Item 1A.
Risk Factors
An investment in our common stock involves a high degree of risk. You should carefully consider the factors described
below, in addition to those discussed elsewhere in this report, in analyzing an investment in our common stock. If any of the events described below occurs, our business, financial condition, and results of operations would likely suffer, the
trading price of our common stock could fall, and you could lose all or part of the money you paid for our common stock. The risk factors described below are not the only ones we face. Risks and uncertainties not known to us currently, or that may
appear immaterial, also may have a material adverse effect on our business, financial condition, and results of operations.
In addition, the following risk factors and uncertainties could cause our actual results to differ materially from those projected in our forward-looking statements, whether made in this 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.
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Risks Related to our Business
Uncertainty and adverse changes in the economy and financial markets could have an adverse impact on our business
and operating results.
Uncertainty or adverse changes in the economy could lead to a significant
decline in demand for the end products manufactured by our customers, which, in turn, could result in a decline in the demand for our products and pressure to reduce our prices. Any decrease in demand for our products could have an adverse impact on
our financial condition, operating results and cash flows. Uncertainty and adverse changes in the economy could also increase the cost and decrease the availability of potential sources of financing and increase our exposure to losses from bad
debts, either of which could have a material adverse effect on our financial condition, operating results and cash flows.
We are heavily dependent upon the worldwide electronics industry, which is characterized by economic cycles and fluctuations in product demand. A downturn in the electronics industry or prolonged
global economic crisis could result in decreased demand for our manufacturing services and materially adversely affect our business, financial condition, and results of operations.
A majority of our revenue is generated from the electronics industry, which is characterized by intense competition,
relatively short product life cycles, and significant fluctuations in product demand. The industry is subject to economic cycles and recessionary periods. Due to the uncertainty in the end markets served by most of our customers, we have a low level
of visibility with respect to future financial results. Consequently, our past operating results, earnings, and cash flows may not be indicative of our future operating results, earnings, and cash flows.
If we are unable to respond to rapid technological change and process development, we may not be able to compete
effectively.
The market for our manufacturing services is characterized by rapidly changing technology
and continual implementation of new production processes. The future success of our business will depend in large part upon our ability to maintain and enhance our technological capabilities, to manufacture products that meet changing customer
needs, and to successfully anticipate or respond to technological changes on a cost-effective and timely basis. We expect that the investment necessary to maintain our technological position will increase as customers make demands for products and
services requiring more advanced technology on a quicker turnaround basis. For example, in 2017 we expect to continue to make significant capital expenditures to expand our HDI, mSAP and other advanced manufacturing capabilities. We may not be able
to obtain access to additional sources of funds in order to respond to technological changes as quickly as our competitors. In addition, failure to adopt and implement technological improvements quickly may cause inefficiencies as our product yields
or quality may decrease, and therefore our earnings generated may deteriorate.
In addition, the PCB industry
could encounter competition from new or revised manufacturing and production technologies that render existing manufacturing and production technology less competitive or obsolete. We may not respond effectively to the technological requirements of
the changing market. If we need new technologies and equipment to remain competitive, the development, acquisition, and implementation of those technologies and equipment will require us to make significant capital investments.
Changes in tax laws could materially affect our financial position and results of operations.
The U.S. tax laws are subject to significant change. The current U.S. administration and key members of Congress have made
public statements indicating that tax reform is a priority. Certain changes to U.S. tax laws including limitations on the ability to defer U.S. taxation on earnings outside of the United States until those earnings are repatriated to the United
States, could affect the tax treatment of our earnings. Due to the large and expanding scale of our international business activities, many of these types of changes to the taxation of our activities could increase our worldwide effective tax rate
and materially impact our financial position or results of operations.
An increase in the cost of raw
materials could have a material adverse effect on our business, financial condition, and results of operations and reduce our gross margins.
To manufacture PCBs, we use raw materials such as laminated layers of fiberglass, copper foil, chemical solutions, gold, and other commodity products, which we order from our suppliers. In the case of
backplane assemblies, components include connectors, sheet metal, capacitors, resistors and diodes, many of which are custom made and controlled by our customers approved vendors. If raw material and component prices increase, it may reduce
our gross margins.
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We have substantial outstanding indebtedness, and our outstanding
indebtedness could adversely impact our liquidity and flexibility in obtaining additional financing, our ability to fulfill our debt obligations and our financial condition and results of operations.
We have substantial debt and, as a result, we have significant debt service obligations. We maintain a Term Loan Credit
Agreement (Term Loan) at an interest rate of LIBOR plus 4.25%, a $200.0 million U.S. Asset-Based Lending Credit Agreement (U.S ABL), and a $150.0 million Asia Asset-Based Lending Credit Agreement (Asia ABL). In addition, we and a number of
our direct and indirect subsidiaries have various credit facilities, letters of credit and guarantee facilities. Such agreements also contain certain financial covenants which require us to maintain a specified consolidated leverage ratio and under
the occurrence of certain events, a consolidated fixed charge coverage ratio.
Our indebtedness could have
important consequences to us and our shareholders because in certain circumstances we may need to comply with the covenants in the agreements governing such indebtedness and dedicate funds to service our outstanding debt. For example, it could:
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make it more difficult for us to satisfy our obligations with respect to our indebtedness, which could in turn result in an event of default on such
indebtedness;
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require us to use a substantial portion of our cash flow from operations for debt service payments, thereby reducing the availability of cash for
working capital, capital expenditures, acquisitions and other general corporate purposes;
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impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and other investments or
general corporate purposes, which may limit our ability to execute our business strategy;
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diminish our ability to withstand a downturn in our business, the industry in which we operate or the economy generally and restrict us from
exploiting business opportunities or making acquisitions;
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limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate or the general economy;
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increase our vulnerability to general adverse economic and industry conditions, including movements in interest rates, which could result in
increased borrowing costs;
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limit managements discretion in operating our business; and
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place us at a competitive disadvantage as compared to our competitors that have less debt as it could limit our ability to capitalize on future
business opportunities and to react to competitive pressures or adverse changes.
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We may be
able to incur substantial additional debt in the future, some or all of which may be secured by a lien on our assets. If new debt or other liabilities or obligations are added to our current debt levels, the related risks that we and our
subsidiaries now face could intensify.
Servicing our debt requires a significant amount of cash and we
may not be able to generate sufficient cash to service all of our debt and may be forced to take other actions to satisfy our obligations under our debt, which may not be successful.
For the two quarters ended July 3, 2107, we made optional prepayments of principal of $50.0 million on the Term
Loan. We are not required to make quarterly scheduled payments of the outstanding Term Loan balance due to mandatory payments and optional loan prepayments applied to date. We may be required to make an additional principal payment on an annual
basis, based on certain parameters defined in these agreements, which includes a secured leverage ratio. For fiscal year 2017, we are not required to make any additional principal payments as our secured leverage ratio is less than or equal to 1.5.
We may be required to make additional principal payments in future years, if our secured leverage ratio is greater than 1.5.
Our ability to make scheduled payments on or to refinance our debt obligations and to fund planned capital expenditures and expansion efforts depends on our ability to generate cash in the future and our
financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain regulatory, competitive, financial, business and other factors beyond our control. We cannot assure you that we will
maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our debt.
If we are unable to meet our debt service obligations, we may be forced to reduce or delay investments or to sell assets, seek additional capital (which could include obtaining additional equity capital
on terms that may be onerous or highly dilutive) or restructure or refinance our debt. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our operating results and available cash
may in the future be insufficient to meet our debt service obligations. We could face substantial liquidity challenges and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be
able to consummate those dispositions or, if consummated, the proceeds of such dispositions may not be adequate to meet any debt service obligations then due.
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We have pursued and intend to continue to pursue acquisitions of
other businesses and may encounter risks associated with these activities, which could harm our business and operating results.
