e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 27, 2010
Commission File Number: 0-31285
TTM TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE
(State or other jurisdiction of
incorporation or organization)
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91-1033443
(I.R.S. Employer
Identification No.) |
2630 South Harbor Boulevard, Santa Ana, California 92704
(Address of principal executive offices)
(714) 327-3000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§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
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
Number of shares of common stock, $0.001 par value, of registrant outstanding at November 3,
2010: 80,070,669
TTM TECHNOLOGIES, INC.
Consolidated Condensed Balance Sheets
As of September 27, 2010 and December 31, 2009
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September 27, |
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December 31, |
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2010 |
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2009 |
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(Unaudited) |
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(In thousands) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
164,230 |
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$ |
94,347 |
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Short-term investments |
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1,351 |
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Restricted cash |
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120,000 |
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Accounts and
notes receivable, net of allowances of $6,440 in 2010 and $3,651 in 2009 |
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299,786 |
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89,519 |
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Inventories |
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133,399 |
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60,153 |
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Prepaid expenses and other current assets |
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23,156 |
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2,669 |
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Assets held for sale |
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4,249 |
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7,875 |
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Deferred income taxes |
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6,645 |
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6,645 |
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Foreign deferred income taxes |
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2,075 |
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Total current assets |
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633,540 |
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382,559 |
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Property, plant and equipment, net of accumulated depreciation of $119,795 in 2010 and
$108,118 in 2009 |
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701,549 |
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88,577 |
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Debt issuance costs, net |
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5,485 |
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3,542 |
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Deferred income taxes |
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28,983 |
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37,430 |
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Goodwill |
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200,208 |
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14,130 |
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Definite-lived intangibles, net |
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93,613 |
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15,111 |
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Deposits and other non-current assets |
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32,575 |
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1,709 |
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$ |
1,695,953 |
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$ |
543,058 |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
66,944 |
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$ |
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Accounts payable |
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151,602 |
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37,867 |
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Accounts payable due to related parties |
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51,610 |
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Accrued salaries, wages and benefits |
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44,337 |
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19,253 |
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Equipment payable |
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61,249 |
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Other accrued expenses |
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29,651 |
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2,327 |
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Total current liabilities |
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405,393 |
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59,447 |
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Convertible senior notes, net of discount |
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143,890 |
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139,882 |
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Long-term debt, net of discount |
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312,859 |
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Foreign deferred income taxes |
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12,129 |
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Related party financing obligation |
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20,230 |
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Other long-term liabilities |
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16,041 |
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2,812 |
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Total long-term liabilities |
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505,149 |
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142,694 |
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Commitments and contingencies (Note 14) |
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Equity: |
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TTM Technologies, Inc. stockholders equity |
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Common stock, $0.001 par value; 100,000 shares authorized, 80,059 and 43,181 shares
issued and outstanding in 2010 and 2009, respectively |
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80 |
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43 |
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Additional paid-in capital |
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514,907 |
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215,461 |
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Retained earnings |
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160,788 |
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122,283 |
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Accumulated other comprehensive income |
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8,442 |
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3,130 |
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Total TTM Technologies, Inc. stockholders equity |
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684,217 |
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340,917 |
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Noncontrolling interest |
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101,194 |
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Total equity |
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785,411 |
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340,917 |
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$ |
1,695,953 |
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$ |
543,058 |
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See accompanying notes to consolidated condensed financial statements.
3
TTM TECHNOLOGIES, INC.
Consolidated Condensed Statements of Operations
For the Quarter and Three Quarters Ended September 27, 2010 and September 28, 2009
(Unaudited)
(In thousands, except per share data)
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Quarter Ended |
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Three Quarters Ended |
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September 27, |
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September 28, |
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September 27, |
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September 28, |
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2010 |
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2009 |
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2010 |
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2009 |
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Net sales |
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$ |
357,813 |
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$ |
139,075 |
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$ |
806,280 |
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$ |
432,552 |
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Cost of goods sold |
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277,478 |
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114,868 |
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641,878 |
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357,017 |
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Gross profit |
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80,335 |
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24,207 |
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164,402 |
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75,535 |
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Operating expenses: |
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Selling and marketing |
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9,055 |
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6,546 |
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24,885 |
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20,037 |
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General and administrative |
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21,922 |
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9,403 |
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56,308 |
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25,460 |
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Amortization of definite-lived intangibles |
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3,653 |
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860 |
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9,065 |
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2,580 |
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Restructuring charges |
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2,501 |
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449 |
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5,009 |
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Impairment of long-lived assets |
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10,293 |
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766 |
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10,636 |
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Total operating expenses |
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34,630 |
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29,603 |
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91,473 |
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63,722 |
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Operating income (loss) |
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45,705 |
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(5,396 |
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72,929 |
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11,813 |
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Other income (expense): |
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Interest expense |
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(6,690 |
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(2,919 |
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(15,882 |
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(8,396 |
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Interest income |
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164 |
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196 |
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360 |
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356 |
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Other, net |
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2,405 |
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57 |
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2,382 |
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96 |
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Total other expense, net |
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(4,121 |
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(2,666 |
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(13,140 |
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(7,944 |
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Income (loss) before income taxes |
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41,584 |
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(8,062 |
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59,789 |
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3,869 |
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Income tax (provision) benefit |
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(9,439 |
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3,177 |
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(16,419 |
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(1,379 |
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Net income (loss) |
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32,145 |
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(4,885 |
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43,370 |
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2,490 |
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Less: Net income attributable to the noncontrolling interest |
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(3,054 |
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(4,865 |
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Net income (loss) attributable to TTM Technologies, Inc. stockholders |
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$ |
29,091 |
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$ |
(4,885 |
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$ |
38,505 |
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$ |
2,490 |
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Earnings (loss) per share attributable to TTM Technologies, Inc.
stockholders: |
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Basic earnings (loss) per share |
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$ |
0.36 |
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$ |
(0.11 |
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$ |
0.58 |
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$ |
0.06 |
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Diluted earnings (loss) per share |
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$ |
0.36 |
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$ |
(0.11 |
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$ |
0.57 |
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$ |
0.06 |
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See accompanying notes to consolidated condensed financial statements.
4
TTM TECHNOLOGIES, INC.
Consolidated Condensed Statements of Cash Flows
For the Three Quarters Ended September 27, 2010 and September 28, 2009
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Three Quarters Ended |
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September 27, |
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September 28, |
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2010 |
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2009 |
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(Unaudited) |
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(In thousands) |
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Cash flows from operating activities: |
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Net income |
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$ |
43,370 |
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$ |
2,490 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation of property, plant and equipment |
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32,113 |
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14,491 |
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Amortization of definite-lived intangible assets |
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9,152 |
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2,678 |
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Amortization of convertible notes, debt discount and debt issuance costs |
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4,947 |
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4,059 |
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Non-cash interest imputed on other long-term liabilities and related party financing obligation |
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698 |
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112 |
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Income tax benefit from restricted stock units released and common stock options exercised |
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(436 |
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(17 |
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Deferred income taxes |
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6,796 |
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(1,078 |
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Stock-based compensation |
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4,660 |
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4,698 |
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Impairment of long-lived assets |
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766 |
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10,636 |
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Net loss on sale of property, plant and equipment |
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291 |
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84 |
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Net unrealized loss on derivative assets and liabilities |
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300 |
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Net unrealized foreign currency exchange loss |
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263 |
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Changes in operating assets and liabilities, net of acquisition: |
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Accounts and notes receivable, net |
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(78,001 |
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19,292 |
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Inventories |
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(6,962 |
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9,273 |
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Prepaid expenses and other current assets |
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(9,199 |
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154 |
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Accounts payable |
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4,051 |
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(12,294 |
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Accrued salaries, wages and benefits and other accrued expenses |
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23,763 |
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2,717 |
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Net cash provided by operating activities |
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36,572 |
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57,295 |
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Cash flows from investing activities: |
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Acquisition, net of cash acquired |
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(28,529 |
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Restricted cash released to cash and cash equivalents |
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120,000 |
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Purchase of property, plant and equipment and equipment deposits |
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(25,178 |
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(9,301 |
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Proceeds from sale of property, plant and equipment and assets held for sale |
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4,351 |
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663 |
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Purchase of license agreement |
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(350 |
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Proceeds from redemption of short-term investments |
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1,351 |
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2,238 |
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Net cash provided by (used in) investing activities |
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71,995 |
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(6,750 |
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Cash flows from financing activities: |
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Repayment of assumed long-term debt in acquisition |
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(387,980 |
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Proceeds from new long-term borrowings |
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387,980 |
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Net repayments of revolving loan |
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(37,987 |
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Proceeds from exercise of common stock options |
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197 |
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297 |
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Excess income tax benefit from restricted stock units released and common stock options exercised |
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436 |
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17 |
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Net cash (used in) provided by financing activities |
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(37,354 |
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314 |
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Effect of foreign currency exchange rates on cash and cash equivalents |
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(1,330 |
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(6 |
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Net increase in cash and cash equivalents |
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69,883 |
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50,853 |
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Cash and cash equivalents at beginning of period |
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94,347 |
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148,465 |
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Cash and cash equivalents at end of period |
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$ |
164,230 |
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$ |
199,318 |
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Supplemental cash flow information: |
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Cash paid for income taxes |
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$ |
11,157 |
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$ |
3,331 |
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Cash paid for interest |
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9,204 |
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|
2,855 |
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5
Supplemental disclosures of non-cash investing and financing activities:
The Company issued common stock and replacement awards with a fair value of $294,382 in connection
with the PCB Subsidiaries acquisition, (as defined in the
accompanying notes.) See Note 2.
As of September 27, 2010 and September 28, 2009, accrued purchases of equipment totaled $70,799 and
$272, respectively.
During the three quarters ended September 28, 2009, the Company commenced the process of selling
the building at its Redmond, Washington production facility and as a result classified such assets
to assets held for sale. See Note 9.
See accompanying notes to consolidated condensed financial statements.
6
TTM TECHNOLOGIES, INC.
Notes to Consolidated Condensed Financial Statements
(unaudited)
(Dollars and shares in thousands, except per share data)
(1) Nature of Operations and Basis of Presentation
TTM Technologies, Inc. (the Company or TTM) is a world-wide manufacturer of complex printed
circuit boards (PCBs) used in sophisticated electronic equipment and provides backplane and
sub-system assembly services for both standard and specialty products in defense and commercial
operations. The Company sells to a variety of customers located both within and outside of the
United States of America. The Companys customers include both original equipment manufacturers
(OEMs) and electronic manufacturing services (EMS) companies. The Companys OEM customers often
direct a significant portion of their purchases through EMS companies.
The accompanying consolidated condensed financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations. These consolidated
condensed financial statements reflect all adjustments (consisting only of normal recurring
adjustments) which, in the opinion of management, are necessary to present fairly the financial
position, the results of operations and cash flows of the Company for the periods presented. It is
suggested that these consolidated condensed financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the Companys most recent
Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year. The preparation of financial statements
in accordance with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the Companys consolidated condensed
financial statements and accompanying notes. Actual results could differ materially from those
estimates. The Company uses a 13-week fiscal quarter accounting period with the first quarter
ending on the Monday closest to April 1 and the fourth quarter always ending on December 31. The
third quarters ended September 27, 2010 and September 28, 2009 each contained 91 days. The three
quarters ended September 27, 2010 and September 28, 2009 contained 270 and 271 days, respectively.
(2) Acquisition of PCB Subsidiaries
On the evening of April 8, 2010 (in the morning of April 9, 2010. Hong Kong time), the Company
acquired from Meadville Holdings Limited (Meadville), an exempted company incorporated under the
laws of the Cayman Islands, and MTG Investment (BVI) Limited (MTG), a company incorporated under
the laws of the British Virgin Islands and a wholly owned subsidiary of Meadville, all of the
issued and outstanding capital stock of four wholly owned subsidiaries of MTG. These four
companies, through their respective subsidiaries, engage in the business of manufacturing and
distributing printed circuit boards, including circuit design, quick-turn-around services, and
drilling and routing services. Subsequent to the acquisition, these four companies and their
subsidiaries (together, the PCB Subsidiaries) are subsidiaries of the Company and represent the
Asia Pacific operating segment of the Company.
The Company purchased the PCB Subsidiaries for a total consideration of $114,034 in cash and
36,334 shares of TTM common stock, of which approximately 26,225 are subject to restrictions. After
taking into account the 36,334 shares of TTM common stock issued in the acquisition and based on
the number of shares outstanding on April 8, 2010, the date the Company acquired the PCB
Subsidiaries, approximately 46% of TTM common stock outstanding was held by Meadville, its
shareholders, or their transferees.
Bank fees and legal and accounting costs associated with the acquisition of the PCB
Subsidiaries of $428 and $9,212 for the quarter and three quarters ended September 27, 2010, have
been expensed and recorded as general and administrative expense in the consolidated condensed
statement of operations in accordance with ASC Topic 805, Business Combinations.
As part of the consideration for the purchase of all of the outstanding capital stock of the
PCB Subsidiaries as described above, the Company was required to maintain approximately $120,000 in
cash and cash equivalents in various accounts, which were restricted in nature and therefore
recorded as restricted cash in the consolidated balance sheet as of December 31, 2009.
7
TTM TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
The following summarizes the components of the PCB Subsidiaries purchase price:
|
|
|
|
|
|
|
(In thousands) |
|
Value of TTM shares issued: |
|
|
|
|
TTM shares issued with restrictions |
|
$ |
201,959 |
|
TTM shares issued without restrictions |
|
|
89,965 |
|
Foreign employee replacement share awards |
|
|
2,458 |
|
|
|
|
|
|
|
|
294,382 |
|
Cash consideration |
|
|
114,034 |
|
|
|
|
|
Total |
|
$ |
408,416 |
|
|
|
|
|
The value of the shares of the Companys common stock used in determining the purchase price
was $9.06 per share, the closing price of the Companys common stock on April 8, 2010, the
effective date of the acquisition. Additionally, approximately 26,225 of the Companys shares
issued and subsequently distributed to the principal shareholders in the acquisition of the PCB
Subsidiaries maintain certain restrictions, including a lock-up transfer restriction during the
18-month period following the closing of the acquisition of the PCB Subsidiaries and therefore, the
fair value of these shares has been determined considering the restrictions, resulting in a
discount of 15% from the closing share price.
The
foreign employee share awards were transferred to certain employees involved in the PCB
Subsidiaries business by a related party and controlling shareholder of the PCB Subsidiaries. The
fair value of the share awards included as purchase consideration was determined using a $9.06 per
share price plus cash prorated for the pre-combination service period. See Note 16.
The purchase price of the PCB Subsidiaries was allocated to tangible and intangible assets
acquired, liabilities assumed and noncontrolling interests based on their estimated fair value at
the date of the acquisition (April 8, 2010). The excess of the purchase price over the fair value
of net assets acquired and noncontrolling interests was allocated to goodwill.
The fair values assigned are based on reasonable methods applicable to the nature of the
assets acquired, liabilities assumed and noncontrolling interests.
The following summarizes the preliminary
estimated fair values of net assets acquired and noncontrolling interests:
|
|
|
|
|
|
|
(In thousands) |
|
Cash |
|
$ |
85,505 |
|
Trade and notes receivables ($139,398 contractual gross
receivables) |
|
|
131,844 |
|
Inventories |
|
|
66,150 |
|
Other current assets |
|
|
12,762 |
|
Property, plant, and equipment |
|
|
576,454 |
|
Identifiable intangible assets |
|
|
87,565 |
|
Goodwill |
|
|
185,623 |
|
Other assets |
|
|
13,013 |
|
Current liabilities |
|
|
(196,866 |
) |
Long-term debt, net of discount |
|
|
(417,414 |
) |
Related party financing obligation |
|
|
(19,381 |
) |
Other liabilities |
|
|
(21,945 |
) |
Noncontrolling interest |
|
|
(94,894 |
) |
|
|
|
|
Total |
|
$ |
408,416 |
|
|
|
|
|
During the third quarter ended September 27, 2010, certain equipment payables approximating
$7,936 were reclassified to current liabilities due to the short-term nature of these obligations.
Due to the fact that the acquisition of the PCB Subsidiaries occurred in the previous interim period, the magnitude of the transaction, and because significant information to be obtained and analyzed resides in a foreign jurisdiction, the Company's fair value estimates for the purchase price allocation
are preliminary and may change during the allowable measurement period,
which is up to the point the Company obtains and analyzes the information that existed
as of the date of the acquisition necessary to determine the fair values, but in no case to exceed more than one year from
the date of acquisition. As of September 27, 2010, the fair values of property, plant and equipment and noncontrolling
interests are preliminary as the Company continues to accumulate and analyze information necessary to finalize the fair
values.
8
TTM TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
Equipment payables
Equipment
payables represent equipment purchases, some with extended payment terms. Equipment
purchases, some with payment terms less than one year are reported as Equipment payables in the
consolidated condensed balance sheet and those with payment terms greater than one year
are included in Other long-term liabilities in the consolidated condensed balance sheet.
Property, plant and equipment
The fair value of property, plant and equipment was determined by utilizing three approaches:
the cost, sales comparison, and income capitalization approaches combined with management
assumptions. Each approach assumes valuation of the property at the propertys highest and best
use.
