TTM Technologies, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter ended September 26, 2011; year-to-date covers the three quarters ended that date. Financial statements are unaudited. TTM manufactures printed circuit boards and backplane assemblies for communications, computing, mobile-device, aerospace/defense, and other markets.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Three quarters 2011 | Three quarters 2010 |
|---|---|---|---|---|
| Net sales | $358.3m | $357.8m | $1,067.2m | $806.3m |
| Gross profit / margin | $70.7m / 19.7% | $80.3m / 22.5% | $229.9m / 21.5% | $164.4m / 20.4% |
| Operating income / margin | $36.3m / 10.1% | $45.7m / 12.8% | $73.5m / 6.9% | $72.9m / 9.0% |
| Net income attributable to TTM shareholders | $24.5m | $29.1m | $30.7m | $38.5m |
| Diluted EPS | $0.30 | $0.36 | $0.37 | $0.57 |
| Operating cash flow | Not presented for quarter | $147.4m | $36.6m |
- Q3 sales were essentially flat year over year, while gross profit fell $9.7m and gross margin contracted 2.8 percentage points. Management cited higher labor, outside-service and material costs in Asia Pacific, and higher material costs and weaker operating leverage in North America.
- Year-to-date sales rose 32.4%, but the comparison is substantially affected by the April 2010 acquisition of the PCB Subsidiaries: 2010 results included only 172 days of Asia Pacific operations, versus 269 days in 2011. The acquired business also contributed to the higher year-to-date gross margin.
- Year-to-date operating income was nearly unchanged despite higher sales, principally reflecting a $48.1m long-lived-asset impairment in Asia Pacific. The charge received no tax benefit and contributed to the 41.4% year-to-date effective tax rate, versus 27.5% in 2010.
- Year-to-date capital spending on property, plant, equipment and equipment deposits was $99.3m, versus $25.2m. Approximate operating cash flow less that spending was $48.2m, compared with $11.4m in 2010.
Balance sheet, debt and liquidity
- At September 26, cash and cash equivalents were $207.7m, with $4.0m of available-for-sale securities. Current assets were $696.7m and current liabilities $486.0m; reported net working capital was $210.7m.
- Long-term debt, including current maturities and net of discount, was $337.9m; convertible senior notes, net of discount, were $149.6m. Total carrying-value debt was therefore approximately $487.5m. The notes have $175m principal and mature in May 2015.
- About $120.9m of long-term debt was scheduled to mature within one year. The company reported $87.5m of available revolving capacity and $65.0m under its factoring facility; $60.3m of the $80.0m letters-of-credit facility was in use. TTM was in compliance with credit covenants at quarter-end, following a July amendment to certain subsidiary financial covenants.
- Cash declined $8.4m from year-end to $207.7m. Cash provided by operations was $147.4m; investing used $98.8m, including capital expenditure, and financing used $55.0m, including $67.1m of debt repayment and $20.5m to settle a related-party financing obligation.
Outlook, risks and unusual items
- Management expected 2011 capital expenditures of approximately $138m, about $125m for Asia Pacific, to add capacity, expand technology capabilities and replace aging equipment. Management believed operating cash flow, cash on hand and available borrowing capacity would cover anticipated needs for the next 12 months and beyond. No specific revenue or earnings guidance is provided in the filing.
- The $48.1m impairment followed weaker performance and reduced expected demand at a specific Asia Pacific plant; $39.9m related to equipment held for use and $8.3m to equipment considered obsolete or expected to become obsolete. The impaired assets were valued using discounted cash flows, third-party quotes or estimated salvage values. Further impairments are possible if forecasts change.
- Customer concentration increased: one customer represented approximately 11% of sales in both Q3 and the first three quarters of 2011; the top ten represented 49% of Q3 sales and 47% year to date. The company warned that loss or reduced purchases by major customers could materially harm results.
- Other exposures include variable-rate debt and foreign exchange movements; a 1% change in variable interest rates was estimated to change annual interest cost by $1.8m. Seasonality in computing and cellular-phone markets can lift Q3 sales, while Chinese New Year can depress Q1 sales. Related-party laminate and prepreg purchases were $86.4m year to date, under supply arrangements expiring December 2012.
- Environmental remediation liabilities were accrued at $0.6m; estimated undiscounted costs ranged from $0.8m to $1.3m over an expected 12-to-84-month period. The company reported ordinary-course legal matters and said known accrued losses were not material, while noting outcomes are uncertain.
Key facts for investors to verify
- Whether Q3 margin pressure in both segments persists, particularly from labor, outside services, materials and reduced operating leverage.
- How much year-to-date growth reflects the acquisition-period comparison versus underlying demand, and the subsequent performance of the impaired Asia Pacific plant.
- Cash conversion and capital spending relative to the $138m 2011 plan, alongside the approximately $121m of debt maturities due within a year.
- Customer concentration, demand changes and the extent to which sales depend on seasonal consumer-electronics patterns.
- Compliance with credit covenants, refinancing capacity as debt approaches 2013 maturity, and exposure to interest-rate, foreign-exchange and environmental costs.