TTM TECHNOLOGIES, INC. 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 also be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth in our Annual Report on Form 10-K for the fiscal year endedJanuary 3, 2022 , filed with theSEC .
COMPANY OVERVIEW
We are a leading global manufacturer of technology solutions including engineered systems, radio frequency (RF) components and RF microwave/microelectronic assemblies, and printed circuit boards (PCB). We focus on providing time-to-market and volume production of advanced technology products and offer a one-stop design, engineering, and manufacturing solution to our customers. This one-stop design, engineering, and manufacturing solution allows us to align technology development with the diverse needs of our customers and to enable them to reduce the time required to develop new products and bring them to market. We serve a diversified customer base consisting of approximately 1,000 customers in various markets throughout the world, including aerospace and defense, data center computing, automotive components, medical, industrial and instrumentation related products, as well as networking/communications infrastructure products. Our customers include both original equipment manufacturers (OEMs) and electronic manufacturing services (EMS) providers. RECENT DEVELOPMENTS OnJune 27, 2022 , we completed our acquisition of all of the issued and outstanding common stock ofGritel Holding Co., Inc. (Gritel) andISC Farmingdale Corp. for a preliminary total consideration of$299.2 million in cash.Telephonics Corporation is wholly-owned by Gritel, and as a result of the acquisition, became an indirect, wholly-owned subsidiary of the Company (collectively withISC Farmingdale Corp. , Telephonics). Telephonics is recognized globally as a leading provider of highly sophisticated military intelligence, surveillance and communications solutions that are deployed across a wide range of land, sea, and air applications. Because the acquisition closed shortly prior to the end of our second fiscal quarter, the results of operations of Telephonics since the acquisition date were not material to our consolidated condensed financial statements. OnMarch 1, 2022 , we announced that we will open a new highly automated PCB manufacturing facility inPenang, Malaysia . We recently commenced construction, which we expect will take 12 to 15 months, with equipment installation in late 2023. We expect that the total capital spending for this facility will be approximately$130.0 million and this investment will be spread from 2022 through 2025. The coronavirus (COVID-19) pandemic initially caused business disruption to our operations inChina inJanuary 2020 . ByMarch 2020 , the situation escalated as the scope of the COVID-19 pandemic worsened outside of theAsia-Pacific region , withEurope andNorth America being affected by the pandemic. With the development and deployment of vaccines, certain of the adverse societal and economic effects of the pandemic have declined. However, as new variants of the virus emerge and evolve, we could see a rebound in the severity of the adverse effects of the pandemic. As a result, we expect continued impacts on our production, as well as ongoing significant uncertainty relating to the actual and potential impacts of the COVID-19 pandemic, and we cannot reasonably estimate its duration or severity. For example, during the first quarter of the 2022 fiscal year, an outbreak in Mainland China forced temporary lockdown orders in several cities in which we operate. Further, inNorth America , there was a surge in cases resulting from the Omicron variant fromDecember 2021 throughJanuary 2022 which resulted in production inefficiencies caused by a combination of quarantine impacts and direct labor shortages on our overall production. The COVID-19 pandemic has created and continues to create various global macroeconomic, customer demand, operational and supply chain risks and has contributed to high inflation, each of which could have a material and adverse impact on our business going forward. See Item 1A, Risk Factors, of Part II below for further information related to the COVID-19 pandemic. We have taken active measures to seek to protect our employees, suppliers, and customers by implementing extensive pandemic related protocols, establishing situational leadership teams inAsia-Pacific andNorth America along with regularly scheduled executive reviews and planning calls, implementing global travel restrictions, and conforming to the guidance and direction of local governments and global health organizations. We are monitoring the impacts the COVID-19 pandemic has had, and continues to have, on our supply chain and are collaborating with our third-party partners with the goal of mitigating, to the extent reasonably practicable, significant delays in delivery of our products.