Long-term debt, net of discount
On the acquisition date, the Company became a party to the PCB Subsidiaries November 16, 2009
Credit Agreement with various lenders. The credit agreement was put in place in contemplation of
the acquisition in order to refinance existing credit facilities consisting of a term and revolving
loan and factoring and letter of credit facilities. The amount drawn under this credit agreement
to refinance and extinguish the existing credit facilities
was approximately $388,000 after the completion of the acquisition of the PCB Subsidiaries. The
fair value of existing debt assumed was based on its contractual provisions that required it to be
repaid upon a change in control.
Additionally,
certain bank loans maintained by the PCB Subsidiaries within the Peoples
Republic of China (PRC) were kept in place after the Companys completion of the acquisition of
the PCB Subsidiaries. The amount drawn under these lines as of the acquisition date amounted to
approximately $30,000. The Company determined the fair value of the
assumed debt using
a present value analysis based on market rates of LIBOR plus spread for the debt.
Related party financing obligation
The related party financing obligation consists of a put and call option agreement which
grants the noncontrolling interest a put option to sell, and to one of the PCB Subsidiaries a call
option to purchase, the remaining 20% equity interest in one of its majority owned subsidiaries.
The exercise price of the put option is the greater of (i) an enterprise value calculation, which
uses earnings before income taxes, depreciation and amortization projections on the extrapolation
of the latest unaudited combined financial results of the majority owned subsidiary to a four-year
period and an enterprise value of 5.5 times, or (ii) the net asset value based on the extrapolation
of the latest unaudited combined financial results of the majority owned subsidiary as at end of
the fiscal year 2012; or (iii) the minimum price of approximately 15,384 EUR plus interest which
will accrue at a rate of 2.5% compounded annually until the option
is exercised. Fair value as
of the acquisition date of the financial liability was based upon the minimum price as the other
two scenarios were determined to be nonsubstantive due to the challenging current and expected
future operations of the subsidiary. As the minimum price represents a fixed obligation, the
noncontrolling interest was accounted for as a financing obligation rather than a noncontrolling
interest and 100% of the subsidiary is consolidated. The fair value of the related party financial
liability was estimated based on the minimum price of the obligation plus 2.5% interest discounted
at the liabilitys discount rate based on the Companys adjusted cost of borrowing as of the
acquisition date.
Noncontrolling Interest
Noncontrolling interests consist of a 29.8% equity interest in one PCB manufacturing
subsidiary and a 20.0% equity interest in one other PCB manufacturing subsidiary held by third
parties. The fair value was determined by utilizing a combination of income and market comparable
approaches. The income approach was used to estimate the total enterprise value of each
noncontrolling interest by estimating discounted future cash flows. The market comparable approach
indicates the fair value of the noncontrolling interest based on a comparison to comparable
enterprises in similar lines of business that are publicly traded or are part of a public or
private transaction.
9
TTM TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
Identifiable Intangible Assets
Acquired identifiable intangible assets include customer relationships, trade name and order
backlog. The fair value of the identifiable intangible assets was determined using various income
approach methods, including excess earnings and relief from royalties, as appropriate to determine
the present value of expected future cash flows for each identifiable intangible asset based on
discount rates which incorporate a risk premium to take into account the risks inherent in those
expected cash flows. The expected cash flows were estimated using available historical data
adjusted based on the Companys historical experience and the expectations of market participants.
The amounts assigned to each class of intangible assets and the related weighted average
amortization periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
Intangible asset |
|
|
Weighted-average |
|
|
|
acquired |
|
|
amortization period |
|
|
|
(In thousands) |
|
|
|
|
|
Customer relationships |
|
$ |
75,975 |
|
|
8.0 years |
Trade name |
|
|
10,302 |
|
|
6.0 years |
Order backlog |
|
|
1,288 |
|
|
0.2 years |
|
|
|
|
|
|
|
|
|
|
$ |
87,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
Goodwill represents the excess of the PCB Subsidiaries purchase price over the fair value of
assets acquired, liabilities assumed and noncontrolling interests. During the quarter ended
September 27, 2010, goodwill was adjusted to reflect:
|
|
|
a decrease in fair value of inventory by $358 as a result of additional information
received regarding the existence of certain inventory; |
|
|
|
a decrease in minority interest by $11,214 resulting from the completion of the
valuation for one of the noncontrolling interests; |
|
|
|
a decrease in property, plant and equipment by $3,074 due to the identification of
an asset held for sale and the completion of the valuation of certain property acquired; |
|
|
|
a decrease in the related party financing obligation by $1,156 resulting from the
completion of its valuation; |
|
|
|
an increase in other current assets by $1,006 and other non current assets by $207
due to completion of the compilation of deferred tax assets and
reclassification of non current deferred taxes of $7,671 from other
assets to other liabilities; and |
|
|
|
an increase in current liabilities of $914 and other non current liabilities of
$764 related to other lease obligations. |
Prior to the Companys acquisition of the PCB Subsidiaries, the Company had two operating
segments, PCB Manufacturing and Backplane Assembly, consistent with the nature of its operations.
Due to the acquisition, the Company has reassessed its operating segments and determined that it
has two operating segments based primarily on geographical location of operations, North America
and Asia Pacific. The PCB Subsidiaries excess purchase price over the fair value of assets
acquired, liabilities assumed and noncontrolling interests has been appropriately allocated to the
Asia Pacific operating segment.
The Company believes that the acquisition of the PCB Subsidiaries will produce the following
significant benefits:
|
|
|
Create a Leading Global PCB Company. The combination of the Company and the PCB
Subsidiaries has created a leading global PCB company with high-technology capabilities
and highly diversified revenue mix by geographic region and end market. Additionally, the
combination resulted in a one-stop global solution from quick-turn through volume
production and a focused facility specialization strategy. |
|
|
|
Increased Market Presence and Opportunities. The combination of the Company and the
PCB Subsidiaries has created an opportunity to capture additional business globally from
both existing and new customers, particularly in North America and Europe. |
10
TTM TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
|
|
|
Operating Efficiencies. The combination of the Company and the PCB Subsidiaries has
also provided the opportunity for potential economies of scale, cost savings and access
to a highly trained PCB Subsidiary workforce, resulting from a global sales force and
manufacturing platform; complementary footprints, customers and end markets; and talented
management teams with leading expertise in the Asian market. |
The Company believes that these primary factors support the amount of goodwill recognized as a
result of the purchase price paid for the PCB Subsidiaries, in relation to other acquired tangible
and intangible assets. The goodwill acquired in the acquisition is not deductible for income tax
purposes.
Results of Operations
Included in the consolidated condensed statement of operations are net sales of $209,551 and
$380,874 for the quarter and three quarters ended September 27, 2010, respectively, and net income
of $23,382 and $29,559 for the quarter and three quarters ended September 27, 2010, respectively,
from the PCB Subsidiaries operations.
Pro forma Results of Operations
Unaudited pro forma operating results for the Company, assuming the acquisition of the PCB
Subsidiaries occurred on January 1, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Three Quarters Ended |
|
|
|
September 27, |
|
|
September 28, |
|
|
September 27, |
|
|
September 28, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(In thousands, except per share data) |
|
|
|
|
|
Net sales |
|
$ |
357,813 |
|
|
$ |
301,660 |
|
|
$ |
989,899 |
|
|
$ |
884,280 |
|
Net income |
|
|
29,091 |
|
|
|
4,661 |
|
|
|
45,184 |
|
|
|
20,629 |
|
Basic earnings per share |
|
$ |
0.36 |
|
|
$ |
0.06 |
|
|
$ |
0.57 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive earnings per share |
|
$ |
0.36 |
|
|
$ |
0.06 |
|
|
$ |
0.56 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pro forma information is not necessarily indicative of the actual results that would have
been achieved had the PCB Subsidiaries acquisition occurred as of January 1, 2010 and 2009, or the
results that may be achieved in future periods.
(3) Accounts Receivable Factoring Arrangements
In the normal course of business, the Companys foreign subsidiaries utilize accounts
receivable factoring arrangements. Under these arrangements, the Company may sell certain of its
trade or notes receivable to financial institutions, which are accounted for as a sale, at a
discount ranging from 1% to 2% of the trade or notes receivable. In all arrangements there is no
recourse against the Company for its customers failure to pay. The Company sold approximately
$19,167 and $38,904 of accounts and notes receivable for the quarter and three quarters ended
September 27, 2010, respectively.
(4) Inventories
Inventories as of September 27, 2010 and December 31, 2009 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 27, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Raw materials |
|
$ |
47,534 |
|
|
$ |
21,758 |
|
Work-in-process |
|
|
50,139 |
|
|
|
27,296 |
|
Finished goods |
|
|
35,726 |
|
|
|
11,099 |
|
|
|
|
|
|
|
|
|
|
$ |
133,399 |
|
|
$ |
60,153 |
|
|
|
|
|
|
|
|
11
TTM TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
(5) Goodwill and Definite-lived Intangibles
As of September 27, 2010 and December 31, 2009, goodwill by operating segment and the
components of definite-lived intangibles were as follows:
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
Asia |
|
|
|
|
|
|
America |
|
|
Pacific |
|
|
Total |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Balance as of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
131,148 |
|
|
$ |
|
|
|
$ |
131,148 |
|
Accumulated impairment losses |
|
|
(117,018 |
) |
|
|
|
|
|
|
(117,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
14,130 |
|
|
|
|
|
|
|
14,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during the three quarters ended September 27, 2010 |
|
|
|
|
|
|
185,623 |
|
|
|
185,623 |
|
Foreign currency translation adjustment during the three quarters
ended September 27, 2010 |
|
|
261 |
|
|
|
194 |
|
|
|
455 |
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 27, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
131,409 |
|
|
|
185,817 |
|
|
|
317,226 |
|
Accumulated impairment losses |
|
|
(117,018 |
) |
|
|
|
|
|
|
(117,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,391 |
|
|
$ |
185,817 |
|
|
$ |
200,208 |
|
|
|
|
|
|
|
|
|
|
|
Definite-lived Intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Net |
|
|
Average |
|
|
|
Gross |
|
|
Accumulated |
|
|
Currency |
|
|
Carrying |
|
|
Amortization |
|
|
|
Amount |
|
|
Amortization |
|
|
Rate Change |
|
|
Amount |
|
|
Period |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
(years) |
|
September 27, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic customer relationships |
|
$ |
35,429 |
|
|
$ |
(23,224 |
) |
|
$ |
269 |
|
|
$ |
12,474 |
|
|
|
12.0 |
|
Licensing
agreements |
|
|
350 |
|
|
|
(157 |
) |
|
|
|
|
|
|
193 |
|
|
|
3.0 |
|
Acquired intangibles from the
acquisition of the PCB
Subsidiaries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic customer relationships |
|
|
75,975 |
|
|
|
(4,559 |
) |
|
|
65 |
|
|
|
71,481 |
|
|
|
8.0 |
|
Trade name |
|
|
10,302 |
|
|
|
(845 |
) |
|
|
8 |
|
|
|
9,465 |
|
|
|
6.0 |
|
Order backlog |
|
|
1,288 |
|
|
|
(1,286 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
123,344 |
|
|
$ |
(30,071 |
) |
|
$ |
340 |
|
|
$ |
93,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of the definite-lived intangibles are amortized using the straight line method of
amortization over the useful life, with the exception of the strategic customer relationship
intangibles, which are amortized using an accelerated method of amortization based on cash flows.
Amortization expense was $3,682 and $890 for the quarters ended September 27, 2010 and September
28, 2009, respectively, and $9,152 and $2,678 for the three quarters ended September 27, 2010 and
September 28, 2009, respectively. Amortization expense related to acquired licensing agreements is
classified as cost of goods sold.
12
TTM TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
Estimated aggregate amortization for definite-lived intangible assets for the next five years
is as follows:
|
|
|
|
|
|
|
(In thousands) |
|
Remaining 2010 |
|
$ |
3,820 |
|
2011 |
|
|
16,136 |
|
2012 |
|
|
15,254 |
|
2013 |
|
|
14,350 |
|
2014 |
|
|
12,858 |
|
|
|
|
|
|
|
$ |
62,418 |
|
|
|
|
|
(6) Long-term Debt and Letters of Credit
The following table summarizes the long-term debt of the Company as of September 27, 2010. No
long-term debt was outstanding at December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
Average Effective |
|
|
|
|
|
|
Interest Rate |
|
|
|
|
|
|
as of September 27, |
|
|
September 27, |
|
|
|
2010 |
|
|
2010 |
|
|
|
|
|
|
|
(In thousands) |
|
Bank loans, due various dates through May 2012 |
|
|
3.18 |
% |
|
$ |
30,174 |
|
Term loan due November 2013 |
|
|
2.26 |
% |
|
|
350,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
380,174 |
|
Less Unamortized discount |
|
|
|
|
|
|
(371 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
379,803 |
|
Less current maturities |
|
|
|
|
|
|
(66,944 |
) |
|
|
|
|
|
|
|
|
Long-term debt, less current maturities |
|
|
|
|
|
$ |
312,859 |
|
|
|
|
|
|
|
|
|
The maturities of long-term debt through 2013 are as follows:
|
|
|
|
|
|
|
(In thousands) |
|
2012 |
|
$ |
120,359 |
|
2013 |
|
|
192,500 |
|
|
|
|
|
|
|
$ |
312,859 |
|
|
|
|
|
Bank loans are made up of bank lines of credit in mainland China and are used for working
capital and capital investment for the Companys mainland China facilities acquired in conjunction with the
acquisition of the PCB Subsidiaries. These facilities are denominated in either U.S. Dollars or
Chinese Renminbi (RMB), with interest rates tied to either the LIBOR or Peoples Bank of China
rates. These bank loans expire at various dates through May 2012.
On April 9, 2010, in conjunction with the acquisition of the PCB Subsidiaries, the Company
became a party to a credit agreement (Credit Agreement), entered into on November 16, 2009 by the
PCB Subsidiaries, which are now foreign subsidiaries of the Company. The Credit Agreement consists
of a $350,000 senior secured term loan (Term Loan), a $87,500 senior secured revolving loan
(Revolving Loan), a $65,000 factoring facility (Factoring Facility), and a $80,000 letters of
credit facility (Letters of Credit Facility), all of which mature on November 16, 2013. The Credit
Agreement is secured by substantially all of the assets of the PCB Subsidiaries, and the Company
has fully and unconditionally guaranteed the Credit Agreement for full and prompt payment when due
of all present and future payment obligations.
Borrowings under the Credit Agreement bear interest at a floating rate of LIBOR (term election
by Company) plus an applicable interest margin. Borrowings under the Term Loan will bear interest
at a rate of LIBOR plus 2.0%, LIBOR plus 2.25% under the Revolving Loan, and LIBOR plus 1.25% under
the Factoring Facility. There is no provision, other than an event of default, for these interest
margins to increase. At September 27, 2010, the weighted average interest rate on the outstanding
borrowings under the Credit Agreement was 2.26%.
13
TTM TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
The Company is required to make scheduled payments of the outstanding Term Loan balance
beginning in 2011. All and any other outstanding balances under the Credit Agreement are due at the
maturity date of November 16, 2013. Borrowings under the Credit Agreement are subject to certain
financial and operating covenants that include, among other provisions, limitations on dividends or
other distributions, in addition to maintaining maximum total leverage ratios and minimum net
worth, current assets, and interest coverage ratios at both the Company and PCB Subsidiaries level.
On August 3, 2010, the Company entered into a waiver and amendment letter with Hong Kong
and Shanghai Banking Corporation Limited, as Facility Agent for and on behalf of the other lenders
named in the Credit Agreement, as amended March 30, 2010, which amended certain financial covenants
applicable to the Company. Pursuant to the waiver and amendment letter, the lenders under the
Credit Agreement agreed to amend the financial covenants related to consolidated tangible net
worth, gearing ratio (the ratio of consolidated net borrowings to consolidated tangible net worth),
and leverage. The Company is in compliance with the amended covenants.
The Company is also required to pay a commitment fee of 0.20% per annum on any unused portion
of loan or facility under the Credit Agreement. As of September 27, 2010, all of the Term Loan was
outstanding, none of the Revolving Loan or Factoring Facility was outstanding, and $62,735 of the
Letters of Credit Facility was outstanding. Available borrowing capacity under the Revolving Loan
and Factoring Facility was $87,500 and $65,000, respectively, at September 27, 2010.
On April 9, 2010, the Company entered into an interest rate swap arrangement with an initial
notional amount of $146,500, for the period beginning April 18, 2011 and ending on April 16, 2013.
See Note 11 Financial Instruments.
Other Letters of Credit
The Company maintains several letters of credit: a $1,494 standby letter of credit expiring
December 31, 2010 associated with its insured workers compensation program, a $1,000 standby letter
of credit expiring February 28, 2011 related to the lease of one of its production facilities, and
various other letters of credits aggregating to approximately $654 maintained by the Companys
foreign subsidiaries related to purchases of machinery and equipment with various expiration dates
through June 2011.
(7) Convertible Senior Notes
In May 2008, the Company issued 3.25% Convertible Senior Notes (Convertible Notes) due May 15,
2015, in a public offering for an aggregate principal amount of $175,000. The Convertible Notes
bear interest at a rate of 3.25% per annum. Interest is payable semiannually in arrears on May 15
and November 15 of each year, beginning November 15, 2008. The Convertible Notes are senior
unsecured obligations and rank equally to the Companys future unsecured senior indebtedness and
senior in right of payment to any of the Companys future subordinated indebtedness. The liability
and equity components of the Convertible Notes are separately accounted for in a manner that
reflects the Companys non-convertible debt borrowing rate when interest costs are recognized.
