility of RMB into foreign currencies, which subjects us to further currency exchange risk.

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. 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 PCB, 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. In addition, we manufacture products for a range of automotive customers. If any of our products are or are alleged to be defective, we may be required to participate in a recall of such products. As suppliers become more integral to the vehicle design process and assume more of the vehicle assembly functions, vehicle manufacturers are increasingly looking to their suppliers for contributions when faced with product liability claims or recalls. In addition, vehicle manufacturers, which have traditionally borne the costs associated with warranty programs offered on their vehicles, are increasingly requiring suppliers to guarantee or warrant their products and may seek to hold us responsible for some or all of the costs related to the repair and replacement of parts supplied by us to the vehicle manufacturer.

We are heavily dependent upon the worldwide electronics industry, which is characterized by economic cycles and fluctuations in product demand. A downturn in the electronics industry or prolonged global economic crisis could result in decreased demand for our manufacturing services and materially adversely affect our business, financial condition, and results of operations.

A majority of our revenue is generated from the electronics industry, which is characterized by intense competition, relatively short product life cycles, and significant fluctuations in product demand. The industry is subject to economic cycles and recessionary periods. 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. Consequently, our past operating results, earnings, and cash flows may not be indicative of our future operating results, earnings, and cash flows.

We depend upon a relatively small number of OEM customers for a large portion of our sales, and a decline in sales to major customers would materially adversely affect our business, financial condition, and 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 33%, 37% and 44% of our net sales for the years ended January 2, 2017, December 28, 2015 and December 29, 2014, respectively, and one customer represented 15% of our sales for the year ended January 2, 2017. 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

 

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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 would materially adversely affect our business, financial condition, and results of operations. 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 business, financial condition, and results of operations would be materially adversely affected.

In addition, during industry downturns, we may need to reduce prices to limit the level of order losses, and we may be unable to collect payments from our customers. There can be no assurance that key customers would not cancel orders, that they would continue to place orders with us in the future at the same levels as experienced by us in prior periods, that they would be able to meet their payment obligations, or that the end-products that use our products would be successful. This concentration of customer base may materially adversely affect our business, financial condition, and results of operations due to the loss or cancellation of business from any of these key customers, significant changes in scheduled deliveries to any of these customers, or decreases in the prices of the products sold to any of these customers.

If we are unable to maintain satisfactory capacity utilization rates, our business, financial condition, and results of operations would be materially adversely affected.

Given the high fixed costs of our operations, decreases in capacity utilization rates can have a significant effect on our business. Accordingly, our ability to maintain or enhance gross margins will continue to depend, in part, on maintaining satisfactory capacity utilization rates. In turn, our ability to maintain satisfactory capacity utilization will depend on the demand for our products, the volume of orders we receive, and our ability to offer products that meet our customers’ requirements at competitive prices. If current or future production capacity fails to match current or future customer demands, our facilities would be underutilized, our sales may not fully cover our fixed overhead expenses, and we would be less likely to achieve expected gross margins. If forecasts and assumptions used to support the realizability of our long-lived assets change in the future, significant impairment charges could result that would materially adversely affect our business, financial condition, and results of operations.

In addition, we generally schedule our quick turnaround 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, as well as potentially causing disruptions in our ability to supply customers.

We rely on the cellular phone and mobile technology industry for a significant portion of sales. The economic volatility in this industry has had, and may continue to have, a material adverse effect on our ability to forecast demand and production and to meet desired sales levels.

A large percentage of our business is conducted with customers who are in the cellular phone and mobile technology industry. This industry is characterized by intense competition, short product life cycles, seasonality, particularly around the year-end holiday season, and significant fluctuations in consumer demand. This industry is heavily dependent on consumers and therefore can be affected by their demand patterns. If the volatility in this industry continues, it may have a material adverse effect on our business, financial condition, and results of operations.

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.

Our results of operations fluctuate for a variety of reasons, including:

 

   

timing of orders from and shipments to major customers;

 

   

the levels at which we utilize our manufacturing capacity;

 

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price competition;

 

   

changes in our mix of revenues generated from quick-turn versus standard delivery time services;

 

   

expenditures, charges or write-offs, including those related to acquisitions, facility restructurings, or asset impairments; and

 

   

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 cellular phone and tablet industries and quick-turn ordering patterns affect the overall PCB 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 that may 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.

We rely on the telecommunication industry for a significant portion of sales. The economic volatility in this industry has had, and may continue to have, a material adverse effect on our ability to forecast demand and production and to meet desired sales levels.

A large percentage of our business is conducted with customers who are in the telecommunication industry. This industry is characterized by intense competition, relatively short product life cycles, and significant fluctuations in product demand. This industry is heavily dependent on the end markets it serves and therefore can be affected by the demand patterns of those markets. If the volatility in this industry continues, it would have a material adverse effect on our business, financial condition, and results of operations.

Our results can be adversely affected by rising labor costs.

There is uncertainty with respect to rising labor costs, particularly within China, where we have most of our manufacturing facilities. In recent periods there have been regular and significant increases in the minimum wage payable in various provinces of China. In addition, we have experienced very high employee turnover in our manufacturing facilities in China, generally after the Chinese New Year, and we are experiencing ongoing difficulty in recruiting employees for these facilities. Furthermore, labor disputes and strikes based partly on wages have in the past slowed or stopped production by certain manufacturers in China. In some cases, employers have responded by significantly increasing the wages of workers at such plants. Any increase in labor costs due to minimum wage laws or customer requirements about scheduling and overtime that we are unable to recover in our pricing to our customers could materially adversely affect our business, financial condition, and results of operations. In addition, the high turnover rate and our difficulty in recruiting and retaining qualified employees and the other labor trends we are noting in China could result in a potential for defects in our products, production disruptions or delays, or the inability to ramp production to meet increased customer orders, resulting in order cancellation or imposition of customer penalties if we are unable to deliver products in a timely manner.

To respond to competitive pressures and customer requirements, we may further expand internationally in lower-cost locations. If we pursue such expansions, we may be required to make additional capital expenditures. In addition, the cost structure in certain countries that are now considered to be favorable may increase as economies develop or as such countries join multinational economic communities or organizations, causing local wages to rise. As a result, we may need to continue to seek new locations with lower costs and the employee and infrastructure base to support PCB manufacturing. We cannot assure investors that we will realize the anticipated strategic benefits of our international operations or that our international operations will contribute positively to our operating results.

In our North America operations, rising health care costs pose a significant labor-related risk. We work with our insurance brokers and carriers to control the cost of health care for our employees. However, there can be no assurance that our efforts will succeed, especially given recent and pending changes in government oversight of health care.

 

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Unanticipated changes in our tax rates or in our assessment of the realizability of our deferred income tax assets or exposure to additional income tax liabilities could affect our business, financial condition, and results of operations.

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 materially adversely affected by changes in the mix of earnings in countries and states with differing statutory tax rates, changes in the valuation of deferred income 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 materially adversely affect our business, financial condition, and results of operations.

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 income tax assets.

Certain of our foreign subsidiaries have deferred income tax assets. Based on our forecast for future taxable earnings for these foreign subsidiaries, we believe we will utilize the deferred income tax assets in future periods. However, if our estimates of future earnings decline, we may have to increase our valuation allowance against our net deferred income tax assets, resulting in a higher income tax provision, which would reduce our cash flows.

Issues arising during the upgrade of our enterprise resource planning system could affect our operating results and ability to manage our business effectively.

We are in the process of upgrading our enterprise resource planning, or ERP, management system to enhance operating efficiencies and provide more effective management of our business operations. We are investing significant financial and personnel resources into this project. However, there is no assurance that the system upgrade will meet our current or future business needs or that it will operate as designed. The transition to the new ERP system will affect numerous systems necessary for our operation. If we fail to correctly implement one or more components of the ERP system, we could experience significant disruption to our operations. Such disruptions could include, among other things, temporary loss of data, inability to process certain orders, failure of systems to communicate with each other and the inability to track or reconcile key data. We are heavily dependent on automated management systems, and any significant failure or delay in the system upgrade could cause a substantial interruption to our business and additional expense, which could result in an adverse impact on our operating results, cash flows or financial condition.

We have a significant amount of goodwill, indefinite-lived intangible assets, and other intangible assets on our consolidated balance sheet. If our goodwill, indefinite-lived intangible assets, or other intangible assets become impaired in the future, we would be required to record a material, non-cash charge to earnings, which would also reduce our stockholders’ equity.

As of January 2, 2017, our consolidated balance sheet reflected $499.2 million of goodwill and definite-lived intangible assets. We periodically evaluate whether events and circumstances have occurred, such that the potential for reduced expectations for future cash flows coupled with further decline in the market price of our stock and market capitalization 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.

 

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Our ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposes is subject to limitations, and future transfers of shares, when aggregated with the November 2016 secondary sale of our shares, could cause us to experience an “ownership change” that could further limit our ability to utilize our net operating losses.

Under U.S. federal income tax law, a corporation’s ability to utilize its net operating losses (NOL’s) to offset future taxable income may be significantly limited if it experiences an “ownership change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the Code). In general, an ownership change will occur if there is a cumulative change in a corporation’s ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period.

A corporation that experiences an ownership change will generally be subject to an annual limitation on its pre-ownership change NOLs equal to the value of the corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate (subject to certain adjustments). The annual limitation for a taxable year is generally increased by the amount of any “recognized built-in gains” for such year and the amount of any unused annual limitation in a prior year. As a result of our acquisition of Viasystems, the NOLs acquired were subject to this limitation. In November 2016, 13,800,000 shares of common stock were sold by Su Sih, our largest shareholder and a “5-percent shareholder,” in an underwritten registered public secondary offering. Additional future transfers or sales of our common stock during the rolling period by “5-percent shareholders” could cause us to experience an ownership change under Section 382, which could further limit our use of NOLs.

Adverse judgments or settlements resulting from legal proceedings in which we may be involved in the normal course of our business could reduce our profitability or limit our ability to operate our business.

In the normal course of our business, we have been, and may in the future be subject to employee claims based on, among other things, discrimination, minimum wage, overtime pay and other employment related matters. We cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of these legal proceedings. Any significant adverse determinations, judgments or settlements could reduce our profitability and could materially adversely affect our business, financial condition and results of operations, limit our ability to operate our business or harm our reputation.

Employee strikes and other labor-related disruptions may materially adversely affect our business, financial condition, and results of operations.

Our business is labor intensive, utilizing large numbers of engineering and manufacturing personnel. Strikes or labor disputes with our unionized employees, primarily in China, may adversely affect our ability to conduct our business. If we are unable to reach agreement with any of our unionized work groups on future negotiations regarding the terms of their collective bargaining agreements, we may be subject to work interruptions or stoppages. Any of these events could be disruptive to our operations and could result in negative publicity, loss of contracts, and a decrease in revenues. We may also become subject to additional collective bargaining agreements in the future if more employees or segments of our workforce become unionized, including any of our employees in the United States. We have not experienced any labor problems resulting in a work stoppage since 2013.

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.

Additionally, our OEM customers often direct a significant portion of their purchases through a relatively limited number of EMS companies. Sales to EMS companies represented approximately 35%, 35% and 39% of our net sales for the years ended January 2, 2017, December 28, 2015 and December 29, 2014, respectively. Our

 

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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 business, financial condition, and results of operations would be materially adversely affected.

We rely on suppliers and equipment manufacturers for the timely delivery of raw materials, components, equipment and spare parts used in manufacturing our PCBs and E-M Solutions. If a raw material supplier or equipment manufacturer goes bankrupt, liquidates, consolidates out of existence or fails to satisfy our product quality standards, it could harm our ability to purchase new manufacturing equipment, service the equipment we have, or timely produce our products, thereby affecting our customer relationships.

Consolidations and restructuring in our supplier base and equipment fabricators related to our raw materials purchases or the manufacturing equipment we use to fabricate our products may result in adverse changes in pricing of materials due to reduction in competition among our raw material suppliers or an elimination or shortage of equipment and spare parts from our manufacturing equipment supply base. Suppliers and equipment manufacturers may be impacted by other events outside our control including macro-economic, financial instability, environmental occurrences, or supplier interruptions due to fire, natural catastrophes or otherwise. Suppliers and equipment manufacturers may 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 and negatively impact our financial results. In addition, in extreme circumstances, the suppliers we purchase from could cease production due to a fire, natural disaster, consolidation or liquidation of their businesses. As such, this may impact our ability to deliver our products on a timely basis and harm our customer relationships and negatively impact our financial results.

We serve customers and have manufacturing facilities outside the United States and are subject to the risks characteristic of international operations.

We have significant manufacturing operations in Asia and sales offices located in Asia and Europe, and we continue to consider additional opportunities to make foreign investments and construct new foreign facilities.

For the year ended January 2, 2017, we generated 72% of our net sales from non-U.S. operations, and a significant portion of our manufacturing material was provided by international suppliers during this period. As a result, we are subject to risks relating to significant international operations, including but not limited to:

 

   

managing international operations;

 

   

imposition of governmental controls;

 

   

unstable regulatory environments;

 

   

compliance with employment laws;

 

   

implementation of disclosure controls, internal controls, financial reporting systems, and governance standards to comply with U.S. accounting and securities laws and regulations;

 

   

limitations on imports or exports of our product offerings;

 

   

fluctuations in the value of local currencies;

 

   

inflation or changes in political and economic conditions;

 

   

labor unrest, rising wages, difficulties in staffing, and geographical labor shortages;

 

   

government or political unrest;

 

   

longer payment cycles;

 

   

language and communication barriers, as well as time zone differences;

 

   

cultural differences;

 

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increases in duties and taxation levied on our products;

 

   

other potentially adverse tax consequences;

 

   

imposition of restrictions on currency conversion or the transfer of funds;

 

   

travel restrictions;

 

   

expropriation of private enterprises;

 

   

the potential reversal of current favorable policies encouraging foreign investment and trade; and

 

   

the potential for strained trade relationships between the United States and its trading partners.

Our operations in China subject us to risks and uncertainties relating to the laws and regulations of China.

Under its current leadership, the government of China 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 China 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, China 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 China may be protracted and may result in substantial costs and diversion of resources and management’s attention. In addition, though changes in government policies and rules are timely published or communicated, there is usually no indication of the duration of any grace period before which full implementation and compliance will be required. As a result, we may operate our business in violation of new rules and policies before full compliance can be achieved. These uncertainties could limit the legal protections available to us.

We depend on the U.S. government for a significant portion of our business, which involves unique risks. Changes in government defense spending or regulations could have a material adverse effect on our business, financial condition, and results of operations.

A significant portion of our revenues is derived from products and services ultimately sold to the U.S. government by our OEM and EMS customers 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. The contracts between our direct customers and the government end user are subject to political and budgetary constraints and processes, changes in short-range and long-range strategic plans, the timing of contract awards, the congressional budget authorization and appropriation processes, the government’s 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.

For the year ended January 2, 2017, aerospace and defense sales accounted for approximately 15% of our total net sales. The substantial majority of aerospace and defense sales are related to both U.S. and foreign military and defense programs. While we do not sell any significant volume of products directly to the U.S. government, we are a supplier to the U.S. government and its agencies, as well as foreign governments and agencies. Consequently, our sales are affected by changes in the defense budgets of the U.S. and foreign governments and may be affected by federal budget sequestration measures.

The domestic and international threat of terrorist activity, emerging nuclear states, and conventional military threats have led to an increase in demand for defense products and services and homeland security solutions in the recent past. The U.S. government, however, is facing unprecedented budgeting constraints. 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, financial condition, and results of operations.

 

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Future changes to the U.S. Munitions List could reduce or eliminate restrictions that currently apply to some of the products we produce. If these regulations or others are changed in a manner that reduces restrictions on products being manufactured overseas, we would likely face an increase in the number of competitors and increased price competition from overseas manufacturers, who are restricted by the current export laws from manufacturing products for U.S. defense systems.

