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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
Commission file number 0-31285
Commission file number 0-31285
TTM TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 91-1033443 | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
2630 South Harbor Boulevard, Santa Ana, California 92704
(Address of Principal Executive Offices) (Zip Code)
(Address of Principal Executive Offices) (Zip Code)
(714) 327-3000
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Exchange Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| Common Stock, $0.001 par value | Nasdaq National Market |
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value of Common Stock held by nonaffiliates of the registrant (41,658,229)
based on the closing price of the registrant’s Common Stock as reported on the Nasdaq National
Market on June 30, 2006, was $602,794,574. For purposes of this computation, all officers,
directors, and 10% beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed to be an admission that such officers, directors, or 10%
beneficial owners are, in fact, affiliates of the registrant.
As of March 12, 2007, there were outstanding 42,177,893 shares of the registrant’s Common
Stock, $0.001 par value.
Documents Incorporated by Reference
Portions of the registrant’s definitive Proxy Statement for the 2007 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
TTM TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Table of Contents
Statement Regarding Forward-Looking Statements
This report on Form 10-K contains forward-looking statements regarding future events or our
future financial and operational performance. Forward-looking statements include statements
regarding markets for our products; trends in net sales, gross profits and estimated expense
levels; liquidity and anticipated cash needs and availability; and any statement that contains the
words “anticipate,” “believe,” “plan,” “forecast,” “foresee,” “estimate,” “project,” “expect,”
“seek,” “target,” “intend,” “goal” and other similar expressions. The forward-looking statements
included in this report reflect our current expectations and beliefs, and we do not undertake
publicly to update or revise these statements, even if experience or future changes make it clear
that any projected results expressed in this report, annual or quarterly reports to stockholders,
press releases or company statements will not be realized. In addition, the inclusion of any
statement in this report does not constitute an admission by us that the events or circumstances
described in such statement are material. Furthermore, we wish to caution and advise readers that
these statements are based on assumptions that may not materialize and may involve risks and
uncertainties, many of which are beyond our control, that could cause actual events or performance
to differ materially from those contained or implied in these forward-looking statements. These
risks and uncertainties include the business and economic risks described in Item 1A, “Risk
Factors.”
ITEM 1. BUSINESS
Overview
We are a one-stop provider of time-critical and technologically complex printed circuit boards
(“PCBs”) and backplane assemblies. PCBs serve as the foundation of sophisticated electronic
products. We serve high-end commercial markets and aerospace and defense markets, providing PCBs
and backplane assemblies for applications including networking/communications infrastructure;
high-end computing; commercial and military flight management systems; naval and aerospace radar
systems; weapons guidance systems; military communication devices; satellites; industrial controls;
and medical testing equipment. Our products are characterized by high levels of complexity and
moderate production volumes. Our customers include both original equipment manufacturers, or OEMs,
and electronic manufacturing services, or EMS, providers. On October 27, 2006, we completed the
acquisition of the Tyco Printed Circuit Group business (“PCG”) from Tyco International Ltd. for a
total purchase price of $226.8 million, excluding acquisition costs. We acquired six PCB
fabrication facilities and three backplane assembly facilities. One facility is located in
Shanghai, China, and the rest are located in the United States. We are in the process of closing
the Dallas, Oregon, facility, (one of the acquired facilities,) and transferring the PCB production
to our other facilities.
Industry Background
Printed circuit boards are manufactured from sheets of laminated material, or panels. Each
panel is typically subdivided into multiple printed circuit boards, each consisting of a pattern of
electrical circuitry etched from copper to provide an electrical connection between the components
mounted to it.
Printed circuit boards serve as the foundation for virtually all electronic products, ranging
from consumer products (such as cellular telephones and personal computers) to high-end commercial
electronic equipment (such as medical equipment, data communications routers, switches and
servers), and aerospace and defense electronic systems. Generally, consumer electronics products
utilize commodity-type printed circuit boards with lower layer counts, less complexity and larger
production runs. High-end commercial equipment and aerospace and defense products require more
customized, multilayer printed circuit boards using advanced technologies. In addition, most
high-end commercial and aerospace and defense end markets have low volume requirements that demand
a highly flexible manufacturing environment. As production of sophisticated circuit boards becomes
more complex, high-end manufacturers must continually invest in advanced production equipment,
engineering and process technology, and a skilled workforce. Backplane assemblies also exhibit
these characteristics.
According to Prismark Partners LLC, the worldwide market for printed circuit boards was
approximately $45 billion in 2006 with North America producing 11%, or approximately $5 billion.
As a result of consolidation and the slowdown in the electronics industry in 2001 and 2002, many
manufacturing facilities were closed, reducing North American printed circuit board manufacturing
capacity by as much as 40%. This capacity reduction combined with improved market demand led to
higher capacity utilization across the industry in 2003 and continuing through 2006. Management
believes this situation provides significant opportunities for well-capitalized manufacturers that
have advanced technological capabilities.
Several trends are impacting the printed circuit board manufacturing and backplane assembly
industries. These trends include:
Short electronic product life cycles. Continual advances in technology have shortened the
life cycles of complex commercial electronic products, placing greater pressure on OEMs to quickly
bring new products to market. The accelerated time-to-market and ramp-to-volume needs of OEMs for
high-end commercial equipment create opportunities for printed circuit board manufacturers that can
offer engineering support in the prototype stage and manufacturing scalability throughout the
production life cycle.
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Increasing complexity of electronic products. OEMs are continually designing higher
performance electronic products, which require technologically complex printed circuit boards that
can accommodate higher speeds and component densities. These complex printed circuit boards often
require very high layer counts, advanced manufacturing processes and materials, and high-mix
production capabilities, which involve processing small lots in a flexible manufacturing
environment. OEMs increasingly rely upon larger printed circuit board manufacturers, which possess
the financial resources necessary to invest in advanced manufacturing process technologies and
sophisticated engineering staff, often to the exclusion of smaller printed circuit board
manufacturers that do not possess such technologies or resources.
Increasing competition from Asian manufacturers. In recent years, many electronics
manufacturers have moved their commercial production to Asia to take advantage of its exceptionally
large, low-cost labor pool. This is particularly true for consumer electronics producers that
utilize commodity-type printed circuit boards with low layer counts and complexity. These less
sophisticated printed circuit boards are generally mass produced and have experienced significant
pricing pressures from Asian manufacturers. Printed circuit boards requiring complex technologies,
advanced manufacturing processes and materials, quick turnaround times or high-mix production are
subject to less competition from low cost regions. In addition, many of the unique challenges
involved in successfully designing and manufacturing highly complex printed circuit boards—and the
ongoing capital investment required to maintain state-of-the-art capabilities—have effectively
served as barriers to entry in these high-mix and high-complexity segments of the domestic printed
circuit board industry. Export controls also represent a barrier to entry for international
competition as they restrict the overseas export of defense-related materials, services and
sensitive technologies that are associated with government programs.
Decreased reliance on multiple printed circuit board manufacturers by OEMs. OEMs
traditionally have relied on multiple printed circuit board manufacturers to provide different
services as an electronic product moves through its life cycle. The transfer of a product among
different printed circuit board manufacturers often results in increased costs and inefficiencies
due to incompatible technologies and manufacturing processes and production delays. In addition,
OEMs find it easier to manage fewer printed circuit board manufacturers. As a result, OEMs are
reducing the number of printed circuit board manufacturers and backplane assembly services
providers on which they rely, presenting an opportunity for those that can offer one-stop
manufacturing capabilities—from prototype to volume production.
Increasing demand for aerospace and defense products. The aerospace and defense market is
characterized by time-consuming and complex certification processes, long product life cycles and a
unique combination of demand for leading-edge technology with extremely high reliability and
durability. Increasing focus on incorporating leading-edge technology in products for
reconnaissance and intelligence combined with continued spending on military communications,
aerospace and weapons systems applications are anticipated to drive steady end market growth.
Success in the defense and aerospace market is achieved only after manufacturers demonstrate the
long-term ability to pass extensive OEM and government certification processes; numerous product
inspections; audits for quality and performance; and extensive administrative requirements
associated with participation in government programs. Export controls represent a barrier to entry
for international competition as they restrict the overseas export of defense-related materials,
services and sensitive technologies that are associated with government programs. In addition, the
complexity of the end products serves as a barrier to entry to potential new suppliers.
Customers increasingly rely on manufacturing partners for backplane assembly and sub-system
assembly services. OEM customers are increasingly relying on either EMS companies or PCB
manufacturers for backplane assembly and sub-system assembly services as they focus on streamlining
their own supply chains. As a result, OEMs increasingly prefer close proximity to their assembly
partners as quick-turn and prototyping processes are more efficient with readily accessible
engineering teams and shorter shipping times. Although some North American backplane assembly has
migrated to Asia in recent years, complex custom backplanes and sub-systems have typically remained
in North America. The large physical size and complexity of many of these assemblies make them cost
prohibitive to ship from Asia to North America. Furthermore, North American facilities are better
able to service the small lot and quick turn-around requirements of many North American customers.
Cost savings from migrating backplane assembly to Asia are limited, particularly for more complex
and technically sophisticated large products.
The TTM Solution
We manufacture printed circuit boards and backplane assemblies that satisfy all stages of an
electronic product’s life cycle—from prototype to volume production. Key aspects of our solution
include:
| • | One-stop manufacturing solution. We offer a one-stop manufacturing solution to our customers through our specialized and integrated facilities, some of which focus on different stages of an electronic product’s life cycle. This one-stop solution allows us to provide a broad array of services and technologies to meet the rapidly evolving needs of our customer base. | ||
| • | Quick-turn services. We deliver highly complex printed circuit boards to customers in significantly compressed lead times. This rapid delivery service enables OEMs to develop sophisticated electronic products quickly and reduce their time to market. |
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| In addition, our quick-turn services provide us with an opportunity to cross-sell our other services, including high-mix and volume production in our targeted end markets. | |||
| • | Strong process and technology expertise. We deliver time-critical and highly complex manufacturing services through our advanced manufacturing processes and material and technology expertise. We regularly manufacture printed circuit boards with layer counts in excess of 30 layers. | ||
| • | Aerospace and defense capabilities. We provide a comprehensive product offering in the defense and aerospace market and provide customers with comprehensive PCB fabrication capabilities, exotic material expertise and technological experience. | ||
| • | Complementary backplane assembly. We provide backplane and sub-system assembly products as a natural extension of our commercial and defense PCB offerings. This segment is a full service provider of complex backplane assembly, sub-system assembly, electro-mechanical integration and design services. |
Our Manufacturing Services
Quick-turn
We refer to our rapid turnaround services as “quick-turn” because we provide custom-fabricated
printed circuit boards to our customers within as little as 24 hours to 10 days. As a result of our
ability to rapidly and reliably respond to the critical time requirements of our customers, we
generally receive a premium for our quick-turn services as compared to standard lead time prices.
| • | Prototype production. In the design, testing, and launch phase of a new electronic product’s life cycle, our customers typically require limited quantities of printed circuit boards in a very short period of time. We satisfy this need by manufacturing prototype printed circuit boards in small quantities of up to 50 boards per order, with delivery times ranging from as little as 24 hours to 10 days. | ||
| • | Ramp-to-volume production. After a product has successfully completed the prototype phase, our customers introduce the product to the market and require larger quantities of printed circuit boards in a short period of time. This transition stage between low-volume prototype production and volume production is known as ramp-to-volume. Our ramp-to-volume services typically include manufacturing up to a few hundred printed circuit boards per order with delivery times ranging from 5 to 15 days. |
For the years ended December 31, 2005 and 2006, orders with delivery requirements of 10 days
or less represented approximately 22% and 17% of our gross PCB sales, respectively. Quick-turn
orders decreased as a percentage of our gross PCB sales in 2006 due to both higher demand for our
standard lead-time, high technology production services as well as the inclusion of the PCG
facilities, which focus primarily on standard lead-time services.
Standard delivery
Our standard delivery time services focus on the high-mix and complex technology requirements
of our customers, with delivery times typically ranging from four to six weeks. Our high technology
expertise is evidenced by our ability to regularly produce complex printed circuit boards with more
than 30 layers in commercial volumes. In 2006, the average layer count of our PCBs decreased to
15.5 from 15.8 in 2005 due to the inclusion of the PCG facilities, which generally manufacture PCBs
with lower layer counts. In addition, many of our lower layer-count PCBs are complex as a result
of the incorporation of other technologically advanced features, including high performance
materials, blind and buried vias, sequential lamination and extremely fine geometries and
tolerances. Although we provide standard delivery time services to all customers, including large
OEMs, we do not target our standard delivery time services to high-volume, consumer electronics
applications such as cellular telephones, personal computers, hand-held devices and automotive
products.
Strategy
Our goal is to be the leading provider of time-critical, one-stop manufacturing services for
highly complex printed circuit boards and backplane assemblies. Key aspects of our strategy
include:
Leveraging our one-stop manufacturing solution. Our quick-turn capabilities allow us to
establish relationships with customers early in a product’s life cycle, giving us an advantage in
securing preferred vendor status for subsequent ramp-to-volume and volume production opportunities.
We also seek to gain quick-turn business from our existing ramp-to-volume and volume customers.
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Using our quick-turn capabilities to attract new customers with high-growth potential. Our
time-to-market strategy focuses on the rapid introduction and short product life cycle of advanced
electronic products. We continue to attract emerging companies to our quick-turn facilities and
believe that our ability to rapidly and reliably respond to the critical time requirements of our
customers provides us with a significant competitive advantage.
Continuing to improve our technological capabilities and manufacturing processes. We are
consistently among the first to adopt new developments in printed circuit board manufacturing
processes and technology. We continuously evaluate new manufacturing processes, materials, and
technology to increase our capabilities and further reduce our delivery times, improve quality,
increase yields and decrease costs. We continue to invest in technologies that are required by the
leading OEMs in the electronics industry.
Capitalizing on facility specialization to enhance operating efficiency. We utilize a
facility specialization strategy in which each commercial order is directed to the facility best
suited to the customer’s particular delivery time, product complexity and volume needs. Our plants
use compatible technologies and manufacturing processes, allowing us generally to move orders
easily between plants to optimize operating efficiency. This strategy provides customers with
faster delivery times and enhanced product quality and consistency.
Expanding our presence in targeted markets through internal initiatives and selective
acquisitions. We actively target technologies and business opportunities that enhance our
competitive position in selected markets. Our 2006 acquisition of PCG exemplifies our ability to
successfully expand our business into markets, such as the desirable aerospace and defense market.
We intend to pursue high-end commercial and defense customers that demand flexible and advanced
manufacturing processes, expertise with high-performance specialty materials, and other high-mix
and complex technologies. In addition, we regularly evaluate and pursue internal initiatives aimed
at adding new customers and better serving existing customers within our markets.
Manufacturing Technology
The market for our products is characterized by rapidly evolving technology. In recent years,
the trend in the electronic products industry has been to increase the speed, complexity and
performance of components while reducing their size. We believe our technological capabilities
allow us to address the needs of manufacturers who must bring complicated electronic products to
market faster.
To manufacture printed circuit boards, we generally receive circuit designs directly from our
customers in the form of computer data files, which we review to ensure data accuracy and product
manufacturability. Processing these computer files with computer aided manufacturing (CAM)
technology, we generate images of the circuit patterns that we then physically develop on
individual layers, using advanced photographic processes. Through a variety of plating and etching
processes, we selectively add and remove conductive materials to form horizontal layers of thin
circuits, called traces, which are separated by insulating material. A finished multilayer circuit
board laminates together a number of layers of circuitry, using intense heat and pressure under
vacuum. Vertical connections between layers are achieved by plating through small holes, called
vias. Vias are made by highly specialized drilling equipment capable of achieving extremely fine
tolerances with high accuracy. We specialize in high layer-count printed circuit boards with
extremely fine geometries and tolerances. Because of the tolerances involved, we employ clean rooms
in certain manufacturing processes where tiny particles might otherwise create defects on the
circuit patterns. We also use automated optical inspection systems to ensure consistent quality.
We believe that our highly specialized equipment and advanced manufacturing processes enable
us to reliably produce printed circuit boards with the following characteristics:
| • | High layer count. Manufacturing printed circuit boards with a large number of layers is difficult to accomplish due to the accumulation of manufacturing tolerances and registration systems required. We regularly manufacture printed circuit boards with more than 30 layers on a quick-turn and volume basis. For 2006, approximately 65% of our gross PCB sales involved the manufacture of printed circuit boards with at least 12 layers, compared with 68% in 2005. Printed circuit boards with at least 20 layers represented 37% of gross PCB sales in 2006, down slightly from 38% in 2005. | ||
| • | Blind and buried vias. Vias are drilled holes that provide electrical connectivity between layers of circuitry in a printed circuit board. Blind vias connect the surface layer of the printed circuit board to an internal layer and terminate at the internal layer. Buried vias are holes that do not reach either surface of the printed circuit board but allow inner layers to be interconnected. Products with blind and buried vias can be made thinner, smaller, lighter and with higher component density and more functionality than products with traditional vias. |
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| • | Embedded passives. Embedded passive technology involves embedding either the capacitive or resistive elements inside the printed circuit board, which allows for removal of passive components from the surface of the printed circuit board and thereby leaves more surface area for active components. Use of this technology results in greater design flexibility and products with higher component density and increased functionality. | ||
| • | Fine line traces and spaces. Traces are the connecting copper lines between the different components of the printed circuit board and spaces are the distances between traces. The smaller the traces and tighter the spaces, the higher the density on the printed circuit board and the greater the expertise required to achieve a desired final yield on an order. We are able to provide 0.003 inch traces and spaces. | ||
| • | High aspect ratios. The aspect ratio is the ratio between the thickness of the printed circuit board and the diameter of a drilled hole. The higher the ratio, the greater the difficulty to reliably form, electroplate and finish all the holes on a printed circuit board. We are able to provide aspect ratios of up to 15:1. | ||
| • | Thin core processing. A core is the basic inner-layer building block material from which printed circuit boards are constructed. A core consists of a flat sheet of material comprised of glass-reinforced resin with copper foil on either side. The thickness of inner-layer cores is determined by the overall thickness of the printed circuit board and the number of layers required. The demand for thinner cores derives from requirements of thinner printed circuit boards, higher layer counts and various electrical parameters. Core thickness in our printed circuit boards ranges from as little as 0.002 inches up to 0.062 inches. | ||
| • | Microvias. Microvias are small vias with diameters generally between 0.001 inches and 0.005 inches after plating. These very small vias consume much less space on the layers they interconnect, thereby providing for greater wiring densities and closer spacing of components and their attachment pads. The fabrication of printed circuit boards with microvias requires specialized equipment, such as laser drills, and highly developed process knowledge. Applications such as handheld wireless devices employ microvias to obtain a higher degree of functionality from a given surface area. | ||
| • | Advanced hole fill process. Our advanced hole fill processes provide designers the opportunity to increase the density of component placements by reducing the surface area required to place many types of components. In traditional design, components are routed from their surface interfaces through via connections in order to access power and ground connections and the internal circuitry used to connect to other discrete components. Our advanced hole fill processes provide methods to allow for vias to be placed inside their respective surface mount pads by filling the vias with a thermoset epoxy and plating flat copper surface mount pads directly over the filled hole. | ||
| • | Advanced materials. We manufacture circuit boards using a wide variety of advanced insulating materials. These high-performance materials offer electrical, thermal, and long-term reliability advantages over conventional materials but are more difficult to manufacture. We are certified by Underwriters Laboratories to manufacture printed circuit boards using many types and combinations of these specialty materials. This wide offering allows us to manufacture complex boards for niche and high-end commercial and aerospace and defense markets. | ||
| • | Advanced backplane assembly and system integration. We provide specialized assembly services for highly complex and large form-factor backplanes. These services provide additional value for many of the high technology backplane circuit boards produced in our printed circuit board manufacturing facilities. The manufacture of backplane assemblies involves mounting various electronic components to large PCBs. Components include, but are not limited to, connectors, capacitors, resistors, diodes, integrated circuits, hardware and a variety of other parts. TTM also assembles backplanes, sub-systems and provides full systems integration of backplane assemblies, cabling, power, thermal and other complex electromechanical parts into chassis and other enclosures. In addition to assembling, TTM provides a full range of inspection and testing services such as Automated Optical Inspection (“AOI”) and X-ray inspection to ensure that all components have been properly placed and electrical circuits are complete. | ||
| • | Flexible circuits. We manufacture circuits on flexible substrates that can be installed in three-dimensional applications for electronic packaging systems. Use of flexible circuitry enables improved reliability, improved electrical performance, reduced weight and reduced assembly costs when compared with traditional wire harness or ribbon cable packaging. We can combine these flexible substrates with rigid laminates to create high reliability, high layer count rigid-flex products. | ||
| • | High frequency circuits. We have the ability to produce and test specialized circuits used in radio-frequency (“RF”) or microwave emission and collection applications. These products are typically used for radar, transmit/receive antennas and similar wireless applications. Markets include defense, avionics, satellite, and commercial. The manufacture of these products requires advanced materials, equipment, and methods that are highly specialized and distinct from conventional printed circuit manufacturing techniques. We also offer specialized RF assembly and test services. |
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| • | Thermal management. Increased component density on circuit boards often requires improved thermal dissipation to reduce operating temperatures. We have the ability to produce printed circuits with electrically passive heatsinks laminated externally on a circuit board or between two circuit boards and/or electrically active thermal cores. | ||
| • | Design Engineering Services. We have the ability to offer both mechanical and electrical computer aided design (“CAD”) services, which allows us to offer our customers complete manufacturing opportunities for PCB, assembly and system level products. We provide design services for both defense and commercial applications. We also offer signal integrity, thermal, and structural analysis services. |
Customers and Markets
Our customers include both OEMs and EMS companies that primarily serve the
networking/communications, high-end computing, industrial/medical and aerospace/defense end markets
of the electronics industry. Because of the significant increase in aerospace/defense business due
to the recent acquisition of PCG, we have modified our end market classifications to more
accurately portray our resulting customer base. We measure customers as those companies that have
placed at least two orders in the preceding 12-month period. As of December 31, 2005, we had
approximately 580 customers and approximately 740 customers as of December 31, 2006. This
significant increase is primarily due to the acquisition of PCG.
The following table shows the percentage of our net sales in each of the principal end markets
we served for the periods indicated:
| End Markets (1) | 2004 | 2005 | 2006 | |||||||||
Networking/Communications |
42 | % | 46 | % | 43 | % | ||||||
Computing/Storage/Peripherals |
37 | 34 | 29 | |||||||||
Medical/Industrial/Instrumentation/Other |
14 | 12 | 12 | |||||||||
Aerospace/Defense |
7 | 8 | 16 | |||||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
| (1) | Sales to EMS companies are classified by the end markets of their OEM customers. |
Sales attributable to our five largest OEM customers, which can vary from year to year,
accounted for 54% of our net sales in 2005 and 39% of our net sales in 2006. This dilution in our
customer concentration reflects our acquisition of PCG, which allowed us to diversify our customer
base. Our five largest OEM customers in 2006 were, in alphabetical order, Cisco Systems,
Hewlett-Packard, IBM, Juniper Networks and Motorola. Sales attributed to OEMs include sales made
through EMS providers. Sales to EMS providers comprised approximately 69% and 65% of our sales in
2005 and 2006, respectively. Although our contractual relationship is with the EMS company, we
typically negotiate price and volume requirements directly with the OEMs. In addition, we are on
the approved vendor lists of several of our EMS providers, which allow us to be awarded additional
discretionary orders. Our five largest EMS customers in 2006 were, in alphabetical order,
Celestica, Flextronics, Jabil Circuit, Plexus and Solectron. Sales to our two largest EMS
customers, Solectron and Celestica, accounted for 20% and 10%, respectively, of our net sales in
2006.
During 2006, approximately 68% of our net sales were to customers in the United States, 12% in
Malaysia, 5% in Canada, 4% in China, 2% in Taiwan, 2% in Singapore and the remainder was primarily
to other European and Asian countries. In 2005, approximately 62% of our net sales were to
customers in the United States, 17% in Malaysia, 6% in Italy, 5% in Canada, and the remainder
primarily was to other European and Asian countries.
Our marketing strategy focuses on building long-term relationships with our customers’
engineering and new product introduction personnel early in the product development phase. As the
product moves from the prototype stage through ramp-to-volume and volume production, we shift our
focus to the customers’ procurement departments in order to capture sales at each point in the
product’s life cycle.
Our staff of engineers, sales support personnel, and managers assist our sales representatives
in advising customers with respect to manufacturing feasibility, design review, and technological
capabilities through direct communication and visits. We combine our sales efforts with customer
service at each facility to better serve our customers. Each large customer is typically assigned
an account manager to coordinate all of the company’s services across all its facilities.
Additionally, the largest and most strategic customers are also supported by selected program
management and engineering resources. Our sales force is comprised of direct salespeople,
complemented by a large force of commission-based, independent representatives.
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Our international footprint includes a backplane assembly operation in Shanghai, China, and
inventory hubs in Belgium, Canada, Czech Republic, Malaysia, Mexico, and Thailand. Our
international sales force services customers in Canada, China, England, Ireland, Israel, Mexico,
Singapore, Spain, Sweden and countries in Eastern Europe. We believe our international reach
enables us to access new customers and allows us to better serve existing customers.
Suppliers
The primary raw materials we use in PCB manufacturing include copper-clad laminate; chemical
solutions such as copper and gold for plating operations; photographic film; carbide drill bits;
and plastic for testing fixtures. The primary raw materials we use in backplane assembly include
PCBs, connectors, capacitors, resistors, diodes and integrated circuits.
We use just-in-time procurement practices to maintain our raw materials inventory at low
levels and work closely with our suppliers to obtain technologically advanced raw materials.
Although we have preferred suppliers for some raw materials, most of our raw materials are
generally readily available in the open market from numerous other potential suppliers. In
addition, we periodically seek alternative supply sources to ensure that we are receiving
competitive pricing and service. Adequate amounts of all raw materials have been available in the
past, and we believe this availability will continue into the foreseeable future.
Competition
Despite industry consolidation, the printed circuit board industry is fragmented and
characterized by intense competition. Our principal North American PCB competitors include DDi,
Endicott Interconnect Technologies, Merix, Sanmina-SCI, Coretec, Pioneer Circuits and Unicircuit.
Our principal international PCB competitors include Elec & Eltek, Hitachi, Ibiden, and Multek. Our
principal assembly competitors include Amphenol, Sanmina-SCI, Simclair, TT Electronics, and Via
Systems.