14
TTM TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
The Company received proceeds of $169,249 after the deduction of offering expenses of $5,751
upon issuance of the Convertible Notes. The Company has allocated the Convertible Notes offering
costs to the liability and equity components in proportion to the allocation of proceeds and
accounted for them as debt issuance costs and equity issuance costs, respectively. At September 27,
2010 and December 31, 2009, the following summarizes the liability and equity components of the
Convertible Notes:
|
|
|
|
|
|
|
|
|
|
|
September 27, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Liability components: |
|
|
|
|
|
|
|
|
Convertible Notes |
|
$ |
175,000 |
|
|
$ |
175,000 |
|
Less: Convertible Notes unamortized discount |
|
|
(31,110 |
) |
|
|
(35,118 |
) |
|
|
|
|
|
|
|
Convertible Notes, net of discount |
|
$ |
143,890 |
|
|
$ |
139,882 |
|
|
|
|
|
|
|
|
Equity components: |
|
|
|
|
|
|
|
|
Additional paid-in capital: |
|
|
|
|
|
|
|
|
Embedded conversion option Convertible Notes |
|
$ |
43,000 |
|
|
$ |
43,000 |
|
Embedded conversion option Convertible Notes issuance costs |
|
|
(1,413 |
) |
|
|
(1,413 |
) |
|
|
|
|
|
|
|
|
|
$ |
41,587 |
|
|
$ |
41,587 |
|
|
|
|
|
|
|
|
At September 27, 2010 and December 31, 2009, remaining unamortized debt issuance costs
included in other non-current assets were $3,138 and $3,542, respectively. The debt issuance costs
and debt discount are being amortized to interest expense over the term of the Convertible Notes
using the effective interest rate method. At September 27, 2010, the remaining amortization period
for the unamortized Convertible Note discount and debt issuance costs was 4.6 years.
The components of interest expense resulting from the Convertible Notes for the quarter and
three quarters ended September 27, 2010 and September 28, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Three Quarters Ended |
|
|
|
September 27, |
|
|
September 28, |
|
|
September 27, |
|
|
September 28, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Contractual coupon interest |
|
$ |
1,422 |
|
|
$ |
1,422 |
|
|
$ |
4,266 |
|
|
$ |
4,266 |
|
Amortization of Convertible Notes debt discount |
|
|
1,364 |
|
|
|
1,255 |
|
|
|
4,008 |
|
|
|
3,687 |
|
Amortization of debt issuance costs |
|
|
137 |
|
|
|
126 |
|
|
|
404 |
|
|
|
372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,923 |
|
|
$ |
2,803 |
|
|
$ |
8,678 |
|
|
$ |
8,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter and three quarters ended September 27, 2010 and September 28, 2009, the
amortization of the Convertible Notes debt discount and debt issuance costs are based on an
effective interest rate of 8.37%.
Conversion
At any time prior to November 15, 2014, holders may convert their Convertible Notes into cash
and, if applicable, into shares of the Companys common stock based on a conversion rate of 62.6449
shares of the Companys common stock per $1 principal amount of Convertible Notes, subject to
adjustment, under the following circumstances: (1) during any calendar quarter beginning after June
30, 2008 (and only during such calendar quarter), if the last reported sale price of our common
stock for at least 20 trading days during the 30 consecutive trading days ending on the last
trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the
applicable conversion price on each applicable trading day of such preceding calendar quarter; (2)
during the five business day period after any 10 consecutive trading day period in which the
trading price per note for each day of that 10 consecutive trading day period was less than 98% of
the product of the last reported sale price of the Companys common stock and the conversion rate on such
day; or (3) upon the occurrence of specified corporate transactions described in the prospectus
supplement. As of September 27, 2010, none of the conversion criteria had been met.
On or after November 15, 2014 until the close of business on the third scheduled trading
day preceding the maturity date, holders may convert their notes at any time, regardless of the
foregoing circumstances. Upon conversion, for each $1 principal amount of notes, the Company will
pay cash for the lesser of the conversion value or $1 and shares of our common stock, if any, based
on a daily conversion value calculated on a proportionate basis for each day of the 60 trading day
observation period. Additionally, in the event of a fundamental change as defined in the prospectus
supplement, or other conversion rate adjustments such as share splits or
15
TTM TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
combinations, other distributions of shares, cash or other assets to stockholders,
including self-tender transactions (Other Conversion Rate Adjustments), the conversion rate may be
modified to adjust the number of shares per $1 principal amount of the notes. As of September 27,
2010, 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 13,978.
Note Repurchase
The Company is not permitted to redeem the Convertible Notes at any time prior to maturity. In
the event of a fundamental change or certain default events, as defined in the prospectus
supplement, holders may require the Company to repurchase for cash all or a portion of their
Convertible Notes at a price equal to 100% of the principal amount, plus any accrued and unpaid
interest.
Convertible Note Hedge and Warrant Transaction
In connection with the issuance of the Convertible Notes, the Company entered into a
convertible note hedge and warrant transaction (Call Spread Transaction), with respect to the
Companys common stock. The convertible note hedge, which cost
an aggregate of $38,257 and was
recorded, net of tax, as a reduction of additional paid-in capital, consists of the Companys
option to purchase up to 10,963 shares of common stock at a price of $15.96 per share. This option
expires on May 15, 2015 and can only be executed upon the conversion of the above mentioned
Convertible Notes. Additionally, the Company sold warrants to purchase 10,963 shares of
its common stock at a price of $18.15 per share. The warrants expire on August 17, 2015.
Proceeds from the sale of warrants of $26,197 was recorded as an addition to additional paid-in
capital. The Call Spread Transaction has no effect on the terms of the Convertible Notes and
reduces potential dilution by effectively increasing the conversion price of the Convertible Notes
to $18.15 per share of the Companys common stock.
(8) Comprehensive Income
The following table summarizes the components of comprehensive income (loss) for the quarter
and three quarters ended September 27, 2010 and September 28, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Three Quarters Ended |
|
|
|
September 27, |
|
|
September 28, |
|
|
September 27, |
|
|
September 28, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Net income (loss) |
|
$ |
32,145 |
|
|
$ |
(4,885 |
) |
|
$ |
43,370 |
|
|
$ |
2,490 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax
expense of $202 and $10 for the quarters ended September
27, 2010 and September 28, 2009, respectively, and net of
tax expense (benefit) of $271 and ($26) for the three
quarters ended September 27, 2010 and September 28, 2009,
respectively |
|
|
7,384 |
|
|
|
17 |
|
|
|
9,772 |
|
|
|
(42 |
) |
Unrealized loss on effective cash flow hedges, net of tax
benefit of $228 and $608 for the quarter and three
quarters ended September 27, 2010 |
|
|
(1,101 |
) |
|
|
|
|
|
|
(3,025 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of tax |
|
|
6,283 |
|
|
|
17 |
|
|
|
6,747 |
|
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
38,428 |
|
|
|
(4,868 |
) |
|
|
50,117 |
|
|
|
2,448 |
|
Comprehensive income attributable to noncontrolling interests |
|
|
(4,048 |
) |
|
|
|
|
|
|
(6,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to TTM
Technologies, Inc. stockholders |
|
$ |
34,380 |
|
|
$ |
(4,868 |
) |
|
$ |
43,817 |
|
|
$ |
2,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
TTM TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
The following provides a summary of the activity associated with the designated cash flow
hedges reflected in accumulated other comprehensive income for the three quarters ended September
27, 2010:
|
|
|
|
|
|
|
September 27, 2010 |
|
|
|
(in thousands) |
|
Beginning balance, net of tax |
|
$ |
|
|
Changes in fair value loss, net of tax |
|
|
(3,025 |
) |
Reclassification to earnings, net of tax |
|
|
|
|
|
|
|
|
Ending balance, net of tax |
|
$ |
(3,025 |
) |
|
|
|
|
The amount recorded in accumulated other comprehensive income for the cash flow hedges is
expected to be reclassified into the consolidated condensed statement of operations when the
forecasted transaction affects earnings. The Company expects that approximately $1,004 will be
reclassified into the statement of operations, net of tax, in the next 12 months (see Note 11).
(9) Restructuring Charges and Impairment of Long-lived Assets
Restructuring Charges
On September 1, 2009 the Company announced its plan to close its Hayward and Los Angeles,
California facilities and lay off approximately 340 employees at these sites. As a result, the
Company recorded $2,501 in separation costs for the quarter and three quarters ended September 28,
2009, related to this restructuring. These charges are presented as restructuring charges in the
consolidated condensed statement of operations. As of September 27, 2010, $57 of accrued separation
costs remain for employees yet to be separated. The Company expects the remaining employees to be
separated and the remaining accrued restructuring costs to be paid during the fourth quarter of
2010. Accrued restructuring costs are included as a component of accrued salaries, wages and
benefits in the consolidated condensed balance sheet.
During the three quarters ended September 27, 2010, the Company incurred $399 in contract
termination costs related to building operating leases associated with the closure of its Hayward,
California manufacturing facility, which the Company ceased use. These accrued contract termination
costs are included as a component of other accrued expenses in the consolidated balance sheet.
The Hayward and Los Angeles, California facilities were part of the Companys North America
operating segment.
The below table shows the utilization of the accrued restructuring costs during the three
quarters ended September 27, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract |
|
|
|
|
|
|
Severance |
|
|
Termination |
|
|
Total |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Accrued at December 31, 2009 |
|
$ |
702 |
|
|
$ |
529 |
|
|
$ |
1,231 |
|
Estimated liabilities |
|
|
|
|
|
|
399 |
|
|
|
399 |
|
Change in estimates |
|
|
50 |
|
|
|
|
|
|
|
50 |
|
Amount paid |
|
|
(695 |
) |
|
|
(436 |
) |
|
|
(1,131 |
) |
|
|
|
|
|
|
|
|
|
|
Accrued at September 27, 2010 |
|
$ |
57 |
|
|
$ |
492 |
|
|
$ |
549 |
|
|
|
|
|
|
|
|
|
|
|
In January 2009, the Company announced its plan to close its Redmond, Washington facility and
lay off approximately 370 employees at this site. In addition, the Company laid off about 140
employees at various other U.S. facilities in January 2009. As a result, the Company recorded
$2,508 in separation costs for the three quarters ended September 28, 2009, related to this
restructuring. These charges are presented as restructuring charges in the consolidated condensed
statement of operations. As of December 31, 2009, the Redmond, Washington facility had been closed,
all employees related to the January 2009 restructuring had been separated, and all accrued
separation costs had been paid. The Redmond, Washington facility was part of the Companys North
America operating segment.
17
TTM TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
Impairment of Long-lived Assets
During the three quarters ended September 27, 2010, the Company reduced the carrying value of
the Dallas, Oregon facility, which was classified as an asset held for sale in a prior period, to
record the estimated fair value less costs to sell, resulting in an impairment of $766 due to a
depressed real estate market in the surrounding Dallas, Oregon region. During the third quarter
ended September 27, 2010, the Dallas Oregon facility was sold for $234.
During the quarter and three quarters ended September 28, 2009, the Company recorded the
impairment of certain long-lived assets, including assets held for sale, for its Redmond,
Washington, Dallas, Oregon, and two California facilities in the amount of $10,293 and $10,636 for
the quarter and three quarters ended September 28, 2009, respectively. The impairment for the
Redmond, Washington and the two California facilities of $8,043 and $8,386 for the quarter and
three quarters ended September 28, 2009, respectively, is directly related to facility closures and
consisted of buildings and machinery and equipment. Additionally, in the third quarter of 2009, the
Company reduced the carrying value of the Dallas, Oregon facility, which was classified as an asset
held for sale, by $2,250 to record the estimated fair value less costs to sell given current market
conditions. These charges are presented as impairment of long-lived assets in the Companys
consolidated condensed statement of operations.
The Dallas, Oregon, Redmond, Washington and the two California facilities were part of the
Companys North America operating segment.
(10) Income Taxes
The Companys effective tax rate was 22.7% and (39.4%) for the quarters ended September 27,
2010 and September 28, 2009, respectively, and 27.5% and 35.6% for the three quarters ended
September 27, 2010 and September 28, 2009, respectively. The Companys effective tax rate decreased
primarily due to the impact of an increase in total earnings earned in lower-tax jurisdictions
resulting from the acquisition of the PCB Subsidiaries, partially offset by the discrete tax expense
associated with non-deductible acquisition-related costs. Additionally, certain foreign losses
generated are not more than likely to be realizable, and thus, no income tax benefit has been
recognized on these losses. The Companys effective tax rate will generally differ from the U.S.
federal statutory rate of 35% due to favorable tax rates associated with certain earnings from the
Companys operations in lower-tax jurisdictions in China. The
Companys foreign earnings attributable to the
Asia Pacific operating segment will be permanently reinvested in such foreign jurisdictions and,
therefore, no deferred tax liabilities for U.S. income taxes on undistributed earnings are
recorded.
(11) Financial Instruments
Derivatives
As a matter of policy, the Company uses derivatives for risk management purposes, and does not
use derivatives for speculative purposes. Derivatives are typically
entered into as hedges against
changes in interest rates, currency exchange rates, and other risks. All derivative instruments are
recognized as either assets or liabilities in the balance sheet at their respective fair values.
For derivatives that are designated as a cash flow hedge, changes in the fair value of the
derivative are recognized in accumulated other comprehensive income, to the extent the derivative
is effective at offsetting the changes in cash flow being hedged until the hedged item affects
earnings. To the extent there is any hedge ineffectiveness, changes in fair value relating to the
ineffective portion are immediately recognized in earnings. Changes in the fair value of
derivatives that are not designated as hedges are recorded in earnings each period.
Interest Rate Swaps
The Companys business is exposed to interest rate risk resulting from fluctuations in
interest rates on certain variable rate LIBOR debt. Increases in interest rates would increase
interest expenses relating to the outstanding variable rate borrowings of certain foreign
subsidiaries and increase the cost of debt. Fluctuations in interest rates can also lead to
significant fluctuations in the fair value of the debt obligations.
On April 9, 2010, the Company entered into a two-year pay-fixed, receive floating (1-month
LIBOR), amortizing interest rate swap arrangement with an initial notional amount of $146,500, for
the period beginning April 18, 2011 and ending on April 16, 2013. The interest rate swap will apply
a fixed interest rate against the first interest payments of a portion of the $350,000 Term Loan
over
18
TTM TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
the term of the interest rate swap. As part of the Companys risk management strategy, the
Company chose not to hedge its initial year interest payment cash flows of its Term Loan because of
low current LIBOR rates which would have initially resulted in locking in a fixed rate higher than
LIBOR spot rate at the onset.
The notional amount of the interest rate swap decreases to zero over its term, consistent with
the Companys risk management objectives. The notional value underlying the hedge at September 27,
2010 was $146,500. Under the terms of the interest rate swap, the Company will pay a fixed rate of
2.50% and will receive floating 1-month LIBOR during the swap period. The Company has designated
this interest rate swap as a cash flow hedge.
At inception, the fair value of the interest rate swap was zero. As of September 27, 2010, the
fair value of the swap was recorded as a liability of $3,684 in other long-term liabilities. The
change in the fair value of the interest rate swap is recorded as a component of accumulated other
comprehensive income, net of tax, in the Companys consolidated balance sheet. No ineffectiveness was
recognized for the quarter ended September 27, 2010. There was no impact to interest expense for
the quarter ending September 27, 2010 as the interest rate swap does not hedge interest rate cash
flows until the period beginning April 18, 2011.
Additionally, the Company, through its acquisition of the PCB Subsidiaries, assumed a long
term pay-fixed, receive floating (1-month LIBOR), amortizing interest rate swap arrangement with an
initial notional amount of $40,000, for the period beginning October 8, 2008 and ending on July 30,
2012. This interest rate swap applied to the PCB Subsidiaries pre-acquisition, long-term
borrowings, which were paid-off on the acquisition date. The notional amount of the interest rate
swap decreases to zero over its term. Under the terms of the interest rate swap, the Company will
pay a fixed rate of 3.43% and will receive floating 1-month LIBOR during the swap period. As the
borrowings attributable to this interest rate swap were paid off upon acquisition, the Company did
not designate this interest rate swap as a cash flow hedge. As of September 27, 2010, the fair
value of the swap was recorded as a liability of $1,553 in other long-term liabilities. The change
in the fair value of this interest rate swap is recorded as other, net in the consolidated
condensed statement of operations.
Foreign Exchange Contracts
The Company enters into foreign currency forward contracts to mitigate the impact of changes
in foreign currency exchange rates and to reduce the volatility of purchases and other obligations
generated in currencies other than the functional currencies. Our foreign subsidiaries may at times
purchase forward exchange contracts to manage their foreign currency
risks in relation to particular
purchases or obligations, such as the related party financing obligation arising from the put call
option to purchase the remaining 20% of a majority owned subsidiary in 2013 (Note 2), and certain
purchases of machinery denominated in foreign currencies other than the Companys foreign
functional currency. The notional amount of the foreign exchange contracts at September 27, 2010
was approximately $30,145. The Company did not have any foreign exchange contracts as of December
31, 2009. The Company has designated certain of these foreign exchange contracts as cash flow
hedges, with the exception of the foreign exchange contracts in relation to the related party
financing obligation. In this instance, the hedged item is a recognized liability subject to
foreign currency transaction gains and losses and, therefore, changes in the hedged item due to
foreign currency exchange rates are already recorded in earnings. Therefore, hedge accounting has
not been applied.