We are subject to the requirements of the National Industrial Security Program Operating Manual for our facility security clearance, which is a prerequisite to our ability to perform on classified contracts for the U.S. government.

A facility security clearance is required in order to be awarded and perform on classified contracts for the Department of Defense and certain other agencies of the U.S. government. As a cleared entity, we must comply with the requirements of the National Industrial Security Program Operating Manual (NISPOM), and any other applicable U.S. government industrial security regulations. Further, due to the fact that a significant portion of our voting equity is owned by a non-U.S. entity, we are required to be governed by and operate in accordance with the terms and requirements of the Special Security Agreement (the SSA). The terms of the SSA have been previously disclosed in our SEC filings.

If we were to violate the terms and requirements of the SSA, the NISPOM, or any other applicable U.S. government industrial security regulations (which may apply to us under the terms of classified contracts), we could lose our security clearance. We cannot be certain that we will be able to maintain our security clearance. If for some reason our security clearance is invalidated or terminated, we may not be able to continue to perform on classified contracts and would not be able to enter into new classified contracts, which could materially adversely affect our business, financial condition, and results of operations.

We participate in the competitive automotive industry, which has strict quality control standards.

A significant portion of our sales are to customers within the automotive industry. If there was a destabilization of the automotive industry or a market shift away from our automotive customers, it may have a materially adverse effect on our business, financial condition, and results of operations.

In addition, for safety reasons, automotive customers have strict quality standards that generally exceed the quality requirements of other customers. If such products do not meet these quality standards, our business, financial condition, and results of operations may be materially adversely affected. These automotive customers may require long periods of time to evaluate whether our manufacturing processes and facilities meet their quality standards. If we were to lose automotive customers due to quality control issues, we might not be able to regain those customers or gain new automotive customers for long periods of time, which could have a material adverse effect on our business, financial condition, and results of operations. Moreover, we may be required under our contracts with automotive industry customers to indemnify them for the cost of warranties and recalls relating to our products.

Competition in the PCB 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 PCB 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 PCB and substrate competitors include AT & S Austria Technologie & Systemtechnik AG, Chin Poon Industrial Co., LTD., Compeq Manufacturing Co., Ltd., IBIDEN Co., Ltd., ISU Petasys Co., Ltd., Multek Corporation, Sanmina Corporation, Tripod Technology Corp., Unimicron Technology Corp., and Wus Printed Circuit Co., Ltd. Our principal E-M Solutions competitors include Amphenol Corp, Flex, Jabil Circuit, Inc. and Sanmina Corporation. In addition, we increasingly compete on an international basis, and new and emerging technologies may result in new competitors entering our markets.

Some of our competitors and potential competitors have advantages over us, including:

 

   

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;

 

   

more manufacturing facilities worldwide, some of which are closer in proximity to OEMs;

 

   

manufacturing facilities that are located in countries with lower production costs;

 

   

lower capacity utilization, which in peak market conditions can result in shorter lead times to customers;

 

   

ability to add additional capacity faster or more efficiently;

 

   

preferred vendor status with existing and potential customers;

 

   

greater name recognition; and

 

   

larger customer bases.

In addition, these competitors may respond more quickly to new or emerging technologies or adapt more quickly to changes in customer requirements 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 would cause our gross margins to decline.

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. For example, in 2017 we expect to continue to make significant capital expenditures to expand our HDI and other advanced manufacturing capabilities. We may not be able to obtain access to additional sources of funds in order to respond to technological changes as quickly as our competitors.

In addition, the PCB 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 will require us to make significant capital investments.

An increase in the cost of raw materials could have a material adverse effect on our business, financial condition, and results of operations and reduce our gross margins.

To manufacture PCBs, 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. 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. If raw material and component prices increase, it may reduce our gross margins.

If we are unable to provide our customers with high-end technology, high-quality products, and responsive service, or if we are unable to deliver our products to our customers in a timely manner, our business, financial condition, and results of operations may be materially adversely affected.

In order to maintain our existing customer base and obtain business from new customers, we must demonstrate our ability to produce our products at the level of technology, quality, responsiveness of service, timeliness of delivery, and cost that our customers require. If our products are of substandard quality, if they are

 

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not delivered on time, if we are not responsive to our customers’ demands, or if we cannot meet our customers’ technological requirements, our reputation as a reliable supplier of our products would likely be damaged. If we are unable to meet anticipated product and service standards, we may be unable to obtain new contracts or keep our existing customers, and this would have a material adverse effect on our business, financial condition, and results of operations.

We are subject to risks for the use of certain metals from “conflict minerals” originating in the Democratic Republic of the Congo.

During the third quarter of 2012, the SEC adopted rules implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). These rules impose diligence and disclosure requirements regarding the use of “conflict minerals” mined from the Democratic Republic of Congo and adjoining countries. While these new rules continue to be the subject of ongoing litigation and, as a result, uncertainty, we submitted a conflict minerals report on Form SD with the SEC on June 2, 2014, May 14, 2015 and May 26, 2016. Compliance with these rules results in additional costs and expenses, including costs and expenses incurred for due diligence to determine and verify the sources of any conflict minerals used in our products, in addition to the costs and expenses of remediation and other changes to products, processes, or sources of supply as a consequence of such verification efforts. These rules may also affect the sourcing and availability of minerals used in the manufacture of our PCBs, as there may be only a limited number of suppliers offering “conflict free” minerals that can be used in our products. There can be no assurance that we will be able to obtain such minerals in sufficient quantities or at competitive prices. Also, since our supply chain is complex, we may, at a minimum, face reputational challenges with our customers, stockholders, and other stakeholders if we are unable to sufficiently verify the origins of the minerals used in our products. We may also encounter customers who require that all of the components of our products be certified as conflict free. If we are not able to meet customer requirements, such customers may choose to disqualify us as a supplier, which could impact our sales and the value of portions of our inventory.

Damage to our manufacturing facilities due to fire, natural disaster, or other events could materially adversely affect our business, financial condition, and results of operations.

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, other natural disasters, an outbreak of epidemics such as Ebola or severe acute respiratory syndrome, required maintenance, or other events could harm us financially, increasing our costs of doing business and limiting our ability to deliver our manufacturing services on a timely basis.

Our insurance coverage with respect to damages to our facilities or our customers’ products caused by natural disasters is limited and is subject to deductibles and coverage limits. Such coverage may not be adequate or continue to be available at commercially reasonable rates and terms.

In the event one or more of our facilities is closed on a temporary or permanent basis as a result of a natural disaster, required maintenance or other event, or in the event that an outbreak of a serious epidemic results in quarantines, temporary closures of offices or manufacturing facilities, travel restrictions or the temporary or permanent loss of key personnel, our operations could be significantly disrupted. Such events could delay or prevent product manufacturing and shipment for the time required to transfer production or repair, rebuild or replace the affected manufacturing facilities. This time frame could be lengthy and result in significant expenses for repair and related costs. While we have disaster recovery plans in place, there can be no assurance that such plans will be sufficient to allow our operations to continue in the event of every natural or man-made disaster, pandemic, required repair or other extraordinary event. Any extended inability to continue our operations at unaffected facilities following such an event would reduce our revenue and potentially damage our reputation as a reliable supplier.

 

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We face constant pricing pressure from our customers and competitors, which may decrease our profit margins.

Competition in the PCB market is intense, and we expect that competition will continue to increase, thereby creating a highly aggressive pricing environment. We and some of our competitors have reduced average selling prices in the past. In addition, competitors may reduce their average selling prices faster than our ability to reduce costs, which can also accelerate the rate of decline of our selling prices. When prices decline, we may also be required to write down the value of our inventory.

The effects of such pricing pressures on our business may be exacerbated by inflationary pressures that affect our costs of supply. When we are unable to extract comparable concessions from our suppliers on prices they charge us, this in turn reduces gross profit if we are unable to raise prices. Further, uncertainty or adverse changes in the economy could also lead to a significant decline in demand for our products and pressure to reduce our prices. As a result of the recent global economic downturn, many businesses have taken a more conservative stance in ordering inventory. Any decrease in demand for our products, coupled with pressure from the market and our customers to decrease our prices, would materially adversely affect our business, financial condition, and results of operations.

The pricing pressure we face on our products requires us to introduce new and more advanced technology products to maintain average selling prices or reduce any declines in average selling prices. As we shift production to more advanced, higher-density PCBs, we tend to make significant investments in plants and other capital equipment and incur higher costs of production, which may not be recovered.

The prominence of EMS companies as our customers could reduce our gross margins, potential sales, and customers.

Sales to EMS companies represented approximately 35%, 35% and 39% of our net sales for the years ended January 2, 2017, December 28, 2015 and December 29, 2014, 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 has in the past, and could in the future, 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 PCBs 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, financial condition, and results of operations may be materially adversely affected.

If we are unable to manage our growth effectively, our business, financial condition, and results of operations could be materially adversely affected.

We have experienced, and expect to continue to experience, growth in the scope and complexity of our operations. This growth may strain our managerial, financial, manufacturing, and other resources. In order to manage our growth, we may be required to continue to implement additional operating and financial controls and hire and train additional personnel. There can be no assurance that we will be able to do so in the future, and failure to do so could jeopardize our expansion plans and seriously harm our operations. In addition, growth in our capacity could result in reduced capacity utilization and a corresponding decrease in gross margins.

Our international sales are subject to laws and regulations relating to corrupt practices, trade, and export controls and economic sanctions. Any non-compliance could have a material adverse effect on our business, financial condition, and results of operations.

We operate on a global basis and are subject to anti-corruption, anti-bribery, and anti-kickback laws and regulations, including restrictions imposed by the Foreign Corrupt Practices Act (the FCPA). The FCPA and similar anti-corruption, anti-bribery, and anti-kickback laws in other jurisdictions generally prohibit companies and their intermediaries and agents from making improper payments to government officials or any other persons for the purpose of obtaining or retaining business. We operate and sell our products in many parts of the world

 

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that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-corruption, anti-bribery, and anti-kickback laws may conflict with local customs and practices. We also, from time to time, undertake business ventures with state-owned companies or enterprises.

Our global business operations must also comply with all applicable domestic and foreign export control laws, including International Traffic In Arms Regulations (ITAR), and Export Administration Regulations (EAR). Some items we manufacture are controlled for export by the U.S. Department of Commerce’s Bureau of Industry and Security under EAR.

We train our employees concerning anti-corruption, anti-bribery, and anti-kickback laws and compliance with international regulations regarding trades and exports, and we have policies in place that prohibit employees from making improper payments. We cannot provide assurances that our internal controls and procedures will guarantee compliance by our employees or third parties with whom we work. If we are found to be liable for violations of the FCPA or similar anti-corruption, anti-bribery, or anti-kickback laws in international jurisdictions or for violations of ITAR, EAR, or other similar regulations regarding trades and exports, either due to our own acts or out of inadvertence, or due to the inadvertence of others, we could suffer criminal or civil fines or penalties or other repercussions, including reputational harm, which could have a material adverse effect on our business, financial condition, and results of operations.

Our global business operations also must be conducted in compliance with applicable economic sanctions laws and regulations, such as laws administered by the U.S. Department of the Treasury’s Office of Foreign Asset Control, the U.S. State Department, and the U.S. Department of Commerce. We must comply with all applicable economic sanctions laws and regulations of the United States and other countries. Violations of these laws or regulations could result in significant additional sanctions including criminal or civil fines or penalties, more onerous compliance requirements, more extensive debarments from export privileges, or loss of authorizations needed to conduct aspects of our international business.

In certain countries, we may engage third-party agents or intermediaries, such as customs agents, to act on our behalf, and if these third-party agents or intermediaries violate applicable laws, their actions may result in criminal or civil fines or penalties or other sanctions being assessed against us. We take certain measures designed to ensure our compliance with U.S. export and economic sanctions laws, anti-corruption laws and regulations, and export control laws. However, it is possible that some of our products were sold or will be sold to distributors or other parties, without our knowledge or consent, in violation of applicable law. There can be no assurances that we will be in compliance in the future. Any such violation could result in significant criminal or civil fines, penalties, or other sanctions and repercussions, including reputational harm, which could have a material adverse effect on our business, financial condition, and results of operations.

Our failure to comply with the requirements of environmental laws could result in litigation, fines, revocation of permits necessary to our manufacturing processes, or 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, the Toxic Substances Control 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,

 

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gold, silver, cyanide, and fluoride, and both filter cake and spent ion exchange resins from equipment used for on-site waste treatment.

Environmental law violations, including the failure to maintain required environmental permits, could subject us to fines, penalties, and other sanctions, including the revocation of our effluent discharge permits. This could require us to cease or limit production at one or more of our facilities and could have a material adverse effect on our business, financial condition, and results of operations. Even if we ultimately prevail, environmental lawsuits against us would be time consuming and costly to defend.

Environmental laws have generally become more stringent and this trend may continue 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 relocation to another global location where prohibitive regulations do not exist. It is possible that environmental compliance costs and penalties from new or existing regulations may materially adversely affect our business, financial condition, and results of operations.

We are increasingly required to certify compliance with 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 China’s RoHS legislation. Similar laws have been adopted in other jurisdictions and may become increasingly prevalent. In addition, we must also certify as to the non-applicability of the EU’s Waste Electrical and Electronic Equipment directive for certain products that we manufacture. The REACH directive requires the identification of Substances of Very High Concern (SVHCs) periodically. We must survey our supply chain and certify to the non-presence or presence of SVHCs to our customers. 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 also subject to a variety of environmental laws and regulations in China, which impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage, and disposal of solid and hazardous wastes. The manufacturing of our products generates gaseous chemical wastes, liquid wastes, waste water, and other industrial wastes from various stages of the manufacturing process. Production sites in China are subject to regulation and periodic monitoring by the relevant environmental protection authorities. Environmental claims or the failure to comply with current or future regulations could result in the assessment of damages or imposition of fines against us, suspension of production, or cessation of operations.

The process to manufacture PCBs requires adherence to city, county, state, federal, and foreign environmental regulations regarding the storage, use, handling, and disposal of chemicals, solid wastes, and other hazardous materials, as well as compliance with air quality standards and chemical use reporting. In China, governmental authorities have adopted new rules and regulations governing environmental issues. An update to Chinese environmental waste water law was issued in late 2012, allowing for an interim period in which plants subject to such law may install equipment that meets the new regulatory regime. Our plants in China are not yet in full compliance with the newly adopted environmental regulations. There can be no assurance that violations will not occur in the future.

Employee theft or fraud could result in loss.

Certain of our employees have access to, or signature authority with respect to, bank accounts or other company assets, which could expose us to fraud or theft. In addition, certain employees have access to certain precious metals used in connection with our manufacturing and key information technology (IT) infrastructure and to customer and other information that is commercially valuable. Should any employee, for any reason, steal any such precious metals (which has occurred from time to time), compromise our IT systems, or misappropriate customer or other information, we could incur losses, including losses relating to claims by our customers against us, and the willingness of customers to do business with us may be damaged. Additionally, in the case of our

 

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defense business, we could be debarred from future participation in government programs. Any such losses may not be fully covered by insurance.

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.

Although we have long-term contracts with many customers, those contracts generally do not contain volume commitments. We generally sell to customers on a purchase order basis. 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, subject to negotiations. The level and timing of orders placed by our customers may vary due to:

 

   

customer attempts to manage inventory;

 

   

changes in customers’ manufacturing strategies, such as a decision by a customer to either diversify or consolidate the number of PCB manufacturers or backplane assembly service providers used or to manufacture or assemble its own products internally;

 

   

variation in demand for our customers’ products; and

 

   

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 materially adversely affect our business, financial condition, and results of operations.

Increasingly, our customers are requesting that we enter into supply agreements with them that have restrictive terms and conditions. These agreements typically include provisions that increase our financial exposure, which could result in significant costs to us.

