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
| Metric (in thousands) | Q1 2004 | Q1 2003 |
|---|---|---|
| Net Sales | $57,696 | $39,634 |
| Gross Profit | $17,280 | $4,526 |
| Gross Margin | 30.0% | 11.4% |
| Operating Income | $10,431 | $(1,336) |
| Net Income | $6,526 | $(150) |
| Diluted EPS | $0.15 | $0.00 |
| Cash and Equivalents | $32,620 | $26,114 |
| Working Capital | $62,369 | $52,352 |
| Long-Term Debt (Total) | $7,777 | $7,777 |
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.