19
TTM TECHNOLOGIES, INC.
Notes
to Consolidated Financial Statements (Continued)
The Company only had derivative instruments during the three quarters ended September 27,
2010. The fair values of derivative instruments in the consolidated condensed balance sheet are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Asset / |
|
|
|
|
|
(Liability) |
|
|
|
|
|
Fair Value |
|
|
|
|
|
September 27, |
|
|
|
Balance Sheet Location |
|
2010 |
|
|
|
|
|
(In thousands) |
|
Cash flow derivative instruments designated as hedges: |
|
|
|
|
|
|
Foreign exchange contracts |
|
Prepaid expenses and other current assets |
|
$ |
51 |
|
Interest rate swap |
|
Other long-term liabilities |
|
|
(3,684 |
) |
Cash flow derivative instruments not designated as hedges: |
|
|
|
|
|
|
Foreign exchange contracts |
|
Prepaid expenses and other current assets |
|
|
456 |
|
Foreign exchange contracts |
|
Other accrued expenses |
|
|
(3 |
) |
Foreign exchange contracts |
|
Deposits and other non-current assets |
|
|
797 |
|
Interest rate swap |
|
Other long-term liabilities |
|
|
(1,553 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
(3,936 |
) |
|
|
|
|
|
|
20
TTM TECHNOLOGIES, INC.
Notes
to Consolidated Financial Statements (Continued)
The following tables provide information about the amounts recorded in accumulated other
comprehensive income related to derivatives designated as cash flow hedges, as well as the amounts
recorded in each caption in the consolidated condensed statement of operations when derivative
amounts are reclassified out of accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 27, 2010 |
|
|
|
|
|
Effective Portion |
|
|
Ineffective Portion |
|
|
|
|
|
Gain/ (Loss) |
|
|
Gain/ (Loss) |
|
|
Gain/ (Loss) |
|
|
|
|
|
Recognized in Other |
|
|
Reclassified into |
|
|
Recognized into |
|
|
|
Financial Statement Caption |
|
Comprehensive Income |
|
|
Income |
|
|
Income |
|
|
|
|
|
(In thousands) |
|
Cash flow hedge: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
Interest expense |
|
$ |
(1,403 |
) |
|
$ |
|
|
|
$ |
|
|
Foreign currency forward |
|
Other, net |
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,329 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended September 27, 2010 |
|
|
|
|
|
Effective Portion |
|
|
Ineffective Portion |
|
|
|
|
|
Gain/ (Loss) |
|
|
Gain/ (Loss) |
|
|
Gain/ (Loss) |
|
|
|
|
|
Recognized in Other |
|
|
Reclassified into |
|
|
Recognized into |
|
|
|
Financial Statement Caption |
|
Comprehensive Income |
|
|
Income |
|
|
Income |
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Cash flow hedge: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
Interest expense |
|
$ |
(3,684 |
) |
|
$ |
|
|
|
$ |
|
|
Foreign currency forward |
|
Other, net |
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3,633 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
net gain recognized in the consolidated condensed statement of
operations on derivative instruments not designated as hedges is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Quarters Ended |
|
|
|
|
|
|
|
|
|
September 27, |
|
|
September 27, |
|
|
|
Financial Statement Caption |
|
|
|
|
|
2010 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Derivative instruments not designated as hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
Other, net |
|
|
|
|
|
$ |
94 |
|
|
$ |
145 |
|
Foreign exchange contracts |
|
Other, net |
|
|
|
|
|
|
2,030 |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,124 |
|
|
$ |
545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Instruments
The carrying amount and estimated fair value of the Companys financial instruments at
September 27, 2010 and December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Short-term investments |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,351 |
|
|
$ |
1,351 |
|
Short-term derivative assets |
|
|
507 |
|
|
|
507 |
|
|
|
|
|
|
|
|
|
Short-term derivative liabilities |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Noncurrent derivative assets |
|
|
797 |
|
|
|
797 |
|
|
|
|
|
|
|
|
|
Long-term derivative liabilities |
|
|
5,237 |
|
|
|
5,237 |
|
|
|
|
|
|
|
|
|
Long-term equity investment |
|
|
2,718 |
|
|
|
2,283 |
|
|
|
|
|
|
|
|
|
Related party financing obligation |
|
|
20,230 |
|
|
|
20,214 |
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
379,803 |
|
|
|
372,345 |
|
|
|
|
|
|
|
|
|
Convertible senior notes |
|
|
143,890 |
|
|
|
167,510 |
|
|
|
139,882 |
|
|
|
174,340 |
|
The fair value of the derivative instruments was determined using pricing models developed
based on the LIBOR swap rate, foreign currency exchange rates, and
other observable market data, including quoted market prices, as
appropriate. The values were adjusted to reflect nonperformance risk of both the counterparty and
the Company.
The fair value of equity securities accounted for under the cost method (nonmarketable equity
securities) was determined using market multiples derived from comparable companies. Under that
approach, the identification of comparable companies requires significant judgment. Additionally,
multiples might lie in ranges with a different multiple for each comparable company. The selection
of where the appropriate multiple falls within that range also requires significant judgment,
considering both qualitative and quantitative factors.
The related party financing obligation fair value was estimated based on the minimum price of
the obligation plus 2.5% interest discounted at the liabilitys discount rate based on the
Companys adjusted cost of borrowing.
21
TTM TECHNOLOGIES, INC.
Notes
to Consolidated Financial Statements (Continued)
The fair value of the long-term debt was estimated based on discounting the par value of the
debt over its life for the difference between the debt stated interest rate and current market
rates for similar debt at September 27, 2010.
The fair value of the convertible senior notes was estimated based
on quoted market prices.
The fair value of short-term investments was estimated based on a court order issued by a U.S.
District Court prescribing amounts to be distributed which resulted in sufficient information
available to determine the investment fair value.
At September 27, 2010 and December 31, 2009, the Companys financial instruments included cash
and cash equivalents, short-term investments, restricted cash, accounts receivable, accounts
payable and equipment payables. Due to short-term maturities, the carrying amount of these
instruments approximates fair value.
(12) Concentration of Credit Risk
In the normal course of business, the Company extends credit to its customers, which are
concentrated primarily in the computer and electronics instrumentation and aerospace/defense
industries, and most of which are located outside the United States. The Company performs ongoing
credit evaluations of customers and does not require collateral. The Company also considers the
credit risk profile of the entity from which the receivable is due in further evaluating collection
risk.
As of September 27, 2010 and December 31, 2009, the Companys 10 largest customers in the
aggregate accounted for 54% and 57%, respectively, of total accounts receivable. If one or more of
the Companys significant customers were to become insolvent or were otherwise unable to pay for
the manufacturing services provided, it would have a material adverse effect on the Companys
financial condition and results of operations.
(13) Fair Value Measures
The Company measures at fair value its financial and non-financial assets by using a fair
value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date, essentially an exit
price, based on the highest and best use of the asset or liability. The levels of the fair value
hierarchy are:
Level 1 Quoted market prices in active markets for identical assets or liabilities;
Level 2 Significant other observable inputs (e.g., quoted prices for similar items in active
markets, quoted prices for identical or similar items in markets that are not active, inputs
other than quoted prices that are observable such as interest rate and yield curves, and
market-corroborated inputs); and
Level 3 Unobservable inputs in which there is little or no market data, which require the
reporting unit to develop its own assumptions.
22
TTM TECHNOLOGIES, INC.
Notes
to Consolidated Financial Statements (Continued)
At September 27, 2010 and December 31, 2009, the following financial assets and
liabilities were measured at fair value on a recurring basis using the type of inputs shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, |
|
|
Fair Value Measurements Using: |
|
|
|
2010 |
|
|
Level 1 Inputs |
|
|
Level 2 Inputs |
|
|
Level 3 Inputs |
|
|
|
(In thousands) |
|
Cash equivalents |
|
$ |
39,986 |
|
|
$ |
39,986 |
|
|
|
|
|
|
|
|
|
Foreign exchange derivative assets |
|
|
1,304 |
|
|
|
|
|
|
|
1,304 |
|
|
|
|
|
Interest rate swap derivative liabilities |
|
|
5,237 |
|
|
|
|
|
|
|
5,237 |
|
|
|
|
|
Foreign exchange derivative liabilities |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Fair Value Measurements Using: |
|
|
|
2009 |
|
|
Level 1 Inputs |
|
|
Level 2 Inputs |
|
|
Level 3 Inputs |
|
|
|
(In thousands) |
|
Cash equivalents |
|
$ |
70,794 |
|
|
$ |
70,794 |
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
1,351 |
|
|
|
|
|
|
|
|
|
|
|
1,351 |
|
Restricted cash |
|
|
120,000 |
|
|
|
120,000 |
|
|
|
|
|
|
|
|
|
There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs
for the quarter and three quarters ended September 27, 2010.
The following is a summary of activity for fair value measurements using Level 3 inputs for
the three quarters ended September 27, 2010 and September 28, 2009:
|
|
|
|
|
|
|
|
|
|
|
Three Quarters Ended |
|
|
|
September 27, 2010 |
|
|
September 28, 2009 |
|
Fair Value Measurement using Significant Unobservable Inputs (Level 3) |
|
|
|
|
|
(In thousands) |
|
Beginning balance |
|
$ |
1,351 |
|
|
$ |
3,657 |
|
Transfers to
level 3 |
|
|
|
|
|
|
|
|
Settlement |
|
|
(1,351 |
) |
|
|
(2,238 |
) |
Changes in fair value included in earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
|
|
|
$ |
1,419 |
|
|
|
|
|
|
|
|
The majority of the Companys non-financial instruments, which include goodwill, intangible
assets, inventories, and property, plant and equipment, are not required to be carried at fair
value on a recurring basis. However, if certain triggering events occur (or tested at least
annually for goodwill) such that a non-financial instrument is required to be evaluated for
impairment, based upon a comparison of the non-financial instruments fair value to its carrying
value, an impairment is recorded to reduce the carrying value to the fair value, if the carrying
value exceeds the fair value.
23
TTM TECHNOLOGIES, INC.
Notes
to Consolidated Financial Statements (Continued)
For the three quarters ended September 27, 2010 and September 28, 2009, the following
non-financial instruments were measured at fair value on a nonrecurring basis using the type of
inputs shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the three quarters |
|
|
|
September 27, |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
ended |
|
|
|
2010 |
|
|
Inputs |
|
|
Inputs |
|
|
Inputs |
|
|
September 27, 2010 |
|
|
|
(In thousands) |
|
Asset held for sale |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the three quarters |
|
|
|
September 28, |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
ended |
|
|
|
2009 |
|
|
Inputs |
|
|
Inputs |
|
|
Inputs |
|
|
September 28, 2009 |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Long-lived assets held and used |
|
$ |
1,516 |
|
|
|
|
|
|
$ |
1,516 |
|
|
|
|
|
|
$ |
8,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset held for sale |
|
|
1,000 |
|
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
2,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair values of long-lived assets held and used and the asset held for sale were primarily
determined using appraisals and comparable prices of similar assets, which are considered to be
Level 2 inputs.
(14) Commitments and Contingencies
Legal Matters
Prior to the Companys acquisition of the PCB Subsidiaries of Meadville Holdings Ltd., two of
the PCB Subsidiaries were involved in various legal and arbitration proceedings instituted in the
Peoples Republic of China by a former customer. The proceedings related to quality claims about
certain products supplied by the PCB Subsidiaries. In May 2010, the parties entered into a
settlement agreement whereby the PCB Subsidiaries agreed to pay approximately $2,500 as the final
settlement and the former customer withdrew all the legal and arbitration proceedings against the
PCB Subsidiaries after receipt of the settlement funds.
Prior to the Companys acquisition of Tyco Printed Circuit Group LP (PCG) in October 2006, PCG
made legal commitments to the U.S. Environmental Protection Agency (U.S. EPA) and the State of
Connecticut regarding settlement of enforcement actions against the PCG operations in Connecticut.
On August 17, 2004, PCG was sentenced for Clean Water Act violations and was ordered to pay a
$6,000 fine and an additional $3,700 to fund environmental projects designed to improve the
environment for Connecticut residents. In September 2004, PCG agreed to a stipulated judgment with
the Connecticut Attorney Generals office and the Connecticut Department of Environmental
Protection (Connecticut DEP) under which PCG paid a $2,000 civil penalty and agreed to implement
capital improvements of $2,400 to reduce the volume of rinse water discharged from its
manufacturing facilities in Connecticut. The obligations to the U.S. EPA were completed as of July
1, 2009. The Connecticut DEP obligation involves the installation of rinse water recycling systems
at the Stafford, Connecticut facilities. As of September 27, 2010, one recycling system was
completed and placed into operation, and approximately $93 remains to be expended in the form of
capital improvements to meet the second rinse water recycling system requirement which is expected
to be completed by December 2010. The Company has assumed these legal commitments as part of its
purchase of PCG. Failure to meet the remaining commitment could result in further costly
enforcement actions.
The Company is subject to various other legal matters, which it considers normal for its
business activities. While the Company currently believes that the amount of any ultimate potential
loss for known matters would not be material to the Companys financial condition, the outcome of
these actions is inherently difficult to predict. In the event of an adverse outcome, the ultimate
potential loss could have a material adverse effect on the Companys financial condition or results
of operations in a particular period. The Company has accrued amounts for its loss contingencies
which are probable and estimable at September 27, 2010 and December 31, 2009. However, these
amounts are not material to the condensed consolidated financial statements.
24
TTM TECHNOLOGIES, INC.
Notes
to Consolidated Financial Statements (Continued)
Environmental Matters
The process to manufacture PCBs requires adherence to city, county, state, federal and foreign
jurisdiction environmental regulations regarding the storage, use, handling and disposal of
chemicals, solid wastes and other hazardous materials as well as air quality standards. Management
believes that its facilities comply in all material respects with environmental laws and
regulations. The Company has in the past received certain notices of violations and has implemented
certain required minor corrective activities. There can be no assurance that violations will not
occur in the future.
The Company is involved in various stages of investigation and cleanup in Connecticut related
to environmental remediation matters for two of the sites and has investigated a third site. The
ultimate cost of site cleanup is difficult to predict given the uncertainties regarding the extent
of the required cleanup, the interpretation of applicable laws and regulations, and alternative
cleanup methods. The third Connecticut site was investigated under Connecticuts Land Transfer Act
and no contamination above applicable standards was found. The Company is also involved in
additional investigation and remediation of former manufacturing sites in Washington and
California. The Company concluded that it was probable that it would incur remediation and
monitoring costs for these sites of approximately $755 and $720 as of September 27, 2010 and
December 31, 2009, respectively, the liability for which is included in other long-term
liabilities. The Company estimates that it will incur the remediation costs over the next 12 to 84
months. This accrual was discounted at 8% per annum to determine the Companys best estimate of the
liability, which the Company estimated as ranging from $839 to $1,274 on an undiscounted basis.
The liabilities recorded do not take into account any claims for recoveries from insurance or
third parties and none are anticipated. These costs are mostly comprised of estimated consulting
costs to evaluate potential remediation requirements, completion of the remediation, and monitoring
of results achieved. Subject to the imprecision in estimating future environmental remediation
costs, the Company does not expect the outcome of the environmental remediation matters, either
individually or in the aggregate, to have a material adverse effect on its financial position,
results of operations, or cash flows.
(15) Earnings Per Share
The following is a reconciliation of the numerator and denominator used to calculate basic
earnings per share and diluted earnings per share for the quarter and three quarters ended
September 27, 2010 and September 28, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Three Quarters Ended |
|
|
|
September 27, |
|
|
September 28, |
|
|
September 27, |
|
|
September 28, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands, except per share amounts) |
|
Net income (loss) attributable to TTM Technologies, Inc. stockholders |
|
$ |
29,091 |
|
|
$ |
(4,885 |
) |
|
$ |
38,505 |
|
|
$ |
2,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
80,059 |
|
|
|
43,142 |
|
|
|
66,730 |
|
|
|
43,048 |
|
Dilutive effect of stock options, restricted stock units, and
performance-based restricted units |
|
|
462 |
|
|
|
|
|
|
|
521 |
|
|
|
410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares |
|
|
80,521 |
|
|
|
43,142 |
|
|
|
67,251 |
|
|
|
43,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to TTM Technologies, Inc stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.36 |
|
|
$ |
(0.11 |
) |
|
$ |
0.58 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive |
|
$ |
0.36 |
|
|
$ |
(0.11 |
) |
|
$ |
0.57 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options, restricted stock units, and performance-based restricted
stock units to purchase
1,853 shares of common stock for the quarter ended September 27, 2010 and 1,960 and 2,223 shares of
common stock for the three quarters ended September 27, 2010 and September 28, 2009, respectively,
were not considered in calculating diluted earnings per share because the options exercise prices
or the total expected proceeds under the treasury stock method for stock options or restricted
stock units and performance-based restricted stock units was greater than the average market price of
common shares during the period and, therefore, the effect would be anti-dilutive. For the third
quarter ended September 28, 2009 potential shares of common stock consisting of stock options to
purchase approximately 2,122 shares of common stock at exercise prices ranging from $2.76 to $16.82
per share and 1,185 restricted stock units, were not included in the computation of diluted
earnings per share because the Company incurred a net loss from operations and, as a result, the
impact would be anti-dilutive.
