TTM TECHNOLOGIES INC 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk In the normal course of business operations, we are exposed to risks associated with fluctuations in interest rates and foreign currency exchange rates. We address these risks through controlled risk management that includes the use of derivative financial instruments to economically hedge or reduce these exposures. We do not enter into derivative financial instruments for trading or speculative purposes. We have not experienced any losses to date on any derivative financial instruments due to counterparty credit risk. To ensure the adequacy and effectiveness of our interest rate and foreign exchange hedge positions, we continually monitor our interest rate swap positions and foreign exchange forward positions, both on a stand-alone basis and in conjunction with their underlying interest rate and foreign currency exposures, from an accounting and economic perspective. However, given the inherent limitations of forecasting and the anticipatory nature of the exposures intended to be hedged, we cannot be assured that such programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in either interest or foreign exchange rates. In addition, the timing of the accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect our consolidated operating results and financial position. Interest Rate Risks Our business is exposed to interest rate risk resulting from fluctuations in interest rates. Our interest expense is more sensitive to fluctuations in the general level of LIBOR interest rates than to changes in rates in other markets. Increases in interest rates would increase interest expense relating to our outstanding variable rate borrowings and increase the cost of debt. Fluctuations in interest rates can also lead to significant fluctuations in the fair value of our debt obligations. On May 15, 2018, we entered into a four-year pay-fixed, receive floating (1-month LIBOR), interest rate swap arrangement with a notional amount of $400.0 million for the period beginning June 1, 2018 and ending on June 1, 2022. Under the terms of the interest rate swap, we pay a fixed rate of 2.84% against the first interest payments of a portion of our LIBOR-based debt and receive floating 1-month LIBOR during the swap period. At inception, we designated the interest rate swap as a cash flow hedge and the fair value of the interest rate swap was zero. As of September 28, 2020, the fair value of the interest rate swap was recorded as a liability and as a component of other long-term liabilities in the amount of $17.5 million. No ineffectiveness was recognized for the quarter and three quarters ended September 28, 2020. During the quarter and three quarters ended September 28, 2020, the interest rate swap increased interest expense by $2.7 million and $6.2 million, respectively. See Liquidity and Capital Resources and Long-term Debt and Letters of Credit appearing in Item 2 of this Quarterly Report on Form 10-Q for further discussion of our financing facilities and capital structure. As of September 28, 2020, approximately 93.1% of our total debt was based on fixed rates. Based on our borrowings as of September 28, 2020, an assumed 100 basis point increase in variable rates would cause our annual interest cost to increase by $0.8 million and an assumed 100 basis point decrease in variable rates would cause our annual interest cost to decrease by $0.1 million. On July 27, 2017, the Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021, which may affect us adversely. If LIBOR is discontinued, we may need to renegotiate the terms of certain credit instruments, which utilize LIBOR as a benchmark in determining the interest rate, to replace LIBOR with the new standard that is established. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on our cost of capital and net investment income cannot yet be determined. Foreign Currency Risks In the normal course of business, we are exposed to risks associated with fluctuations in foreign currency exchange rates related to transactions that are denominated in currencies other than our functional currencies, as well as the effects of translating amounts denominated in a foreign currency to the U.S. Dollar as a normal part of our financial reporting process. Most of our foreign operations have the U.S. Dollar as their functional currency, however, two of our China facilities utilize the Renminbi (RMB), which results in recognition of translation adjustments included as a component of other comprehensive loss. Our foreign exchange exposure results primarily from employee-related and other costs of running our operations in foreign countries, foreign currency denominated purchases and translation of balance sheet accounts denominated in foreign currencies. Our primary foreign exchange exposure is to the RMB. Except for certain equipment purchases, we do not engage in hedging to manage foreign currency risk. However, we may consider the use of derivatives in the future. In general, our Chinese customers pay us in RMB, which partially mitigates this foreign currency exchange risk. We enter into foreign currency forward contracts to mitigate the impact of changes in foreign currency exchange rates and to reduce the volatility of purchases and other obligations generated in currencies other than our functional currencies. Our foreign subsidiaries may at times enter into forward exchange contracts to manage foreign currency risks in relation to certain purchases of machinery denominated in foreign currencies other than our functional currencies. The notional amount of the foreign exchange contracts as of September 28, 2020 and December 30, 2019 was approximately $2.0 million (Japanese Yen (JPY) 209.0 million) and $2.0 million (JPY 215.8 million), respectively. We designated certain of these foreign exchange contracts as cash flow hedges. 32 The table below presents information about certain of the foreign currency forward contracts as of September 28, 2020 and December 30, 2019: As of September 28, 2020 As of December 30, 2019 Notional Amount Average Contract Rate or Strike Amount Notional Amount Average Contract Rate or Strike Amount (In thousands) Receive foreign currency/pay USD Japanese Yen $ 1,968 0.01 $ 1,994 0.01 Estimated fair value, net asset / (liability) $ 19 $ (2 ) Debt Instruments The table below presents information about certain of our debt instruments as of September 28, 2020: As of September 28, 2020 Remaining 2020 2021 2022 2023 2024 (1) Thereafter Total Fair Market Value Weighted Average Interest Rate (In thousands) US$ Variable Rate $ — $ — $ — $ — $ 475,879 $ — $ 475,879 $ 466,240 2.47% US$ Fixed Rate 249,975 — — — — 375,000 624,975 681,385 4.08% Total $ 249,975 $ — $ — $ — $ 475,879 $ 375,000 $ 1,100,854 $ 1,147,625 (1) Interest rate swap effectively fixed $400,000 of variable rate debt. Interest Rate Swap Contracts As of September 28, 2020, the fair value of the interest rate swap was recorded as a liability in the amount of $17,461. The table below presents information regarding our interest rate swaps during the three quarters ended September 28, 2020: Three Quarters Ended September 28, 2020 (In thousands, except interest rates) Average interest payout rate 2.84 % Interest payout amount $ (8,612 ) Average interest received rate 0.79 % Interest received amount 2,387 33