TTMI

Business Context and Reporting Period

Company: TTM Technologies, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2001
Business Overview: TTM Technologies provides time-critical, one-stop manufacturing services for highly complex printed circuit boards (PCBs). The company serves original equipment manufacturers (OEMs) and electronic manufacturing services providers in networking/communications, industrial/medical, and high-end computing sectors. Operations are conducted through three primary facilities in Santa Ana and Redmond, California, and Burlington, Washington, utilizing a facility specialization strategy to optimize delivery times and quality.

Key Financial Metrics (Year Ended Dec 31, 2001)

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 36.7% to $129.0 million, driven by a significant downturn in the electronics industry and reduced volume of PCBs sold.
• Margin Compression: Gross margin fell from 37.6% to 28.5%. This was primarily due to lower absorption of fixed manufacturing overhead expenses resulting from reduced capacity utilization.
• Expense Reduction: Operating expenses decreased 43.3% to $17.5 million. Notable reductions included the elimination of amortization for the deferred retention bonus ($5.5M in 2000 vs. $0 in 2001) and management fees ($2.2M in 2000 vs. $0 in 2001).
• Debt Reduction: Total indebtedness decreased to $32.6 million from $43.3 million, significantly reducing interest expense from $12.2 million in 2000 to $2.6 million in 2001.
• Customer Concentration: Sales to the top 10 customers decreased from 52.4% of net sales in 2000 to 46.1% in 2001, indicating a slight diversification despite the overall market contraction.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Recent Developments: The company completed a public offering in February 2002, selling 2.025 million shares at $8.50 per share, netting approximately $15.3 million. Management anticipates that cash from operations and the new credit facility will meet needs for the next 12 months. However, the company notes low visibility regarding future financial results due to economic uncertainty and the recent terrorist attacks exacerbating the slowdown.

Key Risks:

• Industry Downturn: Heavy dependence on the electronics industry, which is suffering from excess capacity, price competition, and decreased demand.
• Customer Concentration: Reliance on a small number of customers; the top two customers (Solectron and Compaq) accounted for 20.5% of 2001 sales.
• Competition: Intense competition from domestic and Asian manufacturers with lower production costs.
• Intangible Assets: Significant portion of assets ($78.2 million) consists of goodwill and intangibles. The adoption of SFAS No. 142 in 2002 will change accounting from amortization to impairment testing, creating uncertainty regarding future earnings.
• 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.

Investor Verification Checklist

• Capacity Utilization: Verify current facility utilization rates to assess the sustainability of the 28.5% gross margin given high fixed costs.
• Deferred Tax Assets: Confirm the realizability of the $19.3 million net deferred tax asset, as a future valuation allowance could significantly impact earnings.
• Customer Orders: Monitor order volumes from top customers (Solectron, Compaq) given their combined 20.5% revenue share.
• Legal Exposure: Track the status of the Lemelson patent infringement lawsuit for potential damages or injunctions.
• Goodwill Impairment: Review the first annual impairment test results under SFAS No. 142 expected in 2002, as the $78.2 million in intangibles could be written down.