25
TTM TECHNOLOGIES, INC.
Notes
to Consolidated Financial Statements (Continued)
Additionally, for the quarter and three quarters ended September 27, 2010, the effect of
10,963 shares of common stock related to the Companys Convertible Notes, the effect of the
convertible note hedge to purchase 10,963 shares of common stock and the warrants sold to purchase
10,963 shares of the Companys common stock were not included in the computation of dilutive
earnings per share because the conversion price of the Convertible Notes and the strike price of
the warrants to purchase the Companys common stock were greater than the average market price of
common shares during the period, and therefore, the effect would be anti-dilutive.
(16) Stock-Based Compensation
Stock-based compensation expense is recognized in the accompanying consolidated condensed
statements of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Three Quarters Ended |
|
|
|
September 27, |
|
|
September 28, |
|
|
September 27, |
|
|
September 28, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Cost of goods sold |
|
$ |
309 |
|
|
$ |
413 |
|
|
$ |
964 |
|
|
$ |
1,263 |
|
Selling and marketing |
|
|
105 |
|
|
|
133 |
|
|
|
321 |
|
|
|
413 |
|
General and administrative |
|
|
1,241 |
|
|
|
980 |
|
|
|
3,375 |
|
|
|
3,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense recognized |
|
|
1,655 |
|
|
|
1,526 |
|
|
|
4,660 |
|
|
|
4,698 |
|
Income tax benefit recognized |
|
|
(557 |
) |
|
|
(548 |
) |
|
|
(1,447 |
) |
|
|
(1,602 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense after income taxes |
|
$ |
1,098 |
|
|
$ |
978 |
|
|
$ |
3,213 |
|
|
$ |
3,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-based
Restricted Stock Units
During the first quarter ended March 29, 2010, the Company implemented a new long-term
incentive program for executive officers that provides for the issuance of performance-based
restricted stock units (PRUs), representing hypothetical shares of the Companys common stock that may be
issued under the Companys 2006 Incentive Compensation Plan. Under the PRU program, a target number
of PRUs are awarded at the beginning of each three-year performance period. The number of shares of
our common stock released at the end of the performance period will range from zero to 2.4 times
the target number depending on performance during the period. The performance metrics of the PRU
program are based on (a) annual financial targets, which for 2010 are based on revenue and earnings
before interest, tax, depreciation, and amortization expense, each equally weighted, and (b) an
overall modifier based on the Companys total stockholder return (TSR) relative to the S&P SmallCap
600 over the three-year performance period.
Under the PRU program, financial goals are set at the beginning of each fiscal year and
performance is reviewed at the end of that year. The percentage to be applied to each participants
target award ranges from zero to 160% based upon the extent to which the annual financial
performance goals are achieved. If specific performance threshold levels for the annual financial
goals are met, the amount earned for that element will be applied to one-third of the participants
PRU award to determine the number of units earned.
At the end of the three-year performance period, the total units earned, if any, are adjusted
by applying a modifier, ranging from zero to 150% based on the Companys TSR based on stock price
changes relative to the TSR of S&P SmallCap 600 companies for the same three-year period.
The TSR modifier is intended to ensure that there are limited or no payouts under the PRU
program if the Companys stock performance is below the median TSR of S&P SmallCap 600 companies
for the three-year performance period. Where the annual financial goals have been met and where
there has been strong relative TSR performance over the three-year performance period, the PRU
program may provide substantial rewards to participants with a maximum payout of 2.4 times the
initial PRU award. However, even if all of the annual financial metric goals are achieved in each
of the three years, there may be limited or no payouts if the Companys stock performance is below
that of the median TSR of S&P SmallCap 600 companies.
Recipients of PRU awards generally must remain employed by the Company on a continuous basis
through the end of the three-year performance period in order to receive any amount of the PRUs
covered by that award. Target shares subject to PRU awards do not have voting rights of common
stock until earned and issued following the end of the three-year performance period.
26
TTM TECHNOLOGIES, INC.
Notes
to Consolidated Financial Statements (Continued)
During the three quarters ended September 27, 2010, the Company granted 48 PRUs, representing
the first one-third of the 143 target PRUs, with an estimated weighted average fair value per unit
of $10.11 at the date of grant. There were no PRUs granted during the quarter ended September 27,
2010. The fair value for PRUs granted is calculated using the Monte Carlo simulation model, as the
TSR modifier contains a market condition. For the three quarters ended September 27, 2010 the
following assumptions were used in determining the fair value:
|
|
|
|
|
|
|
September 27, |
|
|
|
2010 |
|
Risk-free interest rate |
|
|
1.3 |
% |
Dividend yield |
|
|
|
|
Expected volatility |
|
|
65 |
% |
Expected term in months |
|
|
33 |
|
The expected term of the PRUs reflects the performance period for the PRUs granted on March
25, 2010. Expected volatility is calculated using the Companys historical stock price to calculate
expected volatility over the expected term of each grant. The risk-free interest rate for the
expected term of PRUs is based on the U.S Treasury yield curve in effect at the time of grant. As
of September 27, 2010, $392 of total unrecognized compensation cost related to PRUs is expected to
be recognized over a weighted-average period of 2.3 years.
Restricted Stock Units
The Company granted 66 restricted stock units during the quarter ended September 27, 2010, and
442 and 684 restricted stock units during the three quarters ended September 27, 2010 and September
28, 2009, respectively. There were no restricted stock units granted during the quarter ended
September 28, 2009. The units granted were estimated to have a weighted-average fair value per unit
of $9.46 for the quarter ended September 27, 2010, and $9.19 and $4.54 for the three quarters ended
September 27, 2010 and September 28, 2009, respectively. The fair value for restricted stock units
granted is based on the closing share price of the Companys
common stock on the date of grant. As of September 27, 2010, $5,095
of total unrecognized compensation cost related to restricted stock units is expected to be
recognized over a weighted-average period of 0.9 years.
Stock Options
The Company granted 60 and 28 stock option awards during the quarters ended September 27, 2010
and September 28, 2009, respectively, and 60 and 83 stock option awards during the three quarters
ended September 27, 2010 and September 28, 2009, respectively. The stock awards granted were
estimated to have a weighted-average fair value per unit of $6.74 and $6.12 for the quarters ended
September 27, 2010 and September 28, 2009, respectively, and $6.74 and $4.52 for the three quarters
ended September 27, 2010 and September 28, 2009, respectively. The fair value for stock options
granted is calculated using the Black-Scholes option-pricing model on the date of grant. For the
quarter and three quarters ended September 27, 2010 and September 28, 2009 the following
assumptions were used in determining the fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter |
|
|
For the |
|
|
For the Three |
|
|
|
and Three |
|
|
Quarter Ended |
|
|
Quarters Ended |
|
|
|
Quarters Ended |
|
|
September 28, |
|
|
September 28, |
|
|
|
September 27, 2010 |
|
|
2009 |
|
|
2009 |
|
Risk-free interest rate |
|
|
2.7 |
% |
|
|
2.9 |
% |
|
|
2.4 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility |
|
|
69 |
% |
|
|
60 |
% |
|
|
60 |
% |
Expected term in months |
|
|
96 |
|
|
|
66 |
|
|
|
66 |
|
As of September 27, 2010, $816 of total unrecognized compensation cost related to stock
options is expected to be recognized over a weighted-average period of 1.0 year.
27
TTM TECHNOLOGIES, INC.
Notes
to Consolidated Financial Statements (Continued)
Foreign Employee Share Awards
The PCB Subsidiaries, prior to their acquisition by the Company, maintained employee share
award grants whereby a related party and controlling shareholder of the PCB Subsidiaries
transferred Meadville Holdings shares to certain employees involved in the PCB Subsidiaries
business to incentivize and reward such employees if stated service periods were completed by the
employee. At the acquisition date of the PCB Subsidiaries, the unvested Meadville Holdings shares
transferred by this entity were exchanged for the right to earn fractional shares of TTM common
stock plus cash equal to the cash dividend to be received by Meadville Holdings shareholders as a
dividend after the close of the acquisition. These remaining grants, with the condition of
employment and cliff vesting, will vest in five tranches, with two tranches vesting in 2011 and the
remaining three tranches vesting annually thereafter, through 2014. As per ASC Topic 805, Business
Combinations, the fair value of the common stock plus cash consideration to be received by the
employee participating in the employee share award grants, after adjustment for estimated
forfeiture, that is attributed to pre combination service, is recognized as purchase consideration.
The fair value, after adjustment for estimated forfeiture, attributed to post combination service
is recognized as an expense over the remaining vesting period and is included as a component of
total stock-based compensation expense. At September 27, 2010, there were approximately 179 shares,
net of estimated forfeitures, in the employee share award grants. As of September 27, 2010, $946 of
total unrecognized compensation cost related to these employee share award grants is expected to be
recognized over a weighted-average period of 1.4 years.
(17) Segment Information
The operating segments reported below are the Companys segments for which separate financial
information is available and upon which operating results are evaluated by the chief operating
decision maker on a timely basis to assess performance and to allocate resources.
Prior to the Companys acquisition of the PCB Subsidiaries, the Company had two operating
segments, PCB Manufacturing and Backplane Assembly, consistent with the nature of its operations.
Due to the acquisition, the Company has reassessed its operating segments and concluded that it
will analyze its worldwide operations based on two geographic operating segments: 1) North America,
which consists of six domestic PCB fabrication plants, including a facility that provides follow-on
value-added services primarily for one of the domestic PCB manufacturing plants, and the Companys Shanghai,
China backplane assembly plant and its related Ireland sales support infrastructure, and 2) Asia
Pacific, which consists of the newly acquired PCB Subsidiaries. Each segment operates predominantly
in the same industry with production facilities that produce similar customized products for its
customers and use similar means of product distribution in their respective geographic regions.
The Company evaluates segment performance based on operating segment income, which is
operating income before amortization of intangibles. Interest expense and interest income are not
presented by segment since they are not included in the measure of segment profitability reviewed
by the chief operating decision maker. All inter-segment transactions have been eliminated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Three Quarters Ended |
|
|
|
September 27, |
|
|
September 28, |
|
|
September 27, |
|
|
September 28, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
148,263 |
|
|
$ |
139,075 |
|
|
$ |
425,407 |
|
|
$ |
432,552 |
|
Asia Pacific |
|
|
211,463 |
|
|
|
|
|
|
|
384,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
|
359,726 |
|
|
|
139,075 |
|
|
|
809,943 |
|
|
|
432,552 |
|
Inter-segment sales |
|
|
(1,913 |
) |
|
|
|
|
|
|
(3,663 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
357,813 |
|
|
$ |
139,075 |
|
|
$ |
806,280 |
|
|
$ |
432,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Segment Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
17,147 |
|
|
$ |
(4,536 |
) |
|
$ |
34,012 |
|
|
$ |
14,393 |
|
Asia Pacific |
|
|
32,211 |
|
|
|
|
|
|
|
47,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating segment income |
|
|
49,358 |
|
|
|
(4,536 |
) |
|
|
81,994 |
|
|
|
14,393 |
|
Amortization of intangibles |
|
|
(3,653 |
) |
|
|
(860 |
) |
|
|
(9,065 |
) |
|
|
(2,580 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
|
45,705 |
|
|
|
(5,396 |
) |
|
|
72,929 |
|
|
|
11,813 |
|
Total other expense |
|
|
(4,121 |
) |
|
|
(2,666 |
) |
|
|
(13,140 |
) |
|
|
(7,944 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
41,584 |
|
|
$ |
(8,062 |
) |
|
$ |
59,789 |
|
|
$ |
3,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
TTM TECHNOLOGIES, INC.
Notes
to Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
September 27, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Segment Assets: |
|
|
|
|
|
|
|
|
North America |
|
$ |
394,998 |
|
|
$ |
543,058 |
|
Asia Pacific |
|
|
1,300,955 |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,695,953 |
|
|
$ |
543,058 |
|
|
|
|
|
|
|
|
The Companys customers include both OEMs and EMS companies. The Companys OEM customers often
direct a significant portion of their purchases through EMS companies. While the Companys
customers include both OEM and EMS providers, the Company measures customer concentration based on
OEM companies, as they are the ultimate end customers.
For the quarters and three quarters ended September 27, 2010 and September 28, 2009, no one
customer accounted for 10% or more of net sales. Sales to the Companys 10 largest OEM customers for the
quarters ended September 27, 2010 and September 28, 2009 were 42% and 57%, respectively. Sales to
the Companys 10 largest OEM customers for the three quarters ended September 27, 2010 and
September 28, 2009 were 41% and 56%, respectively. The loss of one or more major customers or a
decline in sales to the Companys major customers would have a material adverse effect on the
Companys financial condition and results of operations.
(18) Related Party Transactions
Long-term Equity Investment
The Company, through its acquisition of the PCB Subsidiaries, acquired a 10% equity interest
in a private company, Aspocomp Oulu Oy (Oulu), which is located in Finland. The majority owner of
this private company is Aspocomp Group Oyj (Aspocomp), a Helsinki Stock Exchange traded Finnish
company, which is therefore a related party. Aspocomp is also the 20% minority shareholder in
Meadville Aspocomp (BVI) Holdings Limited, a majority-owned subsidiary of the Company. The Company
consolidates the financial results of this majority-owned Company.
The Company accounts for this 10% investment in Oulu using the cost method of accounting.
Under the cost method of accounting, the investment is measured at cost subsequent to initial
measurement, which for the Company was April 8, 2010, the acquisition date of the PCB Subsidiaries.
The fair value assigned to this investment was $2,718, which was based on a market approach to
estimate the enterprise value calculation and recorded as a component of non-current assets.
The equity investment is tested for impairment if there are impairment triggers. There was no
impairment of the equity investment for the quarter and three quarters ended September 27, 2010.
Supply and Lease Arrangements
In December 2009, one of the Companys foreign subsidiaries (on behalf of itself and other
foreign subsidiaries) entered into long-term supply arrangements to
purchase laminate and prepregs
from a related party (and its subsidiary) in which a significant shareholder of the Company holds
an approximate 18% share. These arrangements commenced on January 1, 2010, and expire on December
31, 2012. The Companys foreign subsidiaries also purchase
laminate and prepregs from Meadville. For
the quarter and three quarters ended September 27, 2010, the Company purchased $33,329 and $60,190,
respectively, of laminate and prepregs from these related parties. These supply arrangements
contain terms and prices for laminate and prepregs comparable to those charged by and contracted
with other third party suppliers.
Additionally, a foreign subsidiary of the Company also leases warehouse space from a related
party controlled by a significant shareholder of the Company. Likewise, a related party leases
employee housing space from a foreign subsidiary. For the quarter and three quarters ended
September 27, 2010, the net income for these activities was $74 and $154, respectively.
At September 27, 2010, the Company had $51,610 in accounts payable due to and $65 in
accounts receivable due from the related party, in the consolidated condensed balance sheet, for
the supply and lease arrangements.
29
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read
in conjunction with our consolidated condensed financial statements and the related notes and the
other financial information included in this Quarterly Report on Form 10-Q. This discussion and
analysis contains forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking statements as a
result of specified factors, including those set forth in Item 1A Risk Factors of Part II below
and elsewhere in this Quarterly Report on Form 10-Q.
This discussion and analysis should be read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations set forth in our annual report on Form
10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission.
Overview
We are a one-stop provider of time-critical and technologically complex printed circuit boards
(PCBs) and backplane assemblies, which serve as the foundation of sophisticated electronic
products. We serve high-end commercial and aerospace/defense markets including the
networking/communications infrastructure, defense, high-end computing, and industrial/medical
markets which are characterized by high levels of complexity and moderate production volumes.
Our customers include original equipment manufacturers (OEMs), electronic manufacturing services
(EMS) providers, and aerospace/defense companies. Our time-to-market and high technology focused
manufacturing services enable our customers to reduce the time required to develop new products and
bring them to market.
On the evening of April 8, 2010 (April 9, 2010 at approximately 9:00 a.m. Hong Kong time), the
Company acquired from Meadville and MTG all of the issued and outstanding capital stock of the PCB
Subsidiaries. The PCB Subsidiaries, through their respective subsidiaries, engage in the business
of manufacturing and distributing PCBs, including circuit design,
quick-turn-around services, and drilling and routing services. The PCB Subsidiaries are wholly
owned subsidiaries of the Company and represent the Companys Asia Pacific operating segment.
We
believe that the combination of our legacy business and the PCB
Subsidiaries will increase our diversification and allow us
to better address a number of industry trends and other operational challenges impacting us:
Ability to meet customer demand for one-stop manufacturing solution. As a result of the
business combination, we are now a leading global PCB company with high-technology capabilities and
a highly diversified revenue mix by geographic region and end market. In addition, we can now offer
our customers a one-stop global solution from quick-turn through volume production and a focused
facility specialization strategy.
Ability to continue expanding market presence and capitalizing on new opportunities. We can
now capture additional business globally from both existing and new customers, particularly in
North America and Europe.