Increasingly, our customers are requesting that we enter into supply agreements with them. These agreements typically do not include volume commitments, but do include provisions that generally serve to increase our exposure for product liability and limited sales returns, 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 could materially adversely affect our cash flow, business, financial condition, and results of operations.

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 materially adversely affected.

Consolidation among our customers could materially adversely affect our business, financial condition, and results of operations.

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.

 

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We may need additional capital in the future to fund investments in our operations, refinance our indebtedness, and to maintain and grow our business, and such capital may not be available on a timely basis, on acceptable terms, or at all.

Our business is capital-intensive, and our ability to increase revenue, profit, and cash flow depends upon continued capital spending. To the extent that the funds generated by our ongoing operations are insufficient to cover our liquidity requirements, we may need to raise additional funds through financings. If we are unable to fund our operations and make capital expenditures as currently planned or if we do not have sufficient liquidity to service the interest and principal payments on our debt, it would have a material adverse effect on our business, financial condition, and results of operations. If we do not achieve our expected operating results, we would need to reallocate our sources and uses of operating cash flows. This may include borrowing additional funds to service debt payments, which may impair our ability to make investments in our business. Looking ahead at long-term needs, we may need to raise additional funds for a number of purposes, including the following:

 

   

to fund capital equipment purchases to increase production capacity, upgrade and expand our technological capabilities and replace aging equipment or introduce new products;

 

   

to refinance our existing indebtedness;

 

   

to fund our operations beyond 2017;

 

   

to fund working capital requirements for future growth that we may experience;

 

   

to enhance or expand the range of services we offer;

 

   

to increase our sales and marketing activities; or

 

   

to respond to competitive pressures or perceived opportunities, such as investment, acquisition, and international expansion activities.

Should we need to raise funds through incurring additional debt, we may become subject to covenants even more restrictive than those contained in our current debt instruments. There can be no assurance that additional capital, including any future equity or debt financing, would be available on a timely basis, on favorable terms, or at all. If such funds are not available to us when required or on acceptable terms, our business, financial condition, and results of operations could be materially adversely affected.

Our operations could be materially adversely affected by a shortage of utilities or a discontinuation of priority supply status offered for such utilities.

The manufacturing of PCBs requires significant quantities of electricity and water. Our operations in Asia have historically purchased substantially all of the electrical power for their manufacturing plants in China from local power plants. Because China’s economy has recently been in a state of growth, the strain on the nation’s power plants is increasing, which has led to continuing power outages in various parts of the country. There may be times when our operations in China may be unable to obtain adequate sources of electricity to meet production requirements. Various regions in China have in the past experienced shortages of both electricity and water and unexpected interruptions of power supply. From time to time, the Chinese government rations electrical power, which can lead to unscheduled production interruptions at our manufacturing facilities.

In addition, certain of the areas in which our North America operations have manufacturing facilities, particularly in California, have experienced power and resource shortages from time to time, including mandatory periods without electrical power, changes to water availability, and significant increases in utility and resource costs. California has also recently experienced drought conditions, prompting the Governor of California to proclaim a Drought State of Emergency. Due to the severe drought conditions, some local and regional water districts and the state government are implementing policies or regulations that restrict water usage and increase the cost of water.

We do not generally maintain any back-up power generation facilities or reserves of water for our operations, so if we were to lose supplies of power or water at any of our facilities, we would be required to cease

 

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operations until such supply was restored. Any resulting cessation of operations could materially adversely affect our ability to meet our customers’ orders in a timely manner, thus potentially resulting in a loss of business, along with increased costs of manufacturing, and under-utilization of capacity. In addition, the sudden cessation of our power or water supply could damage our equipment, resulting in the need for costly repairs or maintenance, as well as damage to products in production, resulting in an increase in scrapped products.

For example, in the third quarter of 2014, one of our principal plants was affected by a five day unexpected power outage, which increased our manufacturing costs and caused delivery delays. There can be no assurance that our required utilities would not in the future experience material interruptions, which could have a material adverse effect on our business, financial condition, and results of operations.

Outages, computer viruses, break-ins, and similar events could disrupt our operations, and breaches of our security systems may cause us to incur significant legal and financial exposure.

We rely on information technology networks and systems, some of which are owned and operated by third parties, to process, transmit, and store electronic information. In particular, we depend on our information technology infrastructure for a variety of functions, including worldwide financial reporting, inventory management, procurement, invoicing, and email communications. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, terrorist attacks, and similar events. Despite the implementation of network security measures, our systems and those of third parties on which we rely may also be vulnerable to computer viruses, break-ins, and similar disruptions. If we or our vendors are unable to prevent such outages and breaches, our operations could be disrupted. If unauthorized parties gain access to our information systems or such information is used in an unauthorized manner, misdirected, lost, or stolen during transmission, any theft or misuse of such information could result in, among other things, unfavorable publicity, governmental inquiry and oversight, difficulty in marketing our services, allegations by our customers that we have not performed our contractual obligations, litigation by affected parties, and possible financial obligations for damages related to the theft or misuse of such information, any of which could have a material adverse effect on our business, financial condition, and results of operations.

We may be unable to hire and retain sufficient qualified personnel, and the loss of any of our key executive officers could materially adversely affect our business, financial condition, and results of operations.

We believe that our future success will depend in large part on our ability to attract and retain highly skilled, knowledgeable, sophisticated, and qualified managerial and professional personnel. We may not be able to retain our executive officers and key personnel or attract additional qualified management in the future. We can make no assurances that future changes in executive management will not have a material adverse effect on our business, financial condition, or results of operations. 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.

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 materially adversely affect our business, financial condition, and results of operations.

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 that 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. For example, we have experienced a significant amount of employee attrition in our China operations each year, which has negatively impacted our yield, costs of production, and service times.

 

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We may be exposed to intellectual property infringement claims by third parties that could be costly to defend, could divert management’s attention and resources, and if successful, could result in liability.

We rely on a combination of copyright, patent, trademark, and trade secret laws, confidentiality procedures, contractual provisions, and other measures to protect our proprietary information. All of these measures afford only limited protection. These measures may be invalidated, circumvented, or challenged, and others may develop technologies or processes that are similar or superior to our technology. We may not have the controls and procedures in place that are needed to adequately protect proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy our products or obtain or use information that we regard as proprietary, which could materially adversely affect our business, financial condition, and results of operations.

Furthermore, there is a risk that we may infringe on the intellectual property rights of others. As is the case with many other companies in the PCB industry, we from time to time receive communications from third parties asserting patent rights to our products and enter into discussions with such third parties. Irrespective of the validity or the successful assertion of such claims, we could incur costs in either defending or settling any intellectual property disputes alleging infringement. If any claims are brought against the customers for such infringement, whether or not these have merit, we could be required to expend significant resources in defending such claims. In the event we are subject to any infringement claims, we may be required to spend a significant amount of money to develop non-infringing alternatives or obtain licenses. We may not be successful in developing such alternatives or in obtaining such licenses on reasonable terms or at all, which could disrupt the production processes, damage our reputation, and materially adversely affect our business, financial condition, and results of operations.

Future sales of our common stock or other securities by the Company or its large shareholders may adversely affect the market price of our common stock.

In the future, we may issue additional equity securities or one or more of our large shareholders may offer their shares for sale through public or private offerings. Pursuant to our certificate of incorporation, our board of directors has the authority, without action by stockholders, to designate and issue preferred stock in one or more series. Our board of directors may also designate the rights, preferences and privileges of each series of preferred stock, any or all of which may be superior to the rights of the common stock. Any such issuance of additional shares would reduce your influence over matters on which our stockholders vote, would dilute the percentage of ownership interest of existing stockholders and may dilute the per share book value of the common stock. In addition, option holders may exercise their options at a time when we would otherwise be able to obtain additional equity capital on more favorable terms. Any issuances of preferred stock would likely result in your interest being subject to the prior rights of holders of that preferred stock. Also, we may have shareholders that hold large quantities of our shares. If one or more of these shareholders offered their shares for sale, it could result in a decrease in demand for our shares which could have the effect of decreasing our share price. The market price of our common stock could decline as a result of any future offering as well as sales of shares of our common stock made after such offerings or the perception that such sales could occur.

Because we do not expect to pay any cash dividends for the foreseeable future, shareholders may not receive any return on investment unless the shareholders sells their common stock for a price greater than that which was paid.

We have not declared or paid any dividends since 2000 and do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any payment of cash dividends will be at the discretion of our board of directors and will depend on our financial condition, anticipated cash needs, capital requirements, legal requirements, earnings and other factors. Our ability to pay dividends is restricted by the terms of our debt agreements and might be restricted by the terms of any indebtedness that we incur in the future. Consequently, shareholders should not rely on dividends in order to receive a return on your investment. See our dividend policy in Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

 

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Our business, financial condition, and results of operations could be materially adversely affected by climate change initiatives.

Our manufacturing processes require that we purchase significant quantities of energy from third parties, which results in the generation of greenhouse gases, either directly on-site or indirectly at electric utilities. Both domestic and international legislation to address climate change by reducing greenhouse gas emissions could create increases in energy costs and price volatility. Considerable international attention is now focused on development of an international policy framework to guide international action to address climate change. Proposed and existing legislative efforts to control or limit greenhouse gas emissions could affect our energy sources and supply choices, as well as increase the cost of energy and raw materials that are derived from sources that generate greenhouse gas emissions.

Failure to maintain good relations with the noncontrolling interest holder of a majority-owned subsidiary of TTM in China could materially adversely affect our ability to manage that operation.

A noncontrolling interest holder owns a 5% interest in a subsidiary of TTM that operates the Huiyang, China facility that became a part of our operations through the acquisition of Viasystems. The noncontrolling interest holder is affiliated with the Chinese government and has close ties to local economic development and other Chinese government agencies. The noncontrolling interest holder has certain rights to be consulted and to consent to certain operating and investment matters concerning the Huiyang facility and the board of directors of our subsidiary that operates the Huiyang facility. Failure to maintain good relations with the noncontrolling interest holder could materially adversely affect our ability to manage the operations of the plant.

Security breaches and other disruptions could compromise our information and expose us to liability, which could cause our business and reputation to suffer.

In the ordinary course of our business, we collect and store sensitive data in our data centers and on our networks, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our employees. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence in our products and services, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2. PROPERTIES

The following table describes our principal manufacturing facilities and our drilling and tooling process facility.

 

U.S. Locations

   Operating
Segment
     Leased
Square Feet
     Owned
Square Feet
     Total
Square Feet
 

Anaheim, CA (ANA)

     PCB               96,000        96,000  

Cleveland, OH (CLE)(2)

     PCB               40,000        40,000  

Costa Mesa, CA(1)

     Headquarters        11,775               11,775  

Chippewa Falls, WI (CF)

     PCB               281,000        281,000  

El Paso, TX(2)

    

E-M

Solutions

Warehousing

 

 

 

     30,000               30,000  

Forest Grove, OR (FG)

     PCB               280,300        280,300  

Littleton, Colorado (DEN)

     PCB        19,512        22,502        42,014  

Logan, UT (LG)

     PCB        12,000        129,300        141,300  

North Jackson, OH (NJ)

     PCB        8,800        66,276        75,076  

San Diego, CA (SD)

     PCB        37,539               37,539  

San Jose, CA (SJ)

     PCB        42,344               42,344  

Santa Ana, CA (SA)

     PCB               82,550        82,550  

Santa Clara, CA (SC)

     PCB        18,304        49,115        67,419  

Stafford, CT (ST)

     PCB               177,000        177,000  

Stafford Springs, CT (SS)

     PCB        30,251        85,328        115,579  

Sterling, VA (STE)

     PCB        100,879               100,879  
     

 

 

    

 

 

    

 

 

 

Total

        311,404        1,309,371        1,620,775  

Foreign Locations

                           

Canada

           

Toronto (TOR)

     PCB        15,500        99,960        115,460  

Mexico

           

Juarez, Chihuahua (JZ)(2)

    

E-M

Solutions

 

 

     206,000               206,000  

China

           

Hong Kong (OPCM)

     PCB        4,757        156,350        161,107  

Dongguan (DMC)

     PCB               1,069,120        1,069,120  

Guangzhou (GME)

     PCB               1,467,827        1,467,827  

Guangzhou (GZ)

     PCB               1,872,800        1,872,800  

Huiyang (HY)

     PCB               435,485        435,485  

Shanghai(SH)

    
E-M
Solutions

 
     85,745               85,745  

Shanghai (SH E-MS)

    

E-M

Solutions

 

 

            286,000        286,000  

Shanghai (SME)

     PCB               316,198        316,198  

Shanghai (SMST/SP)

     PCB               760,496        760,496  

Shanghai (SKE)(3)

     PCB               110,971        110,971  

Shenzhen (SZ)

    
E-M
Solutions

 
     430,000               430,000  

Zhongshan (ZS)

     PCB               1,132,760        1,132,760  
     

 

 

    

 

 

    

 

 

 

Total

        742,002        7,707,967        8,449,969  

 

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We maintain our properties in good operating condition. We believe that our properties are suitable and adequate for us to operate at present levels, and the productive capacity and extent of utilization of the facilities are appropriate for our existing manufacturing requirements.

 

(1) Location of our headquarters and not a manufacturing facility

 

(2) Facility / warehouse was shutdown or consolidated into other facilities in 2016

 

(3) Drilling and tooling process facility

 

ITEM 3. LEGAL PROCEEDINGS

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

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Historical Trading Price

Our common stock has been listed on the Nasdaq Global Select Market under the symbol “TTMI” since September 21, 2000. The following table sets forth the quarterly high and low sales prices of our common stock as reported on the Nasdaq Global Select Market for the periods indicated.

 

     High      Low  

2016:

     

First Quarter

   $ 6.97      $ 4.67  

Second Quarter

   $ 8.16      $ 6.22  

Third Quarter

   $ 11.58      $ 6.93  

Fourth Quarter

   $ 15.00      $ 10.85  

2015:

     

First Quarter

   $ 9.27      $ 6.87  

Second Quarter

   $ 10.93      $ 8.77  

Third Quarter

   $ 10.18      $ 6.09  

Fourth Quarter

   $ 8.31      $ 5.96  

As of February 17, 2017, there were approximately 289 holders of record of our common stock. The closing sale price of our common stock on the Nasdaq Global Select Market on February 17, 2017 was $16.69.

Dividend Policy

TTM Technologies, Inc. has not declared or paid any dividends since 2000 and does not anticipate paying any cash dividends in the foreseeable future. TTM Technologies, Inc. presently intends to retain any future earnings to service debt and to finance future operations and the expansion of its business. In addition, TTM Technologies, Inc. debt agreements contain restrictions and limitations on the declaration and payment of dividends and distributions.

 

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STOCK PRICE PERFORMANCE GRAPH

The performance graph below compares, for the period from December 31, 2011 to January 2, 2017, the cumulative total stockholder return on our common stock against the cumulative total return of:

 

   

the NASDAQ Composite Index; and

 

   

the Dow Jones U.S. Electrical Components & Equipment Index.

The graph assumes $100 was invested in our common stock on December 31, 2011, and an investment in NASDAQ Composite Index and the Dow Jones US Electrical Components & Equipment Index. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among TTM Technologies, Inc., the NASDAQ Composite Index

and the Dow Jones US Electrical Components & Equipment Index

 

 

LOGO

 

* $100 invested on December 31, 2011 in stock or index, including reinvestment of dividends.

 

    12/31/11     12/31/12     12/30/13     12/29/14     12/28/15     01/02/17  

TTM Technologies, Inc.

    100.00        83.85        78.38        68.89        62.14        124.36   

NASDAQ Composite

    100.00        116.41        165.47        188.69        200.32        216.54   

Dow Jones US Electrical Components & Equipment

    100.00        122.53        169.41        182.85        172.70        208.95   

The performance graph above shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section. The performance graph above will not be deemed incorporated by reference into any filing of our company under the Securities Act of 1933, as amended, or the Exchange Act.

