Business Context and Reporting Period
Company: TTM Technologies, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2008 (Second Quarter)
Business Overview: TTM Technologies is a manufacturer of complex printed circuit boards (PCBs) and backplane assemblies serving high-end commercial, aerospace, and defense markets. The company operates two reportable segments: PCB Manufacturing and Backplane Assembly.
Key Financial Metrics
| Metric (in thousands) | Q2 2008 | Q2 2007 | YTD 2008 (2 Qtrs) | YTD 2007 (2 Qtrs) |
|---|---|---|---|---|
| Net Sales | $172,975 | $162,016 | $347,046 | $338,913 |
| Gross Profit | $36,580 | $29,546 | $74,182 | $64,267 |
| Gross Margin | 21.1% | 18.2% | 21.4% | 19.0% |
| Operating Income | $19,055 | $13,059 | $43,491 | $30,853 |
| Net Income | $9,444 | $6,184 | $23,816 | $14,649 |
| Diluted EPS | $0.22 | $0.15 | $0.56 | $0.35 |
| Cash & Equivalents (End of Period) | $118,687 | $26,131 | $118,687 | $26,131 |
| Operating Cash Flow (YTD) | $33,749 | $42,014 | $33,749 | $42,014 |
| Total Debt (Convertible Notes) | $175,000 | $85,000 | $175,000 | $85,000 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 6.8% in Q2 2008 compared to Q2 2007, driven by increased demand from networking and aerospace/defense customers and a 9% price increase due to a shift toward high-technology production. YTD sales increased 2.4%.
- Margin Expansion: Gross margin improved significantly from 18.2% to 21.1% in Q2, attributed to higher capacity utilization, improved yields, and higher pricing. Operating income rose 46% year-over-year in the quarter.
- Debt Restructuring: In May 2008, the company repaid its entire $85 million senior secured term loan and revolving credit facility. Concurrently, it issued $175 million in 3.25% Convertible Senior Notes due 2015.
- Unusual Items: The company recognized $3.7 million of income in the first quarter of 2008 (included in YTD results) related to a pricing reconciliation for metal reclamation (gold) from a vendor. Additionally, a $1.2 million loss was recorded in Q2 related to the settlement of an interest rate swap derivative upon debt repayment.
- Liquidity: Cash and cash equivalents surged from $18.7 million at year-end 2007 to $118.7 million at June 30, 2008, primarily due to the convertible note issuance.
Guidance, Outlook, and Risks
- Capital Expenditures: The 2008 capital expenditure plan is expected to total approximately $23 million to fund equipment purchases for capacity expansion and technological upgrades.
- Outlook: Management believes cash from operations and the new convertible notes will be adequate to meet debt service, working capital, and capital expenditure needs for the next 12 months.
- Key Risks:
- Customer Concentration: The 10 largest customers accounted for 51% of net sales in Q2 2008. One customer accounted for approximately 13% of sales.
- Industry Cyclicality: Heavy dependence on the electronics industry, which is subject to significant economic cycles and demand fluctuations.
- Competition: Intense competition from Asian manufacturers with lower production costs, potentially leading to price erosion.
- Environmental Liabilities: Ongoing obligations related to the acquisition of Tyco Printed Circuit Group (PCG), including compliance plans and remediation costs estimated at $0.8 million.
Investor Verification Checklist
- Debt Conversion Terms: Verify the conversion rate (62.6449 shares per $1,000 principal) and the effective conversion price ($18.15) of the new $175 million convertible notes, including the impact of the call spread transaction.
- Customer Concentration: Assess the stability of the top 10 customers, which represent over half of total revenue, and the risk of order cancellations.
- One-Time Gains: Confirm the non-recurring nature of the $3.7 million metal reclamation income to accurately assess core operating profitability.
- Environmental Compliance: Review the status of the $0.5 million remaining capital improvements required for the Connecticut facilities to avoid federal contract exclusion.
- Quick-Turn Mix: Monitor the decline in quick-turn orders (from 17% to 13% of PCB sales) and its potential impact on future pricing premiums.