As part of our business strategy, we expect that we will continue to grow by pursuing acquisitions of businesses, technologies, assets, or product lines that complement or expand our business. Risks
related to an acquisition may include:
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the potential inability to successfully integrate acquired operations and businesses or to realize anticipated synergies, economies of scale, or
other expected value;
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diversion of managements attention from normal daily operations of our existing business to focus on integration of the newly acquired
business;
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unforeseen expenses associated with the integration of the newly acquired business;
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difficulties in managing production and coordinating operations at new sites;
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the potential loss of key employees of acquired operations;
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the potential inability to retain existing customers of acquired companies when we desire to do so;
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insufficient revenues to offset increased expenses associated with acquisitions;
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the potential decrease in overall gross margins associated with acquiring a business with a different product mix;
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the inability to identify certain unrecorded liabilities;
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the potential need to restructure, modify, or terminate customer relationships of the acquired company;
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an increased concentration of business from existing or new customers; and
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the potential inability to identify assets best suited to our business plan.
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Acquisitions may cause us to:
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enter lines of business and/or markets in which we have limited or no prior experience;
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issue debt and be required to abide by stringent loan covenants;
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assume liabilities; record goodwill and indefinite-lived intangible assets that will be subject to impairment testing and potential periodic
impairment charges;
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become subject to litigation and environmental issues, which include product material content certifications related to conflict minerals;
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incur unanticipated costs;
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incur large and immediate write-offs; and
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incur substantial transaction-related costs, whether or not a proposed acquisition is consummated.
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Acquisitions of high technology companies are inherently risky, and no assurance can be given that our recent or future
acquisitions will be successful. Failure to manage and successfully integrate acquisitions we make could have a material adverse effect on our business, financial condition, and results of operations. Even when an acquired company has already
developed and marketed products, product enhancements may not be made in a timely fashion. In addition, unforeseen issues might arise with respect to such products after any such acquisition.
We are subject to risks of currency fluctuations.
A portion of our cash and other current assets is held in currencies other than the U.S. dollar. As of July 3, 2017,
we had an aggregate of approximately $155.7 million in current assets denominated in Chinese Renminbi (RMB) and the Hong Kong Dollar (HKD). Changes in exchange rates among other currencies and the U.S. dollar will affect the value of these
assets as translated to U.S. dollars on our balance sheet. To the extent that we ultimately decide to repatriate some portion of these funds to the United States, the actual value transferred could be impacted by movements in exchange rates. Any
such type of movement could negatively impact the amount of cash available to fund operations or to repay debt. To the extent that we may have outstanding receivables or indebtedness denominated in the U.S. dollar or in the HKD, the fluctuation of
the RMB against the U.S. dollar or the HKD may have a material adverse effect on our business, financial condition, and results of operations (including the cost of servicing, and the value on our balance sheet of, the U.S. dollar and
HKD-denominated
indebtedness). Additionally, we have revenues and costs denominated in currencies other than the U.S. dollar (primarily the RMB). Fluctuations in the exchange rates between the U.S. dollar and the
RMB could result in increases or decreases in our costs or revenues which could negatively impact our business, financial condition, and results of operations. Significant inflation or disproportionate changes in foreign exchange rates could occur
as a result of general economic conditions, acts of war or terrorism, changes in governmental monetary or tax policy, or changes in local interest rates. For the quarter and two quarters ended July 3, 2017, our consolidated condensed statement
of operations included an unrealized foreign exchange loss of approximately $6.5 million and $10.2 million, respectively, due primarily to the appreciation of the RMB against the U.S. dollar and the HKD. The impact of future exchange rate
fluctuations between the U.S. dollar and the RMB and the U.S. dollar and the HKD cannot be predicted. Further, Chinas government imposes controls over the convertibility of RMB into foreign currencies, which subjects us to further
currency exchange risk.
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Products we manufacture may contain design or manufacturing
defects, which could result in reduced demand for our services and liability claims against us.
We
manufacture products to our customers specifications, which are highly complex and may contain design or manufacturing errors or failures, despite our quality control and quality assurance efforts. Defects in the products we manufacture,
whether caused by a design, manufacturing, or materials failure or error, may result in delayed shipments, customer dissatisfaction, a reduction or cancellation of purchase orders, or liability claims against us. If these defects occur either in
large quantities or too frequently, our business reputation may be impaired. Since our products are used in products that are integral to our customers businesses, errors, defects, or other performance problems could result in financial or
other damages to our customers beyond the cost of the PCB, for which we may be liable. Although our invoices and sales arrangements generally contain provisions designed to limit our exposure to product liability and related claims, existing or
future laws or unfavorable judicial decisions could negate these limitation of liability provisions. In addition, we manufacture products for a range of automotive customers. If any of our products are or are alleged to be defective, we may be
required to participate in a recall of such products. As suppliers become more integral to the vehicle design process and assume more of the vehicle assembly functions, vehicle manufacturers are increasingly looking to their suppliers for
contributions when faced with product liability claims or recalls. In addition, vehicle manufacturers, which have traditionally borne the costs associated with warranty programs offered on their vehicles, are increasingly requiring suppliers to
guarantee or warrant their products and may seek to hold us responsible for some or all of the costs related to the repair and replacement of parts supplied by us to the vehicle manufacturer.
We depend upon a relatively small number of OEM customers for a large portion of our sales, and a decline in sales
to major customers would materially adversely affect our business, financial condition, and results of operations.
A small number of customers are responsible for a significant portion of our sales. Our five largest OEM customers accounted for approximately 33% and 29% of our net sales for the quarters ended
July 3, 2017 and June 27, 2016, respectively, and one customer represented 16% of our sales for the quarter ended July 3, 2017. Sales attributed to OEMs include both direct sales as well as sales that the OEMs place through EMS
providers. Our customer concentration could fluctuate, depending on future customer requirements, which will depend in large part on market conditions in the electronics industry segments in which our customers participate. The loss of one or more
significant customers or a decline in sales to our significant customers would materially adversely affect our business, financial condition, and results of operations. In addition, we generate significant accounts receivable in connection with
providing manufacturing services to our customers. If one or more of our significant customers were to become insolvent or were otherwise unable to pay for the manufacturing services provided by us, our business, financial condition, and results of
operations would be materially adversely affected.
In addition, during industry downturns, we may need to
reduce prices to limit the level of order losses, and we may be unable to collect payments from our customers. There can be no assurance that key customers would not cancel orders, that they would continue to place orders with us in the future at
the same levels as experienced by us in prior periods, that they would be able to meet their payment obligations, or that the
end-products
that use our products would be successful. This concentration of
customer base may materially adversely affect our business, financial condition, and results of operations due to the loss or cancellation of business from any of these key customers, significant changes in scheduled deliveries to any of these
customers, or decreases in the prices of the products sold to any of these customers.
If we are unable
to maintain satisfactory capacity utilization rates, our business, financial condition, and results of operations would be materially adversely affected.
Given the high fixed costs of our operations, decreases in capacity utilization rates can have a significant effect on our
business. Accordingly, our ability to maintain or enhance gross margins will continue to depend, in part, on maintaining satisfactory capacity utilization rates. In turn, our ability to maintain satisfactory capacity utilization will depend on the
demand for our products, the volume of orders we receive, and our ability to offer products that meet our customers requirements at competitive prices. If current or future production capacity fails to match current or future customer demands,
our facilities would be underutilized, our sales may not fully cover our fixed overhead expenses, and we would be less likely to achieve expected gross margins. If forecasts and assumptions used to support the realizability of our long-lived assets
change in the future, significant impairment charges could result that would materially adversely affect our business, financial condition, and results of operations.
In addition, we generally schedule our quick turnaround production facilities at less than full capacity to retain our
ability to respond to unexpected additional quick-turn orders. However, if these orders are not received, we may forego some production and could experience continued excess capacity. If we conclude we have significant, long-term excess capacity, we
may decide to permanently close one or more of our facilities and lay off some of our employees. Closures or
lay-offs
could result in our recording restructuring charges such as severance, other exit costs,
and asset impairments, as well as potentially causing disruptions in our ability to supply customers.
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We rely on the cellular phone and mobile technology industry for
a significant portion of sales. The economic volatility in this industry has had, and may continue to have, a material adverse effect on our ability to forecast demand and production and to meet desired sales levels.
