TTM Technologies, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. The unaudited quarter ended June 29, 2015 (13 weeks); comparative periods ended June 30, 2014. TTM manufactures printed circuit boards (PCBs) and backplane assemblies. On May 31, 2015, it completed its acquisition of Viasystems, adding 15 manufacturing facilities and electro-mechanical solutions. Accordingly, 2015 comparisons include only one month of Viasystems results and are not fully comparable. Unless stated otherwise, amounts below are in U.S. dollars, millions.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | First two quarters 2015 | First two quarters 2014 |
|---|---|---|---|---|
| Net sales | $445.4 | $297.6 | $774.6 | $589.5 |
| Gross profit / margin | $61.2 / 13.7% | $38.6 / 13.0% | $112.7 / 14.6% | $77.1 / 13.1% |
| Operating income (loss) | $(7.1) / (1.6%) | $3.2 / 1.1% | $1.2 / 0.2% | $7.7 / 1.3% |
| Net loss attributable to TTM shareholders | $(36.6) | $(3.1) | $(33.2) | $(6.9) |
| Basic and diluted loss per share | $(0.41) | $(0.04) | $(0.38) | $(0.08) |
| Operating cash flow | Not separately presented for the quarter | $82.9 | $33.6 |
- Sales rose 49.7% in Q2 and 31.4% for the first two quarters, substantially reflecting the acquisition. TTM also reported stronger cellular-phone demand and higher utilization at advanced-technology plants; Asia Pacific PCB shipments rose 12% and average selling prices rose 17% in Q2. North America sales were nearly flat.
- Operating expenses included $22.6 million of Q2 and $30.9 million of first-half acquisition-related costs; Q2 general and administrative expense also included Viasystems’ post-acquisition costs. Interest expense increased with acquisition financing. The Q2 tax provision was $16.6 million, including discrete tax effects; TTM recorded a full valuation allowance against existing U.S. deferred tax assets.
- First-half investing cash outflow was $210.2 million, including $166.6 million for the acquisition and $46.5 million of capital expenditures and equipment deposits. Financing cash flow was a $3.1 million outflow after substantial new borrowings, refinancing and debt repayments. Cash and cash equivalents ended at $148.9 million, down from $279.0 million at year-end; restricted cash was $22.0 million.
- At June 29, working capital was approximately $311.0 million. Debt included a $950 million term loan, $80 million drawn under the U.S. ABL, and $250 million principal of 2020 convertible notes; balance-sheet debt carrying values are lower due to discounts. The term loan bears floating-rate interest (6.0% weighted average at quarter-end). Available borrowing capacity was $65.4 million under the U.S. ABL and $150 million under the undrawn Asia ABL. TTM reported compliance with debt covenants.
Material changes, outlook and risks
- The Viasystems transaction had $397.8 million of cash and stock consideration, plus approximately $669.0 million of assumed and refinanced debt. Preliminary purchase accounting included $297.9 million of goodwill and $146.5 million of acquired identifiable intangibles; fair-value allocations remained subject to change. Viasystems contributed $93.2 million in post-acquisition sales and a $6.1 million net loss for the period reported.
- Management expected approximately $145 million of 2015 cash capital expenditures, including about $80 million for Asia Pacific; new capital expenditure purchases were expected to be about $85 million. Management said cash on hand, operating cash flow and available financing should cover anticipated capital expenditure, debt-service and working-capital needs for the next 12 months. No revenue or earnings guidance is provided in the supplied filing text.
- Management identified $55 million of annualized Viasystems cost savings, expected to be implemented within 12 months of closing, but cautioned that the savings and timing are uncertain and could be offset by other costs. Integration, retention of customers and employees, and realization of synergies remain important risks.
- Key exposures include substantial debt and floating interest rates, customer and end-market concentration, cyclical demand, pricing pressure, foreign-exchange movements, and manufacturing and environmental compliance risks. One customer represented 22% of Q2 sales and 24% of first-half sales; the ten largest customers represented 53% and 55%, respectively.
- TTM said impairment was reasonably possible by fiscal year-end given market-capitalization volatility and planned its annual impairment test for Q4. Some Chinese plants were not yet fully compliant with updated wastewater rules, although the company said it had compliance plans and did not anticipate immediate fines or closure. Viasystems acquisition litigation had a proposed settlement, subject to court approval, with no class payment and attorneys’ fees capped at $550,000.
- Disclosure controls were reported effective, but integration of Viasystems’ separate systems and processes represented a material change in internal controls; management was reviewing and evaluating those controls.
Important facts for investors to verify
- How much of sales growth and operating performance is recurring or attributable to Viasystems, and whether the stated $55 million annualized savings are achieved on schedule.
- Whether the preliminary acquisition valuation, goodwill and intangible-asset estimates change materially when purchase accounting is finalized, and the outcome of the Q4 impairment test.
- Debt repayment capacity, covenant headroom, floating-rate exposure and actual availability of asset-based borrowing facilities.
- Whether the largest customer’s contribution and cellular-phone demand persist, and how changes in networking/communications demand affect utilization and margins.
- Progress on Viasystems integration and internal controls, court approval of the acquisition-litigation settlement, and compliance investment at Chinese facilities.