Monday, May 10, 2010

TTM Technologies (TTMI) Sees PCB Demand

A sequential (and annual) revenue decrease at TTM Technologies (TTMI) for the first quarter of 2010 masks some very positive trends for the company. Despite the revenue decrease, profits were up. In addition TTM has combined with Meadville Holdings to create a formidable world-class PCB (printed circuit board) operation.

For detailed results and discussion from the May 6 conference, see my TTM Technologies Q1 2010 analyst conference summary.

The PCB industry in the U.S. has been contracting, so why should investors be there at all? The key here is that in many cases today's PCB is not your father's PCB. As the size of semiconductor chips has shrunk, PCB technology has changed. More interconnections between components need to be crammed into shrinking surface areas. This means high-end PCBs have multiple layers. The myriad tiny connections on a board must be rock-solid reliable or the finished product won't work. Holes must be drilled precisely by laser.

So PCB work that used to be done in the U.S. has gone in two directions. One direction is overseas, where volume work can be done more cheaply. Much of the work that remains in the U.S. involves high technology, which in turn requires capital investments that mom & pop PCB makers can't afford anymore. Most of the shakeout in 2008 and 2009 has been among the smaller players.

Even so, TTM management decided they needed to run a tighter operation. Between Q1 2009 and Q1 2010 revenues decreased 7%. But net income increased 221% (of course, the high percentage is partly a reflection of the minimal profits in Q1 2009). Even the $0.10 a share of GAAP EPS of Q1 2010 reflects the costs of closing plants in the U.S. Non-GAAP EPS was a healthier $0.19.

When TTM closed some plants, it tried to keep the profitable customers and drop the low-margin customers, with some evident success.

Demand is now expanding. The March book-to-bill ratio jumped to 1.12. So the plants that remain in operation in the U.S. should run closer to capacity, which means better profit margins ahead.

By revenue, the acquired Meadville is actually the larger company. Based in Hong Kong with plants in China, it has benefitted from the booming Chinese economy in 2009. But the important thing is how the two parts fit together.

U.S. companies, during the design stage, like to have their PCBs made near at hand, in the U.S. They like to have engineering support from PCB specialists. But if they are making a high volume product, in particular consumer product, they want to do their production for sale in a lower cost facility, typically in Asia. So a company might do its prototypes and low volume production (which happens with many defense and industrial products) with TTM, but then need to transition to an Asian supplier.

Now TTM can assist customers from start to finish. From the first prototype to the last board created for sale before a new model changeover, companies can work with the trusted team at TTM. According to management, most suitable customers are ready to make this transition. Of course the Asian plants should retain the customers they already have as well. TTM will also be able to bring high level engineering skills and production processes to the plants in China.

The transition will take some time, partly because it must wait for customers to bring in new designs, and partly because the Asian plants need more capacity. Plans are underway to fit more production machinery into the current plants, so we could see capacity begin to expand in Q3, and more fully in the beginning of 2011.

In addition to the usual risks, I would see the main risk for investors as the level of debt in the new TTM. Meadville brought debt with it. It was at a level that Meadville was paying down out of profits, so it should not be a problem to continue to pay down. However, if there were to be a second macroeconomic dip too soon, it is possible the debt could become a problem.

I am a long term investor in TTMI, so do further research before making your investment decision.

And keep diversified!

See also the TTM Technologies site

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