TTM Technologies, Inc. — Q1 2013 Form 10-Q
Reporting period: Quarter ended April 1, 2013 (91 days), compared with the quarter ended March 26, 2012 (86 days). Financial amounts below are in U.S. dollars; figures are in millions except per-share data.
Business context and results
TTM manufactures printed circuit boards and backplane assemblies for markets including networking and communications, mobile devices, computing, aerospace and defense, and industrial and medical. Revenue grew 8.3%, led by Asia Pacific; profitability declined as margins contracted in both operating segments.
| Metric | Q1 2013 | Prior-year quarter |
|---|---|---|
| Net sales | $325.4 | $300.5 |
| Gross profit / margin | $50.7 / 15.6% | $56.5 / 18.8% |
| Operating income / margin | $12.7 / 3.9% | $21.8 / 7.3% |
| Net income | $6.6 | $12.3 |
| Net income attributable to TTM stockholders | $5.2 | $12.6 |
| Basic and diluted EPS | $0.06 | $0.15 |
| Operating cash flow | $10.4 | $33.5 |
| Capital expenditures and equipment deposits | $11.7 | $26.7 |
Financial position and liquidity
- Cash and cash equivalents were $284.1 at April 1, 2013, versus $285.4 at December 31, 2012. Net working capital was approximately $361.0, down from $395.7, primarily because more debt was classified as current.
- Total debt consisted of $400.0 under the credit facilities and $175.0 principal amount of 3.25% convertible notes due May 2015. The balance sheet reported $78.1 of short-term debt, $321.9 of long-term debt, and $159.2 of convertible notes net of discount.
- The company had $60.0 of available revolving capacity under its credit agreement and an undrawn PRC facility of approximately $46.7, whose terms would be negotiated if drawn. TTM reported compliance with credit agreement covenants.
- Operating cash flow less reported purchases of property, plant and equipment and equipment deposits was approximately negative $1.3, compared with approximately positive $6.8 in the prior-year quarter. Cash declined $1.3 during Q1.
Material changes and management commentary
- Asia Pacific sales rose 18.4% excluding inter-segment sales, driven by mobile-phone programs and stronger networking and communications demand; PCB shipments increased 13% and average selling price rose 4%. Segment operating income fell to $11.1 from $12.8.
- North America sales fell 4.9%, reflecting lower computing and medical/industrial demand. PCB volume declined 16%; higher average PCB selling prices and 4% growth in backplane assembly demand partly offset the decline. Segment operating income fell to $3.9 from $12.9.
- Management attributed weaker margins to higher labor costs, equipment-related expense, higher direct material content, lower utilization and production volumes, and increased Chinese wages. Asia Pacific margins were also affected by first-quarter seasonality and Chinese New Year.
- The effective tax rate fell to 10.6% from 27.4%, mainly due to $1.2 million of discrete U.S. and China research-and-development tax benefits. Management anticipated a higher Q2 tax rate as those discrete benefits would not recur.
- Management planned approximately $100 million of 2013 capital expenditures, including about $83 million in Asia Pacific, for capacity and technology expansion, environmental requirements, and equipment replacement. It stated that cash, operating cash generation and borrowing availability should meet anticipated needs for the next 12 months.
Outlook, transactions and risks
- TTM agreed to sell its majority interest in Dongguan Shengyi Electronics (SYE) for about RMB 702 million (approximately $113 million) and acquire Sytech’s minority interest in Dongguan Meadville Circuits (DMC) for RMB 180 million (approximately $29 million). Closing was expected by the end of Q3 2013, subject to approvals and regulatory clearance. TTM estimated a $5–$10 million gain on the SYE sale and approximately $40 million in total cash proceeds after specified intercompany-loan repayment and transaction taxes. Management cited potential benefits including improved utilization and margins; the filing warns these benefits may not be realized if the transaction fails to close.
- Management expected seasonal sales strength in Q3 and Q4, with first-quarter softness associated with consumer-electronics seasonality and Chinese New Year. It also warned that PRC wage increases could continue to pressure Asia Pacific margins.
- Customer concentration is significant: Apple represented approximately 14% of sales, and the 10 largest OEM customers represented 51% of sales. The 10 largest customers accounted for 55% of accounts receivable.
- Debt is largely floating-rate; the filing estimated that a 1 percentage-point rate change would alter annual interest cost by $3.2 million. TTM also identified commodity-cost exposure, foreign-exchange and interest-rate risks, and ordinary-course legal matters whose adverse outcomes could be material in a particular period. It reported no expected material impact from environmental remediation matters.
- Disclosure controls were assessed as effective, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the SYE/DMC transaction obtained all approvals, closed on the expected timetable, and delivered the estimated proceeds and gain.
- Whether revenue growth translates into margin recovery, particularly given labor inflation, utilization, product mix, and North America volume trends.
- Actual Q2 tax rate and subsequent earnings compared with Q1’s unusually low rate due to discrete tax benefits.
- Cash conversion, working-capital movements, capital spending versus the approximately $100 million plan, and available borrowing capacity.
- Customer concentration and the sensitivity of earnings to key customers, seasonality, commodity prices, and floating interest rates.