TTM Technologies, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter ended June 29, 2020; comparative quarter ended July 1, 2019. Dollar amounts below are in millions unless noted. The filing is unaudited.
Business context
TTM manufactures printed circuit boards (PCBs) and high-frequency RF and microwave components and assemblies. It reports PCB and E-M Solutions segments. The Mobility business unit was sold on April 17, 2020 and is presented as discontinued operations for all periods shown; continuing-operations results therefore exclude that business.
Key financial results
| Metric | Q2 2020 | Q2 2019 | First two quarters 2020 | First two quarters 2019 |
|---|---|---|---|---|
| Continuing net sales | $570.3 | $526.9 | $1,067.9 | $1,063.3 |
| Gross profit / margin | $100.4 / 17.6% | $92.8 / 17.6% | $181.8 / 17.0% | $191.7 / 18.0% |
| Operating income | $23.0 | $29.0 | $39.2 | $59.1 |
| Net income from continuing operations | $9.3 | $12.5 | $6.1 | $18.7 |
| Reported net income, including discontinued operations | $192.8 | $3.4 | $191.6 | $0.2 |
Q2 continuing revenue increased 8.2%, while first-half revenue was nearly flat, up 0.4%. Q2 diluted EPS from continuing operations was $0.09 versus $0.12; reported diluted EPS was $1.79 versus $0.03. First-half continuing diluted EPS was $0.06 versus $0.18; reported diluted EPS was $1.78 versus approximately zero.
- Segments: Q2 PCB sales were $520.1, up 11.4%; E-M Solutions sales were $50.2, down 16.2%. PCB segment operating income was $80.1 versus $62.5; E-M Solutions recorded an operating loss of $15.6 versus income of $0.9.
- Drivers and margins: PCB demand improved in medical/industrial/instrumentation, computing/storage/peripherals, and aerospace and defense, offset by weaker automotive demand. PCB price per square foot rose 22.5%, mainly from mix, while shipment volume fell 13.3%. E-M Solutions’ Q2 gross margin fell to negative 1.1% from 7.3%, reflecting lower sales and inventory provisions.
- Cash flow: First-half cash from operations was $146.9 overall, including $107.4 from continuing operations, compared with $123.0 overall and $120.3 from continuing operations in the prior-year period. Investing cash flow was $147.9 overall, including $202.8 net proceeds from the Mobility sale; continuing-operations investing cash use was $45.3. Capital expenditures and other asset purchases were $54.9 overall.
- Liquidity and debt: At June 29, cash and equivalents were $694.7, current assets $1,871.9, and current liabilities $1,197.5. Debt, net of discount and issuance costs, was $1,482.8; $650.0 was classified current, including $400.0 of Term Loan and $250.0 of convertible notes. After quarter-end, TTM prepaid $400.0 of Term Loan principal. The company reported compliance with debt covenants at quarter-end.
Material changes, outlook, and risks
- Mobility divestiture: The sale generated a pretax gain of $248.9 and discontinued-operations net income of $183.5 in Q2 ($185.5 for the first two quarters). At quarter-end, $314.6 of sale proceeds remained receivable; TTM said it received the remaining proceeds after quarter-end. The company also entered transition-services and sales-force arrangements with the purchaser.
- Restructuring: TTM announced a restructuring of E-M Solutions: it plans to discontinue operations at two Chinese facilities and integrate a third into PCB operations, phasing out production over the remainder of 2020. It had incurred $13.4 of restructuring charges by June 29 and estimated total restructuring charges of approximately $18.5 plus $8.0 of accelerated depreciation.
- Management outlook: Expected 2020 net capital expenditures and asset acquisitions were $100–$110. Management believed cash resources and operating cash generation would cover working-capital needs for at least 12 months, while noting that weaker demand or worsening collections could materially reduce operating cash. No revenue or earnings guidance is provided in the filing text.
- COVID-19 and operating risks: Management cited uncertainty in the duration and severity of the pandemic and risks to demand, supply chains, staffing, and operations. Other significant exposures include customer concentration, cyclical automotive and electronics markets, international and China-related risks, tariffs, foreign exchange, interest rates, and substantial debt. The company estimated a 100-basis-point increase in variable rates would raise annual interest cost by $4.8, based on quarter-end borrowings.
- Other items: A $65.8 discrete tax expense related mainly to the Mobility sale affected discontinued operations. Known legal matters were described as not reasonably expected to be material based on current information, but the filing cautions an adverse outcome could materially affect a particular period. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Post-quarter-end cash, debt balances, and the treatment of the $400.0 Term Loan prepayment and remaining Mobility sale proceeds.
- Whether PCB demand, pricing/mix, and shipment volumes remain sustainable, and whether automotive weakness or COVID-related disruption worsens.
- Actual E-M Solutions restructuring and accelerated-depreciation costs, closure timing, and expected operating improvement.
- Repayment or refinancing of the $250.0 convertible notes due December 2020, debt covenant headroom, and the company’s intended use of divestiture proceeds.
- Cash conversion, receivables and contract-asset collections, and whether planned 2020 capital spending remains within the stated range.