Business Context and Reporting Period
Company: TTM Technologies, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 28, 2010 (Second Quarter)
Business Overview: TTM is a global manufacturer of complex printed circuit boards (PCBs) and backplane assemblies serving aerospace/defense, networking, computing, and industrial markets. The reporting period is significantly impacted by the acquisition of the PCB Subsidiaries (Meadville) on April 8, 2010, which established a new Asia Pacific operating segment.
Key Financial Metrics
| Metric (in thousands) | Q2 2010 | Q2 2009 | YTD 2010 (2 Qtrs) | YTD 2009 (2 Qtrs) |
|---|---|---|---|---|
| Net Sales | $310,248 | $144,480 | $448,467 | $293,477 |
| Gross Profit | $57,094 | $27,059 | $84,067 | $51,328 |
| Gross Margin | 18.4% | 18.7% | 18.7% | 17.5% |
| Operating Income | $17,356 | $12,177 | $27,224 | $17,209 |
| Net Income (Total) | $6,740 | $5,948 | $11,225 | $7,375 |
| Net Income (TTM Stockholders) | $4,929 | $5,948 | $9,414 | $7,375 |
| Diluted EPS (TTM Stockholders) | $0.06 | $0.14 | $0.16 | $0.17 |
| Cash & Equivalents (End of Period) | $213,186 | $187,939 | N/A | |
| Operating Cash Flow (YTD) | $19,750 | $42,893 | ||
| Total Debt (Long-term + Current) | $437,984 | $0 |
Note: Debt figures reflect the assumption of approximately $388 million in credit facilities and $30 million in bank loans associated with the PCB Subsidiaries acquisition.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 115% in Q2 2010 compared to Q2 2009, driven primarily by the inclusion of the Asia Pacific segment (PCB Subsidiaries) which contributed $173.1 million in sales. North America sales declined 4% due to facility closures (Los Angeles and Hayward) and a shift in product mix.
- Profitability: While total net income increased, net income attributable to TTM stockholders decreased from $5.9 million in Q2 2009 to $4.9 million in Q2 2010. This was due to $1.8 million of net income attributable to noncontrolling interests in the acquired subsidiaries and increased operating expenses.
- Expense Increases: General and administrative expenses rose significantly ($17.6 million increase in Q2) due to the acquisition and $7.0 million in transaction-related costs. Amortization of intangibles increased $3.7 million due to acquired assets.
- Balance Sheet: Total assets grew from $543 million to $1.7 billion. Goodwill increased from $14.1 million to $208.3 million. Long-term debt increased from zero to $347.8 million (excluding current portion) following the acquisition financing.
Guidance, Outlook, and Risks
- Outlook: Management expects the acquisition to create a leading global PCB company with diversified revenue and operating efficiencies. Capital expenditures for 2010 are projected at approximately $80 million, with $65 million allocated to the Asia Pacific segment.
- Seasonality: The company anticipates higher net sales in the third quarter due to seasonal demand in the computer and cellular phone industries.
- Key Risks:
- Integration Risk: Challenges in integrating the newly acquired PCB Subsidiaries, including internal control over financial reporting.
- Customer Concentration: The 10 largest OEM customers accounted for 42% of net sales in Q2 2010.
- Debt Covenants: The company is subject to financial covenants (leverage, net worth, interest coverage) under its new Credit Agreement. A waiver and amendment were executed in August 2010 to adjust these covenants.
- Environmental/Legal: Ongoing environmental remediation obligations in Connecticut (estimated $0.7 million) and a settled legal matter regarding quality claims in China ($2.5 million settlement).
Investor Verification Checklist
- Acquisition Accounting: Verify the finalization of the purchase price allocation for the PCB Subsidiaries, as fair value estimates for assets and liabilities are currently preliminary.
- Debt Structure: Review the terms of the new Credit Agreement ($350M Term Loan, $87.5M Revolver) and compliance with amended financial covenants.
- Noncontrolling Interest: Monitor the portion of net income attributable to noncontrolling interests ($1.8M in Q2) and its impact on diluted EPS.
- Inventory Valuation: Note the $6.7 million fair value markup of acquired inventory which impacted gross margin in the Asia Pacific segment.
- Facility Closures: Track the completion of restructuring charges and lease terminations for the Hayward and Los Angeles facilities.