TTMI

Business Context and Reporting Period

Company: TTM Technologies, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: TTM Technologies is a leading provider of time-critical and technologically complex printed circuit boards (PCBs) and backplane assemblies. The company serves high-end commercial markets (networking, computing) and aerospace/defense sectors. A defining event for the period was the acquisition of the Tyco Printed Circuit Group (PCG) on October 27, 2006, for $226.8 million, which expanded the company's footprint to include six PCB fabrication facilities and three backplane assembly facilities, positioning it as the largest PCB fabricator in North America.

Key Financial Metrics

Note: 2006 results include 65 days of PCG operations. 2005 results included a $12.7 million favorable tax benefit from a valuation allowance adjustment.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by $129.1 million, driven primarily by the PCG acquisition ($72.9 million contribution) and a 26% increase in production volume at legacy facilities. Prices also rose approximately 12% due to higher demand and a shift toward high-technology production.
• Margin Expansion: Gross margin improved to 25.2% from 22.4%, fueled by higher selling prices and better absorption of fixed costs due to increased production volumes. This was partially offset by the inclusion of PCG's backplane assembly operations, which carry inherently lower margins.
• Debt Structure: To fund the PCG acquisition, the company secured a new $200 million senior secured term loan and a $40 million revolving credit facility. Total indebtedness rose to $200.7 million, representing 41% of total capitalization.
• Customer Concentration: The acquisition diversified the customer base. Sales to the five largest OEM customers decreased from 54% of net sales in 2005 to 39% in 2006.
• Segment Reporting: The company now reports two segments: PCB Manufacturing and Commercial Assembly (the latter added via PCG).

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

Management expects to continue pursuing acquisitions to expand operations. The company anticipates that cash generated from operations, available cash, and the new revolving credit facility will be adequate to meet debt service, capital expenditure, and working capital needs for the next 12 months and beyond. The 2007 capital expenditure plan is estimated at $16 million.

Risks and Contingencies

• Acquisition Integration: Risks associated with integrating PCG operations, including potential inability to realize synergies, loss of key employees, and diversion of management attention.
• Debt Covenants: The new credit agreement imposes restrictive leverage and interest coverage ratios. The company expects to repay $60 million of debt in 2007 to meet covenants; failure to meet financial performance expectations could require additional debt repayments.
• Environmental Liabilities: The company assumed legal commitments from PCG regarding environmental remediation in Connecticut, including a Compliance Management Plan through July 2009. Estimated remediation costs range from $1.0 million to $1.2 million over the next 12 to 60 months.
• Customer Concentration: Despite diversification, the top 10 customers still accounted for 53% of net sales in 2006. Loss of major customers could materially harm results.
• Goodwill Impairment: As of December 31, 2006, goodwill and intangible assets totaled $141.9 million. Future impairment charges could negatively affect earnings if market conditions deteriorate.

Unusual Items

• Restructuring Charges: The company recorded $0.2 million in restructuring charges in 2006 related to severance for sales and administrative employees following the PCG acquisition. Additionally, a liability of $3.2 million was accrued for the planned closure of the Dallas, Oregon facility.
• Stock-Based Compensation: Effective January 1, 2006, the company adopted SFAS No. 123R, resulting in a $1.6 million stock-based compensation expense for the year.

Key Facts for Investor Verification

• Debt Servicing Capability: Verify the company's ability to meet the $60 million debt repayment target in 2007 and maintain leverage ratios under the new credit agreement.
• PCG Integration Progress: Monitor the successful integration of PCG facilities, specifically the closure of the Dallas, Oregon plant and the retention of key PCG customers and employees.
• Environmental Compliance: Track the status of the Connecticut environmental remediation and the fulfillment of the Compliance Management Plan to avoid potential fines or debarment from government contracts.
• Customer Retention: Assess the stability of revenue from the top 10 customers, which represent over half of total sales, particularly in the context of the electronics industry's cyclical nature.
• Goodwill Valuation: Review future quarterly reports for any indications of goodwill impairment, given the significant increase in intangible assets following the acquisition.