TTMI

Business Context and Reporting Period

Company: TTM Technologies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 27, 2004 (Third Fiscal Quarter)
Business Overview: TTM Technologies is a provider of time-critical and technologically complex multilayer printed circuit boards (PCBs). The company operates three specialized facilities in the United States (Santa Ana, CA; Chippewa Falls, WI; Redmond, WA) serving high-end commercial markets including networking/communications, high-end computing, and industrial/medical sectors.

Key Financial Metrics

Note: All financial figures are in thousands of dollars unless otherwise noted. The company paid off its term loan in full during the third quarter of 2004.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 37.2% in Q3 2004 compared to Q3 2003, driven by a 62% contribution from price improvements and 38% from volume increases. YTD sales grew 44.0%.
• Margin Expansion: Gross margin improved significantly from 20.9% to 28.4% in Q3 2004. This was attributed to higher sales prices, labor efficiencies, and better absorption of fixed manufacturing overhead. The average layer count of boards increased from 14.5 to 16.3.
• Debt Reduction: The company eliminated all long-term debt. The term loan was paid in full during Q3 2004, and there were no outstanding balances on the revolving credit facility as of September 27, 2004.
• Restructuring: A restructuring charge of $855,000 was recorded in Q3 2004 related to an asset impairment of a building held for sale in Burlington, Washington. This contrasts with a $203,000 charge in the prior year period for severance.
• Customer Concentration: Sales to the ten largest customers increased from 64% of net sales in Q3 2003 to 68% in Q3 2004.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Capacity Expansion: Management is executing a two-phase expansion at the Chippewa Falls, Wisconsin facility. Phase 1 (approx. $10 million) is underway to increase capacity by 40%. Phase 2 (approx. $4 million) is contingent on demand and market conditions.
• Q4 2004 Guidance: Management estimates net sales for the fourth fiscal quarter of 2004 to be between $58 million and $62 million.
• Liquidity: The company maintains a $25 million revolving credit facility with no current draws. Management believes cash from operations and available credit will meet needs for the next 12 months.

Risks and Contingencies

• Customer Concentration: Heavy reliance on a small number of OEM and EMS customers; the loss of a major customer could materially harm operations.
• Competition: Intense competition from Asian manufacturers with lower production costs, which may pressure pricing and margins.
• Raw Materials: Rising costs for critical materials like laminate could impact margins if not passed to customers.
• Deferred Tax Assets: The company maintains a valuation allowance of approximately $19.0 million against deferred tax assets. Future profitability is required to realize these assets.
• Legal Proceedings: The company is a defendant in a patent infringement lawsuit by the Lemelson Foundation, though a related Nevada court ruling found the patents invalid. The plaintiff has the right to appeal.

Investor Verification Checklist

• Debt Status: Verify the complete payoff of the term loan and the current utilization of the $25 million revolving credit facility.
• Customer Concentration: Review the specific identities and financial health of the top 10 customers, who represent 68% of sales.
• Expansion ROI: Monitor the utilization rates of the Chippewa Falls expansion to ensure demand supports the $10 million capital expenditure.
• Margin Sustainability: Assess whether the 28.4% gross margin is sustainable given rising raw material costs (laminate) and potential price competition.
• Deferred Tax Valuation: Track future earnings to determine if the $19 million valuation allowance on deferred tax assets can be reduced, which would impact future tax provisions.