 

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ITEM 6. SELECTED FINANCIAL DATA

The selected historical financial data presented below are derived from our consolidated financial statements. The selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto included elsewhere in this report.

 

    Year Ended  
    January 2,
2017(1)
    December 28,
2015(1)(2)
    December 29,
2014(1)
    December 30,
2013(1)
    December 31,
2012
 
    (In thousands, except per share data)  

Consolidated Statement of Operations Data:

         

Net sales

  $ 2,533,359     $ 2,095,488     $ 1,325,717     $ 1,368,215     $ 1,348,668  

Cost of goods sold

    2,109,744       1,785,351       1,131,028       1,150,372       1,123,669  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    423,615       310,137       194,689       217,843       224,999  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Selling and marketing

    66,366       57,361       36,919       37,149       35,957  

General and administrative

    147,247       167,669       100,999       105,924       98,005  

Amortization of definite-lived intangibles

    24,252       18,888       8,387       9,332       14,637  

Impairment of long-lived assets

    3,346             1,845       10,782       18,082  

Restructuring charges

    8,951       7,381             3,445        

Gain on sale of assets

          (2,504           (17,917      

Impairment of goodwill and definite-lived intangibles

                            200,335  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    250,162       248,795       148,150       148,715       367,016  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    173,453       61,342       46,539       69,128       (142,017

Other income (expense):

         

Interest expense

    (76,008     (59,753     (23,830     (24,031     (25,784

Loss on extinguishment of debt

    (47,767     (802     (506     (10,743     (5,527

Other, net

    17,324       8,189       88       5,418       4,956  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

    (106,451     (52,366     (24,248     (29,356     (26,355

Income (loss) before income taxes

    67,002       8,976       22,291       39,772       (168,372

Income tax provision

    (31,427     (34,594     (7,598     (15,879     (12,728
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    35,575       (25,618     14,693       23,893       (181,100

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

    (714     (264           (2,016     6,505  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to TTM Technologies, Inc. stockholders

  $ 34,861     $ (25,882   $ 14,693     $ 21,877     $ (174,595
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share attributable to TTM Technologies, Inc. stockholders:

         

Basic

  $ 0.35     $ (0.28   $ 0.18     $ 0.27     $ (2.13

Diluted

  $ 0.34     $ (0.28   $ 0.18     $ 0.26     $ (2.13

Weighted average common shares:

         

Basic

    100,099       92,675       83,238       82,506       81,800  

Diluted

    101,482       92,675       83,941       83,132       81,800  

Other Financial Data:

         

Depreciation of property, plant and equipment

  $ 156,229     $ 133,508     $ 95,349     $ 92,120     $ 84,286  

 

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(1) Beginning in 2013, we operate on a 52 or 53 week year ending on the Monday nearest December 31. Fiscal 2016 consisted of 53 weeks ended on January 2, 2017 with the additional week included in the fourth quarter. We estimate the additional week contributed approximately $29.2 million of additional revenue and approximately $1.1 million of additional operating income for the year ended January 2, 2017. Fiscal year 2015, 2014 and 2013 were 52 weeks ended December 28, 2015, December 29, 2014 and December 30, 2013, respectively. Prior to 2013, our fiscal year always ended on December 31.
(2) Our results for the year ended December 28, 2015 include 211 days of activity of Viasystems, which we acquired on May 31, 2015. Additionally, our results include $34.4 million of bank fees and legal, accounting and other professional service costs associated with the acquisition of Viasystems.

 

    As of  
    January 2,
2017(1)
    December 28,
2015(1)
    December 29,
2014
    December 30,
2013
    December 31,
2012
 
    (In thousands)  

Consolidated Balance Sheet Data:

         

Working capital

  $ 323,776     $ 277,526     $ 302,111     $ 346,988     $ 395,732  

Total assets

    2,500,076       2,640,133       1,601,289       1,673,575       1,676,962  

Long-term debt, including current maturities

    1,019,682       1,170,786       502,687       573,743       557,545  

TTM Technologies, Inc. stockholders’ equity

    820,847       819,105       715,464       705,295       653,947  
    Year Ended  
    January 2,
2017
    December 28,
2015
    December 29,
2014
    December 30,
2013
    December 31,
2012
 
    (In thousands)  

Supplemental Data:

         

Adjusted EBITDA(2)

  $ 395,445     $ 285,673     $ 166,044     $ 181,293     $ 190,592  

Net cash provided by operating activities

    298,336       237,462       129,810       71,388       182,565  

Net cash used in investing activities

    (77,968     (247,660     (108,571     (35,689     (136,444

Net cash (used in) provided by financing activities

    (217,109     (5,756     (77,141     12,985       45,068  

 

(1) Reflects adoption of Financial Accounting Update 2015-03, Imputation of Interest, which requires that debt issuance costs related to debt be reported as a direct reduction from the face amount of the debt. Accordingly, as of January 2, 2017, approximately $4.7 million of unamortized debt issuance costs were presented as a reduction of long-term debt on our balance sheet. Furthermore, we reclassified approximately $31.2 million of unamortized debt issuance costs that had been presented as other non-current assets as of December 28, 2015 as a reduction of long-term debt.

 

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(2) “EBITDA” means earnings before interest expense, income taxes, depreciation and amortization. Adjusted EBITDA means earnings before interest expense, income taxes, depreciation, amortization, stock-based compensation, gain on sale of assets, acquisition-related costs, and impairments, restructuring and other charges. This is a non-GAAP financial measurement used by us to enhance the understanding of our operating results. Adjusted EBITDA is a key measure we use to evaluate our operations. We provide our adjusted EBITDA because we believe that investors and securities analysts will find adjusted EBITDA to be a useful measure for evaluating our operating performance and comparing our operating performance with that of similar companies that have different capital structures and for evaluating our ability to meet our future debt service, capital expenditures, and working capital requirements. However, adjusted EBITDA should not be considered as an alternative to cash flows from operating activities as a measure of liquidity or as an alternative to net income as a measure of operating results in accordance with accounting principles generally accepted in the United States. The following provides a reconciliation of adjusted EBITDA to the financial information in our consolidated statements of operations.

 

    Year Ended  
    January 2,
2017
    December 28,
2015
    December 29,
2014
    December 30,
2013
    December 31,
2012
 
    (In thousands)  

Net income (loss)

  $ 35,575      $ (25,618   $ 14,693      $ 23,893      $ (181,100

Add back items:

         

Income tax provision

    31,427        34,594        7,598        15,879        12,728   

Interest expense

    76,008        59,753        23,830        24,031        25,784   

Depreciation of property, plant and equipment

    156,229        133,508        95,349        92,120        84,286   

Amortization of definite-lived intangibles

    24,252        18,888        8,387        9,332        14,684   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    323,491        221,125        149,857        165,255        (43,618

Stock-based compensation

    11,090        9,661        7,800        8,985        10,266   

Gain on sale of assets

    (1,472     (2,504            (17,917       

Acquisition-related costs

    1,688        34,448        5,981                 

Loss on extinguishment of debt

    47,767        802        506        10,743        5,527   

Impairments, restructuring, and other charges

    12,881        22,141        1,900        14,227        218,417   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 395,445      $ 285,673      $ 166,044      $ 181,293      $ 190,592   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This financial review presents our operating results for each of our three most recent fiscal years and our financial condition at January 2, 2017. Except for historical information contained herein, the following discussion contains forward-looking statements which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this report and specifically under Item 1A of Part I of this report, Risk Factors. In addition, the following discussion should be read in connection with the information presented in our consolidated financial statements and the related notes to our consolidated financial statements.

COMPANY OVERVIEW

We are a leading global printed circuit board (PCB) manufacturer, focusing on quick-turn and volume production of technologically complex PCBs and electro-mechanical solutions (E-M Solutions). We focus on providing time-to-market and volume production of advanced technology products and offer a one-stop manufacturing solution to our customers from engineering support to prototype development through final mass production. This one-stop manufacturing solution allows us to align technology development with the diverse needs of our customers and to enable them to reduce the time required to develop new products and bring them to market. We serve a diversified customer base consisting of approximately 1,500 customers in various markets throughout the world, including manufacturers of networking/communications infrastructure products, smartphones and touchscreen tablets, as well as the aerospace and defense, automotive components, high-end computing, and medical, industrial and instrumentation related products. Our customers include both original equipment manufacturers (OEMs) and electronic manufacturing services (EMS) providers.

RECENT DEVELOPMENTS

On May 31, 2015, we completed the acquisition of Viasystems for total consideration of $248.8 million in cash and 15.1 million shares of TTM common stock with a fair value of $149.0 million, and thereby acquired all of the outstanding shares of capital stock and other equity rights of Viasystems. Additionally, in connection with the completion of the acquisition, we assumed and refinanced Viasystems’ debt, which was approximately $669.0 million as of May 31, 2015. Viasystems was a worldwide provider of complex multi-layer rigid, flexible, and rigid-flex PCBs and custom electronic assemblies.

The acquisition of Viasystems has had and will continue to have a significant effect on our operations and financial results. We have greatly increased and diversified our revenue base and added the fast growing Automotive end market to our portfolio of markets we serve. Our financial results for the year ended January 2, 2017 demonstrate the benefits of this diversification along with our strong operational execution and focus on realizing synergies from the integration. These results are reflected in improved gross and operating margins for the year ended January 2, 2017 as compared to the year ended December 28, 2015.

On September 29, 2015 we announced a consolidation plan that resulted in the closure of our facilities in Cleveland, Ohio, Milpitas, California and Juarez, Mexico (the Consolidation Plan). The Consolidation Plan was part of our integration strategy to improve total plant utilization, operational performance and customer focus following our acquisition of Viasystems. In accordance with the Consolidation Plan, we combined our Cleveland and Milpitas facilities into our North Jackson, Ohio and Silicon Valley, California facilities, respectively, and closed our Juarez facility. As a result, during the year ended January 2, 2017, we recognized total restructuring charges of $8.9 million. These charges primarily represent severance expense associated with the Consolidation Plan and other global realignment restructuring efforts. As of January 2, 2017, we have incurred approximately $16.3 million of restructuring charges since the September 29, 2015 announcement.

On September 27, 2016, we issued new $775.0 million Term B Loans (Term Loan B) at an interest rate of LIBOR, with a 1.0% LIBOR floor, plus 4.25%, a reduction of 75 basis points from the previous Term Loan Credit Agreement (Term Loan), and repaid in full the remaining outstanding balance of the Term Loan. This transaction was accounted for as an extinguishment of debt and accordingly, we recognized a loss of $47.8 million primarily associated with the write off of the remaining unamortized debt discount and issuance costs.

 

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Additionally, on September 27, 2016, we amended our U.S. Asset-Based Lending Credit Agreement (U.S. ABL) to increase the amount available to $200.0 million, reduce the applicable margin by 25 basis points for both Eurodollar loans and ABR loans, and reduce the Letters of Credit Facilities to $50 million. On December 22, 2016, we amended our Asia Asset-Based Lending Credit Agreement (Asia ABL) to reduce the interest margin by 35 basis points.

During the year ended January 2, 2017, we made net debt principal payments totaling $217.6 million, representing normally scheduled principal payments as well as additional prepayments of principal.

FINANCIAL OVERVIEW

For the fiscal year 2016, we experienced higher demand in our Automotive and Aerospace and Defense end markets and additional sales from the full year contribution of Viasystems compared to that of fiscal year 2015. This increase in sales resulted in higher capacity utilization at our Automotive focused facilities resulting in higher gross margins. Additionally, we have improved operating efficiencies at certain of our North American plants.

We operate on a 52 or 53 week year ending on the Monday nearest December 31. Fiscal 2016 consisted of 53 weeks ended on January 2, 2017 with the additional week included in the fourth quarter. We estimate the additional week contributed approximately $29.2 million of additional revenue and approximately $1.1 million of additional operating income for the year ended January 2, 2017. Fiscal year 2015 and 2014 were 52 weeks ended December 28, 2015 and December 29, 2014, respectively.

While our customers include both OEMs and EMS providers, we measure customers based on OEM companies as they are the ultimate end customers. Sales to our five largest customers accounted for 33%, 37% and 44% of our net sales in fiscal years 2016, 2015 and 2014, respectively. We sell to OEMs both directly and indirectly through EMS providers.

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

 

End Markets(1)(2)

   2016     2015(4)     2014  

Aerospace and Defense

     15     14     16

Automotive(2)

     20        13        2   

Cellular Phone(3)

     14        21        23   

Computing/Storage/Peripherals(3)

     12        12        13   

Medical/Industrial/Instrumentation

     14        13        10   

Networking/Communications

     23        25        33   

Other(2)(3)

     2        2        3   
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

 

 

(1) Sales to EMS companies are classified by the end markets of their OEM customers.
(2) Certain reclassifications of prior year end market percentages have been made to conform to the current year presentation. Beginning 2015, Automotive has been reclassified from the Other end market.
(3) Smartphones are included in the Cellular Phone end market, tablets are included in the Computing/Storage/Peripherals end market and other mobile devices such as e-readers are included in the Other end market.
(4) Amounts includes 211 days of activity of Viasystems, which we acquired on May 31, 2015.

We derive revenues primarily from the sale of PCBs and custom electronic assemblies using customer-supplied engineering and design plans. We recognize revenues when persuasive evidence of a sales arrangement exists, the sales terms are fixed or determinable, title and risk of loss have transferred, and collectability is reasonably assured — generally when products are shipped to the customer. Net sales consist of gross sales less an allowance for returns, which typically have been less than 3% of gross sales. We provide our customers a limited right of return for defective PCBs and backplane assemblies. We record an estimate for sales returns and

 

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allowances at the time of sale based on historical results. Purchase orders may be cancelled prior to shipment. We generally charge customers a fee, based on the percentage completed, if an order is cancelled once it has entered production.

Cost of goods sold consists of materials, labor, outside services, and overhead expenses incurred in the manufacture and testing of our products. Shipping and handling fees and related freight costs and supplies associated with shipping products are also included as a component of cost of goods sold. Many factors affect our gross margin, including capacity utilization, product mix, production volume, and yield. We generally do not participate in any significant long-term contracts with suppliers, and we believe there are a number of potential suppliers for the raw materials we use.

Selling and marketing expenses consist primarily of salaries, labor related benefits, and commissions paid to our internal sales force, independent sales representatives, and our sales support staff, as well as costs associated with marketing materials and trade shows.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated 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 us 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.

A critical accounting policy is defined as one that is both material to the presentation of our consolidated financial statements and requires us to make judgments that could have a material effect on our financial condition or results of operations. These policies require us to make assumptions about matters that are highly uncertain at the time of the estimate. Different estimates we could reasonably have used, or changes in the estimates that are reasonably likely to occur, or could have a material effect on our financial condition or results of operations.

We base our 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.

Our critical accounting policies include asset valuation related to bad debts and inventory; sales returns and allowances; impairment of long-lived assets, including goodwill and intangible assets; realizability of deferred tax assets; and determining self-insurance reserves.

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 judgments as to expected collectability of accounts. Our actual bad debts may differ from our estimates.

Inventories

In assessing the realizability of inventories, we are required to make judgments as to future demand requirements and compare these with current and committed inventory levels. When the market value of inventory is less than the carrying value, the inventory cost is written down to its estimated net realizable value, thereby establishing a new cost basis. Our inventory requirements may change based on our projected customer

 

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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.

Sales Returns and Allowances

We derive revenues primarily from the sale of PCBs and custom electronic assemblies using customer-supplied engineering and design plans. We recognize revenue when persuasive evidence of a sales arrangement exists, the sales terms are fixed or determinable, title and risk of loss have transferred, and collectability is reasonably assured — generally when products are shipped to the customer. We provide our customers a limited right of return for defective PCBs and backplane assemblies. We accrue an estimate for sales returns and allowances at the time of sale using our judgment based on historical results and anticipated returns as a result of current period sales. To the extent actual experience varies from our historical experience, revisions to these allowances may be required.

