TTM Technologies Expands Capabilities

August 22, 2012

Almost every electronic device made contains at least one printed circuit board, or PCB. The leading U.S.-based manufacturer of PCBs is TTM Technologies (TTMI). Post the acquisition of a Hong Kong based PCB manufacturer, TTM is able to serve its customers with quick-turnaround, small quantity prototyping in the U.S. and low-cost mass production in China. Its five largest clients by revenue in Q2 were, in alphabetical order, Apple, Cisco, Ericsson, Huawei, and IBM.

Revenues were disappointing in Q2 at $327.4 million, up 9% sequentially from $300.5 million but down 11% from $366.1 million in the year-earlier quarter. The y/y drop reflected a slowdown in the telecommunications sector. This was also reflected in Juniper and ZTE dropping out of the top-five customer list, though they remain major customers.

As one of the world's largest manufacturers of PCBs, TTM has trouble escaping fluctuations in global demand. Despite that, the industry is consolidating as smaller players, particularly in the U.S., are unable to make the capital investments necessary to create PCBs with ever-denser component layouts. In particular smartphones and tablet computers are built on PCBs with multiple layers and high-density interconnections (HDI). In 2011 and this year TTM has been investing significant cash in upgrading its Chinese factories to be able to handle more HDI work.

TTM management is expecting a surge in smartphone and tablet production for Q3 and Q4. Exactly how much of a surge depends on end consumer demand, particularly in Europe, the U.S., and China.

Even at Q2 levels of revenue TTM generated profits and cash. Non-GAAP net income was $13.6 million, down sequentially from $18.8 million and down from $32.9 million year-earlier. EPS was $0.17. EBITDA was $42.3 million, and cash flow from operations was $39 million. Capital expenditures in the quarter were $33 million.

Cash and equivalents balance ended at $248.5 million. TTM has $299.9 million net debt, reflecting the cost of acquiring and upgrading the Chinese factories.

During the quarter revenue from Chinese operations was $195.6 million, while U.S. factories generated $132.3 million.

I like TTMI partly because it is an unglamorous yet essential part of the electronics industry. While there is certainly competition in the PCB industry both in the U.S. and globally, TTMI has a strategic advantage thought it leading edge PCB manufacturing capabilities and volume production capabilities. Smartphone turnover at the consumer level is far quicker that most prior electronic devices, guaranteeing demand for HDI PCBS for the foreseeable future. I don't care who the smartphone, e-book reader, or tablet winners are, as long as they get their PCBs from TTMI.

I see TTMI finishing most of its capital buildout this year. In 2013 it should turn into a cash cow, capable of quickly paying down debt and returning cash to shareholders.

TTMI closed today at $10.20, up 1.39%. It has a 52-week high of $13.75 and low of $8.55. The trailing P/E is 15.94.

Disclaimer: I am long TTMI. I will not trade in the stock for 1 week after this is first published.

The usual risks and uncertainties apply, so keep diversified!

TTMI main page at OpenIcon



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Copyright 2012 William P. Meyers