Business Context and Reporting Period
Company: TTM Technologies, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: October 1, 2007 (Third Fiscal Quarter)
Business Overview: TTM Technologies is a manufacturer of complex printed circuit boards (PCBs) and backplane assemblies serving aerospace/defense, networking/communications, and industrial/medical markets. The reporting period is significantly impacted by the October 27, 2006, acquisition of the Tyco Printed Circuit Group (PCG), which established TTM as the largest North American PCB fabricator.
Key Financial Metrics
| Metric (in thousands) | Q3 2007 | Q3 2006 | YTD 3Q 2007 | YTD 3Q 2006 |
|---|---|---|---|---|
| Net Sales | $163,079 | $75,765 | $501,992 | $225,136 |
| Gross Profit | $31,245 | $22,477 | $95,512 | $65,649 |
| Gross Margin | 19.2% | 29.7% | 19.0% | 29.2% |
| Operating Income | $15,174 | $15,026 | $46,027 | $43,537 |
| Net Income | $8,201 | $10,523 | $22,850 | $29,890 |
| Diluted EPS | $0.19 | $0.25 | $0.54 | $0.71 |
| Cash & Equivalents | $27,315 | $59,660 | $27,315 | $61,258 |
| Total Debt (Outstanding) | $109,000 | $200,000 | $109,000 | $200,000 |
| Operating Cash Flow (YTD) | $56,937 | $32,525 | $56,937 | $32,525 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 115.2% in Q3 and 123.0% YTD, driven primarily by the inclusion of PCG operations ($93.6M in Q3 sales). Historic operations saw a slight decline in sales volume.
- Margin Compression: Gross margin decreased significantly from 29.7% to 19.2% in Q3. This is attributed to the lower-margin profile of the newly acquired backplane assembly operations and increased material/labor costs.
- Profitability: Despite revenue growth, Net Income declined 22.1% in Q3 and 23.6% YTD. This was caused by a $2.6M increase in interest expense and amortization of debt issuance costs related to the $200M term loan used to fund the PCG acquisition.
- Debt Reduction: The company aggressively paid down debt, reducing the term loan balance from $200M to $109M as of October 1, 2007 (further reduced to $99M by November 13, 2007). This resulted in a net cash outflow of $90.5M in financing activities YTD.
- Segment Shift: The company now reports two segments: PCB Manufacturing and Backplane Assembly. Backplane Assembly contributed $30.7M in Q3 sales.
Outlook, Risks, and Contingencies
- Debt Covenants: The company is subject to restrictive leverage and interest coverage ratios under its Credit Agreement. These ratios become more restrictive over successive quarters. Failure to meet performance expectations could force additional debt repayments.
- Interest Rate Risk: The company has a floating-rate term loan. A 1.0% increase in interest rates would increase annual interest expense by approximately $0.5M. An interest rate swap covers approximately 40% of the debt (notional value $56M as of Oct 25, 2007).
- Customer Concentration: Sales to the ten largest customers accounted for 45% of net sales in Q3 2007 (down from 61% in Q3 2006). The five largest OEM customers accounted for 25% of sales.
- Legal & Environmental:
- Patent Litigation: A stayed lawsuit by the Lemelson Foundation regarding "machine vision" patents. Management believes defenses are meritorious and no reserve is established.
- Environmental Remediation: Obligations related to the PCG acquisition in Connecticut include a Compliance Management Plan through July 2009 and estimated remediation costs of $0.9M to $1.2M over the next 12-60 months.
- Restructuring: The company closed the PCG Dallas facility in Q2 2007. All accrued restructuring charges ($3.26M) were paid by the end of Q2 2007.
Investor Verification Checklist
- Debt Compliance: Verify continued compliance with the Credit Agreement's leverage and interest coverage covenants, which tighten over time.
- Margin Stabilization: Monitor whether gross margins stabilize as the integration of PCG operations completes and capacity utilization improves.
- Customer Retention: Assess the stability of the top 10 customers, which represent nearly half of total revenue.
- Environmental Liabilities: Track the actual costs of the Connecticut environmental remediation and compliance plans against the current estimates.
- Interest Rate Exposure: Evaluate the impact of rising LIBOR rates on the unhedged portion of the $109M term loan.