TTM Technologies, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and first three quarters ended September 26, 2016. Financial statements are unaudited; dollar amounts below are in millions except per-share data. TTM manufactures printed circuit boards (PCBs) and electro-mechanical solutions (E-M Solutions). Comparisons are affected by the May 2015 Viasystems acquisition, whose results were included only from its acquisition date in the prior-year periods.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | First 3 quarters 2016 | First 3 quarters 2015 |
|---|---|---|---|---|
| Net sales | $641.7 | $652.0 | $1,826.8 | $1,426.6 |
| Gross profit / margin | $109.6 / 17.1% | $89.1 / 13.7% | $290.8 / 15.9% | $201.9 / 14.2% |
| Operating income | $50.2 | $23.6 | $103.8 | $24.8 |
| Net income (loss) attributable to TTM shareholders | $25.6 | $(2.2) | $36.9 | $(35.4) |
| EPS, basic / diluted | $0.26 / $0.23 | $(0.02) / $(0.02) | $0.37 / $0.36 | $(0.39) / $(0.39) |
| Cash provided by operating activities | Not presented by quarter | $200.7 | $97.6 |
- Q3 sales fell 1.6% year over year; first-three-quarter sales rose 28.1%, substantially reflecting Viasystems. For the first three quarters, Viasystems contributed $410.7 million of the increase in PCB sales. Q3 PCB shipments rose 4.8%, while average selling prices fell 4.6%; management attributed the price decline to product mix.
- Q3 operating margin increased to 7.8% from 3.6%; first-three-quarter operating margin was 5.7% versus 1.7%. Management cited acquired-facility operating improvements and integration synergies. E-M Solutions margins also improved, aided by Juarez closure savings and higher production at acquired facilities.
- First-three-quarter interest expense was $60.7 million, up from $39.5 million, principally reflecting acquisition-related borrowings. The period included a $14.0 million income-tax provision, versus $24.0 million in the prior-year period; discrete tax benefits contributed to the decrease.
- Cash and cash equivalents were $291.8 million at September 26, including $174.2 million held by foreign subsidiaries. Working capital was $309.1 million, compared with $277.5 million at December 28, 2015. Operating cash flow was $200.7 million; investing cash outflow was $57.5 million and financing cash outflow was $106.4 million. Capital expenditures and equipment deposits used $62.5 million.
- Debt carrying value was approximately $1.082 billion, including $146.5 million classified as short-term; gross debt before discounts and issuance costs was $1.173 billion. TTM repaid $106.5 million of principal during the first three quarters. It reported covenant compliance at quarter-end. Available borrowing capacity was $63.0 million under the U.S. ABL and $142.9 million under the Asia ABL, including outstanding letters of credit.
Material changes, outlook, and notable items
- After quarter-end, TTM refinanced its term loan: it issued a $775 million loan at LIBOR plus 4.25%, 75 basis points below the prior margin, repaid the prior $841.1 million balance, and reduced term-loan principal by $66.1 million. Quarterly principal payments on the new loan begin in April 2020; maturity remains May 2021. The U.S. ABL was amended to increase facility availability to $200 million and reduce borrowing margins by 0.25 percentage point.
- Management expected fiscal 2016 capital expenditures of $105–$115 million, for capacity, advanced-technology production, environmental compliance, equipment replacement, and technology upgrades. Management believed operating cash, cash on hand, and borrowing sources would meet anticipated capital, debt-service, and working-capital needs for the next 12 months. Fiscal 2016 is a 53-week year, with the additional week in Q4; the filing gives no earnings or revenue guidance.
- Restructuring charges were $8.0 million for the first three quarters of 2016; cumulative charges since the 2015 consolidation announcement were approximately $15.2 million. Management estimated total charges of approximately $20 million for closures and global realignment. A further $3.3 million of long-lived-asset impairment was recorded in the period. Remaining restructuring costs were expected to be substantially paid by December 2016.
- TTM reported a 17% customer share of Q3 sales for its largest customer; its five largest OEM customers accounted for approximately 35% of Q3 sales. Management cited lower Q3 demand in networking/communications and computing/storage/peripherals, partly offset by stronger aerospace/defense and cellular-phone demand.
- Risk and contingency disclosures include substantial debt and floating-rate exposure (a 100-basis-point rate increase was estimated to raise annual interest cost by $8 million), foreign-currency exposure with no broad hedging program, customer and end-market concentration, acquisition-integration and utilization risks, and potential product-quality, supply, labor, and regulatory issues. Some Chinese plants were not yet fully compliant with updated wastewater rules; TTM said it was implementing compliance plans and did not anticipate an immediate risk of fines or closure. Management noted that market-capitalization volatility made a fiscal-year-end goodwill impairment charge reasonably possible; the annual impairment test was planned for Q4. Known legal-loss accruals were not material, though an adverse outcome could be material in a particular period.
Most important facts for investors to verify
- How much of reported year-to-date growth and margin improvement reflects Viasystems, integration synergies, and sustainable underlying demand rather than acquisition-related comparability.
- Whether Q3 price/mix pressure and softness in networking and computing markets persist, and how shipment volumes and customer concentration evolve.
- Execution of the post-quarter refinancing, including realized interest savings, debt repayment, liquidity availability, and continued covenant compliance.
- Progress toward the $20 million restructuring estimate, the $105–$115 million full-year capital-spending range, and the planned Chinese environmental-compliance investments.
- Outcome of the Q4 goodwill impairment test, given management’s stated risk; also monitor foreign-exchange movements, tax benefits and exposures, and any material developments in legal or other contingencies.