TTMI

TTM Technologies, Inc. - Form 10-Q Summary

Business Context and Reporting Period

TTM Technologies, Inc. is a provider of time-critical, multilayer printed circuit boards serving high-end commercial markets including networking, high-end computing, and industrial/medical sectors. This report covers the quarterly period ended June 30, 2003, and the two fiscal quarters ended June 30, 2003. The results for the current period include the operations of Advanced Circuits, Inc., acquired in December 2002, which significantly altered the company's sales mix and customer concentration.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 76.3% for the quarter and 71.6% for the two-quarter period compared to the same periods in 2002. This growth is primarily attributable to the acquisition of Advanced Circuits, which accounted for over half of total net sales in the current period.
• Profitability: The company returned to profitability for the quarter, reporting net income of $432,000 compared to a net loss of $1,284,000 in the prior year quarter. For the two-quarter period, the company reported a net income of $282,000, driven by an $824,000 extraordinary gain, masking an operating loss before extraordinary items of $542,000.
• Margin Expansion: Gross margin improved to 15.7% for the quarter (from 9.4% in 2002) due to better absorption of fixed overhead, lower material unit pricing, and a sales mix shift toward higher-layer count boards.
• Customer Concentration: Concentration increased significantly. The top 10 customers accounted for 65% of net sales in the current two-quarter period, compared to 42% in the prior year period.
• Restructuring: No restructuring charges were incurred in the second quarter of 2003. A $203,000 charge was recorded in the first quarter of 2003 for severance at the Redmond facility.

Outlook, Risks, and Unusual Items

• Extraordinary Gain: The two-quarter net income includes an $824,000 extraordinary gain resulting from the settlement of a working capital adjustment claim against the seller of Advanced Circuits and other purchase accounting adjustments.
• Debt and Liquidity: The company amended its credit facility in April 2003. It holds a $10 million term loan and a $25 million revolving credit facility. As of June 30, 2003, no amounts were outstanding on the revolver, leaving $10.2 million in available borrowing capacity. Management believes cash flow and available credit are sufficient for the next 12 months.
• Key Risks:
  • Customer Dependence: Heavy reliance on a small number of customers (65% of sales to top 10) creates vulnerability to order cancellations or customer insolvency.
  • Competition: Intense competition from Asian manufacturers with lower production costs could pressure pricing and margins.
  • Deferred Tax Assets: The company holds $16.5 million in net deferred tax assets. If future taxable income expectations are not met, a valuation allowance may be required, negatively impacting results.
  • Seasonality: The company historically experiences lower sales in the second and third fiscal quarters due to customer capital budgeting cycles.

Investor Verification Checklist

• Verify the sustainability of the 15.7% gross margin, noting it is heavily influenced by the Advanced Circuits acquisition and specific product mix shifts.
• Assess the impact of the $824,000 extraordinary gain on the reported net income; the underlying operating business reported a loss before this item for the two-quarter period.
• Monitor the concentration risk associated with the top 10 customers representing 65% of sales.
• Review the status of the $16.5 million deferred tax asset and the likelihood of future taxable income to realize it.
• Confirm compliance with the amended credit facility covenants, particularly the borrowing base formula tied to accounts receivable and inventory.