We believe we compete favorably based on the following competitive factors:
| • | status as largest North American PCB fabricator; | ||
| • | ability to offer the most comprehensive PCB product offering; | ||
| • | ability to offer one-stop manufacturing capabilities; | ||
| • | specialized and integrated manufacturing facilities; | ||
| • | ability to offer time-to-market capabilities; | ||
| • | capability and flexibility to produce technologically complex products; | ||
| • | leading edge aerospace and defense capabilities; | ||
| • | flexibility to manufacture high-mix products; | ||
| • | consistent high-quality product; and | ||
| • | outstanding customer service. |
In addition, we believe our continuous evaluation and early adoption of new manufacturing and
production technologies give us a competitive advantage. We believe that our ability to manufacture
PCBs using advanced technologies, such as blind and buried vias, larger panel size, sequential
lamination, exotic materials, and smaller traces and spaces provides us with a competitive
advantage over manufacturers that do not possess these advanced technological capabilities. Our
future success will depend in large part on our ability to maintain and enhance our manufacturing
capabilities and production technologies.
Backlog
Backlog consists of purchase orders received, including, in some instances, forecast
requirements released for production under customer contracts. Cancellation and rescheduling
charges will vary depending upon the time of cancellation or rescheduling. We obtain firm purchase
orders from our customers for all products. However, for many of these purchase orders, customers
do not make firm orders for delivery of products more than 30 to 60 days in advance. Some of the
markets which we serve are characterized by
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increasingly short product life cycles. For other markets, longer product life cycles are more
common as are orders for deliveries greater than 60 days in advance.
Intellectual Property
We have limited patent or trade secret protection for our manufacturing processes. We believe
our business depends on the effectiveness of our fabrication techniques and our ability to continue
to improve our manufacturing processes. We rely on the collective experience of our employees in
the manufacturing process to ensure we continuously evaluate and adopt new technologies in our
industry. In addition, we depend on training, recruiting, and retaining our employees, who are
required to have sufficient know-how to operate advanced equipment and to conduct complicated
manufacturing processes.
Governmental Regulation
Our operations are subject to federal, state, and local regulatory requirements relating to
environmental compliance, waste management, and health and safety matters. In particular, we are
subject to regulations promulgated by:
| • | the U.S. Occupational Safety and Health Administration (OSHA), and state OSHA and Department of Labor laws pertaining to health and safety in the workplace; | ||
| • | the Environmental Protection Agency, pertaining to air emissions, wastewater discharges, the use, storage, discharge, and disposal of hazardous chemicals used in the manufacturing processes; | ||
| • | corresponding state laws and regulations, including site investigation and remediation; | ||
| • | corresponding U.S. county and city agencies; and | ||
| • | corresponding agencies in China for the Shanghai facility. |
To date, the costs of compliance and environmental remediation have not been material to us.
These costs include investigation and remediation of our three Connecticut sites as required by the
Connecticut Land Transfer Act. Nevertheless, additional or modified requirements may be imposed in
the future. If such additional or modified requirements are imposed on us, or if conditions
requiring remediation at other sites are found to exist, we may be required to incur substantial
additional expenditures.
PCG made legal commitments to the U.S. Environmental Protection Agency and to the State of
Connecticut regarding settlement of enforcement actions against the PCG facilities in Connecticut.
The obligations include fulfillment of a Compliance Management Plan until at least July 2009,
completion of a wastewater audit, and installation of rinse water recycling systems at the
Stafford, Connecticut facility.
Employees
As of December 31, 2006, we had 4,009 employees. None of our U.S. employees are represented
by unions and in China, our employees are represented by a labor union on a national level. Of
these employees, 3,717 were involved in manufacturing and engineering, 153 worked in sales and
marketing, and 139 worked in accounting, systems and other support capacities. We have not
experienced any labor problems resulting in a work stoppage and believe that we have good relations
with our employees. On December 7, 2006, we announced plans to close the Dallas, Oregon, facility,
affecting approximately 300 employees.
Management
The following table, together with the accompanying text, presents certain information as of
February 28, 2007, with respect to each of our executive officers.
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| Name | Age | Position(s) Held With the Company | ||||
Kenton K. Alder
|
57 | Chief Executive Officer, President and Director | ||||
Steven W. Richards
|
42 | Executive Vice President, Chief Financial Officer and Secretary | ||||
Douglas L. Soder
|
46 | Executive Vice President | ||||
Shane S. Whiteside
|
41 | Executive Vice President and Chief Operating Officer | ||||
Daniel L. Felsenthal
|
50 | Vice President and Corporate Controller | ||||
Kenton K. Alder has served as our Chief Executive Officer, President and Director since March
1999. From January 1997 to July 1998, Mr. Alder served as Vice President of Tyco Printed Circuit
Group Inc., a printed circuit board manufacturer. Prior to that time, Mr. Alder served as President
and Chief Executive Officer of ElectroStar, Inc., previously a publicly held printed circuit board
manufacturing company, from December 1994 to December 1996. From January 1987 to November 1994,
Mr. Alder served as President of Lundahl Astro Circuits Inc., a predecessor company to ElectroStar.
Mr. Alder holds a Bachelor of Science degree in Finance and a Bachelor of Science degree in
Accounting from Utah State University.
Steven W. Richards has served as our Chief Financial Officer since December 2005 and Executive
Vice President since November 2006. Mr. Richards has served as our Secretary since September 2005,
a Vice President since October 2003 and our Treasurer from May 2000 to December 2005. From June
1996 to April 2000, Mr. Richards worked in a variety of financial planning and analysis roles at
Atlantic Richfield Corporation, a multinational oil and gas company. Mr. Richards holds a Bachelor
of Journalism degree from the University of Missouri, Columbia and a Master of Business
Administration degree from the University of Southern California. Mr. Richards is a Chartered
Financial Analyst charterholder.
Douglas L. Soder has served as our Executive Vice President since November 2006. Prior to
joining TTM Technologies, Mr. Soder held the position of Executive Vice President for Tyco
Electronics – Printed Circuit Group from January 2001 to November 2006 at which time the company
was acquired by TTM Technologies. During an almost 24-year career at Tyco Electronics, Mr. Soder
served in a variety of sales and sales management positions at AMP Incorporated and PCG. From
November 1996 to January 2001, Mr. Soder was Vice President of Sales and Marketing for PCG. Mr.
Soder holds a Bachelor of Arts degree in Political Science from Dickinson College.
Shane S. Whiteside has served as an Executive Vice President since November 2006 and Senior
Vice President since October 2003 and our Vice President and Chief Operating Officer since December
2002. From January 2001 to November 2002, Mr. Whiteside was the Vice President of Operations—Santa
Ana Division and our Director of Operations—Santa Ana Division from July 1999 to December 2000.
From March 1998 to June 1999, Mr. Whiteside was the Director of Operations of Power Circuits. Mr.
Whiteside holds a Bachelor of Arts degree in Economics from the University of California at Irvine.
Daniel L. Felsenthal has served as our Vice President and Corporate Controller since February
2003. From May 2002 through November 2002, Mr. Felsenthal was a financial consultant. From
November 2001 through May 2002, Mr. Felsenthal served as the Chief Financial Officer for
Castro–Krause’s Industries, Inc. From February 1999 through October 2001, Mr. Felsenthal served as
the Vice President, Corporate Controller for Krause’s Furniture, Inc. Mr. Felsenthal holds a
Bachelor of Arts degree in Economics from the University of California at Los Angeles and a Master
of Business Administration degree from the University of Pennsylvania, the Wharton School.
Availability of Reports Filed with the Securities and Exchange Commission
Our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
registration statements, and amendments to those reports are available without charge on our
website, http://www.ttmtech.com/ir/sec filings, as soon as reasonably practicable after they are
filed electronically with the SEC. Copies are also available without charge by (i) telephonic
request by calling our Investor Relations Department at (714) 241-0303, (ii) e-mail request to
investor@ttmtech.com, or (iii) a written request to TTM Technologies, Inc., Attention: Investor
Relations, 2630 South Harbor Blvd., Santa Ana, CA 92704.
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ITEM 1A. RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully
consider the factors described below, in addition to those discussed elsewhere in this report, in
analyzing an investment in our common stock. If any of the events described below occurs, our
business, financial condition, and results of operations would likely suffer, the trading price of
our common stock could fall, and you could lose all or part of the money you paid for our common
stock.
In addition, the following risk factors and uncertainties could cause our actual results to
differ materially from those projected in our forward-looking statements, whether made in this Form
10-K or the other documents we file with the SEC, or our annual or quarterly reports to
stockholders, future press releases, or orally, whether in presentations, responses to questions,
or otherwise.
Risks Related to Our Company
We are heavily dependent upon the worldwide electronics industry, which is characterized by
significant economic cycles and fluctuations in product demand. A significant downturn in the
electronics industry could result in decreased demand for our manufacturing services and could
lower our sales and gross margins.
A majority of our revenues are generated from the electronics industry, which is characterized
by intense competition, relatively short product life cycles, and significant fluctuations in
product demand. Furthermore, the industry is subject to economic cycles and recessionary periods
and would be negatively affected by a contraction in the U.S. economy and worldwide electronics
market. Moreover, due to the uncertainty in the end markets served by most of our customers, we
have a low level of visibility with respect to future financial results. A lasting economic
recession, excess manufacturing capacity, or a decline in the electronics industry could negatively
affect our business, results of operations, and financial condition. For example, our net sales
declined from $129.0 million in 2001 to $89.0 million in 2002 due to a significant downturn in
demand in the electronics industry during 2001 and 2002. A decline in our net sales could harm our
profitability and results of operations and could require us to record an additional valuation
allowance against our deferred tax assets or recognize an impairment of our long-lived assets,
including goodwill and other intangible assets.
We recently completed a major acquisition and expect to continue to pursue acquisitions to expand
our operations. We may have trouble integrating acquisitions. Acquisitions involve numerous risks.
As part of our business strategy, we expect that we will continue to grow by pursuing
acquisitions of businesses, technologies, assets, or product lines that complement or expand our
existing business. On October 27, 2006, we acquired the Printed Circuit Group business unit from
Tyco International Ltd. The acquired PCG business generally consists of nine printed circuit board
or backplane and subassembly plants, including one in China and the total purchase price was $226.8
million, excluding acquisition costs.
We paid for the transaction from our available cash and cash equivalents and from a new senior
credit financing. We obtained a new senior secured term loan of $200 million with a six-year
maturity and a senior secured revolving credit facility of $40 million with a five-year maturity
from a syndicate of financial institutions. The term loan and revolving facility are secured by
substantially all of our domestic assets and 65% of our foreign assets.
Our acquisition of businesses and expansion of operations involve risks, including the
following:
| • | the potential inability to successfully integrate acquired operations and businesses or to realize anticipated synergies, economies of scale, or other expected value; | ||
| • | diversion of management’s attention from normal daily operations of our existing business to focus on integration of the newly acquired business; | ||
| • | difficulties in managing production and coordinating operations at new sites; | ||
| • | the potential loss of key employees of acquired operations; | ||
| • | the potential inability to retain existing customers of acquired companies when we desire to do so; | ||
| • | insufficient revenues to offset increased expenses associated with acquisitions; | ||
| • | the potential decrease in overall gross margins associated with acquiring a business with a different product mix; | ||
| • | the inability to identify certain unrecorded liabilities; |
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| • | the potential need to restructure, modify, or terminate customer relationships of the acquired company; | ||
| • | an increased concentration of business from existing or new customers; and | ||
| • | the potential inability to identify assets best suited to our business plan. |
Acquisitions may cause us to:
| • | enter lines of business and/or markets in which we have limited or no prior experience; | ||
| • | issue debt and be required to abide by stringent loan covenants; | ||
| • | assume liabilities; | ||
| • | record goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential periodic impairment charges; | ||
| • | become subject to litigation and environmental issues; | ||
| • | incur unanticipated costs; | ||
| • | incur large and immediate write-offs; | ||
| • | issue common stock that would dilute our current stockholders’ percentage ownership; and | ||
| • | incur substantial transaction-related costs, whether or not a proposed acquisition is consummated. |
Acquisitions of high technology companies are inherently risky, and no assurance can be given
that our recent or future acquisitions will be successful and will not harm our business, operating
results, or financial condition. Failure to manage and successfully integrate acquisitions we make
could harm our business and operating results in a material way. Even when an acquired company has
already developed and marketed products, product enhancements may not be made in a timely fashion.
In addition, unforeseen issues might arise with respect to such products after the acquisition.
During periods of excess global printed circuit board manufacturing capacity, our gross margins may
fall and/or we may have to incur restructuring charges if we choose to reduce the capacity of or
close any of our facilities.
When we experience excess capacity, our sales revenues may not fully cover our fixed overhead
expenses, and our gross margins will fall. In addition, we generally schedule our quick-turn
production facilities at less than full capacity to retain our ability to respond to unexpected
additional quick-turn orders. However, if these orders are not received, we may forego some
production and could experience continued excess capacity.
If we conclude we have significant, long-term excess capacity, we may decide to permanently
close one or more of our facilities, and lay off some of our employees. Closures or lay-offs could
result in our recording restructuring charges such as severance, other exit costs, and asset
impairments.
We face a risk that capital needed for our business and to repay our debt obligations will not be
available when we need it. Additionally, our leverage and our debt service obligations may
adversely affect our cash flow.
On December 31, 2006, we had total indebtedness of approximately $200.7 million, which
represented approximately 41% of our total capitalization.
Our discretionary use of cash or cash flow is constrained by certain leverage and interest
coverage ratio tests required to be met under the terms of our credit agreement. These ratios
become more restrictive over each of the next successive quarters. As a result, if the financial
performance of our business falls short of expectations, then we might be required to repay
additional debt beyond current planned repayments. We also are required to apply any excess cash
flow, as defined by the credit agreement, to pay down our debt.
Our indebtedness could have significant negative consequences, including:
| • | increasing our vulnerability to general adverse economic and industry conditions, |
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| • | limiting our ability to obtain additional financing, | ||
| • | requiring the dedication of a substantial portion of any cash flow from operations to service our indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures, | ||
| • | limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete, and | ||
| • | placing us at a possible competitive disadvantage to less leveraged competitors and competitors that have better access to capital resources. |
We are dependent upon a relatively small number of OEM customers for a large portion of our net
sales, and a decline in sales to major customers could harm our results of operations.
A small number of customers are responsible for a significant portion of our net sales. Our
five largest OEM customers accounted for approximately 54% of our net sales in 2005 and
approximately 39% of our net sales in 2006. Sales attributed to OEMs include both direct sales as
well as sales that the OEMs place through EMS providers. As result of the acquisition of PCG, our
customer concentration could fluctuate, depending on future customer requirements, which will
depend in large part on market conditions in the electronics industry segments in which our
customers participate. The loss of one or more significant customers or a decline in sales to our
significant customers could harm our business, results of operations, and financial condition and
lead to declines in the trading price of our common stock. In addition, we generate significant
accounts receivable in connection with providing manufacturing services to our customers. If one or
more of our significant customers were to become insolvent or were otherwise unable to pay for the
manufacturing services provided by us, our results of operations would be harmed.
We compete against manufacturers in Asia, where production costs are lower. These competitors may
gain market share in our key market segments, which may have an adverse effect on the pricing of
our products.
We may be at a competitive disadvantage with respect to price when compared to manufacturers
with lower-cost facilities in Asia and other locations. We believe price competition from printed
circuit board manufacturers in Asia and other locations with lower production costs may play an
increasing role in the market. Although we do have a backplane assembly facility in China, we do
not have offshore facilities for PCB fabrication in lower-cost locations such as Asia. While
historically our competitors in these locations have produced less technologically advanced printed
circuit boards, they continue to expand their capacity and capabilities with advanced equipment to
produce higher technology printed circuit boards. In addition, fluctuations in foreign currency
exchange rates may benefit these offshore competitors. As a result, these competitors may gain
market share, which may force us to lower our prices, reducing our gross margins.
A trend toward consolidation among OEMs could adversely affect our business.
Recently, some of our large customers, including Siemens and Nokia, have consolidated.
Depending on which organization becomes the controller of the supply chain function following the
consolidation, we may not be retained as a preferred or approved supplier. In addition, product
duplication at the OEM could result in the termination of a product line that we currently support.
While there is potential for increasing our position with the combined Company, there does exist
the potential for decreased revenue if we are not retained as a continuing supplier. We also face
the risk of increased pricing pressure from the combined OEM because of its increased market share.
Our failure to comply with the requirements of environmental laws could result in fines and
revocation of permits necessary to our manufacturing processes. Failure to operate in conformance
with environmental laws could lead to debarment from our participation in federal government
contracts.
Our operations are regulated under a number of federal, state, and foreign environmental and
safety laws and regulations that govern, among other things, the discharge of hazardous materials
into the air and water, as well as the handling, storage, and disposal of such materials. These
laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and
Recovery Act, the Superfund Amendment and Reauthorization Act, the Comprehensive Environmental
Response, Compensation and Liability Act, and the Federal Motor Carrier Safety Act as well as
analogous state and foreign laws. Compliance with these environmental laws is a major consideration
for us because our manufacturing processes use and generate materials classified as hazardous, such
as ammoniacal and cupric etching solutions, copper, nickel and other plating baths, etc. Because we
use hazardous materials and generate hazardous wastes in our manufacturing processes, we may be
subject to potential financial liability for costs associated with the investigation and
remediation of our own sites, or sites at which we have arranged for the disposal of hazardous
wastes, if such sites become contaminated. Even if we fully comply with applicable environmental
laws and are not directly at fault for the contamination, we may still be liable. The wastes we
generate include spent ammoniacal and cupric etching solutions, metal stripping solutions, and
waste acid solutions, waste alkaline cleaners, waste oil and waste waters that contain heavy metals
such as copper, tin, lead, nickel, gold, silver, cyanide, and fluoride; and both filter cake and
spent ion exchange resins from equipment used for
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on-site waste treatment. We believe that our operations substantially comply with all
applicable environmental laws. However, any material violations of environmental laws by us could
subject us to revocation of our effluent discharge permits. Any such revocations could require us
to cease or limit production at one or more of our facilities, and harm our business, results of
operations, and financial condition. Even if we ultimately prevail, environmental lawsuits against
us would be time consuming and costly to defend.
Prior to our acquisition of the PCG business, PCG made legal commitments to the U.S.
Environmental Protection Agency and to the State of Connecticut regarding settlement of enforcement
actions related to the PCG facilities in Connecticut. The obligations include fulfillment of a
Compliance Management Plan through at least July 2009 and completion of a wastewater audit and
installation of rinse water recycling systems at the Stafford, Connecticut facility. Failure to
meet either commitment could result in further costly enforcement actions, including exclusion from
participation in defense and other federal contracts, which would materially harm our business,
results of operations, and financial condition.
Environmental laws also could become more stringent over time, imposing greater compliance
costs and increasing risks and penalties associated with violation. We operate in environmentally
sensitive locations, and we are subject to potentially conflicting and changing regulatory agendas
of political, business, and environmental groups. Changes or restrictions on discharge limits,
emissions levels, material storage, handling, or disposal might require a high level of unplanned
capital investment or global relocation. It is possible that environmental compliance costs and
penalties from new or existing regulations may harm our business, results of operations, and
financial condition.
In addition, we are increasingly required to certify compliance to the European Union
Restriction of Hazardous Substances (“RoHS”) directive and non-applicability to the Waste
Electrical and Electronic Equipment directive for some of the products that we manufacture. As
with other types of product certifications that we routinely provide, we may incur liability and
pay damages if our products do not conform to our certification.
We are exposed to the credit risk of some of our customers and to credit exposures in weakened
markets.
Most of our sales are on an “open credit” basis, with standard industry payment terms. We
monitor individual customer payment capability in granting such open credit arrangements, seek to
limit such open credit to amounts we believe the customers can pay, and maintain reserves we
believe are adequate to cover exposure for doubtful accounts. During periods of economic downturn
in the electronics industry and the global economy, our exposure to credit risks from our customers
increases. Although we have programs in place to monitor and mitigate the associated risks, such
programs may not be effective in reducing our credit risks.
Our 10 largest customers accounted for approximately 66% of our net sales in 2005 and
approximately 53% of our net sales in 2006. Our OEM customers often direct a significant portion
of their purchases through a relatively limited number of EMS companies. Our contractual
relationship is often with the EMS companies, who are obligated to pay us for our products.
Because we expect our OEM customers to continue to direct our sales to EMS companies, we expect to
continue to be subject to the credit risk with a limited number of EMS customers. If one or more
of our significant customers were to become insolvent or were otherwise unable to pay us, our
results of operations would be harmed.
Some of our customers are EMS companies located abroad. Our exposure has increased as these
foreign customers continue to expand. With the primary exception of sales from our facility in
China and a portion of sales from our Ireland sales office, our foreign sales are denominated in
U.S. dollars and are typically on the same “open credit” basis and terms described above. Our
foreign receivables were approximately 11% of our net account receivable as of December 31, 2006
and are expected to continue to grow as a percentage of our total receivables. We do not utilize
credit insurance as a risk management tool.
We rely on suppliers for the timely delivery of raw materials and components used in manufacturing
our printed circuit boards and backplane assemblies, and an increase in industry demand or the
presence of a shortage for these raw materials or components may increase the price of these raw
materials and reduce our gross margins. If a raw material supplier fails to satisfy our product
quality standards, it could harm our customer relationships.
To manufacture printed circuit boards, we use raw materials such as laminated layers of
fiberglass, copper foil, chemical solutions, gold, and other commodity products, which we order
from our suppliers. Although we have preferred suppliers for most of these raw materials, the
materials we use are generally readily available in the open market, and numerous other potential
suppliers exist. In the case of backplane assemblies, components include connectors, sheet metal,
capacitors, resistors and diodes, many of which are custom made and controlled by our customers’
approved vendors. These components for backplane assemblies in some cases have limited or sole
sources of supply. From time to time, we may experience increases in raw material prices, based on
demand trends, which can negatively affect our gross margins. In addition, consolidations and
restructuring in our supplier base may result in adverse materials pricing due to reduction in
competition among our suppliers. Furthermore, if a raw material supplier fails to satisfy our
product quality standards, it could harm our customer relationships. Suppliers may from time to
time extend lead times, limit supplies, or increase prices, due to capacity constraints or other
factors, which could harm our ability to deliver our products on a timely basis.
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If we are unable to respond to rapid technological change and process development, we may not be
able to compete effectively.
The market for our manufacturing services is characterized by rapidly changing technology and
continual implementation of new production processes. The future success of our business will
depend in large part upon our ability to maintain and enhance our technological capabilities, to
manufacture products that meet changing customer needs, and to successfully anticipate or respond
to technological changes on a cost-effective and timely basis. We expect that the investment
necessary to maintain our technological position will increase as customers make demands for
products and services requiring more advanced technology on a quicker turnaround basis. We may not
be able to raise additional funds in order to respond to technological changes as quickly as our
competitors.
In addition, the printed circuit board industry could encounter competition from new or
revised manufacturing and production technologies that render existing manufacturing and production
technology less competitive or obsolete. We may not respond effectively to the technological
requirements of the changing market. If we need new technologies and equipment to remain
competitive, the development, acquisition, and implementation of those technologies and equipment
may require us to make significant capital investments.
Competition in the printed circuit board market is intense, and we could lose market share if we
are unable to maintain our current competitive position in end markets using our quick-turn, high
technology and high-mix manufacturing services.
The printed circuit board industry is intensely competitive, highly fragmented, and rapidly
changing. We expect competition to continue, which could result in price reductions, reduced gross
margins, and loss of market share. Our principal North American PCB competitors include DDi,
Endicott Interconnect Technologies, Merix, Sanmina-SCI, Coretec, Pioneer Circuits and Unicircuit.
Our principal international PCB competitors include Elec & Eltek, Hitachi, Ibiden, and Multek. Our
principal assembly competitors include Amphenol, Sanmina-SCI, Simclair, TT Electronics, and Via
Systems. In addition, we increasingly compete on an international basis, and new and emerging
technologies may result in new competitors entering our markets.
Some of our competitors and potential competitors have advantages over us, including:
| • | greater financial and manufacturing resources that can be devoted to the development, production, and sale of their products; | ||
| • | more established and broader sales and marketing channels; | ||
| • | more manufacturing facilities worldwide, some of which are closer in proximity to OEMs; | ||
| • | manufacturing facilities that are located in countries with lower production costs; | ||
| • | lower capacity utilization, which in peak market conditions can result in shorter lead times to customers; | ||
| • | ability to add additional capacity faster or more efficiently; | ||
| • | preferred vendor status with existing and potential customers; | ||
| • | greater name recognition; and | ||
| • | larger customer bases. |
In addition, these competitors may respond more quickly to new or emerging technologies, or
adapt more quickly to changes in customer requirements, and devote greater resources to the
development, promotion, and sale of their products than we do. We must continually develop improved
manufacturing processes to meet our customers’ needs for complex products, and our manufacturing
process technology is generally not subject to significant proprietary protection. During
recessionary periods in the electronics industry, our strategy of providing quick-turn services, an
integrated manufacturing solution, and responsive customer service may take on reduced importance
to our customers. As a result, we may need to compete more on the basis of price, which could cause
our gross margins to decline. Periodically, printed circuit board manufacturers and backplane
assembly providers experience overcapacity. Overcapacity, combined with weakness in demand for
electronic products, results in increased competition and price erosion for our products.
Our quarterly results of operations are often subject to demand fluctuations and seasonality. With
a high level of fixed operating costs, even small revenue shortfalls would decrease our gross
margins and potentially cause the trading price of our common stock to decline.
Our quarterly results of operations fluctuate for a variety of reasons, including:
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| • | timing of orders from and shipments to major customers; | ||
| • | the levels at which we utilize our manufacturing capacity; | ||
| • | price competition; | ||
| • | changes in our mix of revenues generated from quick-turn versus standard delivery time services; | ||
| • | expenditures, charges or write-offs, including those related to acquisitions, facility restructurings, or asset impairments; and | ||
| • | expenses relating to expanding existing manufacturing facilities. |
A significant portion of our operating expenses is relatively fixed in nature, and planned
expenditures are based in part on anticipated orders. Accordingly, unexpected revenue shortfalls
may decrease our gross margins. In addition, we have experienced sales fluctuations due to seasonal
patterns in the capital budgeting and purchasing cycles, as well as inventory management practices
of our customers and the end markets we serve. In particular, the seasonality of the computer
industry and quick-turn ordering patterns affects the overall printed circuit board industry. These
seasonal trends have caused fluctuations in our quarterly operating results in the past and may
continue to do so in the future. Results of operations in any quarterly period should not be
considered indicative of the results to be expected for any future period. In addition, our future
quarterly operating results may fluctuate and may not meet the expectations of securities analysts
or investors. If this occurs, the trading price of our common stock would likely decline.
Because we sell on a purchase order basis, we are subject to uncertainties and variability in
demand by our customers that could decrease revenues and harm our operating results.
