TTM Technologies Inc: Form 10-Q for the period ended Sep 30, 2024

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (Report) contains forward-looking statements regarding future events or our future financial and operational performance. Forward-looking statements include statements regarding markets for our products; trends in net sales, gross profits, and estimated expense levels; liquidity and anticipated cash needs and availability; and any statement that contains the words “anticipate,” “believe,” “plan,” “forecast,” “foresee,” “estimate,” “project,” “expect,” “seek,” “target,” “intend,” “goal,” and other similar expressions. The forward-looking statements included in this report reflect our current expectations and beliefs, and we do not undertake publicly to update or revise these statements, even if experience or future changes make it clear that any projected results expressed in this report or future quarterly reports to stockholders, press releases, or company statements will not be realized. In addition, the inclusion of any statement in this report does not constitute an admission by us that the events or circumstances described in such statement are material. Furthermore, we wish to caution and advise readers that these statements are based on assumptions that may not materialize and may involve risks and uncertainties, many of which are beyond our control, that could cause actual events or performance to differ materially from those contained or implied in these forward-looking statements. These risks and uncertainties include the risks identified under the heading "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended January 1, 2024, as updated by our other filings with the Securities and Exchange Commission (SEC), and described elsewhere in this Report. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated condensed financial statements and the related notes and the other financial information included in this Report, as well as the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our Annual Report on Form 10-K for the fiscal year ended January 1, 2024, filed with the SEC.

COMPANY OVERVIEW

We are a leading global manufacturer of technology solutions including mission systems, radio frequency (RF) components, RF microwave/microelectronic assemblies, and quick-turn and technologically advanced printed circuit boards (PCB). We focus on providing time-to-market and volume production of advanced technology products and offer a one-stop design, engineering, and manufacturing solution to our customers. This solution allows us to align technology development with the diverse needs of our customers and to enable them to reduce the time required to develop new products and bring them to market. We serve a diversified customer base consisting of approximately 1,500 customers in various markets throughout the world, including aerospace and defense, data center computing, automotive, medical, industrial and instrumentation, and networking. Our customers include original equipment manufacturers (OEMs), electronic manufacturing services (EMS) providers, original design manufacturers (ODMs), distributors, and government agencies (both domestic and allied foreign governments).

RECENT DEVELOPMENTS

On August 1, 2024, we entered into a First Amendment to our Amended and Restated Term Loan Credit Agreement, dated as of May 30, 2023, by and among us, as Borrower, JPMorgan Chase Bank, N.A., as Administrative Agent, and the several lenders from time to time parties thereto, pursuant to which we closed our $346.5 million new senior secured term loan (Term Loan Facility) that bears interest at a floating rate of 1-month Chicago Mercantile Exchange (CME) Term Secured Overnight Financing Rate (SOFR) plus an applicable margin of 2.25%, 50 basis points lower than our previous term loan facility issued in May 2023. The Term Loan Facility amends and restates our previous term loan facility. The Term Loan Facility is issued at par, maintains the same maturity of May 30, 2030 as the previous term loan facility, and the majority is a cashless rollover from the previous term loan facility.

On November 1, 2023, we announced our selection of Syracuse, New York as the location for a new proposed advanced technology PCB manufacturing facility. We expect that the proposed facility will bring advanced technology capability for our domestic high-volume production of ultra-high-density interconnect (HDI) PCBs in support of national security requirements. We believe the planned investment aligns with New York State’s continuing focus on the region as a premier technology hub for U.S. electronics and the recent selection of Buffalo-Rochester-Syracuse (BRS) for the Federal Tech Hub designation. The project reflects our support for cultivating a stronger microelectronics ecosystem in New York and across the U.S. Aerospace and Defense industrial base. We have broken ground on the 24-acre property adjacent to our existing facility in Syracuse for the campus expansion and the site for the new facility, and we expect initial low rate production within 18 to 24 months. Phase one of the proposed project, including capital for campus-wide improvements is estimated to be $100.0 million to $130.0 million, and we expect to receive support in the form of grants, awards, and tax credits from both Federal and New York State sources of approximately $52.0 million in the aggregate, subject to certain requirements and contingencies, which would serve to offset the initial capital investment and lower operating expenses.

In addition, we also have plans to consolidate two smaller PCB facilities in Elizabeth City, North Carolina and Huntington, New York into existing facilities in order to improve efficiencies. This consolidation will occur over the next three quarters and is not expected to have a material impact on our results of operations, cash flows, or financial position.

