Business Context and Reporting Period
Company: TTM Technologies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 1, 2002
Business Overview: TTM Technologies 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) | Q1 2002 | Q1 2001 |
|---|---|---|
| Net Sales | $23,734 | $46,001 |
| Gross Profit | $2,347 | $18,296 |
| Gross Margin | 9.9% | 39.8% |
| Operating Income (Loss) | $(185) | $12,554 |
| Net Income (Loss) | $(278) | $7,562 |
| Diluted EPS | $(0.01) | $0.19 |
| Cash and Equivalents | $41,284 | $23,724 |
| Total Debt (Current + Long-term) | $30,656 | $32,625 |
| Operating Cash Flow | $3,894 | $19,209 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 48.4% ($22.3 million) year-over-year, 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 39.8% to 9.9%. This was caused by lower pricing, higher depreciation, start-up costs for technology improvements at the Redmond division, and unabsorbed fixed manufacturing overhead due to excess capacity.
- Profitability Shift: The company reported a net loss of $278,000 compared to net income of $7.56 million in the prior year. Operating expenses decreased significantly ($3.2 million reduction) due to workforce reductions and lower bad debt provisions, but this was insufficient to offset the drop in gross profit.
- Accounting Change: Effective January 1, 2002, the company adopted FASB Statement No. 142, ceasing the amortization of goodwill. This reduced amortization expense by approximately $0.9 million compared to the prior year.
- Liquidity Improvement: Cash and cash equivalents increased to $41.3 million from $24.5 million, primarily due to a secondary stock offering in February 2002 that generated $15.3 million in net proceeds.
Guidance, Outlook, and Risks
- Outlook: Management expects an effective tax rate of approximately 36% for fiscal 2002. The company anticipates that cash from operations and available credit facilities will be adequate for the next 12 months.
- Market Conditions: The electronics industry continues to suffer from excess manufacturing capacity, intense price competition, and decreased demand. The company faces low visibility regarding future financial results due to economic uncertainty.
- Customer Concentration: The top 10 customers accounted for 44.8% of net sales in Q1 2002. A decline in orders from major customers, such as Solectron (10.3% of sales), poses a significant risk.
- 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 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, particularly in the high-end computing segment.
Investor Verification Checklist
- Capacity Utilization: Verify current facility utilization rates to assess the sustainability of the 9.9% gross margin and the risk of further margin compression if demand does not recover.
- Customer Order Trends: Monitor order volumes from the top 10 customers, specifically Solectron, to gauge revenue stability given the high concentration risk.
- Debt Covenants: Confirm continued compliance with financial covenants under the senior credit facility, especially given the recent net loss and reduced operating cash flow.
- Legal Exposure: Track the status of the Lemelson patent infringement lawsuit for potential future liabilities or royalty obligations.
- Capital Expenditures: Review the necessity and ROI of ongoing technology improvements and start-up costs at the Redmond division, which contributed to the margin decline.