Long-lived Assets

We have significant long-lived tangible and intangible assets consisting of property, plant and equipment, definite-lived intangibles, and goodwill. We review these assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. In addition, we perform an impairment test related to goodwill at least annually. As necessary, we make judgments regarding future cash flow forecasts in the assessment of impairment.

During the fourth quarter of each year, and when events and circumstances warrant an evaluation, we perform an impairment assessment of goodwill, which may require the use of a fair-value based analysis. We first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we conduct a two-step quantitative goodwill impairment test. We determine the fair value of our reporting units based on discounted cash flows and market approach analyses as considered necessary. We consider factors such as the state of the economy and reduced expectations for future cash flows coupled with a decline in our market capitalization for a sustained period as indicators for potential goodwill impairment. If the reporting unit’s carrying amount exceeds its estimated fair value, a second step must be performed to measure the amount of the goodwill impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill, determined in the same manner as the amount of goodwill recognized in a business combination, with the carrying amount of such goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. We periodically evaluate whether events and circumstances have occurred, such that the potential for reduced expectations for future cash flows coupled with a further decline in the market price of our stock and market capitalization 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 may result in an impairment charge.

We also assess other long-lived assets, specifically definite-lived intangibles and property, plant and equipment, for potential impairment given similar impairment indicators. When indicators of impairment exist related to our long-lived tangible assets and definite-lived intangible assets, we use an estimate of the undiscounted net cash flows and comparison to like-kind assets, as appropriate, in measuring whether the carrying amount of the assets is recoverable. Measurement of the amount of impairment, if any, is based upon the difference between the asset’s carrying value and estimated fair value. Fair value is determined through various valuation techniques, including cost-based, market and income approaches as considered necessary, which involve judgments related to future cash flows and the application of the appropriate valuation model. During the years ended 2016 and 2014 we recorded impairment charges to reduce the carrying value of certain long-lived assets in the PCB operating segment. See Note 4 to our consolidated financial statements.

 

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Assets Held for Sale — We classify assets to be sold as assets held for sale when (i) we have approved and commit to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable, (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Assets classified as held for sale are recorded at the lower of the carrying amount or fair value less the cost to sell.

Assets Held for Use — If a decision to dispose of an asset or a business is made and the held for sale criteria are not met, it is considered held for use. Assets of the business are evaluated for recoverability in the following order: (i) assets other than goodwill, property and intangibles; (ii) property and intangibles subject to amortization; and (iii) goodwill. In evaluating the recoverability of property and intangible assets subject to amortization, in a held for use business, the carrying value is first compared to the sum of the undiscounted cash flows expected to result from the use and eventual disposition. If the carrying value exceeds the undiscounted expected cash flows, then a fair value analysis is performed. An impairment charge is recognized if the carrying value exceeds the fair value.

Income Taxes

Deferred income tax assets are reviewed for recoverability, and valuation allowances are provided, when necessary, to reduce deferred income tax assets to the amounts that are more likely than not to be realized based on our estimate of future taxable income. At January 2, 2017, we had a net noncurrent deferred income tax liability of $14.0 million, which is net of the $76.9 million deferred tax assets. At January 2, 2017, our deferred income tax assets of $76.9 million were net of a valuation allowance of approximately $222.0 million. Should our expectations of taxable income change in future periods, it may be necessary to adjust our valuation allowance, which could affect our results of operations in the period such a determination is made. We record income tax provision or benefit during interim periods at a rate that is based on expected results for the full year. If future changes in market conditions cause actual results for the year to be more or less favorable than those expected, adjustments to the effective income tax rate could be required.

In addition, we are subject to income taxes in the United States and foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions for which the ultimate tax determination is uncertain. Additionally, our calculations of income taxes are based on our interpretations of applicable tax laws in the jurisdictions in which we file.

Self Insurance

We are primarily self-insured in North America for group health insurance and worker’s compensation benefits provided to our U.S. employees, and we purchase insurance to protect against annual claims at the individual and aggregate level. We estimate our exposure for claims incurred but not reported at the end of each reporting period. We use our judgment using our historical claim data and information and analysis provided by actuarial and claim advisors, our insurance carriers and brokers on an annual basis to estimate our liability for these claims. This liability is subject to individual insured stop-loss coverage of $350,000 per individual for group health insurance and $250,000 per individual for worker’s compensation benefits. Our actual claims experience may differ from our estimates.

RESULTS OF OPERATIONS

We operate on a 52 or 53 week year ending on the Monday nearest December 31. Fiscal 2016 consisted of 53 weeks ended on January 2, 2017 with the additional week included in the fourth quarter. We estimate the additional week contributed approximately $29.2 million of additional revenue and approximately $1.1 million of additional operating income for the year ended January 2, 2017. Fiscal year 2015 and 2014 were 52 weeks ended December 28, 2015 and December 29, 2014, respectively.

The Viasystems acquisition occurred on May 31, 2015. Accordingly, the results of operations of Viasystems are not included in our fiscal year 2014, and our fiscal year 2015 only includes the last seven fiscal months

 

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Viasystems’ 2015 results of operations. The acquisition has had and will continue to have a significant effect on our operations as discussed in the various comparisons noted below.

The following table sets forth the relationship of various items to net sales in our consolidated statements of operations:

 

     For the Year Ended  
     January 2,
2017
    December 28,
2015
    December 29,
2014
 

Net sales

     100.0     100.0     100.0

Cost of goods sold

     83.3       85.2       85.3  
  

 

 

   

 

 

   

 

 

 

Gross profit

     16.7       14.8       14.7  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Selling and marketing

     2.6       2.7       2.8  

General and administrative

     5.8       8.0       7.6  

Amortization of definite-lived intangibles

     1.0       0.9       0.7  

Impairment of long-lived assets

     0.1             0.1  

Restructuring charges

     0.4       0.4        

Gain on sale of assets

           (0.1      
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     9.9       11.9       11.2  
  

 

 

   

 

 

   

 

 

 

Operating income

     6.8       2.9       3.5  

Other income (expense):

      

Interest expense

     (3.0     (2.9     (1.8

Loss on extinguishment of debt

     (1.9            

Other, net

     0.7       0.4        
  

 

 

   

 

 

   

 

 

 

Total other expense, net

     (4.2     (2.5     (1.8
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     2.6       0.4       1.7  

Income tax provision

     (1.2     (1.6     (0.6
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     1.4       (1.2     1.1  

Less: Net income attributable to the noncontrolling interest

                  
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to TTM Technologies, Inc. stockholders

     1.4     (1.2 )%      1.1
  

 

 

   

 

 

   

 

 

 

We have reviewed our reportable operating segments and determined that we continue to have two reportable operating segments: PCB and E-M Solutions. The PCB reportable segment is comprised of multiple operating segments. This determination was made based on the criteria of earning revenues and incurring expenses, our organizational structure which has segment managers who report to the chief operating decision maker, discrete financial information, and the aggregation of similar operating segments into reportable operating segments.

 

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The following table compares net sales by reportable segment for fiscal years 2016, 2015 and 2014:

 

     For the Year Ended  
     January 2,
2017
     December 28,
2015
     December 29,
2014
 
     (In thousands)  

Net Sales:

        

PCB

   $ 2,346,554       $ 1,944,041       $ 1,251,665   

E-M Solutions

     198,483         158,655         76,545   
  

 

 

    

 

 

    

 

 

 

Total sales

     2,545,037         2,102,696         1,328,210   

Inter-segment sales

     (11,678      (7,208      (2,493
  

 

 

    

 

 

    

 

 

 

Total net sales

   $ 2,533,359       $ 2,095,488       $ 1,325,717   
  

 

 

    

 

 

    

 

 

 

Net Sales

Total net sales increased $437.9 million, or 20.9%, from $2,095.5 million for the year ended December 28, 2015 to $2,533.4 million for the year ended January 2, 2017. Net sales for the PCB operating segment, excluding inter-segment sales, increased $397.7 million, or 20.5%, from $1,937.2 million for the year ended December 28, 2015 to $2,334.9 million for the year ended January 2, 2017. This increase is primarily due to the additional sales resulting from a full year contribution from the acquisition of Viasystems, combined with higher demand in our Automotive and Aerospace and Defense end markets, partially offset with lower demand in our Cellular Phone end market. These changes, including the sales from Viasystems, resulted in a 40% increase in PCB shipments from the year ended December 28, 2015. In addition, the average PCB selling price decreased 13%, which was driven by a product mix shift resulting from the acquisition. Net sales for the E-M Solutions operating segment, excluding inter-segment sales, increased $40.2 million, or 25.4%, from $158.3 million for the year ended December 28, 2015 to $198.5 million for the year ended January 2, 2017. This increase is due to the additional sales resulting from the acquisition of Viasystems.

Total net sales increased $769.8 million, or 58.1%, from $1,325.7 million for the year ended December 29, 2014 to $2,095.5 million for the year ended December 28, 2015. Net sales for the PCB operating segment, excluding inter-segment sales, increased $687.7 million, or 55.0%, from $1,249.5 million for the year ended December 29, 2014 to $1,937.2 million for the year ended December 28, 2015. This increase is primarily due to the additional sales resulting from the acquisition of Viasystems, which accounted for $582.3 million in PCB sales for the year ended December 28, 2015. Additionally, the increase in PCB sales is due to higher demand in our Cellular Phone end market, partially offset with lower demand in our Networking/Communications end market. These changes, including the sales from Viasystems, resulted in a 110% increase in PCB shipments from the year ended December 29, 2014. In addition, the average PCB selling price decreased 25%, which was driven by a product mix shift resulting from the acquisition. Net sales for the E-M Solutions operating segment, excluding inter-segment sales, increased $82.1 million, from $76.2 million for the year ended December 29, 2014 to $158.3 million for the year ended December 28, 2015. This increase is due to the acquisition of Viasystems, which accounted for $82.0 million in E-M Solutions sales for the year ended December 28, 2015.

The inter-segment sales are primarily sales from the PCB operating segment to the E-M Solutions operating segment.

Gross Margin

Overall gross margin increased from 14.8% for the year ended December 28, 2015 to 16.7% for the year ended January 2, 2017. Gross margin for the PCB operating segment increased from 15.5% for the year ended December 28, 2015 to 17.7% for the year ended January 2, 2017 primarily due to higher utilization and full year contribution from the Automotive focused facilities and the absence of $13.3 million of increased costs incurred during fiscal year 2015 due to the fair value mark up of acquired inventory associated with the acquisition of Viasystems. Gross margin for the E-M Solutions operating segment increased from 6.6% for the year ended December 28, 2015 to 9.1% for the year ended January 2, 2017 primarily due to increased production volumes at certain acquired facilities.

 

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Overall gross margin increased from 14.7% for the year ended December 29, 2014 to 14.8% for the year ended December 28, 2015. Gross margin for the PCB operating segment increased from 15.0% for the year ended December 29, 2014 to 15.5% for the year ended December 28, 2015 primarily due to higher utilization at our advanced technology plants, partially offset by the acquisition of Viasystems with lower margins than our existing business and $13.3 million of increased costs due to the fair value mark up of acquired inventory associated with the acquisition of Viasystems. Gross margin for the E-M Solutions operating segment decreased from 9.4% for the year ended December 29, 2014 to 6.6% for the year ended December 28, 2015 primarily due to the acquisition of Viasystems.

Selling and Marketing Expenses

Selling and marketing expenses increased $9.0 million from $57.4 million for the year ended December 28, 2015 to $66.4 million for the year ended January 2, 2017. Additionally, selling and marketing expenses increased $20.5 million, from $36.9 million for the year ended December 29, 2014 to $57.4 million for the year ended December 28, 2015. The increase in selling and marketing expense for the years ended January 2, 2017 and December 28, 2015 primarily related to additional selling and marketing activities resulting from the acquisition of Viasystems. As a percentage of net sales, selling and marketing expenses were 2.6% for the year ended January 2, 2017, as compared to 2.7% for the year ended December 28, 2015, and 2.8% for the year ended December 29, 2014. The decrease in selling and marketing expense as a percentage of net sales for the periods noted was primarily due to higher net sales.

General and Administrative Expenses

General and administrative expenses decreased $20.5 million from $167.7 million, or 8.0% of net sales, for the year ended December 28, 2015 to $147.2 million, or 5.8% of net sales, for the year ended January 2, 2017. The decrease in expense primarily related to a decrease of $32.8 million in acquisition-related costs as compared to the year ended December 28, 2015, partially offset by increased expenses resulting from the acquisition of Viasystems. The decrease in general and administrative expense as percentage of net sales was primarily due to the decrease in acquisition-related costs and higher net sales.

General and administrative expenses increased $66.7 million from $101.0 million, or 7.6% of net sales, for the year ended December 29, 2014 to $167.7 million, or 8.0% of net sales, for the year ended December 28, 2015. The increase in expense was primarily due to $34.4 million of acquisition-related costs for the year ended December 28, 2015 associated with the acquisition of Viasystems and seven months of general and administrative expense resulting from Viasystems post acquisition through December 28, 2015.

Impairment of Long-Lived Assets and Restructuring Charges

For the years ended January 2, 2017 and December 28, 2015, we incurred restructuring charges of $8.9 million and $7.4 million, respectively, related to the Consolidation Plan announced on September 29, 2015, that resulted in the closure of our facilities in Cleveland, Ohio, Milpitas, California, and Juarez, Mexico and other global realignment efforts.

During the year ended January 2, 2017, in connection with the Consolidation Plan, we recognized restructuring charges of $3.7 million, $4.5 million and $0.7 million in our PCB, E-M Solutions and Corporate segments, respectively. For the year ended December 28, 2015, we recognized restructuring charges of $2.0 million in both our PCB and E-M Solutions segments and $3.4 million in our Corporate segment. These charges primarily represent employee separation and contract termination and other costs associated with the Consolidation Plan and other global realignment restructuring efforts. As of January 2, 2017, the Company has incurred approximately $16.3 million of restructuring charges since the September 29, 2015 announcement.

Additionally, as a result of the above mentioned plant closures and other plant realignment efforts, we also recognized impairment charges of $3.3 million for the year ended January 2, 2017, of which $1.4 million were recognized in our PCB operating segment and $1.9 million were recognized in the Corporate operating segment. The impairment charge for the PCB operating segment related to machinery and equipment while the impairment charge for the Corporate operating segment related to the write-off of capitalized software costs.

 

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If forecasts and assumptions used to support the realizability of our long-lived assets change in the future, significant impairment or restructuring charges could result that would adversely affect our results of operations and financial condition.

Other Income (Expense)

Other expense, net increased $54.1 million from $52.4 million for the year ended December 28, 2015 to $106.5 million for the year ended January 2, 2017. The increase in other expense, net was primarily due to the loss on extinguishment of debt of $47.8 million related to the full repayment of the May 31, 2015 Term Loan and newly issued $775.0 million Term B Loan on September 27, 2016. Another factor contributing to the increase in other expense, net was the increase in interest expense of $16.2 million related to our Term Loan, which was paid off, and currently outstanding Term Loan B and ABL Revolving Loans, compared with only seven months of the Term Loan and ABL Revolving Loans facilities outstanding during 2015 which was secured in connection with the acquisition of Viasystems. The increase in other expense, net was partially offset by $13.5 million foreign currency and derivative transaction gains for the year ended January 2, 2017 compared to $6.4 million for the year ended December 28, 2015.