A large percentage of our business is conducted with customers who are in the cellular phone and mobile technology
industry. This industry is characterized by intense competition, short product life cycles, seasonality, particularly around the
year-end
holiday season, and significant fluctuations in consumer demand. This
industry is heavily dependent on consumers and therefore can be affected by their demand patterns. If the volatility in this industry continues, it may have a material adverse effect on our business, financial condition, and results of operations.
We participate in the competitive automotive industry, which has strict quality control standards.
A significant portion of our sales are to customers within the automotive industry. The automotive
industry has historically experienced multi-year cycles of growth and decline. In recent years, we have witnessed a growth cycle. If sales of automobiles should decline or go into a cyclical down turn, our sales could decline and this could have a
materially adverse impact on our business, financial condition and result of operations.
In addition, for
safety reasons, automotive customers have strict quality standards that generally exceed the quality requirements of other customers. If such products do not meet these quality standards, our business, financial condition, and results of operations
may be materially adversely affected. These automotive customers may require long periods of time to evaluate whether our manufacturing processes and facilities meet their quality standards. If we were to lose automotive customers due to quality
control issues, we might not be able to regain those customers or gain new automotive customers for long periods of time, which could have a material adverse effect on our business, financial condition, and results of operations. Moreover, we may be
required under our contracts with automotive industry customers to indemnify them for the cost of warranties and recalls relating to our products.
Our results of operations are often subject to demand fluctuations and seasonality. With a high level of fixed operating costs, even small revenue shortfalls would decrease our gross margins.
Our results of operations fluctuate for a variety of reasons, including:
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timing of orders from and shipments to major customers;
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the levels at which we utilize our manufacturing capacity;
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changes in our mix of revenues generated from quick-turn versus standard delivery time services;
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expenditures, charges or write-offs, including those related to acquisitions, facility restructurings, or asset impairments; and
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expenses relating to expanding existing manufacturing facilities.
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A significant portion of our operating expenses is relatively fixed in nature, and planned expenditures are based in part
on anticipated orders. Accordingly, unexpected revenue shortfalls may decrease our gross margins. In addition, we have experienced sales fluctuations due to seasonal patterns in the capital budgeting and purchasing cycles, as well as inventory
management practices of our customers and the end markets we serve. In particular, the seasonality of the cellular phone and tablet industries and quick-turn ordering patterns affect the overall PCB industry. These seasonal trends have caused
fluctuations in our operating results in the past and may continue to do so in the future. Results of operations in any period should not be considered indicative of the results that may be expected for any future period. In addition, our future
quarterly operating results may fluctuate and may not meet the expectations of securities analysts or investors.
We rely on the telecommunication industry for a significant portion of sales. The economic volatility in this industry has had, and may continue to have, a material adverse effect on our ability to
forecast demand and production and to meet desired sales levels.
A large percentage of our business is
conducted with customers who are in the telecommunication industry. This industry is characterized by intense competition, relatively short product life cycles, and significant fluctuations in product demand. This industry is heavily dependent on
the end markets it serves and therefore can be affected by the demand patterns of those markets. If the volatility in this industry continues, it may have a material adverse effect on our business, financial condition, and results of operations.
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Unanticipated changes in our tax rates or in our assessment of
the realizability of our deferred income tax assets or exposure to additional income tax liabilities could affect our business, financial condition, and results of operations.
We are subject to income taxes in the United States and various foreign jurisdictions. Significant judgment is required in
determining our provision for income taxes and, in the ordinary course of business, there are many transactions and calculations in which the ultimate tax determination is uncertain. Our effective tax rates could be materially adversely affected by
changes in the mix of earnings in countries and states with differing statutory tax rates, changes in the valuation of deferred income tax assets and liabilities, changes in tax laws, as well as other factors. Our tax determinations are regularly
subject to audit by tax authorities, and developments in those audits could adversely affect our income tax provision. Although we believe that our tax estimates are reasonable, the final determination of tax audits or tax disputes may be different
from what is reflected in our historical income tax provisions, which could materially adversely affect our business, financial condition, and results of operations.
If our net earnings do not remain at or above recent levels, or we are not able to predict with a reasonable degree
of probability that they will continue, we may have to record a valuation allowance against our net deferred income tax assets.
Certain of our foreign subsidiaries have deferred income tax assets. Based on our forecast for future taxable earnings for these foreign subsidiaries, we believe we will utilize the deferred income tax
assets in future periods. However, if our estimates of future earnings decline, we may have to increase our valuation allowance against our net deferred income tax assets, resulting in a higher income tax provision, which would reduce our results of
operations.
Issues arising during the upgrade of our enterprise resource planning system could affect
our operating results and ability to manage our business effectively.
We are in the process of
upgrading our enterprise resource planning, or ERP, management system to enhance operating efficiencies and provide more effective management of our business operations. We are investing significant financial and personnel resources into this
project. However, there is no assurance that the system upgrade will meet our current or future business needs or that it will operate as designed. The transition to the new ERP system will affect numerous systems necessary for our operation. If we
fail to correctly implement one or more components of the ERP system, we could experience significant disruption to our operations. Such disruptions could include, among other things, temporary loss of data, inability to process certain orders,
failure of systems to communicate with each other and the inability to track or reconcile key data. We are heavily dependent on automated management systems, and any significant failure or delay in the system upgrade could cause a substantial
interruption to our business and additional expense, which could result in an adverse impact on our operating results, cash flows or financial condition.
Our results can be adversely affected by rising labor costs.
There is uncertainty with respect to rising labor costs, particularly within China, where we have most of our manufacturing facilities. In recent periods there have been regular and significant increases
in the minimum wage payable in various provinces of China. In addition, we have experienced very high employee turnover in our manufacturing facilities in China, generally after the Chinese New Year, and we are experiencing ongoing difficulty in
recruiting employees for these facilities. Furthermore, labor disputes and strikes based partly on wages have in the past slowed or stopped production by certain manufacturers in China. In some cases, employers have responded by significantly
increasing the wages of workers at such plants. Any increase in labor costs due to minimum wage laws or customer requirements about scheduling and overtime that we are unable to recover in our pricing to our customers could materially adversely
affect our business, financial condition, and results of operations. In addition, the high turnover rate and our difficulty in recruiting and retaining qualified employees and the other labor trends we are noting in China could result in a potential
for defects in our products, production disruptions or delays, or the inability to ramp production to meet increased customer orders, resulting in order cancellation or imposition of customer penalties if we are unable to deliver products in a
timely manner.
To respond to competitive pressures and customer requirements, we may further expand
internationally in lower-cost locations. If we pursue such expansions, we may be required to make additional capital expenditures. In addition, the cost structure in certain countries that are now considered to be favorable may increase as economies
develop or as such countries join multinational economic communities or organizations, causing local wages to rise. As a result, we may need to continue to seek new locations with lower costs and the employee and infrastructure base to support PCB
manufacturing. We cannot assure investors that we will realize the anticipated strategic benefits of our international operations or that our international operations will contribute positively to our operating results.
In our North America operations, rising health care costs pose a significant labor-related risk. We work with our
insurance brokers and carriers to control the cost of health care for our employees. However, there can be no assurance that our efforts will succeed, especially given recent and pending changes in government oversight of health care.
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We have a significant amount of goodwill, indefinite-lived
intangible assets, and other intangible assets on our consolidated balance sheet. If our goodwill, indefinite-lived intangible assets, or other intangible assets become impaired in the future, we would be required to record a
non-cash
charge to earnings, which may be material and would also reduce our stockholders equity.
As of July 3, 2017, our consolidated balance sheet reflected $487.3 million of goodwill and definite-lived intangible assets. We periodically evaluate whether events and circumstances have
occurred, such that the potential for reduced expectations for future cash flows coupled with further decline in the market price of our stock and market capitalization may indicate that the remaining balance of goodwill and definite-lived
intangible assets may not be recoverable. If factors indicate that assets are impaired, we would be required to reduce the carrying value of our goodwill and definite-lived intangible assets, which could harm our results during the periods in which
such a reduction is recognized.
