TTMI

Business Context and Reporting Period

Company: TTM Technologies, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
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 a "one-stop" solution from prototype to volume production.

Key Financial Metrics (Year Ended Dec 31, 2005)

Material Changes vs. Prior Period

• Revenue Stability: Net sales remained essentially flat (down 0.2%) despite a 5% increase in production volume. This was offset by a 5% decline in average selling prices due to industry competition and excess capacity.
• Margin Compression: Gross margin declined significantly from 28.5% to 22.4%. This was driven by lower product prices and increased costs of goods sold (raw materials, utilities, labor, and depreciation).
• Net Income Growth: Despite lower operating income, Net Income increased by 8.8% to $30.8 million. This was primarily due to a shift from an income tax provision in 2004 to a $2.5 million income tax benefit in 2005, resulting from a reduction in the valuation allowance against deferred tax assets.
• Customer Concentration: The top 10 customers accounted for 66% of net sales in 2005, up from 65% in 2004. The top five OEM customers represented 54% of sales.
• Product Mix: Quick-turn orders (delivery ≤ 10 days) increased to 22% of sales from 20% in 2004. The average layer count of PCBs increased slightly to 15.8 from 15.6.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items:
  • Customer Dispute Resolution: The company recorded a $2.2 million net loss contingency accrual in General and Administrative expenses related to a definitive agreement resolving a dispute over goods shipped in 2002-2003. A payment of $3.15 million was accrued, partially offset by an expected insurance recovery of $0.99 million.
  • Tax Benefit: A significant portion of the 2005 net income increase was driven by a $12.7 million reduction in the valuation allowance for deferred tax assets, based on improved earnings visibility.
• Outlook & Strategy: Management expects to continue investing in technology and capacity expansion (specifically at the Chippewa Falls facility) to meet demand for complex boards. The company anticipates that cash from operations and its $25 million revolving credit facility (currently undrawn) will be sufficient for future needs.
• Key Risks:
  • Customer Concentration: Heavy reliance on a small number of OEMs and EMS providers; loss of a major customer could materially harm results.
  • Competition: Intense price competition, particularly from Asian manufacturers with lower labor costs, though TTM focuses on high-complexity segments less susceptible to this.
  • Raw Materials: Fluctuations in the price of raw materials (e.g., laminates) can impact gross margins.
  • Technology Obsolescence: Rapid technological changes require continuous capital investment to maintain competitive capabilities.

Investor Verification Checklist

• Tax Asset Realizability: Verify the sustainability of the reduced valuation allowance on deferred tax assets, as future earnings shortfalls could trigger a reversal and reduce net income.
• Pricing Power: Monitor the ability to pass on raw material cost increases to customers given the 5% price decline in 2005.
• Customer Concentration: Assess the stability of relationships with the top 5 OEM customers (Cisco, HP, IBM, ITT, Juniper) which drive over half of revenue.
• Dispute Resolution: Confirm the final settlement terms and insurance recovery status regarding the $3.15 million customer dispute.
• Capacity Utilization: Track the utilization rates of the expanded Chippewa Falls facility to ensure fixed costs are adequately absorbed.