FINANCIAL OVERVIEW

While our customers include both OEMs and EMS providers, we measure customers based on OEM companies, as they are the ultimate end customers. Sales to our ten largest customers collectively accounted for 54% and 53% of our net sales for the quarter and three quarters ended September 30, 2024, respectively. Sales to our ten largest customers collectively accounted for 53% and 50% of our net sales for the quarter and three quarters ended October 2, 2023, respectively. We sell to OEMs both directly and indirectly through EMS providers.

The percentage of our net sales attributable to each of the principal end markets we served was as follows:

(1) Sales to EMS companies are classified by the end markets of their OEM customers.

We derive revenues primarily from the sale of PCBs, engineered systems using customer-supplied engineering and design plans as well as our long-term contracts related to the design and manufacture of highly sophisticated intelligence, surveillance, and communications solutions, and RF and microwave/microelectronics components, assemblies, and subsystems. Orders for products generally correspond to the production schedules of our customers and are supported with firm purchase orders. Our customers have continuous control of the work in progress and finished goods throughout the PCB and engineered systems manufacturing process, as these are built to customer specifications with no alternative use, and there is an enforceable right of payment for work performed to date. As a result, we recognize revenue progressively over time based on the extent of progress towards completion of the performance obligation. We recognize revenue based on a cost method as it best depicts the transfer of control to the customer which takes place as we incur costs. Revenues are recorded proportionally as costs are incurred.

We also manufacture certain components, assemblies, subsystems, and completed systems which service our RF and Specialty Components (RF&S Components) customers and certain aerospace and defense customers. We recognize revenue at a point in time upon transfer of control of the products to our customer. Point in time recognition was determined as our customers do not simultaneously receive or consume the benefits provided by our performance and the asset being manufactured has alternative uses to us.

Net sales consist of gross sales less an allowance for returns, which typically have been approximately 2% of gross sales. We provide our customers a limited right of return for defective PCBs including components, subsystems, and assemblies. We record an estimate for sales returns and allowances at the time of sale based on historical results and anticipated returns.

Cost of goods sold consists of materials, labor, outside services, and overhead expenses incurred in the manufacture and testing of our products. Shipping and handling fees and related freight costs and supplies associated with shipping products are also included as a component of cost of goods sold. Many factors affect our gross margin, including capacity utilization, product mix, production volume, supply chain costs, and yield.

Selling and marketing expenses consist primarily of salaries, labor related benefits, and commissions paid to our internal sales force, independent sales representatives, and our sales support staff, as well as costs associated with marketing materials and trade shows.

General and administrative costs primarily include the salaries for executive, finance, accounting, information technology, and human resources personnel, as well as expenses for accounting and legal assistance, incentive compensation expense, and gains or losses on the sale or disposal of property, plant, and equipment.

Research and development expenses consist primarily of salaries and labor related benefits paid to our research and development staff, as well as material costs.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated condensed financial statements included in this Report have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities.

See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended January 1, 2024 for further discussion of critical accounting policies and estimates. There were no material changes to our critical accounting policies and estimates since January 1, 2024.

RESULTS OF OPERATIONS

The relationship of various items to net sales in our consolidated condensed statements of operations was as follows:

The following discussion and analysis is for the quarter and three quarters ended September 30, 2024, compared to the quarter and three quarters ended October 2, 2023, unless otherwise stated.

Net Sales

Total net sales increased $43.9 million, or 7.7%, to $616.5 million for the third quarter of 2024 from $572.6 million for the third quarter of 2023. The increase in total net sales primarily resulted from an increase in net sales for the PCB reportable segment of $43.1 million, or 7.6%, to $606.8 million for the third quarter of 2024 from $563.7 million for the third quarter of 2023. The primary driver of this increase was demand growth in our aerospace and defense and data center computing end markets as well as demand recovery in our networking end market, partially offset by demand weakness in our medical, industrial, and instrumentation and automotive end markets. Net sales for the RF&S Components reportable segment increased $0.8 million, or 9.4%, to $9.7 million for the third quarter of 2024 from $8.9 million for the third quarter of 2023, which was primarily due to higher demand in our networking end market.