We continue to experience supply chain constraints and inflationary pressures. We have been actively taking measures intended to manage both supply chain constraints and higher raw materials costs, including, without limitation, through such measures as supplier diversification, ongoing operational efficiency efforts and quotation adjustments to mitigate the impact on our business.
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We also continue to see challenges in attracting and retaining labor in North
America . We actively seek to demonstrate employees' value to our business
through a combination of financial and non-financial methods. However, a number
of factors may continue to adversely affect the labor force available to us,
including high employment levels, government regulations, and wage inflation. An
overall labor shortage, lack of skilled labor, increased turnover or labor
inflation could have a material adverse impact on our business.
FINANCIAL OVERVIEW
While our customers include both OEMs and EMS providers, we measure customers based on OEM companies, as they are the ultimate end customers. Sales to our ten largest customers collectively accounted for 41% and 43% of our net sales for the quarter and two quarters endedJuly 4, 2022 , respectively. Sales to our ten largest customers accounted for 40% and 42% of our net sales for the quarter and two quarters endedJune 28, 2021 , respectively. We sell to OEMs both directly and indirectly through EMS providers.
The following table shows the percentage of our net sales attributable to each of the principal end markets we served for the periods indicated:
Quarter Ended Two Quarters Ended
End Markets (1) July 4, 2022 June 28, 2021 July 4, 2022 June 28, 2021
Aerospace and Defense 30 % 33 % 30 % 34 %
Automotive 18 18 19 18
Data Center Computing 17 14 16 14
Medical/Industrial/Instrumentation 21 19 21 18
Networking/Communications 14 15 14 15
Other (2) - 1 - 1
Total 100 % 100 % 100 % 100 %
(1) Sales to EMS companies are classified by the end markets of their OEM
customers.
(2) Other end market reflects direct sales to EMS and distributor customers.
We derive revenues primarily from the sale of PCBs, custom electronic assemblies using customer-supplied engineering and design plans as well as our long-term contracts related to the design and manufacture of RF and microwave/microelectronics components, assemblies, and subsystems. Orders for products generally correspond to the production schedules of our customers and are supported with firm purchase orders. Our customers have continuous control of the work in progress and finished goods throughout the PCB and custom electronic assemblies manufacturing process, as these are built to customer specifications with no alternative use, and there is an enforceable right of payment for work performed to date. As a result, we recognize revenue progressively over time based on the extent of progress towards completion of the performance obligation. We recognize revenue based on a cost method as it best depicts the transfer of control to the customer which takes place as we incur costs. Revenues are recorded proportionally as costs are incurred. We also manufacture certain components, assemblies, and subsystems which service our RF and Specialty Components (RF&S Components) customers. We recognize revenue at a point in time upon transfer of control of the products to our customer. Point in time recognition was determined as our customers do not simultaneously receive or consume the benefits provided by our performance and the asset being manufactured has alternative uses to us. Net sales consist of gross sales less an allowance for returns, which typically have been approximately 2% of gross sales. We provide our customers a limited right of return for defective PCBs including components, subsystems, and assemblies. We record an estimate for sales returns and allowances at the time of sale based on historical results and anticipated returns. Cost of goods sold consists of materials, labor, outside services, and overhead expenses incurred in the manufacture and testing of our products. Shipping and handling fees and related freight costs and supplies associated with shipping products are also included as a component of cost of goods sold. Many factors affect our gross margin, including capacity utilization, product mix, production volume, and yield. While we have entered into supply assurance agreements with some of our key suppliers to maintain the continuity of supply of some of the key materials we use, we generally do not participate in any significant long-term contracts with suppliers, and we believe there are a number of potential suppliers for most of the raw materials we use. Selling and marketing expenses consist primarily of salaries, labor related benefits, and commissions paid to our internal sales force, independent sales representatives, and our sales support staff, as well as costs associated with marketing materials and trade shows. General and administrative costs primarily include the salaries for executive, finance, accounting, information technology, and human resources personnel, as well as expenses for accounting and legal assistance, incentive compensation expense, and gains or losses on the sale or disposal of property, plant, and equipment.