Ability to respond to increasing global competition. We now can capitalize on potential
economies of scale, cost savings and access to a highly trained PCB
Subsidiaries workforce resulting from a global sales force and flexible manufacturing platform; complementary footprints, customers
and end markets; and talented management teams with leading expertise in the Asian market.
We believe that these factors position us to compete effectively in our industry by allowing
us to respond to technologically complex and time-sensitive customer demands and increasing
competition from Asian manufacturers.
While our customers include both OEM and EMS providers, we measure customers based on OEM
companies as they are the ultimate end customers. We measure customers as those companies that have
placed orders of $2,000 or more in the preceding 12-month period. As of September 27, 2010, we had
approximately 1,137 customers and approximately 843 as of September 28, 2009. Sales to our 10
largest OEM customers accounted for 42% and 57% of our net sales in the third quarter ended
September 27, 2010 and September 28, 2009, respectively. Sales to our 10 largest OEM customers
accounted for 41% and 56% of our net sales for the three quarters ended September 27, 2010 and
September 28, 2009, respectively.
30
The following table shows the percentage of our net sales attributable to each of the
principal end markets we served for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
Three Quarters Ended |
|
|
September 27, |
|
September 28, |
|
September 27, |
|
September 28, |
End Markets(1) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Aerospace/Defense |
|
|
17 |
% |
|
|
44 |
% |
|
|
22 |
% |
|
|
45 |
% |
Cellular Phone |
|
|
11 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
Computing/Storage/Peripherals |
|
|
21 |
|
|
|
12 |
|
|
|
21 |
|
|
|
11 |
|
Medical/Industrial/Instrumentation/Other |
|
|
9 |
|
|
|
8 |
|
|
|
9 |
|
|
|
8 |
|
Networking/Communications |
|
|
36 |
|
|
|
35 |
|
|
|
34 |
|
|
|
35 |
|
Other |
|
|
6 |
|
|
|
1 |
|
|
|
5 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
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(1) |
|
Sales to EMS companies are classified by the end markets of their OEM customers. |
For PCBs, we measure the time sensitivity of our products by tracking the quick-turn
percentage of our work. We define quick-turn orders as those with delivery times of 10 days or
less, which typically captures research and development, prototype, and new product introduction
work, in addition to unexpected short-term demand among our customers. Generally, we quote prices
after we receive the design specifications and the time and volume requirements from our customers.
Our quick-turn services command a premium price as compared to standard lead-time products.
We also deliver a significant percentage of compressed lead-time work with lead times of 11 to
20 days. We typically receive a premium price for this work as well. Purchase orders may be cancelled prior
to shipment. We charge customers a fee, based on percentage completed, if an order is cancelled
once it has entered production. We derive revenues primarily from the sale of PCBs
and backplane assemblies using customer-supplied engineering and design plans. We recognize
revenues when persuasive evidence of a sales arrangement exists, the sales terms are fixed and
determinable, title and risk of loss have transferred, and collectibility is reasonably assured
generally when products are shipped to the customer. Net sales consist of gross sales less an
allowance for returns, which typically has been less than 2% of gross sales. We provide our
customers a limited right of return for defective PCBs and backplane assemblies.
We record an estimated amount for sales returns and allowances at the time of sale based on
historical information.
Cost of goods sold consists of materials, labor, outside services, and overhead expenses
incurred in the manufacture and testing of our products as well as stock-based compensation
expense. Many factors affect our gross margin, including capacity utilization, product mix,
production volume, and yield. We generally do not participate in any significant long-term
contracts with suppliers, with the exception of the supply arrangement to purchase laminate and
prepregs from a related party controlled by a significant shareholder, and we believe there are a
number of potential suppliers for the raw materials we use.
Selling and marketing expenses consist primarily of salaries and commissions paid to our
internal sales force and independent sales representatives, salaries paid to our sales support
staff, stock-based compensation expense as well as costs associated with marketing materials and
trade shows. We generally pay higher commissions to our independent sales representatives for
quick-turn work, which generally has a higher gross profit component than standard lead-time work.
General and administrative costs primarily include the salaries for executive, finance,
accounting, information technology, facilities and human resources personnel, as well as insurance
expenses, expenses for accounting and legal assistance, incentive compensation expense, stock-based
compensation expense, bad debt expense, gains or losses on the sale or disposal of property, plant
and equipment, and acquisition related expenses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated condensed financial statements included in this report have been prepared in
accordance with accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, net sales and expenses, and related
disclosure of contingent assets and liabilities.
31
A critical accounting policy is defined as one that is both material to the presentation of
our consolidated condensed financial statements and requires management to make difficult,
subjective or complex 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, would have a material effect on our
financial condition or results of operations.
Management bases its estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Management has discussed the development, selection and disclosure of these
estimates with the audit committee of our board of directors. Actual results may differ from these
estimates under different assumptions or conditions.
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; derivative instruments and hedging activities; realizability of deferred tax assets;
establishing the fair value of individual assets acquired, liabilities assumed, and noncontrolling
interest when we acquire other businesses; and determining self-insured reserves, asset retirement
obligations and environmental liabilities.
Allowance for Doubtful Accounts
We provide customary credit terms to our customers and generally do not require collateral. We
perform ongoing credit evaluations of the financial condition of our customers and maintain an
allowance for doubtful accounts based upon historical collections experience and expected
collectibility of accounts. Our actual bad debts may differ from our estimates.
Inventories
In assessing the realization of inventories, we are required to make judgments as to future
demand requirements and compare these with current and committed inventory levels. Provision is
made to reduce excess and obsolete inventories to their estimated net realizable value thereby
establishing a new cost basis. Our inventory requirements may change based on our projected
customer demand, market conditions, technological and product life cycle changes, longer or shorter
than expected usage periods, and other factors that could affect the valuation of our inventories.
We maintain certain finished goods inventories near certain key customer locations in accordance
with agreements with those customers. Although this inventory is typically supported by valid
purchase orders, should these customers ultimately not purchase these inventories, our results of
operations and financial condition would be adversely affected.
Revenue Recognition
We derive revenues primarily from the sale of printed circuit boards and backplane assemblies
using customer-supplied engineering and design plans. We provide our customers a limited right of
return for defective printed circuit boards and backplane assemblies. We accrue an estimated amount
for sales returns and allowances at the time of sale based on historical information. To the extent
actual experience varies from our historical experience, revisions to these allowances may be
required.
Long-lived Assets
We have significant long-lived tangible and intangible assets consisting of property, plant
and equipment, definite-lived intangibles, and goodwill. We review these assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. In addition, we perform an impairment test related to goodwill at least
annually. Our goodwill and intangibles are largely attributable to our acquisitions of other
businesses. We have two operating segments, North America and Asia
Pacific.
During the fourth quarter of each year, and when events and circumstances warrant an
evaluation, we perform our annual impairment assessment of goodwill, which requires the use of a
fair-value based analysis. We determine the fair value of our reporting units based on discounted
cash flows and market approach analyses as considered necessary and consider factors such as a
weakened economy, reduced expectations for future cash flows coupled with a decline in the market
price of our stock and market capitalization for a sustained period as indicators for potential
goodwill impairment. If the reporting units carrying amount exceeds its estimated fair
32
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 units 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 units goodwill
exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount
equal to that excess.
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 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 assets carrying value and estimated fair value. Fair value is determined
through various valuation techniques, including market and income approaches as considered
necessary.
If forecasts and assumptions used to support the realizability of our goodwill and other
long-lived assets change in the future, significant impairment charges could result that would
adversely affect our results of operations and financial condition.
Derivative Instruments and Hedging Activities
As a matter of policy, we use derivatives for risk management purposes, and we do not use
derivatives for speculative purposes. Derivatives are typically entered into as hedges of changes
in interest rates, currency exchange rates, and other risks.
When we determine to designate a derivative instrument as a cash flow hedge, we formally
document the hedging relationship and its risk management objective and strategy for undertaking
the hedge, the hedging instrument, the hedged item, the nature of the risk being hedged, how the
hedging instruments effectiveness in offsetting the hedged risk will be assessed, and a
description of the method of measuring ineffectiveness. We also formally assess, both at the
hedges inception and on an ongoing basis, whether the derivative that is used in hedging
transactions is highly effective in offsetting changes in cash flows of hedged items.
Derivative financial instruments are recognized as either assets or liabilities on the
consolidated balance sheet with measurement at fair value. Fair value of the derivative
instruments is determined using pricing models developed based on the underlying swap interest
rate, foreign currency exchange rates, and other observable market data as appropriate. The values
are also adjusted to reflect nonperformance risk of both the counterparty and the Company. For
derivatives that are designated as a cash flow hedge, changes in the fair value of the derivative
are recognized in accumulated other comprehensive income, to the extent the derivative is effective
at offsetting the changes in cash flow being hedged until the hedged item affects earnings. To the
extent there is any hedge ineffectiveness, changes in fair value relating to the ineffective
portion are immediately recognized in earnings. Changes in the fair value of derivatives that are
not designated as hedges are recorded in earnings each period.
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. Should our expectations of
taxable income change in future periods, it may be necessary to establish a valuation allowance,
which could affect our results of operations in the period such a determination is made. In
addition, we record income tax provision or benefit during interim periods at a rate that is based
on expected results for the full year. If 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.
Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets
acquired, liabilities assumed and noncontrolling interest, based on their estimated fair values.
The excess of the purchase price over these fair values is recorded as goodwill. We engage
independent third-party appraisal firms to assist us in determining the fair values of assets
acquired, liabilities assumed, and noncontrolling interest. Such valuations require management to
make significant estimates and assumptions, especially with respect to intangible assets. The
significant purchased intangible assets recorded by us include customer relationships, trade name,
and order backlog. The fair values assigned to the identified intangible assets are discussed in
Note 2 to the consolidated condensed financial statements.
33
Critical estimates in valuing certain intangible assets include but are not limited to: future
expected cash flows from customer relationships, estimating cash flows from existing backlog,
market position of the trade name, as well as assumptions about cash flow savings from the trade
name, and discount rates. Managements estimates of fair value are based upon assumptions believed
to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual
results may differ from estimates.
Estimates associated with the accounting for acquisitions may change during the measurement
period as additional information becomes available regarding the assets acquired, liabilities
assumed, and noncontrolling interest as discussed in Note 2 to the consolidated condensed financial
statements.
Self Insurance
We are primarily self-insured for group health insurance and workers compensation benefits provided to
our U.S. employees, and we purchase insurance to protect against annual claims at the individual
and aggregate level. The insurance carrier adjudicates and processes employee claims and is paid a
fee for these services. We reimburse our insurance carriers for paid claims subject to variable
monthly limitations. We estimate our exposure for claims incurred but not 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 an individual
insured stop-loss coverage that ranges from $175,000 to $250,000 per individual. Our actual claims
experience may differ from our estimates.
Asset Retirement Obligations and Environmental Liabilities
We establish liabilities for the costs of asset retirement obligations when a legal or
contractual obligation exists to dispose of or restore an asset upon its retirement and the timing
and cost of such work can be reasonably estimated. The Company capitalizes the associated asset
retirement costs as part of the carrying amount of the long-lived asset. The liability is initially
measured at fair value and subsequently is adjusted for accretion expense and changes in the amount
or timing of the estimated cash flows. In addition, we accrue an estimate of the costs of site
closure environmental investigations and environmental remediation for work at identified sites
where an assessment has indicated it is probable that cleanup costs are or will be required and may
be reasonably estimated. In making these estimates, we consider information that is currently
available, existing technology, enacted laws and regulations, and our estimates of the timing of
the required remedial actions, and we discount these estimates at 8%. We also are required to
estimate the amount of any probable recoveries, including insurance recoveries.
Results of Operations
Quarter and Three Quarters Ended September 27, 2010 Compared to the Quarter and Three Quarters
Ended September 28, 2009
The third quarter and the three quarters ended September 28, 2009 do not include the results
of operations from our acquired PCB Subsidiaries, as the acquisition occurred on April 8, 2010. The
acquisition has had and will continue to have a significant effect on our operations as discussed
in the various comparisons noted below.
There were 91 days in each of the third quarters ended September 27, 2010 and September 28,
2009 and 270 and 271 days in the three quarters ended September 27, 2010 and September 28, 2009,
respectively. Included in the consolidated statement of operations for both the quarter and three
quarters ended September 27, 2010 are 91 and 172 days, respectively, of results of
operations for the Asia Pacific operations for the period from April 9, 2010 through September 27, 2010.
34
The following table sets forth statement of operations data expressed as a percentage of net
sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
Three Quarters Ended |
|
|
September 27, |
|
September 28, |
|
September 27, |
|
September 28, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
77.5 |
|
|
|
82.6 |
|
|
|
79.6 |
|
|
|
82.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
22.5 |
|
|
|
17.4 |
|
|
|
20.4 |
|
|
|
17.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
2.5 |
|
|
|
4.7 |
|
|
|
3.1 |
|
|
|
4.6 |
|
General and administrative |
|
|
6.1 |
|
|
|
6.8 |
|
|
|
7.0 |
|
|
|
5.9 |
|
Amortization of definite-lived intangibles |
|
|
1.1 |
|
|
|
0.6 |
|
|
|
1.1 |
|
|
|
0.6 |
|
Restructuring charges |
|
|
|
|
|
|
1.8 |
|
|
|
0.1 |
|
|
|
1.2 |
|
Impairment of long-lived assets |
|
|
|
|
|
|
7.4 |
|
|
|
0.1 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
9.7 |
|
|
|
21.3 |
|
|
|
11.4 |
|
|
|
14.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
12.8 |
|
|
|
(3.9 |
) |
|
|
9.0 |
|
|
|
2.7 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(1.9 |
) |
|
|
(2.1 |
) |
|
|
(2.0 |
) |
|
|
(1.9 |
) |
Interest income |
|
|
|
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Other, net |
|
|
0.7 |
|
|
|
0.1 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(1.2 |
) |
|
|
(1.9 |
) |
|
|
(1.6 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
11.6 |
|
|
|
(5.8 |
) |
|
|
7.4 |
|
|
|
0.9 |
|
Income tax (provision) benefit |
|
|
2.6 |
|
|
|
2.3 |
|
|
|
2.0 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
9.0 |
|
|
|
(3.5 |
) |
|
|
5.4 |
|
|
|
0.6 |
|
Net income attributable to the noncontrolling interest |
|
|
(0.9 |
) |
|
|
|
|
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to TTM Technologies,
Inc, stockholders |
|
|
8.1 |
% |
|
|
(3.5 |
)% |
|
|
4.8 |
% |
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
to our acquisition of the PCB Subsidiaries, we had two operating segments, PCB
Manufacturing and Backplane Assembly, consistent with the nature of
our operations. Due to the
acquisition, we have reassessed our operating segments and concluded
that we will analyze
our worldwide operations based on two geographic operating segments: 1) North America, which
consists of six domestic PCB fabrication plants, including a facility that provides follow-on
value-added services primarily for one of the PCB manufacturing plants, and one backplane assembly
plant in Shanghai, China, which is managed in conjunction with the
U.S. operations, and its related
Ireland sales support infrastructure; and 2) Asia Pacific, which consists of the newly acquired PCB
Subsidiaries. Each segment operates predominantly in the same industry with production
facilities that produce similar customized products for our customers and use similar means of
product distribution in their respective geographic regions.
35
The following table compares net sales by reportable segment for the quarters and three
quarters ended September 27, 2010 and September 28, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Three Quarters Ended |
|
|
|
September 27, |
|
|
September 28, |
|
|
September 27, |
|
|
September 28, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
148,263 |
|
|
$ |
139,075 |
|
|
$ |
425,407 |
|
|
$ |
432,552 |
|
Asia Pacific |
|
|
211,463 |
|
|
|
|
|
|
|
384,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
|
359,726 |
|
|
|
139,075 |
|
|
|
809,943 |
|
|
|
432,552 |
|
Inter-segment sales |
|
|
(1,913 |
) |
|
|
|
|
|
|
(3,663 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
357,813 |
|
|
$ |
139,075 |
|
|
$ |
806,280 |
|
|
$ |
432,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
Net sales increased $218.7 million, from $139.1 million in the third quarter of 2009 to $357.8
million in the third quarter of 2010 and $373.7 million from $432.6 million for the three quarters
ended 2009 to $806.3 million for the three quarters ended 2010 primarily due to our acquisition of
the PCB Subsidiaries, which comprise our Asia Pacific reporting segment.
Revenue for the North America segment increased $9.2 million, or 6.6%, from $139.1 million in
the third quarter 2009 to $148.3 million in the third quarter of 2010 primarily due to increased
sales volume at a number of our facilities due to the improving economy and the transfer of work
from our closed facilities, partially offset by lost revenue resulting from the closure of our Los
Angeles, California facility in November 2009, and our Hayward, California facility in March 2010.
The revenue increase reflects an unchanged average PCB selling price from the third quarter of 2009
and an increase in PCB volume of 12% during the same period due to the improving economy.
Revenue
for the North America segment decreased $7.2 million, or 1.7%,
from $432.6 million in the first three quarters of 2009 to $425.4 million in the first three quarters of 2010 primarily due to lower
volume of backplane assemblies partially offset by higher PCB manufacturing revenue. PCB revenue
reflects an increase in PCB volume of 7% during the first three
quarters of 2010 due to the
improving economy. Partially offsetting this increase in volume was a 4% decrease in PCB selling
price during the same period due largely to a shift in production mix.