Total net sales increased $128.3 million, or 7.7%, to $1,791.8 million for the first three quarters of 2024 from $1,663.5 million for the first three quarters of 2023. This increase in total net sales primarily resulted from an increase in net sales for the PCB reportable segment of $130.4 million, or 8.0%, to $1,764.7 million for the first three quarters of 2024 from $1,634.3 million for the first three quarters of 2023. The primary driver of this increase was demand growth in our data center computing and aerospace and defense end markets, partially offset by demand weakness in our automotive, networking, and medical, industrial, and instrumentation end markets, and by the sale of our Shanghai backplane business in the first quarter of 2023, which had the effect of reducing $8.4 million of net sales when comparing the first three quarters of 2024 to the first three quarters of 2023. Net sales for the RF&S Components reportable segment decreased $2.2 million, or 7.4%, to $27.0 million for the first three quarters of 2024 from $29.2 million for the first three quarters of 2023, which was primarily due to lower demand in our networking end market.

Gross Margin

Overall gross margin increased to 21.1% for the third quarter of 2024 from 19.8% for the third quarter of 2023. The increase in overall gross margin was due to the increase in gross margin for the PCB reportable segment to 21.9% for the third quarter of 2024 from 21.1% for the third quarter of 2023. This increase was due to higher sales volume, particularly in the aerospace and defense and data center computing end markets, and improved operational execution. Gross margin for the RF&S Components reportable segment decreased to 50.4% for the third quarter of 2024 from 56.4% for the third quarter of 2023, primarily due to unfavorable product mix.

Overall gross margin increased to 19.6% for the first three quarters of 2024 from 17.9% for the first three quarters of 2023. The increase in overall gross margin was due to the increase in gross margin for the PCB reportable segment to 20.5% for the first three quarters of 2024 from 18.8% for the first three quarters of 2023. This increase was due to higher sales volume, particularly in the aerospace and defense and data center computing end markets, and improved operational execution. Gross margin for the RF&S Components reportable segment decreased to 49.3% for the first three quarters of 2024 from 54.3% for the first three quarters of 2023, primarily due to lower sales.

An important factor affecting gross margins is capacity utilization, which is measured by the actual production as a percentage of maximum capacity. This measure is particularly important in our high-volume PCB facilities in Asia, as a significant portion of our operating costs are fixed in nature. We believe that our North America utilization figures are not as meaningful as Asia because bottlenecks in these high mix low volume facilities tend to occur in areas outside of plating, which is the core process that we use for calculating utilization rates. Capacity utilization for the third quarter of 2024 in our Asia and North America PCB facilities was 60% and 35%, respectively, compared to 46% and 38%, respectively, for the third quarter of 2023. Capacity utilization for the first three quarters of 2024 in our Asia and North America PCB facilities was 59% and 37%, respectively, compared to 48% and 39%, respectively, for the first three quarters of 2023. The increase in capacity utilization in our Asia PCB facilities was due to continued strong data center demand.

Selling and Marketing Expenses

Selling and marketing expenses increased $1.2 million to $20.0 million, or 3.2% of net sales, for the third quarter of 2024 from $18.8 million, or 3.3% of net sales, for the third quarter of 2023. The increase in selling and marketing expenses was primarily due to higher labor costs and stock-based compensation. Selling and marketing expenses as a percentage of net sales decreased as a result of higher net sales.

Selling and marketing expenses increased $1.8 million to $60.1 million, or 3.4% of net sales, for the first three quarters of 2024 from $58.2 million, or 3.5% of net sales, for the first three quarters of 2023. The increase in selling and marketing expenses was primarily due to higher labor costs, stock-based compensation, and travel costs, partially offset by a decrease in commissions. Selling and marketing expenses as a percentage of net sales decreased as a result of higher net sales.

General and Administrative Expenses

General and administrative expenses increased $3.7 million to $42.6 million, or 6.9% of net sales, for the third quarter of 2024 from $38.9 million, or 6.8% of net sales, for the third quarter of 2023. The increase in general and administrative expenses was primarily due to increases in consulting expenses, labor costs, and stock-based compensation, partially offset by decreases in spending on supplies.

General and administrative expenses increased $13.0 million to $124.8 million, or 7.0% of net sales, for the first three quarters of 2024 from $111.8 million, or 6.7% of net sales, for the first three quarters of 2023. The increase in general and administrative expenses was primarily due to increases in consulting and legal expenses, labor costs, stock-based compensation, bad debt, incentive compensation, and the write down of our Hong Kong building of $6.1 million, partially offset by gains on the sale of assets primarily related to the sale of two buildings vacated by the closure of our Anaheim and Santa Clara plants of $14.4 million and decreases in spending on supplies.