Research and development expenses consist primarily of salaries and labor related benefits paid to our research and development staff, as well as material costs.
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--------------------------------------------------------------------------------CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated condensed financial statements included in this report have been prepared in accordance with accounting principles generally accepted inthe United States of America (U.S. GAAP). 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. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year endedJanuary 3, 2022 for further discussion of critical accounting policies and estimates. There were no material changes to our critical accounting policies and estimates sinceJanuary 3, 2022 .
RESULTS OF OPERATIONS
The following table sets forth the relationship of various items to net sales in our consolidated condensed statements of operations:
Quarter Ended Two Quarters Ended
July 4, 2022 June 28, 2021 July 4, 2022 June 28, 2021
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 81.3 82.4 82.8 83.4
Gross profit 18.7 17.6 17.2 16.6
Operating expenses:
Selling and marketing 2.8 2.6 2.9 2.8
General and administrative 7.8 5.5 6.8 5.7
Research and development 0.9 0.7 0.9 0.8
Amortization of definite-lived intangibles 1.3 1.6 1.4 1.7
Total operating expenses 12.8 10.4 12.0 11.0
Operating income 5.9 7.2 5.2 5.6
Other (expense) income:
Interest expense (1.7 ) (2.0 ) (1.8 ) (2.1 )
Loss on extinguishment of debt - - - (1.4 )
Other, net 1.3 0.1 0.8 0.3
Total other expense, net (0.4 ) (1.9 ) (1.0 ) (3.2 )
Income before income taxes 5.5 5.3 4.2 2.4
Income tax provision (1.1 ) (0.3 ) (0.5 ) (0.1 )
Net income 4.4 % 5.0 % 3.7 % 2.3 %
Net Sales
Total net sales increased $58.2 million , or 10.3%, to $625.6 million for the
second quarter of 2022 from $567.4 million for the second quarter of 2021. The
primary driver for the increase in total net sales was an increase in net sales
for the PCB reportable segment of $55.9 million , or 10.1%, to $609.4 million for
the second quarter of 2022 from $553.5 million for the second quarter of 2021,
which was primarily due to strong growth in most of our commercial end markets.
The increase in PCB net sales also benefitted from an 18.6% increase in the
average price per square foot driven mainly by better pricing, higher levels of
quick-turn revenue and a favorable shift in product mix, partially offset by a
7.3% decrease in the volume of PCB shipments as compared to the second quarter
of 2021. Additionally, there was an increase in net sales for the RF&S
Components reportable segment of $2.2 million , or 16.0%, to $16.1 million for
the second quarter of 2022 from $13.9 million for the second quarter of 2021,
which was primarily due to higher demand in our Networking/Communications end
market.
Total net sales increased $113.0 million , or 10.3%, to $1,206.8 million for the
first two quarters of 2022 from $1,093.8 million for the first two quarters of
2021. This increase in total net sales primarily resulted from an increase in
net sales for the PCB reportable segment of $111.5 million , or 10.5%, to
$1,175.4 million for the first two quarters of 2022 from $1,064.0 million for
the first two quarters of 2021 primarily due to strong growth in most of our
commercial end markets, partially offset by lower demand in our Aerospace and
Defense end market. The increase in PCB net sales also benefitted from an 11.0%
increase in the average price per square foot driven mainly by better pricing,
higher levels of quick-turn revenue and a favorable shift in product mix. Volume
was essentially unchanged. Additionally, there was an increase in net sales for
the RF&S Components reportable segment of $4.7 million , or 17.7%, to $31.3
million for the first two quarters of 2022 from $26.6 million for the first two
quarters of 2021 primarily due to higher demand in our Networking/Communications
end market.
