TTM Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and first two quarters ended June 27, 2016. Unaudited figures are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. TTM manufactures printed circuit boards (PCBs) and electro-mechanical solutions (E-M Solutions). The comparison is affected by the May 2015 Viasystems acquisition: the prior-year quarter included Viasystems only from May 31, 2015.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First two quarters 2016 | First two quarters 2015 |
|---|---|---|---|---|
| Net sales | $601.8 | $445.4 | $1,185.1 | $774.6 |
| Gross profit / margin | $97.6 / 16.2% | $61.2 / 13.7% | $181.2 / 15.3% | $112.7 / 14.6% |
| Operating income (loss) | $34.7 | $(7.1) | $53.6 | $1.2 |
| Net income (loss) attributable to TTM stockholders | $18.5 | $(36.6) | $11.3 | $(33.2) |
| Diluted earnings (loss) per share | $0.17 | $(0.41) | $0.11 | $(0.38) |
| Operating cash flow | Not presented by quarter | $97.9 | $82.9 |
- Q2 sales increased 35.1%; first-half sales rose 53.0%. Management attributed growth primarily to Viasystems, partly offset by weaker cellular-phone demand. PCB shipments increased, while average PCB selling prices fell due to acquisition-related product mix.
- Q2 gross margin improved to 16.2%, with management citing improved performance at certain acquired facilities and integration synergies. First-half gross margin was 15.3%.
- Q2 selling and marketing expense was $16.6 million; general and administrative expense was $36.5 million. G&A declined from the prior year largely because acquisition-related costs were lower.
- Interest expense was $20.1 million in Q2 and $41.9 million in the first half, reflecting acquisition-related borrowings. First-half results included $5.9 million of restructuring charges and $3.3 million of long-lived asset impairments.
Balance sheet, debt and liquidity
- At June 27, 2016, cash and cash equivalents were $216.2 million, including $152.0 million held by foreign subsidiaries. Current assets were $942.0 million and current liabilities $622.5 million; reported working capital was approximately $319.5 million.
- Debt principal totaled approximately $1.173 billion, including a $841.1 million term loan, $80.0 million drawn on the U.S. ABL, $250.0 million principal of convertible notes due 2020, and a $2.0 million capital lease. Balance-sheet debt, net of discounts and issuance costs, was approximately $1.078 billion. The term loan and U.S. ABL are primarily floating-rate borrowings.
- TTM repaid $106.5 million of debt principal in the first half. It had $63.0 million of available U.S. ABL capacity and $137.8 million of Asia ABL capacity, including outstanding letters of credit; no Asia ABL borrowings were outstanding. The company reported compliance with its debt covenants.
- First-half investing cash outflow was $31.9 million, primarily reflecting capital expenditures net of asset-sale proceeds and release of restricted cash. Financing cash outflow was $106.5 million, principally debt repayment. Cash declined $42.9 million from year-end 2015.
- Management expected 2016 capital expenditures of $110–$120 million, and believed cash, operating cash flow and available borrowing sources would meet anticipated needs for the next 12 months. This is not revenue or earnings guidance.
Changes, outlook and notable items
- Viasystems materially expanded the business and diversified end markets. Automotive represented 19% of Q2 sales versus 7% in the comparable 2015 quarter; cellular-phone sales represented 10% versus 24%. TTM cautioned that acquisition effects make year-over-year growth an imperfect measure of underlying performance.
- The company’s consolidation plan includes facility closures in Cleveland, Milpitas and Juarez and approximately 480 planned employee layoffs. TTM had incurred about $13.3 million of restructuring charges since the plan’s announcement and estimated total charges of $15–$20 million; remaining accrued costs were expected to be substantially paid by December 2016.
- Q2 income taxes included a net discrete tax benefit of $5.9 million; first-half discrete benefit was $6.5 million. China tax incentives reduced first-half Chinese taxes by about $4.5 million. TTM recorded no tax benefit on certain U.S. and foreign losses because of valuation allowances.
- Foreign currency translation reduced first-half other comprehensive income by $13.7 million. Management reported that a 100-basis-point change in variable interest rates would change annual interest cost by approximately $6.1 million.
- Management noted seasonality, typically stronger third- and fourth-quarter sales and weaker first-quarter sales around Chinese New Year. Results remain exposed to demand shifts, product mix, utilization, pricing and integration execution.
Risks and contingencies
- Substantial indebtedness and scheduled debt service may constrain liquidity and investment; variable rates expose the company to higher interest costs. Debt agreements contain financial covenants.
- Customer concentration remains relevant: one customer represented about 10% of Q2 sales, while the ten largest customers represented 40%. Demand weakness in cellular phones, electronics-industry cyclicality, price pressure and customer order changes could affect results.
- TTM identified foreign-exchange exposure, particularly to the RMB, and stated it generally does not hedge RMB and HKD revenue and expense exposures. It also cited labor, supply-chain, facility, technology, cybersecurity, environmental and regulatory risks.
- Some Chinese plants were not yet fully compliant with updated wastewater regulations; TTM said it was implementing plans and did not anticipate immediate fines or temporary closures. Environmental compliance capital spending was included in its projections.
- TTM disclosed ordinary-course legal matters and said accrued probable and estimable losses were not material. It cautioned that an adverse outcome could nevertheless materially affect a particular period.
- Given volatility in its market capitalization, TTM said an impairment charge was reasonably possible at its fiscal 2016 annual goodwill impairment test. It recorded $3.3 million of impairment in the first half, including machinery and capitalized software costs.
Important facts for investors to verify
- How much reported sales and margin growth reflects Viasystems versus organic demand, and whether cellular-phone weakness persists.
- Progress in realizing acquisition synergies and completing facility closures, including final restructuring and impairment costs.
- Debt repayment pace, borrowing availability, covenant headroom and sensitivity to floating-rate increases.
- Whether operating cash flow supports the $110–$120 million capital expenditure plan while meeting debt service and working-capital needs.
- Customer concentration, foreign-currency exposure, Chinese environmental compliance and the outcome of the annual goodwill impairment test.