We generally sell to customers on a purchase order basis rather than pursuant to long-term
contracts. Our quick-turn orders are subject to particularly short lead times. Consequently, our
net sales are subject to short-term variability in demand by our customers. Customers submitting
purchase orders may cancel, reduce, or delay their orders for a variety of reasons. The level and
timing of orders placed by our customers may vary, due to:
| • | customer attempts to manage inventory; | ||
| • | changes in customers’ manufacturing strategies, such as a decision by a customer to either diversify or consolidate the number of printed circuit board manufacturers or backplane assembly service providers used or to manufacture or assemble its own products internally; | ||
| • | variation in demand for our customers’ products; and | ||
| • | changes in new product introductions. |
We have periodically experienced terminations, reductions, and delays in our customers’
orders. Further terminations, reductions, or delays in our customers’ orders could harm our
business, results of operations, and financial condition.
The increasing prominence of EMS providers in the printed circuit board industry could reduce our
gross margins, potential sales, and customers.
Sales to EMS providers represented approximately 65% of our net sales in 2006. Sales to EMS
providers include sales directed by OEMs as well as orders placed with us at the EMS providers’
discretion. EMS providers source on a global basis to a greater extent than OEMs. The growth of
EMS providers increases the purchasing power of such providers and could result in increased price
competition or the loss of existing OEM customers. In addition, some EMS providers, including some
of our customers, have the ability to directly manufacture printed circuit boards and create
backplane assemblies. If a significant number of our other EMS customers were to acquire these
abilities, our customer base might shrink, and our sales might decline substantially. Moreover, if
any of our OEM customers outsource the production of printed circuit boards and creation of
backplane assemblies to these EMS providers, our business, results of operations, and financial
condition may be harmed.
If events or circumstances occur in our business that indicate that our goodwill and intangibles
may not be recoverable, we could have impairment charges that would negatively affect our earnings.
As of December 31, 2006, our consolidated balance sheet reflected $141.9 million of goodwill
and intangible assets. We evaluate whether events and circumstances have occurred that indicate
the remaining balance of goodwill and intangible assets may not be recoverable. If factors indicate
that assets are impaired, we would be required to reduce the carrying value of our goodwill and
intangible assets, which could harm our results during the periods in which such a reduction is
recognized. Our goodwill and
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intangible assets may increase in future periods if we consummate other acquisitions.
Amortization or impairment of these additional intangibles would, in turn, harm our earnings.
Damage to our manufacturing facilities due to fire, natural disaster or other event could harm our
financial results.
We have U.S. manufacturing facilities in California, Connecticut, Oregon, Utah, Washington,
and Wisconsin. We also have a manufacturing facility in China. The destruction or closure of any of
our manufacturing facilities for a significant period of time as a result of fire; explosion;
blizzard; act of war or terrorism; or flood, tornado, earthquake, lightning, or other natural
disaster could harm us financially, increasing our costs of doing business and limiting our ability
to deliver our manufacturing services on a timely basis.
Our manufacturing processes depend on the collective industry experience of our employees. If a
significant number of these employees were to leave us, it could limit our ability to compete
effectively and could harm our financial results.
We have limited patent or trade secret protection for our manufacturing processes. We rely on
the collective experience of our employees in the manufacturing processes to ensure we continuously
evaluate and adopt new technologies in our industry. Although we are not dependent on any one
employee or a small number of employees, if a significant number of our employees involved in our
manufacturing processes were to leave our employment, and we were not able to replace these people
with new employees with comparable experience, our manufacturing processes might suffer as we might
be unable to keep up with innovations in the industry. As a result, we may lose our ability to
continue to compete effectively.
Our profitability is impacted by the global interest rate environment.
We are exposed to interest rate risk relating to our senior secured term loan and revolving
credit facility, which bears interest at either the Alternate Base Rate, as defined in our credit
agreement, plus an applicable margin or LIBOR plus an additional margin. The interest rate on our
term loan is linked to LIBOR and re-prices at intervals of 30, 60, 90, or 180 days as selected by
the Company. A 1.0% increase in the interest rate would result in an increase of approximately
$2.0 million in interest expense per year
Our revolving credit facility bears interest at floating rates. The revolving credit facility
bears interest at rates ranging from 1.75% to 2.25% per year plus the applicable LIBOR or from
0.75% to 1.25% per year plus the Alternate Base Rate. As of December 31, 2006, we have no
outstanding revolving loans.
We may be exposed to intellectual property infringement claims by third parties that could be
costly to defend, could divert management’s attention and resources, and if successful, could
result in liability.
We could be subject to legal proceedings and claims for alleged infringement by us of
third-party proprietary rights, such as patents, from time to time in the ordinary course of
business. It is possible that the circuit board designs and other specifications supplied to us by
our customers might infringe on the patents or other intellectual property rights of third parties,
in which case our manufacture of printed circuit boards according to such designs and
specifications could expose us to legal proceedings for allegedly aiding and abetting the
violation, as well as to potential liability for the infringement. If we do not prevail in any
litigation as a result of any such allegations, our business could be harmed.
We depend heavily on a single end customer, the U.S. government, for a substantial portion of our
business, including programs subject to security classification restrictions on information.
Changes affecting the government’s capacity to do business with us or our direct customers or the
effects of competition in the defense industry could have a material adverse effect on our
business.
A significant portion of our revenues are derived from products and services ultimately sold
to the U.S. government and are therefore affected by, among other things, the federal budget
process. We are a supplier, primarily as a subcontractor, to the U.S. government and its agencies
as well as foreign governments and agencies. These contracts are subject to the respective
customers’ political and budgetary constraints and processes, changes in customers’ short-range and
long-range strategic plans, the timing of contract awards, and in the case of contracts with the
U.S. government, the congressional budget authorization and appropriation processes, the
government’s ability to terminate contracts for convenience or for default, as well as other risks
such as contractor suspension or debarment in the event of certain violations of legal and
regulatory requirements. The termination or failure to fund one or more significant contracts by
the U.S. government could have a material adverse effect on our business, results of operations or
prospects.
Our business may suffer if any of our key senior executives discontinues employment with us or if
we are unable to recruit and retain highly skilled engineering and sales staff.
Our future success depends to a large extent on the services of our key managerial employees.
We may not be able to retain our executive officers and key personnel or attract additional
qualified management in the future. Our business also depends on our
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continuing ability to recruit, train, and retain highly qualified employees, particularly
engineering and sales and marketing personnel. The competition for these employees is intense, and
the loss of these employees could harm our business. Further, our ability to successfully integrate
acquired companies depends in part on our ability to retain key management and existing employees
at the time of the acquisition.
Increasingly, our larger customers are requesting that we enter into supply agreements with them
that have increasingly restrictive terms and conditions. These agreements typically include
provisions that increase our financial exposure, which could result in significant costs to us.
Increasingly, our larger customers are requesting that we enter into supply agreements with
them. These agreements typically include provisions that generally serve to increase our exposure
for product liability and warranty claims – as compared to our standard terms and conditions –
which could result in higher costs to us as a result of such claims. In addition, these agreements
typically contain provisions that seek to limit our operational and pricing flexibility and extend
payment terms, which can adversely impact our cash flow and results of operations.
Our commercial assembly operation serves customers and has a manufacturing facility outside the
United States and is subject to the risks characteristic of international operations. These risks
include significant potential financial damage and potential loss of the business and its assets.
Because we have manufacturing operations and sales offices located in Asia and Europe, we are
subject to the risks of changes in economic and political conditions in those countries, including
but not limited to:
| • | managing international operations; | ||
| • | export license requirements; | ||
| • | fluctuations in the value of local currencies; | ||
| • | labor unrest and difficulties in staffing; | ||
| • | government or political unrest; | ||
| • | longer payment cycles; | ||
| • | language and communication barriers as well as time zone differences; | ||
| • | cultural differences; | ||
| • | increases in duties and taxation levied on our products; | ||
| • | imposition of restrictions on currency conversion or the transfer of funds; | ||
| • | limitations on imports or exports of our product offering; | ||
| • | travel restrictions; | ||
| • | expropriation of private enterprises; and | ||
| • | the potential reversal of current favorable policies encouraging foreign investment and trade. |
Products we manufacture may contain design or manufacturing defects, which could result in reduced
demand for our services and liability claims against us.
We manufacture products to our customers’ specifications, which are highly complex and may
contain design or manufacturing errors or failures, despite our quality control and quality
assurance efforts. Defects in the products we manufacture, whether caused by a design,
manufacturing, or materials failure or error, may result in delayed shipments, customer
dissatisfaction, a reduction or cancellation of purchase orders, or liability claims against us. If
these defects occur either in large quantities or too frequently, our business reputation may be
impaired. Our sales mix has shifted towards standard delivery time products, which have larger
production runs, thereby increasing our exposure to these types of defects. Since our products are
used in products that are integral to our customers’ businesses, errors, defects, or other
performance problems could result in financial or other damages to our customers beyond the cost of
the printed circuit board, for which we may be liable. Although our invoices and sales arrangements
generally contain provisions designed to limit our exposure to product liability and related
claims, existing or future laws or unfavorable judicial decisions could negate these limitation of
liability provisions. Product liability litigation against us, even if it were unsuccessful, would
be time consuming and costly to defend. Although we maintain technology errors and omissions
insurance, we cannot assure you that we will continue to be able to purchase such insurance
coverage in the future on terms that are satisfactory to us, if at all.
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We are subject to risks of currency fluctuations.
A portion of our cash and other current assets are held in currencies other than the U.S.
dollar. As of December 31, 2006, we had approximately $19 million of current assets denominated in
Chinese RMB. Changes in exchange rates among other currencies and the U.S. dollar will affect the
value of these assets as translated to U.S. dollars in our balance sheet. To the extent that we
ultimately decide to repatriate some portion of these funds to the United States, the actual value
transferred could be impacted by movements in exchange rates. Any such type of movement could
negatively impact the amount of cash available to fund operations or to repay debt.
We export defense and commercial products from the United States to other countries. If we fail to
comply with export laws, we could be subject to fines and other punitive actions.
Exports from the United States are regulated by the U.S. Department of State and U.S.
Department of Commerce. Failure to comply with these regulations can result in significant fines
and penalties. Additionally, violations of these laws can result in punitive penalties, which
would restrict or prohibit us from exporting certain products, resulting in significant harm to our
business.
Changes
in business relationships with Tyco International subsidiaries as a
result of our recent acquisition could lead to lower revenue or
increased costs.
The PCG
facilities we acquired from Tyco International Ltd. generated
$72.9 million of our 2006 revenue. Over time, the PCG locations
developed business relationships with other Tyco entities. These
relationships involved the purchase of raw materials from other Tyco
entities and sale of products to other Tyco entities. Sales to other
Tyco entities accounted for approximately $1.5 million of our
consolidated 2006 net sales. If we are unable to maintain these
relationships or if the pricing with the Tyco entities changes as a
result of the acquisition of PCG, we could face higher raw material
costs or lower revenues if the Tyco entities elect to purchase
product from other suppliers.
Our business has benefited from OEMs deciding to outsource their PCB manufacturing and backplane
assembly needs to us. If OEMs choose to provide these services in-house or select other providers,
our business could suffer.
Our future revenue growth partially depends on new outsourcing opportunities from OEMs.
Current and prospective customers continuously evaluate our performance against other providers.
They also evaluate the potential benefits of manufacturing their products themselves. To the
extent that outsourcing opportunities are not available either due to OEM decisions to produce
these products themselves or to use other providers, our future growth could be adversely affected.
We may not be able to fully recover our costs for providing design services to our customers, which
could harm our financial results.
Although we enter into design service activities with purchase order commitments, the cost of
labor and equipment to provide these services may in fact exceed what we are able to fully recover
through purchase order coverage. We also may be subject to agreements with customers in which the
cost of these services is recovered over a period of time or through a certain number of units
shipped as part of the ongoing product price. While we may make contractual provisions to recover
these costs in the event that the product does not go into production, the actual recovery can be
difficult and may not happen in full. In other instances, the business relationship may involve
investing in these services for a customer as an ongoing service not directly recoverable through
purchase orders. In any of these cases, the possibility exists that some or all of these
activities are considered costs of doing business, are not directly recoverable, and may adversely
impact our operating results.
Unanticipated changes in our tax rates or in our assessment of the realizability of our deferred
tax assets or exposure to additional income tax liabilities could affect our operating results and
financial condition.
We are subject to income taxes in both the United States and various foreign jurisdictions.
Significant judgment is required in determining our provision for income taxes and, in the ordinary
course of business, there are many transactions and calculations in which the ultimate tax
determination is uncertain. Our effective tax rates could be adversely affected by changes in the
mix of earnings in countries and states with differing statutory tax rates, changes in the
valuation of deferred tax assets and liabilities, changes in tax laws, as well as other factors.
Our tax determinations are regularly subject to audit by tax authorities, and developments in those
audits could adversely affect our income tax provision. Although we believe that our tax estimates
are reasonable, the final determination of tax audits or tax disputes may be different from what is
reflected in our historical income tax provisions, which could affect our operating results.
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If our net earnings do not remain at or above recent levels, or we are not able to predict with a
reasonable degree of probability that they will continue, we may have to record an additional
valuation allowance against our net deferred tax assets.
As of December 31, 2006, we had deferred tax assets of approximately $6.7 million, which is
net of a valuation allowance of $2.4 million. If we should determine that it is more likely than
not that we will not generate taxable income in sufficient amounts to be able to use our net
deferred tax assets, we would be required to increase our current valuation allowance against these
deferred tax assets. This would result in an additional income tax provision and a deterioration of
our results of operations. Based on our forecast for future earnings, we believe we will utilize
the deferred tax asset in future periods. However, if our estimates of future earnings are lower
than expected, we may record a higher income tax provision due to a write down of our net deferred
tax assets, which would reduce our earnings per share.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The following table describes our principal manufacturing facilities and administrative
offices.
| Leased | Owned | Total | ||||||||||
| Location | Square Feet | Square Feet | Square Feet | |||||||||
Chippewa Falls, WI |
— | 280,400 | 280,400 | |||||||||
Dallas, OR (1) |
14,000 | 118,272 | 132,272 | |||||||||
Enfield, CT (office) (2) |
11,563 | — | 11,563 | |||||||||
Hopkins, MN (office) |
8,700 | — | 8,700 | |||||||||
Inglewood, CA |
65,137 | — | 65,137 | |||||||||
Logan, UT |
— | 124,104 | 124,104 | |||||||||
Redmond, WA |
— | 102,200 | 102,200 | |||||||||
San Diego, CA |
37,500 | — | 37,500 | |||||||||
Santa Ana, CA |
— | 98,000 | 98,000 | |||||||||
Santa Clara, CA |
36,448 | 36,245 | 72,693 | |||||||||
Shanghai, China |
63,098 | — | 63,098 | |||||||||
Stafford, CT |
— | 89,696 | 89,696 | |||||||||
Stafford Springs, CT |
10,000 | 53,000 | 63,000 | |||||||||
Staffordville, CT |
— | 43,056 | 43,056 | |||||||||
Union City, CA |
116,993 | — | 116,993 | |||||||||
Total |
363,439 | 944,973 | 1,308,412 | |||||||||
Logan, UT (vacant land) |
2.5 acres | |||||||||||
Stafford, CT (vacant land) |
2.5 acres | |||||||||||
Our owned facilities are subject to mortgages under our senior credit facility.
| (1) | On December 7, 2006, we announced the plans to close the Dallas, Oregon facility. | |
| (2) | At the end of January 2007, we terminated the lease in our Enfield office and moved our employees to our Stafford and Stafford Springs facilities. |
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ITEM 3. LEGAL PROCEEDINGS
From time to time we may become a party to various legal proceedings arising in the ordinary
course of our business. There can be no assurance that we will prevail in any such litigation.
We were added as a defendant in a patent infringement lawsuit filed in 2001 in the U.S.
District Court for the District of Arizona by Lemelson Medical, Education and Research Foundation,
Limited Partnership. The suit alleges that we have infringed certain “bar code,” “machine vision”
and other patents owned by the plaintiff and seeks injunctive relief, damages for the alleged
infringements and payment of the plaintiff’s attorneys’ fees. In March 2002, the lawsuit was stayed
pending the outcome of Symbol Technologies, et al. v. Lemelson in the U.S. District Court for the
District Court of Nevada, in which a declaratory relief suit filed by certain manufacturers
challenged the validity, enforceability and infringement of Lemelson’s “bar code” and “machine
vision” patents. As a result of the stay, we have not filed an answer to the complaint nor has any
discovery been conducted. In January 2004, the Nevada court found the Lemelson patents, including
those patents asserted by the Lemelson Foundation against us in the Arizona case, to be invalid,
not infringed and unenforceable. The Lemelson Foundation has the right to appeal the Nevada court’s
judgment. Although the ultimate outcome of this matter is not currently determinable, we believe we
have meritorious defenses to these allegations and do not expect this litigation to materially
impact our business, results of operations or financial condition. However, there can be no
assurance that the ultimate resolution of this matter will not have a material adverse effect on
our results of operations for any quarter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common stock has been listed on the Nasdaq National Market under the symbol “TTMI” since
September 21, 2000. The following table sets forth the quarterly high and low closing prices of our
common stock as reported on the Nasdaq National Market for the periods indicated.
| High | Low | |||||||
2006: |
||||||||
First Quarter |
$ | 15.29 | $ | 9.68 | ||||
Second Quarter |
$ | 17.46 | $ | 12.56 | ||||
Third Quarter |
$ | 14.24 | $ | 10.00 | ||||
Fourth Quarter |
$ | 13.27 | $ | 11.33 | ||||
2005: |
||||||||
First Quarter |
$ | 11.33 | $ | 8.82 | ||||
Second Quarter |
$ | 10.55 | $ | 7.28 | ||||
Third Quarter |
$ | 8.38 | $ | 6.25 | ||||
Fourth Quarter |
$ | 9.83 | $ | 6.81 | ||||
As of March 12, 2007, there were approximately 327 holders of record of our common stock. The
closing sale price of our common stock on the Nasdaq National Market on March 12, 2007 was $10.01
per share.
We have not declared or paid any dividends since 2000, and we do not anticipate paying any
cash dividends in the foreseeable future. Additionally, our senior credit facility prohibits the
payment of dividends. We presently intend to retain any future earnings to finance future
operations and the expansion of our business.
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PERFORMANCE GRAPH
The following graph compares, for the period from December 31, 2001 to December 31, 2006, the
cumulative total stockholder return on our common stock against the cumulative total return of:
| • | the Nasdaq Composite Index; and | ||
| • | a peer group consisting of us and two other publicly traded printed circuit board companies that we have selected. |
The graph assumes $100 was invested in our common stock on September 21, 2000, the date on
which our common stock became registered under Section 12 of the Securities Exchange Act of 1934 as
a result of our initial public offering, and an investment in each of the peer group and the Nasdaq
Composite Index, and the reinvestment of all dividends. The companies included in the peer group
are Sanmina Corporation (Nasdaq NM: SANM) and Merix Corporation (Nasdaq NM: MERX).
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among TTM Technologies, Inc., The NASDAQ Composite Index
And A Peer Group
Among TTM Technologies, Inc., The NASDAQ Composite Index
And A Peer Group
| * | $100 invested on 12/31/01 in stock or index-including reinvestment of dividends. Fiscal year ending December 31. |
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ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data presented below are derived from our consolidated
financial statements. The selected financial data should be read in conjunction with Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our
consolidated financial statements and the notes thereto included elsewhere in this report.
| Year Ended December 31, | ||||||||||||||||||||
| 2002(1) | 2003(1) | 2004 | 2005 | 2006(3)(4) | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
Consolidated Statement of Operations Data: |
||||||||||||||||||||
Net sales |
$ | 88,989 | $ | 180,317 | $ | 240,650 | $ | 240,209 | $ | 369,316 | ||||||||||
Cost of goods sold |
78,456 | 145,694 | 172,103 | 186,453 | 276,168 | |||||||||||||||
Gross profit |
10,533 | 34,623 | 68,547 | 53,756 | 93,148 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Selling and marketing |
6,447 | 10,858 | 12,032 | 11,977 | 16,473 | |||||||||||||||
General and administrative |
5,519 | 11,696 | 13,223 | 14,135 | 19,656 | |||||||||||||||
Amortization of definite-lived intangibles |
1,202 | 1,202 | 1,202 | 1,202 | 1,786 | |||||||||||||||
Restructuring charges(2) |
3,859 | 649 | 855 | — | 199 | |||||||||||||||
Total operating expenses |
17,027 | 24,405 | 27,312 | 27,314 | 38,114 | |||||||||||||||
Operating income (loss) |
(6,494 | ) | 10,218 | 41,235 | 26,442 | 55,034 | ||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest expense |
(1,084 | ) | (583 | ) | (367 | ) | (179 | ) | (3,020 | ) | ||||||||||
Amortization of debt issuance costs |
(105 | ) | (97 | ) | (148 | ) | (72 | ) | (374 | ) | ||||||||||
Interest income and other, net |
694 | 352 | 793 | 2,126 | 4,462 | |||||||||||||||
Income (loss) before income taxes and extraordinary item |
(6.989 | ) | 9,890 | 41,513 | 28,317 | 56,102 | ||||||||||||||
Income tax (provision) benefit |
2,278 | (3,901 | ) | (13,183 | ) | 2,524 | (21,063 | ) | ||||||||||||
Income (loss) before extraordinary item |
(4,711 | ) | 5,989 | 28,330 | 30,841 | 35,039 | ||||||||||||||
Extraordinary gain |
6,296 | 1,453 | — | — | — | |||||||||||||||
Net income |
$ | 1,585 | $ | 7,442 | $ | 28,330 | $ | 30,841 | $ | 35,039 | ||||||||||
Income (loss) per common share, before extraordinary item: |
||||||||||||||||||||
Basic |
$ | (0.12 | ) | $ | 0.15 | $ | 0.69 | $ | 0.75 | $ | 0.84 | |||||||||
Diluted |
$ | (0.12 | ) | $ | 0.15 | $ | 0.68 | $ | 0.74 | $ | 0.83 | |||||||||
Net income per common share: |
||||||||||||||||||||
Basic |
$ | 0.04 | $ | 0.19 | $ | 0.69 | $ | 0.75 | $ | 0.84 | ||||||||||
Diluted |
$ | 0.04 | $ | 0.18 | $ | 0.68 | $ | 0.74 | $ | 0.83 | ||||||||||
Weighted average common shares: |
||||||||||||||||||||
Basic |
39,511 | 39,993 | 40,780 | 41,232 | 41,740 | |||||||||||||||
Diluted |
39,511 | 41,123 | 41,868 | 41,770 | 42,295 | |||||||||||||||
Other Financial Data: |
||||||||||||||||||||
Depreciation of property, plant and equipment |
$ | 8,761 | $ | 7,774 | $ | 8,213 | $ | 9,290 | $ | 12,178 | ||||||||||
Non-cash restructuring charges for impairment of building and equipment |
1,838 | 446 | 855 | — | — | |||||||||||||||
| (1) | Our results for the year ended December 31, 2002 include only six days of activity of Advanced Circuits, Inc., which we acquired on December 26, 2002. A full year of activity at this subsidiary is included in our results commencing in the year ended December 31, 2003. In both 2002 and 2003, we recorded extraordinary gains related to this acquisition. | |
| (2) | We recorded restructuring charges in 2002, 2003 and 2004 related to the closure of our Burlington, Washington, facility and sale of the building. The charge in 2002 is comprised primarily of severance expense and other cash exit costs as well as non-cash expenses to write down the value of the building and equipment held for sale. The charges in 2003 and 2004 were to further write down the value of the building and equipment. We recorded a restructuring charge in 2006 for severance for certain sales and administrative employees of the acquiring business. See Note 3 to our consolidated financial statements included herein. | |
| (3) | Our results for the year ended December 31, 2006, include 65 days of activity of PCG, which we acquired on October 27, 2006. | |
| (4) | Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R, “Share Based Payment” and began recording expense related to our stock options. See Note 2 to our consolidated financial statements included herein. |
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| As of December 31, | ||||||||||||||||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Consolidated Balance Sheet Data: |
||||||||||||||||||||
Working capital |
$ | 40,405 | $ | 52,352 | $ | 82,645 | $ | 111,224 | $ | 127,405 | ||||||||||
Total assets |
197,506 | 205,857 | 235,770 | 273,143 | 573,698 | |||||||||||||||
Long-term debt, including current maturities |
10,000 | 7,777 | — | — | 200,705 | |||||||||||||||
Stockholders’ equity |
167,426 | 178,327 | 211,626 | 243,952 | 287,315 | |||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Supplemental Data: |
||||||||||||||||||||
EBITDA(1) |
$ | 10,459 | $ | 21,057 | $ | 51,560 | $ | 39,176 | $ | 73,577 | ||||||||||
Cash flows from operating activities |
10,011 | 18,582 | 48,810 | 31,027 | 32,784 | |||||||||||||||
Cash flows from investing activities |
(7,017 | ) | (13,181 | ) | (9,276 | ) | (13,583 | ) | (234,579 | ) | ||||||||||
Cash flows from financing activities |
(7,105 | ) | 863 | (5,989 | ) | 626 | 200,027 | |||||||||||||
| (1) | “EBITDA” means earnings before interest expense, income taxes, depreciation and amortization. We present EBITDA to enhance the understanding of our operating results. EBITDA is a key measure we use to evaluate our operations. EBITDA is also a key component in two of our debt covenant calculations for under credit agreement; the leverage ratio and minimum interest coverage ratio. However, the EBITDA amount determined under our credit agreement is further adjusted to exclude certain transaction costs and other non-cash charges (see “Management’s Discussion and Analysis of Financial Condition and results of operations”). In addition, we provide our EBITDA because we believe that investors and securities analysts will find EBITDA to be a useful measure for evaluating our operating performance and comparing our operating performance with that of similar companies that have different capital structures and for evaluating our ability to meet our future debt service, capital expenditures, and working capital requirements. However, EBITDA should not be considered as an alternative to cash flows from operating activities as a measure of liquidity or as an alternative to net income as a measure of operating results in accordance with accounting principals generally accepted in the United States. The following provides a reconciliation of EBITDA to the financial information in our consolidated statement of operations. |
| Year Ended December 31, | ||||||||||||||||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Net income |
$ | 1,585 | $ | 7,442 | $ | 28,330 | $ | 30,841 | $ | 35,039 | ||||||||||
Add back items: |
||||||||||||||||||||
Income taxes |
(2,278 | ) | 3,901 | 13,183 | (2,524 | ) | 21,063 | |||||||||||||
Interest expense |
1,084 | 583 | 367 | 179 | 3,020 | |||||||||||||||
Amortization of debt issuance
costs |
105 | 97 | 148 | 72 | 374 | |||||||||||||||
Depreciation of property, plant
and equipment |
8,761 | 7,774 | 8,213 | 9,290 | 12,178 | |||||||||||||||
Amortization of intangibles |
1,202 | 1,260 | 1,319 | 1,318 | 1,903 | |||||||||||||||
Total |
8,874 | 13,615 | 23,230 | 8,335 | 38,538 | |||||||||||||||
EBITDA |
$ | 10,459 | $ | 21,057 | $ | 51,560 | $ | 39,176 | $ | 73,577 | ||||||||||
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a one-stop provider of time-critical and technologically complex printed circuit boards
(“PCBs”) and backplane assemblies, which serve as the foundation of sophisticated electronic
products. We serve high-end commercial and aerospace / defense markets—including the
networking/communications infrastructure, high-end computing, defense, aerospace and
industrial/medical markets—which are characterized by high levels of complexity and moderate
production volumes. Our customers include original equipment manufacturers, or OEMs, electronic
manufacturing services, or EMS, providers and defense and aerospace companies. Our time-to-market
and high technology focused manufacturing services enable our customers to reduce the time required
to develop new products and bring them to market.