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--------------------------------------------------------------------------------Gross Margin
Overall gross margin increased to 18.7% for the second quarter of 2022 from 17.6% for the second quarter of 2021. Gross margin for the PCB reportable segment increased to 19.6% for the second quarter of 2022 from 17.4% for the second quarter of 2021. This increase was primarily due to price increases, higher levels of quick-turn revenue, higher sales, and improved product mix, partially offset by higher labor and material costs. Gross margin for the RF&S Components reportable segment increased to 60.2% for the second quarter of 2022 from 52.4% for the second quarter of 2021, primarily due to higher sales. Overall gross margin increased to 17.2% for the first two quarters of 2022 from 16.6% for the first two quarters of 2021. Gross margin for the PCB reportable segment increased to 17.2% for the first two quarters of 2022 from 16.6% for the first two quarters of 2021. This increase was primarily due to price increases, higher levels of quick-turn revenue, higher sales, and improved product mix, partially offset by higher labor and material costs. Gross margin for the RF&S Components reportable segment increased to 60.3% for the first two quarters of 2022 from 52.0% for the first two quarters of 2021, primarily due to higher sales. Capacity utilization is a key driver for us, which is measured by the actual production as a percentage of maximum capacity. This measure is particularly important in our high-volume facilities inAsia , as a significant portion of our operating costs are fixed in nature. Capacity utilization for the second quarter of 2022 in ourAsia and North America PCB facilities was 88% and 42%, respectively, compared to 88% and 49%, respectively, for the second quarter of 2021. Capacity utilization for the first two quarters of 2022 in ourAsia and North America PCB facilities was 86% and 44%, respectively, compared to 84% and 52%, respectively, for the first two quarters of 2021. The increase in capacity utilization in our Asia PCB facilities during the first two quarters of 2022 was due to an increase in production resulting from increased sales in our commercial end markets. The decrease in our capacity utilization in our North America PCB facilities was primarily due to increased capacity resulting from additional plating capacity, bottlenecks in non-plating processes and direct labor shortages in certain regions.
Selling and Marketing Expenses
Selling and marketing expense increased$3.0 million , to$17.6 million for the second quarter of 2022 from$14.6 million for the second quarter of 2021. As a percentage of net sales, selling and marketing expense was 2.8% for the second quarter of 2022, as compared to 2.6% for the second quarter of 2021. The increase in selling and marketing expenses was primarily due to an increase in commission expense and labor costs. Selling and marketing expenses increased$4.9 million , to$35.8 million for the first two quarters of 2022 from$30.9 million for the first two quarters of 2021. As a percentage of net sales, selling and marketing expenses was 2.9% for the first two quarters of 2022, as compared to 2.8% for the first two quarters of 2021. The increase in selling and marketing expense for the first two quarters of 2022 was primarily due to an increase in commission expense and labor costs.
General and Administrative Expenses
General and administrative expense increased$17.6 million to$48.8 million , or 7.8% of net sales, for the second quarter of 2022 from$31.2 million , or 5.5% of net sales, for the second quarter of 2021. The increase in expense primarily resulted from$9.9 million of costs incurred in connection with the acquisition of Telephonics onJune 27, 2022 . In addition, there were increases in labor costs, incentive compensation, and other general and administrative spending. General and administrative expenses increased$19.0 million to$81.8 million , or 6.8% of net sales, for the first two quarters of 2022 from$62.7 million , or 5.7% of net sales, for the first two quarters of 2021. The increase in expense primarily resulted from$10.7 million of costs incurred in connection with the acquisition of Telephonics onJune 27, 2022 . In addition, there were increases in labor costs, incentive compensation, bad debt, and other general and administrative spending. These increases were partially offset by the decrease in restructuring charges of$3.2 million associated with the restructuring of ourE-M Solutions business unit during the first two quarters of 2021.