Our ability to use net operating loss carryforwards to offset future
taxable income for U.S. federal income tax purposes is subject to limitations, and future transfers of shares, when aggregated with the November 2016 secondary sale of our shares, could cause us to experience an ownership change that
could further limit our ability to utilize our net operating losses.
Under U.S. federal income tax
law, a corporations ability to utilize its net operating losses (NOLs) to offset future taxable income may be significantly limited if it experiences an ownership change as defined in Section 382 of the Internal Revenue
Code of 1986, as amended (the Code). In general, an ownership change will occur if there is a cumulative change in a corporations ownership by
5-percent
shareholders that exceeds 50
percentage points over a rolling three-year period.
A corporation that experiences an ownership change will
generally be subject to an annual limitation on its
pre-ownership
change NOLs equal to the value of the corporation immediately before the ownership change, multiplied by the long-term
tax-exempt
rate (subject to certain adjustments). The annual limitation for a taxable year is generally increased by the amount of any recognized
built-in
gains
for such year and the amount of any unused annual limitation in a prior year. As a result of our acquisition of Viasystems, the NOLs acquired were subject to this limitation. In February 2017 and November 2016, 4,000,000 and 13,800,000 shares of
common stock, respectively, were sold by Su Sih, our largest shareholder and a
5-percent
shareholder. Additional future transfers or sales of our common stock during the rolling period by
5-percent
shareholders could cause us to experience an ownership change under Section 382, which could further limit our use of NOLs.
Adverse judgments or settlements resulting from legal proceedings in which we may be involved in the normal course
of our business could reduce our profitability or limit our ability to operate our business.
In the
normal course of our business, we have been, and may in the future be subject to employee claims based on, among other things, discrimination, minimum wage, overtime pay and other employment related matters. We cannot predict with certainty the cost
of defense, the cost of prosecution or the ultimate outcome of these legal proceedings. Any significant adverse determinations, judgments or settlements could reduce our profitability and could materially adversely affect our business, financial
condition and results of operations, limit our ability to operate our business or harm our reputation.
Employee strikes and other labor-related disruptions may materially adversely affect our business, financial
condition, and results of operations.
Our business is labor intensive, utilizing large numbers of
engineering and manufacturing personnel. Strikes or labor disputes with our unionized employees, primarily in China, may adversely affect our ability to conduct our business. If we are unable to reach agreement with any of our unionized work groups
on future negotiations regarding the terms of their collective bargaining agreements, we may be subject to work interruptions or stoppages. Any of these events could be disruptive to our operations and could result in negative publicity, loss of
contracts, and a decrease in revenues. We may also become subject to additional collective bargaining agreements in the future if more employees or segments of our workforce become unionized, including any of our employees in the United States. We
have not experienced any labor problems resulting in a work stoppage since 2013.
We are exposed to the
credit risk of some of our customers and to credit exposures in weakened markets.
Most of our sales
are on an open credit basis, with standard industry payment terms. We monitor individual customer payment capability in granting such open credit arrangements, seek to limit such open credit to amounts we believe the customers can pay,
and maintain reserves we believe are adequate to cover exposure for doubtful accounts. During periods of economic downturn in the electronics industry and the global economy, our exposure to credit risks from our customers increases. Although we
have programs in place to monitor and mitigate the associated risks, such programs may not be effective in reducing our credit risks.
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Additionally, our OEM customers often direct a significant portion of
their purchases through a relatively limited number of EMS companies. Sales to EMS companies represented approximately 36% and 38% of our net sales for the quarters ended July 3, 2017 and June 27, 2016, respectively. Our contractual
relationship is often with the EMS companies, who are obligated to pay us for our products. Because we expect our OEM customers to continue to direct our sales to EMS companies, we expect to continue to be subject to this credit risk with a limited
number of EMS customers. If one or more of our significant customers were to become insolvent or were otherwise unable to pay us, our business, financial condition, and results of operations would be materially adversely affected.
We rely on suppliers and equipment manufacturers for the timely delivery of raw materials, components, equipment
and spare parts used in manufacturing our PCBs and
E-M
Solutions. If a raw material supplier or equipment manufacturer goes bankrupt, liquidates, consolidates out of existence or fails to satisfy our product
quality standards, it could harm our ability to purchase new manufacturing equipment, service the equipment we have, or timely produce our products, thereby affecting our customer relationships.
Consolidations and restructuring in our supplier base and equipment fabricators related to our raw materials purchases or
the manufacturing equipment we use to fabricate our products may result in adverse changes in pricing of materials due to reduction in competition among our raw material suppliers or an elimination or shortage of equipment and spare parts from our
manufacturing equipment supply base. Suppliers and equipment manufacturers may be impacted by other events outside our control including macro-economic, financial instability, environmental occurrences, or supplier interruptions due to fire, natural
catastrophes or otherwise. Suppliers and equipment manufacturers may extend lead times, limit supplies, or increase prices due to capacity constraints or other factors, which could harm our ability to deliver our products on a timely basis and
negatively impact our financial results. In addition, in extreme circumstances, the suppliers we purchase from could cease production due to a fire, natural disaster, consolidation or liquidation of their businesses. As such, this may
impact our ability to deliver our products on a timely basis and harm our customer relationships and negatively impact our financial results.
We serve customers and have manufacturing facilities outside the United States and are subject to the risks characteristic of international operations.
We have significant manufacturing operations in Asia and sales offices located in Asia and Europe, and we continue to
consider additional opportunities to make foreign investments and construct new foreign facilities.
For the
quarter ended July 3, 2017, we generated 72% of our net sales from
non-U.S.
operations, and a significant portion of our manufacturing material was provided by international suppliers during this period.
As a result, we are subject to risks relating to significant international operations, including but not limited to:
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managing international operations;
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imposition of governmental controls;
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unstable regulatory environments;
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compliance with employment laws;
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implementation of disclosure controls, internal controls, financial reporting systems, and governance standards to comply with U.S. accounting and
securities laws and regulations;
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limitations on imports or exports of our product offerings;
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fluctuations in the value of local currencies;
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inflation or changes in political and economic conditions;
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labor unrest, rising wages, difficulties in staffing, and geographical labor shortages;
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government or political unrest;
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language and communication barriers, as well as time zone differences;
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increases in duties and taxation levied on our products;
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other potentially adverse tax consequences;
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imposition of restrictions on currency conversion or the transfer of funds;
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expropriation of private enterprises;
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the potential reversal of current favorable policies encouraging foreign investment and trade; and
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the potential for strained trade relationships between the United States and its trading partners.
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37
Our operations in China subject us to risks and uncertainties
relating to the laws and regulations of China.
Under its current leadership, the government of China
has been pursuing economic reform policies, including the encouragement of foreign trade and investment and greater economic decentralization. No assurance can be given, however, that the government of China will continue to pursue such policies,
that such policies will be successful if pursued, or that such policies will not be significantly altered from time to time. Despite progress in developing its legal system, China does not have a comprehensive and highly developed system of laws,
particularly with respect to foreign investment activities and foreign trade. Enforcement of existing and future laws and contracts is uncertain, and implementation and interpretation thereof may be inconsistent. As the Chinese legal system
develops, the promulgation of new laws, changes to existing laws, and the preemption of local regulations by national laws may adversely affect foreign investors. Further, any litigation in China may be protracted and may result in substantial costs
and diversion of resources and managements attention. In addition, though changes in government policies and rules are timely published or communicated, there is usually no indication of the duration of any grace period before which full
implementation and compliance will be required. As a result, we may operate our business in violation of new rules and policies before full compliance can be achieved. These uncertainties could limit the legal protections available to us.
We depend on the U.S. government for a significant portion of our business, which involves unique
risks. Changes in government defense spending or regulations could have a material adverse effect on our business, financial condition, and results of operations.
A significant portion of our revenues is derived from products and services ultimately sold to the U.S. government by our
OEM and EMS customers and is therefore affected by, among other things, the federal budget process. We are a supplier, primarily as a subcontractor, to the U.S. government and its agencies, as well as foreign governments and agencies. The contracts
between our direct customers and the government end user are subject to political and budgetary constraints and processes, changes in short-range and long-range strategic plans, the timing of contract awards, the congressional budget authorization
and appropriation processes, the governments ability to terminate contracts for convenience or for default, as well as other risks, such as contractor suspension or debarment in the event of certain violations of legal and regulatory
requirements.
