TTM Technologies, Inc. — Q3 2014 Form 10-Q
Business context and period. TTM manufactures printed circuit boards (PCBs) and backplane assemblies for electronics, aerospace and defense, industrial, and other markets. This unaudited report covers the quarter ended September 29, 2014 and the first three fiscal quarters of 2014; comparisons are with the corresponding 2013 periods.
Financial performance
| Metric | Q3 2014 | Q3 2013 | First three quarters 2014 | First three quarters 2013 |
|---|---|---|---|---|
| Net sales | $345.3 million | $338.7 million | $934.8 million | $1,002.1 million |
| Gross profit / margin | $49.1 million / 14.2% | $48.4 million / 14.3% | $126.2 million / 13.5% | $147.6 million / 14.7% |
| Operating income (loss) | $12.3 million | $(1.2) million | $20.0 million | $39.8 million |
| Net income (loss) attributable to TTM | $7.7 million | $(7.7) million | $0.8 million | $10.6 million |
| Diluted earnings (loss) per share | $0.09 | $(0.09) | $0.01 | $0.13 |
- Cash flow: First-three-quarter operating cash flow was $77.4 million, versus $59.4 million a year earlier. Capital spending and equipment deposits were $83.4 million, making operating cash flow less those outlays approximately negative $6.0 million. Cash declined $81.8 million to $248.7 million.
- Liquidity: Working capital was $251.3 million, down from $347.0 million at December 30, 2013. Current assets were $718.1 million and current liabilities $466.7 million. The company had $90.0 million of unused revolving credit capacity; $43.2 million of letters of credit were outstanding under its $80.0 million facility.
- Debt: TTM reported approximately $556.2 million of total indebtedness. Term-loan principal was $273.8 million, including $96.2 million due through September 2015; convertible-note principal totaled $282.4 million, including $32.4 million due in 2015 and $250.0 million due in 2020. No revolving-loan balance was outstanding. TTM said it was in compliance with its credit covenants.
- Capital spending and margins: The 2014 capital expenditure plan was approximately $100 million. Year-to-date gross margin fell 1.2 percentage points, with lower utilization, product mix, and equipment-related costs cited among the factors.
Changes and management commentary
- Q3 sales grew 1.9% year over year, while first-three-quarter sales fell 6.7%. The year-to-date decline largely reflected the absence of sales from a subsidiary sold in 2013 and lower Asia Pacific shipments. North America sales were nearly flat for the quarter and up 0.9% year to date.
- Q3 Asia Pacific sales rose 3.9%, helped by cellular-phone and networking demand and a 13% increase in average PCB selling price, partly offset by 8% lower shipments. North America sales declined 1.1%, with weaker networking demand and a mix shift toward lower-margin assembly products affecting results.
- TTM’s Q3 return to profit compared with a 2013 quarter that included $10.8 million of long-lived-asset impairment and $3.4 million of restructuring charges. Year-to-date 2014 included a further $1.8 million impairment related to the Suzhou facility closure. The year-ago period included a $17.9 million gain on an asset sale.
- Year-to-date other expense increased to $20.2 million from $13.7 million, including foreign-exchange losses and a $0.5 million loss on repurchasing 2015 notes. Management cited RMB volatility; the filing reports approximately $2.1 million of unrealized foreign-exchange loss for the first three quarters and approximately $1.5 million of unrealized gain in Q3.
Outlook, significant items, and risks
- Viasystems acquisition: TTM agreed to acquire Viasystems for $11.33 cash plus 0.706 TTM shares per Viasystems share, valued at approximately $16.46 per share using the September 19 market price. Announced enterprise value, including assumed debt, was approximately $927 million. Closing was expected in the first half of 2015, subject to approvals and other conditions. TTM recorded $1.6 million of acquisition costs in Q3.
- After quarter-end, TTM disclosed financing commitments for a $1.115 billion Term B facility and a $150 million asset-based revolving facility to support the merger and refinancing. TTM warned additional indebtedness could constrain operating flexibility and liquidity.
- Two putative class actions challenged the Viasystems transaction and seek, among other remedies, to block or rescind it. TTM said it believed the suits were without merit; outcomes were uncertain. The merger agreement also provides for a $40 million reverse termination fee to Viasystems under specified circumstances.
- Management believed existing cash, operating cash generation, and borrowing availability would cover anticipated capital expenditure, debt service, and working-capital needs for the next 12 months. No earnings or revenue guidance was provided in the supplied filing text.
- Management noted seasonal demand typically supports higher Q3 and Q4 sales. Risks include customer and end-market concentration, rising China labor costs, currency movements, utilization and pricing pressure, and reliance on international operations. One customer represented about 23% of quarterly sales; the ten largest OEM customers accounted for 58%.
- TTM’s Chinese facilities were not yet fully compliant with updated environmental water-waste rules. The company expected to comply during the applicable 2014–2015 interim period and budgeted approximately $15 million of related capital spending through 2015. Management also said market-capitalization volatility made a year-end goodwill impairment charge reasonably possible.
Investor verification priorities
- Track Viasystems merger approvals, litigation, closing conditions, final financing terms, and the effect of added debt on leverage, liquidity, and covenants.
- Reconcile the year-to-date revenue and profit decline, especially the effect of the 2013 subsidiary sale, shipment volumes, product mix, and segment utilization.
- Assess cash conversion against capital expenditure needs, near-term debt maturities, and the planned environmental investment.
- Monitor customer concentration and demand in cellular phones, networking, and other major end markets, as well as China labor, power, and currency exposures.
- Review the fourth-quarter goodwill impairment test and progress toward Chinese environmental compliance.