The market for our products experienced a sustained downturn during 2001 and 2002, due to the
economic slowdown in the electronics industry. During this period, we reduced our work force and
focused on cost reduction by improving the efficiency of our operations and negotiating lower
prices on key supplies from our vendors. Throughout this period, we generated positive cash flow
from operations, added new customers, and continued to invest in our future growth, adding capital
equipment and acquiring Advanced Circuits in December 2002. During 2003, we generated increased
sales due to the inclusion of Advanced Circuits, market share gains, and the improving economic
conditions in the electronics industry and our customers’ end markets. Our gross profit margin also
increased from 2002 to 2003, due to our improved operating leverage as costs that are largely fixed
in nature, such as labor, were absorbed over greater production volume. Market conditions continued
to improve in 2004, resulting in further revenue growth and expanded gross margins. During the
first half of 2005, prices for our printed circuit boards declined leading to lower revenue and
gross margins. However, prices as well as production volume increased during the second half of
2005 and in 2006, leading to increased revenue and expanded gross margins.
On October 27, 2006, we completed the acquisition of PCG from Tyco International Ltd. The
total purchase price of this acquisition was $226.8 million, excluding acquisition costs. This
acquisition enhanced our business in the following ways:
| • | positioned us as the largest PCB fabricator in North America as well as the largest PCB fabricator in the defense and aerospace end market; | ||
| • | added complementary commercial PCB fabrication facilities to our original three commercial PCB manufacturing sites; | ||
| • | added global backplane and sub-system assembly capability; | ||
| • | entered the backplane assembly market in China with a facility in Shanghai; | ||
| • | expanded engineering and materials expertise; | ||
| • | expanded and diversified our customer base. |
We measure customers as those companies that have placed at least two orders in the preceding
12-month period. As of December 31, 2006, we had approximately 740 customers and approximately 580
as of December 31, 2005. Sales to our 10 largest customers accounted for 53% of our net sales in
2006 and 66% of our net sales in 2005. We sell to OEMs both directly and indirectly through EMS
companies. Sales attributable to our five largest OEM customers accounted for approximately 39% of
our net sales in 2006, 54% of our net sales in 2005 and 54% of our net sales in 2004.
The following table shows the percentage of our net sales attributable to each of the
principal end markets we served for the periods indicated. Because of the significant increase in
aerospace/defense business due to the recent acquisition of PCG, we have modified our end market
classifications to more accurately portray our resulting customer base.
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| Year Ended December 31, | ||||||||||||
| End Markets (1) | 2004 | 2005 | 2006 | |||||||||
Networking/Communications |
42 | % | 46 | % | 43 | % | ||||||
Computing/Storage/Peripherals |
37 | 34 | 29 | |||||||||
Medical/Industrial/Instrumentation/Other |
14 | 12 | 12 | |||||||||
Aerospace/Defense |
7 | 8 | 16 | |||||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
| (1) | Sales to EMS companies are classified by the end markets of their OEM customers. |
For PCBs we measure the time sensitivity of our products by tracking the quick-turn percentage
of our work. We define quick-turn orders as those with delivery times of 10 days or less, which
typically captures research and development, prototype, and new product introduction work, in
addition to unexpected short-term demand among our customers. Generally, we quote prices after we
receive the design specifications and the time and volume requirements from our customers. Our
quick-turn services command a premium price as compared to standard lead time products. Quick-turn
orders decreased from approximately 22% of net PCB sales in 2005 to 17% of net PCB sales in 2006,
due to both higher demand for our standard lead-time, high technology production services as well
as the inclusion of the PCG facilities, which focus primarily on standard lead-time services. We
also deliver a large percentage of compressed lead-time work with lead times of 11 to 20 days. We
receive a premium price for this work as well. Purchase orders may be cancelled prior to shipment.
We charge customers a fee, based on percentage completed, if an order is cancelled once it has
entered production.
We recognize revenues when persuasive evidence of a sales arrangement exists, the sales terms
are fixed and determinable, title and risk of loss has transferred, and collectibility is
reasonably assured—generally when products are shipped to the customer. Net sales consist of gross
sales less an allowance for returns, which typically has been less than 2% of gross sales. We
provide our customers a limited right of return for defective printed circuit boards. We record an
amount for estimated sales returns and allowances at the time of sale based on our historical
results. To the extent actual returns vary from our historical experience, revisions to these
allowances may be required.
Cost of goods sold consists of materials, labor, outside services, and overhead expenses
incurred in the manufacture and testing of our products as well as stock-based compensation
expense. Many factors affect our gross margin, including capacity utilization, product mix,
production volume, and yield. We do not participate in any significant long-term contracts with
suppliers, and we believe there are a number of potential suppliers for the raw materials we use.
We believe that our cost of goods sold will continue to fluctuate as a percentage of net sales.
Selling and marketing expenses consist primarily of salaries and commissions paid to our
internal sales force and commissions paid to independent sales representatives, salaries paid to
our sales support staff, stock-based compensation expense as well as costs associated with
marketing materials and trade shows. We generally pay higher commissions to our independent sales
representatives for quick-turn work, which generally has a higher gross profit component than
standard lead-time work. We expect our selling and marketing expenses to continue to fluctuate as a
percentage of net sales.
General and administrative costs primarily include the salaries for executive, finance,
accounting, information technology, facilities and human resources personnel, as well as insurance
expenses, expenses for accounting and legal assistance, incentive compensation expense, stock-based
compensation expense, and bad debt expense. We expect these expenses to continue to fluctuate as a
percentage of net sales as we add personnel and incur additional costs related to the growth of our
business and the requirements of operating as a public company.
Amortization of intangibles consists of intangible assets, which we recorded as a result of
the Power Circuits acquisition in July 1999 as well as the PCG acquisition in October 2006.
Restructuring charges in 2004 relate to the final write down of assets held for sale
associated with the sale of the Burlington, Washington, facility. Restructuring charges in 2006
relate to severance costs to terminate certain sales and administrative employees of the acquiring
entity following the PCG acquisition.
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Our interest expense relates to our senior secured credit facility and our other long-term
obligations. Amortization of debt issuance costs consists of the amortization of loan origination
fees and related legal and administrative expenses. Interest and other income consist primarily of
interest received on our cash and short-term investment balances.
Critical Accounting Policies and Estimates
Our consolidated financial statements included in this report have been prepared in accordance
with accounting principles generally accepted in the United States of America. The preparation of
these financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, net sales and expenses, and related disclosure of
contingent assets and liabilities. Management bases its estimates on historical experience, the use
of independent valuation firms and licensed environmental professionals, and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Senior management has discussed the development, selection
and disclosure of these estimates with the audit committee of our board of directors. Actual
results may differ from these estimates under different assumptions or conditions.
Accounting policies for which significant judgments and estimates are made include asset
valuation related to bad debts and inventory obsolescence; sales returns and allowances; impairment
of long-lived assets, including goodwill and intangible assets; realizability of deferred tax
assets; establishing the fair value of individual assets acquired and individual liabilities
assumed when we acquire other businesses; determining stock-based compensation expense,
self-insured medical reserves, asset retirement obligations and environmental liabilities. A
detailed description of these estimates and our policies to account for them is included in the
notes to our consolidated financial statements in this report.
We provide customary credit terms to our customers and generally do not require collateral. We
perform ongoing credit evaluations of the financial condition of our customers and maintain an
allowance for doubtful accounts based upon historical collections experience and expected
collectibility of accounts. Our actual bad debts may differ from our estimates.
In assessing the realization of inventories, we are required to make judgments as to future
demand requirements and compare these with current and committed inventory levels. Provision is
made to reduce excess and obsolete inventories to their estimated net realizable value. Our
inventory requirements may change based on our projected customer demand, changes due to market
conditions, technological and product life cycle changes, longer or shorter than expected usage
periods and other factors that could affect the valuation of our inventories. We maintain certain
finished goods inventories near certain key customer locations in accordance with agreements.
Although this inventory is typically supported by valid purchase orders, should these customers
ultimately not purchase these inventories, our results of operations and financial condition would
be adversely affected.
We derive revenues primarily from the sale of printed circuit boards and backplane assemblies
using customer-supplied engineering and design plans and recognize revenues when persuasive
evidence of a sales arrangement exists, the sales terms are fixed and determinable, title and risk
of loss have transferred, and collectibility is reasonably assured—generally when products are
shipped to the customer. We provide our customers a limited right of return for defective printed
circuit boards and backplane assemblies. We accrue an estimated amount for sales returns and
allowances at the time of sale based on historical information. To the extent actual experience
varies from our historical experience, revisions to these allowances may be required.
We have significant long-lived tangible and intangible assets consisting of property, plant
and equipment; goodwill; and definite-lived intangibles. We review these assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. In addition, we perform an impairment test related to goodwill at least
annually. Our goodwill and intangibles are largely attributable to our acquisitions of other
businesses. During the fourth fiscal quarter 2006, we performed an impairment assessment of our
goodwill, which requires the use of a fair-value based analysis and determined that no impairment
existed. At December 31, 2006, we determined that there were no events or changes in circumstances
that indicated that the carrying amount of long-lived tangible assets and definite-lived intangible
assets may not be recoverable. We use an estimate of the future undiscounted net cash flows in
measuring whether our long-lived tangible assets and definite-lived intangible assets are
recoverable. If forecasts and assumptions used to support the realizability of our long-lived
assets change in the future, significant impairment charges could result that would adversely
affect our results of operations and financial condition.
Deferred income tax assets are reviewed for recoverability and valuation allowances are
provided, when necessary, to reduce deferred tax assets to the amounts expected to be realized. At
December 31, 2006, we have net deferred income tax assets of $6.7 million, which is net of a
valuation allowance of approximately $2.4 million. Should our expectations of taxable income change
in future periods, it may be necessary to adjust our valuation allowance, which could affect our
results of operations in the period such a determination is made. In addition, we record income tax
provision or benefit during interim periods at a rate that is based on expected
results for the full year. If we determine in the future that it is more likely than not that
some or all of our deferred income tax assets would be realizable in an amount greater than what
already is recorded, we would reverse all or a portion of valuation allowance in the period the
determination is made. If future changes in market conditions cause actual results for the year to
be more or less favorable than those expected, adjustments to the effective income tax rate could
be required.
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We apply the provisions of purchase accounting when recording our acquisitions. Application of
purchase accounting requires that we estimate the fair value of the individual assets acquired and
liabilities assumed of a business. Determination of the fair value of the assets involves a number
of judgments and estimates. In our acquisitions to date, we have engaged an outside valuation firm
to provide us with an appraisal report, which we utilized in determining the purchase price
allocation. The allocation of the purchase price to different asset classes impacts the
depreciation and amortization expense we subsequently record. The principal assets we have acquired
to date are receivables, inventory, real estate, property and equipment, as well as intangible
assets such as customer relationships. The principal liabilities we have assumed to date are
payables, asset retirement obligations and future environmental remediation obligations. The fair
values assigned to the assets acquired and liabilities assumed in our 2006 acquisition of Tyco
Printed Circuit Group has not been finalized and is subject to change pending the receipt of
additional information necessary to finalize the fair values of: accounts receivables; sales
returns and allowances; property, plant and equipment; asset retirement obligations; environmental
reserves; and certain contingent liabilities. The additional information includes among other
items, adequate support for certain credits in the accounts receivable, completion of a final
compilation of property and equipment due to the incompleteness of the records acquired, completion
of the appraisals being obtained on certain property and equipment, and information being obtained
to finalize the values of asset retirement obligations, environmental reserves and certain
contingent liabilities. The Company will continue to obtain the necessary information to finalize
the fair values of these items during 2007 and may make further purchase accounting adjustments if
appropriate which would primarily affect the amount of goodwill that we recorded.
We establish liabilities for the costs of asset retirement obligations when a legal or
contractual obligation exists to dispose of or restore an asset upon its retirement and the timing
and cost of such work is reasonably estimable. We record such liabilities only when such timing and
costs are reasonably determinable. In addition, we accrue an estimate of the undiscounted costs of
environmental remediation for work at identified sites where an assessment has indicated it is
probable that cleanup costs are or will be required and may be reasonably estimated. In making
these estimates, we consider information that is currently available, existing technology, enacted
laws and regulations, and our estimates of the timing of the required remedial actions, and we
discount these estimates at 8%. We may use outside environmental consultants to assist us in making
these estimates. We also are required to estimate the amount of any probable recoveries, including
insurance recoveries.
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R
“Share-Based Payments” (“SFAS 123R”) using the modified prospective transition method, and
therefore have not restated prior periods’ results. Under this method we recognize compensation
expense for all share-based payments granted on and after January 1, 2006, and prior but not yet
vested as of January 1, 2006, in accordance with SFAS No. 123R. Under the fair value recognition
provisions of SFAS No. 123R, we recognize stock-based compensation net of an estimated forfeiture
rate and only recognize compensation cost for those shares expected to vest over the requisite
service period of the award using a straight-line method. Prior to SFAS No. 123R adoption, we
accounted for share-based payments under APB No. 25 “Accounting for Stock Issued to Employees”, and
therefore we generally recognized compensation expense only when we granted options with an
exercise price below the market price on the date of grant.
We estimate the value of share-based awards on the date of grant using the Black-Scholes
option pricing model. Calculating the fair value of share-based payment awards requires the input
of highly subjective assumptions, including the expected term of the share-based payment awards and
expected stock price volatility. The expected term represents the average time that options that
vest are expected to be outstanding. The expected volatility rates are estimated based on a
weighted average of the historical volatilities of our common stock. The assumptions used in
calculating the fair value of share-based payment awards represent management’s best estimates, but
these estimates involve inherent uncertainties and the application of management judgment. As a
result, if factors change and we use different assumptions, our stock-based compensation expense
could be materially different in the future. In addition, we are required to estimate the expected
forfeiture rate and only recognize expense for those shares expected to vest. We have currently
estimated our forfeiture rate to be 7 percent. If our actual forfeiture rate is materially
different from our estimate, the stock-based compensation expense could be significantly different
from what we have recorded in the current period. For the year ended December 31, 2006, share-based
compensation expense was $1.6 million. At December 31, 2006, total unrecognized estimated
compensation expense related to non-vested stock options was $5.9 million, which is expected to be
recognized over a weighted-average period of 1.6 years.
We are self-insured for group health insurance benefits provided to our employees, and we
purchase insurance to protect against claims at the individual and aggregate level. The insurance
carrier adjudicates and processes employee claims and is paid a fee for these services. We
reimburse our insurance carrier for paid claims subject to variable monthly limitations. We
estimate our exposure for claims incurred but not paid at the end of each reporting period and use
historical information supplied by our insurance carrier and broker to estimate our liability for
these claims. This liability is subject to an aggregate stop-loss that varies based on employee
enrollment and factors that are established at each annual contract renewal. Our actual claims
experience may differ from our estimates.
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RESULTS OF OPERATIONS
The following table sets forth statement of operations data expressed as a percentage of net
sales for the periods indicated:
| Year Ended December 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of goods sold |
71.5 | 77.6 | 74.8 | |||||||||
Gross profit |
28.5 | 22.4 | 25.2 | |||||||||
Operating expenses: |
||||||||||||
Selling and marketing |
5.0 | 5.0 | 4.5 | |||||||||
General and administrative |
5.5 | 5.9 | 5.3 | |||||||||
Amortization of definite-lived intangibles |
0.5 | 0.5 | 0.5 | |||||||||
Restructuring charges |
0.4 | — | — | |||||||||
Total operating expenses |
11.4 | 11.4 | 10.3 | |||||||||
Operating income |
17.1 | 11.0 | 14.9 | |||||||||
Other income (expense): |
||||||||||||
Interest expense |
(0.1 | ) | (0.1 | ) | (0.8 | ) | ||||||
Amortization of debt issuance costs |
(0.0 | ) | (0.0 | ) | (0.1 | ) | ||||||
Interest income and other, net |
0.3 | 0.9 | 1.2 | |||||||||
Total other income (expense), net |
0.2 | 0.8 | 0.3 | |||||||||
Income before income taxes |
17.3 | 11.8 | 15.2 | |||||||||
Income tax benefit (provision) benefit |
(5.5 | ) | 1.0 | (5.7 | ) | |||||||
Net income |
11.8 | % | 12.8 | % | 9.5 | % | ||||||
Business Segments
The Company has two reportable segments: PCB Manufacturing and Commercial Assembly. Prior to
our acquisition of PCG we had one reportable segment. These reportable segments are managed
separately because they distribute and manufacture distinct products with different production
processes. PCB Manufacturing fabricates printed circuit boards. Commercial Assembly is a contract
manufacturing business that specializes in assembling backplanes into subassemblies and other
complete electronic devices. PCB Manufacturing customers are either EMS companies or OEM
companies, while Commercial Assembly customers are usually OEMs. Our Commercial Assembly segment
includes our Hayward, California and Shanghai, China plants and our Ireland sales and distribution
infrastructure. Our PCB manufacturing segment is composed of nine domestic PCB fabrication plants
and an assembly operation that is closely affiliated with one of the PCB manufacturing plants.
We evaluate each segment on the basis of segment profits, which excludes profit on
inter-segment sales, certain interest income and expense, and income tax expense. Corporate
expenses and certain centrally-managed expenses are allocated to each segment. The following table
presents sales and operating income for our reportable segments. For further information regarding
our reportable segments, refer to Note 13 to our consolidated financial statements.
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| Year Ended December 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
| (in thousands) | ||||||||||||
Net sales: |
||||||||||||
PCB Manufacturing |
$ | 240,650 | $ | 240,209 | $ | 353,734 | ||||||
Commercial Assembly |
— | — | 22,357 | |||||||||
Total Sales |
240,650 | 240,209 | 376,091 | |||||||||
Inter-segment sales |
— | — | (6,775 | ) | ||||||||
Total Net Sales |
$ | 240,650 | $ | 240,209 | $ | 369,316 | ||||||
Operating income: |
||||||||||||
PCB Manufacturing |
$ | 42,554 | $ | 27,760 | $ | 55,561 | ||||||
Commercial Assembly |
— | — | 1,376 | |||||||||
Total operating segment income |
42,554 | 27,760 | 56,937 | |||||||||
Amortization of intangibles |
(1,319 | ) | (1,318 | ) | (1,903 | ) | ||||||
Total operating income |
41,235 | 26,442 | 55,034 | |||||||||
Total other income |
278 | 1,875 | 1,068 | |||||||||
Income before income taxes |
$ | 41,513 | $ | 28,317 | $ | 56,102 | ||||||
Year Ended December 31, 2006, Compared to Year Ended December 31, 2005
The full year 2006 includes 65 days of the results of operations from our PCG acquisition, which
occurred on October 27, 2006. The acquisition has had and will continue to have a significant
affect on our operations as discussed in the various comparisons noted below.
Net Sales
Net sales increased $129.1 million, or 53.7%, from $240.2 million in 2005 to $369.3 million in
2006 due to several factors, including the addition of the PCG facilities, and both increased
prices and production volume at the three original TTM Technologies plants. Of the $129.1 million
increase in sales, $72.9 million resulted from our PCG acquisition, including $22.4 million from
the commercial assembly segment. Volume increased approximately 26% primarily due to higher demand
from our customers for our products. Prices rose approximately 12% due to increased demand for
PCBs as well as a shift in production mix toward more high technology production. Our quick-turn
production, which generally is characterized by higher prices, decreased from 22% of PCB revenue in
2005 to 17% of PCB revenue in 2006 due to both higher demand for our standard lead-time, high
technology production services as well as the inclusion of the PCG facilities, which focus
primarily on standard lead-time services.
Gross Profit
Cost of goods sold increased $89.7 million, or 48.1%, from $186.5 million for 2005 to $276.2
million for 2006. Cost of goods sold rose due to several factors, including the addition of the PCG
facilities, and both increased material prices and production volume at the three original TTM
Technologies plants. Adding to this increase was higher repair and maintenance costs, higher
utilities costs and higher depreciation expense. The increase in cost of goods sold included approximately $4.0 million for
the value of the manufacturing profit added to the PCG inventories at the acquisition date. In addition, higher wage rates, greater
headcount, increased incentive compensation and the inclusion of stock option expense led to
increased labor costs. As a percentage of net sales, cost of goods sold decreased from 77.6% for
2005 to 74.8% for 2006 primarily due to increased pricing and greater absorption of fixed costs due
to increased production.
As
a result of the foregoing, gross profit increased $39.3 million, or 73.0%, from $53.8
million for 2005 to $93.1 million for 2006. Our gross margin increased from 22.4% in 2005 to 25.2%
in 2006.
The increase in our gross margin was due to higher sale prices for our products as well as
lower cost of goods sold as a percent of sales, which increased due to the factors discussed above,
partially offset by assembly sales, which have inherently lower gross margins. This increase in
gross margin was fueled by increased absorption of fixed costs due to increased production. Printed
circuit board manufacturing is a multi-step process that requires a certain level of equipment and
staffing for even minimal production volumes. As production increases, our employees are able to
work more efficiently and produce more printed circuit boards without incurring significant cost
increases. However, at higher capacity utilization rates, additional employees and capital may be
required.
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Table of Contents
Operating Expenses
Selling and marketing expenses increased $4.5 million, or 37.5%, from $12.0 million for 2005
to $16.5 million for 2006, primarily due to the inclusion of the PCG facilities in our results for
2006 as well as higher commission expense due to higher revenue. As a percentage of net sales,
selling and marketing expenses decreased from 5.0% in 2005 to 4.5% in 2006 due to greater
absorption of fixed costs. The mix of selling and marketing expenses did not change significantly
from 2005 to 2006.
General and administrative expenses increased $5.6 million from $14.1 million, or 5.9% of net
sales, for 2005 to $19.7 million, or 5.3% of net sales, for 2006. The increase in expenses
resulted primarily from the inclusion of the PCG facilities in our results for 2006. Other factors
that increased general and administrative expense were higher incentive compensation and
stock-based compensation expense as well as increased accounting, legal fees and consulting
expenses related to completion and integration of the acquisition. General and administrative
expenses decreased as a percentage of net sales, primarily due to greater absorption of these costs
over a larger revenue base.
In the fourth fiscal quarter 2006, we recorded a restructuring charge of $0.2 million related
to realigning certain sales and administrative functions.
Other Income (Expense)
Other income (expense) declined $0.8 million from income of $1.9 million in 2005 to income of
$1.1 million in 2006. This net decrease resulted from an increase of $3.1 million in interest
expense and amortization of debt issuance costs related to our new $200 million senior secured term
loan used to fund the acquisition of PCG, net of an increase of $2.3 million from interest earned
on higher balances in cash and cash equivalents and short-term investments for most of 2006.
Income Taxes
The provision for income taxes increased from a $2.5 million benefit for 2005 to a $21.1
million provision for 2006. The change from an income tax benefit in 2005 to an income tax
provision in 2006 resulted from a favorable valuation allowance adjustment in 2005, higher pretax
income in 2006, and a higher effective tax rate for 2006. Our effective tax benefit rate was 8.9%
in 2005, and our effective tax provision rate was 37.5% in 2006. Our effective tax rate is
primarily impacted by the federal income tax rate; apportioned state income tax rates; utilization
of other credits and deductions available to us; and certain non-deductible items. During 2005, we
decreased our valuation allowance against our deferred income tax assets and benefited our 2005
income tax provision by $12.7 million for the portion of the deferred income tax assets that we
determined that is more likely than not to be realized. Our expectations of future earnings were
sufficient for us to conclude that it was more likely than not that most of our deferred income tax
assets will be realized. Excluding the favorable impacts to our tax provision resulting from the
decreases in our valuation allowance in 2005, our effective tax rate in 2005 was 35.8%. The
increase from this rate to the 2006 effective tax rate of 37.5% is due primarily to the acquisition
of the PCG facilities, which are generally in states with higher tax rates, most notably
California. Our federal tax rate also increased from 34.0% in 2005 to 35.0% in 2006. As of
December 31, 2006, our valuation allowance against deferred income tax assets was approximately
$2.4 million.
Year Ended December 31, 2005, Compared to Year Ended December 31, 2004
Net Sales
Net sales decreased $0.4 million, or 0.2%, from $240.6 million in 2004 to $240.2 million in
2005 due to declining prices, partially offset by an increase in production volume. Volume
increased approximately 5% primarily due to higher demand from our customers for our products.
Prices fell approximately 5% primarily due to increased competition and excess capacity in the
North American printed circuit board industry, partially offset by a shift in product mix toward
more high technology production. Our quick-turn production, which generally is characterized by
higher prices, increased from 20% of revenue in 2004 to 22% of revenue in 2005.
Gross Profit
Cost of goods sold increased $14.4 million, or 8.3%, from $172.1 million for 2004 to $186.5
million for 2005. Cost of goods sold rose due to an increase in the number of printed circuit
boards sold as well as price increases in raw materials, higher repair and maintenance costs,
higher utilities costs, primarily natural gas, and higher depreciation expense. In addition,
higher wage rates and greater headcount led to increased labor costs, but these increases were
partially offset by a reduced incentive compensation accrual. As a percentage of net sales, cost
of goods sold increased from 71.5% for 2004 to 77.6% for 2005 primarily due to declining prices and
higher absolute costs, partially offset by increased absorption of fixed costs.
As a result of the foregoing, gross profit decreased $14.7 million, or 21.6%, from $68.5
million for 2004 to $53.8 million for 2005. Our gross margin decreased from 28.5% in 2004 to 22.4%
in 2005.
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The decline in our gross margin was due to lower prices for our products as well as higher
cost of goods sold, which increased due to the factors discussed above. This decline in gross
margin was somewhat mitigated by increased absorption of fixed costs due to increased production.
Printed circuit board manufacturing is a multi-step process that requires a certain level of
equipment and staffing for even minimal production volumes. As production increases, our employees
are able to work more efficiently and produce more printed circuit boards without incurring
significant cost increases. However, at higher capacity utilization rates, additional employees
and capital may be required. Our average layer count increased from 15.6 in 2004 to 15.8 in 2005.
Operating Expenses
Selling and marketing expenses remained essentially flat at $12.0 million for 2004 and 2005.
As a percentage of net sales, selling and marketing expenses remained unchanged at 5.0% during the
same periods of time. The mix of selling and marketing expenses did not change significantly from
2004 to 2005.