Research and Development Expenses

Research and development expenses increased $1.9 million to $8.1 million, or 1.3% of net sales, for the third quarter of 2024 from $6.2 million, or 1.1% of net sales, for the third quarter of 2023. The increase in research and development expenses was primarily due to increases in labor costs and research and development projects.

Research and development expenses increased $4.2 million to $23.9 million, or 1.3% of net sales, for the first three quarters of 2024 from $19.7 million, or 1.2% of net sales, for the first three quarters of 2023. The increase in research and development expenses was primarily due to increases in labor costs and research and development projects.

Total Other Expense, Net

Total other expense, net increased $18.9 million to $25.9 million for the third quarter of 2024 from $7.1 million for the third quarter of 2023. During the third quarter of 2024, there was a $17.8 million foreign exchange loss, compared to a $0.9 million foreign exchange gain in the third quarter of 2023. We utilize the Chinese Renminbi (RMB) and Malaysian Ringgit (MYR) at our China and Malaysia facilities, respectively, for employee-related and other costs of running our operations in foreign countries. However, the current year impact was primarily driven by $14.3 million of unrealized foreign exchange losses from translation of our China and Malaysia balance sheets from local currency into the U.S. dollar functional currency, which experienced significant devaluation against the RMB and MYR during the third quarter of 2024 as compared to the third quarter of 2023. Interest expense increased $1.7 million in the third quarter of 2024 as compared to the same period of 2023, partially offset by a $1.0 million increase in interest income.

Total other expense, net increased $12.1 million to $37.4 million for the first three quarters of 2024 from $25.3 million for the first three quarters of 2023. This increase was primarily due to the foreign currency impacts discussed in the paragraph above, which resulted in a $12.9 million foreign currency loss in the first three quarters of 2024 ($12.0 million of which was unrealized) as compared to a $3.1 million foreign currency gain in the first three quarters of 2023 ($4.1 million of which was unrealized). Interest expense increased $1.6 million in the first three quarters of 2024 as compared to the same period of 2023, partially offset by a $4.3 million increase in interest income and government subsidies of $0.8 million.

Income Taxes

Income tax expense decreased $9.1 million to $10.7 million for the third quarter of 2024 from $19.8 million for the third quarter of 2023. The decrease in income tax expense was primarily due to a change in the mix of projected foreign and U.S. income resulting in a decrease in our effective tax rate. Such decrease was partially offset by the finalization of Hong Kong corporate income tax returns and the absence in the third quarter of 2024 of finalization of the U.S. income tax return.

Income tax expense stayed constant at $18.5 million for the first three quarters of 2024 compared to the first three quarters of 2023, but with changes in the components. The changes in income tax expense components for the first three quarters of 2024 was primarily due to a windfall tax benefit of the stock-based compensation releases and a net tax benefit of the finalization of China, Canada, and Hong Kong corporate income tax returns, which was offset by the absence of the release of uncertain tax position benefits and finalization of the U.S. income tax return that existed in the first three quarters of 2023.

Our effective tax rate is primarily impacted by the mix of foreign and U.S. income, tax rates in China and Hong Kong, the U.S. federal income tax rate, apportioned state income tax rates, the generation of credits and deductions available to us as well as changes in valuation allowances and certain non-deductible items. We had a net deferred income tax liability of $40.4 million and $56.8 million as of September 30, 2024 and October 2, 2023, respectively.

Liquidity and Capital Resources

Our principal sources of liquidity have been cash provided by operations, the issuance of debt, and borrowings under our revolving credit facility. Our principal uses of cash have been to finance capital expenditures, finance acquisitions, fund working capital requirements, repay debt obligations, and repurchase common stock. We anticipate that financing capital expenditures, financing acquisitions, funding working capital requirements, servicing debt, and repurchasing common stock will be the principal demands on our cash in the future.

Cash flow provided by operating activities during the first three quarters of 2024 was $150.8 million as compared to cash flow provided by operating activities of $139.8 million in the same period in 2023. The increase in cash flow was primarily due to an increase in net income of $87.2 million partially offset by an increased investment in working capital.

