TTM Technologies, Inc. — Q2 2012 Form 10-Q
Business and period: TTM manufactures printed circuit boards (PCBs) and backplane assemblies for communications, computing, mobile-device, aerospace/defense, industrial and medical markets. The unaudited quarter ended June 25, 2012; the first two fiscal quarters covered 177 days. Comparisons are with the quarter and two quarters ended June 27, 2011.
Key financial results
Amounts below are in millions except per-share data and percentages.
| Metric | Q2 2012 | Q2 2011 | First two quarters 2012 | First two quarters 2011 |
|---|---|---|---|---|
| Net sales | $327.4 | $366.1 | $627.9 | $708.9 |
| Gross profit / margin | $54.7 / 16.7% | $77.3 / 21.1% | $111.2 / 17.7% | $159.3 / 22.5% |
| Operating income (loss) / margin | $18.1 / 5.5% | $(8.5) / (2.3)% | $39.9 / 6.4% | $37.1 / 5.2% |
| Net income (loss) attributable to TTM shareholders | $7.4 | $(20.9) | $20.0 | $6.2 |
| Diluted earnings (loss) per share | $0.09 | $(0.26) | $0.24 | $0.08 |
| Cash provided by operating activities | Not separately provided for the quarter | $72.3 | $104.9 | |
| Capital spending, including equipment deposits | Not separately provided for the quarter | $59.7 | $71.0 |
- Sales fell 10.6% in Q2 and 11.4% for the first two quarters. Asia Pacific sales declined 12.9% and 13.9%, respectively; North America sales declined 7.0% and 7.8%.
- Operating cash flow less reported capital spending was approximately $12.6 million for the first two quarters, versus $33.9 million a year earlier; this simple measure is not a company-reported free-cash-flow metric.
- At June 25, cash and equivalents were $248.5 million, current assets $724.0 million, current liabilities $441.6 million, and working capital $282.4 million (versus $234.4 million at year-end 2011). Current ratio was approximately 1.64.
- Debt carrying amounts were $373.4 million of long-term debt, including current maturities, plus $154.3 million of convertible notes, net of discount. The notes have $175.0 million principal; total principal debt was approximately $548.4 million. Cash was $248.5 million. Current debt maturities were $111.8 million.
- Cash increased $52.4 million during the first two quarters, to $248.5 million. Financing provided $36.1 million, including $103.8 million of new long-term debt proceeds and $68.5 million of repayments.
Material changes and operating drivers
- Gross margin weakened despite lower operating expenses, reflecting higher labor and depreciation costs, lower factory utilization/fixed-cost absorption and the temporary closure of the Dongguan SYE facility. China wage increases and compensation changes related to reduced overtime also weighed on Asia Pacific margins.
- Q2 Asia Pacific PCB shipments declined 18%, partly offset by a 6% higher average PCB selling price as sales shifted toward advanced HDI products. North America PCB volume fell 7%; average PCB selling price rose 2%, while backplane assembly demand fell 12%.
- SYE was temporarily closed for repairs and upgrades beginning in January. Management estimated lost Asia Pacific sales of $2.8 million in Q2 and $5.3 million for the first two quarters, with related costs of $4.4 million and $8.3 million, respectively. Reopening was expected in Q3 2012.
- The prior-year Q2 and first-half results included a $48.1 million long-lived-asset impairment charge in Asia Pacific. Its absence in 2012 materially affects the year-over-year operating-income comparison. The 2011 impairment reflected weak plant performance and reduced product demand.
- Q2 other expense was $6.6 million versus $3.2 million in the prior-year quarter, mainly due to lower foreign-exchange/derivative gains and the absence of a prior-year $1.7 million gain on early settlement of a related-party financing obligation. First-half other expense also included a $0.8 million gain on securities sales.
Outlook, liquidity, risks and contingencies
- Management expected the majority of 2012 net sales in the second half, citing customer inputs and product introductions. This is not quantified revenue or earnings guidance. Seasonal patterns typically support higher Q3 sales.
- Management planned approximately $135 million of 2012 capital expenditures, including about $123 million in Asia Pacific, to expand advanced HDI and rigid-flex capacity, enhance technology and replace equipment; approximately $5 million was allocated to SYE repairs and upgrades.
- The $350 million term loan and $87.5 million revolver, together with related facilities, mature November 16, 2013. Management was evaluating refinancing options and expected to complete refinancing before fiscal year-end. The company reported compliance with credit covenants at June 25, 2012 and believed available cash, operating cash flow and borrowing capacity would meet anticipated needs for 12 months; future refinancing access remains important.
- Credit Agreement borrowings are secured by substantially all Asia Pacific segment assets and are guaranteed by TTM. The company had $87.5 million drawn on the revolver, $56.8 million of letters of credit outstanding and $65 million available under the factoring facility. A 1% change in variable interest rates was estimated to change annual interest cost by $2.4 million. Hedging may only partly offset rate and currency movements.
- Management reported that market capitalization declined significantly late in Q2, largely alongside weaker-than-expected Asia Pacific results, but did not identify an impairment trigger at quarter-end. If the Asia Pacific outlook or performance does not recover, a goodwill impairment assessment and potential charge may follow; Asia Pacific goodwill was $183.5 million.
- Customer concentration remains a risk: Apple represented about 10% of quarterly sales and 12% of first-half sales; the ten largest customers represented 44% of Q2 sales. The filing warns that loss or reduced purchases by major customers could materially affect results.
- Environmental remediation accruals for three sites were $0.5 million at June 25, 2012; estimated undiscounted costs ranged from $0.8 million to $1.3 million. Management did not expect a material overall effect, but cleanup costs are uncertain. Known legal contingencies were accrued where probable and estimable; recorded amounts were not material.
- A majority-owned foreign subsidiary declared a $47.6 million dividend during Q2, including $9.5 million payable to its noncontrolling shareholder; the latter amount was paid after quarter-end. Related-party laminate and prepreg purchases totaled $43.5 million in the first half, and the supply arrangements were due to expire December 31, 2012.
- Cash held by foreign subsidiaries was $92.9 million, primarily in Asia and expected to remain for local operations. Repatriation of certain Shanghai and European cash was expected to incur U.S. tax. Management also noted that higher China labor costs had largely not been passed through to customers, and commodity-cost increases may pressure margins.
Important facts for investors to verify
- Whether second-half demand materialized as expected and SYE reopened on schedule, and how both affected sales, utilization and margins.
- Progress and terms of refinancing before the November 2013 credit-facility maturity, including coverage of near-term maturities and covenant headroom.
- Whether Asia Pacific performance and market capitalization trends prompted a goodwill impairment test or charge after quarter-end.
- Whether customer concentration, China labor inflation, commodity costs and foreign-exchange movements changed materially.
- Actual capital expenditures and operating cash generation relative to the $135 million plan and debt-service needs.