TTM Technologies, Inc. — Q1 2017 Form 10-Q
Reporting period: 13-week quarter ended April 3, 2017; comparative quarter ended March 28, 2016. Unaudited results. TTM manufactures printed circuit boards (PCBs) and electro-mechanical solutions (E-M Solutions) for global electronics markets.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $625.2 million | $583.3 million | +7.2% |
| Gross profit / margin | $105.0 million / 16.8% | $83.6 million / 14.3% | Margin +2.5 percentage points |
| Operating income / margin | $52.6 million / 8.4% | $18.9 million / 3.2% | Higher |
| Net income attributable to TTM shareholders | $33.0 million | Net loss of $7.3 million | Turned profitable |
| EPS, basic / diluted | $0.33 / $0.28 | $(0.07) / $(0.07) | Turned profitable |
| Operating cash flow | $49.6 million | $17.9 million | Higher |
| Capital expenditures and equipment deposits | $33.3 million | $20.1 million | Higher |
Drivers and segment mix: PCB sales rose 10.8% excluding intersegment sales, supported by higher cellular phone, computing/storage/peripherals and aerospace/defense demand; PCB shipments increased 9% and average selling price rose 1%. Networking/communications demand declined. E-M Solutions sales fell to $41.7 million from $56.5 million, mainly reflecting the Juarez facility closure and weaker networking/communications demand. E-M Solutions segment income was a loss of $1.6 million versus income of $0.4 million.
Management attributed improved PCB margins to higher volumes and capacity utilization, synergy savings, and a $3.0 million insurance settlement related to a prior-year facility fire. E-M Solutions margin fell to 2.7% from 6.6%, amid lower volumes and higher inventory reserves. General and administrative expense declined, partly because certain facility and labor support costs were reclassified to cost of goods sold; this reclassification affects comparability of reported expenses.
Liquidity, debt and balance sheet
- At April 3, 2017, cash and cash equivalents were $282.9 million, current assets $1.027 billion, and current liabilities $721.6 million. Net working capital was approximately $305.7 million, down from $323.8 million at January 2, 2017.
- Gross debt principal was approximately $1.062 billion: $700 million term loan, $80 million U.S. ABL, $30 million Asia ABL, $250 million convertible notes, and $1.8 million capital lease. Cash was $282.9 million. The filing reports $160.7 million of short-term debt and $861.4 million of long-term debt net of discount and issuance costs.
- Available borrowing capacity was $113.5 million under the U.S. ABL and $99.6 million under the Asia ABL, after outstanding letters of credit. TTM reported compliance with debt covenants. It made an additional $50 million optional term-loan principal prepayment after quarter-end.
- Operating cash flow improved with stronger operations and working-capital use; cash cycle days were 46 versus 54 in the prior-year quarter. Investing cash outflow was $23.4 million, including $9.9 million in proceeds from asset sales. Cash increased $26.6 million during the quarter.
- Approximately $225.5 million of cash was held by foreign subsidiaries, primarily in Asia, and management expected those funds to support local operations.
Outlook, commentary and risks
- Management expected 2017 net capital expenditures of $155–$170 million: approximately 40% for technology enhancements, 30% for capacity expansion, and 30% for compliance and maintenance. It believed cash, operating cash generation and borrowing sources would cover anticipated needs over the next 12 months. No revenue or earnings guidance was provided.
- Management noted stronger first-quarter demand in cellular phone, computing/storage/peripherals and aerospace/defense markets. Results remain subject to demand variability, customer order patterns and seasonal effects, including Chinese New Year shutdowns; TTM historically sees stronger third- and fourth-quarter sales.
- Customer concentration increased: one customer represented 16% of sales versus 10% a year earlier; the top 10 represented 45% versus 41%. The five largest OEM customers accounted for 34% of sales. This concentration makes results and collections sensitive to customer demand and creditworthiness.
- Foreign-currency transaction losses were $3.7 million, primarily associated with Renminbi appreciation. TTM did not hedge most RMB and HKD revenue and expense exposure. Management estimated that a 100-basis-point increase in variable interest rates would raise annual interest cost by $8.0 million.
- China tax incentives reduced Chinese taxes by $5.5 million and increased basic and diluted EPS by $0.05 and $0.04, respectively. The quarter’s effective tax rate also reflected a $2.5 million net discrete tax benefit. Tax incentives at certain Chinese entities were effective through 2017.
- The $250 million 1.75% convertible notes due December 2020 met the stock-price conversion test as of quarter-end, permitting holders to give conversion notice in Q1 and Q2 2017. The filing describes potential issuance of up to approximately 32.4 million shares, subject to note terms; the call-spread transaction is intended to reduce dilution above an effective $14.26 conversion price.
- TTM had incurred approximately $16.9 million of charges under its facility consolidation plan and estimated total plan charges of approximately $20 million. Remaining accrued restructuring costs were $0.9 million; no long-lived-asset impairment was recorded in the quarter.
- Some Chinese plants were not yet fully compliant with updated wastewater regulations. TTM reported plans in progress, no anticipated immediate risk of fines or temporary closure, and 2017 compliance spending included in capital expenditure projections. Legal matters were described as ordinary-course; accrued probable and estimable losses were not material, though adverse outcomes could be material in a particular period.
- Other material risks include substantial debt and floating-rate exposure, cyclical and competitive electronics markets, pricing pressure, high fixed costs and capacity utilization, raw-material and labor costs, international and currency risks, and the possibility of impairment or operational disruption.
Investor verification priorities
- Confirm whether PCB volume, mix and capacity utilization gains persisted, and whether E-M Solutions recovered from lower demand and inventory reserves.
- Assess how much margin improvement reflects sustainable operating gains versus the $3.0 million insurance settlement and expense reclassification.
- Track customer concentration, especially the customer contributing 16% of sales, and monitor receivables and customer order changes.
- Verify progress against the $155–$170 million capital expenditure plan, cash generation, debt reduction and availability under asset-based facilities.
- Monitor convertible-note conversion activity and potential dilution, alongside the $50 million post-quarter debt prepayment.
- Check the duration and earnings contribution of Chinese tax incentives, environmental compliance progress in China, and exposure to RMB and interest-rate movements.