For the quarter ended July 3, 2017, aerospace and defense sales accounted for
approximately 17% of our total net sales. The substantial majority of aerospace and defense sales are related to both U.S. and foreign military and defense programs. While we do not sell any significant volume of products directly to the U.S.
government, we are a supplier to the U.S. government and its agencies, as well as foreign governments and agencies. Consequently, our sales are affected by changes in the defense budgets of the U.S. and foreign governments and may be affected by
federal budget sequestration measures.
The domestic and international threat of terrorist activity, emerging
nuclear states, and conventional military threats have led to an increase in demand for defense products and services and homeland security solutions in the recent past. The U.S. government, however, is facing unprecedented budgeting constraints.
The termination or failure to fund one or more significant contracts by the U.S. government could have a material adverse effect on our business, financial condition, and results of operations.
Future changes to the U.S. Munitions List could reduce or eliminate restrictions that currently apply to some of the
products we produce. If these regulations or others are changed in a manner that reduces restrictions on products being manufactured overseas, we would likely face an increase in the number of competitors and increased price competition from
overseas manufacturers, who are restricted by the current export laws from manufacturing products for U.S. defense systems.
We are subject to the requirements of the National Industrial Security Program Operating Manual for our facility security clearance, which is a prerequisite to our ability to perform on classified
contracts for the U.S. government.
A facility security clearance is required in order to be awarded
and perform on classified contracts for the Department of Defense and certain other agencies of the U.S. government. As a cleared entity, we must comply with the requirements of the National Industrial Security Program Operating Manual (NISPOM), and
any other applicable U.S. government industrial security regulations. Further, due to the fact that a significant portion of our voting equity is owned by a
non-U.S.
entity, we are required to be governed by
and operate in accordance with the terms and requirements of the Special Security Agreement (the SSA). The terms of the SSA have been previously disclosed in our SEC filings.
If we were to violate the terms and requirements of the SSA, the NISPOM, or any other applicable U.S. government
industrial security regulations (which may apply to us under the terms of classified contracts), we could lose our security clearance. We cannot be certain that we will be able to maintain our security clearance. If for some reason our security
clearance is invalidated or terminated, we may not be able to continue to perform on classified contracts and would not be able to enter into new classified contracts, which could materially adversely affect our business, financial condition, and
results of operations.
38
Competition in the PCB market is intense, and we could lose
market share if we are unable to maintain our current competitive position in end markets using our quick-turn, high technology, and
high-mix
manufacturing services.
The PCB industry is intensely competitive, highly fragmented, and rapidly changing. We expect competition to continue,
which could result in price reductions, reduced gross margins, and loss of market share. Our principal PCB and substrate competitors include AT & S Austria Technologie & Systemtechnik AG, Chin Poon Industrial Co., LTD., Compeq
Manufacturing Co., Ltd., IBIDEN Co., Ltd., ISU Petasys Co., Ltd., Multek Corporation, Sanmina Corporation, Tripod Technology Corp., Unimicron Technology Corp., and Wus Printed Circuit Co., Ltd. Our principal
E-M
Solutions competitors include Amphenol Corp, Flex, Jabil Circuit, Inc. and Sanmina Corporation. In addition, we increasingly compete on an international basis, and new and emerging technologies may result
in new competitors entering our markets.
Some of our competitors and potential competitors have advantages
over us, including:
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greater financial and manufacturing resources that can be devoted to the development, production, and sale of their products;
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more established and broader sales and marketing channels;
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more manufacturing facilities worldwide, some of which are closer in proximity to OEMs;
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manufacturing facilities that are located in countries with lower production costs;
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lower capacity utilization, which in peak market conditions can result in shorter lead times to customers;
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ability to add additional capacity faster or more efficiently;
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preferred vendor status with existing and potential customers;
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greater name recognition; and
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In addition, these competitors may respond more quickly to new or emerging technologies or adapt more quickly to changes in customer requirements than we do. We must continually develop improved
manufacturing processes to meet our customers needs for complex products, and our manufacturing process technology is generally not subject to significant proprietary protection. During recessionary periods in the electronics industry, our
strategy of providing quick-turn services, an integrated manufacturing solution, and responsive customer service may take on reduced importance to our customers. As a result, we may need to compete more on the basis of price, which would cause our
gross margins to decline.
If we are unable to provide our customers with
high-end
technology, high-quality products, and responsive service, or if we are unable to deliver our products to our customers in a timely manner, our business, financial condition, and results of operations
may be materially adversely affected.
In order to maintain our existing customer base and obtain
business from new customers, we must demonstrate our ability to produce our products at the level of technology, quality, responsiveness of service, timeliness of delivery, and cost that our customers require. If our products are of substandard
quality, if they are not delivered on time, if we are not responsive to our customers demands, or if we cannot meet our customers technological requirements, our reputation as a reliable supplier of our products would likely be damaged.
If we are unable to meet anticipated product and service standards, we may be unable to obtain new contracts or keep our existing customers, and this would have a material adverse effect on our business, financial condition, and results of
operations.
We are subject to risks for the use of certain metals from conflict minerals
originating in the Democratic Republic of the Congo.
During the third quarter of 2012, the SEC adopted
rules implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). These rules impose diligence and disclosure requirements regarding the use of conflict minerals mined from the Democratic Republic of Congo
and adjoining countries. While these new rules continue to be the subject of ongoing litigation and, as a result, uncertainty, we submitted a conflict minerals report on Form SD with the SEC for the past four years, most recently on May 30,
2017. Compliance with these rules results in additional costs and expenses, including costs and expenses incurred for due diligence to determine and verify the sources of any conflict minerals used in our products, in addition to the costs and
expenses of remediation and other changes to products, processes, or sources of supply as a consequence of such verification efforts. These rules may also affect the sourcing and availability of minerals used in the manufacture of our PCBs, as there
may be only a limited number of suppliers offering conflict free minerals that can be used in our products. There can be no assurance that we will be able to obtain such minerals in sufficient quantities or at competitive prices. Also,
since our supply chain is complex, we may, at a minimum, face reputational challenges with our customers, stockholders, and other stakeholders if we are unable to sufficiently verify the origins of the minerals used in our products. We may also
encounter customers who require that all of the components of our products be certified as conflict free. If we are not able to meet customer requirements, such customers may choose to disqualify us as a supplier, which could impact our sales and
the value of portions of our inventory.
39
Outages, computer viruses,
break-ins,
and similar events could disrupt our operations, and breaches of our security systems may cause us to incur significant legal and financial exposure.
We rely on information technology networks and systems, some of which are owned and operated by third parties, to process,
transmit, and store electronic information. In particular, we depend on our information technology infrastructure for a variety of functions, including worldwide financial reporting, inventory management, procurement, invoicing, and email
communications. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, terrorist attacks, and similar events. Despite the implementation of network security measures, our systems and those of
third parties on which we rely may also be vulnerable to computer viruses,
break-ins,
and similar disruptions. If we or our vendors are unable to prevent such outages and breaches, our operations could be
disrupted. If unauthorized parties gain access to our information systems or such information is used in an unauthorized manner, misdirected, lost, or stolen during transmission, any theft or misuse of such information could result in, among other
things, unfavorable publicity, governmental inquiry and oversight, difficulty in marketing our services, allegations by our customers that we have not performed our contractual obligations, litigation by affected parties, and possible financial
obligations for damages related to the theft or misuse of such information, any of which could have a material adverse effect on our business, financial condition, and results of operations.
Damage to our manufacturing facilities due to fire, natural disaster, or other events could materially adversely
affect our business, financial condition, and results of operations.
The destruction or closure of any
of our facilities for a significant period of time as a result of fire, explosion, blizzard, act of war or terrorism, flood, tornado, earthquake, lightning, other natural disasters, an outbreak of epidemics such as Ebola or severe acute respiratory
syndrome, required maintenance, or other events could harm us financially, increasing our costs of doing business and limiting our ability to deliver our manufacturing services on a timely basis.
