TTM Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and three quarters ended September 28, 2015. Unaudited; amounts below are USD millions except per-share data. Comparisons are with the corresponding 2014 periods. Viasystems was acquired May 31, 2015, so reported growth includes acquired operations and is not directly comparable.
Business context and reporting period
TTM manufactures printed circuit boards (PCBs), backplane assemblies and electro-mechanical solutions for markets including networking, communications, cellular phones, automotive, aerospace and defense, and industrial and medical. The Viasystems acquisition significantly expanded the company’s scale, manufacturing footprint and end-market mix. TTM now reports PCB and E-M Solutions segments.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Three quarters 2015 | Three quarters 2014 |
|---|---|---|---|---|
| Net sales | $652.0 | $345.3 | $1,426.6 | $934.8 |
| Gross profit | $89.1 | $49.1 | $201.9 | $126.2 |
| Gross margin | 13.7% | 14.2% | 14.2% | 13.5% |
| Operating income | $23.6 | $12.3 | $24.8 | $20.0 |
| Net income (loss) attributable to TTM | $(2.2) | $7.7 | $(35.4) | $0.8 |
| Diluted earnings (loss) per share | $(0.02) | $0.09 | $(0.39) | $0.01 |
| Interest expense | $21.0 | $6.0 | $39.5 | $18.1 |
Q3 sales increased 88.8%; three-quarter sales increased 52.6%. Management attributed the increases mainly to Viasystems, alongside stronger cellular-phone demand and, year to date, higher utilization at advanced-technology plants. The acquisition also shifted product mix: average PCB selling prices fell 40.7% in Q3 and 27.5% year to date, while PCB shipments rose 177.6% and 93.4%, respectively. Q3 gross margin declined year over year; year-to-date gross margin improved. The company cited acquisition-related inventory markups and weaker E-M Solutions margins as factors.
Viasystems contributed $283.2 of net sales in Q3 and $376.4 for the three quarters since acquisition. TTM said it was impracticable to report Viasystems’ net loss separately during integration. Year-to-date general and administrative expense included $32.9 of acquisition-related costs.
Cash flow, debt and liquidity
- Operating cash flow for the first three quarters was $97.6, versus $77.4 in 2014. Investing cash outflow was $226.6, including $169.2 for the acquisition, net of acquired cash. Financing cash outflow was $3.4.
- Cash and cash equivalents were $144.7 at September 28, down from $279.0 at year-end 2014; an additional $5.5 was restricted cash. Net working capital was $320.7, and management reported a 52-day cash cycle.
- Current assets were $980.7 and current liabilities $660.0. These balances include substantial acquisition-related increases in receivables and inventory.
- Debt principal outstanding was approximately $1.28 billion: $950.0 term loan, $80.0 U.S. asset-based revolver, and $250.0 convertible notes due 2020. The balance-sheet carrying amount is lower because of discounts. The term loan’s weighted average rate was 6.0%; the revolver’s was 1.9%. About 19.5% of total debt was fixed-rate. Management estimated a 100-basis-point change in variable rates would change annual interest cost by $3.9.
- Available borrowing capacity was $65.4 under the U.S. ABL and $142.2 under the Asia ABL; the Asia facility had no borrowings. TTM said it was in covenant compliance and believed cash, operating cash flow and available financing would meet anticipated needs for the next 12 months.
Material changes, outlook and risks
- Viasystems acquisition: Total consideration was $248.8 cash and 15.1 million TTM shares; approximately $669.0 of Viasystems debt was assumed and refinanced. Reported enterprise value was $1.067 billion. Purchase-price allocation remained preliminary and could change materially, including goodwill.
- Restructuring: TTM announced closures of facilities in Cleveland, Milpitas and Juarez to consolidate capacity. It recorded $1.9 of restructuring charges, primarily Juarez severance, and estimated total charges of $15–$20. It expected additional severance charges in Q4 2015 and said the closures would negatively affect Q4 results.
- Integration target: Management identified $55 million in annualized Viasystems cost savings, expected to be implemented within 12 months after closing; realization and timing are uncertain and may involve additional costs.
- Capital spending: The 2015 cash capital expenditure plan was approximately $120 million; new 2015 purchases were expected to be about $80 million.
- Other items: TTM sold its Suzhou subsidiary for $21.3 and recognized a $2.5 gain. Q3 tax expense was $8.7 despite pretax income of $6.6; year-to-date tax expense was $24.0 on a pretax loss, reflecting valuation allowances and other tax items. TTM also disclosed potential goodwill and intangible impairment risk and said its annual impairment test would occur in Q4.
- Risks and contingencies: Key risks include high acquisition-related leverage and interest costs, integration execution, variable interest rates, customer and end-market concentration, pricing and utilization pressure, foreign exchange exposure, and environmental compliance at some Chinese plants. One customer represented 17% of Q3 sales and 21% of year-to-date sales. Litigation challenging the Viasystems merger had a proposed non-monetary settlement subject to court approval; plaintiffs’ fees and expenses were capped at $0.55. The filing states no formal revenue or earnings guidance.
Important facts for investors to verify
- Whether Viasystems integration delivers the targeted $55 million annualized savings, and the timing and total cost of facility closures.
- Final acquisition purchase-price allocation, acquired-business profitability, and any resulting goodwill or asset impairment.
- Debt repayment capacity, covenant headroom, available revolver capacity, and sensitivity to floating interest rates.
- Customer concentration and demand trends, particularly in networking/communications, cellular phones and automotive.
- Q4 restructuring effects, planned capital spending, and progress on Chinese environmental compliance and merger-litigation settlement approval.