Business Context and Reporting Period
Company: TTM Technologies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 1, 2001 (Third Fiscal Quarter)
Business Overview: TTM provides time-critical, one-stop manufacturing services for highly complex printed circuit boards (PCBs) to original equipment manufacturers and electronic manufacturing services providers. The company serves end markets including networking/communications, high-end computing, and industrial/medical sectors.
Key Financial Metrics
| Metric (in thousands) | Q3 2001 | Q3 2000 | YTD 3Q 2001 | YTD 3Q 2000 |
|---|---|---|---|---|
| Net Sales | $26,895 | $55,060 | $103,562 | $143,220 |
| Gross Profit | $5,874 | $21,472 | $31,931 | $48,802 |
| Gross Margin | 21.8% | 39.0% | 30.8% | 34.1% |
| Operating Income | $2,014 | $9,123 | $18,376 | $25,206 |
| Net Income | $979 | $10,203 | $10,718 | $15,341 |
| Diluted EPS | $0.03 | $0.30 | $0.28 | $0.47 |
| Cash & Equivalents | $24,083 | $4,821 | $24,083 | $4,821 |
| Total Debt (Current + Long-term) | $34,594 | $43,312 | $34,594 | $43,312 |
| Operating Cash Flow (YTD) | $33,046 | $22,588 | $33,046 | $22,588 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales for Q3 2001 decreased 51.2% ($28.2 million) compared to Q3 2000, driven by a significant downturn in the electronics industry, specifically in the networking and communications sector, and lower pricing levels.
- Margin Compression: Gross margin fell from 39.0% in Q3 2000 to 21.8% in Q3 2001. This was caused by lower pricing and an increase in unabsorbed manufacturing overhead due to reduced volume.
- Expense Reductions: Operating expenses decreased significantly due to the elimination of management fees ($1.65 million in Q3 2000 vs. $0 in Q3 2001) and deferred retention bonus amortization ($4.5 million in Q3 2000 vs. $0 in Q3 2001) following the company's IPO in September 2000.
- Interest Expense: Interest expense dropped 79.3% in Q3 2001 compared to the prior year due to the repayment of substantial indebtedness using IPO proceeds.
- Customer Concentration: Sales to the top 10 customers increased from 49% of net sales in Q3 2000 to 53% in Q3 2001.
Outlook, Risks, and Management Commentary
- Liquidity: Management believes cash generated from operations, available cash ($24.1 million), and the senior credit facility (with $25 million revolving commitment, currently unused) are adequate for the next 12 months.
- 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 market.
- Accounting Changes: The company adopted SFAS No. 133 (Derivatives) in Jan 2001 with no material effect. It anticipates adopting SFAS No. 141 and 142 (Goodwill) in 2002, which will stop goodwill amortization but require annual impairment testing.
- Key Risks:
- Industry Dependence: Heavy reliance on the electronics industry, which is cyclical and prone to excess capacity.
- Customer Concentration: Top 10 customers represent over 50% of sales; loss of a major customer (e.g., Compaq at 16.5% or ATL Ultrasound at 11.4%) could significantly harm operations.
- Competition: Intense competition from Asian manufacturers with lower production costs and established competitors like Sanmina and Tyco.
- California Power Crisis: Operations in California face risks from rolling blackouts and rising energy costs.
- Intangible Assets: Significant portion of assets ($79.4 million) are goodwill and intangibles, subject to potential impairment write-downs.
Investor Verification Checklist
- Verify the sustainability of the 51% revenue decline and whether the downturn in the networking/communications sector is stabilizing.
- Assess the impact of the 17.2 percentage point drop in gross margin on future profitability if volume does not recover.
- Review the concentration risk regarding the top 10 customers (53% of sales) and the specific status of contracts with Compaq and ATL Ultrasound.
- Confirm the company's compliance with debt covenants given the reduced cash flow and the upcoming expiration of the interest rate swap in December 2001.
- Monitor the potential impact of the California energy crisis on manufacturing costs and operational continuity at the Santa Ana facility.