Net cash used in investing activities during the first three quarters of 2024 was $93.4 million, primarily resulting from the use of $129.7 million for purchases of property, plant and equipment and other assets. This is partially offset by the receipt of $29.6 million of proceeds from the sale of property, plant, and equipment and other assets primarily related to the sale of two buildings vacated by the closure of our Anaheim and Santa Clara plants and $6.7 million of proceeds from the sale of property associated with our Shanghai E‑MS subsidiary. Net cash used in investing activities was approximately $46.1 million for the first three quarters of 2023, primarily reflecting the use of $114.2 million for purchases of property, plant, and equipment and other assets, partially offset by the receipt of $61.8 million of proceeds from the sale of property associated with our Shanghai E‑MS subsidiary and $6.0 million of proceeds from the sale of our Shanghai Backplane Assembly subsidiary, net of cash disposed.

Net cash used in financing activities during the first three quarters of 2024 was $38.2 million reflecting the use of $34.5 million for repurchases of common stock, $8.7 million for the repayment of long-term debt borrowings, and $1.1 million for payment of debt issuance costs, partially offset by $6.1 million of proceeds from long-term debt borrowings related to the refinancing of our Term Loan Facility. Net cash used in financing activities during the first three quarters of 2023 was $87.9 million, primarily reflecting repayment of long-term debt borrowings of $291.5 million, repurchases of common stock of $14.6 million, refunding of customer deposits of $7.5 million, payment of debt issuance costs of $5.5 million, and payment of the original issue discount of $3.5 million, partially offset by the receipt of proceeds from long-term debt borrowing of $234.8 million.

As of September 30, 2024, we had cash and cash equivalents of $469.5 million, of which $189.0 million was held by our foreign subsidiaries, primarily in China. Should we choose to remit cash to the United States from our foreign locations, we may incur tax obligations which would reduce the amount of cash ultimately available to the United States. However, we believe there would be no material tax consequences not previously accrued for the repatriation of this cash.

Our total 2024 capital expenditures are expected to be in the range of $175.0 million to $195.0 million.

Share Repurchases

On May 3, 2023, our Board of Directors authorized a share repurchase program (2023 Repurchase Program) allowing us to repurchase up to $100.0 million of our common stock from time to time through May 3, 2025. We did not repurchase any shares of our common stock during the quarter ended September 30, 2024. During the three quarters ended September 30, 2024, we repurchased 2.0 million shares of our common stock for a total cost of $34.5 million (including commissions). As of September 30, 2024, the remaining amount in value available to be repurchased under the 2023 Repurchase Program was approximately $41.1 million.

Long-term Debt and Letters of Credit

As of September 30, 2024, we had $916.3 million of outstanding debt, net of discount and debt issuance costs, composed of $496.5 million of Senior Notes due March 2029, $339.8 million under the Term Loan Facility, and $80.0 million under the Asia Asset-Based Lending Credit Agreement (Asia ABL).

Pursuant to the terms of the Senior Notes due March 2029 and Term Loan Facility, we are subject to certain affirmative and negative covenants, including limitations on indebtedness, corporate transactions, investments, dispositions, and restricted payments. Under the U.S. Asset-Based Lending Credit Agreement (U.S. ABL) and Asia ABL (collectively, the ABL Revolving Loans), we are also subject to various financial covenants, including leverage and fixed charge coverage ratios. As of September 30, 2024, we were in compliance with the covenants under the Senior Notes due March 2029, Term Loan Facility, and ABL Revolving Loans.

Based on our current level of operations, we believe that cash generated from operations, cash on hand, and cash from the issuance of term and revolving debt will be adequate to meet our currently anticipated capital expenditure, debt service, and working capital needs for the next 12 months. Additional information regarding our indebtedness, including information about the credit available under our debt facilities, interest rates, and other key terms of our outstanding indebtedness, is included in Part I, Item 1, Note 8, Long‑term Debt and Letters of Credit, of the Notes to Consolidated Condensed Financial Statements included in this Report.

Supplier Finance Program Obligations

We have agreements with financial institutions to facilitate payments to certain suppliers. Under the terms of the agreements, we confirm the validity of each supplier invoice to the respective financial institution upon receipt. The supplier receives payment from the financial institution, and we pay the financial institution based on the terms negotiated, which generally range from 160 days to 360 days. Liabilities associated with these agreements are recorded in accounts payable on the consolidated condensed balance sheets and amounted to $18.3 million and $18.8 million as of September 30, 2024 and January 1, 2024, respectively.

