TTMI

Business Context and Reporting Period

Company: TTM Technologies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 29, 2004 (First Fiscal Quarter)
Business Overview: TTM Technologies is a provider of time-critical and technologically complex multilayer printed circuit boards (PCBs). The company operates three 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: Q1 2003 included a $0.824 million extraordinary gain related to the Advanced Circuits acquisition. Q1 2004 had no extraordinary items.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 45.6% year-over-year, driven by a 44% contribution from price improvements (due to economic strengthening and a shift to higher-tech products) and a 56% contribution from volume increases.
• Margin Expansion: Gross margin improved significantly from 11.4% to 30.0%. This was attributed to higher pricing, labor efficiencies, and better absorption of fixed manufacturing overhead. The average layer count of boards increased from 13.2 to 14.7.
• Profitability: The company moved from an operating loss of $1.3 million in Q1 2003 to an operating income of $10.4 million in Q1 2004. Net income turned positive ($6.5 million) compared to a net loss of $0.15 million in the prior year.
• Restructuring: Q1 2003 included $203,000 in restructuring charges for employee layoffs; no such charges were recorded in Q1 2004.

Guidance, Outlook, and Risks

Management Commentary and Outlook

Management anticipates continued demand growth and has approved a significant capacity expansion plan for its Chippewa Falls, Wisconsin facility. The plan involves two phases totaling an 85% capacity increase:

• Phase 1: Expected to increase capacity by 55% by end of 2004, costing approximately $10 million.
• Phase 2: An additional 30% capacity increase, contingent on market conditions, estimated at $4 million.

The 2004 capital plan is projected to total approximately $20 million. Management believes cash from operations and available credit facilities will meet liquidity needs for the next 12 months.

Risks and Contingencies

• Customer Concentration: The top 10 customers accounted for 66% of net sales in Q1 2004. The top 5 OEM customers accounted for 54% of sales. Loss of major customers would materially impact results.
• Competition: Intense competition from Asian manufacturers with lower production costs poses a risk to pricing power and market share.
• Seasonality: Historically lower sales in Q2 and Q3 due to customer capital budgeting cycles.
• Legal Proceedings: The company is a defendant in a patent infringement lawsuit by the Lemelson Foundation. While a related Nevada court found the patents invalid in January 2004, the plaintiff may appeal.
• Deferred Tax Assets: The company holds $8.4 million in net deferred tax assets. If future taxable income expectations change, a valuation allowance adjustment could negatively impact results.

Investor Verification Checklist

• Customer Concentration: Verify the stability of the top 5 OEM customers, which represent over half of net sales.
• Expansion Execution: Monitor the timeline and cost adherence of the Chippewa Falls facility expansion to ensure it aligns with actual demand growth.
• Margin Sustainability: Assess whether the 30% gross margin is sustainable given potential price competition from Asian manufacturers and raw material cost fluctuations.
• Legal Status: Track the appeal status of the Lemelson Foundation patent litigation.
• Debt Covenants: Confirm continued compliance with financial covenants (leverage and fixed charge coverage) under the senior credit facility.