TTM Technologies, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and first two quarters ended July 2, 2018; financial statements are unaudited. Dollars are in millions except per-share data.
Business context and reporting period
TTM manufactures printed circuit boards (PCBs), electro-mechanical solutions, and RF and microwave components and assemblies for markets including aerospace and defense, automotive, communications, computing, and medical/industrial. On April 18, 2018, TTM acquired Anaren for approximately $787.9 million of total consideration, including $596.4 million cash consideration and $178.6 million of assumed debt. Anaren contributed $62.0 million of sales after acquisition during the reported periods. Purchase accounting remains preliminary; the company plans to integrate Anaren into the PCB reporting segment beginning in Q3.
Key financial results
| Metric | Q2 2018 | Q2 2017 | First two quarters 2018 | First two quarters 2017 |
|---|---|---|---|---|
| Net sales | $716.9 | $627.2 | $1,380.5 | $1,252.4 |
| Gross profit | $116.1 | $95.9 | $204.8 | $200.9 |
| Gross margin | 16.2% | 15.3% | 14.8% | 16.0% |
| Operating income | $31.7 | $45.1 | $61.7 | $97.6 |
| Net income attributable to TTM shareholders | $84.0 | $20.6 | $94.1 | $53.6 |
| Basic / diluted EPS | $0.81 / $0.65 | $0.20 / $0.18 | $0.91 / $0.75 | $0.53 / $0.46 |
- Q2 sales rose 14.3%; first-half sales rose 10.2%. The comparisons include Anaren only from its April acquisition date in 2018.
- Q2 operating margin declined to 4.4% from 7.2%; first-half operating margin declined to 4.5% from 7.8%. Q2 net margin was 11.7%, but net income included a substantial discrete tax benefit.
- Operating cash flow was $41.4 million in the first two quarters, down from $108.7 million. Investing cash flow was negative $677.5 million, including $596.4 million for the Anaren acquisition and $81.3 million for capital spending. Financing cash flow was positive $431.7 million. Cash declined to $204.1 million from $409.3 million at the start of the year.
- At July 2, cash was $204.1 million, current assets were $1,202.6 million, current liabilities were $689.3 million, and working capital was approximately $513.4 million. Of cash, $139.5 million was held by foreign subsidiaries, primarily in China, and was expected to support local operations. Reported available borrowing capacity was $153.9 million under the U.S. ABL and $106.5 million under the Asia ABL.
- Debt principal outstanding was approximately $1.642 billion, versus $1.023 billion at January 1, principally reflecting acquisition financing. This included a $945.9 million floating-rate term loan, $375 million of 5.63% senior notes, $250 million of 1.75% convertible notes due 2020, and $70 million drawn under ABL facilities. Interest expense was $20.5 million in Q2 and $34.2 million for the first half.
Changes, accounting effects, and management commentary
- PCB sales increased, but shipments fell 4.6% in Q2 and 2.8% for the first half; higher average selling prices, driven mainly by product mix, offset lower volumes. Q2 PCB selling price increased 7.9%. E-M Solutions sales growth was attributed primarily to automotive demand.
- TTM adopted the new revenue standard in January 2018, moving certain revenue recognition from shipment to recognition over time. Compared with the former policy, the standard increased reported Q2 sales by $17.7 million and net income by $7.4 million; first-half sales by $31.8 million and net income by $9.6 million. July 2 contract assets were $300.7 million, primarily unbilled revenue.
- Q2 gross margin benefited from Anaren’s reported 35.4% segment margin, which included a $4.9 million purchase-accounting inventory charge. Existing PCB margin was pressured by lower utilization at cellular-phone-focused facilities; E-M Solutions margin declined due to product mix. First-half PCB margin also reflected lower volumes in cellular and networking/communications facilities.
- The first-half tax benefit was $61.5 million, including a net discrete tax benefit of $66.4 million; the Q2 discrete benefit was $67.3 million. A $74.6 million release of part of the U.S. deferred-tax-asset valuation allowance was a major item. The company also recorded a $10.0 million discrete tax expense related to changes in its foreign-earnings repatriation assertion. Tax benefits materially affect reported net income and EPS.
- Management expects 2018 net capital expenditures of $150–$170 million and stated that cash, operating cash generation, and borrowing sources should cover anticipated needs for the next 12 months. No specific revenue or earnings guidance is provided. Management reported compliance with debt covenants at July 2; it made a subsequent optional $40 million term-loan prepayment, after which scheduled quarterly term-loan payments were deferred until October 2022, subject to possible annual payments under loan terms.
Outlook, risks, and contingencies
- Key risks include Anaren integration and realization of expected synergies; substantial indebtedness and variable-rate exposure; demand, pricing, and capacity-utilization volatility; customer concentration; and potential U.S.-China trade tariffs affecting PCB imports.
- A $400 million interest-rate swap fixes the rate on a portion of floating-rate debt through June 2022. TTM estimated that a 100-basis-point change in variable rates would change annual interest cost by $6.2 million based on borrowings at July 2.
- TTM reported that some China facilities were not yet fully compliant with updated wastewater regulations and that related investment plans were underway. Legal matters and accrued probable losses were described as not material, although the company cautioned that an adverse outcome could materially affect a particular period.
- Q2 Asia PCB capacity utilization was 71%, down from 83% a year earlier; North America utilization was 61%, up from 54%. Management identifies utilization as important because of fixed operating costs. The company also cited foreign-exchange, raw-material, labor, environmental, and seasonality risks.
Important facts for investors to verify
- How much of reported sales and profit growth is attributable to Anaren, revenue-recognition timing, and recurring operations?
- Whether the preliminary Anaren purchase-price allocation, goodwill, and acquired intangible values change materially during the measurement period, and whether integration produces expected benefits.
- Whether working-capital investment and longer cash-cycle days (49 days versus 40 a year earlier) improve, and how contract assets convert to billed receivables and cash.
- Debt-service capacity, covenant headroom, future required term-loan payments, and sensitivity to interest rates despite the swap.
- The sustainability of gross margins and utilization, particularly in PCB facilities, and progress toward China environmental compliance.