General and administrative expenses increased $0.9 million from $13.2 million, or 5.5% of net
sales, for 2004 to $14.1 million, or 5.9% of net sales, for 2005. The increase in expenses
resulted primarily from a net $2.2 million loss contingency accrual related to reaching a
definitive agreement with a customer to resolve a dispute concerning certain goods shipped in 2002
and 2003; higher accounting fees for the audit of internal control over financial reporting
required by Section 404 of the Sarbanes-Oxley Act; and higher labor expense due to higher wage
rates, partially offset by lower incentive compensation expense and costs related to a proposed
public stock offering in the second fiscal quarter 2004. General and administrative expenses
increased as a percentage of net sales, primarily due to the net increase in expenses described in
this paragraph.
In the second fiscal quarter 2004, we recorded a restructuring charge of $0.9 million to write
down the value of our Burlington, Washington building prior to selling it. We subsequently sold it
in the fourth fiscal quarter 2004.
Other Income (Expense)
Other income (expense) improved $1.6 million from income of $0.3 million in 2004 to income of
$1.9 million in 2005. This increase resulted from higher interest income due to higher cash and
short term investment balances and higher interest rates in 2005 as compared to 2004 as well as
lower interest expense in 2005 due to the repayment of our term loan in 2004.
Income Taxes
The provision for income taxes decreased from a $13.2 million provision for 2004 to a $2.5
million benefit for 2005. The change from an income tax provision in 2004 to an income tax benefit
in 2005 resulted from lower pretax income in 2005 combined with a lower effective tax rate for
2005. Our effective tax provision rate was 31.8% in 2004 and our effective tax benefit rate was
8.9% in 2005. Our effective tax rate is primarily impacted by the federal income tax rate;
apportioned state income tax rates; utilization of other credits and deductions available to us;
and certain non-deductible items. In addition, during 2004 and 2005, we decreased our valuation
allowance against our deferred income tax assets and benefited our 2004 and 2005 income tax
provision by $2.1 million and $12.7 million, respectively, for the portion that we determined that
is more likely than not to be realized. The reduction in valuation allowance in 2005 occurred
during the fourth quarter given the additional positive evidence from continued historical earnings
and expectations of future earnings which was sufficient for us to conclude that it was more likely
than not that most of our deferred income tax assets will be realized. Excluding the favorable
impacts to our tax provision resulting from the decreases in our valuation allowance in 2004 and
2005, our effective tax rate in 2004 was 36.8% and 35.8% in 2005. As of December 31, 2005, our
valuation allowance against deferred income tax assets was approximately $2.5 million.
Liquidity and Capital Resources
Our principal sources of liquidity have been cash provided by operations, borrowings under our
senior secured credit facility, and proceeds from employee exercises of stock options. Our
principal uses of cash have been to finance acquisitions, meet debt service requirements, finance
capital expenditures and fund working capital requirements. We anticipate that servicing debt,
funding working capital requirements and financing capital expenditures will continue to be the
principal demands on our cash in the future. On October 27, 2006, we completed the PCG acquisition
for $226.8 million, excluding acquisition costs. This purchase price was paid using some of our
available cash and cash equivalents as well as proceeds from a new $200 million senior secured term
loan. We cancelled our existing $25 million revolving credit facility and replaced it with a new
$40 million senior secured revolving credit facility.
As of December 31, 2006, we had net working capital of approximately $127.4 million, compared
to $111.2 million as of December 31, 2005. The increase in working capital is primarily
attributable to increases in accounts receivable and inventories largely due to consolidation of
the acquired entity’s balance sheet and partially offset by the classification of a significant
portion of
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our long-term debt as a current liability in 2006. On October 27, 2006, we used $34.1 million
of our cash and cash equivalents to fund a portion of the price paid for PCG plus direct
acquisition and debt issuance costs.
Our 2007 capital expenditure plan is expected to total approximately $16 million and will fund
capital equipment purchases to increase capacity and expand our technological capabilities
throughout our facilities.
The following table provides information on contractual obligations as of December 31, 2006
(in thousands):
| Contractual Obligations | Total | Less than 1 year | 1 – 3 years | 4 – 5 years | After 5 years | |||||||||||||||
Operating leases |
$ | 8,705 | $ | 2,401 | $ | 3,992 | $ | 924 | $ | 1,388 | ||||||||||
Purchase obligations |
30 | 30 | — | — | — | |||||||||||||||
Capital lease obligations |
744 | 744 | — | — | — | |||||||||||||||
Debt obligations |
200,000 | 60,000 | 1,781 | 2,850 | 135,369 | |||||||||||||||
Interest on debt obligations (1) |
62,341 | 12,058 | 21,101 | 20,710 | 8,472 | |||||||||||||||
Total contractual obligations |
$ | 271,820 | $ | 75,233 | $ | 26,874 | $ | 24,484 | $ | 145,229 | ||||||||||
| (1) | For variable rate debt, interest is based upon the rates in effect at December 31, 2006, adjusted for the impact of our interest rate hedge entered into January, 2007. |
In connection with the PCG acquisition, the Company is involved in various stages of
investigation and cleanup related to environmental remediation at two Connecticut sites and is
obligated to investigate a third Connecticut site. The Company currently estimates that it will
incur remediation costs of $1.0 million to $1.2 million over the next 12 to 60 months related to
these matters. In addition, the Company has obligations to the Connecticut Department of
Environmental Protection to complete a compliance management plan through July 2009 under which the
Company will make certain environmental asset improvements to its waste water systems, which are
estimated to cost $1.0 million.
Based on our current level of operations, we believe that cash generated from operations,
available cash and amounts available under a new five-year senior secured $40 million revolving
credit facility will be adequate to meet our currently anticipated debt service, capital
expenditure, and working capital needs for the next 12 months and beyond. Our principal liquidity
needs for periods beyond the next 12 months are to meet debt service requirements as well as for
other contractual obligations as indicated in our contractual obligations table above and for
capital purchases under our annual capital expenditure plan.
Net cash provided by operating activities was $32.8 million in 2006, compared to $31.0 million
in 2005. Our 2006 operating cash flow of $32.8 million primarily reflects net income of $35.0
million, $14.1 million of depreciation and amortization, a decrease in deferred income tax assets
of $5.0 million and $0.6 million from a variety of other factors, partially offset by a net
increase in working capital of $21.9 million, excluding cash and short-term investments.
Net cash used in investing activities was $234.6 million in 2006, compared to $13.6 million in
2005. In 2006, we acquired the PCG business and used cash of $230.9 million, which is net of the
cash acquired and includes the direct acquisition costs. Additionally, we made net purchases of
approximately $14.1 million of property, plant, and equipment, offset by a reduction of $10.4 million in our net
short-term investments.
Net cash provided by financing activities was $200.0 million in 2006, compared to $0.6 million
in 2005. Our 2006 financing net cash flow reflects proceeds of $200.0 million from issuance of
debt, approximately $5.0 million from employee stock option exercises and $0.9 million from a
variety of other factors, partially offset by payment of $5.9 million of debt issuance costs for
our new senior term loan and revolving credit facility. As of December 31, 2006, we had $200
million of long-term debt obligations outstanding under our senior secured term loan facility and
no borrowing outstanding under our senior secured revolving credit facility. Beginning with our
adoption of SFAS 123R on January 1, 2006, the excess of tax benefits upon exercise of common stock
options is reported as a cash flow from financing activities.
In accordance with EITF No. 95-3, Recognition of Liabilities in Connection with a Purchase
Business Combination, the Company recorded a liability in purchase accounting, the costs of
involuntary employee severance and other exit activity costs of $3.2 million associated with its
plan to close the PCG Dallas, Oregon, facility, and the termination of certain sales employees of
the acquired business. The closure of the Dallas facility is expected to be completed during the
second quarter of 2007 after which the Company will commence the process of selling the building
and certain assets. We anticipate that we will also incur additional costs of approximately $0.4
million related to transferring certain equipment and closing the facility which will be expensed
as incurred. The table below shows amounts (in thousands) which resulted from these restructuring
actions during the year ended December 31, 2006. As of December 31, 2006, we had paid $0.2 of the
amounts accrued and had a remaining liability of $3.2 million.
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| 2006 Restructuring Summary | ||||||||||||
| Corporate Sales, | ||||||||||||
| Dallas, Oregon | Administrative | |||||||||||
| Facility Closure | Realignment | Total | ||||||||||
PCB Manufacturing |
$ | 2,680 | $ | 545 | $ | 3,225 | ||||||
Corporate (1) |
— | 199 | 199 | |||||||||
Total Restructuring Costs (1) |
$ | 2,680 | $ | 744 | $ | 3,424 | ||||||
| (1) | The corporate realignment accrual of $0.2 million was reflected as a charge to earnings in the year ended December 31, 2006. |
On October 27, 2006, we entered into a credit agreement (the “Credit Agreement”) with certain
lenders lead by UBS Securities LLC. The Credit Agreement provides for a $200 million term loan that
matures in October 2012, and a $40 million revolving loan facility, that matures in October 2011.
Borrowings under the Credit Agreement will bear interest at a floating rate of either a base rate
(the “Alternate Base Rate”) plus an applicable interest margin or LIBOR plus an applicable interest
margin. The Alternate Base Rate is equal to the greater of (i) the federal funds rate plus 0.50%
or (ii) the prime rate. Under terms of the Credit Agreement, borrowings under the term loan and the
revolving loan facility will, at the Borrower’s option, initially bear interest at a rate based on
either (a) LIBOR plus 2.25% or (b) the Alternate Base rate plus 1.25%. The applicable interest
margins on both Alternate Base Rate loans and LIBOR loans under the revolving loan facility may
decrease under the terms of the Credit Agreement by up to 0.5% as our leverage ratio decreases.
There is no provision in the credit agreement, other than in the event of default, for these
interest margins to increase. Each calendar year we are required to repay 1% of the outstanding
term loan balance, subject to adjustment for prior period repayments, and excess cash flow as
defined in the credit agreement. Discretionary use of cash or cash flow by the Company is
constrained by certain leverage and interest coverage ratio tests required to be met under the
terms of our Credit Agreement. These ratios become more restrictive over each of the next
successive quarters. Currently, we expect to repay $60 million of our outstanding debt in 2007 in
order to meet certain financial covenants of our Credit Agreement. As of March 15, 2007, we have
repaid $25 million on our outstanding debt. If the financial performance of our business falls
short of expectations then we might be required to repay additional debt beyond current planned
repayments.
The Credit Agreement contains customary limitations, including limitations on indebtedness;
limitations on liens; limitations on investments and acquisitions; limitations on dividends, stock
repurchases, stock redemptions and the redemption or prepayment of other debt; limitations on
mergers, consolidations or sales of assets; limitations on capital expenditures; and limitations on
transactions with affiliates. We are also subject to financial covenants, including a maximum
total leverage ratio and minimum interest coverage ratio and limitations on capital expenditures.
The leverage ratio is the ratio of total indebtedness to consolidated EBITDA and the interest
coverage ratio is the ratio of consolidated EBITDA to consolidated interest expense. EBITDA used
for our debt covenants is adjusted for certain costs related to our PCG transactions (not to exceed
$9 million) and other non-cash charges as defined in the credit agreement. Our maximum leverage
ratio covenant ranges from 1.85:1 to 1:00:1 during the term of the agreement. Our minimum interest
coverage ratio ranges from 5.75:1 to 10.50:1 during the term. The term loan and revolving loan
facility are secured by substantially all of our domestic assets and 65% of our foreign assets.
At December 31, 2006, none of our debt was covered by any hedging arrangements. On January
25, 2007, we entered into an interest rate swap, to comply with the terms of our credit agreement,
to hedge 40% or $70.0 million of our outstanding debt. This amount reflects a repayment of $25.0
million of the debt which occurred on January 2, 2007. The interest rate swap has been designated
as a cash flow hedge and will be accounted for in accordance with SFAS No. 133 “Accounting for
Derivative Instruments and Hedging Activities.”
Impact of Inflation
We believe that our results of operations are not dependent upon moderate changes in the
inflation rate as we expect that we generally will be able to pass along component price increases
to our customers.
Seasonality
We have historically experienced some seasonality in our second and third fiscal quarters in
our computing/storage/peripherals end market.
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Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes,” which defines the threshold for recognizing the
benefits of tax return positions in the financial statements as “more-likely-than-not” to be
sustained by the taxing authority. A tax position that meets the “more-likely-than-not” criterion
shall be measured at the largest amount of benefit that is more than 50% likely of being realized
upon ultimate settlement. Interpretation No. 48 applies to all tax positions accounted for under
SFAS No. 109, “Accounting for Income Taxes.” Interpretation No. 48 is effective for fiscal years
beginning after December 15, 2006. Upon adoption, we will adjust our financial statements to
reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption
date. Any adjustment will be recorded directly to our beginning retained earnings balance in the
period of adoption and reported as a change in accounting principle. We are currently analyzing the
effects of adopting Interpretation No. 48 on our financial statements.
In June 2006, the EITF reached a consensus on EITF Issue No. 06-03, “How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross versus Net Presentation)”. EITF 06-03 provides that the presentation of taxes
assessed by a governmental authority that is directly imposed on a revenue-producing transaction
between a seller and a customer on either a gross basis (included in revenues and costs) or on a
net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The
provisions of EITF 06-03 become effective as of January 1, 2007. The adoption of EITF 06-03 is not
expected to have any effect on our financial statements.
In September 2006, the Securities and Exchange Commission issued SAB 108 to address diversity
in practice in quantifying financial statement misstatements. SAB 108 requires that we quantify
misstatements based on their impact on each of our financial statements and related disclosures.
SAB 108 is effective as of the end of our 2006 year, allowing a one-time transitional cumulative
effect adjustment to retained earnings as of January 1, 2006 for errors that were not previously
deemed material, but are material under the guidance in SAB 108. We do not expect the impact of
SAB 108 to have an impact on our financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair
value, establishes a framework for measuring fair value and expands disclosures about fair value
measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit
fair value measurements and does not require any new fair value measurements. The provisions of
SFAS No. 157 are effective beginning January 1, 2008. We are currently evaluating the impact this
standard will have on our financial position and results of operations.
In September 2006, the FASB issued FASB Staff Position No. AUG AIR-1, “Accounting for Planned
Major Maintenance Activities,” which prohibits companies from recognizing planned major maintenance
costs by accruing a liability over several reporting periods before the maintenance is performed –
the accrue-in-advance method. This pronouncement will be effective
for us beginning
January 1, 2007. Our policy is to expense maintenance costs as the direct expenses are
incurred and therefore, the adoption of this pronouncement will not
impact our
consolidated financial statements.
In February 2007, FASB Statement No. 159 “The Fair Value Option for Financial Assets and
Financial Liabilities” was released. SFAS 159 provides companies with an option to report selected
financial assets and liabilities at fair value and establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. SFAS 159 will
be effective for us
beginning January 1, 2008. We are currently assessing the potential effect of SFAS 159 on our
financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. We are exposed to interest rate risk relating to our senior secured
term loan, which bears interest at (a) either an alternate base rate plus an applicable margin or
(b) LIBOR plus an additional margin. A 1.0% fluctuation in the interest rate would result in a $2.0
million increase in interest expense per annum.
Our revolving credit facility bears interest at floating rates. The revolving credit facility
bears interest ranging from 1.75% to 2.25% per year plus the applicable LIBOR or from 0.75 to 1.25%
per year plus the Alternate Base Rate, as defined in our credit agreement. As of December 31,
2006, we have no outstanding revolving loans. However, $0.3 million of the available capacity for
letters of credit is utilized in support of a real estate lease.
At December 31, 2006, none of our debt was covered by any hedging arrangements. On January
25, 2007, we entered into an interest rate swap, to comply with the terms of our credit agreement,
to hedge 40%, or $70.0 million, of our outstanding debt, to effectively fix the interest rate for
such portion of our outstanding debt at 7.46%. This amount reflects a repayment of $25.0 million of
the debt on January 2, 2007. The interest rate swap has been designated as a cash flow hedge and
amortizes to a zero notional value on January 25, 2010. Accounting for this swap agreement is
covered by SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”.
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Foreign Currency Exchange Risk. We are subject to risks associated with transactions that
are denominated in currencies other than the US dollar, as well as the effects of translating
amounts denominated in a foreign currency to the US dollar as a normal part of the reporting
process. Our recently acquired Chinese operations utilize the Chinese Yuan or RMB as the
functional currency which results in the Company recording a translation adjustment which is
included as component of accumulated other comprehensive income within stockholders’ equity. Net
foreign currency transaction losses on transactions denominated in currencies other than the US
dollar were $0.1 million during the fiscal year ended December 31, 2006. There were no foreign
currency transaction gains or losses for the fiscal years ended December 31, 2005 and 2004. We
currently do not utilize any derivative instruments to hedge foreign currency risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the report thereon, the notes thereto, and the
supplementary data commencing at page F-1 of this report, which financial statements, report,
notes, and data are included herein.
The following unaudited selected quarterly results of operations data for the years ended
December 31, 2005 and 2006 have been derived from the Company’s unaudited consolidated financial
statements, which in the opinion of management have been prepared on the same basis as the audited
consolidated financial statements and reflect all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the information for the quarters presented. This
information should be read in conjunction with the consolidated financial statements and the
related notes and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included as part of this Form 10-K. The operating results for the quarters presented
are not necessarily indicative of the operating results of any future period. The Company uses a
13-week fiscal quarter accounting period with the first quarter ending on the Monday closest to
April 1 and the fourth quarter always ending on December 31. The first and fourth quarters of 2005
and 2006 contained 95 and 90 days, and 94 and 91 days, respectively.
| First | Second | Third | Fourth | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
Year Ended December 31, 2005: |
||||||||||||||||
Net sales |
$ | 58,883 | $ | 57,216 | $ | 60,979 | $ | 63,131 | ||||||||
Gross profit |
13,538 | 11,037 | 14,152 | 15,029 | ||||||||||||
Net income |
4,460 | 3,272 | 4,061 | 19,048 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.11 | $ | 0.08 | $ | 0.10 | $ | 0.46 | ||||||||
Diluted |
$ | 0.11 | $ | 0.08 | $ | 0.10 | $ | 0.46 | ||||||||
Year Ended December 31, 2006: |
||||||||||||||||
Net sales |
$ | 72,688 | $ | 76,683 | $ | 75,765 | $ | 144,180 | ||||||||
Gross profit |
20,203 | 22,969 | 22,477 | 27,499 | ||||||||||||
Net income |
8,811 | 10,556 | 10,523 | 5,149 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.21 | $ | 0.25 | $ | 0.25 | $ | 0.12 | ||||||||
Diluted |
$ | 0.21 | $ | 0.25 | $ | 0.25 | $ | 0.12 | ||||||||
Our quarterly results of operations reflect some seasonal trends in the second and third
quarters that are primarily due to seasonality experienced by the customers in computing, storage
and peripherals end markets.
During the fourth quarter of fiscal 2005, we reversed valuation allowances on certain deferred
income tax assets which had a $12.7 million favorable impact on our net income for that period.
During the fourth quarter of fiscal 2006, we acquired the operations of PCG which
significantly affected our net sales, gross profit and net income for that period. We also
incurred significant operating costs related to integrating the PCG acquisition that impacted net
income for that period. Gross profit was negatively impacted by approximately $4.0 million for the
value of the manufacturing profit added to the PCG inventories at the acquisition date. These
inventories were substantially sold during the fourth quarter. Gross margins also were affected by
the inclusion of PCG’s backplane assembly operations, which inherently carry a lower gross margin
than printed circuit board manufacturing.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision of and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of our disclosure controls and procedures as of December 31, 2006. Based on that evaluation, our
management, including the CEO and CFO, concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported as specified in the SEC’s rules and forms. There has been no change in our internal
control over financial reporting during the three months ended December 31, 2006, that has
materially affected, or is reasonably likely to materially affect, internal control over financial
reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision
and with the participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on
our evaluation under the framework in Internal Control – Integrated Framework, our management
concluded that our internal control over financial reporting is effective as of December 31, 2006.
The Company acquired PCG (the “acquired entity”) during October 2006. Management excluded
from its assessment of the effectiveness of our internal control over financial reporting as of
December 31, 2006, the acquired entity’s internal control over financial reporting associated with
total assets of $296 million and total revenues of $73 million included in the consolidated
financial statements of the Company as of and for the year ended December 31, 2006.
Our management’s assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2006 has been audited by KPMG, LLP, an independent registered public
accounting firm, as stated in their report, which is included on page F-2 of this report.
Inherent Limitations on Effectiveness of Controls
Our management, including our principal executive officer and chief financial officer, does
not expect that our disclosure controls or our internal control over financial reporting will
prevent or detect all errors and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control system’s objectives
will be met. The design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Further,
because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
ITEM 9B. OTHER INFORMATION
Not Applicable
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item relating to our directors is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange
Act for our 2007 Annual Meeting of Stockholders. The information required by this Item relating to
our executive officers is included in Item 1, “Business – Management” of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the definitive
Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2007 Annual
Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is incorporated herein by reference to the definitive
Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2007 Annual
Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the definitive
Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2007 Annual
Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the definitive
Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2007 Annual
Meeting of Stockholders.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Financial Statement Schedule
(1) Financial Statements are listed in the Index to Financial Statements on page F-1 of this
Report.
(2) Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts are set forth on page S-2 of this Report.
Other schedules are omitted because they are not applicable, not required, or because required
information is included in the consolidated financial statements or notes thereto.
(3) Exhibits
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(b) Exhibits
| Exhibit | ||||||
| Number | Exhibits | |||||
| 2.1 | Form of Plan of Reorganization (1). | |||||
| 2.2 | Stock and Asset Purchase Agreement by and among Tyco Printed Circuit Group LP, Tyco Electronics Corporation, Raychem International, Tyco Kappa Limited, Tyco Electronics Logistics AG, and TTM (Ozarks) Acquisition, Inc. dated as of August 2, 2006 (2) | |||||
| 3.1 | Registrant’s Certificate of Incorporation.(3) | |||||
| 3.2 | Registrant’s Bylaws.(3) | |||||
| 4.1 | Form of Registrant’s common stock certificate.(3) | |||||
| 10.1 | UBS Credit Agreement see ex. 10.1 to November 2, 2006 8-K (4) | |||||
| 10.2 | Employment Agreement dated as of December 31, 2005 between the Registrant and Kenton K. Alder. (5) | |||||
| 10.3 | Form of Executive Change in Control Severance Agreement and schedule of agreements entered into
on December 1, 2005. (5) |
|||||
| 10.4 | Employment Agreement dated as of October 23, 2006 between the Registrant and Douglas L. Soder.(6) | |||||
| 10.5 | Form of Severance Agreement and schedule of agreements entered into on December 1, 2006.(6) | |||||
| 10.6 | 2006 Incentive Compensation Plan.(6) | |||||
| 10.7 | Form of Stock Option Agreement. (6) | |||||
| 10.8 | Form of Restricted Stock Unit Award Agreement. (6) | |||||
| 10.9 | Form of Indemnification Agreement with directors. (1) | |||||
| 10.10 | Statutory Warranty Deeds for Redmond Facility.(1) | |||||
| 21.1 | Subsidiaries of the Registrant (6) | |||||
| 23.1 | Consent of KPMG LLP, independent registered public accounting firm (6) | |||||
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. (6) | |||||
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. (6) | |||||
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (6) | |||||
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (6) | |||||
| (1) | Incorporated by reference to the Registration Statement on Form S-1 (Registration No. 333-39906) declared effective September 20, 2000. | |
| (2) | Incorporated by reference to the Registrant’s Form 8-K as filed with the Securities and Exchange Commission (the “Commission”) on August 4, 2006. | |
| (3) | Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on August 30, 2005. | |
| (4) | Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on November 2, 2006. | |
| (5) | Incorporated by reference to the Registrant’s Form 10-K as filed with the Commission on March 15, 2006. | |
| (6) | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| TTM TECHNOLOGIES, INC. | ||||
Date: March 15, 2007
|
By: | /s/ KENTON K. ALDER | ||
| Kenton K. Alder | ||||
| President and Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
| Name | Title | Date | ||
/s/ KENTON K. ALDER
|
President, Chief Executive Officer (Principal Executive Officer), and Director | March 15, 2007 | ||
/s/ STEVEN W. RICHARDS
|
Executive Vice President, Chief Financial Officer and Secretary (Principal Financial Officer) | March 15, 2007 | ||
/s/ DANIEL L. FELSENTHAL
|
Vice President and Controller (Principal Accounting Officer) | March 15, 2007 | ||
/s/ ROBERT E. KLATELL
|
Chairman of the Board | March 15, 2007 | ||
/s/ THOMAS T. EDMAN
|
Director | March 15, 2007 | ||
/s/ JAMES K. BASS
|
Director | March 15, 2007 | ||
/s/ RICHARD P. BECK
|
Director | March 15, 2007 | ||
/s/ JOHN G. MAYER
|
Director | March 15, 2007 |
39
Table of Contents
TTM TECHNOLOGIES, INC.
Index to Consolidated Financial Statements and Schedule
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 | ||||
| F-8 | ||||
| S-1 | ||||
| S-2 |
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
TTM Technologies, Inc:
TTM Technologies, Inc:
We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting appearing under Item 9A, that TTM Technologies, Inc.
maintained effective internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). TTM Technologies, Inc.’s management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is
to express an opinion on management’s assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that TTM Technologies, Inc. maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated, in all material
respects, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, TTM
Technologies, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company acquired Tyco Printed Circuit Group LP (the “acquired entity”) during 2006, and
management excluded from its assessment of the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2006, the acquired entity’s internal control over financial
reporting associated with total assets of $296 million and total revenues of $73 million included
in the consolidated financial statements of the Company and subsidiaries as of and for the year
ended December 31, 2006. Our audit of internal control over financial reporting of the Company also
excluded an evaluation of the internal control over financial reporting of the acquired entity.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of TTM Technologies, Inc. and subsidiaries
as of December 31, 2005 and 2006, and the related consolidated statements of operations,
stockholders’ equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2006, and our report dated March 15, 2007 expressed an
unqualified opinion on those consolidated financial statements.
/s/KPMG LLP
Salt Lake City, Utah
March 15, 2007
March 15, 2007
F-2
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
TTM Technologies, Inc.:
TTM Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of TTM Technologies, Inc. and
subsidiaries as of December 31, 2005 and 2006, and the related consolidated statements of
operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in
the three-year period ended December 31, 2006. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of TTM Technologies, Inc. and subsidiaries as of December
31, 2005 and 2006, and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2006 the
Company changed its method of accounting for stock-based compensation upon adoption of Statement of
Financial Accounting Standards No. 123R, “Share Based Payment.”
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of TTM Technologies, Inc.’s internal control over
financial reporting as of December 31, 2006, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 15, 2007, expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control over financial
reporting.
/s/KPMG LLP
Salt Lake City, Utah
March 15, 2007
March 15, 2007
F-3
Table of Contents
TTM TECHNOLOGIES, INC.
