Viasystems: An Eye on Details

Is Viasystems up to its old tricks?

The PCB fabricator today announced a deal to acquire DDi for $268 million, a move that will push the company back into the industry top 10 for the first time in years.

Keep in mind, 12 years ago, Viasystems was the second largest PCB company in the world, behind Sanmina, with sales of about $1.25 billion. The deal pushes Viasystems past that mark for the first time since 2001. That’s when the market imploded, and telecom was wiped out, taking much of Viasystems’ capital with it.

That disaster made Viasystems something of an industry punchline. Two bankruptcies followed, plus a high-profile takedown of the venture capitalists behind the company, and some expected the entity to collapse like a black hole. But lo and behold, the remaining management wisened up, stopped buying other people’s garbage with other people’s money (Viasystems paid cash for DDi), and concentrated on learning the business. They shuttered money-losing operations in the US and Europe, and broadened their focus to automotive. Oh, and they learned being smaller and profitable is better than being the biggest and bleeding.

What a difference a decade makes.

What this means for Mikel Williams has not yet been revealed. The DDi CEO remade the company, which also suffered badly after a series of management missteps and internal struggles. Profits have improved four years running (revenues took a minor hit in 2011), and the company successfully absorbed smaller rival Coretec without a hitch. One hopes Williams stays in this industry; he’s a star and would be missed.

Also watching this closely will be Shennan Circuits. DDi reportedly outsources some of its larger orders to the China-based board shop. That is certainly about to change.

Good Times, Bad Times

Major printed circuit board fabricators are beginning to report their quarterly earnings, and the figures give some reason for concern.

By all accounts, 2010 was a banner year for PCBs in all regions. Sales were up 34% year-over-year in Germany through October, 18% in North America through November, and at least 10% overall worldwide. TTM and M-Flex, among others, are reporting record sales. DDi beat the pack to the recovery and has continued to spike.

But while the specialists are doing great, not all is well.

While Multek, a top 5 PCB provider, grew in the low-double digits sequentially, profits are scarcer, with the company saying the unit won’t be breakeven until the end of the current quarter (and that assumes the no dip in orders). Sanmina experienced problems in one of its factories (rumored to be Kuching, Malaysia) that sucked the margin out of what should be one of its more profitable businesses.

And that’s my concern: Even during a period where demand peaked, the largest players are still not consistently profitable. Based on experience, when the market slows, that means more factory closures or continued losses, or both. Another likely response is dropping their drawers on pricing, a move that inevitably ripples through the broader market.

Twenty years (!) in the PCB market has taught me this: If you can’t make a profit in an up market, you can’t make one in a down market.

There’s only one way to resolve this conundrum. The capacity increases have to stop. Let the factories remain full for a few years. Push back on OEMs that constantly demand price reductions with little regard for rising commodity prices and currency fluctuations. Try working together as an industry on this.

Devil’s in the (Dynamic) Details

While I remain unconvinced the acquisition of Coretec was the right move at this time, I must applaud DDi for its deft moves to bring the company four straight quarters of net profits in 2009. That’s not something many publicly traded board shops can brag about.

Something to watch going forward is whether the company ups its capex spending. For obvious reasons, 2009 should be considered an outlier, but DDi’s capex budget was $3.6 million on $158 million in sales, or roughly 2.3 of revenues%. Given the need for companies like DDi to remain ahead of the technology curve, that number probably needs to rise going forward.

Will Quickturn Buy Return Long-term Gain?

I have mixed feelings about DDi’s pickup of Coretec. On one hand, Coretec was finding it extremely difficult making it as a small yet publicly held company. Its sales had slipped from C$92 million in 2006 to C$81.4 million in 2008 — an 11.5% drop — and were on a run-rate of $72.7 million this year. Worse, it was still seeing sequential declines through the September quarter, while competitor DDi has begun the upward revenue climb. (TTM, for the record, has not seen sequential growth in 2009 either.) Its last quarterly net profit was the fourth quarter 2006. And with no cash on hand, its hands were severely tied. All of which might explain why Coretec’s CFO position has been something of a revolving door for years.

DDI, on the other hand, has turned the corner after years of questionable acquisitions, two bankruptcies, numerous lawsuits, and an internal culture considered by many to be wanton and reckless. Its turned a profit all three quarters this year — which is impressive. That said, DDi has just $25 million in cash itself, and PWB fabrication is a cash-intensive business, with lots of ugly cycles. While I suspect DDi saw an opportunity to beat some competitors to the punch by bidding on Coretec now, I can’t help but think that had they waited, they might have picked up the company more cheaply. And I’d hate to see several years of work undone by a deal gone bad.

On a side note, Coretec CEO Paul Langston is a serious-minded, second-generation PCB guy and I know the difficulties of running the company over the past several years have weighed on him. We wish him the best.

Board Buying Bonanza?

Here we go again?

DDi today proposed acquiring Coretec, a move that would close the gap between the California-based DDi and its quickturn rival, TTM Technologies.

It also marks the second potential M&A deal between “brand-name” board fabricators in the past four weeks. Earlier this month, Viasystems announced a pending acquisition of Merix.

Unlike the Via-Merix deal, while the impact wouldn’t be big in terms of the worldwide PWB fabricator rankings — likely boosting DDi from the low 60s to the top 50s in terms of size — it could change the pricing model for many board shops. DDi and Coretec have both invested heavily in HDI capability and have complementary markets (defense, telecom, quickturn/prototypes). It also would give the merged company a footprint in each of the continental US time zones. DDi had fiscal 2008 revenues of $190 million, while Coretec closed the year at C$81 million.

It strikes me that Coretec’s announcement late Friday that it would seek a cash infusion through the sale of 10 million shares of common stock was all the opening DDi needed to pull the trigger, especially given the relatively low market capitalization of Coretec.

This would be DDi’s first acquisition since its purchase of Sovereign Circuits in October 2006. DDi, of course, often made headlines in the last 1990s and 2000 as it bought company after company, building a PWB operation that once ranked among the top 20 worldwide. Simultaneously, Viasystems was doing much the same, only for both companies to hit the skids during the 2001-03 tech recession.

Today’s announcement makes sense, given the relatively cheap price DDi would have to pay to get Coretec. Whereas today’s headlines have certain echoes of 2000, it’s highly unlikely the risk of fallout is anywhere close.