TTM Technologies, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter ended July 1, 2013; the first two quarters of fiscal 2013. The quarter had 91 days, matching the prior-year quarter; the six-month comparison is 182 days in 2013 versus 177 days in 2012. Financial amounts below are in millions of dollars unless noted.
Business context and results
TTM manufactures printed circuit boards (PCBs) and backplane assemblies for networking and communications, consumer electronics, computing, aerospace and defense, and other markets. It reports Asia Pacific and North America operating segments.
| Metric | Q2 2013 | Q2 2012 | First two quarters 2013 | First two quarters 2012 |
|---|---|---|---|---|
| Net sales | $338.0 | $327.4 | $663.4 | $627.9 |
| Gross profit / margin | $48.5 / 14.3% | $54.7 / 16.7% | $99.2 / 15.0% | $111.2 / 17.7% |
| Operating income | $28.3 | $18.1 | $41.0 | $39.9 |
| Net income attributable to TTM shareholders | $13.1 | $7.4 | $18.3 | $20.0 |
| Diluted EPS | $0.16 | $0.09 | $0.22 | $0.24 |
Q2 sales rose 3.2%; six-month sales rose 5.7%. Asia Pacific growth, led by networking/communications and new cellular-phone programs, was partly offset by lower North America sales. Q2 Asia Pacific sales increased 6.8% excluding intersegment sales, while North America sales fell 2.0%. For the first two quarters, Asia Pacific sales increased 12.2% and North America sales decreased 3.4%.
Profitability weakened despite higher sales. Gross margin fell in both segments: Asia Pacific’s Q2 margin was 12.4% versus 15.5%, and North America’s was 17.4% versus 18.5%. Management cited higher labor and equipment costs, lower production-volume absorption in North America, and a $2.0 million Asia Pacific product-quality issue. Six-month gross-margin pressure was similar.
Q2 operating income included a $17.9 million gain on the sale of assets related to the SYE transaction. Excluding that gain, reported operating income would have been approximately $10.4 million for the quarter and $23.1 million for the first two quarters; these are simple calculations, not company-reported adjusted measures. Six-month shareholder net income declined year over year despite the gain. Q2’s effective tax rate was 40.5%, versus 34.7% a year earlier; the six-month rates were 33.3% and 30.3%.
Cash flow, debt and liquidity
- Cash and cash equivalents were $230.5 million at July 1, down $54.9 million from year-end 2012. Operating cash flow was $69.0 million, compared with $72.3 million in the prior-year period.
- Investing cash outflow was $93.8 million, including $46.6 million of capital expenditures and $47.3 million of payments to acquire the DMC noncontrolling interest. Financing cash outflow was $30.0 million, primarily from repaying the revolving loan.
- Current assets were $729.6 million and current liabilities $405.2 million; reported net working capital was approximately $324.4 million. Cash excludes $114.5 million of SYE sale consideration recorded as a receivable at quarter-end.
- Debt carrying values comprised $48.1 million of current debt, $321.9 million of long-term debt, and $160.9 million of convertible notes. The term loan principal was $370.0 million; $48.1 million was due in March 2014. The $175.0 million convertible notes mature in May 2015.
- Unused revolving capacity was $90.0 million; $52.7 million of the $80.0 million letters-of-credit facility was in use. A separate PRC facility offered approximately $46.8 million of unsecured borrowing, but had not been drawn. The company reported compliance with credit covenants.
Material changes, outlook and risks
- On June 17, TTM sold its 70.2% controlling interest in Dongguan Shengyi Electronics (SYE) for $114.5 million and recognized the $17.9 million gain. It also bought Sytech’s 20.0% interest in Dongguan Meadville Circuits (DMC) for $29.4 million. TTM expected approximately $80.0 million in net cash proceeds in Q3 after transaction taxes; proceeds had not yet been received at quarter-end. TTM reported no remaining noncontrolling interest at July 1.
- Management expected 2013 capital expenditures of approximately $114 million, including $95 million in Asia Pacific, for capacity, advanced HDI and substrate manufacturing, environmental compliance, and equipment replacement. It said operating cash, cash on hand, and available borrowing capacity should cover anticipated needs for the next 12 months. No revenue or earnings guidance is provided in the filing.
- Management noted seasonal strength typically produces higher third- and fourth-quarter sales, while Chinese New Year can weigh on first-quarter sales. It also expects continued PRC labor-cost increases, which may pressure margins. Commodity-price inflation may not be fully passed on to customers.
- Apple represented approximately 14% of sales in both Q2 and the first two quarters of 2013. The ten largest OEM customers represented 52% of sales in each 2013 comparison period. Customer concentration and changes in consumer-electronics demand are material considerations.
- Management anticipated a third-quarter $3.6 million valuation allowance related to state tax-credit carryforwards following a change in state law, and expected recognition of an approximately $0.8 million tax benefit from settlement of an IRS examination.
- SYE sale proceeds and the reported gain could be reduced by PRC tax withholding; the company was discussing the tax amount with Sytech and the local authority, and receipt could be delayed. Known legal and environmental matters were not expected to be material, though an adverse legal outcome could affect a particular period. Controls and procedures were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether and when TTM received the SYE proceeds, and the final PRC tax withholding and realized gain.
- Whether margin pressure from labor, equipment costs, production utilization, and the identified quality issue persisted after Q2.
- Progress on the planned $114 million capital program and the effect on cash, debt, and available liquidity.
- Performance and demand trends in Asia Pacific and North America, particularly given customer and end-market concentration.
- The actual Q3 tax valuation allowance and IRS settlement benefit compared with management’s estimates.