Consolidated Balance Sheets
As of December 31, 2005 and 2006
(In thousands)
| 2005 | 2006 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 61,258 | $ | 59,660 | ||||
Short-term investments |
21,100 | 10,996 | ||||||
Accounts receivable, net of allowances of $4,094 and $7,201, respectively |
38,631 | 125,435 | ||||||
Inventories, net |
12,564 | 67,020 | ||||||
Prepaid expenses and other |
2,261 | 3,924 | ||||||
Income taxes receivable |
— | 717 | ||||||
Deferred income taxes |
4,601 | 3,996 | ||||||
Total current assets |
140,415 | 271,748 | ||||||
Property, plant and equipment, at cost: |
||||||||
Land |
4,932 | 11,761 | ||||||
Machinery and equipment |
68,624 | 137,111 | ||||||
Buildings and improvements |
22,523 | 46,403 | ||||||
Furniture and fixtures |
424 | 576 | ||||||
Automobiles |
80 | 96 | ||||||
Construction-in-process |
1,436 | 10,739 | ||||||
| 98,019 | 206,686 | |||||||
Less accumulated depreciation |
(46,221 | ) | (55,849 | ) | ||||
Property, plant and equipment, net |
51,798 | 150,837 | ||||||
Other assets: |
||||||||
Debt
issuance costs, net of accumulated amortization of $33 and $175, respectively |
199 | 5,711 | ||||||
Deferred income taxes |
6,834 | 2,685 | ||||||
Goodwill |
63,153 | 115,627 | ||||||
Definite-lived intangibles, net of accumulated amortization of $8,061 and $9,614, respectively |
10,318 | 26,235 | ||||||
Deposits and other |
426 | 855 | ||||||
Total other assets |
80,930 | 151,113 | ||||||
| $ | 273,143 | $ | 573,698 | |||||
Liabilities and Stockholders’ Equity |
||||||||
Current liabilities: |
||||||||
Current portion long-term debt |
$ | — | $ | 60,705 | ||||
Accounts payable |
11,310 | 49,276 | ||||||
Accrued salaries, wages and benefits |
9,921 | 24,189 | ||||||
Accrued contingencies |
3,150 | — | ||||||
Other accrued expenses |
1,642 | 10,173 | ||||||
Income taxes payable |
2,116 | — | ||||||
Current portion other long-term liabilities |
1,052 | — | ||||||
Total current liabilities |
29,191 | 144,343 | ||||||
Long-term debt, less current portion |
— | 140,000 | ||||||
Other long-term liabilities, less current portion |
— | 2,040 | ||||||
Total long-term liabilities |
— | 142,040 | ||||||
Commitments and contingencies (Note 8) |
||||||||
Stockholders’ equity: |
||||||||
Common stock, $0.001 par value; 100,000 shares authorized, 41,311 and 42,093 shares issued and
outstanding, respectively |
41 | 42 | ||||||
Additional paid-in capital |
159,634 | 167,850 | ||||||
Retained earnings |
84,277 | 119,316 | ||||||
Accumulated other comprehensive income |
— | 107 | ||||||
Total stockholders’ equity |
243,952 | 287,315 | ||||||
| $ | 273,143 | $ | 573,698 | |||||
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
TTM TECHNOLOGIES, INC.
Consolidated Statements of Operations
For the Years Ended December 31, 2004, 2005 and 2006
(In thousands, except per share data)
| 2004 | 2005 | 2006 | ||||||||||
Net sales |
$ | 240,650 | $ | 240,209 | $ | 369,316 | ||||||
Cost of goods sold |
172,103 | 186,453 | 276,168 | |||||||||
Gross profit |
68,547 | 53,756 | 93,148 | |||||||||
Operating expenses: |
||||||||||||
Selling and marketing |
12,032 | 11,977 | 16,473 | |||||||||
General and administrative |
13,223 | 14,135 | 19,656 | |||||||||
Amortization of definite-lived intangibles |
1,202 | 1,202 | 1,786 | |||||||||
Restructuring charges |
855 | — | 199 | |||||||||
Total operating expenses |
27,312 | 27,314 | 38,114 | |||||||||
Operating income |
41,235 | 26,442 | 55,034 | |||||||||
Other income (expense): |
||||||||||||
Interest expense |
(367 | ) | (179 | ) | (3,020 | ) | ||||||
Amortization of debt issuance costs |
(148 | ) | (72 | ) | (374 | ) | ||||||
Interest income and other, net |
793 | 2,126 | 4,462 | |||||||||
Total other income, net |
278 | 1,875 | 1,068 | |||||||||
Income before income taxes |
41,513 | 28,317 | 56,102 | |||||||||
Income tax benefit (provision) |
(13,183 | ) | 2,524 | (21,063 | ) | |||||||
Net income |
$ | 28,330 | $ | 30,841 | $ | 35,039 | ||||||
Basic earnings per share |
$ | 0.69 | $ | 0.75 | $ | 0.84 | ||||||
Diluted earnings per share |
$ | 0.68 | $ | 0.74 | $ | 0.83 | ||||||
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
TTM TECHNOLOGIES, INC.
| Consolidated Statements of Stockholders’ Equity and Comprehensive Income |
For the Years Ended December 31, 2004, 2005 and 2006
(In thousands)
| Accumulated | |||||||||||||||||||||||||||||||||
| Additional | Deferred | Other | |||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | Stock-Based | Comprehensive | Comprehensive | ||||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Compensation | Income | Income | Total | ||||||||||||||||||||||||||
Balance, December 31, 2003 |
40,475 | $ | 40 | $ | 153,216 | $ | 25,106 | $ | (35 | ) | $ | — | $ | 178,327 | |||||||||||||||||||
Amortization of deferred stock-based
compensation |
— | — | — | — | 35 | — | 35 | ||||||||||||||||||||||||||
Stock-based compensation |
— | — | 96 | — | — | — | 96 | ||||||||||||||||||||||||||
Exercise of common stock options |
539 | 1 | 1,787 | — | — | — | 1,788 | ||||||||||||||||||||||||||
Income tax benefit from options
exercised |
— | — | 3,050 | — | — | — | 3,050 | ||||||||||||||||||||||||||
Net income |
— | — | — | 28,330 | — | — | 28,330 | ||||||||||||||||||||||||||
Balance, December 31, 2004 |
41,014 | 41 | 158,149 | 53,436 | — | — | 211,626 | ||||||||||||||||||||||||||
Exercise of common stock options |
297 | — | 858 | — | — | — | 858 | ||||||||||||||||||||||||||
Income tax benefit from options exercised |
— | — | 627 | — | — | — | 627 | ||||||||||||||||||||||||||
Net income |
— | — | — | 30,841 | — | — | 30,841 | ||||||||||||||||||||||||||
Balance, December 31, 2005 |
41,311 | 41 | 159,634 | 84,277 | — | — | $ | 243,952 | |||||||||||||||||||||||||
Net income |
— | — | — | 35,039 | — | — | $ | 35,039 | 35,039 | ||||||||||||||||||||||||
Cumulative translation adjustment, net of
tax |
— | — | — | — | — | 107 | 107 | 107 | |||||||||||||||||||||||||
Comprehensive income |
— | — | — | — | — | — | $ | 35,146 | |||||||||||||||||||||||||
Exercise of common stock options |
782 | 1 | 4,956 | — | — | — | 4,957 | ||||||||||||||||||||||||||
Income tax benefit from options exercised |
— | — | 1,707 | — | — | — | 1,707 | ||||||||||||||||||||||||||
Stock-based compensation |
— | — | 1,553 | — | — | — | 1,553 | ||||||||||||||||||||||||||
Balance, December 31, 2006 |
42,093 | $ | 42 | $ | 167,850 | $ | 119,316 | $ | — | $ | 107 | $ | 287,315 | ||||||||||||||||||||
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
TTM TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2004, 2005 and 2006
(In thousands)
| 2004 | 2005 | 2006 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 28,330 | $ | 30,841 | $ | 35,039 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Depreciation of property, plant and equipment |
8,213 | 9,290 | 12,178 | |||||||||
Net gain on sale of property, plant and equipment |
— | — | (48 | ) | ||||||||
Amortization of definite-lived intangible assets |
1,319 | 1,318 | 1,903 | |||||||||
Amortization of deferred stock-based compensation and stock-based compensation |
131 | — | 1,553 | |||||||||
Amortization of debt issuance costs |
148 | 72 | 374 | |||||||||
Amortization of premiums and discounts on short-term investments, net |
— | (125 | ) | (322 | ) | |||||||
Non-cash interest imputed on other long-term liabilities |
118 | 64 | 25 | |||||||||
Non-cash restructuring charge for impairment of building and equipment |
855 | — | — | |||||||||
Income tax benefit from stock options exercised |
3,050 | 627 | (1,072 | ) | ||||||||
Deferred income taxes |
9,211 | (8,564 | ) | 4,925 | ||||||||
Changes in operating assets and liabilities net of effect of acquired businesses: |
||||||||||||
Accounts receivable, net |
(7,259 | ) | (2,853 | ) | (8,704 | ) | ||||||
Inventories, net |
(376 | ) | (3,571 | ) | (623 | ) | ||||||
Prepaid expenses and other |
81 | (1,213 | ) | (430 | ) | |||||||
Income taxes receivable |
673 | 157 | (717 | ) | ||||||||
Accounts payable |
1,668 | 1,780 | (7,931 | ) | ||||||||
Income taxes payable |
160 | 1,956 | (486 | ) | ||||||||
Accrued contingencies |
— | 3,150 | (3,150 | ) | ||||||||
Accrued salaries, wages and benefits and other accrued expenses |
2,488 | (1,902 | ) | 270 | ||||||||
Net cash provided by operating activities |
48,810 | 31,027 | 32,784 | |||||||||
Cash flows from investing activities: |
||||||||||||
Purchase of property, plant and equipment and equipment deposits |
(17,502 | ) | (7,962 | ) | (13,949 | ) | ||||||
Purchase of intangibles |
— | — | (350 | ) | ||||||||
Purchases of available-for-sale short-term investments |
(27,050 | ) | (4,300 | ) | — | |||||||
Proceeds from sales of available-for-sale short-term investments |
28,794 | 17,150 | — | |||||||||
Purchases of held-to-maturity short-term investments |
(18,967 | ) | (64,615 | ) | (40,909 | ) | ||||||
Proceeds from redemptions of held-to-maturity short-term investments |
23,975 | 46,140 | 51,335 | |||||||||
Cash paid in business acquisition — net of cash acquired |
— | — | (230,920 | ) | ||||||||
Proceeds from sale of assets, property, plant and equipment |
1,474 | 4 | 214 | |||||||||
Net cash used in investing activities |
(9,276 | ) | (13,583 | ) | (234,579 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from long-term debt |
— | — | 200,000 | |||||||||
Principal payments on long-term debt |
(7,777 | ) | — | (111 | ) | |||||||
Excess tax benefit from stock based compensation |
— | — | 1,072 | |||||||||
Proceeds from exercise of common stock options |
1,788 | 858 | 4,957 | |||||||||
Payment of debt issuance costs |
— | (232 | ) | (5,886 | ) | |||||||
Other financing activities |
— | — | (5 | ) | ||||||||
Net cash provided by (used in) financing activities |
(5,989 | ) | 626 | 200,027 | ||||||||
Effect of foreign currency exchange rates on cash and cash equivalents |
— | — | 170 | |||||||||
Net increase (decrease) in cash and cash equivalents |
33,545 | 18,070 | (1,598 | ) | ||||||||
Cash and cash equivalents at beginning of year |
9,643 | 43,188 | 61,258 | |||||||||
Cash and cash equivalents at end of year |
$ | 43,188 | $ | 61,258 | $ | 59,660 | ||||||
Supplemental cash flow information: |
||||||||||||
Cash paid for interest |
$ | 248 | $ | 97 | $ | 2,912 | ||||||
Cash paid, net for income taxes |
165 | 3,121 | 17,310 | |||||||||
Supplemental disclosures of noncash investing an financing activities:
During 2006, the Company purchased certain assets and assumed certain liabilities of Tyco Printed Circuits. The total purchase consideration included cash payments of $230,920, which is net of $6,050 of cash
acquired and the assumption of liabilities of $70,524 (see Note 3).
See accompanying notes to consolidated financial statements.
F-7
Table of Contents
TTM TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(Dollars and shares in thousands, except per share data)
(1) Nature of Operations and Basis of Presentation
TTM Technologies, Inc. (the “Company”), formerly Pacific Circuits, Inc., was incorporated
under the laws of the State of Washington on March 20, 1978 and reincorporated under the laws of
the State of Delaware on August 29, 2005. In July 1999, Power Circuits, Inc. was acquired, and on
December 26, 2002, Honeywell Advanced Circuits, Inc., renamed to TTM Advanced Circuits, Inc.,
(“Advanced Circuits”) was acquired, and both became wholly-owned subsidiaries of TTM Technologies,
Inc. TTM Technologies International, Inc. was established as a wholly owned subsidiary of TTM
Technologies, Inc. in December 2004.
On October 27, 2006, TTM Technologies, Inc. acquired certain assets, assumed certain
liabilities and acquired certain equity interests of Tyco Printed Circuit Group LP (“PCG”) from
Tyco International, Ltd. In this transaction, the stock of Tyco Packaging Systems (Shanghai) Co.
Ltd. and Tyco Iota, Ltd. were purchased and the acquired assets and assumed liabilities were placed
into new, wholly-owned subsidiaries TTM Printed Circuit Group, Inc., TTM Technologies (Ireland)
Ltd., TTM Technologies, (Ireland) EU Ltd., and TTM Technologies, (Switzerland) GmbH (see Note 3).
TTM Technologies, Inc. and its wholly-owned subsidiaries are collectively referred to as (“the
Company”). The Company is a manufacturer of complex printed circuit boards used in sophisticated
electronic equipment and provides backplane and sub-system assembly services for both standard and
specialty product in defense and commercial operations. The Company sells to a variety of customers
located both within and outside of the United States of America.
(2) Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of TTM Technologies, Inc. and its
wholly-owned subsidiaries, Power Circuits, Inc., TTM Advanced Circuits, Inc., TTM Technologies
International, Inc., TTM Printed Circuit Group, Inc., Tyco Packaging Systems (Shanghai) Co. Ltd.,
Tyco Iota, Ltd., TTM Technologies (Ireland) Ltd., TTM Technologies (Ireland) EU Ltd., and TTM
Technologies (Switzerland) GmbH. All intercompany accounts and transactions have been eliminated
in consolidation.
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, Revenue
Recognition (SAB 104). The Company derives its revenue primarily from the sale of printed circuit
boards using customer supplied engineering and design plans and recognizes revenues when the
criteria of SAB 104 have been met. The criteria to meet this guideline are: (i) persuasive
evidence of a sales arrangement exists, (ii) the sales terms are fixed and determinable, (iii)
title and risk of loss has transferred, and (iv) collectibility is reasonably assured—generally
when products are shipped to the customer, except in situations in which title passes upon receipt
of the products by the customer. In this case, revenues are recognized upon notification that
customer receipt has occurred. The Company does not have customer acceptance provisions, but it
does provide its customers a limited right of return for defective printed circuit boards. The
Company accrues an estimated amount for sales returns and allowances related to defective
printed circuit boards at the time of sale based on its ability to estimate sales returns and
allowances using historical information. As of December 31, 2005 and 2006, the reserve for sales
returns and allowances was $3,168 and $4,443, respectively, which is included as a reduction to
accounts receivable, net. For the years ended December 31, 2004, 2005 and 2006, the provision for
sales returns and allowances, which is recorded as a reduction to net sales, was 1.3%, 1.6% and
0.9% of gross sales, respectively. Shipping and handling fees are included as part of net sales.
The related freight costs and supplies associated with shipping products to customers are included
as a component of cost of goods sold.
F-8
Table of Contents
Foreign Currency Translation and Transactions
The functional currency of the Company’s Tyco Packaging Systems (Shanghai) Co. Ltd. subsidiary
is the local currency, the Chinese RMB. Accordingly, assets and liabilities are translated into
U.S. Dollars using period-end exchange rates. Sales and expenses are translated at the average
exchange rates in effect during the period. The resulting translation gains or losses are recorded
as a component of accumulated other comprehensive income. Gains and losses resulting from foreign
currency transactions are included in income and totaled $(99) for the
year ended December 31, 2006.
Cash Equivalents and Short-Term Investments
The Company considers highly liquid investments with insignificant interest rate risk and
original maturities to the Company of three months or less to be cash equivalents. Cash and cash
equivalents consist primarily of interest-bearing bank accounts, money market funds and short-term
debt securities.
The Company considers highly liquid investments with an effective maturity to the Company of
more than three months and less than one year to be short-term investments.
Management determines the appropriate classification of investments at the time of purchase
and reevaluates such designation as of each balance sheet date. Debt securities that the Company
has the ability and intent to hold until maturity are accounted for as held-to-maturity securities
and are carried at amortized cost, which approximates fair market value. Available-for-sale debt
securities are carried at fair value, which approximates cost.
Short-term investments as of December 31, 2005 and 2006 were as follows:
| 2005 | 2006 | |||||||
Available-for-sale: |
||||||||
Money market funds |
$ | 18,975 | $ | 40,713 | ||||
Held-to-maturity: |
||||||||
Corporate bonds and notes |
27,705 | 11,311 | ||||||
Negotiable bank certificates of deposit |
1,200 | — | ||||||
U.S. Treasury and federal agency securities |
34,516 | 8,330 | ||||||
| 63,421 | 19,641 | |||||||
Total short-term investments |
82,396 | 60,354 | ||||||
Amounts classified as cash equivalents |
61,296 | 49,358 | ||||||
Amounts classified as short-term investments |
$ | 21,100 | $ | 10,996 | ||||
As of December 31, 2006, debt securities totaled $19,641 and are classified as held to
maturity and mature in less than one year.
For each of the years ended December 31, 2004, 2005 and 2006, realized gains and losses upon
the sale of available-for-sale investments were insignificant. Unrealized gains and losses on
available-for-sale investments are insignificant for all periods and accordingly have not been
recorded as a component of accumulated other comprehensive income. The specific identification
method is used to compute the realized gains and losses on debt investments.
The Company regularly monitors and evaluates the realizable value of its investments. When
assessing investments for other-than-temporary declines in value, the Company considers such
factors as, among other things, how significant the decline in value is as a percentage of the
original cost, how long the market value of the investment has been less than its original cost,
the collateral
supporting the investments, insurance policies which protect the Company’s investment
position, and the credit rating issued for the securities by one or more of the major credit rating
agencies.
Certain prior year balances in this disclosure only have been reclassified to conform to the
current year’s presentation.
F-9
Table of Contents
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or
market. Elements of cost in the company's work-in-process and
finished goods generally include raw materials, labor and
manufacturing overhead. Provision is made to reduce excess and obsolete inventories to their estimated net
realizable value. Inventories as of December 31, 2005 and 2006 consist of the following:
| 2005 | 2006 | |||||||
Raw materials |
$ | 3,842 | $ | 22,718 | ||||
Work-in-process |
7,407 | 37,804 | ||||||
Finished goods |
1,315 | 6,498 | ||||||
| $ | 12,564 | $ | 67,020 | |||||
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation expense is computed using the
straight-line method over the estimated useful lives of the assets. Assets recorded under capital
leases and leasehold improvements are amortized using the straight-line method over the lesser of
their useful lives or the related lease term. The Company uses the following estimated useful
lives:
Buildings and improvements |
7 – 40 years | |||
Machinery and equipment |
3 – 12 years | |||
Furniture and fixtures |
3 – 7 years | |||
Automobiles |
5 years | |||
Upon retirement or other disposition of property, plant and equipment, the cost and related
accumulated depreciation are removed from the accounts. The resulting gain or loss is included in
the determination of income. Major renewals and betterments are capitalized and depreciated over
their estimated useful lives while minor expenditures for maintenance and repairs are charged to
expense as incurred.
Debt Issuance Costs
Debt issuance costs are amortized to expense over the period of the underlying senior credit
facility using the effective interest rate method, adjusted to give effect to any early repayments.
During 2005, the Company entered into a new credit agreement and incurred debt issuance costs of
$232. During 2006, the Company entered into a new credit agreement and incurred debt issuance
costs of $5,886. In addition, the Company wrote off $141 of unamortized debt issuance costs
related to the retirement of the 2005 credit facility.
Goodwill
Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets
acquired and liabilities assumed in a business combination. Prior to the Company’s acquisition of
PCG (see Note 3), the Company had three reporting units consistent with the nature of its
operations and all of its goodwill was allocated to one reporting unit. As result of the recent
acquisition, as of December 31, 2006, the Company is in the process of determining its reporting
units under SFAS No. 142 and has preliminarily allocated goodwill to the reportable segments
determined under SFAS No. 131 (see Note 13). A further allocation to a level below the reportable
segment level, to the extent determined necessary, will be completed in 2007 once the allocation of
the purchase price is completed.
SFAS No. 142 requires that goodwill be tested for impairment annually or more often if events
or circumstances indicate a potential impairment exists. Goodwill is tested for impairment using a
two-step process. The first step of the goodwill impairment test, used to identify potential
impairment, compares the estimated fair value of the reporting unit containing goodwill with the
related carrying amount. If the estimated fair value of the reporting unit exceeds its carrying
amount, the reporting unit’s goodwill is not considered to be impaired, and the second step of the
impairment test is unnecessary. If the reporting unit’s carrying amount exceeds its estimated fair
value, the second step test must be performed to measure the amount of the goodwill impairment
loss, if any. The second step of the goodwill impairment test compares the implied fair value of
the reporting unit’s goodwill, determined in the same manner as the amount of goodwill recognized
in a business combination, with the carrying amount of such goodwill. If the carrying
amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess.
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In performing the impairment tests of the goodwill associated with the legacy TTM business,
the fair value of the Company’s reporting unit was determined using a combination of the income
approach and the market approach. Under the income approach, the fair value of a reporting unit is
calculated based on the present value of estimated future net cash flows. Under the market
approach, fair value is estimated based on market multiples of earnings or similar measures for
comparable companies and market transactions, when available.
Based on the results of its first step impairment tests, the Company determined that no
impairment of goodwill existed as of December 31, 2004, 2005 and 2006. However, future goodwill
impairment tests could result in a charge to earnings. The Company will continue to evaluate
goodwill on an annual basis as of the end of the fourth quarter and whenever events and changes in
circumstances indicate that there may be a potential impairment.
Goodwill as of December 31, 2006, totaled $115,627, of which $103,669 is expected to be fully
deductible for tax purposes. As of December 31, 2006, the preliminary goodwill from the PCG
acquisition totaled $52,474 (see Note 3).
Definite-lived Intangibles
Definite-lived intangibles as of December 31, 2005 and 2006 consist of the following:
| 2005 | 2006 | |||||||
Strategic customer relationships |
$ | 18,029 | $ | 35,429 | ||||
Customer backlog |
— | 70 | ||||||
Licensing agreement |
350 | 350 | ||||||
| 18,379 | 35,849 | |||||||
Less accumulated amortization |
(8,061 | ) | (9,614 | ) | ||||
Definite-lived intangibles, net |
$ | 10,318 | $ | 26,235 | ||||
In October 2006, certain intangibles were acquired as part of the PCG acquisition (see Note
3).
The Company’s intangible assets are amortized over the estimated useful lives using
straight-line and accelerated methods. The range of remaining estimated useful lives and
weighted-average amortization periods of the major categories of definite-lived intangible assets
at December 31, 2006 were as follows:
| Range of Remaining | ||||
| Estimated Useful | Weighted Average | |||
| Lives | Amortization Period | |||
Strategic customer relationships
|
6.5 — 9 years | 12 years | ||
Customer backlog
|
0.5 years | 0.7 years | ||
Licensing agreement
|
2.5 years | 3 years |
Amortization expense was $1,319, $1,318 and $1,903 in 2004, 2005 and 2006, respectively.
Estimated aggregate amortization for definite-lived intangible assets for the next five years is as
follows: 2007-$4,213; 2008-$3,877; 2009-$3,460; 2010-$3,131; and 2011-$2,987.
Impairment of Long-lived Assets
Long-lived tangible assets and definite-lived intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the book value of the asset or asset
groups may not be recoverable. The Company evaluates, at each balance sheet date, whether events
and circumstances have occurred that indicate possible impairment. The Company uses an estimate of
the future undiscounted net cash flows of the related asset or asset group over the remaining life
in measuring whether the assets are
recoverable. Measurement of the amount of impairment, if any, is based upon the difference between
the asset’s carrying value and estimated fair value.
When assets are classified as held for sale, the carrying value of these assets is compared to
the estimated fair value, less the cost to sell, to determine if recognition of an impairment is
required.
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Judgments and assumptions are inherent in the Company’s estimate of undiscounted future cash
flows used to determine recoverability of an asset and the estimate of an asset’s fair value used
to calculate the amount of impairment to recognize. The use of alternate judgments and assumptions
could result in the recognition of different levels of impairment charges in the financial
statements.
Self Insurance
The Company is primarily self insured for group health insurance benefits provided to
employees. The Company also purchases stop loss insurance to protect against annual claims per
individual and at the aggregate level. From October 27, 2006, through December 31, 2006, former PCG
employees who became TTM employees were provided health insurance benefits under their former PCG
plans and TTM reimbursed the provider for the costs of these plans. The individual stop losses
range from $100 to $125 per individual depending on the health plans they select, and the aggregate
thresholds are dependent upon the total number of employees participating in the plans. Self
insurance liabilities are estimated for claims incurred but not paid using historical information
provided by our insurance carrier and other professionals. The Company accrued $2,986 and $5,276
for self insurance liabilities at December 31, 2005 and 2006, respectively, and these amounts are
reflected within accrued salaries, wages and benefits in the accompanying December 31, 2005 and
2006 consolidated balance sheets.
Income Taxes
The Company recognizes deferred tax assets or liabilities for expected future tax consequences
of events that have been recognized in the financial statements or tax returns. Under this method,
deferred tax assets or liabilities are determined based upon the difference between the financial
statement and income tax basis of assets and liabilities using enacted tax rates expected to apply
when differences are expected to be settled or realized. Deferred tax assets are reviewed for
recoverability, and the Company records a valuation allowance to reduce its deferred tax assets
when it is more likely than not that all or some portion of the deferred tax assets will not be
realized.
The Company has various foreign subsidiaries formed or acquired to conduct or support its
business outside the United States. The Company provides for income taxes, net of applicable
foreign tax credits on temporary differences in its investment in foreign subsidiaries which are
not considered to be permanently invested outside of the United States.
Earnings Per Share
Basic earnings per common share (“Basic EPS”) excludes dilution and is computed by dividing
net income by the weighted average number of common shares outstanding during the period. Diluted
earnings per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock
options or other common stock equivalents were exercised or converted into common stock.