Contractual Obligations and Commitments

As part of our on-going operations, we enter into contractual arrangements that obligate us to make future cash payments. These obligations impact our liquidity and capital resource needs. Our estimated future obligations consist of long-term debt obligations, interest on debt obligations, derivative liabilities, purchase obligations, and leases. As of September 30, 2024, there were no material changes outside the ordinary course of business since January 1, 2024 to our contractual obligations and commitments and the related cash requirements except for future interest on debt obligations. Our projected aggregate future interest on debt obligations as of September 30, 2024 amounted to $243.8 million, which we expect to settle as follows: $49.7 million within 1 year, $98.6 million within 1-3 years, $80.1 million within 4-5 years, and $15.4 million after 5 years. For debt obligations based on variable rates, interest rates used are as of September 30, 2024.

Offset Agreements

We have and may continue to enter into industrial cooperation agreements, sometimes referred to as offset agreements, as a condition to obtaining orders for our products and services from customers in foreign countries. As of September 30, 2024, we had outstanding offset agreements of approximately $27.3 million, some of which extend through 2028. Offset programs usually extend over several years and in some cases provide for penalties in the event we fail to perform in accordance with contract requirements. To date, we have not been obligated to pay any such penalties. For details about our offset agreements, see Part I, Item 1, Note 14, Commitments and Contingencies, of the Notes to Consolidated Condensed Financial Statements included in this Report.

Seasonality

We tend to experience modest seasonal softness in the first and third quarters due to holidays and vacation periods in China and North America, respectively, which limit production leading to stronger revenue levels in the second and fourth quarters.

Recently Issued Accounting Standards

For a description of recently adopted and issued accounting standards, including the respective dates of adoption and the expected effects on our results of operations and financial condition, see Part I, Item 1, Note 1, Nature of Operations and Basis of Presentation, of the Notes to Consolidated Condensed Financial Statements included in this Report.

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.

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 Term Secured Overnight Financing Rate (SOFR) 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 March 23, 2023, we entered into a four-year pay-fixed, receive-floating (1-month Chicago Mercantile Exchange (CME) Term SOFR), interest rate swap arrangement with a notional amount of $250.0 million for the period beginning April 1, 2023 and ending on April 1, 2027. Under the terms of the interest rate swap, we pay a fixed rate of 3.49% against a portion of our Term SOFR-based debt and receive floating 1-month CME Term SOFR 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 30, 2024, the fair value of the interest rate swap was recorded as a net liability in the amount of $0.6 million, of which $0.8 million is included as a component of prepaid expenses and other current assets and $1.4 million is included as a component of other long-term liabilities. As of January 1, 2024, the fair value of the interest rate swap was recorded as a net asset of $1.8 million, of which $3.3 million is included as a component of prepaid expenses and other current assets and $1.5 million is included as a component of other long-term liabilities. No ineffectiveness was recognized for the quarter and three quarters ended September 30, 2024. During the quarter and three quarters ended September 30, 2024, the interest rate swap decreased interest expense by $1.1 million and $3.5 million, respectively. During the quarter and three quarters ended October 2, 2023, the interest rate swap decreased interest expense by $1.1 million and $2.1 million, respectively.

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 September 30, 2024, approximately 80.9% of our total debt was based on fixed rates. Based on our borrowings as of September 30, 2024, an assumed 100 basis point change in variable rates would cause our annual interest cost to change by $1.8 million.

Foreign Currency Exchange 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 operations have the U.S. Dollar as their functional currency. However, one of our China facilities utilizes 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. We do not engage in hedging to manage this foreign currency risk. However, we may consider the use of derivatives in the future. Our primary foreign exchange exposure is to the RMB and Malaysian Ringgit (MYR). In general, our Chinese customers pay us in RMB, which partially mitigates this foreign currency exchange risk.

Debt Instruments

The fiscal calendar maturities of our debt instruments through 2028 and thereafter were as follows:

(In thousands)

(1) Interest rate swap effectively fixed $250,000 of variable rate debt.

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended (Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our CEO and CFO have concluded that, as of September 30, 2024 such disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.

In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control over Financial Reporting

We continue to expand our implementation of an enterprise resource planning (ERP) system on a worldwide basis, which is expected to improve the efficiency of the financial reporting and related transaction processes. We have completed the implementation at certain locations and as a result, we made changes to our processes and procedures which, in turn, resulted in changes to our internal control over financial reporting, including the implementation of additional controls. We are in the process of rolling out the ERP system to our remaining locations to standardize the ERP system.

There were no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes in our risk factors as previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 1, 2024.