TTM Technologies, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and first two quarters ended July 3, 2023. Unaudited results; dollar amounts below are in millions unless stated otherwise. Comparisons are with the corresponding 2022 periods.
Business context
TTM manufactures printed circuit boards (PCBs), mission systems, and RF and microwave components for aerospace and defense, data center computing, automotive, medical/industrial/instrumentation, and networking markets. Management reported strong aerospace and defense demand, while commercial bookings remained weak amid customer inventory reductions and softer end-market demand.
Key financial results
| Metric | Q2 2023 | Q2 2022 | First two quarters 2023 | First two quarters 2022 |
|---|---|---|---|---|
| Net sales | $546.5 | $625.6 | $1,090.9 | $1,206.8 |
| Gross profit | $98.5 | $117.1 | $184.6 | $208.0 |
| Gross margin | 18.0% | 18.7% | 16.9% | 17.2% |
| Operating income | $21.4 | $37.2 | $17.9 | $63.1 |
| Net income | $6.8 | $27.8 | $1.0 | $45.0 |
| Diluted EPS | $0.07 | $0.27 | $0.01 | $0.43 |
| Operating cash flow | — | $81.0 | $115.3 |
Second-quarter sales fell 12.6%; first-half sales fell 9.6%. PCB sales declined 12.0% in Q2 and 8.9% for the first half. RF&S Components sales fell 38.1% and 35.2%, respectively. Aerospace and defense represented 47% of Q2 sales, up from 30% a year earlier; declines in commercial markets, especially data center computing, medical/industrial/instrumentation, and networking, more than offset growth in aerospace and defense.
Q2 operating expenses included $10.8 million of restructuring charges. First-half operating expenses also included higher intangible amortization and $15.0 million of restructuring charges. First-half results included a $1.3 million gain on sale of a subsidiary; the prior-year comparison included substantial Telephonics acquisition-related expenses. Interest expense was $24.7 million for the first half, up from $22.1 million. The first-half income tax line was a $1.3 million benefit, versus $5.6 million expense in 2022.
Cash, debt, and liquidity
- Cash and cash equivalents were $398.7 million at July 3, 2023, compared with $402.7 million at January 2, 2023; $232.5 million was held by foreign subsidiaries.
- Net cash from operations was $81.0 million. Investing activities used $12.3 million, including $80.5 million for property, plant and equipment and other assets, partly offset by $61.8 million from the Shanghai E-MS property sale and $6.0 million from the Shanghai Backplane Assembly sale. Financing activities used $72.4 million, including debt repayments and refinancing costs.
- Debt, net of discount and issuance costs, was $867.9 million: $495.6 million of 4.00% Senior Notes due 2029, $342.3 million carrying value for the Term Loan due 2030, and $30.0 million under the Asia ABL. Cash exceeded reported net debt by approximately $469 million.
- In May 2023, TTM refinanced its term loan due 2024 with a $350.0 million senior secured term loan due 2030, bearing floating interest at one-month Term SOFR plus 2.75%. The U.S. and Asia ABL maturities were extended to May and June 2028. TTM reported covenant compliance at quarter-end.
- Available borrowing capacity, after letters of credit, was $143.8 million under the U.S. ABL and $106.0 million under the Asia ABL. Management stated that cash on hand, operating cash generation, and borrowing capacity should cover anticipated capital expenditures, debt service, and working capital needs for the next 12 months.
Material changes, outlook, and risks
- PCB capacity utilization weakened: Q2 utilization was 46% in Asia and 38% in North America, compared with 81% and 44%, respectively, a year earlier. Management attributed this mainly to weaker commercial demand in Asia and added plating capacity and product mix in North America.
- TTM plans to close PCB facilities in Hong Kong, Anaheim, and Santa Clara and consolidate production. Hong Kong operations had ceased by quarter-end; the California closures were expected by year-end 2023. Expected restructuring costs are $22–$28 million, about 80% cash; approximately $11.5 million of charges and $2.6 million of accelerated depreciation had been incurred by July 3.
- Management expected 2023 capital expenditures of $130–$150 million. The filing does not provide a specific revenue or earnings forecast.
- Remaining performance obligations on long-term contracts were $376.3 million; approximately 50% was expected to be recognized over the next 12 months. The filing also reported estimated loss-contract costs to complete of $20.0 million.
- Key risks include persistent commercial-market weakness and low utilization, customer and end-market concentration, supply-chain and labor constraints, foreign-exchange and commodity-price exposure, and substantial debt with variable-rate exposure. A $250 million interest-rate swap fixes the rate on part of the floating-rate debt through April 2027; management estimated a 100-basis-point change in variable rates would change annual interest cost by $1.3 million.
- Other notable items: the company expected to collect the remaining 10% of compensation for the expropriated Shanghai E-MS property before December 30, 2023. Outstanding foreign industrial cooperation (offset) obligations were approximately $20.2 million, some extending through 2028; possible penalties are disclosed, but none had been paid. Management said disclosure controls were effective.
Important facts for investors to verify
- Whether commercial demand, order trends, and PCB utilization stabilize, and whether aerospace and defense growth continues to offset weakness elsewhere.
- Progress, costs, production transfers, and expected savings from the three-facility consolidation.
- Capital spending against the $130–$150 million estimate and cash conversion as working capital and investment needs evolve.
- Debt service and refinancing terms, floating-rate exposure, covenant headroom, and the effectiveness of the interest-rate hedge.
- Collection of the remaining Shanghai E-MS property proceeds and realization of long-term contract obligations, including any loss-contract exposure.