Business Context and Reporting Period
Company: TTM Technologies, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2008 (91 days)
Business Overview: Manufacturer of complex printed circuit boards (PCBs) and backplane assemblies serving high-end commercial, aerospace, and defense markets. The company operates two reportable segments: PCB Manufacturing and Backplane Assembly.
Key Financial Metrics
| Metric (in thousands) | Q1 2008 | Q1 2007 |
|---|---|---|
| Net Sales | $174,071 | $176,897 |
| Gross Profit | $37,602 | $34,721 |
| Gross Margin | 21.6% | 19.6% |
| Operating Income | $24,436 | $17,794 |
| Net Income | $14,372 | $8,465 |
| Diluted EPS | $0.34 | $0.20 |
| Operating Cash Flow | $26,781 | $28,297 |
| Cash and Equivalents (End of Period) | $32,569 | $45,381 |
| Total Debt (Outstanding) | $75,000 | $85,000 |
| Available Revolving Credit | $40,000 | $40,000 |
Material Changes vs. Prior Period
- Revenue: Net sales decreased 1.6% ($2.8 million) primarily due to the closure of the Dallas, Oregon facility in April 2007, which had contributed $11.3 million in revenue the prior year. This was partially offset by increased sales at other PCB facilities and an 18% price increase driven by a shift to higher-technology production.
- Profitability: Net income increased 70% ($5.9 million) despite lower sales. Gross margin expanded to 21.6% from 19.6% due to higher work-in-process inventory spreading fixed costs and lower cost content in Backplane Assembly products.
- Unusual Item: Operating income included a $3.7 million gain from metal reclamation income resulting from a pricing reconciliation with a vendor regarding gold reclamations. Management does not expect similar amounts in future periods.
- Interest Expense: Decreased significantly ($3.3 million) due to debt repayments on the senior secured term loan.
- Segment Performance: PCB Manufacturing operating income rose to $22.7 million from $16.4 million. Backplane Assembly operating income increased slightly to $2.7 million from $2.5 million.
Outlook, Risks, and Contingencies
- Liquidity: The company maintains $40 million in available borrowing capacity under its revolving credit facility. Management believes cash from operations and available credit will meet needs for the next 12 months.
- Capital Expenditures: The 2008 capital expenditure plan is approximately $23 million to fund equipment purchases for capacity expansion and technological capabilities.
- Environmental Liabilities: The company has assumed legal commitments from the acquisition of Printed Circuit Group (PCG), including a Compliance Management Plan until July 2009 and capital improvements for rinse water recycling systems. Approximately $0.5 million remains to be expended for these improvements. An additional $0.9 million is accrued for environmental remediation at Connecticut sites.
- Customer Concentration: The 10 largest customers accounted for 48% of net sales in Q1 2008. The five largest OEM customers accounted for 29% of net sales.
- Market Risks: The company faces risks from global electronics industry cycles, competition from lower-cost Asian manufacturers, and potential impairment of goodwill ($130.8 million) and intangible assets if market conditions deteriorate.
Investor Verification Checklist
- Sustainability of Margins: Verify if the 21.6% gross margin is sustainable without the one-time $3.7 million metal reclamation gain and the specific inventory mix shifts of Q1 2008.
- Customer Concentration: Assess the risk exposure given that nearly half of sales come from the top 10 customers and significant reliance on the U.S. government and defense sector.
- Debt Covenants: Confirm continued compliance with leverage and interest coverage ratios under the Credit Agreement, especially given the $75 million outstanding term loan.
- Environmental Compliance: Monitor the status of the PCG-related environmental commitments and the $0.5 million remaining capital improvement requirement to avoid exclusion from federal contracts.
- Quick-Turn Trends: Evaluate the decline in quick-turn orders (from 15% to 12% of PCB sales) and its impact on future pricing power and revenue stability.