TTM Technologies, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter ended July 3, 2017; fiscal 2017 first two quarters ended the same date. Unaudited results. TTM manufactures printed circuit boards (PCBs) and electro-mechanical solutions (E-M Solutions) for diversified global markets.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2017 | Q2 2016 | First two quarters 2017 | First two quarters 2016 |
|---|---|---|---|---|
| Net sales | $627.2 | $601.8 | $1,252.4 | $1,185.1 |
| Gross profit / margin | $95.9 / 15.3% | $97.6 / 16.2% | $200.9 / 16.0% | $181.2 / 15.3% |
| Operating income / margin | $45.1 / 7.2% | $34.7 / 5.7% | $97.6 / 7.8% | $53.6 / 4.5% |
| Net income attributable to TTM shareholders | $20.6 | $18.5 | $53.6 | $11.3 |
| Diluted earnings per share | $0.18 | $0.17 | $0.46 | $0.11 |
| Operating cash flow | Not separately presented for the quarter | $108.7 | $97.9 |
Q2 sales rose 4.2%; first-half sales rose 5.7%. Higher Q2 E-M Solutions sales (+30.9%) and PCB sales (+2.3%) supported growth. First-half PCB sales increased 6.4%, while E-M Solutions sales declined 2.4%. Management cited stronger demand in cellular phone, computing/storage/peripherals, aerospace/defense and automotive markets, partly offset by weaker networking/communications demand.
Q2 gross margin narrowed year over year, despite higher sales. Management attributed the decline mainly to reclassification of facility and labor-support costs into cost of goods sold and annual salary increases; increased volumes partly offset these items. First-half margin improved, with higher PCB volumes, synergy savings and a $3.0 million insurance settlement contributing. First-half E-M Solutions margin fell to 6.8% from 7.4%, reflecting lower volumes and higher inventory reserves.
Liquidity, debt and capital spending
- At July 3, cash and cash equivalents were $246.9 million, total current assets $1,025.3 million and current liabilities $722.7 million; reported net working capital was approximately $302.6 million. Cash was $9.3 million lower than at fiscal year-end.
- First-half operating cash flow was $108.7 million. Investing used $69.0 million, including $87.1 million of property and equipment purchases, partly offset by $18.1 million of asset-sale proceeds. Financing used $49.9 million, principally the $50.0 million optional term-loan prepayment.
- Debt carrying value was approximately $974.5 million, against $246.9 million cash. Principal included a $650.0 million term loan, $110.0 million of U.S. and Asia ABL borrowings, approximately $250.0 million of 1.75% convertible notes due December 2020, and capital leases. TTM was in compliance with debt covenants.
- Unused borrowing capacity was approximately $112.4 million under the U.S. ABL and $78.3 million under the Asia ABL, after letters of credit. Management said cash, operating cash generation and borrowing availability should meet anticipated needs for the next 12 months.
- Management forecast 2017 net capital expenditures of $155–$170 million: approximately 40% for technology enhancements, 30% for capacity expansion and 30% for compliance and maintenance.
Material changes, outlook and notable items
- Interest expense declined year over year, reflecting debt repayment and lower amortization of debt discounts and issuance costs. However, other expense included an unrealized foreign-exchange loss of $6.5 million in Q2 and $10.2 million in the first half, primarily from RMB appreciation; TTM said it does not hedge most RMB/HKD revenue and expense exposure.
- Income tax expense was $5.6 million in Q2 and $9.7 million in the first half. First-half tax results included $4.6 million of net discrete tax benefits; Chinese tax incentives reduced first-half taxes by $6.0 million. Tax benefits were not recorded on certain losses because of valuation allowances.
- Restructuring charges were $0.4 million in Q2 and $1.0 million in the first half. Since the 2015 consolidation plan began, approximately $17.4 million of charges had been incurred; estimated total plan charges were approximately $20 million. No 2017 impairment charge was reported; the comparable first half of 2016 included $3.3 million.
- TTM expects seasonal strength in the third and fourth quarters, while noting that customer orders and electronics demand are difficult to forecast. The filing provides no specific sales or earnings guidance. Management cited higher demand and capacity utilization in certain facilities.
- ASU 2014-09, effective for TTM in fiscal 2018, is expected to change revenue recognition from shipment-based point-in-time recognition to recognition over time; management said adoption could materially affect the financial statements and intended to use the cumulative-effect transition method.
- One customer represented approximately 16% of Q2 sales and 10% of first-half sales. The 10 largest customers represented 45% of sales in the 2017 periods, versus 40% in the comparable 2016 periods. The filing also identifies concentration in OEMs and EMS providers as a risk.
- Known legal matters were considered normal-course and accrued losses were not material; the company cautioned that an adverse outcome could materially affect a particular period. Some China facilities were not yet fully compliant with updated wastewater regulations; TTM said it had implementation plans and did not anticipate immediate fines or closures.
Important facts for investors to verify
- Whether PCB and E-M Solutions demand, margins and capacity utilization sustain the reported growth, particularly given Q2 gross-margin contraction and weaker networking/communications demand.
- How much of reported earnings and future cash generation is affected by RMB/HKD movements, and whether foreign-held cash is readily available for U.S. debt service or investment.
- The implications of the convertible notes’ conversion eligibility in Q2 and Q3 2017, including potential dilution; the call-spread transaction raises the effective conversion price to $14.26 per share.
- Whether the $155–$170 million capital-expenditure plan, working-capital needs and scheduled obligations are funded while maintaining liquidity and covenant compliance.
- The implementation and financial impact of revenue recognition over time under ASU 2014-09, and progress toward China environmental compliance.
- Customer concentration, order variability, raw-material and labor costs, interest-rate exposure, and other risks described in the filing. Controls and procedures were reported effective as of July 3, 2017.