-- Despite weak operating performance by global printed circuit board
(PCB) manufacturer TTM Technologies Inc. during 2012, we expect key end
markets to stabilize in 2013 and that new design wins will result in revenue
growth and margin expansion, leading to modest deleveraging.
-- We are raising our corporate credit rating on TTM to 'BB' from 'BB-'.
-- We are also raising our issue-level rating on the company's
convertible notes to 'BB' from 'BB-'. The recovery rating remains unchanged at
-- The stable outlook reflects our expectation that the company's
networking and computing end markets will stabilize in 2013 and that its
smartphone and tablet programs will propel EBITDA expansion resulting in
leverage in the mid- to high-2x area.
On Nov. 20, 2012, Standard & Poor's Ratings Services raised its corporate
credit rating on Costa Mesa, Calif.-based TTM Technologies Inc. to 'BB' from
'BB-'. The outlook is stable.
At the same time, we raised our issue-level rating on the company's
convertible notes due 2015 to 'BB' from 'BB-'. The recovery rating of '4' is
unchanged and indicates our expectation of average (30% to 50%) recovery in
the event of payment default.
The upgrade reflects our view that the company's networking and computing end
markets, which are down 23% and 15%, respectively, in 2012, will stabilize in
2013 and that smartphone and tablet programs will deliver high-margin revenue
growth, resulting in leverage in the mid- to high-2x area.
The ratings reflect our view of TTM's "weak" business risk profile marked by
cyclical end market demand, a fragmented and competitive PCB manufacturing
industry, meaningful customer concentration, and rising labor costs. These
weaknesses are partially offset by expected strong demand from smartphone and
tablet programs, leading to a more profitable product mix, diverse end
markets, and the company's "significant" financial risk profile with a track
record of leverage below 3x.
TTM is a PCB manufacturer serving networking, computing, defense, and cellular
end markets focusing on products with high manufacturing complexity. Its eight
Asian facilities, which make up about 60% of revenue, support the company's
smartphone, tablet, computing, and networking programs, and its seven U.S.
facilities support aerospace and defense, high-end computing, and networking
programs. The company is the leading PCB maker in the Americas with market
share in the midteens and the sixth leading supplier globally with market
share in the low-single-digits. Key customers are Apple, Cisco, Ericsson,
Huawei, IBM, Juniper, and ZTE.
We view TTM's business risk profile as weak due to its exposure to cyclical
network infrastructure and IT spending, the highly fragmented and competitive
PCB industry landscape, particularly in China, and material customer
concentration with its top five customers making up 31% of sales for the
quarter ended Sept. 30, 2012, and its top customer making up 14%. Compensating
factors are its balanced and diverse end markets and an improving product mix
with smartphone and tablet end market demand influencing growth in its high
margin products. In our assessment, the company's management and governance is
Year-to-date 2012 revenues were $967 million, down 9.4% year-over-year
primarily as a result of weakness in the company's networking, computing, and
defense end markets which generate nearly 70% of revenue and which were down
18% collectively. This decline was offset in part by strength in its cell
phone end market, up 15%. Adjusted EBITDA margin fell to 14% from near 18% on
lower utilization and higher labor costs in China following the implementation
of a maximum 60-hour work week and a government-mandated wage increase of
approximately 13%. However, despite operating weakness and growth-related
capital expenditures, the company maintained positive free cash flow in each
of the first three quarters in 2012.
In 2013, we expect strong demand from smartphone and tablet programs and
modest growth in its networking end market due to wireless carrier spending to
build out LTE networks to offset modest declines in its defense end market,
resulting in mid-single-digit revenue growth. We also anticipate that
increased utilization and an increasingly profitable product mix will offset
further labor cost increases, resulting in modestly higher adjusted EBITDA
We view TTM's financial risk profile as significant with leverage of 2.8x as
of Sept. 30, 2012, pro forma for the repayment of its bank loans in October
2012. The company recently refinanced its 2013 term loan, which addressed a
key credit concern. We expect that leverage will peak at about 3x in the
fourth quarter of 2012, leaving very little cushion within the current rating,
but that revenue growth and margin expansion will lead to leverage in the mid-
to high-2x area by fiscal year-end 2013, and that free cash flow will improve
as capital expenditures moderate.
TTM's liquidity is "adequate" in our view, with sources of cash likely to
exceed uses during the next 12 to 24 months. Cash sources include a cash
balance of $240 million as of Sept. 30, 2012 (pro forma for the repayment of
its bank loans in October 2012), $90 million of availability under its
revolving credit facilities, and expected annual funds from operation (FFO) in
the $160 million area. We expect uses to include modest working capital
investments and capital expenditures of $120 million over the next 12 months.
Our assessment of TTM's liquidity profile incorporates the following
expectations, assumptions, and factors:
-- Sources of liquidity are likely to exceed uses by at least 20% over
the next 12 to 24 months.
-- Net sources would be positive, even with a 15% decline in EBITDA.
-- The company will maintain at least 15% headroom under its financial
For the recovery analysis, see the recovery report on TTM, published Feb. 27,
2012, on RatingsDirect.
The stable outlook reflects our expectation that the company's networking and
computing end markets will stabilize in 2013 and that smartphone and tablet
programs will lead to EBITDA expansion, resulting in modest deleveraging. In
our view, the possibility of an upgrade is limited because of the company's
competitive and cyclical industry conditions.
Alternatively, we could lower the rating if further declines in the company's
end markets, pricing pressure from customers, or higher labor costs cause
EBITDA to decline, or if the company pursues debt-financed acquisitions,
resulting in leverage above 3x on a sustained basis.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Upgraded; Recovery Rating Unchanged; Outlook Action
TTM Technologies Inc.
Corporate Credit Rating BB/Stable/-- BB-/Positive/--
Senior Unsecured BB BB-
Recovery Rating 4 4