TTM Technologies, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are those disclosed in the 10-K. Amounts are U.S. dollars.
Business context
TTM manufactures printed circuit boards (PCBs), RF and microwave components, and electro-mechanical solutions for aerospace and defense, automotive, communications, computing, and other markets. It reported PCB and E-M Solutions segments and approximately 27,000 employees. On April 18, 2018, TTM acquired Anaren for total consideration of $787.9 million, expanding its RF and microwave design and manufacturing capabilities.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $2,847.3 million | $2,658.6 million |
| Gross profit / margin | $457.0 million / 16.1% | $429.6 million / 16.2% |
| Operating income / margin | $159.1 million / 5.6% | $212.8 million / 8.0% |
| Income before taxes | $89.8 million | $140.0 million |
| Net income attributable to TTM | $173.6 million | $124.2 million |
| Diluted EPS | $1.38 | $1.04 |
| Adjusted EBITDA (non-GAAP) | $438.8 million | $388.6 million |
| Cash from operating activities | $273.1 million | $332.8 million |
- Sales grew 7.1%. PCB sales increased 7.1% to $2,621.3 million, including $191.0 million from Anaren; E-M Solutions sales rose 7.5% to $225.9 million.
- Gross margin edged down 0.1 percentage point. Operating income declined 25%, reflecting higher operating expenses, including acquisition-related costs and substantially higher intangible amortization.
- FY2018 net income included an $83.8 million income tax benefit, chiefly reflecting valuation-allowance releases and other tax items. Management disclosed releases of approximately $43.6 million in Q4 and $76.7 million in Q2, the latter associated with deferred tax liabilities acquired with Anaren. Consequently, reported net income rose despite lower pretax income.
- Operating cash flow fell by $59.6 million, which management primarily attributed to increased working capital. Cash and equivalents were $256.4 million at year-end, including $213.9 million held by foreign subsidiaries. Working capital was $533.7 million.
- Year-end debt principal was approximately $1.531 billion; balance-sheet debt, net of discount and issuance costs, was $1.492 billion. Cash less balance-sheet debt implies net debt of about $1.236 billion. TTM made $110 million of optional term-loan repayments during 2018 and a further $30 million after year-end.
- Available borrowing capacity, after letters of credit, was $149.9 million under the U.S. ABL and $107.9 million under the Asia ABL. TTM reported compliance with debt covenants. A $400 million interest-rate swap fixed a portion of variable-rate exposure; management estimated a 100-basis-point rate change would affect annual interest cost by $5.1 million based on year-end borrowings.
Material changes and fourth-quarter figures
- End-market sales mix shifted: aerospace and defense rose to 22% of sales from 16%; cellular phone fell to 13% from 18%; networking/communications fell to 17% from 18%. Apple represented 15% of FY2018 sales; the five largest OEM customers represented 32%.
- PCB average selling price increased 8.1%, mainly from product mix, while PCB shipment volume declined 6.9%. TTM cited stronger aerospace and defense, computing, and medical/industrial demand, partly offset by weaker cellular phone, networking, and automotive demand.
- FY2018 adopted ASC 606, changing recognition for certain PCB and assembly contracts from shipment-based recognition to recognition over time. The company reported this increased FY2018 sales by $17.9 million and net income by $7.9 million versus the prior method; prior-year comparative statements were not restated.
- Q4 FY2018 sales were $711.0 million versus $739.3 million in Q4 FY2017; gross profit was $122.6 million versus $131.9 million. Pretax income was $22.6 million versus $53.6 million, while net income was $52.5 million versus $49.3 million, reflecting the unusual tax effects described above.
- Backlog was $458.4 million at year-end, down from $481.9 million a year earlier; substantially all was expected to convert to sales in Q1 2019.
Outlook, commentary, and risks
- Management expected 2019 capital expenditures of $130 million to $150 million, including investment in HDI, mSAP, and other advanced manufacturing capacity. It stated that operating cash, cash on hand, and borrowing availability should cover anticipated needs for the next 12 months. The filing provides no specific company revenue or earnings guidance.
- Management emphasized operational efficiency, integration of Anaren, growth in automotive and aerospace/defense, and extending RF design capabilities to customers. It cautioned that expected acquisition synergies may take longer than anticipated or may not be fully realized.
- Key exposures include substantial debt and refinancing needs, variable interest rates and the LIBOR transition, cyclical and seasonal demand, customer concentration, pricing pressure, and U.S.-China tariffs. The $250 million convertible notes and both ABL facilities mature in 2020.
- TTM stated that its China plants were not yet fully compliant with newly adopted environmental regulations and that compliance plans and investment were underway. It also cited China labor costs and turnover, foreign-exchange exposure, supply-chain constraints, and risks of product defects, recalls, or production disruption.
- Known legal matters were described as ordinary-course matters with accrued probable and estimable losses not material to the financial statements; adverse outcomes remain inherently difficult to predict. The auditor issued an unqualified opinion on the financial statements and internal controls; Anaren was excluded from the control assessment.
Investor verification priorities
- Separate recurring operating performance from the substantial tax benefit and confirm the sustainability and cash-tax implications of deferred-tax assets and valuation-allowance releases.
- Track Anaren’s post-acquisition revenue, profitability, integration costs, and realization of expected synergies.
- Reconcile earnings to operating cash flow and monitor working capital, capital spending, and the level of cash held outside the United States.
- Assess leverage, interest-rate exposure, covenant headroom, and the refinancing or repayment plan for 2020 maturities.
- Monitor major-customer demand and concentration, particularly Apple, as well as backlog conversion and trends in cellular, networking, automotive, and defense markets.
- Verify progress and costs for China environmental compliance, and assess the effects of tariffs and other trade restrictions.