TTM Technologies, Inc. — Q1 2018 Form 10-Q
Reporting period: Quarter ended April 2, 2018; unaudited. TTM manufactures printed circuit boards (PCBs) and electro-mechanical solutions (E-M Solutions) for markets including aerospace and defense, automotive, mobile devices, computing, and communications.
Key financial metrics
Amounts in millions, except per-share data and percentages.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $663.6 | $625.2 |
| Gross profit / margin | $88.7 / 13.4% | $105.0 / 16.8% |
| Operating income / margin | $30.0 / 4.5% | $52.6 / 8.4% |
| Net income attributable to TTM | $10.1 | $33.0 |
| Diluted EPS | $0.09 | $0.28 |
| Operating cash flow | $(14.3) | $49.6 |
| Capital expenditures and equipment deposits | $(42.2) | $(33.3) |
Revenue increased 6.1% year over year. PCB sales increased 5.6% excluding intersegment sales; E-M Solutions sales rose to $47.2 million from $41.7 million. One OEM customer accounted for approximately 16% of sales in each period; the ten largest customers accounted for 45%.
Material changes and comparability
- TTM adopted the new revenue standard on January 2, 2018, changing recognition for the affected revenue stream from shipment-based recognition to recognition over time using a cost-to-cost measure. Prior-year figures were not restated.
- Adoption added $14.1 million to Q1 2018 reported sales, $2.1 million to gross profit, and $2.2 million to net income versus the former policy. Without the adoption adjustment, sales were $649.5 million and net income was $7.9 million. Accordingly, reported year-over-year growth is not fully comparable.
- Gross margin fell to 13.4% from 16.8%. Management attributed the decline primarily to lower utilization at several PCB facilities, a stronger Chinese renminbi raising costs, and the absence of a $3.0 million insurance settlement received in 2017. PCB segment margin declined to 14.3% from 18.2%; E-M Solutions margin improved to 5.5% from 2.7%.
- Operating expenses increased, including $4.0 million of Anaren acquisition-related costs in general and administrative expense. Net income also reflected a $0.7 million discrete tax expense for interest on uncertain tax positions and the absence of a prior-year China tax incentive benefit.
Cash, debt, and liquidity
- Cash and cash equivalents were $352.6 million at April 2, 2018, down from $409.3 million at January 1. Approximately $164.8 million was held by foreign subsidiaries, primarily for local operations.
- Current assets were $1,247.6 million and current liabilities $677.5 million; reported working capital was approximately $570.1 million. The quarter-end balance sheet included $275.0 million of contract assets, generally expected to convert to receivables within 90 days.
- Debt principal outstanding was approximately $1,022.2 million, before unamortized discounts and issuance costs. Major borrowings included a $348.3 million term loan, $375.0 million senior notes, $250.0 million convertible notes, and $47.0 million under revolving ABL facilities. TTM reported covenant compliance at quarter-end.
- Unused borrowing availability, after outstanding letters of credit, was $175.7 million under the U.S. ABL and $93.0 million under the Asia ABL. Management believed cash, operating cash flow, and available borrowing sources would meet anticipated needs for the next 12 months.
- Operating cash flow was negative, with management citing increased working-capital investment and lower net income. Cash was also affected by $42.1 million of net investing outflows, primarily capital spending.
Outlook, transactions, and risks
- TTM expected 2018 net capital expenditures of $150 million to $170 million. Management noted that third- and fourth-quarter sales have historically been higher, while Chinese New Year can weigh on first-quarter activity. No specific revenue or earnings guidance was provided.
- On April 18, 2018, after quarter-end, TTM completed its acquisition of Anaren for $775 million cash, subject to customary adjustments, and closed a $600 million incremental loan commitment to help fund the purchase and related costs. Purchase accounting and pro forma financial information were not yet available in this filing.
- Key risks include integrating Anaren and realizing expected benefits; substantial debt and variable-rate exposure; customer concentration and electronics-market cyclicality; utilization, pricing, raw-material, labor, currency, and seasonal pressures; and environmental compliance at some China facilities. Management disclosed that certain China plants were not yet fully compliant with updated wastewater rules and had investment plans underway.
- Uncertain Tax Act accounting remained under evaluation, including potential effects of repatriation and GILTI provisions. TTM reported $42.1 million of unrecognized uncertain tax benefits, excluded from contractual-obligations totals because settlement timing was uncertain. Known legal contingency accruals were not material, though adverse outcomes could be significant in a particular period.
- Disclosure controls were assessed as effective at quarter-end. The filing reports no material change in internal control over financial reporting other than controls implemented for the new revenue standard.
Important facts for investors to verify
- How much of reported revenue, profit, and contract assets reflects the over-time revenue method, and how estimates of costs to complete and returns may change.
- Post-acquisition debt balances, financing terms, integration costs, purchase-price allocation, and Anaren’s contribution to results after closing.
- Cash conversion and working-capital trends, including contract-asset billing and collection, alongside the planned capital expenditure range.
- Whether PCB utilization and gross margins recover, given the cited facility underutilization and currency cost pressures.
- Customer concentration, China environmental compliance spending, tax uncertainties, and exposure to interest-rate increases.