Other expense, net increased $28.2 million from $24.2 million for the year ended December 29, 2014 to $52.4 million for the year ended December 28, 2015. The increase in other expense, net was primarily due to an increase in interest expense related to a new long-term borrowing and a revolver loan totaling $1,030.0 million at a weighted average interest rate of 5.7% that we secured in connection with the acquisition of Viasystems. The increase in other expense, net was partially offset by $6.4 million foreign currency and derivative transaction gains for the year ended December 28, 2015 compared to $1.2 million for the year ended December 29, 2014.

Income Taxes

The provision for income taxes decreased $3.2 million from an income tax expense of $34.6 million for the year ended December 28, 2015 to $31.4 million for the year ended January 2, 2017. The decrease in income tax expense in 2016 is primarily due to the release of uncertain tax positions due to lapse of statute in foreign jurisdiction.

Our tax expense is primarily impacted by tax rates in China and Hong Kong, the U.S. federal income tax rate, apportioned state income tax rates, generation of other credits and deductions available to us, change in valuation allowance, and certain non-deductible items. Certain losses generated are not more likely than not to be realizable, and thus no income tax benefit has been recognized on these losses. As of January 2, 2017, we had a net deferred income tax liability of approximately $14.0 million; and as of December 28, 2015, we had a net deferred income tax liability of approximately $13.1 million. As of January 2, 2017, we have a full valuation allowance recorded in U.S. Based on our forecast for future taxable earnings in certain foreign jurisdictions, we believe it is more likely than not that we will utilize the deferred income tax assets in future periods.

The provision for income taxes increased $27.0 million from an income tax expense of $7.6 million for the year ended December 29, 2014 to $34.6 million for the year ended December 28, 2015. The increase in income tax expense in 2015 was primarily due to the provision of a full valuation allowance on existing U.S. deferred tax assets, partially offset by the reversal of deferred tax liabilities related to our decision to indefinitely reinvest the foreign earnings attributable to our backplane assembly facility in Shanghai, China. Further, the income tax expense in 2015 was higher due to inclusion of Viasystems earnings from foreign subsidiaries post acquisition.

Liquidity and Capital Resources

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

Cash flow provided by operating activities during the year ended January 2, 2017 was $298.3 million as compared to $237.5 million in the same period in 2015. The improved cash flow was the result of stronger

 

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operational performance and the full year contribution of Viasystems. As of January 2, 2017, we had net working capital of approximately $323.8 million compared to $277.5 million as of December 28, 2015. At January 2, 2017 cash cycle days improved to 43 days as compared to 49 days at December 28, 2015.

Net cash used in investing activities was approximately $78.0 million for the year ended January 2, 2017 primarily reflecting the purchases of property, plant and equipment of $85.1 million, offset by net of proceeds from sales of property, plant and equipment and assets held for sale of $3.6 million and the release of restricted cash to cash and cash equivalents of $3.5 million.

Net cash used in financing activities was approximately $217.1 million for the year ended January 2, 2017 primarily reflecting the full repayment of the May 31, 2015 Term Loan, and the repayments of normally scheduled principal payments and additional prepayments of principal of our long-term debt, which amounts totaled $1,022.6 million, offset by $775.0 million newly issued Term B Loan and proceeds from our Asia ABL revolving loan of $30.0 million.

As of January 2, 2017, we had cash and cash equivalents of approximately $256.3 million, of which approximately $206.1 million was held by our foreign subsidiaries, primarily in Asia. Cash and cash equivalents held by our foreign locations are expected to be used in local operations.

Our 2017 capital expenditure plan is expected to be in the range of $130.0 million to $140.0 million of which 50 percent are planned for technology enhancements, 25 percent for capacity expansion and 25 percent for compliance and maintenance related expenditures.

Term and Revolving Loans

On May 31, 2015, in conjunction with the acquisition of Viasystems, we entered into a $950.0 million Term Loan Credit Agreement (Term Loan). Additionally, we entered into a $150.0 million U.S. ABL and a $150.0 million Asia ABL. We drew $80.0 million of the U.S. ABL at the closing of the acquisition of Viasystems.

On September 27, 2016, we issued new $775.0 million Term Loan B at an interest rate of LIBOR, with a 1.0% LIBOR floor, plus 4.25%, a reduction of 75 basis points from our previous Term Loan, and repaid in full the remaining outstanding balance of the May 31, 2015 Term Loan. This transaction was accounted for as an extinguishment of debt and accordingly, we recognized a loss of $47.8 million primarily associated with the write off of the remaining unamortized debt discount and issuance costs.

Additionally, on September 27, 2016, we amended our U.S. ABL credit facility to increase the amount available to $200.0 million, reduce the applicable margin by 25 basis points for both Eurodollar loans and ABR loans, and reduce the Letters of Credit Facilities to $50 million. On December 22, 2016, we amended our Asia ABL credit facility to reduce the interest margin by 35 basis points.

The Term Loan B bears interest at a floating rate of LIBOR, with a 1.0% LIBOR floor, plus an applicable interest margin of 4.25%, or JP Morgan Chase Bank’s prime rate, with a 2% floor, plus a margin of 3.25%, at the our option. At January 2, 2017, the weighted average interest rate on the outstanding borrowings under the Term Loan was 5.25%. There is no provision, other than an event of default, for the interest margin to increase. The Term Loan B will mature on May 31, 2021. The Term Loan B is secured by a significant amount of our assets and a pledge of 65% of voting stock of our first tier foreign subsidiaries and is structurally senior to our convertible senior notes. See Convertible Senior Notes below.

The amended U.S. ABL consists of three tranches comprised of a revolving credit facility of up to $200.0 million, a letter of credit facility of up to $50.0 million, and swingline loans of up to $30.0 million, provided that at no time may amounts outstanding under the tranches exceed in aggregate $200.0 million or the applicable borrowing base, which is a percentage of the principal amount of Eligible Accounts, as defined in the U.S. ABL agreement. Borrowings under the U.S. ABL bear interest at either a floating rate of LIBOR plus a margin of 150 basis points or JP Morgan Chase Bank’s prime rate plus a margin of 50 basis points, at our option. At January 2, 2017, the weighted average interest rate on the outstanding borrowings under the U.S. ABL was 2.27%. The applicable margin can vary based on the remaining availability of the facility, from 125 to 175 basis

 

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points for LIBOR-based loans and from 25 to 75 basis points for JP Morgan Chase Bank’s prime rate-based loans. Other than availability and an event of default, there are no other provisions for the interest margin to increase. The U.S. ABL will mature on May 31, 2020. Loans made under the U.S. ABL are secured first by all of our domestic cash, receivables and inventories as well as by a second position against a significant amount of our assets and a pledge of 65% of voting stock of our first tier foreign subsidiaries and are structurally senior to our convertible senior notes. See Convertible Senior Notes below. At January 2, 2017, $80.0 million of the U.S. ABL was outstanding. We and our domestic subsidiaries have fully and unconditionally guaranteed the full and timely payment of all Term Loan B and U.S. ABL related obligations.

The Asia ABL consists of two tranches comprised of a revolving credit facility of up to $150.0 million and a letter of credit facility of up to $100.0 million, provided that at no time may amounts outstanding under both tranches exceed in aggregate $150.0 million or the applicable borrowing base, which is a percentage of the principal amount of Eligible Accounts, as defined in the Asia ABL agreement. Borrowings under the Asia ABL bear interest at a floating rate of LIBOR plus 140 basis points. At January 2, 2017, the weighted average interest rate on the outstanding borrowings under the Asia ABL was 2.17%. There is no provision, other than an event of default, for the interest margin to increase. The Asia ABL will mature on May 22, 2020. Loans made under the Asia ABL are secured by a portion of our Asia Pacific cash and receivables and are structurally senior to our domestic obligations, including the convertible senior notes. See Convertible Senior Notes below. Our Asia Pacific subsidiary and certain of our subsidiaries have fully and unconditionally guaranteed the full and timely payment of all Asia ABL related obligations. At January 2, 2017, $30.0 million of the Asia ABL was outstanding.

During the year ended January 2, 2017, we made net debt principal payments totaling $217.6 million representing normal principal payments as well as additional prepayments of principal. We are not required to make quarterly scheduled payments of the outstanding Term Loan B balance due to mandatory payments and optional loan prepayments applied to date. Based on certain parameters defined in the Term Loan B agreement, including secured leverage ratio, we may be required to make an additional principal payment on an annual basis. Any remaining outstanding balances under the Term Loan B are due at the maturity date of May 31, 2021. Borrowings under the Term Loan B are subject to financial and operating covenants including maintaining a maximum total leverage ratio. Under the occurrence of certain events, the U.S. ABL and the Asia ABL are subject to financial and operational covenants, including maintaining minimum fixed charge coverage ratios. At January 2, 2017, we were in compliance with the covenants under the Term Loan B, the U.S. ABL and the Asia ABL.

We are required to pay a commitment fee of 0.25% to 0.375% per annum on any unused portion of the U.S. ABL or Asia ABL based on utilization levels. We incurred total commitment fees related to unused borrowing availability of $0.7 million, $0.8 million, and $0.6 million for the years ended January 2, 2017, December 28, 2015, and December 29, 2014, respectively. As of January 2, 2017, the outstanding amount of the Term Loan B was $700.0 million, which is included as long-term debt. Additionally, $80.0 million of the U.S. ABL and $30.0 million of the Asia ABL were outstanding as of January 2, 2017, which were classified as short-term debt. Available borrowing capacity under the U.S. ABL and Asia ABL was $113.0 million and $111.7 million, which includes letters of credit outstanding of $7.0 million and $8.3 million mentioned below, respectively, at January 2, 2017.

Letters of Credit

We have up to $50.0 million and $100.0 million Letters of Credit Facilities available under the U.S. ABL and the Asia ABL, respectively. As of January 2, 2017, letters of credit in the amount of $7.0 million were outstanding under the U.S. ABL and $8.3 million were outstanding under the Asia ABL with various expiration dates through December 2017.

Chinese Revolver

We are party to a revolving loan credit facility with a lender in China. Under this arrangement, the lender has made available to us approximately $30.2 million in unsecured borrowing with all terms of the borrowing to

 

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be negotiated at the time the Chinese Revolver is drawn upon. There are no commitment fees on the unused portion of the Chinese Revolver, and this arrangement expires in January 2018. As of January 2, 2017, the Chinese Revolver had not been drawn upon.

Convertible Senior Notes due 2020

We issued 1.75% convertible senior notes due December 15, 2020, in a public offering for an aggregate principal amount of $250.0 million. The convertible senior notes bear interest at a rate of 1.75% per annum. Interest is payable semiannually in arrears on June 15 and December 15 of each year. The convertible senior notes are senior unsecured obligations and rank equally to our future unsecured senior indebtedness and senior in right of payment to any of our future subordinated indebtedness. Offering expenses are being amortized to interest expense over the term of the convertible senior notes.

Conversion:    At any time prior to March 15, 2020, holders may convert their convertible senior notes into cash and, if applicable, into shares of our common stock based on a conversion rate of 103.7613 shares of our common stock per $1,000 principal amount of convertible senior notes, subject to adjustment, under the following circumstances: (1) during any calendar quarter beginning after March 31, 2015 (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 indenture governing the notes. As of January 2, 2017, the conversion criteria had been met allowing holders to give notice of conversion in the first quarter of 2017.

On or after March 15, 2020 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 shares of our common stock, cash or a combination of cash and shares of our common stock at our election, if applicable, based on a daily conversion value calculated on a proportionate basis for each day of the 80 trading day observation period. All conversions occurring on the same date or on or after March 15, 2020 shall be settled using the same settlement method. Additionally, in the event of a fundamental change as defined in the indenture governing the notes, 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. As of January 2, 2017, none of the criteria for a fundamental change or a conversion rate adjustment had been met.

The maximum number of shares issuable upon conversion, including the effect of a fundamental change and subject to Other Conversion Rate Adjustments, would be 32.4 million.

Note Repurchase:    We are not permitted to redeem the convertible senior notes at any time prior to maturity. In the event of a fundamental change or certain default events, as defined in the indenture governing the notes, holders may require us to repurchase for cash all or a portion of their convertible senior 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 senior notes due 2020, we entered into a convertible note hedge and warrant transaction (the Call Spread Transaction), with respect to our common stock. The convertible note hedge consists of our option to purchase up to 25.9 million common stock shares at a price of $9.64 per share. The hedge expires on December 15, 2020 and can only be executed upon the conversion of the above mentioned convertible senior notes due 2020. Additionally, we sold warrants to purchase 25.9 million shares of our common stock at a price of $14.26 per share. The warrants expire ratably from March 2021 through January 2022. The Call Spread Transaction has no effect on the terms of the convertible senior notes due 2020 and reduces potential dilution by effectively increasing the conversion price of the convertible senior notes due 2020 to $14.26 per share of our common stock.

 

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Based on our current level of operations, we believe that cash generated from operations, cash on hand and cash from the issuance of term and revolving debt will be adequate to meet our currently anticipated capital expenditure, debt service, and working capital needs for the next 12 months.

Contractual Obligations and Commitments

The following table provides information on our contractual obligations as of January 2, 2017:

 

Contractual Obligations(1)

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

Long-term debt obligations

   $ 811,798      $ 110,652      $ 739      $ 700,407      $  

Convertible debt obligations

     250,000                      250,000         

Interest on debt obligations

     185,228        44,656        83,395        57,177         

Equipment payables

     12,430        12,430                       

Purchase obligations

     82,690        78,520        4,165        5         

Operating lease commitments

     24,490        7,893        7,531        4,050        5,016  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 1,366,636      $ 254,151      $ 95,830      $ 1,011,639      $ 5,016  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Unrecognized uncertain tax benefits of $39.7 million are not included in the table above as the settlement timing is uncertain.

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.

Seasonality

Orders for our products generally correspond to the production schedules of our customers. We historically experience higher net sales in the third and fourth quarters due to end customer demand in the fourth quarter for consumer electronics products. Seasonal fluctuations also include the Chinese New Year holidays in the first quarter, which typically results in lower net sales. We attribute this decline to shutdowns of our customers’ and our own China based manufacturing facilities surrounding the Chinese New Year public holidays, which normally occur in January or February of each year.

Recently Issued Accounting Standards

In October 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The objective of this update is to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory by recognizing the income tax consequences when the transfer occurs. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the new guidance to determine the impact it may have on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The objective of this update is to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those annual periods and is to be applied utilizing a retrospective approach. Early adoption is permitted. We are currently evaluating the new guidance to determine the impact it may have on our consolidated financial statements and related disclosures.

 

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In March 2016, the FASB issued Accounting Standards Update (ASU) 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective of this update is to simplify several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The impact on our consolidated financial statements is not expected to be material.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods and is to be applied utilizing a modified retrospective approach. We are currently evaluating the new guidance to determine the impact it may have on our consolidated financial statements and related disclosures.