Our insurance coverage with respect to damages to our facilities or our customers products caused by natural
disasters is limited and is subject to deductibles and coverage limits. Such coverage may not be adequate or continue to be available at commercially reasonable rates and terms.
In the event one or more of our facilities is closed on a temporary or permanent basis as a result of a natural disaster,
required maintenance or other event, or in the event that an outbreak of a serious epidemic results in quarantines, temporary closures of offices or manufacturing facilities, travel restrictions or the temporary or permanent loss of key personnel,
our operations could be significantly disrupted. Such events could delay or prevent product manufacturing and shipment for the time required to transfer production or repair, rebuild or replace the affected manufacturing facilities. This time frame
could be lengthy and result in significant expenses for repair and related costs. While we have disaster recovery plans in place, there can be no assurance that such plans will be sufficient to allow our operations to continue in the event of every
natural or
man-made
disaster, pandemic, required repair or other extraordinary event. Any extended inability to continue our operations at unaffected facilities following such an event would reduce our revenue
and potentially damage our reputation as a reliable supplier.
We face constant pricing pressure from
our customers and competitors, which may decrease our profit margins.
Competition in the PCB market is
intense, and we expect that competition will continue to increase, thereby creating a highly aggressive pricing environment. We and some of our competitors have reduced average selling prices in the past. In addition, competitors may reduce their
average selling prices faster than our ability to reduce costs, which can also accelerate the rate of decline of our selling prices. When prices decline, we may also be required to write down the value of our inventory.
The effects of such pricing pressures on our business may be exacerbated by inflationary pressures that affect our costs
of supply. When we are unable to extract comparable concessions from our suppliers on prices they charge us, this in turn reduces gross profit if we are unable to raise prices. Further, uncertainty or adverse changes in the economy could also lead
to a significant decline in demand for our products and pressure to reduce our prices. As a result of the recent global economic downturn, many businesses have taken a more conservative stance in ordering inventory. Any decrease in demand for our
products, coupled with pressure from the market and our customers to decrease our prices, would materially adversely affect our business, financial condition, and results of operations.
The pricing pressure we face on our products requires us to introduce new and more advanced technology products to
maintain average selling prices or reduce any declines in average selling prices. As we shift production to more advanced, higher-density PCBs, we tend to make significant investments in plants and other capital equipment and incur higher costs of
production, which may not be recovered.
40
The prominence of EMS companies as our customers could reduce our
gross margins, potential sales, and customers.
Sales to EMS companies represented approximately 36%
and 38% of our net sales for the quarters ended July 3, 2017 and June 27, 2016, respectively. Sales to EMS providers include sales directed by OEMs as well as orders placed with us at the EMS providers discretion. EMS providers
source on a global basis to a greater extent than OEMs. The growth of EMS providers increases the purchasing power of such providers and has in the past, and could in the future, result in increased price competition or the loss of existing OEM
customers. In addition, some EMS providers, including some of our customers, have the ability to directly manufacture PCBs and create backplane assemblies. If a significant number of our other EMS customers were to acquire these abilities, our
customer base might shrink, and our sales might decline substantially. Moreover, if any of our OEM customers outsource the production of PCBs and creation of backplane assemblies to these EMS providers, our business, financial condition, and results
of operations may be materially adversely affected.
If we are unable to manage our growth effectively,
our business, financial condition, and results of operations could be materially adversely affected.
We have experienced, and expect to continue to experience, growth in the scope and complexity of our operations. This
growth may strain our managerial, financial, manufacturing, and other resources. In order to manage our growth, we may be required to continue to implement additional operating and financial controls and hire and train additional personnel. There
can be no assurance that we will be able to do so in the future, and failure to do so could jeopardize our expansion plans and seriously harm our operations. In addition, growth in our capacity could result in reduced capacity utilization and a
corresponding decrease in gross margins.
Our international sales are subject to laws and regulations
relating to corrupt practices, trade, and export controls and economic sanctions. Any
non-compliance
could have a material adverse effect on our business, financial condition, and results of operations.
We operate on a global basis and are subject to anti-corruption, anti-bribery, and anti-kickback laws
and regulations, including restrictions imposed by the Foreign Corrupt Practices Act (the FCPA). The FCPA and similar anti-corruption, anti-bribery, and anti-kickback laws in other jurisdictions generally prohibit companies and their intermediaries
and agents from making improper payments to government officials or any other persons for the purpose of obtaining or retaining business. We operate and sell our products in many parts of the world that have experienced governmental corruption to
some degree and, in certain circumstances, strict compliance with anti-corruption, anti-bribery, and anti-kickback laws may conflict with local customs and practices. We also, from time to time, undertake business ventures with state-owned companies
or enterprises.
Our global business operations must also comply with all applicable domestic and foreign
export control laws, including International Traffic In Arms Regulations (ITAR), and Export Administration Regulations (EAR). Some items we manufacture are controlled for export by the U.S. Department of Commerces Bureau of Industry and
Security under EAR.
We train our employees concerning anti-corruption, anti-bribery, and anti-kickback laws
and compliance with international regulations regarding trades and exports, and we have policies in place that prohibit employees from making improper payments. We cannot provide assurances that our internal controls and procedures will guarantee
compliance by our employees or third parties with whom we work. If we are found to be liable for violations of the FCPA or similar anti-corruption, anti-bribery, or anti-kickback laws in international jurisdictions or for violations of ITAR, EAR, or
other similar regulations regarding trades and exports, either due to our own acts or out of inadvertence, or due to the inadvertence of others, we could suffer criminal or civil fines or penalties or other repercussions, including reputational
harm, which could have a material adverse effect on our business, financial condition, and results of operations.
Our global business operations also must be conducted in compliance with applicable economic sanctions laws and regulations, such as laws administered by the U.S. Department of the Treasurys Office
of Foreign Asset Control, the U.S. State Department, and the U.S. Department of Commerce. We must comply with all applicable economic sanctions laws and regulations of the United States and other countries. Violations of these laws or regulations
could result in significant additional sanctions including criminal or civil fines or penalties, more onerous compliance requirements, more extensive debarments from export privileges, or loss of authorizations needed to conduct aspects of our
international business.
In certain countries, we may engage third-party agents or intermediaries, such as
customs agents, to act on our behalf, and if these third-party agents or intermediaries violate applicable laws, their actions may result in criminal or civil fines or penalties or other sanctions being assessed against us. We take certain measures
designed to ensure our compliance with U.S. export and economic sanctions laws, anti-corruption laws and regulations, and export control laws. However, it is possible that some of our products were sold or will be sold to distributors or other
parties, without our knowledge or consent, in violation of applicable law. There can be no assurances that we will be in compliance in the future. Any such violation could result in significant criminal or civil fines, penalties, or other sanctions
and repercussions, including reputational harm, which could have a material adverse effect on our business, financial condition, and results of operations.
41
Our failure to comply with the requirements of environmental laws
could result in litigation, fines, revocation of permits necessary to our manufacturing processes, or debarment from our participation in federal government contracts.
Our operations are regulated under a number of federal, state, local, and foreign environmental and safety laws and
regulations that govern, among other things, the discharge of hazardous materials into the air and water, as well as the handling, storage, and disposal of such materials. These laws and regulations include the Clean Air Act, the Clean Water Act,
the Resource Conservation and Recovery Act, the Superfund Amendment and Reauthorization Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Toxic Substances Control Act, and the Federal Motor Carrier Safety Improvement
Act, as well as analogous state, local, and foreign laws. Compliance with these environmental laws is a major consideration for us because our manufacturing processes use and generate materials classified as hazardous. Because we use hazardous
materials and generate hazardous wastes in our manufacturing processes, we may be subject to potential financial liability for costs associated with the investigation and remediation of our own sites, or sites at which we have arranged for the
disposal of hazardous wastes, if such sites become contaminated. Even if we fully comply with applicable environmental laws and are not directly at fault for the contamination, we may still be liable. The wastes we generate include spent ammoniacal
and cupric etching solutions, metal stripping solutions, waste acid solutions, waste alkaline cleaners, waste oil, and waste waters that contain heavy metals such as copper, tin, lead, nickel, gold, silver, cyanide, and fluoride, and both filter
cake and spent ion exchange resins from equipment used for
on-site
waste treatment.
