TTM Technologies, Inc. - 10-Q Summary
Business Context and Reporting Period
Company: TTM Technologies, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: July 2, 2007 (Second Fiscal Quarter)
Business Overview: TTM is a manufacturer of complex printed circuit boards (PCBs) and backplane assemblies serving aerospace/defense, networking/communications, and industrial/medical markets. The company operates two reportable segments: PCB Manufacturing and Commercial Assembly. A significant event during the period was the integration of the Tyco Printed Circuit Group (PCG) acquired in October 2006, which positioned TTM as the largest North American PCB fabricator.
Key Financial Metrics
| Metric (in thousands) | Q2 2007 | Q2 2006 | YTD 2007 (2 Qtrs) | YTD 2006 (2 Qtrs) |
|---|---|---|---|---|
| Net Sales | $162,016 | $76,683 | $338,913 | $149,371 |
| Gross Profit | $29,546 | $22,969 | $64,267 | $43,172 |
| Gross Margin | 18.2% | 30.0% | 19.0% | 28.9% |
| Operating Income | $13,059 | $15,551 | $30,853 | $28,511 |
| Net Income | $6,184 | $10,556 | $14,649 | $19,367 |
| Diluted EPS | $0.15 | $0.25 | $0.35 | $0.46 |
| Cash & Equivalents | $26,131 | $59,660 | $26,131 | $61,258 |
| Total Debt (Long-term + Current) | $120,000 | $200,705 | $120,000 | $200,705 |
| Operating Cash Flow (YTD) | $42,014 | $20,813 | $42,014 | $20,813 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 111.2% in Q2 2007 compared to Q2 2006, driven primarily by the inclusion of PCG operations ($97.7M in sales). This offset a $12.4M decline in historic operations.
- Margin Compression: Gross margin decreased significantly from 30.0% to 18.2% in Q2 2007. This was attributed to the lower-margin profile of the newly acquired Commercial Assembly operations, increased material costs, and higher labor costs (wages, headcount, and stock-based compensation).
- Profitability: Despite revenue growth, Net Income decreased 41.4% in Q2 2007 ($6.2M vs $10.6M) due to higher operating expenses and a substantial increase in interest expense ($3.4M vs $0.05M) related to the $200M term loan used to fund the PCG acquisition.
- Debt Reduction: The company repaid $80.0M of outstanding debt during the first two quarters of 2007, reducing total debt from $200.7M to $120.0M.
- Customer Concentration: Sales to the ten largest customers decreased from 60% of net sales in Q2 2006 to 43% in Q2 2007, indicating a diversification of the customer base following the acquisition.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management anticipates that cash from operations and the $40M revolving credit facility will be adequate for debt service, capital expenditures (planned at ~$15M for 2007), and working capital needs for the next 12 months.
- Restructuring: The company is closing the PCG Dallas facility. As of July 2, 2007, the facility was reclassified as "held for sale" with a fair value of $1.6M. Remaining restructuring accruals were $138K.
- Acquisition Accounting: Purchase price allocation for the PCG acquisition remains preliminary. Adjustments in Q2 2007 resulted in a $202K net increase to goodwill. Finalization is expected in 2007.
- Legal & Environmental:
- Patent Litigation: A stay is in effect on a patent infringement suit by the Lemelson Foundation; management believes defenses are meritorious and no reserve is established.
- Environmental: The company has assumed obligations from PCG regarding environmental remediation in Connecticut, with estimated costs of $0.8M to $1.2M over the next 12-60 months.
- Market Risks: The company faces risks related to the electronics industry cycle, competition from lower-cost Asian manufacturers, and customer concentration. Interest rate risk is managed via an interest rate swap covering approximately 40% of the term loan.
Investor Verification Checklist
- Margin Sustainability: Verify if the 18.2% gross margin is a new baseline due to the PCG mix or if integration efficiencies will restore margins closer to historic 30% levels.
- Debt Covenants: Confirm continued compliance with leverage and interest coverage ratios, which become more restrictive over time and could force additional debt repayments if performance falters.
- Customer Retention: Monitor the retention of key PCG customers and the stability of the diversified customer base (down from 60% concentration to 43%).
- Environmental Liabilities: Track the actual costs of the Connecticut environmental remediation and compliance plans against the current estimates of $1.0M-$1.2M.
- Goodwill Impairment: Assess the $133.2M goodwill balance for potential impairment risks if the PCG integration does not yield expected synergies or if the electronics market contracts.