In April 2015, the FASB issued ASU 2015-03, Imputation of Interest, as amended, which requires an entity to record debt issuance costs related to debt reported in the balance sheet as a direct deduction from the face amount of that debt. The update is effective for annual periods ending after December 15, 2015. The standard requires the use of the retrospective transition method. We adopted the new standard in the first quarter of 2016. Accordingly, as of January 2, 2017, approximately $4.7 million of unamortized debt issuance costs were presented as a reduction of long-term debt on our consolidated balance sheets. Furthermore, we reclassified approximately $31.2 million of unamortized debt issuance costs that had been presented as other non-current assets as of December 28, 2015 as a reduction of long-term debt.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, as amended, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective at the beginning of fiscal year 2018, however application of the standard is allowed as early as the beginning of fiscal 2017. The standard permits the use of either the retrospective or cumulative effect transition method. We have assessed that the impact of the new guidance will result in a change to the timing of revenue recognition for our revenue stream from “point in time” upon physical delivery to an “over time” model and believe this transition could have a material impact on our consolidated financial statements upon adoption. As of January 2, 2017, management intends to apply the cumulative effect transition method. We have identified and are in the process of implementing changes to our systems, processes and internal controls to meet the standard update’s reporting and disclosure requirements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign currency risks

In the normal course of business we are exposed to risks associated with fluctuations in foreign currency exchange rates associated with transactions that are denominated in currencies other than our functional currencies, as well as the effects of translating amounts denominated in a foreign currency to the U.S. Dollar as a normal part of our financial reporting process. Certain of our China operations utilize the Renminbi (RMB) and the Hong Kong Dollar (HKD) as the functional currencies, which results in recognition of translation adjustments included as a component of other comprehensive income. Our foreign exchange exposure results primarily from employee-related and other costs of running operations in foreign countries, foreign currency denominated purchases and translation of balance sheet accounts denominated in foreign currencies. Our primary foreign exchange exposure is to the RMB. We do not engage in hedging to manage foreign currency risk related to revenue and expenses denominated in RMB and HKD, nor do we currently use derivative instruments to reduce exposure to foreign currency risk for a majority of our loans due from our foreign subsidiaries. However, we may consider the use of derivatives in the future. In general, our Chinese customers pay us in RMB, which partially mitigates this foreign currency exchange risk. Additionally, loans due from our foreign subsidiaries are, in some cases, denominated in currencies other than the RMB, thus providing a natural economic hedge, partially mitigating our RMB foreign currency exposure.

 

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Interest rate risk

Our business is exposed to interest rate risk resulting from fluctuations in interest rates. Our interest expense is more sensitive to fluctuations in the general level of LIBOR interest rates than to changes in rates in other markets. Increases in interest rates would increase interest expense relating to our outstanding variable rate borrowings and increase the cost of debt. Fluctuations in interest rates can also lead to significant fluctuations in the fair value of our debt obligations.

As of January 2, 2017, approximately 23.7% of our long term debt was based on fixed rates. Based on our borrowings as of January 2, 2017, an assumed 100 basis point increase in variable rates would cause our annual interest cost to increase by $6.5 million and an assumed 100 basis point decrease in variable rates would cause our annual interest cost to decrease by $0.8 million, after giving consideration to the 1% LIBOR floor on the Term Loan B.

Debt Instruments

The table below presents information about certain of our debt instruments as of January 2, 2017 and December 28, 2015.

 

    As of January 2, 2017  
    2017     2018     2019     2020     2021     Thereafter     Total     Fair Market
Value
    Weighted
Average
Interest Rate
 
    (In thousands)  

US$ Variable Rate

  $ 110,000     $     $     $     $ 700,000     $     $ 810,000     $ 818,750       4.84

US$ Fixed Rate

    652       358       381       250,407                   251,798       382,673       1.78
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

  $ 110,652     $ 358     $ 381     $ 250,407     $ 700,000     $     $ 1,061,798     $ 1,201,423    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
    As of December 28, 2015  
    2016     2017     2018     2019     2020     Thereafter     Total     Fair Market
Value
    Weighted
Average
Interest Rate
 
    (In thousands)  

US$ Variable Rate

  $ 157,375     $     $ 27,125     $ 47,500     $ 47,500     $ 748,125     $ 1,027,625     $ 935,000       5.70

US$ Fixed Rate

                            250,000             250,000       230,950       1.75
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

  $ 157,375     $     $ 27,125     $ 47,500     $ 297,500     $ 748,125     $ 1,277,625     $ 1,165,950    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to our consolidated financial statements, the notes thereto, and the report thereon, commencing on page 66 of this report, which consolidated financial statements, notes and report are incorporated herein by reference.

We operate on a 52 or 53 week year ending on the Monday nearest December 31. Fiscal year 2016 consisted of 53 weeks ended January 2, 2017 with the additional week included in the fourth quarter, and fiscal year 2015 consisted of 52 weeks ended December 28, 2015. Each quarter of fiscal year 2015 contained 91 days.

 

     First
Quarter
     Second
Quarter
     Third
Quarter
     Fourth
Quarter
 
     (In thousands, except per share data)  

Year Ended January 2, 2017:(1)(2)

           

Net sales

   $ 583,258      $ 601,847      $ 641,720      $ 706,534  

Gross profit

     83,563        97,645        109,562        132,845  

Income (loss) before income taxes

     (1,673      17,786        35,283        15,606  

Net income (loss)

     (7,150      18,765        25,770        (1,810

Net income (loss) attributable to TTM Technologies, Inc. stockholders

     (7,264      18,548        25,582        (2,005

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

           

Basic

   $ (0.07    $ 0.19      $ 0.26      $ (0.02

Diluted

   $ (0.07    $ 0.17      $ 0.23      $ (0.02

Year Ended December 28, 2015:(3)

           

Net sales

   $ 329,164      $ 445,445      $ 652,005      $ 668,874  

Gross profit

     51,559        61,190        89,118        108,270  

Income (loss) before income taxes

     2,085        (19,959      6,592        20,258  

Net income (loss)

     3,446        (36,583      (2,138      9,657  

Net income (loss) attributable to TTM Technologies, Inc. stockholders

     3,446        (36,612      (2,237      9,521  

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

           

Basic

   $ 0.04      $ (0.41    $ (0.02    $ 0.10  

Diluted

   $ 0.04      $ (0.41    $ (0.02    $ 0.09  

 

(1) Fiscal year 2016 consisted of 53 weeks ended January 2, 2017 with the additional week included in the fourth quarter. We estimate that the additional week contributed approximately $29.2 million of additional revenue and approximately $1.1 million of additional operating income for the year ended January 2, 2017.
(2) Includes impairment and restructuring charges of $3.3 million and $1.9 million, respectively, in the first quarter, restructuring charges of $4.0 million in the second quarter, restructuring charges of $2.1 million in the third quarter, and loss on extinguishment of debt of $47.8 million and restructuring charges of $0.9 million in the fourth quarter.
(3) Includes a $2.5 million gain on sale of assets in the first quarter, 211 days of activity of Viasystems which we acquired May 31, 2015, acquisition costs of $34.4 million with a substantial portion recognized in the second quarter, and restructuring charges of $7.4 million during the third and fourth quarters.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

 

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ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Report. Based on this evaluation, our CEO and CFO have concluded that, as of January 2, 2017, such disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Under the supervision of and with the participation of our CEO and CFO, management conducted an assessment of the effectiveness of our internal control over financial reporting as of January 2, 2017 based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management concluded that our internal control over financial reporting was effective as of January 2, 2017.

The effectiveness of our internal control over financial reporting as of January 2, 2017 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which appears under the heading “Report of Independent Registered Public Accounting Firm” on page 67 of this Report.

Inherent Limitations on Effectiveness of Controls

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. In addition, the design of any system of controls is based in part on certain assumptions about the likelihood of future events.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended January 2, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

Not applicable.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2017 Annual Meeting of Stockholders.

 

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2017 Annual Meeting of Stockholders.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2017 Annual Meeting of Stockholders.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2017 Annual Meeting of Stockholders.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2017 Annual Meeting of Stockholders.

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

  (a) Financial Statements

Financial Statements are listed in the Index to Consolidated Financial Statements on page 66 of this Report.

 

  (b) Exhibits

 

Exhibit

Number

  

Exhibits

2.1    English translation of Equity Interest Transfer Agreement in relation to Dongguan Meadville Circuits Limited, dated March 13, 2013, by and between Shengyi Technology Co., Ltd. and the Registrant(1)
2.2**    English translation of Equity Interest Transfer Agreement in relation to Dongguan Shengyi Electronics Ltd., dated March 13, 2013, by and between Shengyi Technology Co., Ltd. and the Registrant(1)
2.3**    Agreement and Plan of Merger, by and among the Registrant, Viasystems Group, Inc. and Vector Acquisition Corp., dated September 21, 2014(2)
3.1    Registrant’s Certificate of Incorporation, as amended June 3, 2011 and May 12,2016(3)
3.2    Registrant’s Fourth Amended and Restated Bylaws, as amended March 2, 2016(4)
4.1    Indenture, dated as of May 14, 2008, between the Registrant and American Stock Transfer & Trust Company(5)
4.2    First Supplemental Indenture, dated as of May 14, 2008, between the Registrant and American Stock Transfer & Trust Company(5)
4.3    Form of Registrant’s common stock certificate(6)
4.4    Sell-Down Registration Rights Agreement, dated December 23, 2009, by and among Meadville Holdings Limited, MTG Investment (BVI) Limited, and the Registrant(7)

 

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Exhibit

Number

  

Exhibits

4.5    Registration Rights Agreement, dated as of April 9, 2010, by and among Tang Hsiang Chien, Su Sih (BVI) Limited, and the Registrant(8)
4.6    Shareholders Agreement, dated as of April 9, 2010, by and among Meadville Holdings Limited; Su Sih (BVI) Limited; Tang Hsiang Chien; Tang Chung Yen, Tom; Tang Ying Ming, Mai; and the Registrant(8)
4.7    First Amendment to Shareholders Agreement, dated September 14, 2012, by and among Tang Hsiang Chien; Su Sih (BVI) Limited; Tang Chung Yen, Tom; Tang Ying Ming, Mai; and the Registrant(9)
4.8    Indenture, dated as of December 20, 2013, between the Registrant and American Stock Transfer & Trust Company, LLC(10)
4.9    Registration Rights Agreement Memorandum of Understanding, by and among the Registrant, Hicks, Muse, Tate & Furst Equity Fund III, L.P., HM3 Coinvestors, L.P., HMTF Equity Fund IV (1999), L.P., HMTF Private Equity Fund IV (1999), L.P., Hicks, Muse PG-IV (1999), C.V., HM 4-P (1999) Coinvestors, L.P., HM 4-EQ (1999) Coinvestors, L.P., GSC Recovery II, L.P., and GSC Recovery IIA, L.P., dated September 21, 2014(2)
4.10    Addendum to Registration Rights Agreement, by and among the Registrant, Su Sih (BVI) Limited, and Tang Hsiang Chien, dated September 21, 2014(2)
4.11    Registration Rights Agreement, by and among TTM Technologies, Inc., Hicks, Muse, Tate & Furst Equity Fund III, L.P., HM3 Coinvestors, L.P., HMTF Equity Fund IV (1999), L.P., HMTF Private Equity Fund IV (1999), L.P., Hicks, Muse PG-IV (1999), C.V., HM 4-P (1999) Coinvestors, L.P., and HM 4-EQ (1999) Coinvestors, L.P. and GSC Recovery II, L.P. and GSC Recovery IIA, L.P., dated as of May 31, 2015(27)
4.12    The First Amendment to the Registration Rights Agreement, originally dated as of April 9, 2010, by and among Meadville Holdings Limited, MTG Investment (BVI) Limited, and TTM Technologies, Inc.(29)
4.13    The Second Amendment to the Shareholders Agreement, originally dated as of April 9, 2010, by and among Meadville Holdings Limited; Su Sih (BVI) Limited; Tang Hsiang Chien; Tang Chung Yen, Tom; Tang Ying Ming, Mai; and TTM Technologies, Inc.(29)
10.1    Call Option Transaction Confirmation, dated as of May 8, 2008, between the Registrant and JPMorgan Chase Bank, National Association(5)
10.2    Warrant Transaction Confirmation, dated as of May 8, 2008, between the Registrant and JPMorgan Chase Bank, National Association(5)
10.3    Call Option Transaction Confirmation, dated as of May 8, 2008, between the Registrant and UBS AG(5)
10.4    Warrant Transaction Confirmation, dated as of May 8, 2008, between the Registrant and UBS AG(5)
10.5    Call Option Transaction Confirmation, dated as of May 16, 2008, between the Registrant and JPMorgan Chase Bank, National Association(11)
10.6    Warrant Transaction Confirmation, dated as of May 16, 2008, between the Registrant and JPMorgan Chase Bank, National Association(11)
10.7    Call Option Transaction Confirmation, dated as of May 16, 2008, between the Registrant and UBS AG(11)
10.8    Warrant Transaction Confirmation, dated as of May 16, 2008, between the Registrant and UBS AG(11)
10.9    2006 Incentive Compensation Plan(12)

 

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Exhibit

Number

  

Exhibits

10.10    Form of Stock Option Agreement pursuant to 2006 Incentive Compensation Plan(12)
10.11    Form of Restricted Stock Unit Award Grant Notice pursuant to 2006 Incentive Compensation Plan(12)
10.12    Form of Performance-Based RSU Grant Notice and Award Agreement pursuant to 2006 Incentive Compensation Plan and schedule of signatories(13)
10.13    TTM Technologies, Inc. 2014 Incentive Compensation Plan(14)
10.14    TTM Technologies, Inc. Form of Restricted Stock Unit Award Grant Notice pursuant to TTM Technologies, Inc. 2014 Incentive Compensation Plan(14)
10.15    Form of Director and Officer Indemnification Agreement, dated December 10, 2014(15)
10.16    Stock Purchase Agreement, dated November 16, 2009, by and among Meadville Holdings Limited, MTG Investment (BVI) Limited, the Registrant, TTM Technologies International, Inc., and TTM Hong Kong Limited (now known as TTM Technologies (Asia Pacific) Limited)(16)
10.17    Form of Executive Change in Control Severance Agreement and schedule of agreements(17)
10.18    Credit Agreement, dated November 16, 2009, as amended and restated on March 30, 2010 and as further amended on August 3, 2010 and July 22, 2011, respectively, by and among certain PCB Subsidiaries, the Registrant, the Lenders, and the other parties named therein(18)
10.19    Waiver and Amendment Letter with The Hongkong and Shanghai Banking Corporation Limited, dated August 3, 2010(19)
10.20    Special Security Agreement by and among Tang Hsiang Chien, Su Sih (BVI) Limited, the Registrant and the United States Department of Defense, dated October 19, 2010(20)
10.21    Amendment Letter with The Hongkong and Shanghai Banking Corporation Limited, dated July 22, 2011(21)
10.22    Executive and Director Deferred Compensation Plan(22)
10.23    Facility Agreement, dated September 14, 2012, by and among the PCB Subsidiaries, the lenders, and the other parties named therein(9)
10.24    Call Option Transaction Confirmation, dated as of December 16, 2013, between the Registrant and JPMorgan Chase Bank, National Association, London Branch(10)
10.25    Warrant Transaction Confirmation, dated as of December 16, 2013, between the Registrant and JPMorgan Chase Bank, National Association, London Branch(10)
10.26    Call Option Transaction Confirmation, dated as of December 16, 2013, between the Registrant and RBC Capital Markets, LLC(10)
10.27    Warrant Transaction Confirmation, dated as of December 16, 2013, between the Registrant and RBC Capital Markets, LLC(10)
10.28    Call Option Transaction Confirmation, dated as of December 16, 2013, between the Registrant and Deutsche Bank AG, London Branch(10)
10.29    Warrant Transaction Confirmation, dated as of December 16, 2013, between the Registrant and Deutsche Bank AG, London Branch(10)
10.30    Call Option Transaction Confirmation, dated as of January 9, 2014, between the Registrant and JPMorgan Chase Bank, National Association, London Branch(23)
10.31    Warrant Transaction Confirmation, dated as of January 9, 2014, between the Registrant and JPMorgan Chase Bank, National Association, London Branch(23)

 

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Exhibit

Number

  

