TTM Technologies, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and first three quarters ended September 24, 2012; unaudited. Dollar amounts below are in millions unless stated otherwise. TTM manufactures printed circuit boards (PCBs) and backplane assemblies for networking, computing, mobile, aerospace/defense, industrial and medical markets.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | First 3 quarters 2012 | First 3 quarters 2011 |
|---|---|---|---|---|
| Net sales | $339.0 | $358.3 | $966.9 | $1,067.2 |
| Gross profit / margin | $52.3 / 15.4% | $70.7 / 19.7% | $163.5 / 16.9% | $229.9 / 21.5% |
| Operating income (loss) | $(202.7) | $36.3 | $(162.7) | $73.5 |
| Net income (loss) attributable to TTM shareholders | $(208.3) | $24.5 | $(188.3) | $30.7 |
| Basic and diluted EPS | $(2.54) | $0.30 | $(2.30) basic; $(2.30) diluted | $0.38 basic; $0.37 diluted |
| Operating cash flow | Not separately reported for the quarter | $115.8 | $147.4 | |
| Capital spending, including equipment deposits | Not separately reported for the quarter | $89.9 | $99.3 |
- At September 24, cash and cash equivalents were $280.8, current assets $780.5 and current liabilities $395.0; reported working capital was approximately $385.4. Cash increased $84.7 from year-end 2011.
- Debt included $41.2 of short-term debt, $370.0 of long-term term-loan borrowings and $155.9 carrying value of convertible notes. The notes have $175.0 principal outstanding. The $90.0 revolving facility was undrawn; $64.9 of the separate $80.0 letter-of-credit facility was used.
- Total equity was $731.2, down from $922.7 at December 31, 2011. The company reported total assets of $1,668.7.
Material changes and drivers
- Q3 sales declined 5.4% year over year; nine-month sales declined 9.4%. Lower networking/communications demand was a key factor. For the first three quarters, lower computing demand also weighed on Asia Pacific sales, while lower aerospace/defense demand affected North America.
- Gross margin fell 4.3 percentage points in Q3 and 4.6 points year to date. Management cited higher China labor costs, increased depreciation, weaker fixed-cost absorption as production and capacity utilization declined, and costs associated with the temporary closure of the SYE facility in Dongguan. SYE-related costs were approximately $2.6 in Q3 and $10.9 year to date.
- Q3 included $200.3 of goodwill and definite-lived intangible impairment charges ($171.4 goodwill; $28.9 intangibles) and $18.1 of long-lived asset impairments, all relating to Asia Pacific. The charges followed weaker-than-expected results, softer revenues, product-mix shifts, underutilization and a weaker outlook; the impairment charge was non-cash.
- Asia Pacific reported Q3 operating segment loss of $206.8, compared with income of $27.9 a year earlier; North America segment income was $8.2, down from $12.8. Segment results include the Asia Pacific impairment charges.
- TTM refinanced its prior credit agreement in September 2012 with a $370.0 secured term loan, $90.0 revolving facility and $80.0 letter-of-credit facility. The refinancing produced a $5.5 debt-extinguishment loss. The new term loan and revolving borrowing rate was LIBOR plus 2.38%; the term loan’s reported weighted-average rate was 2.60%. TTM said it was in covenant compliance. Mainland China bank loans outstanding at quarter-end were paid in full after the reporting date.
- Nine-month operating cash flow was below the prior-year period despite the reported net loss, which included substantial non-cash impairment charges. Financing cash flow was $56.3 provided, including $473.8 of debt proceeds and $401.0 of repayments. Investing cash flow used $86.8.
Outlook, risks and contingencies
- Management said weaker Asia Pacific performance had produced a weaker outlook for the remainder of 2012 and beyond. It forecast 2012 capital expenditures of approximately $135, including $123 for Asia Pacific, primarily for advanced HDI and rigid-flex capacity, technology capability and equipment replacement. No sales or earnings guidance was provided in the filing text.
- Management believed cash, operating cash generation and available borrowing capacity would be sufficient for anticipated needs over the next 12 months, and described the risk of covenant noncompliance as minimal. This is management’s assessment, not a guarantee.
- Key operating risks include increased China wages that TTM said it had been largely unable to pass through to customers, lower utilization and product-mix changes, customer concentration, and possible further asset impairments if forecasts weaken. Apple represented approximately 14% of Q3 sales; the ten largest customers represented 44% of Q3 sales.
- Approximately $94.9 of cash was held by foreign subsidiaries, mainly in Asia and expected to remain for local operations. Certain cash held in Shanghai and Europe was expected to be repatriated and subject to U.S. tax.
- Related-party laminate and prepreg supply arrangements were due to expire December 31, 2012. Purchases from related parties were $67.9 in the first three quarters of 2012; related-party payables were $36.9 at quarter-end.
- Environmental remediation liabilities for three sites were accrued at $0.458; estimated undiscounted costs ranged from $0.839 to $1.274. TTM said it did not expect the matters to materially affect its financial position, results or cash flows. The filing also describes ordinary-course legal matters, with no material accrual reported, while noting adverse outcomes could have a material effect in a particular period.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether demand, margins, utilization and labor-cost pressures in Asia Pacific improve, and whether further impairments are required.
- Whether the $135 capital expenditure plan and planned advanced-technology capacity additions are funded and deliver expected returns.
- Debt service, floating-rate exposure, covenant headroom and use of the undrawn $90 revolving facility; TTM estimated a 1-percentage-point rate change would alter annual interest cost by $3.1.
- Customer and end-market concentration, particularly Apple’s share of sales, and the sensitivity of results to major-customer demand.
- Replacement or renewal of the related-party supply arrangements expiring at year-end 2012, and related-party pricing and balances.
- Actual availability of foreign-held cash for U.S. needs, tax costs of repatriation, and the outcome and cost of environmental and legal contingencies.