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 endedDecember 28, 2020 , filed with theSEC .
COMPANY OVERVIEW
We are a leading global printed circuit board (PCB) manufacturer, focusing on quick-turn and volume production of technologically advanced PCBs and backplane assemblies as well as a global designer and manufacturer of high-frequency radio frequency (RF) and microwave components and assemblies. 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 1,300 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
The coronavirus (COVID-19) pandemic first caused business disruption in 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, the pandemic has declined. However, as new variants evolve, we could see a rebound in the severity 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. The COVID-19 pandemic has created and continues to create various global macroeconomic, customer demand, operational and supply chain risks any one 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 protect our employees, suppliers and customers by implementing our extensive pandemic recovery protocols, establishing situational leadership teams inAsia-Pacific andNorth America along with regularly scheduled executive review 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 have been experiencing increasing prices and lead times of copper clad laminates (CCLs) and other raw materials used in the manufacture of PCBs. CCLs are made from epoxy resin, glass cloth and copper foil, all of which are seeing limited supply has resulted in increased prices. We are actively managing higher raw materials costs by seeking to pass on the increase in costs to our customers, implementing ongoing operational efficiencies, and through supplier diversification. FINANCIAL OVERVIEW Results related to our Mobility business unit are reported as discontinued operations for all periods presented. See Part I, Item 1, Note 2, Discontinued Operations, of the Notes to Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q for further information. Unless otherwise noted, amounts and disclosures throughout our Management's Discussion and Analysis of Financial Condition and Results of Operations relate to our continuing operations. 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 40% and 42% of our net sales for the quarter and two quarters endedJune 28, 2021 . Sales to our ten largest customers accounted for 36% and 38% of our net sales for the quarter and two quarters endedJune 29, 2020 , respectively. We sell to OEMs both directly and indirectly through EMS providers. 25 --------------------------------------------------------------------------------
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) June 28, 2021 June 29, 2020 June 28, 2021 June 29, 2020
Aerospace and Defense 33 % 33 % 34 % 35 %
Automotive 18 12 18 13
Data Center Computing (2) 14 13 14 12
Medical/Industrial/Instrumentation 19 21 18 20
Networking/Communications 15 20 15 19
Other (3) 1 1 1 1
Total 100 % 100 % 100 % 100 %
(1) Sales to EMS companies are classified by the end markets of their OEM
customers.
(2) Beginning in the first quarter of 2021, the Computing/Storage/Peripherals end
market was renamed to Data Center Computing to better reflect the customer
mix and growth prospects. There was no change to the customers included in
this end market.
(3) 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 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.
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 endedDecember 28, 2020 for further discussion of critical accounting policies and estimates. There were no material changes to our critical accounting policies and estimates sinceDecember 28, 2020 . 26 --------------------------------------------------------------------------------
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
June 28, 2021 June 29, 2020 June 28, 2021 June 29, 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 82.4 82.4 83.4 83.0
Gross profit 17.6 17.6 16.6 17.0
Operating expenses:
Selling and marketing 2.6 2.8 2.8 3.0
General and administrative 5.5 8.2 5.7 7.6
Research and development 0.7 0.9 0.8 0.9
Amortization of definite-lived
intangibles 1.6 1.7 1.7 1.8
Total operating expenses 10.4 13.6 11.0 13.3
Operating income 7.2 4.0 5.6 3.7
Other (expense) income:
Interest expense (2.0 ) (3.3 ) (2.1 ) (3.6 )
Loss on extinguishment of debt - - (1.4 ) -
Other, net 0.1 0.1 0.3 0.3
Total other expense, net (1.9 ) (3.2 ) (3.2 ) (3.3 )
Income from continuing operations
before income taxes 5.3 0.8 2.4 0.4
Income tax (provision) benefit (0.3 ) 0.8 (0.1 ) 0.2
Net income from continuing operations 5.0 % 1.6 % 2.3 % 0.6 %
As of March 29, 2021 , E-M Solutions no longer met the criteria for segment
reporting and the SH BPA facility has been integrated into the PCB reportable
segment. In fiscal 2020, subsequent to the quarter ended June 29, 2020 , RF&S
Components was added as a reportable segment. As a result, we reclassified prior
periods to reflect these changes to our segments.