Environmental law violations, including the failure to maintain required environmental permits, could subject us to fines, penalties, and other sanctions, including the revocation of our effluent
discharge permits. This could require us to cease or limit production at one or more of our facilities and could have a material adverse effect on our business, financial condition, and results of operations. Even if we ultimately prevail,
environmental lawsuits against us would be time consuming and costly to defend.
Environmental laws have
generally become more stringent and this trend may continue over time, imposing greater compliance costs and increasing risks and penalties associated with violation. We operate in environmentally sensitive locations, and we are subject to
potentially conflicting and changing regulatory agendas of political, business, and environmental groups. Changes or restrictions on discharge limits, emissions levels, material storage, handling, or disposal might require a high level of unplanned
capital investment or relocation to another global location where prohibitive regulations do not exist. It is possible that environmental compliance costs and penalties from new or existing regulations may materially adversely affect our business,
financial condition, and results of operations.
We are increasingly required to certify compliance with
various material content restrictions in our products based on laws of various jurisdictions or territories such as the Restriction of Hazardous Substances (RoHS) and Registration, Evaluation, Authorization and Restriction of Chemicals (REACH)
directives in the European Union and Chinas RoHS legislation. Similar laws have been adopted in other jurisdictions and may become increasingly prevalent. In addition, we must also certify as to the
non-applicability
of the EUs Waste Electrical and Electronic Equipment directive for certain products that we manufacture. The REACH directive requires the identification of Substances of Very High
Concern (SVHCs) periodically. We must survey our supply chain and certify to the
non-presence
or presence of SVHCs to our customers. As with other types of product certifications that we routinely provide, we
may incur liability and pay damages if our products do not conform to our certifications.
We are also subject
to a variety of environmental laws and regulations in China, which impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage, and disposal of solid and hazardous wastes. The
manufacturing of our products generates gaseous chemical wastes, liquid wastes, waste water, and other industrial wastes from various stages of the manufacturing process. Production sites in China are subject to regulation and periodic monitoring by
the relevant environmental protection authorities. Environmental claims or the failure to comply with current or future regulations could result in the assessment of damages or imposition of fines against us, suspension of production, or cessation
of operations.
The process to manufacture PCBs requires adherence to city, county, state, federal, and
foreign environmental regulations regarding the storage, use, handling, and disposal of chemicals, solid wastes, and other hazardous materials, as well as compliance with air quality standards and chemical use reporting. In China, governmental
authorities have adopted new rules and regulations governing environmental issues. An update to Chinese environmental waste water law was issued in late 2012, allowing for an interim period in which plants subject to such law may install equipment
that meets the new regulatory regime. Our plants in China are not yet in full compliance with the newly adopted environmental regulations. There can be no assurance that violations will not occur in the future.
Employee theft or fraud could result in loss.
Certain of our employees have access to, or signature authority with respect to, bank accounts or other company assets,
which could expose us to fraud or theft. In addition, certain employees have access to certain precious metals used in connection with our manufacturing and key information technology (IT) infrastructure and to customer and other information that is
commercially valuable. Should any employee, for any reason, steal any such precious metals (which has occurred from time to time), compromise our IT systems, or misappropriate customer or other information, we could incur losses, including losses
relating to claims by our customers against us, and the willingness of customers to do business with us may be damaged. Additionally, in the case of our defense business, we could be debarred from future participation in government programs. Any
such losses may not be fully covered by insurance.
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Because we sell on a purchase order basis, we are subject to
uncertainties and variability in demand by our customers that could decrease revenues and harm our operating results.
Although we have long-term contracts with many customers, those contracts generally do not contain volume commitments. We generally sell to customers on a purchase order basis. Our quick-turn orders are
subject to particularly short lead times. Consequently, our sales are subject to short-term variability in demand by our customers. Customers submitting purchase orders may cancel, reduce, or delay their orders for a variety of reasons, subject to
negotiations. The level and timing of orders placed by our customers may vary due to:
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customer attempts to manage inventory;
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changes in customers manufacturing strategies, such as a decision by a customer to either diversify or consolidate the number of PCB
manufacturers or backplane assembly service providers used or to manufacture or assemble its own products internally;
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variation in demand for our customers products; and
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changes in new product introductions.
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We have periodically experienced terminations, reductions, and delays in our customers orders. Further terminations, reductions, or delays in our customers orders could materially adversely
affect our business, financial condition, and results of operations.
Increasingly, our customers are
requesting that we enter into supply agreements with them that have restrictive terms and conditions. These agreements typically include provisions that increase our financial exposure, which could result in significant costs to us.
Increasingly, our customers are requesting that we enter into supply agreements with them. These
agreements typically do not include volume commitments, but do include provisions that generally serve to increase our exposure for product liability and limited sales returns, which could result in higher costs to us as a result of such claims. In
addition, these agreements typically contain provisions that seek to limit our operational and pricing flexibility and extend payment terms, which could materially adversely affect our cash flow, business, financial condition, and results of
operations.
Our business has benefited from OEMs deciding to outsource their PCB manufacturing and
backplane assembly needs to us. If OEMs choose to provide these services
in-house
or select other providers, our business could suffer.
Our future revenue growth partially depends on new outsourcing opportunities from OEMs. Current and prospective
customers continuously evaluate our performance against other providers. They also evaluate the potential benefits of manufacturing their products themselves. To the extent that outsourcing opportunities are not available either due to OEM decisions
to produce these products themselves or to use other providers, our financial results and future growth could be materially adversely affected.
Consolidation among our customers could materially adversely affect our business, financial condition, and results of operations.
Recently, some of our large customers have consolidated, and further consolidation of customers may occur. Depending on
which organization becomes the controller of the supply chain function following the consolidation, we may not be retained as a preferred or approved supplier. In addition, product duplication could result in the termination of a product line that
we currently support. While there is potential for increasing our position with the combined customer, there does exist the potential for decreased revenue if we are not retained as a continuing supplier. We also face the risk of increased pricing
pressure from the combined customer because of its increased market share.
We may need additional
capital in the future to fund investments in our operations, refinance our indebtedness, and to maintain and grow our business, and such capital may not be available on a timely basis, on acceptable terms, or at all.
Our business is capital-intensive, and our ability to increase revenue, profit, and cash flow depends upon continued
capital spending. To the extent that the funds generated by our ongoing operations are insufficient to cover our liquidity requirements, we may need to raise additional funds through financings. If we are unable to fund our operations and make
capital expenditures as currently planned or if we do not have sufficient liquidity to service the interest and principal payments on our debt, it would have a material adverse effect on our business, financial condition, and results of operations.
If we do not achieve our expected operating results, we would need to reallocate our sources and uses of operating cash flows. This may include borrowing additional funds to service debt payments, which may impair our ability to make investments in
our business. Looking ahead at long-term needs, we may need to raise additional funds for a number of purposes, including the following:
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to fund capital equipment purchases to increase production capacity, upgrade and expand our technological capabilities and replace aging equipment
or introduce new products;
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to refinance our existing indebtedness;
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to fund our operations beyond 2017;
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to fund working capital requirements for future growth that we may experience;
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to enhance or expand the range of services we offer;
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to increase our sales and marketing activities; or
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to respond to competitive pressures or perceived opportunities, such as investment, acquisition, and international expansion activities.
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Should we need to raise funds through incurring additional debt, we may become subject to
covenants even more restrictive than those contained in our current debt instruments. There can be no assurance that additional capital, including any future equity or debt financing, would be available on a timely basis, on favorable terms, or at
all. If such funds are not available to us when required or on acceptable terms, our business, financial condition, and results of operations could be materially adversely affected.
Our operations could be materially adversely affected by a shortage of utilities or a discontinuation of priority
supply status offered for such utilities.
