TTM Technologies, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and first three quarters ended October 2, 2017; comparisons are to the corresponding 2016 periods. Figures are unaudited and in U.S. dollars.
Business context and results
TTM manufactures printed circuit boards (PCBs) and electro-mechanical solutions (E-M Solutions) for markets including aerospace and defense, automotive, cellular phones, computing, medical and networking. It reported two segments: PCB and E-M Solutions.
| Metric | Q3 2017 | Q3 2016 | First 3 quarters 2017 | First 3 quarters 2016 |
|---|---|---|---|---|
| Net sales | $666.8m | $641.7m | $1,919.2m | $1,826.8m |
| Gross profit / margin | $96.8m / 14.5% | $109.6m / 17.1% | $297.7m / 15.5% | $290.8m / 15.9% |
| Operating income / margin | $44.1m / 6.6% | $50.2m / 7.8% | $141.7m / 7.4% | $103.8m / 5.7% |
| Net income attributable to TTM | $21.5m | $25.6m | $75.0m | $36.9m |
| Diluted EPS | $0.19 | $0.23 | $0.65 | $0.36 |
Financial position, cash flow and debt
- At October 2, cash and cash equivalents were $301.9m, including $206.5m held by foreign subsidiaries. Working capital was approximately $438.2m.
- For the first three quarters, operating cash flow was $180.1m, down from $200.7m. Investing cash outflow was $91.9m, including $118.9m of property, plant and equipment purchases; financing cash outflow was $45.0m. Cash increased $45.7m from the start of the fiscal year.
- Debt principal outstanding was approximately $1.024bn; balance-sheet debt, net of discounts and issuance costs, was about $978.3m long-term plus $4.2m current. The company had $301.9m cash. Available ABL borrowing capacity, after outstanding letters of credit, was $175.4m in the U.S. and $75.0m in Asia.
- On September 28, TTM issued a $350m term loan due 2024 and $375m senior notes due 2025, repaid the remaining $700m prior term loan and paid down $63m of its U.S. ABL. The new term loan’s rate was 3.73% at quarter-end; senior notes carry a 5.63% coupon. The refinancing resulted in a $0.8m debt-extinguishment loss. TTM reported compliance with applicable debt covenants.
- 2017 net capital expenditures were projected at $155m–$165m, allocated approximately 40% to technology enhancements, 30% to capacity expansion and 30% to compliance and maintenance.
Material changes and management commentary
- Q3 sales grew 3.9%, but attributable net income fell 16.1% and gross margin declined 2.6 percentage points. PCB shipments fell 2.4%, while average selling price rose 4.9%, primarily from product mix. E-M Solutions sales rose 31.2%, largely on automotive demand.
- Management attributed the Q3 gross-margin decline to reclassification of facility and labor-support costs into cost of goods sold, higher costs from new technology product ramps in cellular-phone facilities, and E-M Solutions mix shifting toward work with higher direct-material content. Year-to-date sales rose 5.1% and attributable net income increased from $36.9m to $75.0m.
- Foreign-exchange losses, primarily from appreciation of the Chinese renminbi, were approximately $7.4m for Q3 and $17.6m year to date. Interest expense decreased year to date, partly offsetting currency losses. Tax expense was reduced by tax incentives and other discrete benefits; the filing says Chinese tax incentives increased year-to-date diluted EPS by $0.05.
- No specific sales or earnings guidance is provided. Management noted that results are affected by customer demand, product mix, capacity utilization and seasonality; historically, sales tend to be higher in the third and fourth quarters and lower around Chinese New Year.
- Revenue standard ASC 606 becomes effective for TTM in fiscal 2018. Management expected a change for some revenue from recognition at shipment to recognition over time, potentially materially affecting the financial statements, and intended to use the cumulative-effect transition method.
Risks, contingencies and unusual items
- Customer concentration is significant: one customer represented approximately 21% of Q3 sales and 18% year to date; the ten largest customers represented 50% of Q3 sales. TTM also cited dependence on electronics demand, pricing pressure, utilization, product cycles and international operations.
- Currency exposure is material and TTM does not hedge most RMB-denominated revenue and expenses. A 100-basis-point change in variable interest rates was estimated to change annual interest cost by $4.0m.
- TTM reported that its Chinese plants were not yet in full compliance with newly adopted environmental regulations, but said it was implementing plans and did not anticipate immediate fines or temporary closures. Planned 2017 capital expenditures included compliance spending.
- Known legal loss contingencies accrued were not material, though the company cautioned that adverse outcomes could materially affect a particular period. The filing identifies no material off-balance-sheet arrangements.
- After quarter-end, TTM agreed to buy a 5% noncontrolling interest in its Huiyang, China facility for approximately $8.5m, with completion expected by year-end 2017.
Important facts for investors to verify
- Whether the reduced Q3 gross margin reflects temporary new-product ramp and cost-classification effects or a more persistent change in economics.
- Customer exposure and demand trends, particularly the largest customer, cellular-phone products, networking/communications and automotive.
- Cash conversion, working-capital needs and execution of the $155m–$165m capital-spending plan.
- Debt service and covenant headroom under the new facilities, including exposure to variable rates and the maturity/refinancing profile.
- The actual financial-statement impact and implementation of ASC 606, and progress toward Chinese environmental compliance.