TTM Technologies, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended January 2, 2017. FY2016 had 53 weeks; FY2015 had 52 weeks and included only seven months of Viasystems after its May 2015 acquisition. The filing is an annual report, not a standalone fourth-quarter filing.
Business context
TTM manufactures printed circuit boards (PCBs) and electro-mechanical solutions, serving markets including networking and communications, automotive, aerospace and defense, cellular phones, computing, and medical and industrial equipment. It reported PCB and E-M Solutions segments, approximately 28,360 employees, and operations in North America and China.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $2.533 billion | $2.095 billion |
| Gross profit / margin | $423.6 million / 16.7% | $310.1 million / 14.8% |
| Operating income / margin | $173.5 million / 6.8% | $61.3 million / 2.9% |
| Net income (loss) | $35.6 million | $(25.6) million |
| Diluted EPS | $0.34 | $(0.28) |
| Operating cash flow | $298.3 million | $237.5 million |
| Capital expenditures | $85.1 million of purchases of property, plant and equipment | $99.9 million |
| Adjusted EBITDA (non-GAAP) | $395.4 million | $285.7 million |
- Sales rose 20.9%; management attributed growth chiefly to a full-year Viasystems contribution and stronger automotive and aerospace and defense demand, partly offset by lower cellular-phone demand. The extra fiscal week contributed an estimated $29.2 million of sales and $1.1 million of operating income.
- PCB shipments increased 40%, while average PCB selling price fell 13%, largely reflecting the acquired business and product mix. Higher utilization and production volumes supported improved segment gross margins.
- Cash and cash equivalents were $256.3 million; working capital was $323.8 million. Cash from operations increased, and cash-cycle days improved to 43 from 49.
- Reported debt, including current maturities and net of discount and issuance costs, was $1.020 billion; stated principal across term, ABL and convertible borrowings was approximately $1.062 billion. Cash less reported debt implies net debt of about $763 million. The filing also reports $217.6 million of net debt principal payments during FY2016.
Fourth-quarter results and unusual items
FY2016 fourth-quarter sales were $706.5 million and gross profit was $132.8 million. TTM reported a $2.0 million net loss attributable to shareholders and diluted EPS of $(0.02). The quarter included a $47.8 million loss on extinguishment of debt; quarterly results also included restructuring charges. For the full year, restructuring charges were $9.0 million and long-lived asset impairment charges were $3.3 million.
In September 2016, TTM refinanced its prior term loan with $775 million of Term Loan B debt at a reduced margin, repaid the old term loan, and amended its U.S. ABL facility. The refinancing generated the debt-extinguishment loss. The new Term Loan B carried a 5.25% weighted-average rate at year-end; the company was in compliance with stated debt covenants.
Liquidity, outlook and risks
- Management said cash, operating cash generation and available borrowing were expected to cover anticipated capital expenditures, debt service and working capital needs for the next 12 months. This is management’s assessment, not earnings guidance.
- TTM expected FY2017 capital expenditures of $130–$140 million, allocated approximately 50% to technology enhancements, 25% to capacity expansion and 25% to compliance and maintenance.
- Backlog was $405.3 million at January 2, 2017, versus $365.8 million at FY2015 year-end; substantially all was expected to convert to sales in Q1 2017. Orders are largely purchase-order based, and demand is seasonal and can change quickly.
- Key exposures include substantial indebtedness and floating-rate interest costs, customer concentration (Apple represented 15% of FY2016 sales; the five largest OEM customers represented 33%), electronics-market cyclicality, price pressure, China labor and currency risks, and reliance on international operations. A 100-basis-point increase in variable rates was estimated to raise annual interest expense by $6.5 million.
- Some China facilities were not yet fully compliant with updated wastewater rules; management said remediation plans were underway and no immediate fines or closures were anticipated. Legal matters were described as ordinary-course matters with no material reasonably possible losses identified, although outcomes remain uncertain.
- Adoption of the new revenue-recognition standard was expected to change the timing of recognition from point-in-time upon delivery to recognition over time and could materially affect the financial statements. Management intended to use the cumulative-effect transition method.
- The $250 million 1.75% convertible notes due 2020 met conversion criteria for holders to give conversion notice in Q1 2017. Conversion could involve cash, shares or both; the filing describes a hedge and warrants that affect potential dilution.
Most important facts to verify
- Compare FY2016 with FY2015 on a like-for-like basis, accounting for the extra week and the partial-year Viasystems contribution.
- Review debt maturity, borrowing availability, covenant headroom and potential conversion or dilution from the 2020 notes.
- Assess whether improved margins and cash generation can persist despite falling average PCB selling prices and planned higher capital spending.
- Track customer concentration, backlog conversion and end-market demand, particularly automotive, cellular phones and networking/communications.
- Monitor China environmental compliance investment and the financial-statement effects of the forthcoming revenue-recognition change.