Exhibits

10.32    Call Option Transaction Confirmation, dated as of January 9, 2014, between the Registrant and RBC Capital Markets, LLC(23)
10.33    Warrant Transaction Confirmation, dated as of January 9, 2014, between the Registrant and RBC Capital Markets, LLC(23)
10.34    Call Option Transaction Confirmation, dated as of January 9, 2014, between the Registrant and Deutsche Bank AG, London Branch(23)
10.35    Warrant Transaction Confirmation, dated as of January 9, 2014, between the Registrant and Deutsche Bank AG, London Branch(23)
10.36    Voting Agreement, by and among the Company, Hicks, Muse, Tate & Furst Equity Fund III, L.P., HM3 Coinvestors, L.P., HMTF Equity Fund IV (1999), L.P., HMTF Private Equity Fund IV (1999), L.P., Hicks, Muse PG-IV (1999), C.V., HM 4-P (1999) Coinvestors, L.P., and HM 4-EQ (1999) Coinvestors, L.P., dated September 21, 2014(2)
10.37    Voting Agreement, by and among the Company, GSC Recovery II, L.P., and GSC Recovery IIA, L.P., dated September 21, 2014(2)
10.38    Commitment Letter, by and among the Company, JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC and Barclays Bank PLC, dated September 21, 2014(2)
10.39    Amended and Restated Commitment Letter, by and among the Registrant, JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, Barclays Bank PLC, and The Royal Bank of Scotland plc, dated October 23, 2014(24)
10.40    TTM Technologies, Inc. Form of Restricted Stock Unit Award Grant Notice (for U.S. taxpayers) pursuant to TTM Technologies, Inc. 2014 Incentive Compensation Plan(31)
10.41    TTM Technologies, Inc. Form of Restricted Stock Unit Award Grant Notice (for non-U.S. taxpayers) pursuant to TTM Technologies, Inc. 2014 Incentive Compensation Plan(25)
10.42    TTM Technologies, Inc. Form of Performance-Based RSU Grant Notice and Award Agreement pursuant to TTM Technologies, Inc. 2014 Incentive Compensation Plan(31)
10.43    Form of Executive Change in Control Severance Agreement and schedule of agreements(25)
10.44    Facility Agreement, dated May 22, 2015, by and among TTM Technologies Enterprises (HK) Limited, The Hongkong and Shanghai Banking Corporation Limited, and the other parties named therein(26)
10.45    First Amendment to amend and restate the Term Loan Credit Agreement, by and among TTM Technologies, Inc., as Borrower, the several Lenders from time to time parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Barclays Bank PLC, as Syndication Agent, and The Royal Bank of Scotland plc and HCBS Securities (USA) Inc., as Documentation Agents, dated as of May 31,2015, as amended September 27, 2016(32)
10.46    First Amendment to amend and restate the ABL Credit Agreement, by and among TTM Technologies, Inc., as Borrower, the several Lenders from time to time parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Barclays Bank PLC, as Syndication Agent, and The Royal Bank of Scotland plc and HCBS Securities (USA) Inc., as Documentation Agents, dated as of May 31, 2015, as amended September 27, 2016(32)
10.47    TTM Technologies, Inc. Form of Restricted Stock Unit Award Grant Notice (for non-employee directors) pursuant to TTM Technologies, Inc. 2014 Incentive Compensation Plan(28)
10.48    Amendment to TTM Technologies, Inc. 2014 Incentive Compensation Plan(30)

 

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Exhibit

Number

  

Exhibits

12.1*    Statement of Computation of Ratio of Earnings to Fixed Charges
21.1*    Subsidiaries of the Registrant
23.1*    Consent of KPMG LLP, independent registered public accounting firm
31.1*    Certification of Chief Executive Officer
31.2*    Certification of Chief Financial Officer
32.1*    Certification of Chief Executive Officer
32.2*    Certification of Chief Financial Officer
101.INS*    XBRL Instance Document
101.SCH*    XBRL Taxonomy Extension Schema Document
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document

 

 

  (1) Incorporated by reference to the Registrant’s Form 10-Q as filed with the Securities and Exchange Commission(the “Commission”) on May 7, 2013.

 

  (2) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on September 22, 2014.

 

  (3) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on June 6, 2011 and to the Registrant’s Form 8-K as filed with the commission on May 18, 2016.

 

  (4) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on March 8, 2016.

 

  (5) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on May 14, 2008.

 

  (6) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on August 30, 2005.

 

  (7) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on December 23, 2009.

 

  (8) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on April 13, 2010.

 

  (9) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on September 19, 2012.

 

(10) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on December 20, 2013.

 

(11) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on May 22, 2008.

 

(12) Incorporated by reference to the Registrant’s Form 10-K as filed with the Commission on March 16, 2007.

 

(13) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on March 30, 2010.

 

(14) Incorporated by reference to the Registrant’s Form S-8 as filed with the Commission on August 13, 2014.

 

(15) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on December 15, 2014.

 

(16) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on November 16, 2009.

 

(17) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on August 5, 2014.

 

(18) Incorporated by reference to the Registrant’s Form 8-K/A as filed with the Commission on August 5, 2010.

 

(19) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on August 5, 2010.

 

(20) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on October 22, 2010.

 

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(21) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on July 27, 2011.

 

(22) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on September 19, 2011.

 

(23) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on January 14, 2014.

 

(24) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on October 27, 2014.

 

(25) Incorporated by reference to the Registrant’s Form 10-Q as filed with the Commission on May 5, 2015.

 

(26) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on May 29, 2015.

 

(27) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on June 2, 2015.

 

(28) Incorporated by reference to the Registrant’s Form 10-Q as filed with the Commission on August 10, 2015.

 

(29) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on January 4, 2016.

 

(30) Incorporated by reference to the Registrant’s Form S-8 as filed with the Commission on June 1, 2016.

 

(31) Incorporated by reference to the Registrant’s Form 10-Q as filed with the Commission on August 4, 2016.

 

(32) Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on September 27, 2016.

 

Management contract or Compensation Plan

 

* Filed herewith

 

** The appendices to this exhibit have been omitted in reliance on Item 601(b)(2) of Regulation S-K and will be furnished supplementally to the SEC upon request.

 

  (c) Financial Statement Schedules.

 

       None.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

TTM TECHNOLOGIES, INC.
By:  

/s/    Thomas T. Edman        

 

Thomas T. Edman

President and Chief Executive Officer

Date: February 24, 2017

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Name

  

Title

 

Date

/s/    Thomas T. Edman        

Thomas T. Edman

   President, Chief Executive Officer and Director (Principal Executive Officer)   February 24, 2017

/s/    Todd B. Schull        

Todd B. Schull

   Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)   February 24, 2017

/s/    Robert E. Klatell        

Robert E. Klatell

   Chairman of the Board   February 24, 2017

/s/    Kenton K. Alder        

Kenton K. Alder

   Director   February 24, 2017

/s/    James K. Bass        

James K. Bass

   Director   February 24, 2017

/s/    Julie S. England        

Julie S. England

   Director   February 24, 2017

/s/    Philip G. Franklin        

Philip G. Franklin

   Director   February 24, 2017

/s/    Ronald W. Iverson        

Ronald W. Iverson

   Director   February 24, 2017

/s/    John G. Mayer        

John G. Mayer

   Director   February 24, 2017

/s/    Tang Chung Yen, Tom        

Tang Chung Yen, Tom

   Director   February 24, 2017

/s/    Dov S. Zakheim        

Dov S. Zakheim

   Director   February 24, 2017

 

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TTM TECHNOLOGIES, INC.

Index to Consolidated Financial Statements

 

Reports of Independent Registered Public Accounting Firm

     67   

Consolidated Balance Sheets as of January 2, 2017 and December 28, 2015

     69   

Consolidated Statements of Operations for the Years Ended January 2, 2017,  December 28, 2015 and December 29, 2014

     70   

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended January  2, 2017, December 28, 2015 and December 29, 2014

     71   

Consolidated Statements of Stockholders’ Equity for the Years Ended January 2, 2017,  December 28, 2015 and December 29, 2014

     72   

Consolidated Statements of Cash Flows for the Years Ended January 2, 2017,  December 28, 2015 and December 29, 2014

     73   

Notes to Consolidated Financial Statements

     74   

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

TTM Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of TTM Technologies, Inc. and subsidiaries as of January 2, 2017 and December 28, 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended January 2, 2017. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TTM Technologies, Inc. and subsidiaries as of January 2, 2017 and December 28, 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended January 2, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), TTM Technologies, Inc.’s internal control over financial reporting as of January 2, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 24, 2017, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Irvine, California

February 24, 2017

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

TTM Technologies, Inc.:

We have audited TTM Technologies, Inc.’s internal control over financial reporting as of January 2, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). TTM Technologies, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on TTM Technologies, Inc.’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, TTM Technologies, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 2, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of TTM Technologies, Inc. and subsidiaries as of January 2, 2017 and December 28, 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended January 2, 2017, and our report dated February 24, 2017, expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Irvine, California

February 24, 2017

 

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TTM TECHNOLOGIES, INC.

Consolidated Balance Sheets

 

     As of  
     January 2,
2017
    December 28,
2015
 
     (In thousands, except par value)  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 256,277     $ 259,100  

Restricted cash

           3,530  

Accounts receivable, net

     432,788       456,000  

Inventories

     269,212       268,923  

Prepaid expenses and other current assets

     54,564       34,967  
  

 

 

   

 

 

 

Total current assets

     1,012,841       1,022,520  

Property, plant and equipment, net

     966,638       1,103,067  

Goodwill

     372,609       346,990  

Definite-lived intangibles, net

     126,613       150,874  

Deposits and other non-current assets

     21,375       16,682  
  

 

 

   

 

 

 
   $ 2,500,076     $ 2,640,133  
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities:

    

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

   $ 110,652     $ 157,375  

Accounts payable

     371,610       377,222  

Accrued salaries, wages and benefits

     97,171       108,649  

Other accrued expenses

     109,632       101,748  
  

 

 

   

 

 

 

Total current liabilities

     689,065       744,994  
  

 

 

   

 

 

 

Long-term debt, net of discount and issuance costs

     909,030       1,013,411  

Other long-term liabilities

     72,856       55,059  
  

 

 

   

 

 

 

Total long-term liabilities

     981,886       1,068,470  
  

 

 

   

 

 

 

Commitments and contingencies (Note 13)

    

Equity:

    

Common stock, $0.001 par value; 300,000 and 200,000 shares authorized for 2016 and 2015, respectively, and 100,396 and 99,137 shares issued and outstanding in 2016 and 2015, respectively

     100       99  

Additional paid-in capital

     758,440       745,608  

Retained earnings

     74,787       45,963  

Statutory surplus reserve

     31,849       25,812  

Accumulated other comprehensive income (loss)

     (44,329     1,623  
  

 

 

   

 

 

 

Total TTM Technologies, Inc. stockholders’ equity

     820,847       819,105  

Noncontrolling interest

     8,278       7,564  
  

 

 

   

 

 

 

Total equity

     829,125       826,669  
  

 

 

   

 

 

 
   $ 2,500,076     $ 2,640,133  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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TTM TECHNOLOGIES, INC.

Consolidated Statements of Operations

 

     Year Ended  
     January 2,
2017
    December 28,
2015
    December 29,
2014
 
     (In thousands, except per share amounts)  

Net sales

   $ 2,533,359     $ 2,095,488     $ 1,325,717  

Cost of goods sold

     2,109,744       1,785,351       1,131,028  
  

 

 

   

 

 

   

 

 

 

Gross profit

     423,615       310,137       194,689  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Selling and marketing

     66,366       57,361       36,919  

General and administrative

     147,247       167,669       100,999  

Amortization of definite-lived intangibles

     24,252       18,888       8,387  

Impairment of long-lived assets

     3,346             1,845  

Restructuring charges

     8,951       7,381        

Gain on sale of assets

           (2,504      
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     250,162       248,795       148,150  
  

 

 

   

 

 

   

 

 

 

Operating income

     173,453       61,342       46,539  
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest expense

     (76,008     (59,753     (23,830

Loss on extinguishment of debt

     (47,767     (802     (506

Other, net

     17,324       8,189       88  
  

 

 

   

 

 

   

 

 

 

Total other expense, net

     (106,451     (52,366     (24,248
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     67,002       8,976       22,291  

Income tax provision

     (31,427     (34,594     (7,598
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     35,575       (25,618     14,693  

Less: Net income attributable to the noncontrolling interest

     (714     (264      
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to TTM Technologies, Inc. stockholders

   $ 34,861     $ (25,882   $ 14,693  
  

 

 

   

 

 

   

 

 

 

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

      

Basic earnings (loss) per share

   $ 0.35     $ (0.28   $ 0.18  
  

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per share

   $ 0.34     $ (0.28   $ 0.18  
  

 

 

   

 

 

   

 

 

 

Weighted-average shares used in computing per share amounts:

      

Basic

     100,099       92,675       83,238  
  

 

 

   

 

 

   

 

 

 

Diluted

     101,482       92,675       83,941  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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TTM TECHNOLOGIES, INC.

Consolidated Statements of Comprehensive Income (Loss)

 

     For the Year Ended  
     January 2,
2017
    December 28,
2015
    December 29,
2014
 
     (In thousands)  

Net income (loss)

   $ 35,575     $ (25,618   $ 14,693  

Other comprehensive income (loss), net of tax:

      

Foreign currency translation adjustments:

      

Unrealized loss during the year, net

     (46,044     (27,758     (14,841

Gain realized in the statement of operations

           (1,786      
  

 

 

   

 

 

   

 

 

 

Net

     (46,044     (29,544     (14,841
  

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses) on cash flow hedges:

      

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

     (83     (20     43  

Loss realized in the statement of operations

     175       172       146  
  

 

 

   

 

 

   

 

 

 

Net

     92       152       189  
  

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses) on available for sale securities:

      

Unrealized loss on available for sale securities during the year

                 (20

Loss realized in the statement of operations

                 83  
  

 

 

   

 

 

   

 

 

 

Net

                 63  
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax

     (45,952     (29,392     (14,589
  

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income, net of tax

     (10,377     (55,010     104  
  

 

 

   

 

 

   

 

 

 

Less: Comprehensive income attributable to the noncontrolling interest

     (714     (264      
  

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to TTM Technologies, Inc. stockholders

   $ (11,091   $ (55,274   $ 104  
  

 

 

   

 

 

   

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

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TTM TECHNOLOGIES, INC.

Consolidated Statements of Stockholders’ Equity

 

                Additional
Paid-In
Capital
    Retained
Earnings
    Statutory
Surplus
Reserve
    Accumulated
Other
Comprehensive
Income (Loss)
    Total TTM
Technologies, Inc.
Stockholders’
Equity
    Noncontrolling
Interest
    Total
Equity
 
  Common Stock                
  Shares     Amount                
    (In thousands)  

Balance, December 30, 2013

    82,655     $ 83     $ 576,644     $ 64,272     $ 18,692     $ 45,604     $ 705,295           $ 705,295  

Net income

                      14,693                   14,693             14,693  

Other comprehensive loss

                                  (14,589     (14,589           (14,589

Transfer to statutory surplus reserve

                      (2,544     2,544                          

Issuance and repurchase of convertible senior notes

                4,216                         4,216             4,216  

Purchase of convertible senior note hedge, net of tax benefit of $2,964

                (4,989                       (4,989           (4,989

Issuance of warrants related to convertible senior notes

                4,053                         4,053             4,053  

Tax shortfall from stock awards exercised or released

                (1,015                       (1,015           (1,015

Issuance of common stock for performance-based restricted stock units

    90                                                  

Issuance of common stock for restricted stock units

    600                                                  

Stock-based compensation

                7,800                         7,800             7,800  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 29, 2014

    83,345       83       586,709       76,421       21,236       31,015       715,464             715,464  

Net income

                      (25,882                 (25,882     264       (25,618

Other comprehensive loss

                                  (29,392     (29,392           (29,392

Transfer to statutory surplus reserve

                      (4,576     4,576                          

Acquisition of Viasystems, Group, Inc.

    15,082       15       148,991                         149,006       7,300       156,306  

Exercise of stock options

    68             495                         495             495  

Tax shortfall from stock awards exercised or released

                (247                       (247           (247

Issuance of common stock for restricted stock units

    642       1       (1                                    

Stock-based compensation

                9,661                         9,661             9,661  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 28, 2015

    99,137       99       745,608       45,963       25,812       1,623       819,105       7,564       826,669  

Net income

&n