TTM Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and first three quarters ended October 1, 2018. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise. The filing is unaudited.
Business context and period
TTM manufactures printed circuit boards (PCBs), backplane assemblies, electro-mechanical solutions, and RF and microwave components for markets including aerospace and defense, automotive, communications, computing, and medical/industrial. On April 18, 2018, TTM acquired Anaren for stated total consideration of $787.9 million. Anaren’s results are included only from the acquisition date, limiting comparability with 2017.
TTM adopted the new revenue-recognition standard in 2018, moving certain revenue from recognition upon delivery to recognition over time. Prior-year figures were not restated.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | First three quarters 2018 | First three quarters 2017 |
|---|---|---|---|---|
| Net sales | $755.8 | $666.8 | $2,136.3 | $1,919.2 |
| Gross profit | $129.6 | $96.8 | $334.4 | $297.7 |
| Gross margin | 17.1% | 14.5% | 15.7% | 15.5% |
| Operating income | $54.6 | $44.1 | $116.3 | $141.7 |
| Net income attributable to TTM | $27.0 | $21.5 | $121.1 | $75.0 |
| Diluted EPS | $0.22 | $0.19 | $0.98 | $0.65 |
Quarterly sales rose 13.3%; nine-month sales rose 11.3%. Q3 operating margin was approximately 7.2% versus 6.6%; nine-month operating margin was approximately 5.4% versus 7.4%. Nine-month net income benefited substantially from tax items, including a $74.6 million discrete tax benefit recorded in the second quarter; it should not be read as reflecting operating improvement alone. Nine-month interest expense increased to $56.4 million from $40.1 million.
- Cash flow: Operating cash flow was $121.4 million for the first three quarters, versus $180.1 million a year earlier. Capital expenditures were $116.4 million, implying approximate operating cash flow less capital expenditures of $5.0 million. Investing cash outflow was $712.5 million, including $596.4 million for the Anaren acquisition, net of cash acquired.
- Cash and working capital: Cash and equivalents were $208.0 million at October 1, down from $409.3 million at January 1. Net working capital was approximately $537.7 million. About $180.9 million of cash was held by foreign subsidiaries, primarily in China.
- Debt: Gross principal debt was approximately $1.601 billion, up from $1.023 billion at January 1, largely reflecting acquisition financing. Debt included a $905.9 million term loan, $375.0 million senior notes, $250.0 million convertible notes, and $70.0 million of ABL borrowings. The term loan rate was 4.77%; TTM had a $400 million interest-rate swap. TTM reported covenant compliance and made an additional $40 million term-loan prepayment after quarter-end.
- Liquidity: Available borrowing capacity, net of outstanding letters of credit, was $153.3 million under the U.S. ABL and $110.7 million under the Asia ABL. Management said available cash, operating cash flow, and borrowing capacity were expected to cover anticipated needs for the next 12 months.
Material changes and management commentary
- Q3 PCB sales, excluding inter-segment sales, increased 14.9%, with Anaren contributing $64.1 million. Higher demand in aerospace and defense, computing, and cellular markets was partly offset by weaker automotive demand. Average PCB selling prices rose 15.5%, mainly from product mix, while shipment volume fell 6.7%.
- For the first three quarters, PCB sales increased 11.5%, including $126.1 million from Anaren; average selling prices rose 9.7%, while shipment volume fell 4.1%. E-M Solutions sales increased 8.6% for the period but declined in Q3.
- Management attributed stronger Q3 gross margin to Anaren and improved utilization at aerospace-and-defense-focused facilities. E-M Solutions margin declined, primarily due to product mix. PCB capacity utilization in Q3 was 80% in Asia and 60% in North America, compared with 86% and 55%, respectively, a year earlier.
- TTM expected 2018 net capital expenditures of $150 million to $170 million. The filing provides no specific revenue or earnings guidance.
Outlook, risks, contingencies, and unusual items
- Anaren’s purchase-price allocation remained preliminary; final valuation adjustments could affect goodwill. The acquisition added $393.3 million of goodwill and $336.0 million of identifiable intangible assets at preliminary fair values. TTM said it had completed integration and placed Anaren within the PCB segment, but identified integration, employee retention, customer continuity, and realizing anticipated benefits as risks.
- The new revenue standard increased nine-month reported sales by $27.5 million and gross profit by $9.2 million versus the prior recognition approach; Q3 reported sales were $4.3 million lower and gross profit $0.2 million lower. These changes affect comparisons and working-capital presentation, including $296.8 million of contract assets at October 1.
- Key risks include substantial debt and variable-rate exposure, customer and end-market concentration, demand and utilization volatility, U.S.-China tariffs (including tariffs on PCBs), raw-material and labor costs, foreign-exchange movements, and acquisition execution. One customer represented about 20% of Q3 sales; the ten largest customers represented 49%.
- Some Chinese facilities were not yet fully compliant with updated wastewater regulations; TTM had an investment plan, with related 2018 capital spending included in its projections. Known legal matters and recorded loss-contingency accruals were described as not material, although an adverse outcome could materially affect a particular period.
- Disclosure controls were reported effective. Management was still reviewing and integrating Anaren’s internal controls and accounting systems; the acquired business was excluded from the quarter’s internal-control assessment under SEC transition guidance.
Important facts for investors to verify
- How much future growth and margin performance depends on Anaren, and whether expected acquisition benefits are realized.
- The extent to which nine-month earnings reflect recurring operations rather than the large discrete tax benefit, and the eventual tax and valuation-allowance outcomes.
- Whether operating cash flow improves as acquisition-related working-capital demands normalize, given low approximate cash flow after capital expenditures.
- Debt reduction, interest costs, refinancing and covenant flexibility, and the effect of higher rates despite the $400 million swap.
- Trends in PCB shipment volumes, capacity utilization, customer concentration, tariff exposure, and Chinese environmental compliance spending.
- Final Anaren purchase accounting and the impact of acquired intangible-asset amortization on reported operating income.