TTMI

Business Context and Reporting Period

Company: TTM Technologies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 4, 2005 (Second Fiscal Quarter)
Business Overview: TTM Technologies is a provider of time-critical and technologically complex printed circuit boards (PCBs) serving high-end commercial markets including networking/communications, high-end computing, and industrial/medical sectors. The company operates three specialized facilities in the United States (Santa Ana, CA; Chippewa Falls, WI; Redmond, WA).

Key Financial Metrics

Liquidity & Debt: As of July 4, 2005, the company held $44.7 million in cash and cash equivalents and $18.9 million in short-term investments. On July 15, 2005 (subsequent to period end), the company secured a $25 million revolving credit facility with no outstanding balance at that time.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 7.1% in Q2 2005 compared to Q2 2004. This was driven by an 11% decline in average selling prices due to increased competition and excess industry capacity, partially offset by increased production volume.
• Margin Compression: Gross margin contracted significantly from 31.0% in Q2 2004 to 19.3% in Q2 2005. Cost of goods sold (COGS) rose 8.6% due to higher raw material costs (laminate, copper), increased utilities (natural gas), and higher labor costs, exacerbated by the price decline.
• Operating Expenses: Total operating expenses decreased 23.3% year-over-year in Q2, primarily due to the absence of a $0.855 million restructuring charge recorded in Q2 2004 related to a building impairment. General and administrative expenses also declined due to lower incentive compensation.
• Profitability: Net income dropped 52.7% in Q2 2005 compared to the prior year, reflecting the sharp decline in gross profit.

Outlook, Risks, and Management Commentary

• Capacity Expansion: The company completed a 55% capacity expansion at its Chippewa Falls, Wisconsin facility in early 2005 at a cost of approximately $10 million. Management expects to utilize the remaining capacity in the future.
• Stock-Based Compensation (SFAS 123R): The company accelerated the vesting of approximately 986,000 "out-of-the-money" stock options in June 2005 to mitigate the impact of the upcoming adoption of SFAS 123R (Share-Based Payment) in 2006. While no expense was recorded under current rules (APB 25), pro forma net income for Q2 2005 would have been a loss of $3.8 million under the new standard.
• Customer Concentration: The top 10 customers accounted for 69% of net sales in Q2 2005. The top five OEM customers accounted for 57% of sales. Loss of major customers poses a material risk.
• Legal Contingencies: A customer submitted a claim in February 2005 regarding nonconforming PCBs delivered between 2002 and 2003. Management believes exposure is limited by contract terms excluding consequential damages, though outcomes are difficult to predict.
• Market Risks: The company faces intense price competition, particularly from Asian manufacturers with lower production costs. The electronics industry is cyclical, and excess capacity can lead to further price erosion.

Investor Verification Checklist

• Margin Sustainability: Verify if the 19.3% gross margin is sustainable given the 11% price decline and rising input costs.
• Capacity Utilization: Assess the timeline for absorbing the new 55% capacity added in Chippewa Falls to avoid further margin pressure from fixed costs.
• Customer Concentration: Monitor the stability of the top 10 customers, who represent nearly 70% of revenue.
• Impact of SFAS 123R: Review the full impact of the new stock-based compensation accounting standard on 2006 earnings, as pro forma results for Q2 2005 showed a significant loss.
• Legal Exposure: Track the resolution of the customer claim regarding nonconforming boards to ensure no material liability accrues.