Cost of Goods Sold
Cost of goods sold increased $162.6 million from $114.9 million in the third quarter of 2009 to
$277.5 million in the third quarter of 2010 and
$284.9 million from $357.0 million for the first three
quarters of 2009 to $641.9 million for the first three quarters of 2010 primarily due to our acquisition
of the PCB Subsidiaries, which comprise our Asia Pacific reporting segment.
Cost of goods sold for the North America segment increased $1.6 million, or 1.4%, from $114.9
million for the third quarter of 2009 to $116.5 million for the third quarter of 2010 due primarily
to increased production volume partially offset by reduced overhead from the facility closures
discussed above, as well as lower direct material costs due to lower volumes of backplane
assemblies, which inherently have a higher material content. As a percentage of net sales, cost of
goods sold decreased from 82.6% for the third quarter of 2009 to 78.6% for the third quarter of
2010, primarily due to cost savings from our closed facilities and increased absorption of fixed
costs across a smaller plant footprint following the closure of our Los Angeles and Hayward,
California facilities.
Cost of goods sold for the North America segment decreased $18.0 million, or 5.0%, from $357.0
million for the first three quarters of 2009 to $339.0 million
for the first three quarters of 2010 due
primarily to lower demand for backplane assemblies. Additionally, lower labor and direct material
expenses due to the facility closures discussed above, partially offset by higher costs at our
remaining facilities due to increased PCB production contributed to the decrease in our cost of
goods sold. As a percentage of net sales, cost of goods sold decreased from 82.5% for the three
quarters of 2009 to 79.7% for the first three quarters of 2010, primarily due to cost savings from
our closed facilities and increased absorption of fixed costs across a smaller plant footprint
following the closure of our Redmond, Washington, and Los Angeles and Hayward, California
facilities.
36
Cost of goods sold for the Asia Pacific segment for the first three quarters of 2010 were higher
than expected due to the fair value mark up of the acquired PCB Subsidiaries inventory of
approximately $6.7 million. There were no such fair value changes in the third quarter ended 2010,
and we do not expect any further purchase price adjustments related to inventory in the future.
Gross Profit
As a result of the foregoing, gross profit increased $56.1 million from $24.2 million for the
third quarter of 2009 to $80.3 million for the third quarter of 2010 and $88.9 million from $75.5
million for the first three quarters of 2009 to $164.4 million for the three quarters of 2010. The
increase in our gross profit was due primarily to our acquisition of the PCB Subsidiaries.
Gross margin increased from 17.4% in the third quarter of 2009 to 22.5% in the third quarter
of 2010 due to higher overall profit margins for the Asia Pacific segment and higher fixed cost
absorption on higher volumes in our North America segment as well as cost savings from our closed
facilities. Gross margin increased from 17.5% for the first three quarters of 2009 to 20.4% for the first three
quarters of 2010 due to cost savings from our closed facilities and higher fixed cost absorption on
higher volumes in our North America segment and higher overall profit margins for the Asia Pacific
segment, partially offset by $6.7 million of increased costs in the Asia Pacific segment due to the
fair value mark up of acquired PCB Subsidiaries inventory.
Gross profit increased $7.5 million, or 31.0%, from $24.2 million for the third quarter of
2009 to $31.7 million for the third quarter of 2010 for the North America segment due primarily to
higher revenue as described above. Gross margin increased from 17.4% in the third quarter of 2009
to 21.4% in the third quarter of 2010 due to cost savings from our closed facilities and higher
fixed cost absorption on higher volumes.
Gross
profit increased $10.9 million, or 14.4%, from $75.5 million for the first three quarters of
2009 to $86.4 million for the first three quarters of 2010 for the North America segment due to lower
cost of goods sold as described above. Gross margin increased from 17.5% for the first three quarters of
2009 to 20.3% for the first three quarters of 2010 due to cost savings from our closed facilities
and higher fixed cost absorption on higher volumes.
Selling and Marketing Expenses
Selling and marketing expenses increased $2.6 million, or 40.0%, from $6.5 million for the
third quarter of 2009 to $9.1 million for the third quarter of 2010 due to our acquisition of the
PCB Subsidiaries. As a percentage of net sales, selling and marketing expenses were 4.7% in the
third quarter of 2009 as compared to 2.5% in the third quarter of 2010. Additionally, selling and
marketing expenses increased $4.9 million, or 24.5%, from $20.0 million for the first three quarters of
2009 to $24.9 million for the first three quarters of 2010 due to our acquisition of the PCB
Subsidiaries. As a percentage of net sales, selling and marketing expenses were 4.6% in the first three
quarters of 2009 as compared to 3.1% in the first three quarters of 2010. The decline in selling and
marketing expense as a percentage of net sales is due to our acquisition of the PCB Subsidiaries,
which have lower selling labor and commission expense than our North America reporting segment.
General and Administrative Expenses
General and administrative expenses increased $12.5 million from $9.4 million, or 6.8% of net
sales, for the third quarter of 2009 to $21.9 million, or 6.1% of net sales, for the third quarter
of 2010. Additionally, general and administrative expenses increased $30.8 million from $25.5
million, or 5.9% of net sales, for the first three quarters ended
September 28, 2009 to $56.3 million, or 7.0% of net
sales, for the first three quarters ended September 27, 2010. The increase in expense primarily relates to our acquisition
of the PCB Subsidiaries for the quarter and three quarters ended
September 27, 2010, as well as an increase in
transaction related costs of $7.8 million from $1.4 million for the first three quarters ended September
28, 2009 to $9.2 million for the first three quarters ended September 27, 2010.
37
Amortization of Definite-Lived Intangibles
Intangible amortization expense increased $2.8 million from $0.9 million, or 0.6% of net
sales, for the third quarter of 2009 to $3.7 million, or 1.1% of net sales, for the third quarter
of 2010. This expense increased $6.5 million from $2.6 million, or 0.6% of net sales, for the first three
quarters of 2009 to $9.1 million, or 1.1% of net sales, for the first three quarters of 2010. The
increase in both periods was due to our acquisition of the PCB Subsidiaries. Acquired identifiable
intangible assets include customer relationships, trade name and order backlog.
Restructuring Charges
Restructuring charges recorded for the first three quarters of 2010 are related to contract
termination costs related to building operating leases associated with the closure of our Hayward,
California facility, which the Company ceased use. For the third quarter of 2009 and first three quarters
of 2009, the restructuring charges recorded related mainly to the closure of the Hayward and Los
Angeles, California facilities and other Company-wide employee reduction actions during 2009.
Impairment of Long-lived Assets
Impairment of long-lived assets of $0.8 million for the first three quarters of 2010 relates
to the further reduction in the value of the Dallas, Oregon facility to record the estimated fair
value less cost to sell given current market conditions. We sold this facility in July 2010.
Impairment of long-lived assets of $10.3 million and $10.6 million for the third quarter of 2009
and for the first three quarters of 2009, respectively, was related to the impairment of certain
long-lived assets, including assets held for sale, for our Redmond, Washington; Dallas, Oregon; and
Hayward and Los Angeles, California facilities.
Other Expense
Other expense increased $1.4 million from $2.7 million for the third quarter of 2009 to $4.1
million for the third quarter of 2010. Other expense increased $5.2 million from $7.9 million for
the first three quarters of 2009 to $13.1 million for the first three quarters of 2010. The increase in other
expense primarily relates to interest expense related to the debt assumed at the date of
acquisition of the PCB Subsidiaries, as well as increased
amortization of costs related to the issuance of this debt. For the
quarter and three quarters of 2010, the increase in interest expense
is partially offset by foreign currency transaction gains.
Income Tax Provision
The provision for income taxes increased $12.6 million from a benefit of $3.2 million for the
third quarter of 2009 to a provision of $9.4 million for the third quarter of 2010 primarily due to higher pre-tax
income. Our effective tax rate was 22.7% in the third quarter of 2010 and (39.4)% in the third
quarter of 2009. The provision for income taxes increased $15.0 million from $1.4 million for the
first three quarters of 2009 to $16.4 million for the first three quarters of 2010 primarily due to higher
pre-tax income. Our effective tax rate was 27.5% in the first three quarters of 2010 and 35.6% in the
first three quarters of 2009. Our effective tax rate decreased in 2010 primarily due to the acquisition
of the PCB Subsidiaries, which have a lower effective tax rate than our North America operations,
offset by the impact of the non-deductibility of certain transaction costs. Additionally, certain
foreign losses generated are not more than likely to be realizable, and thus no income tax benefit
has been recognized on these losses. Our effective tax rate is primarily impacted by the U.S.
federal income tax rate, apportioned state income tax rates, tax rates in China and Hong Kong,
generation of other credits and deductions available to us, and certain non-deductible items.
Net
Income Attributable to the Noncontrolling Interests
Net income attributable to noncontrolling interests was $3.1 million and $4.9 million for the
quarter and three quarters ended September 27, 2010, respectively. This income relates to two
majority-owned companies in China included in the PCB Subsidiaries acquisition.
38
Liquidity and Capital Resources
General
Our principal sources of liquidity have been cash provided by operations, the issuance of
Convertible Notes and, more recently, the issuance of term and revolving debt. Our principal uses of
cash have been to meet debt service requirements, finance capital expenditures, fund working
capital requirements and finance acquisitions. We anticipate that servicing debt, funding working
capital requirements and financing capital expenditures will continue to be the principal demands
on our cash in the future.
As of September 27, 2010, we had net working capital, including restricted cash, of
approximately $228.1 million, compared to $323.1 million as of December 31, 2009.
Our annual 2010 capital expenditure plan is expected to total approximately $80 million (of
which approximately $65 million relates to our Asia Pacific segment) and will fund capital
equipment purchases to meet evolving customer needs, expand our technological capabilities
throughout our facilities and replace aging equipment.
The following table provides information on contractual obligations as of September 27, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
|
After |
|
Contractual Obligations(1)(2) |
|
Total |
|
|
1 Year |
|
|
1 - 3 Years |
|
|
4 - 5 Years |
|
|
5 Years |
|
|
|
(In thousands) |
|
Long-term debt obligations |
|
$ |
380,174 |
|
|
$ |
66,944 |
|
|
$ |
225,730 |
|
|
$ |
87,500 |
|
|
$ |
|
|
Convertible debt obligations |
|
|
175,000 |
|
|
|
|
|
|
|
|
|
|
|
175,000 |
|
|
|
|
|
Interest on debt obligations |
|
|
46,555 |
|
|
|
13,896 |
|
|
|
20,981 |
|
|
|
11,678 |
|
|
|
|
|
Interest rate swap liabilities |
|
|
6,823 |
|
|
|
2,446 |
|
|
|
4,377 |
|
|
|
|
|
|
|
|
|
Foreign currency forward contract liabilities |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment payables |
|
|
70,176 |
|
|
|
61,249 |
|
|
|
8,927 |
|
|
|
|
|
|
|
|
|
Purchase obligations |
|
|
2,927 |
|
|
|
2,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease commitments |
|
|
4,289 |
|
|
|
1,679 |
|
|
|
1,105 |
|
|
|
451 |
|
|
|
1,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
685,947 |
|
|
$ |
149,144 |
|
|
$ |
261,120 |
|
|
$ |
274,629 |
|
|
$ |
1,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unrecognized uncertain tax benefits of $0.1 million are not included in the table above as we
are not sure when the amount will be paid. |
|
(2) |
|
Environmental liabilities of $0.8 million, not included in the table above, are accrued and
recorded as liabilities in the consolidated balance sheet. |
We are involved in various stages of investigation and cleanup related to environmental
remediation at various production sites. We currently estimate that we will incur total remediation
costs of $0.8 million over the next 12 to 84 months related to three Connecticut production sites.
For our Connecticut production sites, we are involved in various stages of investigation and
cleanup related to environmental remediation matters for two of the sites and have investigated
a third site, where no contamination above applicable standards was found. Further, we are investigating and remediating former production sites in Washington and California
We currently estimate that we will incur remediation costs of $0.8 million to $1.3
million for these sites. In addition, we have obligations to the Connecticut DEP to make certain environmental
asset improvements to the waste water treatment systems in two Connecticut plants. These costs are estimated to be $0.1 million and have been
considered in our capital expenditure plan for 2010.
Based on our current level of operations, we believe that cash generated from operations,
available cash and the proceeds from the issuance of Convertible Notes and Term and Revolving Loan;
will be adequate to meet our currently anticipated debt service, capital expenditure, and working
capital needs for the next 12 months and beyond. Our principal liquidity needs for periods beyond
the next 12 months are to meet debt service requirements as well as for other contractual
obligations as indicated in our contractual obligations table above and for capital purchases under
our annual capital expenditure plan.
39
Cash Flows
Net
cash provided by operating activities was $36.6 million for the
first three quarters of 2010,
compared to $57.3 million for the first three quarters of 2009.
Our 2010 operating cash flow of $36.6
million primarily reflects net income of $43.4 million, $46.2 million of depreciation and
amortization, $4.7 million of stock-based compensation, a net
increase in deferred income taxes of $6.8 million, and
other items totaling $1.8 million, partially offset
by a net decrease in working capital of $66.3
million primarily reflecting an increase in accounts receivable.
Net
cash provided by investing activities was $72.0 million for the first three quarters of 2010,
compared to cash used of $6.8 million for the first three
quarters of 2009. Net cash provided by investing activities in 2010
consisted of proceeds from the release of restricted cash to cash
and cash equivalents of $120.0 million, proceeds from the sale of property, plant and equipment and
assets held for sale of $4.3 million, and $1.4 million from the redemption of short-term
investments, somewhat offset by $28.5 million for the PCB Subsidiaries acquisition and purchases
of property, plant and equipment of $25.2 million.
Net
cash used by financing activities was $37.4 million for the
first three quarters of 2010 and
consisted primarily of $38.0 million of net repayments of borrowings on the revolving loan.
Credit Agreement
On April 9, 2010, in conjunction with the acquisition of the PCB Subsidiaries, the Company
became a party to a credit agreement (Credit Agreement), entered into on November 16, 2009 by the PCB Subsidiaries, which
are now our wholly owned foreign subsidiaries of the Company. The
credit agreement was put in place in contemplation of the acquisition
in order to refinance existing credit facilities.
The Credit Agreement consists of a $350.0 million senior secured Term Loan, a $87.5 million senior secured
Revolving Loan, a $65.0 million Factoring Facility, and a $80.0 million Letters of Credit Facility, all of
which mature on November 16, 2013. The Credit Agreement is secured by substantially all of the
assets of the PCB Subsidiaries. The Company has fully and unconditionally guaranteed the Credit
Agreement for full and prompt payment when due of all present and future payment obligations.
Borrowings under the Credit Agreement bear interest at a floating rate of LIBOR (term election
by Company) plus an applicable interest margin. Borrowings under the Term Loan will bear interest
at a rate of LIBOR plus 2.0%, LIBOR plus 2.25% under the Revolving Loan, and LIBOR plus 1.25% under
the Factoring Facility. There is no provision, other than an event of default, for these interest
margins to increase. At September 27, 2010, the weighted average interest rate on the outstanding
borrowings was 2.26%.
We
are required to make scheduled payments of the outstanding Term Loan
balance beginning in 2011 under the Credit Agreement. All and any other outstanding balances under the Credit Agreement
are due at the maturity date of November 16, 2013. Borrowings under the Credit Agreement are
subject to certain financial and operating covenants that include, among other provisions,
limitations on dividends or other distributions, in addition to maintaining maximum total leverage
ratios and minimum net worth, current assets, and interest coverage ratios at both the Company and
PCB Subsidiaries level. On August 3, 2010, we entered into a waiver and amendment letter
with Hong Kong and Shanghai Banking Corporation Limited, as Facility Agent for and on behalf of the
other lenders named in the Credit Agreement, as amended March 30, 2010, which amended certain
financial covenants applicable to us. Pursuant to the waiver and amendment letter, the lenders
under the Credit Agreement agreed to amend the financial covenants related to consolidated tangible
net worth, gearing ratio (the ratio of consolidated net borrowings to consolidated tangible net
worth), and leverage. At September 27, 2010, we were in compliance with the amended covenants.
We are also required to pay a commitment fee of 0.20% per annum on any unused portion of loan
or facility under the Credit Agreement. As of September 27, 2010, all of the Term Loan was
outstanding and none of the Revolving Loan or the Factoring Facility were outstanding, and $62.7 million
of the Letters of Credit Facility was outstanding. Available borrowing capacity under the Revolving
Loan and Factoring Facility was $87.5 million and $65.0 million, respectively, at September 27, 2010.
40
Bank Loans
Bank loans are made up of bank lines of credit in mainland China and are used for working
capital and capital investment for our mainland China facilities acquired in conjunction with the
acquisition of the PCB Subsidiaries. These facilities are denominated in either U.S. Dollars or
Chinese Renminbi (RMB), with interest rates tied to either the LIBOR or Peoples Bank of China
rates with a small margin adjustment. These bank loans expire at various dates through May 2012.
Convertible Notes
In May 2008, we issued our Convertible Notes in a public offering with an aggregate principal
amount of $175.0 million. The Convertible Notes bear interest at a rate of 3.25% per annum.
