TTM Technologies, Inc. — Q1 2016 Form 10-Q
Reporting period: Quarter ended March 28, 2016. Financial statements are unaudited; dollar amounts below are in millions except per-share data.
Business context and reporting period
TTM manufactures printed circuit boards (PCBs) and electro-mechanical solutions (E-M Solutions) for markets including networking and communications, automotive, aerospace and defense, computing, and medical and industrial. The May 2015 acquisition of Viasystems materially expanded the business. As a result, Q1 2016 includes Viasystems, while the comparable Q1 2015 period does not; reported growth is therefore not like-for-like. The company reports PCB and E-M Solutions segments.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $583.3 | $329.2 |
| Gross profit / margin | $83.6 / 14.3% | $51.6 / 15.7% |
| Operating income / margin | $18.9 / 3.2% | $8.3 / 2.5% |
| Interest expense | $21.8 | $5.8 |
| Net income (loss) attributable to TTM stockholders | $(7.3); $(0.07) per diluted share | $3.4; $0.04 per diluted share |
| Cash from operating activities | $17.9 | $67.4 |
| Capital spending | $20.1 | $22.8 |
Sales rose 77.2%, principally because of Viasystems. PCB sales excluding intersegment activity increased 70.0%; Viasystems contributed $241.1 of PCB sales and $37.2 of E-M Solutions sales in Q1 2016. Management attributed lower gross margins to lower utilization at advanced-technology PCB plants and the acquired E-M Solutions business’s lower margins. Higher interest expense from acquisition-related borrowing contributed to the quarterly net loss.
At March 28, 2016, cash and cash equivalents were $183.7, down from $259.1 at December 28, 2015; $142.0 was held by foreign subsidiaries and expected to be used in local operations. Current assets were $908.2 and current liabilities $598.4, with reported net working capital of approximately $309.8. Cash used in financing was $76.5, including scheduled debt payments and an additional prepayment; cash declined by $75.4 during the quarter.
Gross debt principal was approximately $1,203.2: $871.1 term loan, $80.0 U.S. asset-based revolver, $250.0 convertible notes, and $2.0 capital lease. The reported debt carrying value reflects discounts and issuance costs. The company had $63.0 of U.S. ABL and $141.1 of Asia ABL availability, taking outstanding letters of credit into account; the Asia ABL was undrawn. TTM reported compliance with its debt covenants at quarter-end.
Material changes, outlook, and risks
- TTM reported $1.9 of restructuring charges and $3.3 of impairment charges in the quarter. Since announcing facility consolidations in September 2015, it had incurred about $9.2 of restructuring charges and estimated total charges of $10–$15. The plan includes closing facilities in Cleveland, Milpitas, and Juarez and laying off approximately 480 employees; remaining accrued separation costs were expected to be substantially paid by June 2016.
- Management projected 2016 capital expenditures of $110–$120, for advanced-technology capacity, equipment replacement, and environmental compliance. It said cash on hand, operating cash generation, and debt availability should meet anticipated capital, debt-service, and working-capital needs for the next 12 months. No earnings or revenue guidance is provided in the filing.
- Management cited seasonal volatility and the timing of receivable collections as reasons for lower operating cash flow year over year. It also noted Chinese New Year seasonality and historically higher sales in the third and fourth quarters.
- Key risks include substantial debt and variable-rate exposure (a 100-basis-point rate change was estimated to change annual interest cost by $6.3), customer and electronics-market demand concentration, integration and realization of Viasystems synergies, pricing and capacity utilization, and foreign-exchange exposure. The filing notes that one customer represented approximately 10% of Q1 2016 sales and that the five largest OEM customers represented 29%.
- Some Chinese facilities were not yet fully compliant with updated wastewater regulations; TTM said it had plans in progress and did not anticipate immediate fines or plant closures. Known legal loss accruals were not material, though an adverse outcome in a legal matter could materially affect a particular period. Unrecognized uncertain tax benefits of $15.4 were excluded from the contractual-obligations table.
Important facts for investors to verify
- How much reported sales growth reflects Viasystems, and how underlying demand, shipment mix, and selling prices are trending.
- Whether gross margins and operating cash flow improve as integration, plant utilization, and restructuring progress.
- Progress against the $110–$120 capital expenditure plan, the $10–$15 restructuring estimate, and the stated Viasystems cost-savings expectations.
- Debt repayment capacity, revolver availability, covenant headroom, and sensitivity to interest-rate changes; also consider that much of the reported cash is held abroad.
- Whether Chinese environmental compliance plans, acquisition purchase-price accounting, and tax and legal contingencies result in additional costs or adjustments.