The manufacturing of PCBs requires significant quantities of
electricity and water. Our operations in Asia have historically purchased substantially all of the electrical power for their manufacturing plants in China from local power plants. Because Chinas economy has recently been in a state of growth,
the strain on the nations power plants is increasing, which has led to continuing power outages in various parts of the country. There may be times when our operations in China may be unable to obtain adequate sources of electricity to meet
production requirements. Various regions in China have in the past experienced shortages of both electricity and water and unexpected interruptions of power supply. From time to time, the Chinese government rations electrical power, which can lead
to unscheduled production interruptions at our manufacturing facilities.
In addition, certain of the areas in
which our North America operations have manufacturing facilities, particularly in California, have experienced power and resource shortages from time to time, including mandatory periods without electrical power, changes to water availability, and
significant increases in utility and resource costs. California has also recently experienced drought conditions, prompting the Governor of California to proclaim a Drought State of Emergency. Due to the severe drought conditions, some local and
regional water districts and the state government are implementing policies or regulations that restrict water usage and increase the cost of water.
We do not generally maintain any
back-up
power generation facilities or reserves of water for our operations, so if we were to lose supplies of power or water at
any of our facilities, we would be required to cease operations until such supply was restored. Any resulting cessation of operations could materially adversely affect our ability to meet our customers orders in a timely manner, thus
potentially resulting in a loss of business, along with increased costs of manufacturing, and under-utilization of capacity. In addition, the sudden cessation of our power or water supply could damage our equipment, resulting in the need for costly
repairs or maintenance, as well as damage to products in production, resulting in an increase in scrapped products.
We may be unable to hire and retain sufficient qualified personnel, and the loss of any of our key executive officers could materially adversely affect our business, financial condition, and results
of operations.
We believe that our future success will depend in large part on our ability to attract
and retain highly skilled, knowledgeable, sophisticated, and qualified managerial and professional personnel. We may not be able to retain our executive officers and key personnel or attract additional qualified management in the future. We can make
no assurances that future changes in executive management will not have a material adverse effect on our business, financial condition, or results of operations. Our business also depends on our continuing ability to recruit, train, and retain
highly qualified employees, particularly engineering and sales and marketing personnel. The competition for these employees is intense, and the loss of these employees could harm our business. Further, our ability to successfully integrate acquired
companies depends in part on our ability to retain key management and existing employees at the time of the acquisition.
Our manufacturing processes depend on the collective industry experience of our employees. If a significant number of these employees were to leave us, it could limit our ability to compete
effectively and could materially adversely affect our business, financial condition, and results of operations.
We have limited patent or trade secret protection for our manufacturing processes. We rely on the collective experience of our employees involved in our manufacturing processes to ensure that we
continuously evaluate and adopt new technologies in our industry. Although we are not dependent on any one employee or a small number of employees, if a significant number of our employees involved in our manufacturing processes were to leave our
employment, and we were not able to replace these people with new employees with comparable experience, our manufacturing processes might suffer as we might be unable to keep up with innovations in the industry. As a result, we may lose our ability
to continue to compete effectively. For example, we have experienced a significant amount of employee attrition in our China operations each year, which has negatively impacted our yield, costs of production, and service times.
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We may be exposed to intellectual property infringement claims by
third parties that could be costly to defend, could divert managements attention and resources, and if successful, could result in liability.
We rely on a combination of copyright, patent, trademark, and trade secret laws, confidentiality procedures, contractual provisions, and other measures to protect our proprietary information. All of these
measures afford only limited protection. These measures may be invalidated, circumvented, or challenged, and others may develop technologies or processes that are similar or superior to our technology. We may not have the controls and procedures in
place that are needed to adequately protect proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy our products or obtain or use information that we regard as proprietary, which could
materially adversely affect our business, financial condition, and results of operations.
Furthermore, there
is a risk that we may infringe on the intellectual property rights of others. As is the case with many other companies in the PCB industry, we from time to time receive communications from third parties asserting patent rights to our products and
enter into discussions with such third parties. Irrespective of the validity or the successful assertion of such claims, we could incur costs in either defending or settling any intellectual property disputes alleging infringement. If any claims are
brought against the customers for such infringement, whether or not these have merit, we could be required to expend significant resources in defending such claims. In the event we are subject to any infringement claims, we may be required to spend
a significant amount of money to develop
non-infringing
alternatives or obtain licenses. We may not be successful in developing such alternatives or in obtaining such licenses on reasonable terms or at all,
which could disrupt the production processes, damage our reputation, and materially adversely affect our business, financial condition, and results of operations.
Future sales of our common stock or other securities by the Company or its large shareholders may adversely affect
the market price of our common stock.
In the future, we may issue additional equity securities or one
or more of our large shareholders may offer their shares for sale through public or private offerings. Pursuant to our certificate of incorporation, our board of directors has the authority, without action by stockholders, to designate and issue
preferred stock in one or more series. Our board of directors may also designate the rights, preferences and privileges of each series of preferred stock, any or all of which may be superior to the rights of the common stock. Any such issuance of
additional shares would reduce your influence over matters on which our stockholders vote, would dilute the percentage of ownership interest of existing stockholders and may dilute the per share book value of the common stock. In addition, option
holders may exercise their options at a time when we would otherwise be able to obtain additional equity capital on more favorable terms. Any issuances of preferred stock would likely result in your interest being subject to the priority rights of
holders of that preferred stock. Also, we may have shareholders that hold large quantities of our shares. If one or more of these shareholders offered their shares for sale, it could result in a decrease in demand for our shares which could have the
effect of decreasing our share price. The market price of our common stock could decline as a result of any future offering as well as sales of shares of our common stock made after such offerings or the perception that such sales could occur.
Because we do not expect to pay any cash dividends for the foreseeable future, shareholders may not
receive any return on investment unless the shareholders sell their common stock for a price greater than that which was paid.
We have not declared or paid any dividends since 2000 and do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any payment of cash dividends will be at the discretion
of our board of directors and will depend on our financial condition, anticipated cash needs, capital requirements, legal requirements, earnings and other factors. Our ability to pay dividends is restricted by the terms of our debt agreements and
might be restricted by the terms of any indebtedness that we incur in the future. Consequently, shareholders should not rely on dividends in order to receive a return on your investment. See our dividend policy in Item 5.
Market for Registrants
Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities,
in our Annual Report Form
10-K
for the fiscal year ended January 2, 2017.
Our business, financial condition, and results of operations could be materially adversely affected by climate
change initiatives.
Our manufacturing processes require that we purchase significant quantities of
energy from third parties, which results in the generation of greenhouse gases, either directly
on-site
or indirectly at electric utilities. Both domestic and international legislation to address climate
change by reducing greenhouse gas emissions could create increases in energy costs and price volatility. Considerable international attention is now focused on development of an international policy framework to guide international action to address
climate change. Proposed and existing legislative efforts to control or limit greenhouse gas emissions could affect our energy sources and supply choices, as well as increase the cost of energy and raw materials that are derived from sources that
generate greenhouse gas emissions.
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Failure to maintain good relations with the noncontrolling
shareholder of a majority-owned subsidiary of TTM in China could materially adversely affect our ability to manage that operation.
A noncontrolling interest holder owns a 5% interest in a subsidiary of TTM that operates the Huiyang, China facility that became a part of our operations through the acquisition of Viasystems. The
noncontrolling interest holder is affiliated with the Chinese government and has close ties to local economic development and other Chinese government agencies. The noncontrolling interest holder has certain rights to be consulted and to consent to
certain operating and investment matters concerning the Huiyang facility and the board of directors of our subsidiary that operates the Huiyang facility. Failure to maintain good relations with the noncontrolling interest holder could materially
adversely affect our ability to manage the operations of the plant.
Security breaches and other
disruptions could compromise our information and expose us to liability, which could cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data in our data centers and on our networks, including intellectual property, our proprietary business information and that of our
customers, suppliers and business partners, and personally identifiable information of our employees. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures, our
information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed,
publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence in our products and services,
which could have a material adverse effect on our business, financial condition, results of operations or cash flows.