Other Expense
Other expense, net decreased$7.7 million to$3.1 million for the second quarter of 2022 from$10.8 million for the second quarter of 2021. This decrease was primarily the result of foreign currency gains due to the weakening of the Chinese Renminbi (RMB) in the second quarter of 2022 compared to the second quarter of 2021. We utilize the RMB at ourChina facilities for employee-related expenses, RMB denominated purchases, and other costs of running our operations inChina . Other expense, net decreased$22.4 million to$12.5 million for the first two quarters of 2022 from$34.9 million for the first two quarters of 2021. This decrease was primarily the result of the absence of$15.2 million of loss on extinguishment of debt. In addition, there were foreign currency gains due to the weakening of the RMB in the first two quarters of 2022 compared to the first two quarters of 2021, partially offset by lower government subsidies.
Income Taxes
Income tax expense increased by$4.5 million to$6.3 million of tax expense for the second quarter of 2022 from$1.8 million of tax expense for the second quarter of 2021. The increase in income tax expense for the second quarter of 2022 was primarily due 26 --------------------------------------------------------------------------------
to an increase in pre-tax income and a lower uncertain tax position release benefit, which resulted from the expiration of the statute of limitation in foreign jurisdictions.
Income tax expense increased by$4.8 million to$5.6 million of tax expense for the first two quarters of 2022 from$0.8 million of tax expense for the first two quarters of 2021. The increase in income tax expense for the first two quarters of 2022 was primarily due to an increase in pre-tax income for the first two quarters of 2022 and a lower uncertain tax position release benefit, which resulted from the expiration of the statute of limitation in foreign jurisdictions, partially offset by the approval of the Company's renewal application for High and New Enterprise status for two of the Company's manufacturing subsidiaries inChina in the current year. Our effective tax rate is primarily impacted by tax rates inChina andHong Kong , theU.S. federal income tax rate, apportioned state income tax rates, the generation of credits and deductions available to the Company as well as changes in valuation allowances and certain non-deductible items. We had a net deferred income tax liability of approximately$20.7 million and a net deferred income tax asset of approximately$15.2 million as ofJuly 4, 2022 andJune 28, 2021 , respectively. The decrease in the deferred income tax asset was primarily due to recording of a deferred income tax liability of$27.9 million related to the tax impact of the Telephonics' opening balance sheet.
Liquidity and Capital Resources
Our principal sources of liquidity have been cash provided by operations, the issuance of debt, and borrowings under our Revolving Credit Facility. Our principal uses of cash have been to finance capital expenditures, finance acquisitions, fund working capital requirements, to repay debt obligations, and to repurchase common stock. We anticipate that financing capital expenditures, financing acquisitions, funding working capital requirements, and servicing debt will be the principal demands on our cash in the future. Cash flow provided by operating activities during the first two quarters of 2022 was$115.3 million as compared to cash flow provided by operating activities of$98.1 million in the same period in 2021. The increase in cash flow was primarily due to an increase in net income of$20.0 million . Net cash used in investing activities was approximately$349.0 million for the first two quarters of 2022, primarily reflecting$299.2 million for the acquisition of Telephonics and$49.9 million for purchases of property, plant and equipment and other assets. Net cash used in investing activities was approximately$43.7 million for the first two quarters of 2021, reflecting$44.6 million for purchases of property, plant and equipment and other assets less$0.9 million for proceeds from sale of property, plant and equipment and other assets. Net cash used in financing activities during the first two quarters of 2022 was$36.3 million , primarily reflecting repurchases of common stock of$35.4 million and cash used to settle warrants of$0.9 million . Net cash provided by financing activities during the first two quarters of 2021 was$52.0 million , primarily reflecting proceeds from long-term debt borrowing of$500.0 million , less the repayment of long-term debt borrowings of$425.8 million , capital equipment financing of$7.1 million , repurchases of common stock of$6.1 million , payment of debt issuance costs of$5.8 million , and cash used to settle warrants of$3.1 million . As ofJuly 4, 2022 , we had cash and cash equivalents of approximately$266.5 million , of which approximately$199.4 million was held by our foreign subsidiaries, primarily inHong Kong . Should we choose to remit cash tothe United States from our foreign locations, we may incur tax obligations which would reduce the amount of cash ultimately available tothe United States . However, we believe there would be no material tax consequences not previously accrued for the repatriation of this cash.
