TTM Technologies, Inc. — Q1 2015 Form 10-Q
Reporting period: Quarter ended March 30, 2015; comparative quarter ended March 31, 2014. Financial statements are unaudited. Dollar amounts below are in millions unless noted.
Business context
TTM manufactures printed circuit boards and backplane assemblies for communications, cellular phones, aerospace and defense, computing, and other markets. The quarter’s results reflected stronger cellular-phone demand and improved utilization at advanced-technology plants. The proposed acquisition of Viasystems remained a major strategic and financing focus.
Key financial metrics
- Revenue: $329.2, up 12.8% from $291.9. Asia Pacific sales increased 23.9% to $204.8; North America sales decreased 1.8% to $124.3.
- Profit and margins: Gross profit was $51.6, versus $38.5; gross margin improved to 15.7% from 13.2%. Operating income was $8.3, versus $4.5. Net income was $3.4, or $0.04 per diluted share, compared with a net loss of $3.8, or $0.05 per share.
- Expenses and unusual items: General and administrative expense rose to $34.5 from $22.5, including $8.2 of Viasystems-related costs and higher Asia Pacific indirect taxes. A $2.5 gain on the sale of the Suzhou facility partially offset operating expenses. Other expense declined to $6.2 from $10.1, mainly reflecting lower foreign-currency transaction losses and no debt-extinguishment loss.
- Cash flow and investment: Operating cash flow was $67.4, up from $45.4. Investing cash outflow was $15.6, including $22.8 of property, plant, equipment, and equipment-deposit purchases, partly offset by asset-sale proceeds. Financing cash outflow was $47.8, primarily reflecting $48.1 of debt repayments. Cash increased $3.9 to $283.0.
- Liquidity: Working capital was $273.8, compared with $302.1 at December 29, 2014. Current assets were $730.5 and current liabilities $456.6. The company had $90.0 available under its revolving loan and an undrawn Chinese facility of approximately $37.0.
- Debt: Term-loan borrowings were $225.7, including $96.2 classified as current; the loan matures in 2016. Convertible notes had $282.4 principal outstanding: $32.4 due May 15, 2015 and $250.0 due in 2020. TTM reported compliance with credit-agreement covenants.
- Other balance-sheet items: Total assets were $1,521.9 and equity was $720.2 at quarter-end. Accounts receivable declined to $239.6 from $307.9, while inventory rose to $153.9 from $145.2.
Material changes versus the prior-year quarter
- Revenue growth was concentrated in Asia Pacific and cellular phones: cellular phones rose to 30% of sales from 15%; computing/storage/peripherals fell to 11% from 18%, and networking/communications to 29% from 34%.
- Asia Pacific segment income increased to $14.4 from $3.9, helped by higher advanced-technology plant utilization. North America shifted to a $4.3 segment loss from $2.8 of income, although management cited improved plant efficiencies and higher gross margin despite lower sales.
- One customer accounted for approximately 27% of sales, versus 16% a year earlier. The five largest OEM customers represented 47% of sales, versus 39%.
- Comprehensive loss improved to income of $2.7 from a loss of $15.7, including a substantially smaller foreign-currency translation loss.
Outlook, commentary, risks, and contingencies
- Capital spending and liquidity outlook: Management expected 2015 capital expenditures of approximately $100, including about $80 for Asia Pacific; new 2015 capital-expenditure purchases were expected to approximate $70. Management believed existing cash, operating cash flow, and available borrowing capacity would cover anticipated needs for the next 12 months, before giving effect to the merger.
- Viasystems transaction: Consideration was described as $11.33 cash plus 0.706 TTM shares per Viasystems share, valued at approximately $17.84 per Viasystems share using the April 24 market price. Estimated total purchase price, including assumed debt, was approximately $997.4. TTM had a $1.115 billion financing commitment and intended to use approximately $1.030 billion for the acquisition, refinancing, and related expenses. Specific financing arrangements were still being finalized.
- Merger targets and costs: TTM identified at least $55 of annualized cost savings, expected within 12 months after closing, and expected approximately $26 of cash expenses in 2015 to achieve savings, including about $9.9 of potential change-in-control payments. It estimated total merger-related costs of approximately $32.2; $14.2 had been incurred through the quarter. The filing also cited approximately $61.4 of debt-refinancing premiums, accrued interest, and other costs, and approximately $23.8 of debt-issuance costs.
- Merger contingencies: Completion remained subject to regulatory approvals, including U.S. antitrust and Committee on Foreign Investment in the United States review. Two shareholder lawsuits challenged the transaction; parties had signed a memorandum of understanding toward a proposed settlement, with final terms still being negotiated. The agreement provides for a $40 reverse breakup fee to Viasystems in specified termination circumstances.
- Operating and market risks: Management highlighted demand volatility, seasonality, customer concentration, pricing pressure, capacity utilization, labor costs, foreign-exchange exposure, and the risks of integrating Viasystems and financing the transaction. The company stated that some Chinese facilities were not yet fully compliant with updated wastewater rules, but had compliance plans and included related investment in capital projections.
- Other matters: The Suzhou, China facility sale generated $21.3 of consideration and a $2.5 gain; $14.1 remained receivable at quarter-end, with collection expected in Q2 2015. Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the Viasystems acquisition closed, its final financing terms and total debt burden, and whether projected savings were achieved without offsetting costs.
- Repayment or refinancing of the $32.4 million convertible notes due May 15, 2015, and the company’s subsequent debt maturities and covenant headroom.
- Whether the Suzhou sale receivable was collected as expected and whether the $100 million capital-spending plan was completed as projected.
- Whether customer concentration, especially the customer representing 27% of quarterly sales, changed in subsequent periods.
- Progress toward Chinese environmental compliance and any resulting capital needs, fines, or operating restrictions.