TTMI

Business Context and Reporting Period

Company: TTM Technologies, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: TTM Technologies manufactures time-critical, technologically complex multilayer printed circuit boards (PCBs) for communications infrastructure, industrial/medical equipment, and high-end computing. The company operates a "one-stop" manufacturing model covering prototype, ramp-to-volume, mid-volume, and volume production across facilities in Santa Ana (CA), Redmond (WA), and Chippewa Falls (WI).

Key Financial Metrics (Year Ended Dec 31, 2002)

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 31.0% to $89.0 million, driven by a significant downturn in the electronics industry, reduced order volumes, and lower pricing levels. Approximately $1.4 million of 2002 revenue was attributable to the late-year acquisition of Advanced Circuits.
• Margin Compression: Gross margin collapsed from 28.5% in 2001 to 10.7% in 2002. This was caused by lower absorption of fixed manufacturing expenses due to excess capacity, increased medical expenses, and higher depreciation.
• Restructuring: The company recorded $3.86 million in restructuring charges in 2002, primarily related to the closure of the Burlington, Washington facility and the layoff of 193 employees. This included a $1.84 million non-cash impairment charge.
• Acquisition: On December 26, 2002, TTM acquired Honeywell Advanced Circuits, Inc. for a nominal purchase price of $1. The transaction resulted in a $6.30 million extraordinary gain due to negative goodwill (fair value of net assets exceeded purchase cost).
• Debt Reduction: Long-term debt decreased significantly from $32.6 million to $10.0 million following a $14.5 million prepayment made to finance the Advanced Circuits acquisition.

Guidance, Outlook, and Risks

• Outlook: Management expects the networking/communications and high-end computing markets to become the majority of the sales mix in 2003. The acquisition of Advanced Circuits is expected to increase customer concentration and international sales.
• Liquidity: The company believes cash from operations and available credit ($10.0 million revolving capacity) will meet needs for the next 12 months. A credit facility amendment is expected to be concluded in April 2003.
• Key Risks:
  • Industry Downturn: Heavy dependence on the electronics industry, which faces excess capacity and price competition, particularly from Asian manufacturers.
  • Customer Concentration: The top 10 customers accounted for 41.8% of net sales in 2002; this concentration is expected to increase.
  • Deferred Tax Assets: The company holds $16.3 million in net deferred tax assets. Continued losses could necessitate a valuation allowance, further impacting earnings.
  • Integration Risk: Challenges in integrating Advanced Circuits and realizing synergies.
  • Legal: The company is a defendant in a patent infringement lawsuit filed by the Lemelson Foundation, though management believes it has meritorious defenses.

Investor Verification Checklist

• Deferred Tax Realizability: Verify the sustainability of the $16.3 million net deferred tax asset given the operating loss before extraordinary items.
• Advanced Circuits Integration: Assess the progress of integrating the Chippewa Falls facility and the realization of cross-selling synergies.
• Customer Concentration: Monitor the impact of the top 10 customers (42% of sales) on revenue stability.
• Capacity Utilization: Evaluate whether fixed cost absorption improves as industry demand recovers to restore gross margins.
• Legal Exposure: Track the status of the Lemelson patent infringement litigation.