TTM Technologies, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and first two fiscal quarters ended June 30, 2014; comparative periods ended July 1, 2013. Financial statements are unaudited. Amounts below are in millions unless noted.
Business context
TTM manufactures printed circuit boards and backplane assemblies for networking and communications, aerospace and defense, computing, cellular, medical and industrial markets. It reports Asia Pacific and North America segments. Asia Pacific sales are affected by consumer-electronics seasonality; management says sales typically rise in the third and fourth quarters.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $297.6 | $338.0 | $589.5 | $663.4 |
| Gross profit / margin | $38.6 / 13.0% | $48.5 / 14.3% | $77.1 / 13.1% | $99.2 / 15.0% |
| Operating income | $3.2 | $28.3 | $7.7 | $41.0 |
| Net income (loss) attributable to TTM shareholders | $(3.1) | $13.1 | $(6.9) | $18.3 |
| Diluted earnings (loss) per share | $(0.04) | $0.16 | $(0.08) | $0.22 |
| Cash from operations | — | $33.6 | $69.0 | |
| Capital expenditure and equipment deposits | — | $53.9 | $46.6 |
Q2 sales fell 12.0%; first-half sales fell 11.1%. Asia Pacific sales, excluding intersegment sales, declined 20.3% in Q2 and 19.2% in the first half, reflecting the prior-year sale of a controlling interest in a subsidiary and weaker cellular-phone and computing/peripherals demand. North America sales increased 1.5% in Q2 and 1.9% in the first half.
Margins weakened in both segments. Management attributed Asia Pacific pressure to unfavorable product mix, lower advanced-technology volume and utilization, and higher equipment-related expenses. North America was affected by a mix shift toward lower-margin assembly products and weaker cost absorption at certain PCB plants. Q2 Asia Pacific segment operating income was a loss of $1.9 million, versus income of $23.6 million a year earlier; North America segment operating income was $7.4 million versus $7.0 million.
The prior-year operating results included a $17.9 million gain on asset sale, associated with the 2013 sale of the company’s controlling interest in Dongguan Shengyi Electronics. In Q2 2014, TTM recorded a further $1.8 million impairment charge related to closure and disposal of assets at its Suzhou, China facility. First-half 2014 other expense included a $3.6 million unrealized foreign-exchange loss, primarily from RMB depreciation, and a $0.5 million loss on repurchasing 2015 convertible notes.
Liquidity, debt and capital resources
- Cash and equivalents were $282.0 million at June 30, down from $330.6 million at December 30, 2013; net working capital was $303.9 million and the current ratio was approximately 1.75.
- First-half operating cash flow of $33.6 million was below the prior-year $69.0 million. Investing used $52.8 million and financing used $29.0 million; cash declined $48.5 million during the period.
- Term-loan principal was $321.9 million, including $96.2 million classified as current; $90.0 million remained available under the revolving facility, which had no balance outstanding. A separate approximately $46.6 million PRC facility was undrawn and expires in December 2014.
- Convertible-note principal totaled $282.4 million: $250.0 million due in 2020 and $32.4 million due in 2015. The company repurchased $6.5 million principal of 2015 notes in January 2014. Total debt principal was approximately $604.3 million; carrying values differ because of unamortized discounts.
- The credit agreement requires financial and operating covenants; TTM reported compliance at June 30. Approximately $46.2 million of letters of credit was outstanding under its $80.0 million facility.
Outlook, commentary and risks
- Management expects cash on hand, operating cash generation and available borrowing capacity to meet currently anticipated capital expenditure, debt-service and working-capital needs for the next 12 months. This is not quantified earnings or revenue guidance.
- The 2014 capital-expenditure plan was approximately $100 million, about $80 million in Asia Pacific, for capacity and advanced-technology expansion, equipment replacement and environmental compliance.
- TTM said Chinese facilities were not yet fully compliant with updated environmental regulations, but expected to comply during the permitted interim period; it anticipated approximately $10 million of 2014 environmental-related capital spending and no immediate risk of fines or plant closure.
- Risks highlighted include weaker electronics demand and limited order visibility, customer and EMS concentration, pricing and utilization pressure, rising Chinese labor costs, RMB/HKD currency exposure, substantial debt and refinancing/covenant risk, international and regulatory exposure, and potential product-quality, supply, environmental and facility-disruption issues. The company noted that approximately 63% of Q2 sales came from PRC operations.
- Legal matters were described as ordinary-course matters with accrued probable and estimable losses deemed immaterial; the filing cautions that an adverse outcome could nevertheless materially affect a particular period. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
- TTM was evaluating the effect and transition method for the new revenue-recognition standard, effective for it January 1, 2017; the impact had not yet been determined.
Most important facts for investors to verify
- Whether Asia Pacific demand, plant utilization and gross margins recover, and how much of the year-over-year sales decline reflects the 2013 subsidiary sale versus underlying demand.
- Near-term repayment and refinancing plans for 2015 notes and term-loan maturities, and continued compliance with credit covenants.
- Progress against the $100 million capital-spending plan, including Chinese environmental-compliance milestones and costs.
- Customer and end-market concentration, order cancellations, and the impact of seasonal demand on second-half results.
- RMB/HKD exposure and the potential earnings, cash and repatriation effects of currency changes; the filing states that RMB revenue and expense exposure is not hedged.