TTM Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and first three quarters ended September 30, 2013. The filing is unaudited. Dollar amounts below are in millions unless noted; year-to-date comparisons are with the three quarters ended September 24, 2012, which covered five fewer days.
Business context
TTM manufactures printed circuit boards (PCBs) and backplane assemblies for networking and communications, consumer electronics, aerospace and defense, computing, industrial and medical markets. It reports Asia Pacific and North America operating segments. In June 2013, TTM sold its controlling interest in Dongguan Shengyi Electronics (SYE) and bought the remaining noncontrolling interest in Dongguan Meadville Circuits (DMC); it therefore reported no noncontrolling interest at quarter-end.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | First three quarters 2013 | First three quarters 2012 |
|---|---|---|---|---|
| Net sales | $338.7 | $339.0 | $1,002.1 | $966.9 |
| Gross profit / margin | $48.4 / 14.3% | $52.3 / 15.4% | $147.6 / 14.7% | $163.5 / 16.9% |
| Operating income (loss) | $(1.2) | $(202.7) | $39.8 | $(162.7) |
| Net income (loss) attributable to TTM shareholders | $(7.7) | $(208.3) | $10.6 | $(188.3) |
| Diluted earnings (loss) per share | $(0.09) | $(2.54) | $0.13 | $(2.30) |
| Cash from operating activities | Not separately presented for the quarter | $59.4 | $115.8 |
- Q3 operating results included a $10.8 impairment charge on long-lived assets and $3.4 in Suzhou closure separation costs. A specific product warranty claim reduced Q3 sales and gross profit by $6.0; the claim totaled $8.0 across Q2 and Q3.
- Year-to-date operating results included a $17.9 gain on the SYE sale. The comparable 2012 period included $200.3 of goodwill and intangible impairment charges and a $5.5 debt-extinguishment loss.
- Cash and cash equivalents were $270.5 at September 30, down from $285.4 at December 31, 2012. Net working capital was approximately $266.9, versus $395.7 at year-end; the filing attributes much of the decrease to debt becoming current and the SYE sale.
- Year-to-date investing cash use was $12.9, including $80.2 of capital spending and $67.1 of net proceeds from asset sales. Financing cash use was $59.1, including a $30.0 revolving-loan repayment and $29.4 to acquire the DMC noncontrolling interest.
- Term debt was $370.0, including $96.2 due in 2014; convertible notes had $175.0 principal and a $162.7 net carrying value. TTM reported approximately $545.0 of total indebtedness in its risk disclosures. The $90.0 revolving facility was undrawn and available; a separate approximately $47.4 PRC facility was also undrawn but was due to expire in December 2013.
- Current assets were $719.0 and current liabilities $452.1. The company reported compliance with its credit agreement covenants. It estimated that a 1% change in variable interest rates would change annual interest cost by $3.7.
Changes versus comparable periods
- Q3 sales were nearly flat year over year, but gross margin fell 1.1 percentage points. Asia Pacific sales declined, partly due to the warranty claim and lower demand outside cellular phones; North America sales rose 7.0%, supported by networking and communications demand.
- For the first three quarters, sales rose 3.6%, while gross margin declined 2.2 percentage points. TTM cited the warranty claim, higher equipment-related expenses and labor costs. PCB shipments fell in both segments, partly offset by higher average selling prices and a richer advanced-technology mix.
- The year-to-date return to shareholder profit compares with a large prior-year loss, primarily because the prior period included the $200.3 impairment charge. The 2013 period also included the SYE sale gain; these items make headline earnings comparisons less indicative of underlying operating trends.
- Apple represented approximately 23% of Q3 sales and 17% of year-to-date sales, up from 14% and 12%, respectively, in the comparable 2012 periods. The ten largest OEM customers accounted for 56% of Q3 sales and 52% year to date, versus 47% and 46% previously.
Outlook, risks and unusual items
- Management expected 2013 capital expenditures of approximately $117 million, including about $95 million in Asia Pacific. It said cash, operating cash generation and available borrowing capacity should cover anticipated needs for the next 12 months.
- TTM planned to close its Suzhou, China facility and eliminate 774 positions. Production had ceased by September 30; full closure was expected in Q1 or Q2 2014. Management expected minimal additional separation or exit costs in Q4 2013, with remaining employees and accrued costs addressed by the end of Q2 2014.
- Management cited continued Chinese labor-cost increases, seasonal and cyclical electronics demand, limited order visibility, customer concentration, capacity utilization, product mix and competition as factors that may pressure results. A specific state tax-law change prompted a roughly $3.3 valuation allowance; the company also released a $1.5 valuation allowance related to a foreign subsidiary.
- Other risks include substantial debt and covenant requirements, floating-rate exposure, foreign exchange and China-related operating risks, customer credit and order cancellations, and potential asset impairments. TTM said known legal and environmental matters were not expected to be material, while acknowledging that an adverse legal outcome could materially affect a particular period.
- Disclosure controls were assessed as effective, and the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether margins and operating performance improve after excluding the warranty claim, Suzhou restructuring and asset impairment, and the SYE disposal gain.
- Whether the Suzhou closure proceeds on schedule and whether additional closure, impairment or transition costs arise.
- How customer concentration—particularly Apple’s share of sales—and end-market demand evolve.
- Whether operating cash flow recovers from the year-to-date decline and supports planned capital spending and debt service.
- Near-term debt repayments, covenant headroom, and availability of the PRC borrowing facility after its stated December 2013 expiry.