TTM Technologies, Inc. — Q1 2023 Form 10-Q
Reporting period: Quarter ended April 3, 2023. The unaudited results are compared with the quarter ended April 4, 2022. TTM manufactures printed circuit boards (PCB), RF components and engineered systems for aerospace and defense, data center computing, automotive, medical/industrial/instrumentation and networking markets. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 / prior balance |
|---|---|---|
| Net sales | $544.4 million | $581.3 million |
| Gross profit / gross margin | $86.1 million / 15.8% | $90.9 million / 15.6% |
| Operating income (loss) | $(3.5) million | $25.9 million |
| Net income (loss) | $(5.8) million; $(0.06) per diluted share | $17.2 million; $0.17 per diluted share |
| Cash provided by operations | $55.1 million | $36.0 million |
| Capital expenditures and other asset purchases | $31.0 million | $23.4 million |
| Cash and cash equivalents | $417.5 million | $402.7 million at January 2, 2023 |
| Debt, net of discount and issuance costs | $880.0 million | $929.4 million at January 2, 2023 |
| Total current assets / current liabilities | $1,378.1 million / $627.8 million | $1,493.1 million / $761.3 million at January 2, 2023 |
Operating cash flow improved primarily because of a lower overall investment in working capital. Investing activities provided $9.6 million, including $34.7 million of proceeds from the Shanghai E-MS property sale and $5.6 million net proceeds from a subsidiary sale, offset in part by capital spending. Financing activities used $50.0 million to repay debt. Of cash on hand, $243.8 million was held by foreign subsidiaries, primarily in China.
Changes versus the comparable quarter
- Sales declined 6.3%, primarily reflecting weaker commercial-market demand and customer inventory reductions. PCB sales fell 5.6%; RF&S Components sales fell 32.0%.
- Aerospace and defense sales increased to $232.3 million from $172.2 million and represented 43% of revenue, versus 30%. Data center computing sales declined to $57.9 million from $91.8 million; automotive, medical/industrial/instrumentation and networking sales also declined.
- Gross margin edged up to 15.8% from 15.6%. PCB segment margin improved to 16.5% from 14.7%, while RF&S Components margin declined to 49.6% from 57.0%.
- Operating results turned to a loss as operating expenses rose to $89.6 million from $65.1 million. Amortization of definite-lived intangibles increased to $22.0 million from $8.3 million, and restructuring charges rose to $4.2 million from $0.2 million.
- Interest expense increased to $12.8 million from $11.4 million, reflecting higher rates. The $7.9 million income tax benefit helped reduce the reported net loss.
Outlook, management commentary and notable items
- Management said aerospace and defense demand remained strong, while bookings in commercial end markets had stabilized at a low level amid customer inventory reductions and weaker end-market demand.
- TTM expects 2023 capital expenditures of $125 million to $145 million. Management believes cash from operations, cash on hand and available borrowing sources will meet anticipated capital expenditure, debt service and working-capital needs for the next 12 months.
- The announced consolidation will close PCB facilities in Hong Kong, Anaheim and Santa Clara and transfer operations to other sites. TTM expects $22 million to $28 million of separation, accelerated depreciation and disposal costs, primarily through year-end 2023; about 80% is expected to be cash costs. It expects the changes to improve facility and workforce utilization, but cautions that savings are not assured. Hong Kong operations had ceased by the end of April; the California sites were expected to be substantially closed by year-end.
- Capacity utilization fell: Asia PCB facilities were at 52%, versus 78%, and North America PCB facilities at 39%, versus 49%. Management cited lower Asia production volumes and added plating capacity in North America.
- The term loan and Asia ABL mature in 2024; the term loan principal outstanding was $355.9 million and the Asia ABL balance was $30.0 million. TTM reported compliance with debt covenants. About 84.7% of total debt was fixed-rate; a 100-basis-point change in variable rates was estimated to change annual interest cost by $1.4 million. A $250 million interest-rate swap became effective April 1, 2023, fixing a portion of exposure at 3.49% through April 2027.
- The Shanghai E-MS property was expropriated in December 2022 for RMB 477.6 million, producing a previously recognized $51.8 million gain. TTM had received 50% of proceeds by April 3, 2023 and expected the remainder in 2023. Separately, the March 2023 sale of Shanghai Backplane Assembly generated a $1.3 million gain in this quarter.
- After quarter-end, the board authorized a share repurchase program of up to $100 million through May 3, 2025. The program does not require TTM to repurchase shares.
- Remaining performance obligations under long-term contracts were $378.8 million; TTM expects to recognize approximately 52% over the next 12 months. Estimated remaining costs to complete loss-making contracts were $20.6 million.
- Key disclosed risks include commercial-demand weakness, low capacity utilization, customer concentration, supply-chain and raw-material cost volatility, labor availability and inflation, foreign currency and geopolitical exposure, and the substantial debt burden and 2024 maturities. TTM also cited risks from integrating Telephonics and executing facility closures. Known legal contingencies were not considered material when accrued, although an adverse outcome could affect a particular period.
Important facts for investors to verify
- Whether commercial demand, customer inventory levels and PCB capacity utilization recover, and how they affect sales and margins.
- Whether restructuring costs remain within the $22 million to $28 million estimate and whether facility consolidation produces the expected savings without disrupting customer deliveries.
- Progress toward refinancing or repaying the term loan and Asia ABL due in 2024, covenant compliance and interest-rate exposure.
- Timing and collection of the remaining Shanghai E-MS sale proceeds, and the final purchase-price allocation and integration results for Telephonics.
- Execution of the $125 million to $145 million capital-spending plan, liquidity needs and any actual share repurchases under the authorized program.
- Customer concentration: the top ten customers accounted for 48% of sales, and one customer accounted for approximately 12% in the quarter.