Back in early April, when Anaheim-based DDi Corp. was preparing its initial public offering, what was happening on Wall Street would have made even the most tested executive sweat,let alone a management team venturing into the market for the first time. “The day we priced, the Nasdaq dropped 300 points,” said Joe Gisch, the company’s chief financial officer.
But DDi had to pull the switch. The company’s acquisition of British contract manufacturer MCM Electronics Ltd. hinged on the public offering. To meet their goal of doubling revenue in Europe by way of MCM, DDi executives had to brave the tumultuous spring market for tech stocks. DDi hoped to raise $235 million by selling 14.7 million shares at $16. Instead, it managed only to sell 12 million shares at $14 apiece, for a total of $168 million. On DDi’s first day of trading, the shares closed at 9 1/2, below their offering price. That was then.
DDi, like other contract electronics manufacturers, has been on a tear of late. Its stock was trading at around 34 last week, more than double its IPO price. Its market capitalization of $1.3 billion puts DDi in the top tier of Orange County-based public companies. The stock has tempered some this month,slipping to as low as 29,mostly as a result DDi’s announcement of a secondary offering of 6 million shares. A Sept. 13 profit warning from the industry’s No. 2 player, SCI Systems Inc., didn’t help either. Still, DDi’s shares are up 130% in their first six months of trading. “It could be a lot worse,” Chief Executive Bruce McMaster said. “We’re feeling very good about it.” The company is in one of technology’s hottest sectors. DDi designs and assembles circuit boards and other components for some of the largest makers of chips, networking gear and other electronic equipment.
Customers include a who’s who of the Internet and telecommunications. French networking gear maker Alcatel is DDi’s largest customer, at 8% of its sales. There’s also Britain’s Marconi Corp., IBM Corp., LM Ericsson Telephone Co., Broadcom Corp., Intel Corp. and 3Com Corp. The companies turn to DDi for quick turnaround of custom circuit boards for use in their products. Other contract electronics manufacturers also parcel out work to DDi. They include Toronto’s Celestica Inc., St. Petersburg, Fla.-based Jabil Circuit Inc. and Milpitas-based Solectron Corp. DDi is one of a handful of contract electronics manufacturers operating in OC. Celestica runs a 305,000-square-foot facility in Foothill Ranch, while Santa Ana-based Express Manufacturing Inc. counts 1,000 OC employees.
In the second quarter, DDi’s sales surged 42% to $101.5 million. Expansion and acquisitions have put the company in the red, though DDi edged closer to profitability in the second quarter with a loss of $123,000, vs. a $4.9 million loss in the year-ago quarter. DDi employs 3,000 people, including 600 in OC. Its employment growth rate is running about 20% annually.
The company has expanded to five manufacturing facilities totaling 320,000 square feet in the U.S. and another 150,000 square feet in the United Kingdom. It also has 10 design centers, in Texas, Massachusetts and other tech hot spots around the country. Because DDi’s name isn’t on any of the products it makes, McMaster said he still has to preach about the company to Wall Street. “It’s constantly an education to teach people about what we do and how special this company it really is,the 2,000 customers that we have,” he said.
It seems to be working. Out of the five Wall Street analysts following the company, four recommend as a strong buy. A fifth calls it a buy, according to Zacks Investment Research Inc. DDi “is a classic case of identifying a niche and exploiting the hell out of it,” said Roger W. Norberg, an analyst with Chase H & Q.; “It’s outperforming all its competitors.” (Chase H & Q; is among five companies that follow DDi and also are underwriting its secondary offering. Credit Suisse First Boston Corp., Robertson Stephens, Lehman Brothers Inc. and Thomas Weisel Partners LLC are the others.) DDi traces its roots to Details Inc., an Anaheim company that was founded in 1978 by Jim Swenson. Swenson nearly sold the company in the early 1990s, but McMaster convinced him otherwise (see accompanying story, this page). In 1997, McMaster and other managers bought out Swenson’s interests. Bain Capital Funds of Boston, Chase Manhattan Entities of New York and Celerity Partners LLC of Los Angeles led the recapitalization, investing a total of $62.4 million. The three investment firms now are DDi’s principal shareholders, owning, 26.4%, 8.5% and 5.2%, respectively. A year later, the company merged with Dynamic Circuits Inc., a San Jose-based company founded by Charles D. Dimick in 1991. Dimick now is DDi’s chairman as well as president of the San Jose facility. After the merger, McMaster became the CEO and president, while Gisch, who has been CFO of Details since 1995, remained as CFO of the combined entity. Nowadays, Dimick, McMaster and Gisch are like a troika. The first two each have more than 20 years of experience in electronics manufacturing, while Gisch previously was a partner of accounting firm McGladrey & Pullen LLP, where he was responsible for the audit, accounting and information systems for a variety of manufacturing clients. Two other top managers include Greg Halvorson, vice president of operations, and John Peters, vice president of sales and marketing. “We’re all in the same age grouping,the 38-to-45 age group with similar years of experience,” Gisch said. “We are a good team of seasoned players who are very aggressive in the way that we manage the business.” The contract manufacturing industry lacks glamour but is known for solid cash flow and profitability. In a year that’s been flat for the market, this sector has gone up 65%, according to Chase H & Q;’s Norberg. He calls the pullback in some of the sector’s top stocks normal. The industry was once considered a source of cheap labor. But today DDi and other contract manufacturers are heavily involved in product design.
