TTM Technologies, Inc. — Q1 2020 Form 10-Q
Reporting period: Quarter ended March 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Results are unaudited. Mobility is presented as discontinued operations, and prior-period results were recast accordingly.
Business context and reporting period
TTM manufactures printed circuit boards (PCBs), radio-frequency and microwave products, and electro-mechanical solutions. It reports PCB and E-M Solutions segments. The quarter was affected by China’s extended Chinese New Year shutdowns related to COVID-19; the filing states that the pandemic’s duration and severity were uncertain.
TTM completed the sale of its Mobility business on April 17, 2020, after quarter-end, for a base cash price of $550 million, subject to customary adjustments. Certain receivables were excluded; the company estimated about $95 million would be collected separately.
Financial performance
| Metric | Q1 2020 | Prior comparable quarter |
|---|---|---|
| Continuing-operations net sales | $497.6 million | $536.4 million |
| Gross profit / margin | $81.3 million / 16.3% | $98.8 million / 18.4% |
| Operating income | $16.2 million | $30.1 million |
| Continuing-operations net income (loss) | $(3.2) million | $6.2 million |
| Discontinued-operations income (loss), net of tax | $2.0 million | $(9.5) million |
| Consolidated net income (loss) | $(1.2) million | $(3.3) million |
| Basic and diluted loss per share | $(0.01) | $(0.03) |
PCB sales were $467.4 million, down 3.6%; E-M Solutions sales were $30.2 million, down 41.2%. Segment operating income was $61.6 million for PCB and a $4.3 million loss for E-M Solutions. Aerospace and defense represented 37% of continuing sales; networking/communications represented 16%.
Gross margin fell to 16.3% from 18.4%. PCB margin declined to 18.6% from 20.3%, while E-M Solutions margin moved to negative 5.7% from 6.3%. Management cited lower volumes in commercially focused PCB facilities and, for E-M Solutions, lower sales and additional inventory provisions. Asia PCB capacity utilization was 50%, versus 64% a year earlier; North America utilization was 67%, versus 62%.
Cash flow, debt and liquidity
- Cash and cash equivalents were $362.0 million at quarter-end; $325.5 million was held by foreign subsidiaries, primarily in China.
- Consolidated operating cash flow was $27.9 million, compared with $36.9 million a year earlier. Continuing-operations operating cash flow was $6.6 million, compared with $9.1 million; discontinued operations provided $21.3 million.
- Continuing-operations investing cash flow was a $23.9 million outflow, primarily for capital expenditures. Consolidated investing cash flow was a $2.9 million inflow, including a $35.3 million refundable deposit related to the Mobility sale. There was no financing cash flow from continuing operations in the quarter.
- Debt carrying value, net of discounts and issuance costs, was $1.479 billion; principal outstanding was $1.501 billion. This included $250.0 million of convertible notes due December 2020, $805.9 million of term debt, $375.0 million of senior notes, and $70.0 million drawn on ABL facilities.
- TTM reported compliance with its debt covenants. About 68.3% of total debt was at fixed rates, including the effect of its interest-rate swap. Management estimated that a 100-basis-point change in variable rates would change annual interest cost by $4.7 million.
- Management expected 2020 net capital expenditures and asset acquisitions of $100 million to $120 million and said existing liquidity and operating cash generation were expected to cover requirements for at least twelve months. Sale proceeds not reinvested within twelve months must be used to prepay the term loan; management planned to use proceeds for debt repayment and reinvestment.
Material changes, outlook and risks
Continuing-operations sales decreased 7.2% year over year. Management attributed lower PCB sales principally to reduced networking/communications and automotive demand, partly offset by aerospace and defense growth. PCB shipment volume declined 23.6%, partly offset by a 26.5% increase in average selling price, mainly from product mix. E-M Solutions’ sales decline reflected lower automotive, medical/industrial/instrumentation, and networking/communications demand.
General and administrative expense increased to $34.7 million from $30.3 million, primarily due to acquisition and integration, bad-debt, and consulting costs. Other expense declined to $17.3 million from $21.5 million, largely because of higher foreign-exchange gains. The tax provision included a $2.1 million net discrete expense related to renewed Chinese High and New Tax Enterprise status and uncertain tax positions.
Management provided no specific revenue or earnings guidance in the supplied filing text. It cited significant uncertainty from COVID-19, including potential demand weakness, supply-chain disruption, reduced workforce availability, and customer collection risk. The company described measures to protect employees and coordinate with suppliers, while noting actual results could differ materially from estimates.
On April 29, 2020, TTM announced a restructuring of E-M Solutions: operations at two Chinese facilities were to be discontinued and a third facility integrated into PCB operations. Estimated charges were about $17 million in cash for severance and shutdown costs over 12 to 15 months, plus about $8 million of non-cash asset impairments. These subsequent-event estimates were not included in Q1 results.
Other notable risks include substantial indebtedness and the December 2020 convertible-note maturity, interest-rate and LIBOR transition exposure, customer and end-market concentration, low capacity utilization and fixed-cost absorption, international and China operating risks, and potential restructuring or impairment charges. The company reported that known legal matters and accrued probable losses were not material, but adverse outcomes could be material in a particular period.
Important facts for investors to verify
- Final proceeds and purchase-price adjustments for the Mobility sale, collection of the excluded receivables, and actual allocation of proceeds between debt repayment and reinvestment.
- Cash requirements, timing, and realized savings or impairment charges from the E-M Solutions restructuring.
- COVID-19 effects on orders, facility utilization, supply continuity, receivables, and cash generation after quarter-end.
- Plans and available liquidity to address the $250 million convertible notes due December 2020, as well as covenant headroom and ABL availability.
- Whether gross margins and utilization recover, particularly in E-M Solutions and Asia PCB facilities, and whether the projected $100 million to $120 million of 2020 capital spending changes.