Total net sales decreased$2.9 million , or 0.5%, to$567.4 million for the second quarter of 2021 from$570.3 million for the second quarter of 2020. This decrease in total net sales primarily resulted from a$21.3 million reduction in net sales due to the closure of the two plants from our discontinued E-M solutions segment. This decrease was partially offset by an increase in net sales for the PCB reportable segment of$16.6 million , or 3.1%, to$553.5 million for the second quarter of 2021 from$536.8 million for the second quarter of 2020 primarily due to higher demand in our Automotive andData Center Computing end markets partially offset by lower demand in our Networking/Communications and Medical/Industrial/Instrumentation end markets. These changes in the PCB reportable segment resulted in a 32.6% increase in the volume of PCB shipments, however the resulting increase in net sales was partially offset by a 19.8% lower price per square foot, driven mainly by product mix shift as compared to the second quarter of 2020. Additionally, there was an increase in net sales for the RF&S Components reportable segment of$1.8 million , or 15.0%, to$13.9 million for the second quarter of 2021 from$12.1 million for the second quarter of 2020 primarily due to higher demand in our Networking/Communications end market. Despite the closure of the two plants from our discontinuedE-M Solutions segment, which accounted for a$32.3 million reduction in net sales, total net sales increased$25.9 million , or 2.4%, to$1,093.8 million for the first two quarters of 2021 from$1,067.9 million for the first two quarters of 2020. This increase in total net sales primarily resulted from an increase in net sales for the PCB reportable segment of$53.1 million , or 5.3%, to$1,064.0 million for the first two quarters of 2021 from$1,010.8 million for the first two quarters of 2020 primarily due to higher demand in our Automotive andData Center Computing end markets, partially offset by lower demand in our Networking/Communications, Medical/Industrial/Instrumentation and Other end markets. These changes in the PCB reportable segment resulted in a 30.7% increase in the volume of PCB shipments, however the resulting increase in net sales was partially offset by a 17.9% lower price per square foot, driven mainly by product mix shift as compared to the first two quarters of 2020. Also contributing to the increase in total net sales was an increase in net sales for the RF&S Components reportable segment of$5.1 million , or 23.5%, to$26.6 million for the first two quarters of 2021 from$21.5 million for the first two quarters of 2020 primarily due to higher demand in our Networking/Communications end market. Gross Margin Overall gross margin was 17.6% for both the second quarter of 2021 and the second quarter of 2020. Gross margin for the PCB reportable segment decreased to 17.4% for the second quarter of 2021 from 18.8% for the second quarter of 2020. This decline was 27
-------------------------------------------------------------------------------- primarily due to unfavorable foreign exchange rates which increased our cost of operations and production and labor inefficiencies related to COVID-19. We were able to mitigate most of these costs through higher revenue and production and spending efficiencies including savings from the closure of two of ourE-M Solutions factories. Gross margin for the RF&S Components reportable segment decreased to 52.4% for the second quarter of 2021 from 57.3% for the second quarter of 2020, primarily due to unfavorable product mix. Overall gross margin decreased to 16.6% for the first two quarters of 2021 from 17.0% for the first two quarters of 2020. This decrease was primarily driven by a decrease in gross margin for the PCB reportable segment to 16.6% for the first two quarters of 2021 from 18.2% for the first two quarters of 2020. This decline was primarily due to unfavorable foreign exchange rates which increased our cost of operations, higher raw material costs due to increased commodity prices, primarily copper, and production and labor inefficiencies related to COVID-19. We were able to mitigate most of these costs through higher revenue and production and spending efficiencies including savings from the closure of two of ourE-M Solutions factories. Gross margin for the RF&S Components reportable segment decreased to 52.0% for the first two quarters of 2021 from 52.3% for the first two quarters of 2020, primarily due to unfavorable product mix partially offset by higher sales. Capacity utilization is a key driver for us, which is measured by 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 2021 in ourAsia and North America PCB facilities was 88% and 49%, respectively, compared to 70% and 63%, respectively, for the second quarter of 2020. Capacity utilization for the first two quarters of 2021 in ourAsia and North America PCB facilities was 84% and 52%, respectively, compared to 61% and 65%, respectively for the first two quarters of 2020. The increase in capacity utilization in our Asia PCB facilities was due to an increase in production resulting from increased sales in our Automotive and Data Center Computing end markets. The decrease in our capacity utilization in our North America PCB facilities was due to increased capacity resulting from equipment expansion in the second quarter of 2021 and production inefficiencies related to COVID-19.