Along with Solectron, SCI Systems, Jabil and Celestica, the industry’s other big players include Flextronics International Ltd. of Singapore, Sanmina Corp. of San Jose and Benchmark Electronics Inc. of Angleton, Texas. These seven companies account for more than half of the estimated $43 billion annual contract electronics manufacturing industry. Gisch said DDi doesn’t compete across the board with any one competitor, but rather in certain segments. DDi generates about 20% of its revenue from pre-production and another 16% from assembly, which includes backpanels, card cages, wire harnesses and other products. Its specialty is quick turnaround of circuit boards, which provide about two-thirds of its revenue. DDi has been known to turn prototypes around in as little as 24 hours, though it usually takes three to four days. Company officials boast that’s still quick compared with other companies, which can take three weeks. DDi considers itself an engineering arm of its customers. DDi has 300 engineers on staff, about 10% of its workforce. Manufacturers ask DDi to help design and build their prototype circuit boards for two-way pagers, cellular telephones and data communications, among other products.
“They may have us do four or five or 20 revisions on their prototype before they get it right,” Gisch said. “Then they say, ‘You guys helped us build this board. We want to go to the market with this particular version. We need 10,000 to get into our reps’ hands and throughout the organization to test market it.’ As we ramp to production, we hand off to the guy overseas who will make millions of the products.” DDi executives themselves don’t think of going overseas. When McMaster was asked whether DDi would follow Solectron’s recent example of laying off 850 workers and moving those jobs to Mexico, he replied, “That’s a commodity mindset.”
Instead, DDi has found that its quick-turnaround niche is lucrative. Manufacturers don’t mind the high costs, but the product has to be delivered quickly. DDi’s operating margin of 35% is approximately 1.5 times higher than typical volume product circuit board manufacturers. “DDi Corp. competes more on quality than on price,” Norberg wrote in an analysis. As a result, DDi avoids some of the pricing pressures facing its competitors, he said. But higher prices come with the pressure to pull it off. It often means long hours and plenty of overtime for employees. “Culture is so critical,” McMaster said. “When I came here in 1985, there was a high turnover. You lead by example and expect people to have the same traits. Being an hour late isn’t OK. These people know. They get bonuses on a quarterly basis.” Since Internet companies are constantly putting out new products, there’s plenty of work for DDi. But it’s a fickle business. Instead of long-term contracts, DDi sells on a purchase-order basis. “Because a significant portion of our operating expenses are fixed, even a small revenue shortfall can have a disproportionate effect on our operating results,” the company said in a Securities and Exchange Commission filing. The explosion of the telecommunications industry is driving much of DDi’s growth. If that sector slows down next year, and there are some signs that it could, this could pose problems. Another problem is DDi’s long-term debt,$379 million as of June 30. The secondary offering will help pay down debt, but DDi’s offering prospectus warned it’s more highly leveraged than its competitors and that could harm its ability to compete. Gisch said the company isn’t profitable because of acquisitions and mergers. Besides buying MCM Electronics this year, DDi paid $20 million in cash in August to obtain the manufacturing facility and assets of Automata International, a Virginia-based manufacturer of printed circuit boards that filed Chapter 11 bankruptcy in June. “We have a significant goodwill amortization, which is the reason our bottom line is negative,” Gisch said. “The cash flow from our operation is a significant number. That’s what the Street likes.”
DDi expects to buy more facilities in the coming year (see Executive Summary, page 12). Other contract manufacturers also in the acquisition mode, but Gisch said none have approached DDi. DDi’s facilities in Anaheim are unlike those of most manufacturers. Instead of having everything under one roof, it has a cluster of 24 buildings totaling 130,000 square feet. “It works because we’re doing smaller quantities of quick-turn lots,” Gisch said. “It’s kind of a cell layout for manufacturing. Almost each of the buildings is a separate manufacturing process. With Southern California’s weather, we can get away with getting caught between buildings, whereas in New England you couldn’t do that. This kind of campus setting works for us.” It also works because it has competing technologies at different buildings. DDi officials said they have non-disclosure agreements and work closely with their customers to protect their technologies. That also means DDi is constantly seeing the newest product. “If we feel that a company has a technology capability in a market that’s hot, we’re obviously going to get involved in that,” Gisch said. n
