Business Context and Reporting Period
Company: TTM Technologies, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: TTM Technologies is a manufacturer of time-critical and technologically complex printed circuit boards (PCBs) for 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; Redmond, WA; Chippewa Falls, WI) offering services from prototype to volume production.
Key Financial Metrics (Year Ended Dec 31, 2003)
| Metric | 2003 Value | 2002 Value |
|---|---|---|
| Net Sales | $180.3 million | $89.0 million |
| Gross Profit | $34.6 million | $10.5 million |
| Gross Margin | 19.2% | 11.8% |
| Operating Income | $10.2 million | ($6.5 million) Loss |
| Net Income | $7.4 million | $1.6 million |
| Diluted EPS | $0.18 | $0.04 |
| EBITDA | $19.7 million | $5.3 million |
| Cash Flow from Operations | $18.6 million | $10.0 million |
| Working Capital | $52.4 million | $40.4 million |
| Total Debt (Long-term + Current) | $7.8 million | $10.0 million |
| Available Revolving Credit | $16.9 million | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 102.6% to $180.3 million, driven primarily by the December 2002 acquisition of Advanced Circuits, which accounted for over half of 2003 sales. This acquisition shifted the sales mix toward high-end computing and networking markets.
- Margin Expansion: Gross margin improved significantly from 11.8% to 19.2% due to better absorption of fixed manufacturing overhead, improved labor efficiency, and a shift to higher-complexity, higher-margin products (average layer count increased from 8.6 to 14.3).
- Profitability: The company returned to profitability with an operating income of $10.2 million, compared to an operating loss of $6.5 million in 2002. Net income rose to $7.4 million, aided by a $1.5 million extraordinary gain related to the resolution of acquisition contingencies.
- Customer Concentration: Concentration increased significantly; the top 10 customers accounted for 64% of net sales in 2003 (up from 42% in 2002), and the top 5 OEM customers accounted for 51.6% of sales.
- Restructuring: Restructuring charges decreased to $0.6 million in 2003 (primarily severance for 45 employees) compared to $3.9 million in 2002 (closure of the Burlington, WA facility).
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capacity Expansion: Management approved a two-phase expansion plan for the Chippewa Falls, WI facility to increase production capacity by 85%. Phase 1 (approx. $10 million) aims for a 55% capacity increase by end of 2004. Phase 2 (approx. $4 million) is contingent on demand.
- Market Conditions: Management expects further revenue growth and margin improvements in 2004 if market conditions continue to improve, citing sequential quarterly revenue increases throughout 2003.
- Capital Plan: The 2004 capital plan is approximately $20 million, covering the Chippewa Falls expansion and general maintenance across all facilities.
Risks and Contingencies
- Customer Concentration: Heavy reliance on a small number of OEM and EMS customers creates significant risk if major clients reduce orders or face insolvency.
- Competition: Intense competition from Asian manufacturers with lower labor costs poses a pricing threat, particularly for less complex boards.
- Excess Capacity: If demand does not meet expectations, the planned expansion could lead to excess capacity, potentially requiring restructuring charges or facility closures.
- Legal Proceedings: The company is a defendant in a patent infringement lawsuit filed by the Lemelson Medical, Education and Research Foundation regarding "machine vision" patents. Management believes it has meritorious defenses but notes the outcome is uncertain.
- Deferred Tax Assets: The company holds $12.1 million in net deferred tax assets. If future taxable income is insufficient, additional valuation allowances may be required, negatively impacting earnings.
Investor Verification Checklist
- Acquisition Integration: Verify the ongoing integration of Advanced Circuits and whether the projected synergies and margin improvements are sustainable without the one-time extraordinary gain.
- Customer Concentration: Assess the stability of the top 5 customers (Cisco, HP, IBM, Motorola, Sun Microsystems), which represent over 50% of sales.
- Expansion Execution: Monitor the progress and capital expenditure of the Chippewa Falls expansion to ensure it aligns with actual demand growth.
- Legal Exposure: Track the status of the Lemelson patent infringement lawsuit for potential financial impact.
- Debt Covenants: Confirm continued compliance with the senior credit facility covenants, particularly leverage and fixed charge coverage ratios, as the company expands.