The following is a reconciliation of the numerator and denominator used to calculate Basic EPS
and Diluted EPS for the years ended December 31, 2004, 2005 and 2006:
| 2004 | 2005 | 2006 | ||||||||||||||||||||||||||||||||||
| Net Income | Shares | Per Share | Net Income | Shares | Per Share | Net Income | Shares | Per Share | ||||||||||||||||||||||||||||
Basic EPS |
$ | 28,330 | 40,780 | $ | 0.69 | $ | 30,841 | 41,232 | $ | 0.75 | $ | 35,039 | 41,740 | $ | 0.84 | |||||||||||||||||||||
Dilutive effect of options |
1,088 | 538 | 555 | |||||||||||||||||||||||||||||||||
Diluted EPS |
$ | 28,330 | 41,868 | $ | 0.68 | $ | 30,841 | 41,770 | $ | 0.74 | $ | 35,039 | 42,295 | $ | 0.83 | |||||||||||||||||||||
The computation of Diluted EPS does not assume exercise or conversion of securities
that would have an antidilutive effect on earnings per common share. Stock options to purchase
1,150, 1,759 and 1,520 shares of common stock for the years ended December 31, 2004, 2005, and
2006, respectively, were not considered in calculating Diluted EPS because the effect would be
anti-dilutive.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS
No. 123R “Share-Based Payments” (“SFAS 123R”). The Company elected to use the modified prospective
transition method and, therefore, has not restated any prior reported results. Under this
transition method, stock-based compensation expense for the year ended December 31, 2006, included
compensation expense for all stock-based compensation awards granted prior to, but not yet vested
as of, December 31, 2005, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS 123. Stock-based compensation expense for all stock-based compensation
awards granted on and after January 1, 2006, is based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123R. The Company recognizes these compensation costs net
of estimated forfeitures on a
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straight-line basis over the requisite service period of the award,
which is generally the option vesting term. The Company estimates the forfeiture rate based on its
historical experience.
As a result of adopting SFAS 123R, the impact to the consolidated financial statements for the
year ended December 31, 2006, was a reduction in income before income taxes of $1,553 and a
reduction in net income of $1,357. The impact on basic and diluted earnings per share for the year
ended December 31, 2006, was a decrease of approximately $0.03 and $0.03 per share respectively.
In addition, prior to the adoption of SFAS 123R, the Company presented the tax benefit from
the exercise of common stock option exercises as a component of cash flows from operating
activities. Upon the adoption of SFAS 123R, tax benefits resulting from tax deductions in excess of
the compensation cost recognized for those options are classified as a component of cash flows from
financing activities. This results in a decrease of $1,072 in cash flows from operating activities
and an increase of $1,072 in cash flows from financing activities for the year ended December 31,
2006.
Prior to January 1, 2006, the Company accounted for stock options issued to employees,
officers and directors under Accounting Principles Board Opinion No. 25 (APB No. 25) and the
related interpretations and provided pro forma disclosures as required by SFAS No. 123. The table
below reflects pro forma net income and basic and diluted net earnings per share for the years
ended December 31, 2004 and 2005 had the Company applied the fair value recognition provisions of
SFAS 123, as follows:
| Year Ended December 31, | ||||||||
| 2004 | 2005 | |||||||
Net income, as reported |
$ | 28,330 | $ | 30,841 | ||||
Add: Stock-based compensation included in reported net income, net of related tax effects |
131 | — | ||||||
Less: Stock-based compensation expense determined under the fair-value-based method for
all awards, net of related tax effects |
(4,249 | ) | (8,872 | ) | ||||
Pro forma net income |
$ | 24,212 | $ | 21,969 | ||||
Basic earnings per share: |
||||||||
As reported |
$ | 0.69 | $ | 0.75 | ||||
Pro forma |
$ | 0.59 | $ | 0.53 | ||||
Diluted earnings per share: |
||||||||
As reported |
$ | 0.68 | $ | 0.74 | ||||
Pro forma |
$ | 0.58 | $ | 0.53 | ||||
On June 8, 2005, the Compensation Committee of the Board of Directors of the Company approved
accelerating the vesting of approximately 986 unvested, “out-of-the-money” stock options awarded to
employees, officers and non-employee directors with an exercise price greater than $10.00. On
September 14, 2005, the Compensation Committee of the Board of Directors of the Company approved
accelerating the vesting of approximately 211 unvested, “out-of-the-money” stock options awarded to
employees, officers and non-employee directors with exercise prices between $8.00 and $10.00. The
June 2005 and September 2005 accelerated options have exercise prices ranging from $10.15 to $16.00
and $8.00 to $9.75, respectively. The closing price of the Company’s common stock on June 8, 2005,
and September 14, 2005, was $8.48 and $7.34 per share, respectively. As a result of these
accelerated vestings, the Company remeasured compensation expense for the accelerated options under
APB No. 25. Since the options for which vestings were accelerated were “out-of-the-money,” no
additional compensation expense was recorded.
The Company accelerated these options in advance of the effective date of, and in anticipation
of the earnings effect of, SFAS 123R. The accelerated vesting of these options enabled the Company
to avoid recognizing future compensation cost associated with the accelerated stock options upon
the adoption of SFAS 123R. The accelerated vesting of these options initially increased 2005 pro
forma stock-based compensation expense, before related tax effects, by approximately $9,500 and
decreased 2005 pro forma net income and earnings per share.
For more information on the Company’s stock-based compensation plans, refer to Note 9.
Customer Concentration
The Company’s customers include both original equipment manufacturers (“OEMs”) and electronic
manufacturing services companies (“EMS companies”). The Company’s OEM customers often direct a
significant portion of their purchases through EMS companies.
For the year ended December 31, 2004, two customers accounted for 29% and 17% of the Company’s
net sales. For the year ended December 31, 2005, two customers accounted for 29% and 17% of the
Company’s net sales. For the year ended December 31, 2006,
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two customers, Solectron and
Celestica, accounted for 20% and 10%, respectively, of the Company’s net sales. Sales to these two
customers were substantially from the PCB Manufacturing segment (see Note 13). Sales to our 10
largest customers were 65%, 66% and 53% of net sales for the years ended December 31, 2004, 2005
and 2006, respectively. The loss of one or more major customers or a decline in sales to the
Company’s major customers would have a material adverse effect on the Company’s financial condition
and results of operations.
Concentration of Credit Risk
In the normal course of business, the Company extends credit to its customers, which are
concentrated in the computer and electronics instrumentation industries, and some of which are
located outside the United States. The Company performs ongoing credit evaluations of customers and
does not require collateral. The Company makes judgments as to its ability to collect outstanding
trade receivables when collection becomes doubtful. Provisions are made based upon a specific
review of significant outstanding invoices, historical collection experience and current economic
trends.
For the purposes of evaluating collection risk, the Company considers the credit risk profile
of the entity from which the receivable is due. As of December 31, 2005, five customers in the
aggregate accounted for 57% of total accounts receivable. As of December 31, 2006, five customers
in the aggregate account for 33% of total accounts receivable. If one or more of the Company’s
significant customers were to become insolvent or were otherwise unable to pay for the
manufacturing services provided, it would have a material adverse effect on the Company’s financial
condition and result of operations.
Asset Retirement Obligations
The Company accounts for asset retirement obligations as required by SFAS No. 143, “Accounting
for Asset Retirement Obligations” and FASB Interpretation (“FIN”) No. 47, “Accounting for
Conditional Asset Retirement Obligations.” Under these standards, a liability is recognized for
the fair value of legally required asset retirement obligations associated with long-lived assets
in the period in which the retirement obligations are incurred and the liability can be reasonably
estimated. The Company capitalizes the associated asset retirement costs as part of the carrying
amount of the long-lived asset.
Environmental Accrual
The Company accrues for costs associated with environmental obligations when such costs are
probable and reasonably estimable in accordance with AICPA Statement of Position (“SOP”) 96-1,
“Environmental Remediation Liabilities” Accruals for estimated costs for environmental obligations
generally are recognized no later than the date when the Company identifies what cleanup measures,
if any, are likely to be required to address the environmental conditions. In accordance with SOP
96-1, included in such obligations are the estimated direct costs to investigate and address the
conditions, including the associated engineering, legal and consulting costs. In making these
estimates, we consider information that is currently available, existing technology, enacted laws
and regulations, and our estimates of the timing of the required remedial actions. Such accruals
are measured on a discounted basis and are adjusted as further information becomes available or
circumstances change.
Comprehensive Income
Comprehensive income includes changes to equity accounts that were not the result of
transactions with stockholders. Comprehensive income is comprised of net income and other
comprehensive income and loss items. The Company’s comprehensive income item consists of changes
in the cumulative foreign currency translation adjustments.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes,” which defines the threshold for recognizing the
benefits of tax return positions in the financial statements as “more-likely-than-not” to be
sustained by the taxing authority. A tax position that meets the “more-likely-than-not” criterion
shall be measured at the largest amount of benefit that is more than 50% likely of being realized
upon ultimate settlement. Interpretation No. 48 applies to all tax positions accounted for under
SFAS No. 109, “Accounting for Income Taxes.” Interpretation No. 48 is
effective for fiscal years beginning after December 15, 2006. Upon adoption, the Company will adjust
its financial statements to reflect only those tax positions that are more-likely-than-not to be
sustained as of the adoption date. Any adjustment will be recorded directly to its beginning
retained earnings balance in the period of adoption and reported as a change in accounting
principle. The Company is currently analyzing the effects of adopting
Interpretation No. 48 on its
financial statements.
In June 2006, the EITF reached a consensus on EITF Issue No. 06-03, “How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross versus Net Presentation)”. EITF 06-03 provides that the presentation of taxes
assessed by a governmental authority that is directly imposed on a revenue-producing
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transaction
between a seller and a customer on either a gross basis (included in revenues and costs) or on a
net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The
provisions of EITF 06-03 become effective as of January 1, 2007. The adoption of EITF 06-03 is not
expected to have any effect on the Company's financial statements.
In September 2006, the Securities and Exchange Commission issued SAB 108 to address diversity
in practice in quantifying financial statement misstatements. SAB 108
requires that the Company quantify
misstatements based on their impact on each of its financial statements and related disclosures.
SAB 108 is effective as of the end of our 2006 year, allowing a one-time transitional cumulative
effect adjustment to retained earnings as of January 1, 2006 for errors that were not previously
deemed material, but are material under the guidance in SAB 108. The Company does not expect the
impact of SAB 108 to have an impact on its financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair
value, establishes a framework for measuring fair value and expands disclosures about fair value
measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit
fair value measurements and does not require any new fair value measurements. The provisions of
SFAS No. 157 are effective beginning January 1, 2008. The Company currently is evaluating the
impact this standard will have on its financial position and results of operations.
In September 2006, the FASB issued FASB Staff Position No. AUG AIR-1, “Accounting for Planned
Major Maintenance Activities,” which prohibits companies from recognizing planned major maintenance
costs by accruing a liability over several reporting periods before the maintenance is performed –
the accrue-in-advance method. This pronouncement will be effective for the Company beginning
January 1, 2007. The Company’s policy is to expense maintenance costs as the direct expenses are
incurred and therefore, the adoption of this pronouncement will not impact the Company’s
consolidated financial statements.
In February 2007, FASB Statement No. 159 “The Fair Value Option for Financial Assets and
Financial Liabilities” was released. SFAS 159 provides companies with an option to report selected
financial assets and liabilities at fair value and establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. FAS 159 will be effective for the Company
beginning January 1, 2008. The Company currently is evaluating the potential effect of SFAS 159 on
our financial statements.
Fair Value of Financial Instruments
The carrying amounts of assets and liabilities as reported on the balance sheets at December
31, 2005 and 2006, which qualify as financial instruments, approximate fair value. As of December
31, 2006, the Company had a $200,000 term loan outstanding. The fair value, based on quoted market
prices, of the Company’s term loan was $201,000. The fair value of this term loan may increase or
decrease due to various factors, including fluctuations in the market price of the Company’s common
stock, fluctuations in market interest rates and fluctuations in general economic conditions.
(3) Acquisition of Tyco Printed Circuit Group
On October 27, 2006, the Company acquired substantially all of the assets of the Printed
Circuit Group business unit of Tyco International Ltd. in accordance with the terms of the Stock
and Asset Purchase Agreement dated August 2, 2006, by and among Tyco Printed Circuit Group LP, Tyco
Electronics Corporation, Raychem International, Tyco Kappa Limited, Tyco Electronics Logistics AG
and TTM Printed Circuit Group, Inc. (“Agreement”). TTM Printed Circuit Group, Inc. (f/k/a TTM
(Ozarks) Acquisition, Inc.) is a wholly owned subsidiary of TTM Technologies, Inc. The Tyco Printed
Circuit Group (“PCG”) is a leading producer of complex, high performance and specialty printed
circuit boards (“PCBs”) and is one of the major suppliers of aerospace and defense PCBs in North
America. The purchase makes the Company the largest North American manufacturer of PCBs. These
factors contributed to establishing the purchase price, which resulted in the recognition of
$52,474 of goodwill, $40,516 of which is expected to be deductible for income taxes. The purchase
price was $226,784 in cash, which included adjustments of $1,184 for working capital and capital
expenditures. The total cost of the acquisition, including transaction fees and expenses, was
approximately $236,970, which included $6,050 in cash acquired.
In accordance with SFAS No. 141 “Business Combinations,” the Company recorded this acquisition
using the purchase method of accounting. The purchase price has been preliminarily allocated to
tangible and identifiable intangible assets acquired and liabilities assumed based on their
respective fair values. The excess purchase price over the fair value of tangible and intangible
assets acquired
and liabilities assumed was recorded as goodwill. Fair values were based upon a valuation of
tangible and identifiable intangible assets acquired, including useful lives, as estimated by
management of the Company with the assistance of an independent appraiser. The following sets
forth the preliminary allocation of the purchase consideration:
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Cash |
$ | 6,050 | ||
Other current assets |
133,446 | |||
Property, plant and equipment |
97,736 | |||
Intangible assets |
17,470 | |||
Goodwill |
52,474 | |||
Other non-current assets |
318 | |||
Liabilities assumed |
(70,524 | ) | ||
Net assets acquired |
$ | 236,970 | ||
The fair values assigned to the assets acquired and liabilities assumed in our 2006
acquisition of PCG has not been finalized and is subject to change pending the receipt of
additional information necessary to finalize the fair values of: accounts receivables; sales
returns and allowances; property, plant and equipment; asset retirement obligations; environmental
reserves; and certain contingent liabilities. The additional information includes among other
items, adequate support for certain credits in the accounts receivable, completion of a final
compilation of property and equipment due to the incompleteness of the records acquired, completion
of the appraisals being obtained on certain property and equipment, and information being obtained
to finalize the values of asset retirement obligations, environmental reserves and certain
contingent liabilities. The Company will continue to obtain the necessary information to finalize
the fair values of these items during 2007 and may make further purchase accounting adjustments if
appropriate which would primarily affect the amount of goodwill that we recorded.
In accordance with EITF No. 95-3, Recognition of Liabilities in Connection with a Purchase
Business Combination, the Company recorded as a cost of the acquisition involuntary employee
severance and other exit activity liabilities of $3,225 associated with its plan to close the PCG
Dallas, Oregon, facility, and terminate certain sales
employees of the acquired business. Prior to completing the
acquisition, the Company began assessing the need to close certain PCG
facilities and on December 7, 2006, the Company finalized its
plan to close the Dallas facility. The closure of the Dallas facility is expected to be completed
during the second quarter of 2007 after which the Company will commence the process of selling the
building and certain assets. The table below shows the additions to and utilization of the
accrued restructuring charges during the year ended December 31, 2006 which is included in other
accrued expenses.
| Severance | Other Exit Charges | Total | ||||||||||
Accrued at December 31, 2005 |
$ | — | $ | — | $ | — | ||||||
Dallas facility closure charges |
3,111 | 114 | 3,225 | |||||||||
Non-PCG severance charges |
199 | — | 199 | |||||||||
Utilization |
(163 | ) | — | (163 | ) | |||||||
Accrued at December 31, 2006 |
$ | 3,147 | $ | 114 | $ | 3,261 | ||||||
In connection with the acquisition of PCG, the Company increased the effective state tax rate
applied to its existing net deferred income tax assets which resulted in a $403 increase to the net
deferred tax assets and a corresponding reduction to the acquired goodwill. This state rate
increase reflects the new rate that is expected to apply when the deferred tax items are settled or
realized.
The unaudited pro forma information below presents the results of operations of 2005 and 2006
as if the PCG acquisition occurred at the beginning of each of the respective periods, after giving
effect to certain adjustments (depreciation and amortization of tangible and intangible assets, to
remove expenses related to assets not acquired and liabilities not assumed, interest expense and
amortization of deferred financing costs related to the acquisition debt and the related income tax
effects). The pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisition been made at the beginning
of each of the presented periods or of the results which may occur in the future.
| 2005 | 2006 | |||||||
Net sales |
$ | 584,509 | $ | 717,406 | ||||
Net income |
16,549 | 25,535 | ||||||
Basic earnings per share |
$ | 0.40 | $ | 0.62 | ||||
Diluted earnings per share |
$ | 0.40 | $ | 0.60 | ||||
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(4) Long-term Debt and Credit Agreement
The following table summarizes the long-term debt of the Company at December 31, 2006:
| 2006 | ||||
Term loan due October 27, 2012 |
$ | 200,000 | ||
Borrowings under revolving loan due October 27, 2011 |
— | |||
Capitalized leases (see Note 7) |
705 | |||
| 200,705 | ||||
Less current maturities |
(60,705 | ) | ||
Long-term debt, less current maturities |
$ | 140,000 | ||
The maturities of long-term debt through 2011 and thereafter are as follows:
2007 |
$ | 60,705 | ||
2008 |
356 | |||
2009 |
1,425 | |||
2010 |
1,425 | |||
2011 |
1,425 | |||
Thereafter |
135,369 | |||
| $ | 200,705 | |||
The Company had a committed revolving credit facility of $25,000 with a final maturity date of
July 15, 2008 in place on October 27, 2006. As of October 27, 2006, the Company had no outstanding
revolving loan balances under this facility. This facility was terminated consistent with
placement of a new facility on October 27, 2006.
On October 27, 2006, the Company entered into a credit agreement (the “Credit Agreement”) with
certain lenders lead by UBS Securities LLC. The Credit Agreement provides for a $200,000 senior
term loan, which matures in October 2012, and a $40,000 senior revolving loan facility, which
matures in October 2011. Borrowings under the Credit Agreement will bear interest at a floating
rate of either a base rate (the “Alternate Base Rate”) plus an applicable interest margin or LIBOR
plus an applicable interest margin. The Alternate Base Rate is equal to the greater of (i) the
federal funds rate plus 0.50% or (ii) the prime rate. Under terms of the Credit Agreement,
borrowings under the term loan and the revolving loan facility will, at the Borrower’s option,
initially bear interest at a rate based on either (a) LIBOR plus 2.25% or (b) the Alternate Base
Rate plus 1.25%. The applicable interest margins on both Alternate Base Rate loans and LIBOR loans
under the revolving loan facility may decrease under the terms of the Credit Agreement by up to
0.50% as the Company’s total leverage ratio decreases. There is no provision in the Credit
Agreement, other than an event of default, for these interest margins to increase. Each calendar
year the Company is required to repay 1% of the outstanding term loan balance, subject to
adjustment for prior period repayments, and excess cash flow as defined in the Credit Agreement.
Discretionary use of cash or cash flow by the Company is constrained by certain leverage and
interest coverage ratio tests required to be met under the terms of the Credit Agreement. These
ratios become more restrictive over each of the next successive quarters. Currently, the Company
expects to repay $60,000 of its outstanding debt in 2007 in order to meet certain financial
covenants of its Credit
Agreement. As of March 15, 2007, the Company had repaid $25,000 of the outstanding debt. If
the financial performance of the Company falls short of expectations, then the Company might be
required to repay additional debt beyond current planned repayments.
At December 31, 2006 the weighted average
interest rate on the outstanding borrowings was 8.51%. The revolving loan facility contains a
$10,000 letter of credit sub-facility. The Company may borrow, repay and reborrow under the
revolving loan facility at any time. The New Financings are rated BB- by Standard and Poors and B1
by Moodys. The Company is required to pay an unused commitment fee of 0.50% per annum on the
unused portion of the revolving facility. As of December 31, 2006, $300 of standby letters of
credit were outstanding. Available borrowing capacity under the revolving loan facility was
$39,700 at December 31, 2006.
The Credit Agreement contains customary limitations, including limitations on indebtedness;
limitations on liens; limitations on investments and acquisitions; limitations on dividends, stock
repurchases, stock redemptions and the redemption or prepayment of
F-17
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other debt; limitations on
mergers, consolidations or sales of assets; limitations on capital expenditures; and limitations on
transactions with affiliates. We are also subject to financial covenants, including a maximum
total leverage ratio and minimum interest coverage ratio. The term loan and revolving loan
facility are secured by substantially all of our domestic assets and 65% of our foreign assets.
At December 31, 2006, none of our debt was covered by any hedging arrangements. On January
25, 2007, the Company entered into an interest rate swap, to comply with the terms of the Credit
Agreement, to hedge 40% or $70,000 of its outstanding debt. The interest rate swap has been
designated as a cash flow hedge and will be accounted for in accordance with SFAS No. 133
“Accounting for Derivative Instruments and Hedging Activities.”
(5) Common Stock Transactions
Reincorporation
On August 29, 2005, TTM Technologies, Inc., a Washington corporation (“TTM-Washington”),
consummated a merger (the “Reincorporation”) with and into its wholly owned subsidiary, TTM
Technologies, Inc., a Delaware corporation (“TTM-Delaware”). As a result of the Reincorporation,
the Company became a Delaware corporation.
As provided by the Agreement and Plan of Merger, (i) each outstanding share of TTM-Washington
common stock, no par value per share, was automatically converted into one share of TTM-Delaware
common stock, par value $0.001 per share, and (ii) each option to acquire shares of TTM-Washington
common stock outstanding immediately prior to the effective time of the Merger was converted into
and became an equivalent option to acquire, upon the same terms and conditions, the equal number of
shares of TTM-Delaware common stock (whether or not such option was then exercisable) and the
exercise price per share under each respective option remained equal to the exercise price per
share immediately prior to the effective time of the Merger at the time the Reincorporation became
effective. Each stock certificate representing issued and outstanding shares of TTM-Washington
common stock continues to represent the same number of shares of TTM-Delaware common stock. After
the Reincorporation, the rights of the Company’s stockholders generally will be determined under
Delaware corporate law.
The Company has reflected the merger of entities under common control at historical cost and
accordingly, there was no change to the carrying value of its assets or liabilities. The
applicable components of equity were retroactively adjusted for all periods presented to present
the applicable par value of common stock and the related additional paid-in capital.
(6) Income Taxes
The components of income before taxes for the years ended December 31, 2004, 2005 and 2006
are:
| 2004 | 2005 | 2006 | ||||||||||
United States |
$ | 41,513 | $ | 28,317 | $ | 55,374 | ||||||
Foreign |
— | — | 728 | |||||||||
Income before taxes |
$ | 41,513 | $ | 28,317 | $ | 56,102 | ||||||
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The components of the benefit (provision) for income taxes for the years ended December 31, 2004,
2005 and 2006 are:
| 2004 | 2005 | 2006 | ||||||||||
Current benefit (provision): |
||||||||||||
Federal |
$ | (2,841 | ) | $ | (5,376 | ) | $ | (14,099 | ) | |||
State |
(690 | ) | (664 | ) | (1,911 | ) | ||||||
Foreign |
— | — | (128 | ) | ||||||||
Total current |
(3,531 | ) | (6,040 | ) | (16,138 | ) | ||||||
Deferred benefit (provision): |
||||||||||||
Federal |
(9,900 | ) | 8,886 | (3,411 | ) | |||||||
State |
248 | (322 | ) | (1,503 | ) | |||||||
Foreign |
— | — | (11 | ) | ||||||||
Total deferred |
(9,652 | ) | 8,564 | (4,925 | ) | |||||||
Total benefit (provision) |
$ | (13,183 | ) | 2,524 | $ | (21,063 | ) | |||||
The following is a reconciliation between the statutory federal income tax rate and the
Company’s effective income tax rates for the years ended December 31, 2004, 2005 and 2006, which
are derived by dividing the income tax benefit (provision) by the income before income taxes and
extraordinary item:
| 2004 | 2005 | 2006 | ||||||||||
Statutory federal income tax rate |
(34.0 | )% | (34.0 | )% | (35.0 | )% | ||||||
State income taxes, net of federal
benefit and state tax credits |
(4.4 | ) | (2.7 | ) | (4.2 | ) | ||||||
Federal extraterritorial income exclusion
and domestic production activities
deduction |
1.3 | 2.2 | 1.7 | |||||||||
Decrease in valuation allowance |
5.0 | 42.3 | 0.2 | |||||||||
Other |
0.3 | 1.1 | (0.2 | ) | ||||||||
Total benefit (provision) for income taxes |
(31.8 | )% | 8.9 | % | (37.5 | )% | ||||||
In 2004, 2005 and 2006, the Company derived a tax benefit from an exclusion provided under
U.S. income tax laws with respect to certain extraterritorial income. This exclusion was repealed
as part of the American Jobs Creation Act of 2004 (the “Act”), which was enacted on October 22,
2004. The Act provides for a phase-out such that the exclusion the Company otherwise generated in
2005 and 2006 will be limited to approximately 80% and 60%, respectively. No exclusion will be
available in 2007 and thereafter.
The Act makes a number of other changes to the income tax laws which will affect the Company
in future years, the most significant of which is a new deduction relating to qualifying domestic
production activities. The deduction equals three percent of qualifying income for 2005 and 2006,
six percent for 2007 through 2009 and nine percent beginning in 2010. The U.S. Department of the
Treasury and Internal Revenue Service issued final regulations on May 25, 2006 which provide
comprehensive rules, definitions, and examples to assist in the implementation of this new
deduction.
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. The significant components of the net deferred tax assets as of December
31, 2005 and 2006 are as follows:
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| 2005 | 2006 | |||||||
Deferred tax assets: |
||||||||
Tax goodwill related to recapitalization |
$ | 14,428 | $ | 13,613 | ||||
Property, plant and equipment basis differences |
59 | — | ||||||
Reserves and accruals |
4,561 | 4,127 | ||||||
Net operating loss carryforwards |
299 | 59 | ||||||
State tax credits carryforwards, net of federal benefit |
2,531 | 2,400 | ||||||
Stock-based compensation |
— | 169 | ||||||
Alternative minimum tax credit carryover |
39 | — | ||||||
| 21,917 | 20,368 | |||||||
Less valuation allowance |
(2,531 | ) | (2,400 | ) | ||||
| 19,386 | 17,968 | |||||||
Deferred tax liabilities: |
||||||||
Goodwill and intangible asset amortization |
(7,951 | ) | (10,844 | ) | ||||
Property, plant and equipment basis differences |
— | (193 | ) | |||||
Repatriation of foreign earnings |
— | (250 | ) | |||||
Net deferred income tax assets |
$ | 11,435 | $ | 6,681 | ||||
Current portion |
$ | 4,601 | $ | 3,996 | ||||
Long-term portion |
6,834 | 2,685 | ||||||
The primary deferred tax asset, tax goodwill related to recapitalization, is being amortized
over a 15-year period in accordance with the provisions of the Internal Revenue Code (“Code”). As
a result of the Company’s recapitalization in 1998, the Company became a C Corporation and the tax
effect of all differences between the tax reporting and financial reporting bases of the Company’s
net assets was recorded as a net deferred tax asset. The most significant basis difference resulted
from a Code section 338(h)(10) tax election made at the time of the recapitalization. This election
had the effect of characterizing the recapitalization and stock purchase as an asset purchase for
income tax purposes. Therefore, the consideration paid to the former owner in excess of tax basis
of the net assets was recorded as tax-deductible goodwill, even though no goodwill was reported for
financial reporting purposes.
