TTM Technologies, Inc. — Q1 2019 Form 10-Q
Reporting period: Quarter ended April 1, 2019; unaudited results. TTM manufactures printed circuit boards (PCBs), backplane assemblies, electro-mechanical solutions, and RF/microwave components for markets including aerospace and defense, automotive, communications, computing, and cellular phones.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $620.2 million | $663.6 million |
| Gross profit / margin | $88.7 million / 14.3% | $88.7 million / 13.4% |
| Operating income / margin | $17.5 million / 2.9% | $30.0 million / 4.5% |
| Interest expense | $21.7 million | $13.7 million |
| Net income (loss) | $(3.3) million; $(0.03) diluted EPS | $10.1 million; $0.09 diluted EPS |
| Cash from operating activities | $36.9 million | $(14.3) million |
Cash was $235.2 million at April 1, 2019, down from $256.4 million at year-end 2018; $209.9 million was held by foreign subsidiaries. Current assets were $1.170 billion and current liabilities $607.7 million, or approximately $561.8 million of working capital. Capital spending on property and equipment was $33.5 million in the quarter.
Debt principal was approximately $1.501 billion ($1.466 billion carrying value, net of discount and issuance costs). Gross principal less cash was approximately $1.266 billion. TTM repaid $30.0 million of long-term debt. The company reported $146.6 million of available U.S. ABL capacity and $100.6 million of available Asia ABL capacity, after outstanding letters of credit. It was in compliance with its debt covenants.
Changes versus the prior comparable quarter
- Sales fell $43.4 million, or 6.5%. PCB sales declined 7.7%, mainly from weaker cellular-phone and automotive demand; E-M Solutions sales rose 8.9%, led by networking/communications.
- PCB shipment volume fell 21.2%, while average selling price rose 11.6%, primarily reflecting product mix. Asia PCB facility utilization dropped to 55.4% from 78.2%; North America utilization was 60.3% versus 61.2%.
- Gross margin improved 0.9 percentage points, attributed to Anaren and stronger production at aerospace-and-defense-focused facilities, partly offset by lower cellular-phone facility utilization.
- Operating income declined as operating expenses rose, including definite-lived intangible amortization of $16.8 million versus $5.9 million. Interest expense increased $7.9 million, primarily due to acquisition-related borrowing.
- Net results shifted to a loss. A $1.5 million income tax benefit, including the retroactive approval of Chinese tax incentives for two subsidiaries, partly offset the pretax loss.
- Operating cash flow improved by $51.2 million year over year, mainly because of lower working-capital investment. Prior-year results exclude Anaren, acquired April 18, 2018; comparisons therefore are not fully like-for-like.
Outlook, commentary, and risks
- Management expected 2019 net capital expenditures of $130 million to $150 million and said cash, operating cash generation, and available borrowing were expected to cover anticipated capital expenditure, debt-service, and working-capital needs for the next 12 months. No specific revenue or earnings guidance is provided in the filing.
- Management noted typical seasonality: Q1 may be weaker because of Chinese New Year shutdowns, while Q3 and Q4 have historically benefited from consumer-electronics demand.
- Key exposures include cyclical demand and pricing, low capacity utilization and fixed costs, customer concentration, tariffs and international operations, raw-material and labor costs, and execution of Anaren integration. The ten largest customers represented 47% of sales; the five largest OEM customers represented 28%. Aerospace and defense was 27% of sales.
- Debt and interest-rate exposure are significant. About 68.3% of debt was based on fixed rates, including the effect of hedging; management estimated that a 100-basis-point change in variable rates would change annual interest cost by $4.8 million. A $400 million interest-rate swap runs through June 2022.
- The $250 million convertible notes mature in December 2020; the U.S. and Asia ABL facilities mature in May 2020. The company disclosed substantial indebtedness and related covenant, refinancing, and liquidity risks. Most cash was held outside the U.S.
- Known legal matters were described as ordinary-course matters, with accrued probable and estimable losses not material; the company cautioned that an adverse outcome could still materially affect a particular period. No material changes to critical accounting estimates were reported. Lease accounting adoption added recognized lease assets and liabilities but had no material impact on Q1 operations or cash flows.
Important facts for investors to verify
- Whether the demand declines in cellular phones and automotive stabilize, and whether PCB shipment volume and Asia utilization recover.
- Whether gross-margin gains persist despite lower utilization and whether operating income can absorb acquisition-related amortization and financing costs.
- Cash conversion, cash held overseas, planned capital spending, and the company’s ability to meet the 2020 convertible-note and ABL maturities or refinance them.
- Progress and realized benefits from Anaren integration, alongside continued customer and end-market concentration.
- Developments in tariffs, trade policy, interest rates, and the company’s other disclosed operating and regulatory risks.