TTM Technologies, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 30, 2013 (52 weeks); comparable year ended December 31, 2012. The filing also reports fourth-quarter results. TTM manufactures complex printed circuit boards (PCBs) and backplane assemblies, with operations in North America and Asia Pacific.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $1,368.2 million | $1,348.7 million |
| Gross profit / gross margin | $217.8 million / 15.9% | $225.0 million / 16.7% |
| Operating income (loss) | $69.1 million | $(142.0) million |
| Net income (loss) attributable to TTM stockholders | $21.9 million; diluted EPS $0.26 | $(174.6) million; diluted EPS $(2.13) |
| Cash from operating activities | $71.4 million | $182.6 million |
| Capital expenditures, by segment disclosure | $128.3 million | $160.6 million |
| Cash and cash equivalents at year-end | $330.6 million | $285.4 million |
| Working capital at year-end | $347.0 million | $395.7 million |
Revenue rose 1.4% year over year, but gross margin fell 0.8 percentage points. Operating results include a $17.9 million gain on the SYE sale, $10.8 million of long-lived asset impairment, $3.4 million of restructuring charges, and a $10.7 million loss on extinguishing debt. FY2012 included $200.3 million of goodwill and intangible impairment, which heavily affected its reported loss. FY2013 EBITDA was $165.3 million, a non-GAAP measure defined by the company.
Fourth quarter: Sales were $366.1 million, gross profit $70.2 million, pretax income $13.7 million, net income $11.3 million, and diluted EPS $0.14. The fourth-quarter comparison is affected by differing fiscal-quarter lengths: FY2013 quarters were 91 days each, while FY2012’s fourth quarter was 98 days.
Debt and liquidity: Total debt was approximately $628.9 million at year-end, including $370.0 million of secured floating-rate term debt and $258.9 million principal of convertible notes. Of the term loan, $96.2 million was due in 2014. Cash was $330.6 million; the company also had $90.0 million of unused revolving capacity under its main credit agreement and an undrawn PRC facility of approximately $47.8 million whose borrowing terms would be negotiated when drawn. The company reported compliance with credit covenants. It expected cash, operating cash flow, and available borrowing to cover anticipated needs for the next 12 months.
Changes versus the prior period
- Sales improved modestly, supported by new cellular-phone programs and higher average PCB selling prices, while shipment volumes declined in both segments.
- Gross margin weakened from higher labor and equipment costs and, in Asia Pacific, an $8.0 million product warranty claim. Management cited rising China labor costs and customer pricing pressure as continuing margin risks.
- Operating cash flow fell to $71.4 million from $182.6 million, with a substantial use of cash from the increase in receivables.
- Customer concentration increased: the five largest OEM customers represented 41% of sales versus 33% in 2012; Apple alone represented 20%.
- TTM sold its 70.2% controlling interest in SYE for $114.5 million gross consideration ($67.2 million net of cash sold), recognized a $17.9 million gain, and purchased Sytech’s 20% non-controlling interest in DMC for $29.4 million.
Outlook, commentary, and key risks
- Outlook: No specific revenue or earnings guidance is provided. Management forecast approximately $100 million of 2014 capital expenditures, about $80 million for Asia Pacific, focused on advanced HDI and substrate capacity, environmental compliance, equipment replacement, and technology. It expected minimal additional Suzhou exit costs in the first half of 2014.
- Operations and restructuring: TTM ceased production at its Suzhou, China facility during 2013 and planned to complete the shutdown by the second quarter of 2014, affecting 774 employees. The related $10.8 million impairment reduced held-for-sale assets to an estimated fair value of $2.5 million.
- Customer and market exposure: Demand is cyclical, order visibility is limited, and many sales are purchase-order based without firm volume commitments. Customer concentration, cancellations, price competition, and reliance on EMS providers can affect sales, margins, and collections.
- Debt and financing: Significant indebtedness, scheduled 2014 term-loan repayments, floating-rate exposure, and restrictive covenants are material risks. A 1% change in variable rates was estimated to change annual interest cost by $3.7 million.
- China and regulatory exposure: TTM stated its China plants were not yet fully compliant with environmental rules updated in late 2012; it had an investment plan and did not anticipate immediate fines or closures. The company also cited China labor-cost and utility-supply risks, foreign-exchange exposure, and limits on transferring funds.
- Other contingencies and unusual matters: The filing described ordinary-course legal matters with no material accrued loss identified, but noted adverse outcomes could be material in a particular period. It also highlighted a potential audit disruption related to SEC proceedings involving Chinese accounting-firm affiliates; the filing itself contains an unqualified audit opinion and reports effective internal controls.
- Financing transactions: In December 2013, TTM issued $220 million of 1.75% convertible notes due 2020, repurchased $136.1 million principal of 3.25% notes due 2015 at a premium, and recorded a $10.7 million extinguishment loss. After year-end, it issued another $30 million of 2020 notes and repurchased $6.5 million of 2015 notes.
Important facts for investors to verify
- Whether sales growth can translate into margin recovery despite labor inflation, price pressure, lower shipment volumes, and the warranty claim.
- Customer concentration and dependence on Apple and other major OEMs, including order trends and receivable collection.
- Cash conversion and working-capital trends, particularly receivables, against the planned 2014 capital-spending program and debt maturities.
- Progress on the Suzhou closure and China environmental-compliance investment plan, including any further costs or production effects.
- Debt covenant headroom, refinancing needs, variable-rate exposure, and potential dilution or cash settlement under the convertible notes and related hedge/warrant transactions.
- Remaining goodwill impairment sensitivity: the filing reports $12.1 million of goodwill and only a 9.4% fair-value cushion for the Asia Pacific reporting unit at year-end.