TTM Technologies (TTMI) New China Model

On August 5, 2010 TTM Technologies (TTMI) reported its second quarter results. TTM is the American leader in printed circuit board (PCB) manufacturing. And for the quarter, because of its acquisition of (or merger with) Meadville, its revenues more than doubled since Q1.

For the actual numbers and management's comments see my TTM Technologies Q2 analyst call summary.

Like many technologies, the making of PCBs is rapidly changing. Components are becoming smaller. The number of interconnections has been increasing geometrically, requiring multiple layers of conductors to get the job done. Manufacturing has changed too. For instance, mechanical drills are being replaced by lasers. Just a couple of decades ago engineers designed a system around its electronic components, with the PCB that held them almost an afterthought. Now PCB engineering is critical to the success of high frequency, low voltage devices.

Global manufacturing of electronics is also changing. You may be surprised to learn that many electronic devices are still made in the United States. The change is that these are made in relatively low volumes; they are typically specialty devices for the industrial market. Most high-volume consumer devices are made in lower cost nations like China, where the creation of PCBs and loading them with components are crucial steps.

For years TTM's management has talked about buying an Asian company to complement their business. Typically TTM, like other companies, did prototype PCBs. If a company was making only 1000 or maybe 10,000 devices (say a medical laboratory device), it would probably have the actual production runs done by TTM in addition to the prototypes. But at some scale it made sense to take a PCB board proofed by TTM to China to do a large production run. Of course TTM wanted to capture this missed profit opportunity, but it made no economic sense to build large production run PCB plants in the U.S.

Meadville, meanwhile, had a very successful business, headquartered in Hong Kong but with factories in mainland China, doing large scale production runs. Meadville borrowed large sums of money to build its production capacity over the past decade. For the most part this was not low-end stuff. For instance, one of Meadville's largest clients was Apple.

The combination makes a lot of sense. The most advanced technologies quickly become consumer technologies because consumer devices are migrating to being mobile and handheld, requiring shrinking the entire system. TTM, with its experience with high-end technology prototypes, can take a global manufacturer through the entire process now. They help design and debug prototype PCBs, can do small production runs in the U.S. If a company needs a million devices per month, there will be a smooth transition to Asian manufacturing.

It will probably take about a year for this model to show its stuff. Rapid as technological change is, it can take a year or two for a specific device to go from the design stage to the production stage. Also TTM's China facilities are already running at near capacity. They need even more high end PCB production equipment to keep up with demand. Capital expenses can easily be paid out of cash flow, which is very healthy. TTM has gone from being almost debt free to having substantial debt, but the financing terms from Hong Kong banks are liberal. I believe TTM will be able to rapidly pay down the debt.

Of course this is a competitive area, and things could go wrong, but it looks like the right strategy for the PCB industry. In the U.S., in particular, the industry is consolidating because many of the smaller companies can't afford to invest in new equipment like automated laser drilling machines. TTM is likely to pick up market share both in the U.S. and China.

See also: TTM Technologies and Meadville