Selling and Marketing Expenses
Selling and marketing expenses decreased$1.4 million , to$14.6 million for the second quarter of 2021 from$16.0 million for the second quarter of 2020. As a percentage of net sales, selling and marketing expenses was 2.6% for the second quarter of 2021, as compared to 2.8% for the second quarter of 2020. The decrease in selling and marketing expense for the second quarter of 2021 was primarily due to a decrease in commission expense. Selling and marketing expenses decreased$1.3 million , to$30.9 million for the first two quarters of 2021 from$32.1 million for the first two quarters of 2020. As a percentage of net sales, selling and marketing expenses was 2.8% for the first two quarters of 2021, as compared to 3.0% for the first two quarters of 2020. The decrease in selling and marketing expense for the first two quarters of 2021 was primarily due to a decrease in commission expense and reduced travel costs due to the COVID-19 pandemic, which has decreased travel on what we believe to be a temporary basis.
General and Administrative Expenses
General and administrative expenses decreased$15.5 million to$31.2 million , or 5.5% of net sales, for the second quarter of 2021 from$46.7 million , or 8.2% of net sales, for the second quarter of 2020. This decrease was primarily due to a decrease in restructuring charges of$12.9 million associated with the restructuring of ourE-M Solutions business unit, supplies and acquisition/integration costs. General and administrative expenses decreased$18.7 million to$62.7 million , or 5.7% of net sales, for the first two quarters of 2021 from$81.4 million , or 7.6% of net sales, for the first two quarters of 2020. This decrease was primarily due to a decrease in restructuring charges of$10.0 million associated with the restructuring of ourE-M Solutions business unit, supplies, acquisition/integration costs, and bad debt.
Other Expense
Other expense, net decreased$7.3 million to$10.8 million for the second quarter of 2021 from$18.1 million for the second quarter of 2020. This decrease was primarily the result of a decrease in interest expense of$7.5 million due to overall lower levels of debt outstanding and the refinancing of our bond. Other expense, net decreased$0.5 million to$34.9 million for the first two quarters of 2021 from$35.4 million for the first two quarters of 2020. This decrease was primarily the result of a decrease in interest expense of$15.9 million due to overall lower levels of debt outstanding, partially offset by$15.2 million of loss on extinguishment of debt.
Income Taxes
Income tax expense increased by$6.3 million to$1.8 million of tax expense for the second quarter of 2021 from$4.5 million of tax benefit for the second quarter of 2020. The increase in income tax expense for the second quarter of 2021 was primarily due to an increase in pre-tax income from continuing operations and a lower uncertain tax position release benefit due to the expiration of 28 --------------------------------------------------------------------------------
the statute of limitation in foreign jurisdictions, partially offset by the
absence of tax expense associated with the two
Income tax expense increased by$3.1 million to$0.8 million of tax expense for the first two quarters of 2021 from$2.3 million of tax benefit for the first two quarters of 2020. The increase in income tax expense for the first two quarters of 2021 was primarily due to a lower uncertain tax position release benefit due to the expiration of the statute of limitation in foreign jurisdictions, partially offset by (i) the absence of tax expense associated with the twoE-M Solutions plants that we closed in 2020, and (ii) 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 asset of approximately$15.2 million and$10.9 million as ofJune 28, 2021 andJune 29, 2020 , respectively. OnMarch 11, 2021 , the President ofthe United States signed the American Rescue Plan (ARP) providing additional economic relief for the disruptions caused by the COVID-19 pandemic. Accounting Standard Codification (ASC) 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment regardless of the effective date of those tax law changes. We considered the impact to our financial statements of the corporate income tax aspects of the ARP and determined the impact is not material to our financial statements.
