Santa Ana-based circuit board maker TTM Technologies Inc. is working to get back in Wall Street’s good graces after a rocky first half of the year.
Two analysts recently upgraded the printed circuit board maker, which could be poised for an incremental recovery after two tough quarters.
“In the last half of 2006 and the first half of 2007, our industry just slipped slightly downward,” said Chief Executive Kent Alder. “But it wasn’t a real steep slope. The fourth quarter should be a little better than the second and third, but not anything that we can jump up and down about.”
TTM makes circuit boards,internal parts that hold chips and other electronic components,for computers, networking gear, medical devices and aerospace parts. The company is projected to have sales of $675 million this year.
Shortly after last year’s $226 million buy of Tyco Printed Circuit Board Inc., a former Tyco Inc. unit, some analysts worried that TTM had bitten off more than it could chew.
The company’s shares took a nosedive and fell as much as 14% in the days after the deal closed in late October.
As of last week TTM had a market value of about $500 million.
With the Tyco acquisition, TTM picked up nine sites, doubled its workforce and increased its customers to nearly 1,000, including many in the aerospace industry.
|
|
TTM in Santa Ana: company could look to buy Asian company |
But the company’s earnings took a hit on the deal.
Second-quarter profit was down about 43% compared to a year earlier, largely due to costs associated with a Tyco plant closure the company announced in December. TTM shut down the facility in Dallas, Ore., which it deemed “underperforming.”
About 300 workers lost their jobs.
Then the company warned third-quarter profit would come in lower. It also said it’s seen some slowing in orders from top customer Cisco Systems Inc.
Investors and analysts aren’t too shaken.
For one, Wall Street likes that the company has been aggressively paying down the debt it took on to finance the Tyco deal.
In the second quarter, TTM paid down $30 million in debt and an additional $11 million in July.
“We are down to about $109 million owed (out of $200 million borrowed),” Alder said. “I’d say we made excellent progress. We won’t pay it down at that rate going forward, but we will continue to use cash flow to pay down debt while at the same time invest back into the company.”
Another plus: the smooth integration of the Tyco unit, analysts say.
“They have done a fantastic job so far,” said Kevin Kessel, an analyst at Bear Stearns & Co. in New York. “There really haven’t been any operational miscues to speak of.”
Folding in the Tyco unit has been a long process, according to Alder.
“Prior to the acquisition, we had laid out as much foundation as we could, so we could hit the road running,” Alder said. “It was a company-changing event. We moved quickly and I’m really satisfied with the progress and our ability to tackle the basics of running the business.”
Most of the past year was spent revamping operations from the ground up, he said.
TTM put in place systems for communication, human resources, accounting and technology. The internal reporting structure also was given an overhaul.
“We are better as a company now because we put systems in place that are applicable across the board,” Alder said. “We are just getting to the point where it feels like one company.”
Plus, the Tyco buy almost instantly gave a boost to TTM’s sales.
“The deal was accretive within the first quarter,” Kessel said. “It really hasn’t been the Tyco part of the company that has slowed them down.”
Sales more than doubled in the second quarter to $162 million, compared with a year earlier.
The one weak spot: sales to networking products kingpin Cisco.
TTM saw demand from Cisco and other computer and networking gear makers slip during the spring.
And it showed. Sales for the unit were down about 11% during the second quarter, largely because of Cisco.
That most likely will change, according to Kessel. Sales from Cisco are expected to return to normal,adding about $3 million to TTM’s top line,during the third quarter, Kessel said.
The company’s also growing sales from aerospace and military companies, Alder said.
Aerospace customers, including Raytheon Corp., Boeing Co. and Northrop Grumman Corp., now make up about a third of TTM’s sales.
“That is still the most healthy aspect of our business,” Alder said. “It offsets some of the commercial work. It levels out that side.”
Wall Street’s also pleased with the company’s business model, which has helped it compete with leaner Asian circuit board makers.
The company focuses on turning out custom boards in small numbers. This way, it isn’t competing with Asian rivals that make circuit boards in bulk at cheaper rates for devices such as cell phones and car sensors.
“TTM has a good business model because they build to what the market needs are,” said Anthony Hilvers, vice president of industry programs for IPC, a trade group based near Chicago. “It’s a very good model for the U.S. to make very custom products for very specific applications. I think it’s a proven long-term strategy.”
TTM also is looking to beef up what it calls its “quick turn” business to stay competitive.
The company gets higher profits on specialized, small runs of circuit boards that it can turn out in less than 10 days, Alder said.
The company’s Santa Ana headquarters does most of the quick turn work.
“That enables us to operate in a more profitable segment but it also helps us get new customers,” Alder said. “There’s less competition and it’s a way to capture market share.”
The next step for Alder, who’s been in the circuit board industry for more than 20 years, is to scout out an Asian circuit board maker to buy.
“The missing component would be a low- cost option,” he said. “We need something that’s complementary to our facilities and that has a high-tech mix to it. We think we can have the ideal company on a global basis and compete very effectively.”
Bear Stearns analyst Kessler sees more consolidation down the line in the industry, and perhaps a North American acquisition for TTM, after an Asian one.
“I think it’s inevitable. There are not a lot (of companies) left, but I think TTM is clearly a consolidator,” he said.
