TTM Technologies, Inc. — Q3 2019 Form 10-Q
Business and period: TTM manufactures printed circuit boards (PCBs), electro-mechanical solutions, and RF and microwave products. This unaudited report covers the quarter and first three fiscal quarters ended September 30, 2019; comparisons are with periods ended October 1, 2018. Dollar amounts below are USD millions unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First three quarters 2019 | First three quarters 2018 |
|---|---|---|---|---|
| Net sales | $716.8 | $755.8 | $1,970.1 | $2,136.3 |
| Gross profit / margin | $103.8 / 14.5% | $129.6 / 17.1% | $277.1 / 14.1% | $334.4 / 15.7% |
| Operating income / margin | $36.4 / 5.1% | $54.6 / 7.1% | $70.7 / 3.6% | $116.3 / 5.4% |
| Net income | $15.9 | $27.0 | $16.0 | $121.1 |
| Diluted EPS | $0.14 | $0.22 | $0.15 | $0.98 |
| Operating cash flow | — | $181.8 | $121.4 |
- Q3 sales fell 5.2%; first-three-quarter sales fell 7.8%. PCB sales declined 6.8% in Q3 and 9.0% year to date, while E-M Solutions sales rose 13.8% and 6.2%, respectively.
- Management attributed weaker PCB revenue mainly to lower demand in Networking/Communications, Computing/Storage/Peripherals, and Automotive. Q3 PCB shipment volume declined 13.6%; average selling price rose 5.6%, largely from product mix. Year-to-date PCB shipment volume declined 19.2%, while average selling price rose 10.4%.
- Q3 PCB gross margin decreased to 15.8% from 18.6%, primarily due to lower volumes in commercially focused facilities. Asia PCB capacity utilization was 71% versus 80%; North America was 57% versus 60%.
- Year-to-date net income was sharply lower in part because 2018 included a $74.6 million release of a U.S. deferred-tax valuation allowance. 2019 also reflected lower operating income.
Cash, liquidity, and debt
- At September 30, 2019, cash and cash equivalents were $316.6 million, up from $256.4 million at December 31, 2018. Approximately $250.7 million was held by foreign subsidiaries, primarily in China.
- Current assets were $1,277.8 million and current liabilities were $666.7 million. The company reported no current debt; long-term debt, net of discount and issuance costs, was $1,472.6 million. Debt principal outstanding was $1,500.9 million.
- Debt included a $805.9 million term loan due 2024, $375.0 million senior notes due 2025, $250.0 million convertible notes due December 2020, and $70.0 million of ABL borrowings. The company said it was in compliance with debt covenants.
- Available ABL borrowing capacity, after outstanding letters of credit, was $96.4 million under the U.S. facility and $95.5 million under the Asia facility. Operating cash flow was $181.8 million; purchases of property, plant, equipment, and other assets were $95.4 million. Cash flow from operations less those purchases was approximately $86.4 million.
- Approximately 68.3% of total debt was fixed-rate or effectively fixed. Management estimated that a 100-basis-point change in variable rates would change annual interest cost by $4.8 million, based on period-end borrowings.
Outlook, risks, and unusual items
- Management expected 2019 net capital expenditures and asset acquisitions of $140 million to $150 million. The filing provides no specific revenue or earnings guidance.
- Goodwill testing was triggered by lower-than-expected results and continued sales declines in Communications and Computing and Automotive and Medical/Industrial/Instrumentation. No impairment was recorded; estimated fair value exceeded carrying value by 19% and 8%, respectively. Management cautioned that changed assumptions could lead to future impairment.
- Restructuring charges were $4.4 million year to date, primarily employee separation costs; $1.9 million remained accrued at quarter end. The company also recorded a $14.0 million liability for its interest-rate swap.
- Key risks include weak commercial end-market demand and lower capacity utilization, customer concentration (one customer represented about 20% of Q3 sales), substantial debt and the December 2020 convertible-note maturity, trade tariffs and international operating exposure, and sensitivity to interest rates, foreign exchange, and raw-material costs. Legal matters were described as ordinary-course matters; accrued probable and estimable losses were not material, though an adverse outcome could be material in a particular period.
- The company adopted the lease accounting standard on January 1, 2019. At quarter end it reported $23.7 million of operating lease right-of-use assets and $23.9 million of lease liabilities; adoption did not materially affect operations or cash flows.
Most important facts to verify
- Whether commercial-market demand, PCB shipment volumes, and capacity utilization recover, and how this affects gross margins.
- Whether the company’s goodwill valuation assumptions remain supportable, particularly for the reporting units with 8% and 19% headroom.
- How the company will address the $250.0 million convertible notes due December 2020 and manage overall debt service and refinancing needs.
- Whether the stated 2019 capital-spending range is achieved and translated into operating returns and cash generation.
- Whether major-customer concentration, tariff exposure, and the large share of cash held outside the U.S. create material changes to sales, costs, or accessible liquidity.