Our total 2022 capital expenditures are expected to be in the range of
Share Repurchases OnFebruary 3, 2021 , our board of directors authorized a share repurchase program allowing us to repurchase up to$100.0 million of our common stock. During the second quarter of 2022, we repurchased a total of 0.4 million shares of our common stock for$5.2 million (including commissions) and during the two quarters endedJuly 4, 2022 , we repurchased a total of 2.7 million shares of our common stock for a total cost of$35.4 million (including commissions). As ofJuly 4, 2022 , there are no amounts available for repurchase. We repurchased a total of 7.5 million shares of our common stock for$100.0 million under the share repurchase program. 27 --------------------------------------------------------------------------------
Long-term Debt and Letters of Credit
As ofJuly 4, 2022 , we had$928.6 million of outstanding debt, net of discount and debt issuance costs, composed of$494.9 million of Senior Notes dueMarch 2029 ,$403.7 million of a Term Loan dueSeptember 2024 , and$30.0 million under the Asia Asset-Based Lending Credit Agreement (Asia ABL). Pursuant to the terms of the Term Loan Facility and Senior Notes due 2029, we are subject to certain affirmative and negative covenants, including limitations on indebtedness, corporate transactions, investments, dispositions, and share payments. Under the occurrence of certain events, under theU.S. Asset-Based Lending Credit Agreement (U.S. ABL) and Asia ABL (collectively, the ABL Revolving Loans), we are also subject to various financial covenants, including leverage and fixed charge coverage ratios. As ofJuly 4, 2022 , we were in compliance with the covenants under the Term Loan Facility, Senior Notes due 2029 and ABL Revolving Loans. Based on our current level of operations, we believe that cash generated from operations, cash on hand and cash from the issuance of term and revolving debt will be adequate to meet our currently anticipated capital expenditure, debt service, and working capital needs for the next twelve months. Additional information regarding our indebtedness, including information about the credit available under our debt facilities, interest rates and other key terms of our outstanding indebtedness, is included in Part I, Item 1, Note 8, Long-term Debt and Letters of Credit, of the Notes to Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q.
Contractual Obligations and Commitments
As part of our ongoing operations, we enter into contractual arrangements that obligate us to make future cash payments. These obligations impact our liquidity and capital resource needs. Our estimated future obligations consist of long-term debt obligations, interest on debt obligations, purchase obligations, and leases as ofJuly 4, 2022 . As of the date of this report, our contractual obligations have not changed materially sinceJanuary 3, 2022 , except for additional purchase obligations resulting from the Telephonics acquisition. As ofJuly 4, 2022 , additional purchase obligations resulting from the Telephonics acquisition amounted to$121.1 million , which are expected to be settled as follows:$109.3 million within 1 year,$11.7 million within 1-3 years, and$0.1 million within 4-5 years. Seasonality Historically, we experienced significant seasonality in revenues with a softer first half of the fiscal year and generally ramping volumes in the third quarter which usually peaked in the fourth quarter. After the divestiture of our former Mobility business unit in 2020, this pattern has changed. Barring end market demand changes, we now tend to experience modest seasonal softness in the first and third quarters due to holidays and vacation periods inChina andNorth America , respectively, which limit production leading to stronger revenue levels in the second and fourth quarters.
Recently Issued Accounting Standards
For a description of recently adopted and issued accounting standards, including
the respective dates of adoption and the expected effects on our results of
operations and financial condition, see Part I, Item 1, Note 1, Nature of
Operations and Basis of Presentation, of the Notes to Consolidated Condensed
Financial Statements included in this Quarterly Report on Form 10-Q.
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