Business context and reporting period
TTM Technologies, Inc. filed this unaudited Form 10-Q for the quarter ended June 27, 2011. The company manufactures printed circuit boards and backplane assemblies for networking and communications, computing, aerospace and defense, and other markets. It reports North America and Asia Pacific segments. Amounts below are in millions of dollars unless stated otherwise.
Year-over-year comparisons are affected by the April 2010 acquisition of the PCB Subsidiaries: the 2010 second-quarter comparison included 81 days of Asia Pacific operations versus 91 days in 2011; the first-half comparison included 81 versus 178 days.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | First two quarters 2011 | First two quarters 2010 |
|---|---|---|---|---|
| Net sales | $366.1 | $310.2 | $708.9 | $448.5 |
| Gross profit / margin | $77.3 / 21.1% | $57.1 / 18.4% | $159.3 / 22.5% | $84.1 / 18.7% |
| Operating income (loss) | $(8.5) | $17.4 | $37.1 | $27.2 |
| Net income (loss) attributable to TTM shareholders | $(20.9) | $4.9 | $6.2 | $9.4 |
| Diluted earnings (loss) per share | $(0.26) | $0.06 | $0.08 | $0.16 |
Q2 sales rose 18.0%; first-half sales rose 58.0%, with the acquisition accounting for much of the first-half increase. Q2 operating results included a $48.1 impairment charge in Asia Pacific. Without that charge, reported operating income would have been positive, but the filing does not present this as an adjusted measure. The first-half effective tax rate was 69.1%, elevated in part because the impairment produced no tax benefit and certain foreign losses were not recognized for tax purposes.
Segment results: Q2 North America sales were $142.2 and operating segment income was $13.8; Asia Pacific sales were $226.2 and operating segment loss was $18.0. First-half North America sales and segment income were $284.5 and $30.6; Asia Pacific sales and segment income were $428.7 and $15.1.
Cash provided by operations was $104.9 in the first half, compared with $19.8 a year earlier. Investing activities used $70.6, including $71.0 of property, plant, equipment, and equipment-deposit purchases; financing activities used $13.6. Cash increased $19.8 to $235.9.
At June 27, 2011, current assets were $715.9, current liabilities $487.2, and reported working capital $228.7. Balance-sheet debt carrying amounts comprised $123.2 of short-term debt, $255.8 of long-term debt, and $148.2 of convertible notes. Cash was $235.9. The credit agreement’s $350.0 term loan was outstanding, along with $20.0 of revolving borrowings; $67.5 of revolving capacity and $65.0 of factoring capacity remained available. The company reported compliance with its debt covenants.
Material changes and notable items
- Asia Pacific’s Q2 segment loss reflected weaker performance and reduced expected demand at a manufacturing plant. The $48.1 impairment comprised $39.9 for plant equipment and $8.3 for equipment considered obsolete or expected to become obsolete.
- Gross margin improved year over year, but the filing attributes part of the comparison to a $6.7 acquired-inventory fair-value markup included in Q2 2010 cost of goods sold. It also cites higher prices and improved Asia Pacific margins; North America benefited from the 2010 Hayward facility closure.
- Other income included a $1.7 gain from settling a related-party financing obligation for approximately $20.5 in June 2011. The company also exchanged a 10% interest in Oulu for Aspocomp shares; the investment was recorded as available-for-sale securities at a June 27 fair value of $4.4.
- One customer represented approximately 10% of Q2 sales and 12% of first-half sales. The ten largest customers accounted for 47% of sales in both periods; the ten largest receivables represented 48% of accounts receivable.
Outlook, liquidity, risks, and contingencies
Management expected 2011 capital expenditures of approximately $136.0, including about $115.0 for Asia Pacific, for capacity, technology, and equipment replacement. Management stated that operating cash flow, cash on hand, and available credit were expected to meet anticipated debt service, capital expenditure, acquisition, and working-capital needs for the next 12 months and beyond. No specific revenue or earnings guidance was provided. Management cautioned that significant ongoing capital spending or acquisitions could require refinancing, and that future financing might not be available on acceptable terms.
The term loan and other credit facilities mature in November 2013, with scheduled term-loan repayments increasing as maturity approaches. The company estimated that a 1% change in variable interest rates would change annual interest cost by approximately $2.0. It reported that about 64% of total debt was fixed-rate, including interest-rate swaps. Foreign-exchange and interest-rate hedges may not fully offset adverse movements.
Other risks include customer concentration and credit exposure, seasonal demand (typically stronger Q3 and weaker Q1), foreign currency movements, inventory and asset valuation judgments, and possible further impairments if forecasts change. Environmental remediation liabilities were accrued at $0.7; the company did not expect these matters to materially affect its financial position, results, or cash flows. It also disclosed ordinary-course legal matters whose outcomes are difficult to predict; accrued probable and estimable legal losses were not material.
Important facts for investors to verify
- Whether the Asia Pacific plant’s operating performance and demand recover, and whether additional impairment charges arise.
- How much of reported growth reflects the acquisition and period-comparison effects versus underlying demand, pricing, and product mix.
- Execution and returns on the $136.0 capital expenditure plan, particularly the Asia Pacific portion.
- Cash generation, working-capital requirements, debt repayment schedule, covenant headroom, and refinancing needs ahead of the 2013 credit maturity.
- Customer concentration, related-party supply arrangements, tax-rate assumptions, and the status of environmental and legal contingencies.