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, foreign currency exchange rates, and commodity prices. We seek to address these risks through controlled risk management that includes, from time to time, 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 foreign exchange and commodity price hedge positions, we continually monitor our foreign exchange forward positions and commodity hedge price positions, both on a stand-alone basis and in conjunction with their underlying foreign currency and commodity price 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 foreign exchange rates or commodity prices. 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 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 ended on June 1, 2022. During the term of the interest rate swap, we paid a fixed rate of 2.84% against the first interest payments of a portion of our LIBOR-based debt and received 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. No ineffectiveness was recognized for the quarter and two quarters ended July 4, 2022. During the quarter and two quarters ended July 4, 2022, the interest rate swap increased interest expense by $1.4 million and $4.1 million, respectively. After June 1, 2022, our $400.0 million LIBOR-based variable debt is more sensitive to fluctuations in interest rates due to the expiration of the interest rate swap arrangement. We currently do not expect to enter into a new interest rate swap arrangement. See Liquidity and Capital Resources and Long-term Debt and Letters of Credit appearing in Part I, Item 2 of this Quarterly Report on Form 10-Q for further discussion of our financing facilities and capital structure. As of July 4, 2022, approximately 53.4% of our total debt was based on fixed rates. Based on our borrowings as of July 4, 2022, an assumed 100 basis point change in variable rates would cause our annual interest cost to change by $4.4 million. On July 27, 2017, the Financial Conduct Authority (FCA) announced the desire to phase out the use of LIBOR by the end of 2021. More recently, on March 5, 2021, the FCA announced that all LIBOR settings will either cease to be provided by any administrator or no longer be representative. Specifically, this occurred immediately after December 31, 2021, in the case of all Sterling, Euro (EUR), Swiss franc and Japanese yen settings, and the 1-week, and 2-month U.S. dollar settings; and immediately after June 30, 2023, in the case of the remaining U.S. dollar settings. However, U.S. banking regulators have made it clear that U.S.-dollar LIBOR originations should end by no later than December 31, 2021, and that new LIBOR originations prior to that date must provide for an alternative reference rate in existing contracts. On July 29, 2021, the Alternative Reference Rates Committee (ARRC) announced that it is now formally recommending CME Group’s forward-looking Secured Overnight Financing Rate term rates (SOFR Term Rates). In accordance with recommendations from ARRC, U.S.-dollar LIBOR is expected to be replaced with the Secured Overnight Financing Rate (SOFR) and SOFR Term Rates, a new index calculated by reference to short-term repurchase agreements for U.S. Treasury securities. Further, the International Swaps and Derivatives Association, Inc. recently announced fallback language for LIBOR-referencing derivatives contracts that also provides for SOFR as the primary replacement rate in the event of a LIBOR cessation. The market transition from LIBOR to SOFR is expected to be complicated, including the development of term SOFR rates and credit adjustments to accommodate differences between LIBOR and SOFR. During the transition period, LIBOR may exhibit increased volatility or become less representative, and the overnight Treasury repurchase market underlying SOFR may also experience disruptions from time to time, which may result in unexpected fluctuations in SOFR. Foreign Currency Rate 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 29 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 income (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 this 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. 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 July 4, 2022 was approximately $1.6 million (EUR 1.4 million). There were no foreign exchange contracts as of January 3, 2022. Commodity Price Risks We are exposed to certain commodity risks associated with prices for various raw materials. In particular, we have been experiencing increasing prices and lead times of copper clad laminates (CCLs), a key raw material for the manufacture of PCBs. This may negatively affect our profitability. CCLs are made from epoxy resin, glass cloth, and copper foil, all of which are seeing limited supply and increased prices. We only buy a small amount of copper directly. However, copper is a major driver of laminate cost. We are hedging copper as a proxy for hedging laminate. As of July 4, 2022, we had commodity contracts with a notional quantity of (i) 630 metric tonnes for the period beginning June 30, 2022 and ending on October 3, 2022, (ii) 700 metric tonnes for the period beginning October 4, 2022 and ending on January 3, 2023, (iii) 700 metric tonnes for the period beginning January 1, 2023 and ending on March 31, 2023, and (iv) 700 metric tonnes for the period beginning April 1, 2023 and ending on June 30, 2023. As of July 4, 2022, the fair value of the commodity contracts was recorded as a liability in the amount of $3.5 million and included as a component of other current liabilities. We will continue to evaluate our commodity risks and may utilize commodity forward purchase contracts more frequently in the future. Debt Instruments The table below presents the fiscal calendar maturities of long-term debt through 2026 and thereafter of our debt instruments as of July 4, 2022: As of July 4, 2022 Remaining 2022 2023 2024 (1) 2025 2026 Thereafter Total Fair Value Weighted Average Interest Rate (In thousands) US$ Variable Rate $ — $ — $ 435,879 $ — $ — $ — $ 435,879 $ 431,569 4.20% US$ Fixed Rate — — — — — 500,000 500,000 420,005 4.00% Total $ — $ — $ 435,879 $ — $ — $ 500,000 $ 935,879 $ 851,574 (1) Interest rate swap effectively fixed $400,000 of variable rate debt through June 1, 2022. After June 1, 2022, the $400,000 variable rate debt is more sensitive to fluctuations in interest rates due to the expiration of the interest rate swap arrangement. Interest Rate Swap Contracts Our interest rate swap arrangement ended on June 1, 2022. The table below presents information regarding our interest rate swap during the two quarters ended July 4, 2022: Two Quarters Ended July 4, 2022 (In thousands, except interest rates) Average interest payout rate 2.84 % Interest payout amount $ (4,669 ) Average interest received rate 0.34 % Interest received amount $ 564 30