TTMI

Business Context and Reporting Period

Company: TTM Technologies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 4, 2005 (First Fiscal Quarter)
Business Overview: TTM Technologies is a provider of time-critical and technologically complex printed circuit boards (PCBs) serving high-end commercial markets including networking/communications, high-end computing, and industrial/medical sectors. The company operates three specialized facilities in the United States (Santa Ana, CA; Chippewa Falls, WI; Redmond, WA).

Key Financial Metrics

Liquidity and Debt: As of April 4, 2005, the company held $57.3 million in cash and cash equivalents and $4.6 million in short-term investments. The company has a $25.0 million revolving credit facility with no outstanding borrowings as of the period end, leaving $18.0 million in available capacity.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 2.1% year-over-year to $58.9 million, driven by higher production volumes and capacity expansion at the Chippewa Falls facility.
• Margin Compression: Gross margin declined significantly from 30.0% to 23.0%. This was caused by a shift in product mix toward standard lead-time products (lower prices), increased competition, and rising costs for raw materials (specifically laminates), utilities, and labor.
• Profitability Decline: Operating income fell 34.6% to $6.8 million, and Net Income decreased 31.7% to $4.5 million, primarily due to the gross margin contraction.
• Investment Activity: Net cash provided by investing activities turned positive ($8.1 million) compared to a slight use of cash in the prior year, largely due to a net decrease in short-term investments ($10.8 million) offset by capital expenditures of $2.7 million.

Outlook, Risks, and Management Commentary

Management Commentary:

• Capacity Expansion: Phase one of the Chippewa Falls expansion (55% capacity increase) was substantially completed. Phase two (additional 30% capacity) is contingent on demand and market conditions.
• Product Mix: The average layer count of PCBs increased from 14.7 to 16.1, indicating a shift toward more complex work, though this was offset by pricing pressure.
• Accounting Standards: The company is evaluating the impact of SFAS 123R (Share-Based Payment), expected to be adopted in 2006, which will likely have a material impact on earnings.

Risks and Contingencies:

• Customer Concentration: The top 10 customers accounted for 68% of net sales in Q1 2005. The top five OEM customers accounted for 58% of sales. Loss of major customers poses a material risk.
• Competition: Intense competition from Asian manufacturers with lower production costs threatens pricing power and market share.
• Deferred Tax Assets: The company maintains a valuation allowance of $14.5 million against $8.1 million in net deferred tax assets. Future earnings shortfalls could require additional valuation allowances.
• Raw Materials: Reliance on suppliers for laminates and copper; price increases or shortages could further erode margins.

Investor Verification Checklist

• Margin Sustainability: Verify if the 7% drop in gross margin is a temporary result of raw material costs or a structural shift due to product mix and competition.
• Customer Dependency: Assess the stability of the top 5 customers who represent over half of the company's revenue.
• Capital Expenditure ROI: Monitor the utilization rates of the new Chippewa Falls capacity to ensure the $10 million investment in Phase One generates expected returns.
• Deferred Tax Valuation: Review future earnings guidance to determine if the $14.5 million valuation allowance on deferred tax assets will need to be adjusted.
• Stock-Based Compensation: Evaluate the projected impact of SFAS 123R adoption in 2006 on future EPS.