Business context and reporting period
TTM Technologies, Inc. designs and manufactures printed circuit boards (PCBs) and backplane assemblies, serving networking and communications, cellular phone, computing, aerospace and defense, and industrial/medical markets. The 10-K covers the 52-week fiscal year ended December 29, 2014; fiscal 2013 ended December 30, 2013. The filing also reports quarterly results, including fourth-quarter 2014.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $1,325.7 million | $1,368.2 million |
| Gross profit / margin | $194.7 million / 14.7% | $217.8 million / 15.9% |
| Operating income / margin | $46.5 million / 3.5% | $69.1 million / 5.0% |
| Net income attributable to TTM stockholders | $14.7 million; $0.18 diluted EPS | $21.9 million; $0.26 diluted EPS |
| Adjusted EBITDA (non-GAAP) | $166.0 million | $181.3 million |
| Cash provided by operating activities | $129.8 million | $71.4 million |
| Cash and cash equivalents at year-end | $279.0 million | $330.6 million |
| Working capital | $302.1 million | $347.0 million |
- Fourth-quarter 2014 sales were $390.9 million, gross profit $68.5 million, net income attributable to stockholders $13.9 million, and diluted EPS $0.17. Fourth-quarter 2013 comparables were $366.1 million, $70.2 million, $11.3 million, and $0.14, respectively.
- Investing activities used $108.6 million in 2014, including $109.6 million for property, plant, equipment and equipment deposits. Financing activities used $77.1 million. Cash declined by $51.5 million during the year.
- At year-end, long-term borrowings were $273.8 million and convertible senior notes had $282.4 million principal outstanding ($228.9 million net carrying value). The term loan included $96.2 million due through September 2015; the 2015 convertible notes had $32.4 million principal outstanding. TTM had $90.0 million available under its revolving facility and was compliant with credit covenants.
- TTM planned approximately $100 million of 2015 capital expenditures, including about $80 million in Asia Pacific. Management stated existing cash, operating cash flow, and available borrowing capacity were expected to cover anticipated needs for the next 12 months, before considering the proposed merger financing.
Material changes versus the prior comparable period
- Annual sales fell 3.1%; gross profit declined 10.6%, operating income 32.7%, and adjusted EBITDA 8.4%. Net income attributable to stockholders decreased from $21.9 million to $14.7 million.
- Asia Pacific sales excluding inter-segment activity declined 4.5%, reflecting the absence of sales from a subsidiary interest sold in 2013 and weaker first-half demand in computing and cellular phones. PCB shipments fell 12%, partly offset by a 9% increase in average selling price from product mix. North America sales decreased 0.8%.
- Gross margin contracted in both segments. Asia Pacific was affected by underutilized advanced-technology capacity and a five-day power outage; North America was affected by lower-margin assembly mix and weaker cost absorption.
- Operating cash flow rose to $129.8 million from $71.4 million, while year-end cash declined. Working capital decreased, partly due to debt payments and reclassification of 2015 convertible notes as current.
- Five largest OEM customers accounted for 44% of sales, up from 41%; Apple alone represented 21%. Networking/communications was 33% of sales, cellular phones 23%, computing/storage/peripherals 13%, and aerospace and defense 16%.
Outlook, commentary, risks and unusual items
- TTM did not provide specific consolidated revenue or earnings guidance. It expected significant 2015 capital investment to expand HDI and other advanced manufacturing capacity and address environmental requirements. Management cited seasonality, rising China labor costs, pricing pressure, and the need for productivity and yield improvements as margin considerations.
- The proposed Viasystems acquisition was pending at the filing date. Consideration was $11.33 cash plus 0.706 TTM shares per Viasystems share; the transaction’s estimated total purchase price, including assumed debt, was approximately $992.5 million. A $1.115 billion financing commitment had been obtained, with final financing arrangements still being completed. Closing remained subject to approvals, including U.S. regulatory review.
- TTM identified at least $55 million in annualized merger cost savings expected within 12 months after closing, subject to execution and assumptions. It expected approximately $26 million of cash expenses in 2015 to achieve savings, including approximately $9.9 million in change-in-control payments. The filing also estimated $27.8 million of merger-related costs, of which $6.0 million had been incurred in 2014; refinancing-related premiums, accrued interest and other costs, and debt issuance costs were separately estimated at approximately $76.4 million and $33.3 million, respectively.
- Two putative class actions challenged the merger. The parties entered a memorandum of understanding in January 2015 for a proposed settlement involving attorneys’ fees and releases of claims; the settlement agreement and final court judgment were not yet complete. TTM could owe a $40 million reverse breakup fee under specified termination conditions.
- Other notable items included $6.0 million of 2014 acquisition-related expense, $1.8 million of long-lived asset impairment, and a $3.6 million first-quarter foreign-currency and derivative loss associated primarily with RMB depreciation. The Suzhou facility, shut down in 2013, was sold after year-end for approximately $21.3 million.
- Risks emphasized include customer concentration and order volatility, fixed-cost exposure and capacity utilization, competition and pricing, labor costs and disruptions in China, foreign-exchange and utility interruptions, product quality and warranty exposure, and acquisition integration, financing, approval and synergy risks. Chinese facilities were not yet fully compliant with updated wastewater regulations; TTM reported plans and investment to reach compliance and no anticipated immediate risk of fines or temporary closure.
Important facts for investors to verify
- Whether the Viasystems acquisition closed on the stated terms, the final financing structure and leverage, and the actual integration costs and realized savings.
- Progress in restoring Asia Pacific utilization, yields and margins after the capacity shortfall and power outage, and performance against the planned capital program.
- Customer exposure and purchasing trends, especially the 21% Apple concentration and the 44% share represented by the five largest OEMs.
- Repayment or refinancing of near-term debt, including the 2015 term-loan amortization and remaining convertible notes, and liquidity after the merger.
- Completion and financial terms of the merger-litigation settlement, and the cost and timing of Chinese environmental compliance.