Business Context and Reporting Period
Company: TTM Technologies, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: July 3, 2006 (Second Fiscal Quarter)
Business Overview: Manufacturer of complex printed circuit boards (PCBs) for high-end commercial markets including networking, high-end computing, and industrial/medical sectors. Operations are conducted through three specialized facilities in the United States (Santa Ana, CA; Chippewa Falls, WI; Redmond, WA).
Key Financial Metrics
| Metric (in thousands) | Q2 2006 | Q2 2005 | YTD 2006 (2 Qtrs) | YTD 2005 (2 Qtrs) |
|---|---|---|---|---|
| Net Sales | $76,683 | $57,216 | $149,371 | $116,099 |
| Gross Profit | $22,969 | $11,037 | $43,172 | $24,575 |
| Gross Margin | 30.0% | 19.3% | 28.9% | 21.2% |
| Operating Income | $15,551 | $4,836 | $28,511 | $11,653 |
| Net Income | $10,556 | $3,272 | $19,367 | $7,732 |
| Diluted EPS | $0.25 | $0.08 | $0.46 | $0.19 |
| Cash & Equivalents | $80,972 | $61,258 | (Balance Sheet Data) | |
| Short-term Investments | $20,272 | $21,100 | ||
| Working Capital | $137,000 | $111,200 | (Approx. per MD&A) | |
| Operating Cash Flow (YTD) | $20,813 | $9,288 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 34.0% in Q2 2006 compared to Q2 2005, driven by a 14% increase in production volume and a 16% increase in pricing, particularly in quick-turn work.
- Margin Expansion: Gross margin improved significantly from 19.3% to 30.0% due to higher pricing, greater operating efficiency, and increased absorption of fixed costs.
- Profitability: Net income surged 222% year-over-year in the quarter, rising from $3.3 million to $10.6 million.
- Accounting Change: The company adopted SFAS No. 123R (Share-Based Payments) effective January 1, 2006. This resulted in a reduction of net income by $312,000 for the quarter and $559,000 for the year-to-date period due to the recognition of stock-based compensation expense.
- Customer Concentration: Sales to the ten largest customers decreased slightly as a percentage of net sales from 69% in Q2 2005 to 60% in Q2 2006.
Outlook, Risks, and Unusual Items
Major Acquisition (Subsequent Event)
On August 2, 2006, the company entered into a definitive agreement to acquire the Tyco Printed Circuit Group LP for a gross purchase price of $225.6 million. The transaction is expected to close in the fall of 2006. Funding will be sourced from available cash, short-term investments, and new financing consisting of a $225 million term loan and a $40 million revolving credit facility.
Management Commentary
Management attributes the strong performance to favorable price trends and higher demand. The company expects to continue pursuing acquisitions to expand operations. Capital expenditures for 2006 are planned at approximately $12 million to increase capacity and technological capabilities.
Risk Factors
- Customer Concentration: Heavy reliance on a small number of OEM customers; the five largest OEMs accounted for 48% of Q2 2006 sales.
- Competition: Intense competition from Asian manufacturers with lower production costs, which may pressure pricing.
- Acquisition Risks: Integration challenges and potential dilution or increased debt associated with the Tyco acquisition.
- Market Cyclicality: Dependence on the electronics industry, which is subject to significant economic cycles and demand fluctuations.
Investor Verification Checklist
- Acquisition Closing: Verify the closing date and final purchase price of the Tyco Printed Circuit Group acquisition, including any working capital adjustments.
- Debt Covenants: Review the terms of the new $225 million term loan and $40 million revolving facility to understand leverage ratios and financial covenants.
- Stock-Based Compensation: Monitor the impact of SFAS 123R on future earnings, noting $4.5 million in unrecognized compensation cost expected to be recognized over 1.6 years.
- Customer Retention: Assess the stability of the top 10 customers, who represent 60% of sales, given the risk of order cancellations or insolvency.
- Deferred Tax Assets: Review the valuation allowance of $2.5 million against $8.6 million in deferred tax assets to ensure future earnings projections support their realization.