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 Facilities. Our principal uses of cash have been to finance capital expenditures, finance acquisitions, fund working capital requirements, and to repay existing debt. We anticipate that financing capital expenditures, financing acquisitions, funding working capital requirements, servicing debt, and potential share repurchases will be the principal demands on our cash in the future. Cash flow provided by operating activities for continuing operations during the first two quarters of 2021 was$98.1 million as compared to cash flow provided by operating activities for continuing operations of$107.4 million in the same period in 2020. The decrease in cash flow was primarily due to increased investment in working capital, partially offset by an increase in net income from continuing operations of$18.9 million . Net cash used in investing activities for continuing operations 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 investing activities for continuing operations was approximately$45.3 million for the first two quarters of 2020, reflecting purchases of property, plant and equipment and other assets. Net cash provided by financing activities for continuing operations 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 . There was no activity related to cash flows from financing activities for the first two quarters of 2020. As ofJune 28, 2021 , we had cash and cash equivalents of approximately$558.3 million , of which approximately$238.9 million was held by our foreign subsidiaries, primarily inChina . 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 on the repatriation of this cash.
Our total 2021 capital expenditures are expected to be in the range of
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--------------------------------------------------------------------------------Long-term Debt and Letters of Credit
As ofJune 28, 2021 , we had$926.5 million of outstanding debt, net of discount and debt issuance costs, composed of$493.7 million of Senior Notes dueMarch 2029 ,$402.8 million of a Term Loan dueSeptember 2024 , and$30.0 million under the Asia Asset-Based Lending Credit Agreement (Asia ABL). Pursuant to the terms of the Term Loan Facility and Senior Notes due 2029, we are subject to certain affirmative and negative covenants, including limitations on indebtedness, corporate transactions, investments, dispositions, and share payments. Under the occurrence of certain events, as a result of theU.S. Asset-Based Lending Credit Agreement (U.S. ABL) and Asia ABL (collectively, the ABL Revolving Loans), we are also subject to various financial covenants, including leverage and fixed charge coverage ratios. As ofJune 28, 2021 , we were in compliance with the covenants under the Term Loan Facility, Senior Notes due 2029 and ABL Revolving Loans. Based on our current level of operations, we believe that cash generated from operations, cash on hand and cash from the issuance of term and revolving debt will be adequate to meet our currently anticipated capital expenditure, debt service, and working capital needs for the next twelve months. Additional information regarding our indebtedness, including information about the credit available under our debt facilities, interest rates and other key terms of our outstanding indebtedness, is included in Part I, Item 1, Note 8, Long-term Debt and Letters of Credit, of the Notes to Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q.
Contractual Obligations and Commitments
The following table provides information on our contractual obligations as ofJune 28, 2021 : Less Than 1 - 3 4 - 5 After Total 1 Year Years Years 5 Years Contractual Obligations (1) (In
thousands)
Long-term debt obligations$ 935,879 $ -$ 30,000 $ 405,879 $ 500,000 Interest on debt obligations (2) 195,697 32,469 62,255 42,584 58,389 Derivative liabilities 10,047 10,047 - - - Purchase obligations 151,206 123,607 18,938 718 7,943
Total contractual obligations
(1) Unrecognized uncertain tax benefits of
table above as the settlement timing is uncertain. Operating leases are not
included in the table above - see Part I, Item 1, Note 3, Leases, of the
Notes to Consolidated Condensed Financial Statements included in this
Quarterly Report on Form 10-Q for further details.
(2) For debt obligations based on variable rates, interest rates used are as of
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As a result, we are not materially exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in these relationships. Seasonality Historically, we experienced significant seasonality in revenues with a softer first half and ramping volumes in the third quarter which usually peaked in the fourth quarter. Post the Mobility divestiture, 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 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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