Business Context and Reporting Period
Company: TTM Technologies, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and two fiscal quarters ended July 1, 2002.
Business Overview: TTM provides time-critical, one-stop manufacturing services for highly complex printed circuit boards to original equipment manufacturers and electronic manufacturing services providers. The company serves end markets including networking, industrial/medical, computer peripherals, and high-end computing.
Key Financial Metrics
| Metric (in thousands) | Q2 2002 | Q2 2001 | YTD 2002 (2 Qtrs) | YTD 2001 (2 Qtrs) |
|---|---|---|---|---|
| Net Sales | $23,287 | $30,666 | $47,021 | $76,668 |
| Gross Profit | $1,960 | $7,761 | $4,307 | $26,058 |
| Gross Margin % | 8.4% | 25.3% | 9.2% | 34.0% |
| Operating Income (Loss) | $(1,879) | $3,808 | $(2,064) | $16,362 |
| Net Income (Loss) | $(1,284) | $2,178 | $(1,562) | $9,740 |
| Diluted EPS | $(0.03) | $0.06 | $(0.04) | $0.25 |
| Cash and Equivalents | $39,419 | $26,447 | $39,419 | $26,447 |
| Operating Cash Flow (YTD) | $5,781 (2002) vs $27,060 (2001) | |||
| Total Debt (Current + Long-term) | $28,687 (as of July 1, 2002) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 24.1% in Q2 2002 and 38.7% YTD compared to 2001. This was driven by a significant downturn in the electronics industry, lower volume of printed circuit boards sold, and reduced pricing levels.
- Margin Compression: Gross margin collapsed from 25.4% in Q2 2001 to 8.6% in Q2 2002. The decline is attributed to lower pricing, higher depreciation, and unabsorbed manufacturing overhead due to excess capacity.
- Profitability Shift: The company reported a net loss of $1.3 million for Q2 2002, compared to a net income of $2.2 million in the prior year quarter. Operating expenses remained relatively flat, but the drop in gross profit drove the operating loss.
- Accounting Changes: Effective Jan 1, 2002, the company adopted FASB No. 142, ceasing the amortization of goodwill. This reduced amortization expense by approximately $0.9 million in Q2 2002 compared to Q2 2001.
- Restructuring: The company recorded $0.9 million in pretax restructuring charges in Q2 2002 related to a labor force reduction of 141 employees at its Burlington facility.
Guidance, Outlook, and Risks
- Liquidity: Management believes cash generated from operations, available cash ($39.4 million), and the revolving credit facility ($25 million available) are adequate to meet obligations for the next 12 months.
- Capital Resources: In February 2002, the company completed a secondary offering, receiving net proceeds of approximately $15.3 million. Long-term debt stands at $28.7 million with an interest rate of 3.11%.
- Market Risks: The company faces intense competition, particularly from Asian manufacturers with lower production costs. Excess industry capacity and price erosion continue to pressure margins.
- Customer Concentration: The top 10 customers accounted for 42.3% of net sales in Q2 2002. A decline in orders from these major customers poses a significant risk.
- Legal Contingencies: The company is a defendant in a patent infringement lawsuit filed by the Lemelson Medical, Education and Research Foundation. Management believes it has meritorious defenses and does not expect a material impact, though no assurance can be given.
- Seasonality: The company historically experiences lower sales in the second and third fiscal quarters due to customer capital budgeting cycles.
Investor Verification Checklist
- Capacity Utilization: Verify the extent of excess manufacturing capacity and the timeline for absorption of fixed overhead costs.
- Customer Orders: Monitor order trends from the top 10 customers, which represent over 40% of revenue.
- Restructuring Execution: Confirm the completion of the Burlington facility restructuring and the associated cash outflows in Q3 2002.
- Legal Proceedings: Track the status of the Lemelson patent infringement lawsuit for potential future liabilities.
- Debt Covenants: Review compliance with financial covenants under the senior credit facility, particularly given the recent operating losses.