Business context and reporting period
TTM Technologies, Inc. filed this unaudited Form 10-Q for the quarter ended July 4, 2022, and the first two fiscal quarters of 2022. TTM manufactures printed circuit boards (PCBs), RF components and assemblies, and engineered systems for markets including aerospace and defense, automotive, data center computing, medical/industrial and networking/communications.
On June 27, 2022, TTM acquired Gritel Holding Co. and ISC Farmingdale Corp., including Telephonics, for preliminary cash consideration of $299.2 million. Telephonics’ post-acquisition results were not material to reported results for the period.
Financial performance and liquidity
| Metric | Quarter ended July 4, 2022 | Two quarters ended July 4, 2022 |
|---|---|---|
| Net sales | $625.6 million; up 10.3% year over year | $1,206.8 million; up 10.3% |
| Gross profit / margin | $117.1 million / 18.7%, versus 17.6% | $208.0 million / 17.2%, versus 16.6% |
| Operating income / margin | $37.2 million / 5.9%, versus $40.9 million / 7.2% | $63.1 million / 5.2%, versus $60.7 million / 5.6% |
| Net income | $27.8 million, versus $28.3 million | $45.0 million, versus $25.1 million |
| Diluted EPS | $0.27, versus $0.26 | $0.43, versus $0.23 |
| Operating cash flow | Not separately presented in the provided cash-flow statement | $115.3 million, versus $98.1 million |
Q2 sales growth was driven mainly by PCB revenue, which rose 10.1%; higher pricing, quick-turn sales and favorable product mix more than offset lower PCB shipment volume. Q2 operating income declined despite higher sales, primarily as operating expenses increased. General and administrative expense included $9.9 million of Telephonics transaction costs. For the first two quarters, net income benefited from the absence of the prior-year $15.2 million debt-extinguishment loss.
Cash and cash equivalents were $266.5 million at July 4, 2022, down from $537.7 million at January 3, 2022; $199.4 million was held by foreign subsidiaries. Investing cash outflow was $349.0 million, including the acquisition and $49.9 million of capital purchases. Financing cash outflow was $36.3 million, mainly share repurchases. Current assets were $1,380.9 million and current liabilities $722.3 million.
Debt principal totaled $935.9 million: $500.0 million of 4.00% senior notes due 2029, a $405.9 million floating-rate term loan due 2024, and $30.0 million under the Asia ABL. Balance-sheet debt, net of discount and issuance costs, was $928.6 million. TTM reported compliance with debt covenants. The company said existing cash, operating cash generation and available debt financing should meet anticipated needs for the next 12 months.
Material changes, outlook and risks
- Gross margin improved year over year, with pricing, product mix and higher sales partly offsetting higher labor and material costs. North American PCB capacity utilization fell to 42% in Q2 from 49% a year earlier; Asia utilization was 88% in both periods.
- TTM expects 2022 capital expenditures of $110 million to $130 million. A new highly automated PCB facility in Penang, Malaysia, is under construction; expected total spending is approximately $130 million from 2022 through 2025, with construction expected to take 12 to 15 months.
- The filing gives no specific revenue or earnings guidance. Management cites continuing supply-chain constraints, inflation and labor shortages, as well as ongoing uncertainty from COVID-19. Measures include supplier diversification, efficiency efforts and pricing adjustments.
- The interest-rate swap on $400 million of variable-rate debt expired June 1, 2022, and TTM did not expect to enter a replacement swap. A 100-basis-point change in variable rates was estimated to change annual interest cost by $4.4 million.
- Key risks include acquisition integration and preliminary purchase-price estimates, raw-material availability and costs, labor and capacity utilization, customer concentration, foreign exchange and geopolitical exposure, and substantial variable-rate debt. One customer represented approximately 11% of Q2 sales; the ten largest customers represented 41%.
- Telephonics purchase accounting remains preliminary, including $78.3 million of goodwill and $90.8 million of identifiable intangible assets. TTM reported that disclosure controls were effective; it excluded acquired Telephonics from its internal-control assessment under the SEC’s one-year acquisition relief.
- Known legal matters were not considered material as accrued, but the filing cautions that adverse outcomes could materially affect results in a particular period. Commodity contracts had a $3.5 million liability at quarter-end.
Important facts for investors to verify
- Whether Telephonics integration, finalized purchase accounting and subsequent segment reporting meet management’s expectations.
- Whether pricing and product mix can continue to offset materials, labor and supply-chain costs without weakening demand.
- How higher interest rates affect the floating-rate term loan and Asia ABL after the swap’s expiration.
- Whether cash generation and liquidity remain adequate given acquisition spending, planned capital expenditures, working-capital needs and debt service.
- Whether North American capacity utilization, labor availability and customer concentration create material operating or cash-flow pressure.