TTM Technologies, Inc. — Q1 2014 Form 10-Q
Quarter ended March 31, 2014; unaudited. Comparisons are with the quarter ended April 1, 2013, unless otherwise noted. Dollar amounts below are in millions except per-share data.
Business context
TTM manufactures printed circuit boards and backplane assemblies for networking and communications, computing, cellular phones, aerospace and defense, and other markets. It reports Asia Pacific and North America segments. The filing notes that first-quarter sales can be seasonally lower, including because of Chinese New Year; consumer electronics demand typically supports higher sales in the third and fourth quarters.
Financial performance and liquidity
| Metric | Q1 2014 | Prior-year quarter |
|---|---|---|
| Net sales | $291.9 | $325.4 |
| Gross profit / margin | $38.5 / 13.2% | $50.7 / 15.6% |
| Operating income / margin | $4.5 / 1.5% | $12.7 / 3.9% |
| Net income (loss) attributable to TTM | $(3.8) | $5.2 |
| Diluted EPS | $(0.05) | $0.06 |
| Operating cash flow | $45.4 | $10.4 |
| Capital expenditures and equipment deposits | $28.9 | $11.7 |
- Sales fell 10.3%. Asia Pacific sales decreased 18.1%, reflecting the absence of sales from a subsidiary following the 2013 sale of a controlling interest and weaker cellular-phone demand. PCB shipments in that segment fell 28%, partly offset by a 13% increase in average selling price due to product mix. North America sales rose 2.4%, primarily on stronger networking/communications backplane demand.
- Gross margin declined to 13.2%. Management cited lower utilization and higher equipment-related costs in Asia Pacific, and lower-margin assembly mix and weaker cost absorption at certain North American PCB plants.
- Other expense was $10.1 million, compared with $5.3 million. It included a roughly $3.6 million unrealized foreign-exchange loss associated with RMB depreciation and a $0.5 million loss on extinguishing debt. Net loss also reflected lower operating income.
- Operating cash flow improved year over year, aided in part by a $71.3 million cash inflow from accounts and notes receivable changes. Cash decreased $12.6 million during the quarter to $318.0 million. Cash flow less reported capital expenditures and equipment deposits was approximately $16.5 million.
- At March 31, cash was $318.0 million, current assets $719.4 million, current liabilities $392.5 million, and working capital approximately $326.9 million. The resulting current ratio was about 1.8.
- Debt included $321.9 million of term-loan principal and $282.4 million of convertible-note principal, or approximately $604.3 million total principal indebtedness. Balance-sheet carrying amounts were lower because of convertible-note discounts. The term loan bears floating interest; $96.2 million was classified as current. No credit-agreement revolver was drawn, with $90.0 million available.
Material changes and notable transactions
- TTM issued an additional $30.0 million of 1.75% convertible notes due 2020 and entered into related call-spread transactions. It also repurchased $6.5 million principal amount of 3.25% notes due 2015 at approximately 103.4% of principal.
- Term-loan borrowings declined from $370.0 million at December 30, 2013 to $321.9 million at March 31, 2014, including a $48.1 million repayment during the quarter.
- Foreign-currency translation reduced other comprehensive income by $12.1 million and contributed to a decline in accumulated other comprehensive income to $33.7 million.
- TTM was winding down its Suzhou, China facility after ceasing production. It expected to separate most of the remaining employees and pay remaining accrued restructuring costs by the end of Q2 2014; $0.4 million remained accrued at quarter-end.
Outlook, risks, and contingencies
- Management forecast 2014 capital expenditures of approximately $100 million, including about $80 million for Asia Pacific, for capacity, advanced technology, equipment replacement, and environmental compliance. Management stated that cash, operating cash generation, and borrowing availability were expected to cover anticipated needs for the next 12 months.
- No revenue or earnings guidance was provided in the supplied filing text. Management warned that labor-cost increases, customer pricing pressure, seasonality, and lower first- and second-quarter operating leverage could further pressure Asia Pacific margins.
- Currency is a significant exposure: TTM reported a $3.6 million unrealized loss from RMB depreciation and stated it does not hedge RMB- and HKD-denominated revenue and expenses or loans due from foreign subsidiaries. A 100-basis-point change in variable interest rates was estimated to change annual interest cost by $3.2 million.
- Credit-agreement covenants include leverage, net-worth, current-ratio, and interest-coverage requirements. TTM reported compliance at March 31, 2014. Substantial debt, debt maturities, customer concentration, capacity utilization, demand cyclicality, and rising labor costs are material risks.
- Chinese facilities were not yet fully compliant with updated environmental regulations. TTM reported no anticipated immediate risk of fines or temporary closures and planned approximately $4.7 million of 2014 environmental capital spending.
- Legal proceedings were described as ordinary-course matters; accrued probable and estimable losses were not material. Management cautioned that an adverse outcome could materially affect a particular period. Disclosure controls were assessed as effective, with no material changes to internal control over financial reporting reported.
Important facts for investors to verify
- Whether Asia Pacific demand and utilization recover, and whether the Suzhou shutdown is completed as expected.
- Whether planned capital spending, advanced-technology capacity, and environmental investment deliver expected returns without further margin pressure.
- How RMB movements, customer concentration, and dependence on electronics end markets affect sales, margins, and cash conversion.
- Debt repayment and refinancing capacity, covenant headroom, and the effect of variable interest rates and convertible securities.
- Whether management’s 12-month liquidity assessment remains valid as capital expenditure, working-capital needs, and operating performance evolve.