Interest is payable semiannually in arrears on May 15 and November 15 of each year, beginning
November 15, 2008. The Convertible Notes are senior unsecured obligations and will rank equally to
our future unsecured senior indebtedness and senior in right of payment to any of our future
subordinated indebtedness and are accounted for by separately accounting for the liability and
equity components of the convertible debt. At September 27, 2010 the remaining amortization period
for the unamortized Convertible Note discount in the amount of $31.1 million and debt issuance
costs of $3.1 million was 4.6 years. The amortization of the Convertible Notes debt discount and
unamortized debt issuance costs are based on an effective interest rate of 8.37%.
At any time prior to November 15, 2014, holders may convert their Convertible Notes into cash
and, if applicable, into shares of our common stock based on a conversion rate of 62.6449 shares of
our common stock per $1,000 principal amount of Convertible Notes, subject to adjustment, under the
following circumstances: (1) during any calendar quarter beginning after June 30, 2008 (and only
during such calendar quarter), if the last reported sale price of our common stock for at least 20
trading days during the 30 consecutive trading days ending on the last trading day of the
immediately preceding calendar quarter is greater than or equal to 130% of the applicable
conversion price on each applicable trading day of such preceding calendar quarter; (2) during the
five business day period after any 10 consecutive trading day period in which the trading price per
note for each day of that 10 consecutive trading day period was less than 98% of the product of the
last reported sale price of our common stock and the conversion rate on such day; or (3) upon the
occurrence of specified corporate transactions described in the prospectus supplement related to
the Convertible Notes, which can be found on the SECs website at www.sec.gov. As of September 27,
2010, none of the conversion criteria had been met.
On or after November 15, 2014 until the close of business on the third scheduled trading day
preceding the maturity date, holders may convert their notes at any time, regardless of the
foregoing circumstances. Upon conversion, for each $1,000 principal amount of notes, we will pay
cash for the lesser of the conversion value or $1,000 and shares of our common stock, if any, based
on a daily conversion value calculated on a proportionate basis for each day of the 60 trading day
observation period. Additionally, in the event of a fundamental change as defined in the prospectus
supplement, or other conversion rate adjustments such as share splits or combinations, other
distributions of shares, cash or other assets to stockholders, including self-tender transactions
(Other Conversion Rate Adjustments), the conversion rate may be modified to adjust the number of
shares per $1,000 principal amount of the notes. As of September 27, 2010, 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 approximately 14.0 million shares.
We are not permitted to redeem the notes at any time prior to maturity. In the event of a
fundamental change or certain default events, as defined in the prospectus supplement, holders may
require us to repurchase for cash all or a portion of their notes at a price equal to 100% of the
principal amount, plus any accrued and unpaid interest.
In connection with the issuance of the Convertible Notes, we entered into a convertible note
hedge and warrant transaction (Call Spread Transaction) with respect to our common stock. The
convertible note hedge, which cost an aggregate of $38.3 million and was recorded, net of tax, as a
reduction of additional paid-in capital, consists of our option to purchase up to 11.0 million
shares of common stock at a price of $15.96 per share. This option expires on May 15, 2015 and can
only be executed upon the conversion of the Convertible Notes. Additionally, we sold warrants for
the option to purchase 11.0 million shares of our common stock at a price of $18.15 per share. The
warrants expire on August 17, 2015. The proceeds from the sale of warrants of $26.2 million was
recorded as an addition to additional paid-in capital. The Call Spread Transaction has no effect on
the terms of the Convertible Notes and reduces potential dilution by effectively increasing the
conversion price of the Convertible Notes to $18.15 per share of our common stock.
41
Letters of Credit
The Company maintains several letters of credit: a $1.5 million standby letter of credit expiring
December 31, 2010 associated with its insured workers compensation program, a $1.0 million standby letter
of credit expiring February 28, 2011 related to the lease of one of its production facilities, and
various other letters of credits aggregating to approximately $0.7 million
maintained by our
foreign subsidiaries related to purchases of machinery and equipment with various expiration dates
through June 2011.
Off Balance Sheet Arrangements
We do not currently have any material 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
As a result of the product and customer mix of our Asia Pacific operating segment, a portion
of our revenue will be subject to seasonal fluctuations going forward. This is primarily due to
seasonal patterns in the computer and cellular phone industry, which together have become a
significant portion of the end markets that we serve. This seasonality typically results in higher
net sales in the third quarter due to end customer demand for fourth quarter sales of consumer
electronics products.
Recently Issued Accounting Pronouncements
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic
820): Improving Disclosures about Fair Value Measurements, which will require companies to make new
disclosures about recurring or nonrecurring fair value measurements including significant transfers
into and out of Level 1 and Level 2 fair value hierarchies and information on purchases, sales,
issuance and settlements on a gross basis in the reconciliation of Level 3 fair value measurements.
The ASU is effective prospectively for financial statements issued for fiscal years and interim
periods beginning after December 15, 2009. The new disclosures about purchases, sales, issuance and
settlements on a gross basis in the reconciliation of Level 3 fair value measurements is effective
for interim and annual reporting periods beginning after December 15, 2010. The adoption of ASU
2010-06 did not and is not expected to have a material impact on our consolidated condensed
financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business operations we are exposed to risks associated with
fluctuations in interest rates and foreign currency exchange rates. We address these risks through
controlled risk management that includes the use of derivative financial instruments to
economically hedge or reduce these exposures. We do not enter into derivative financial instruments
for trading or speculative purposes.
We have not experienced any losses to date on any derivative financial instruments due to
counterparty credit risk.
To ensure the adequacy and effectiveness of our interest rate and foreign exchange hedge
positions, we continually monitor our interest rate swap positions and foreign exchange forward
positions both on a stand-alone basis and in conjunction with their underlying interest rate and
foreign currency exposures, from an accounting and economic perspective. However, given the
inherent limitations of forecasting and the anticipatory nature of the exposures intended to be
hedged, we cannot assure that such programs will offset more than a portion of the adverse
financial impact resulting from unfavorable movements in either interest or foreign exchange rates.
In addition, the timing of the accounting for recognition of gains and losses related to
mark-to-market instruments for any given period may not coincide with the timing of gains and
losses related to the underlying economic exposures and, therefore, may adversely affect our
consolidated operating results and financial position.
42
Interest rate risk
Our interest expense is more sensitive to fluctuations in the general level of LIBOR and the
Peoples Bank of China interest rates than to changes in rates in other markets. Our business is
exposed to interest rate risk resulting from fluctuations in interest rates. Increases in interest
rates would increase interest expenses relating to the outstanding variable rate borrowings of
certain foreign subsidiaries and increase the cost of debt. Fluctuations in interest rates can also
lead to significant fluctuations in the fair value of the debt obligations.
On April 9, 2010, we entered into a two-year pay-fixed, receive floating (1-month LIBOR),
amortizing interest rate swap arrangement with an initial notional
amount of $146.5 million, for the
period beginning April 18, 2011 and ending on April 16, 2013. The interest rate swap will apply a
fixed interest rate against the first interest payments of a portion
of the $350.0 million Term Loan for
this period. The notional amount of the interest rate swap decreases to zero over its term,
consistent with our risk management objectives. The notional value underlying the hedge at
September 27, 2010 was $146.5 million. Under the terms of the interest rate
swap, the Company will pay a
fixed rate of 2.50% and will receive floating 1-month LIBOR during the swap period.
To the extent the instruments are considered to be effective, changes in fair value are
recorded as a component of accumulated other comprehensive income. To the extent there is any hedge
ineffectiveness, changes in fair value relating to the ineffective portion are immediately
recognized in earnings as interest expense. No ineffectiveness was recognized for the quarter ended
September 27, 2010. At inception, the fair value of the interest rate swap was zero. As of
September 27, 2010, the fair value of the swap was recorded as a
liability of $3.7 million in other
long-term liabilities. The change in the fair value of the interest rate swap is recorded as a
component of accumulated other comprehensive income, net of tax, in our consolidated condensed
balance sheet. There was no impact to interest expense for the quarter ending September 27, 2010 as
the interest rate swap does not hedge interest rate cash flows until the period beginning April 18,
2011. We have designated this interest rate swap as a cash flow hedge.
We also, through our acquisition of the PCB Subsidiaries, assumed a long term pay-fixed,
receive floating (1-month LIBOR), amortizing interest rate swap arrangement with an initial
notional amount of $40.0 million, for the period beginning October 8, 2008 and ending on July 30, 2012.
The notional amount of the interest rate swap amortizes to
zero over its term, consistent with our risk management objectives. The notional value underlying
the hedge at September 27, 2010 was $40.0 million. Under the terms of the interest rate swap, we will pay
a fixed rate of 3.43% and will receive floating 1-month LIBOR during the swap period. As the
borrowings attributable to this interest rate swap were paid off upon acquisition, we did not
designate this interest rate swap as a cash flow hedge.
As of September 27, 2010, the fair value of the swap was recorded as
a liability of $1.6 million in other long-term liabilities. The
change in fair value of this interest rate swap is recorded as other,
net in the consolidated condensed statement of operations.
Foreign currency risks
We are subject to risks 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 the reporting process. Our Asia Pacific
operations utilize the Chinese Renminbi or RMB, and the Hong Kong Dollar or HKD, as the functional
currency, which results in the Company recording a translation adjustment that is included as a
component of accumulated other comprehensive income. The Company does not generally engage in
hedging to manage foreign currency risk related to its revenue and expenses denominated in RMB and
HKD.
We enter into foreign currency forward contracts to mitigate the impact of changes in foreign
currency exchange rates and to reduce the volatility of purchases and other obligations generated
in currencies other than the functional currencies. Our foreign subsidiaries may at times purchase
forward exchange contracts to manage their foreign currency risk in relation to particular
purchases or obligations, such as the related party financing obligation arising from the put call
option to purchase the remaining 20% of a majority owned subsidiary in 2013, and certain purchases
of machinery denominated in foreign currencies other than our foreign functional currency. The
notional amount of the foreign exchange contracts at
September 27, 2010 was approximately $30.1 million.
We did not have any foreign exchange contracts as of
December 31, 2009. We have designated
certain of these foreign exchange contracts as cash flow hedges, with the exception of the foreign
exchange contracts in relation to the related party financing obligation. In this instance, the
hedged item is a recognized liability subject to foreign currency transaction gains and losses and
therefore, changes in the hedged item due to foreign currency exchange rates are already recorded
in earnings. Therefore, hedge accounting has not been applied.
43
The table below presents information about certain of the foreign currency forward contracts
at September 27, 2010:
|
|
|
|
|
|
|
|
|
|
|
As of September 27, 2010 |
|
|
|
|
|
|
|
Average Contract |
|
|
|
Notional |
|
|
Rate or Strike |
|
|
|
Amount |
|
|
Amount |
|
|
|
(In thousands in USD) |
|
Receive foreign currency / pay USD |
|
|
|
|
|
|
|
|
Euro |
|
$ |
24,542 |
|
|
|
1.30 |
|
Japanese Yen |
|
|
5,603 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
$ |
30,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value |
|
$ |
1,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Instruments
The
table below presents information about certain of our debt instruments (bank borrowing)
as of September 27, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Market |
|
|
Average |
|
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
Thereafter |
|
|
Total |
|
|
Value |
|
|
Interest Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Variable Rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$ |
|
$ |
56,500 |
|
|
$ |
117,000 |
|
|
$ |
192,500 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
366,000 |
|
|
$ |
358,171 |
|
|
|
2.22 |
% |
RMB |
|
|
10,444 |
|
|
|
3,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,174 |
|
|
|
14,174 |
|
|
|
5.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Variable Rate |
|
|
66,944 |
|
|
|
120,730 |
|
|
|
192,500 |
|
|
|
|
|
|
|
|
|
|
|
380,174 |
|
|
|
372,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,000 |
|
|
|
175,000 |
|
|
|
167,510 |
|
|
|
3.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,000 |
|
|
|
175,000 |
|
|
|
167,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
66,944 |
|
|
$ |
120,730 |
|
|
$ |
192,500 |
|
|
$ |
|
|
|
$ |
175,000 |
|
|
$ |
555,174 |
|
|
$ |
539,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Contracts
The table below presents information regarding our interest rate swaps as of September 27,
2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Fair Market Value |
|
Average interest payout rate |
|
|
3.43 |
% |
|
|
2.72 |
% |
|
|
2.59 |
% |
|
|
2.50 |
% |
|
|
|
|
Interest payout amount |
|
|
(350 |
) |
|
|
(3,366 |
) |
|
|
(3,155 |
) |
|
|
(676 |
) |
|
|
|
|
Average interest received rate |
|
|
0.26 |
% |
|
|
0.26 |
% |
|
|
0.26 |
% |
|
|
0.26 |
% |
|
|
|
|
Interest received amount |
|
|
26 |
|
|
|
315 |
|
|
|
313 |
|
|
|
69 |
|
|
|
|
|
Fair value loss at September 27, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,237 |
) |
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
We maintain a system of disclosure controls and procedures for financial reporting to give
reasonable assurance that information required to be disclosed in our reports submitted under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC. These controls and procedures also give
reasonable assurance that information required to be disclosed in such reports is accumulated and
communicated to management to allow timely decisions regarding required disclosures.
Our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), together with management,
conducted an evaluation of the effectiveness of our disclosure controls and procedures as of
September 27, 2010, pursuant to Rules 13a-15(e) of the Exchange Act. Based on that evaluation, our
CEO and CFO concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) of
the Exchange Act) were effective such that information relating to the Company, including our
consolidated subsidiaries, required to
44
be disclosed in our SEC reports, (i) is recorded, processed, summarized and reported within
the time frames specified in SEC rules and forms, and (ii) is accumulated and communicated to
company management, including our CEO and CFO, as appropriate to allow timely discussion regarding
disclosure.
Changes in Internal Control over Financial Reporting.
There has been no change in our internal control over financial reporting that occurred during
the quarter ended September 27, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
The
Companys management is reviewing and evaluating its internal
control procedures and the design of those control procedures
relating to the acquisition of the PCB Subsidiaries and evaluating
when it will complete an evaluation and review of the PCB
Subsidiaries internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our principal executive officer and chief financial officer, does
not expect that our disclosure controls or our internal control over financial reporting will
prevent or detect all errors and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control systems objectives
will be met. The design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Further,
because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Prior to our acquisition of the PCB Subsidiaries of Meadville Holdings Ltd., two of the PCB
Subsidiaries were involved in various legal and arbitration proceedings instituted in the Peoples
Republic of China by a former customer. The proceedings related to quality claims about certain
products supplied by the PCB Subsidiaries. In May 2010, the parties entered into a settlement
agreement whereby the PCB Subsidiaries agreed to pay approximately $2.5 million as the final
settlement and the former customer withdrew all the legal and arbitration proceedings against the
PCB Subsidiaries after receipt of the settlement funds.
Prior to our acquisition of PCG in October 2006, PCG made legal commitments to the U.S. EPA
and the State of Connecticut regarding settlement of enforcement actions against the PCG operations
in Connecticut. On August 17, 2004, PCG was sentenced for Clean Water Act violations and was
ordered to pay a $6.0 million fine and an additional $3.7 million to fund environmental projects
designed to improve the environment for Connecticut residents. In September 2004, PCG agreed to a
stipulated judgment with the Connecticut Attorney Generals office and the Connecticut Department
of Environmental Protection (DEP) under which PCG paid a $2.0 million civil penalty and agreed to
implement capital improvements of $2.4 million to reduce the volume of rinse water discharged from
its manufacturing facilities in Connecticut. The obligations to the U.S. EPA were completed as of
July 1, 2009. The Connecticut DEP obligation involves the installation of rinse water recycling
systems at the Stafford, Connecticut facilities. As of September 27, 2010, one recycling system was
completed and placed into operation, and approximately $0.1 million remains to be expended in the
form of capital improvements to meet the second rinse water recycling system requirement which is
expected to be completed by December 2010. We have assumed these legal commitments as part of our
purchase of PCG. Failure to meet either commitment could result in further costly enforcement
actions.
45
Item 1A. Risk Factors
An investment in our common stock involves a high degree of risk. You should carefully
consider the factors described in Part I Item 1A. Risk Factors in our Annual Report on Form 10-K
for the year ended December 31, 2009, in analyzing an investment in our common stock. If any of the
risks in our Annual Report on Form 10-K occurs, our business, financial condition, and results of
operations would likely suffer, the trading price of our common stock could fall, and you could
lose all or part of the money you paid for our common stock.
In addition, the risk factors and uncertainties could cause our actual results to differ
materially from those projected in our forward-looking statements, whether made in this report or
the other documents we file with the SEC, or our annual or quarterly reports to stockholders,
future press releases, or orally, whether in presentations, responses to questions, or otherwise.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable.
Item 6. Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Exhibits |
31.1
|
|
CEO Certification Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
|
|
|
31.2
|
|
CFO Certification Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
|
|
|
32.1
|
|
CEO Certification Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
|
|
|
32.2
|
|
CFO Certification Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
TTM Technologies, Inc.
|
|
|
/s/ Kenton K. Alder
|
|
|
Kenton K. Alder |
|
Dated: November 8, 2010 |
President and Chief Executive Officer |
|
|
|
|
|
|
/s/ Steven W. Richards
|
|
|
Steven W. Richards |
|
Dated: November 8, 2010 |
Chief Financial Officer and Secretary |
|
47
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Exhibits |
31.1
|
|
CEO Certification Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
|
|
|
31.2
|
|
CFO Certification Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
|
|
|
32.1
|
|
CEO Certification Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
|
|
|
32.2
|
|
CFO Certification Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
48