TTM Technologies, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and first two fiscal quarters ended July 1, 2019. The filing is unaudited. TTM manufactures printed circuit boards (PCBs), radio-frequency and microwave products, and electromechanical solutions.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First two quarters 2019 | First two quarters 2018 |
|---|---|---|---|---|
| Net sales | $633.0m | $716.9m | $1,253.2m | $1,380.5m |
| Gross profit / margin | $84.6m / 13.4% | $116.1m / 16.2% | $173.3m / 13.8% | $204.8m / 14.8% |
| Operating income / margin | $16.8m / 2.7% | $31.7m / 4.4% | $34.3m / 2.7% | $61.7m / 4.5% |
| Net income | $3.4m | $84.0m | $0.2m | $94.1m |
| Diluted EPS | $0.03 | $0.65 | $0.00 | $0.75 |
- Q2 PCB sales fell 12.5% to $573.1m; E-M Solutions sales fell 3.1% to $59.9m. For the first two quarters, PCB sales declined 10.2% to $1,141.9m while E-M Solutions sales rose 2.1% to $111.3m.
- Q2 PCB average selling price rose 14.0%, but shipment volume fell 22.7%. Management attributed the lower PCB sales primarily to softer commercial end markets, partly offset by stronger aerospace and defense demand.
- Q2 gross margin pressure reflected lower commercial-market volumes and ramp inefficiencies on a major cellular product launch. Asia PCB facility utilization was 56%, down from 71% a year earlier; North America utilization was 60%, versus 61%.
- Interest expense was $20.9m in Q2 and $42.6m for the first two quarters. First-half other expense increased to $38.5m from $29.1m, primarily due to higher interest expense associated with debt incurred for the Anaren acquisition.
Cash flow, balance sheet and debt
- First-half operating cash flow was $123.0m, compared with $41.4m a year earlier. Investing cash outflow was $63.2m, including $69.1m of property and equipment purchases; financing cash outflow was $31.5m, including $30.0m of debt repayment. Cash increased $28.1m to $284.5m.
- Cash and cash equivalents were $284.5m; approximately $204.8m was held by foreign subsidiaries, primarily in China. Net working capital was approximately $565.7m.
- Debt principal outstanding totaled approximately $1.501bn: $805.9m term loan, $375.0m senior notes, $250.0m convertible notes due December 2020, and $70.0m under asset-based revolvers. Balance-sheet long-term debt, net of discounts and issuance costs, was $1.469bn. Cash less principal debt implies net debt of approximately $1.216bn.
- In June, TTM extended U.S. and Asia ABL maturities to 2024 and amended facility terms. Available borrowing capacity, after letters of credit, was $94.7m under the U.S. ABL and $97.3m under the Asia ABL. TTM reported compliance with debt covenants.
- About 68.3% of debt was fixed-rate or effectively fixed as of July 1; management estimated a 100-basis-point change in variable rates would change annual interest cost by $4.8m. A $400m interest-rate swap was in place through June 2022.
Changes, outlook and risks
- Compared with 2018, first-half sales declined 9.2% and operating income declined 44.4%. Lower utilization in Asia and weaker commercial demand weighed on performance. Anaren was acquired in April 2018, so prior-year comparisons include different acquisition-related costs and periods of ownership.
- The unusually large prior-year tax benefit materially boosted comparison-period earnings: Q2 2018 included a $66.5m tax benefit, and the first-half benefit was $61.5m. Management cited a $74.6m release of part of the U.S. federal and state deferred-tax valuation allowance in Q2 2018. The 2019 Q2 tax benefit was $2.8m; first-half benefit was $4.3m.
- Management expects 2019 net capital expenditures and asset acquisitions of $150m–$170m and believes operating cash, cash on hand, and debt facilities will cover anticipated capital, debt-service, and working-capital needs for the next 12 months. No earnings or revenue guidance is provided in the filing text.
- Key risks include weak demand and underutilized manufacturing capacity, trade tariffs and international operations, customer and end-market concentration, substantial indebtedness and variable-rate exposure, and execution of the Anaren integration. Aerospace and defense represented 28% of Q2 sales; the ten largest customers represented 46% of sales in both Q2 and the first half.
- TTM recorded $3.9m of Q2 restructuring charges, mainly employee separation costs. Adoption of the lease accounting standard added $25.7m of operating lease liabilities and corresponding right-of-use assets at July 1; management reported no material effect on operating results or cash flows. The company reported effective disclosure controls.
Important facts for investors to verify
- Whether PCB volumes and Asia facility utilization stabilize, and whether commercial-market demand recovers.
- Whether the projected $150m–$170m capital spending and acquisition range is achieved and remains supportable by cash generation.
- Debt repayment and refinancing plans for the $250m convertible notes due December 2020, alongside total debt and interest-rate sensitivity.
- Customer concentration, tariff exposure, and progress in realizing Anaren integration benefits.
- The sustainability of reported tax benefits and the assumptions supporting deferred tax assets and goodwill/intangible asset values.