At December 31, 2006 the Company’s multiple state net operating loss carryforwards for income
tax purposes were approximately $2,444. If not utilized, the state net operating loss carryforwards
will begin to expire in 2007. At December 31, 2006, the Company’s state tax credit carryforwards
were approximately $3,692 and have no expiration date.
A valuation allowance is provided when it is more likely than not that all
or some portion of the deferred tax assets will not be realized. The net decreases in the valuation
allowance during the years ended December 31, 2004, 2005 and 2006 were due primarily to improving
pre-tax income, which allowed the Company to utilize its federal net operating loss in 2004 and
substantial amounts of its multiple state net operating loss carryforwards in 2004, 2005 and 2006,
as well as changes to estimates of future sources of taxable income. The reduction in valuation
allowance in 2005 occurred during the fourth quarter given the additional positive evidence from
continued historical earnings and expectation of future earnings which was sufficient for us to
conclude that it was more likely than not that most of our deferred income tax assets will be
realized.
At December 31, 2006, the Company has determined that a valuation allowance is necessary for
its state tax credit carryforwards that are not more likely than not to be realized based on
estimates of sources of taxable income and ability to generate new credits. It is possible that
the Company’s estimates could change in the near term and it may become necessary to record either
a full or partial decrease or increase to the valuation allowance in future periods, which would
either positively or negatively affect the Company’s results of operations, respectively.
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(7) Commitments and Contingencies
Operating and Capital Leases
The Company leases some of its manufacturing and assembly plants, a sales office and equipment
under noncancellable operating leases that expire at various dates though 2020. Certain real
property leases contain renewal provisions at our option. Most of the leases require us to pay for
certain other costs such as property taxes and maintenance. Certain leases also contain rent
escalation clauses (step rents) that require additional rental amounts in the later years of the
term. Rent expense for leases with step rents is recognized on a straight-line basis over the
minimum lease term.
In connection with the acquisition of PCG, the Company acquired capital lease obligations for
two pieces of manufacturing equipment and operating leases for four pieces of manufacturing
equipment from one vendor. These leases are collateralized by the related manufacturing equipment. The minimum lease payments as of December 31, 2006 are included for 2007
in the table of minimum lease payments shown below. In January 2007, the Company and the vendor
reached agreement to convert these capital and operating leases into a sale for $1,100. The
purchase price is payable in six equal monthly installments during 2007.
The following is a schedule of future minimum lease payments as of December 31, 2006:
| Operating Leases | Capital Leases | |||||||
2007 |
$ | 2,401 | $ | 744 | ||||
2008 |
2,276 | — | ||||||
2009 |
1,716 | — | ||||||
2010 |
761 | — | ||||||
2011 |
163 | — | ||||||
Thereafter |
1,388 | — | ||||||
Total minimum lease payments |
$ | 8,705 | $ | 744 | ||||
Less: interest portion of payments |
39 | |||||||
Present value of minimum lease payments |
$ | 705 | ||||||
Total rent expense for the years ended December 31, 2004, 2005 and 2006 was approximately
$352, $254 and $1,051, respectively. The cost and accumulated depreciation of capital leases
classified as machinery and equipment included in property, plant and equipment as of December 31,
2006 is $415 and $60, respectively.
Legal Matters
During 2001, the Company was advised that it has been added as a defendant in a patent
infringement lawsuit filed in the U.S. District Court for the District of Arizona by Lemelson
Medical, Education and Research Foundation, Limited Partnership. The suit alleges that the Company
has infringed certain “machine vision” and other patents owned by the plaintiff and seeks
injunctive relief, unspecified damages for the alleged infringements and payment of the plaintiff’s
attorneys’ fees. In March 2002, the lawsuit was stayed pending the outcome of Symbol Technologies,
et al. v. Lemelson in the U.S. District Court for the District Court of Nevada, in which a
declaratory relief suit filed by certain manufacturers challenged the validity, enforceability and
infringement of Lemelson’s “bar code” and “machine vision” patents. As a result of the stay, we
have not filed an answer to the complaint nor has any discovery been conducted. In January 2004,
the Nevada court found the Lemelson patents, including those patents asserted by the Lemelson
Foundation against us in the Arizona case, to be invalid, not infringed and unenforceable. The
Lemelson Foundation has the right to appeal the Nevada court’s judgment. Although the ultimate
outcome of this matter is not currently determinable, management believes the Company has
meritorious defenses to these allegations and, based in part on the licensing terms offered by the
Lemelson Partnership, does not expect this litigation to materially impact the Company’s results of
operations, financial condition or liquidity. Accordingly, the Company has not established a
reserve. However, there can be no assurance that the ultimate resolution of this matter will not
have a material adverse effect. Furthermore, there can be no assurance that the Company will
prevail in any such litigation.
Prior to the Company’s acquisition of PCG, PCG made legal commitments to the U.S.
Environmental Protection Agency (“U.S. EPA”) and the State of Connecticut regarding settlement of
enforcement actions against the PCG facilities in Connecticut. On August 17, 2004, PCG was
sentenced for Clean Water Act violations and was ordered to pay a $6,000 fine and an additional
$3,700 to fund environmental projects designed to improve the environment for Connecticut
residents. In September 2004, PCG agreed to a stipulated judgment with the Connecticut Attorney
General’s office and the Connecticut Department of Environmental Protection
(“DEP”) under which PCG paid a $2,000 civil penalty and agreed to implement capital
improvements of $2,400 to reduce the volume of rinse water discharged from its manufacturing
facilities in Connecticut. The obligations to the US EPA and Connecticut DEP include the
fulfillment of a Compliance Management Plan until at least July 2009 and completion of a wastewater
audit and installation of rinse water recycling systems at the Stafford, Connecticut, facilities.
As of December 31, 2006, approximately $1,000
F-21
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remains to be expended in the form of capital
improvements to meet the rinse water recycling systems requirements. The Company has assumed these
legal commitments as part of its purchase of PCG. Failure to meet either commitment could result
in further costly enforcement actions, including exclusion from participation in federal contracts.
The Company is subject to various other legal matters, which it considers normal for its
business activities. While the Company currently believes that the amount of any ultimate
potential loss for known matters would not be material to the Company’s financial condition, the
outcome of these actions is inherently difficult to predict. In the event of an adverse outcome,
the ultimate potential loss could have a material adverse effect on the Company’s financial
condition or results of operations in a particular period. The Company has accrued amounts for its
loss contingencies which are probable and estimable at
December 31, 2005 and 2006.
Environmental Matters
The process to manufacture printed circuit boards requires adherence to city, county, state
and federal environmental regulations regarding the storage, use, handling and disposal of
chemicals, solid wastes and other hazardous materials as well as air quality standards. Management
believes that its facilities comply in all material respects with environmental laws and
regulations. The Company has in the past received certain notices of violations and has been
required to engage in certain minor corrective activities. There can be no assurance that
violations will not occur in the future.
The Company is involved in various stages of investigation and cleanup related to
environmental remediation matters at two Connecticut sites, and the ultimate cost of site cleanup
is difficult to predict given the uncertainties regarding the extent of the required cleanup, the
interpretation of applicable laws and regulations and alternative cleanup methods. The Company is
also obligated to investigate the third Connecticut site as a result of the PCG acquisition under
Connecticut’s Land Transfer Act. The Company concluded that it was probable that it would incur
remedial costs of approximately $875 as of December 31, 2006, the liability for which is included
in other long-term liabilities. This accrual was discounted at 8% per annum based on the Company’s
best estimate of the liability, which the Company estimated as ranging from $952 to $1,212 on an
undiscounted basis. The liabilities recorded do not take into account any claims for recoveries
from insurance or third parties and none is estimated. These costs are mostly comprised of
estimated consulting costs to evaluate potential remediation requirements, completion of the
remediation and monitoring of results achieved. As of December 31, 2006, the Company anticipates
paying these costs ratably over the next 12 to 60 months, which timeframes vary by site. Subject
to the imprecision in estimating future environmental remediation costs, the Company does not
expect the outcome of the environmental remediation matters, either individually or in the
aggregate, to have a material adverse effect on its financial position, results of operations or
cash flows.
Dispute Resolution
From time to time, the Company is involved in various claims and legal disputes in the normal
course of its business. In October 2005, the Company reached an agreement in principle to resolve
an ongoing customer dispute concerning certain printed circuit boards that were shipped between
April 2002 and September 2003. A definitive agreement was signed in December 2005. The definitive
agreement called for the Company to pay the customer $3,150 upon receipt of required documentation
from the customer and contained certain mutual and unilateral covenants. Payments of $3,150 were
made to the customer during 2006 upon the receipt of the required documentation. The Company’s
insurance carrier reimbursed the Company $986 toward the cost of this resolution. The insurance
recovery of $986 is recorded in prepaid expenses and other current assets as of December 31, 2005
and was collected in January 2006. For the year ended December 31, 2005, approximately $2,219 of
expense, which is net of the insurance recovery, is recorded in general and administrative
expenses.
(9) Stock-Based Compensation Plans
In June 2006, the Company adopted the 2006 Incentive Compensation Plan (“The Plan”). The Plan
provides for the grant of “Incentive Stock Options,” as defined by the Internal Revenue Code (the
“Code”), and nonqualified stock options to our key employees, non-employee directors and
consultants. Awards under this Plan may constitute “qualified performance-based compensation” as
defined in Section 162(m) of the Code. Other types of awards such as restricted stock and stock
appreciation rights also are permitted under the Plan. Over the life of this Plan, 6,873 shares may
be issued. The Plan expires on June 22, 2016. Prior to the adoption of the Plan, the Company
adopted the Amended and Restated Management Stock Option Plan (the “Prior Plan”) in 2000. The
Prior Plan provided for the grant of “Incentive Stock Options,” as defined by the Code, and
nonqualified stock options to our key employees, non-employee directors and consultants. Awards
under the Plan and the Prior Plan may constitute “qualified performance-based compensation” as
defined in Section 162(m) of the Code. Under both the Plan and the Prior Plan, the exercise price
is determined by the compensation committee of the Board of Directors and, for options intended to
qualify as Incentive Stock Options, may not be less than the fair market value as determined by the
closing stock price at the date of the grant. Each option and award
shall vest and expire as determined by the compensation committee, generally four years for
employees and three or four years for non-employee directors. Options expire no later than ten
years from the grant date. All grants provide for accelerated vesting if there is a change in
control, as defined in the Plan. Awards under the Prior Plan ceased as of June 22, 2006. As of
December 31, 2006, of the 2,797 options outstanding, 482 options were issued under the Plan, and
2,315 options were issued under the Prior Plan.
F-22
Table of Contents
Upon the exercise of outstanding stock options, the Company’s practice is to issue new
registered shares which are reserved for issuance under the Plan and Prior Plan.
The fair value of share-based payment awards was estimated using the Black-Scholes option
pricing model. The following assumptions and the resulting weighted average fair values for grants
during 2004, 2005 and 2006 are as follows:
| 2004 | 2005 | 2006 | ||||||||||
Risk-free interest rate |
3.4 | % | 4.0 | % | 4.7 | % | ||||||
Dividend yield |
— | % | — | % | — | % | ||||||
Expected volatility |
100 | % | 80 | % | 65 | % | ||||||
Expected term in months |
60 | 55 | 54 | |||||||||
Weighted-average per share fair value of grants |
$ | 7.58 | $ | 5.14 | $ | 7.33 | ||||||
The fair value calculation is based on stock options granted during the period. The Company
determines the expected term of its stock option awards separately for employees and directors by
periodic review of its historical stock option exercise experience. This calculation excludes
pre-vesting forfeitures and uses assumed future exercise patterns to account for option holders’
expected exercise and post-vesting termination behavior for outstanding stock options over their
remaining contractual terms. Expected volatility is calculated by weighting the Company’s
historical stock price to calculate expected volatility over the expected term of each grant. The
risk-free interest rate for the expected term of each option granted is based on the U.S. Treasury
yield curve in effect at the time of grant.
Option activity under the Plan for the year ended December 31, 2006, was as follows:
| Weighted- | ||||||||||||||||
| Average | ||||||||||||||||
| Weighted- | Remaining | Aggregate | ||||||||||||||
| Average | Contractual | Intrinsic | ||||||||||||||
| Shares | Exercise | Term | Value | |||||||||||||
| (in thousands) | Price | (in years) | (in thousands) | |||||||||||||
Year Ended December 31, 2006 |
||||||||||||||||
Outstanding at December 31, 2005 |
2,910 | $ | 9.45 | 7.1 | ||||||||||||
Granted |
871 | 13.01 | ||||||||||||||
Exercised |
(782 | ) | 6.34 | |||||||||||||
Forfeited/cancelled/expired |
(202 | ) | 11.12 | |||||||||||||
Outstanding at December 31, 2006 |
2,797 | $ | 11.31 | 7.4 | $ | 4,608 | ||||||||||
Vested and expected to vest at December 31, 2006 |
2,612 | $ | 11.30 | 7.2 | $ | 4,377 | ||||||||||
Exercisable at December 31, 2006 |
1,517 | $ | 11.80 | 6.1 | $ | 2,288 | ||||||||||
The aggregate intrinsic values in the table above represent the total pretax intrinsic value
(the difference between Company’s closing stock price on the last trading day of 2006 and the
exercise price, multiplied by the number of in-the-money options) that would have been received by
the option holders had all option holders exercised their options on December 31, 2006. This amount
changes based on the fair market value of the Company’s stock. The total intrinsic value of options
exercised for the years ended December 31, 2004, 2005 and 2006 was $5,724, $2,132, and $5,659,
respectively. The total fair value of the options vested for the years ended December 31, 2004,
2005 and 2006 was $4,299, $11,389 and $832, respectively. As of December 31, 2006, $5,853 of total
unrecognized compensation cost related to stock options is expected to be recognized over a
weighted-average period of 1.6 years.
F-23
Table of Contents
Option activity for the years ended December 31, 2004, and December 31, 2005, was as follows:
| Weighted Average | ||||||||
| Options | Exercise Price | |||||||
Outstanding at December 31, 2003 |
3,516 | 8.37 | ||||||
Granted |
72 | 10.03 | ||||||
Exercised |
(539 | ) | 3.32 | |||||
Forfeited |
(204 | ) | 8.96 | |||||
Outstanding at December 31, 2004 |
2,845 | 9.32 | ||||||
Granted |
642 | 8.04 | ||||||
Exercised |
(297 | ) | 2.89 | |||||
Forfeited |
(280 | ) | 11.89 | |||||
Outstanding at December 31, 2005 |
2,910 | $ | 9.45 | |||||
Exercisable at December 31, 2005 |
2,168 | $ | 10.53 | |||||
A summary of options outstanding and options exercisable as of December 31, 2006, is as
follows:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Weighted Average | ||||||||||||||||||||||
| Remaining | ||||||||||||||||||||||
| Number | Contractual Life | Weighted Average | Number | Weighted Average | ||||||||||||||||||
| Range of Exercise Prices | Outstanding | (Years) | Exercise Price | Exercisable | Exercise Price | |||||||||||||||||
| $ | 2.63 - $4.99 | 306 | 5.5 | $ | 3.24 | 170 | $ | 2.79 | ||||||||||||||
| $ | 5.00 - $9.99 | 551 | 8.1 | 7.97 | 237 | 8.38 | ||||||||||||||||
| $ | 10.00 - $14.99 | 1,448 | 7.9 | 12.56 | 830 | 13.21 | ||||||||||||||||
| $ | 15.00 and over | 492 | 6.15 | 16.35 | 280 | 16.00 | ||||||||||||||||
| 2,797 | 7.4 | $ | 11.31 | 1,517 | $ | 11.80 | ||||||||||||||||
For the years ended December 31, 2004, 2005 and 2006, the amounts recognized in the financial
statements with respect to the stock-based compensation plan are as follows:
| Year Ended December 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
Stock-based compensation expense recognized |
$ | 131 | $ | — | $ | 1,553 | ||||||
Income tax benefit |
— | — | (196 | ) | ||||||||
Total stock-based compensation expense after income taxes |
$ | 131 | $ | — | $ | 1,357 | ||||||
Stock-based compensation expense recognized in the financial statements for the year ended
December 31, 2006, was classified as follows:
| Year Ended | ||||
| December 31, 2006 | ||||
Cost of goods sold |
$ | 479 | ||
Selling and marketing |
130 | |||
General and administrative |
944 | |||
Stock-based compensation expense recognized |
$ | 1,553 | ||
Many of the Company’s stock option awards are intended to qualify as incentive stock options
as defined by the Code. Upon the future exercise of incentive stock options which were vested as of
December 31, 2005, the Company may become entitled to a
deduction in its tax returns under certain circumstances; however, the value of this deduction
will be recorded as an increase to additional paid-in capital and not as an income tax benefit.
For the year ended December 31, 2006, a tax benefit of $1,707 related to fully vested stock option
awards exercised was recorded as an increase to additional paid-in capital.
Cash
received from option exercises during the year ended
December 31, 2006, was $4,957.
F-24
Table of Contents
(9) Employee Benefit Plan
The Company currently has two 401(k) savings plans under which all eligible full-time
employees may participate and contribute a percentage of compensation subject to the maximum
allowed by the Code. There is a plan for the original employees of the Company prior to the
acquisition of PCG. Additionally, there is a newly formed plan for the employees of the acquired
PCG plants. The original plan provides for a discretionary matching contribution of a uniform
percent of each participant’s contribution. However, in applying the uniform percent, only
contributions up to 4% of each participant’s compensation have been considered. The PCG plan
provides for a discretionary matching contribution of a non-uniform percentage of each
participant’s contribution. In applying this percentage, contributions from 1% to 5% of each
participant’s compensation shall be considered. The Company accrued contributions under the plans
and predecessor plans of $327, $360 and $1,031 during the years ended December 31, 2004, 2005 and
2006, respectively.
(10) Asset Retirement Obligations
The Company has recorded preliminary estimated asset retirement obligations related to
the restoration of its leased manufacturing facilities to shell condition upon termination of the
leases in place at those facilities and for removal of asbestos at its owned Stafford, Connecticut,
manufacturing plant. These obligations were acquired in connection with the Company’s October 2006
acquisition of PCG (see Note 3). The Company is awaiting receipt of its own estimates of costs to
satisfy these asset retirement obligations and has utilized the seller’s estimates for these
obligations for its preliminary estimates. See Note 7 for a discussion of the related lease terms.
Activity related to asset retirement obligations for the year ended December 31, 2006, consists of
the following and are included in other long-term liabilities:
| December 31,2006 | ||||
Asset retirement obligations at the beginning of the period |
$ | — | ||
Liabilities incurred during the period |
— | |||
Estimated liabilities assumed upon acquisition of PCG |
950 | |||
Liabilities settled during the period |
— | |||
Revisions in estimated cash flows |
— | |||
Accretion expense |
12 | |||
Asset retirement obligations at the end of the period |
$ | 962 | ||
(11) Related Party Transactions
The Company had an agreement with TC Management, L.L.C., TC Management IV, L.L.C. and Brockway
Moran & Partners Management, L.P. (collectively, “the Equity Sponsors”), entities owned by certain
of the Company’s stockholders, which obligated the Company to pay these entities a financial
advisory fee of 1.5% of the first $50,000 of the proceeds or value of any transaction with respect
to which the three entities rendered financial advisory services to the Company, and 1% of any
amount of proceeds or value in excess of $50,000 until such time as these entities and their
affiliates, on a combined basis, owned less than 25% of the total outstanding voting capital stock
of the Company.
In connection with the secondary offering in September 2003, the Equity Sponsors and
their affiliates no longer owned 25% of the total outstanding voting capital stock of the Company,
and the Company no longer was obligated to pay the financial advisory fee previously discussed.
In connection with a shelf offering declared effective in June 2004 and completed in November
2004, the Company incurred $339 of offering related expenses reflected within general and
administrative expense. The Company did not sell shares in this offering, but incurred these
expenses pursuant to a registration rights agreement between the Equity Sponsors and the Company.
Upon the completion of this offering in November 2004, the Equity Sponsors no longer had any equity
interest in the Company.
(12) Preferred Stock
The board of directors has the authority, without action to stockholders, to designate and
issue preferred stock in one or more series. The board of directors may also designate the rights,
preferences and privileges of each series of preferred stock; any or all of which may be superior
to the rights of the common stock. As of December 31, 2006, no shares of preferred stock are
outstanding.
(13) Segment Information
The operating segments reported below are our segments for which separate financial
information is available and upon which operating results are evaluated by the chief operating
decision maker on a timely basis to assess performance and to allocate resources.
F-25
Table of Contents
Effective
October 27, 2006, with the purchase of PCG (see Note 3), the Company has two reportable segments
which are PCB Manufacturing and Commercial Assembly. Prior to October 27, 2006, the Company
operated in one operating segment. These reportable segments are each managed separately as they
distribute and manufacture distinct products with different production processes. Each reportable
segment operates predominately in the same industry with production facilities that produce similar
customized products for its customers and use similar means of product distribution. PCB
Manufacturing fabricates printed circuit boards and Commercial Assembly is a contract manufacturing
business which specializes in assembling backplanes into subassemblies and other complete
electronic devices. PCB Manufacturing customers are either EMS companies or OEM companies while
Commercial Assembly customers are usually OEMs.
The accounting policies of the reportable segments are the same as those described in the
summary of significant accounting policies. The Company evaluates segment performance based on
operating segment income, which is operating income before amortization of intangibles. Interest
expense, amortization of debt issuance costs and interest income are not presented by segment since
they are not included in the measure of segment profitability reviewed by the chief operating
decision maker. All intercompany transactions, primarily sales of PCBs from the PCB Manufacturing
segment to the Commercial Assembly segment, have been eliminated. Reportable segment assets
exclude short-term investments, which are managed centrally.
| Year Ended December 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
Net Sales: |
||||||||||||
PCB Manufacturing |
$ | 240,650 | $ | 240,209 | $ | 353,734 | ||||||
Commercial Assembly |
— | — | 22,357 | |||||||||
Total Sales |
240,650 | 240,209 | 376,091 | |||||||||
Inter-segment sales |
— | — | (6,775 | ) | ||||||||
Total Net Sales |
240,650 | 240,209 | $ | 369,316 | ||||||||
Operating Segment Income: |
||||||||||||
PCB Manufacturing |
$ | 42,554 | $ | 27,760 | $ | 55,561 | ||||||
Commercial Assembly |
— | — | 1,376 | |||||||||
Total operating segment income |
42,554 | 27,760 | 56,937 | |||||||||
Amortization of intangibles |
(1,319 | ) | (1,318 | ) | (1,903 | ) | ||||||
Total operating income |
41,235 | 26,442 | 55,034 | |||||||||
Total other income |
278 | 1,875 | 1,068 | |||||||||
Income before income taxes |
$ | 41,513 | $ | 28,317 | $ | 56,102 | ||||||
Depreciation Expense: |
||||||||||||
PCB Manufacturing |
$ | 8,213 | $ | 9,290 | $ | 11,751 | ||||||
Commercial Assembly |
— | — | 427 | |||||||||
Total |
$ | 8,213 | $ | 9,290 | $ | 12,178 | ||||||
Capital Expenditures: |
||||||||||||
PCB Manufacturing |
$ | 17,502 | $ | 7,962 | $ | 13,763 | ||||||
Commercial Assembly |
— | — | 186 | |||||||||
Total |
$ | 17,502 | $ | 7,962 | $ | 13,949 | ||||||
| As of December 31, | ||||||||||||
| 2004 | 2005 | 2006 | ||||||||||
Segment Assets: |
||||||||||||
PCB Manufacturing |
$ | 220,420 | $ | 252,043 | $ | 497,206 | ||||||
Commercial Assembly |
— | — | 65,496 | |||||||||
Unallocated corporate assets |
15,350 | 21,100 | 10,996 | |||||||||
Total assets |
$ | 235,770 | $ | 273,143 | $ | 573,698 | ||||||
Goodwill: |
||||||||||||
PCB Manufacturing |
$ | 63,153 | $ | 63,153 | $ | 103,669 | ||||||
Commercial Assembly |
— | — | 11,958 | |||||||||
Total |
$ | 63,153 | $ | 63,153 | $ | 115,627 | ||||||
F-26
Table of Contents
Sales and long-lived assets representing more than 1% of the Company’s net sales by country
for the years ended 2004, 2005 and 2006, are as follows:
| 2004 | 2005 | 2006 | ||||||||||||||||||||||
| Sales | Long-lived assets | Sales | Long-lived assets | Sales | Long-lived assets | |||||||||||||||||||
United States |
$ | 165,237 | $ | 126,963 | $ | 149,020 | $ | 125,269 | $ | 250,383 | $ | 277,187 | ||||||||||||
Malaysia |
23,782 | — | 39,794 | — | 44,987 | — | ||||||||||||||||||
Canada |
11,977 | — | 11,818 | — | 17,924 | — | ||||||||||||||||||
China |
3,027 | — | 4,196 | — | 13,512 | 15,487 | ||||||||||||||||||
Taiwan |
— | — | — | — | 7,514 | — | ||||||||||||||||||
Singapore |
— | — | 5,208 | — | 7,487 | — | ||||||||||||||||||
Romania |
— | — | — | — | 4,828 | — | ||||||||||||||||||
Czech Republic |
6,682 | — | 10,408 | — | 4,554 | — | ||||||||||||||||||
Italy |
18,863 | — | 13,399 | — | 4,113 | — | ||||||||||||||||||
Other |
11,082 | — | 6,366 | — | 14,014 | 25 | ||||||||||||||||||
Total |
$ | 240,650 | $ | 126,963 | $ | 240,209 | $ | 125,269 | $ | 369,316 | $ | 292,699 | ||||||||||||
F-27
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
TTM Technologies, Inc.:
TTM Technologies, Inc.:
Under date of March 15, 2007, we reported on the consolidated balance sheets of TTM Technologies,
Inc. and subsidiaries as of December 31, 2005 and 2006, and the related consolidated statements of
operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in
the three-year period ended December 31, 2006, which are included in the TTM Technologies, Inc.
Annual Report on Form 10-K. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial statement schedule in the
Annual Report on Form 10-K. This financial statement schedule is the responsibility of the
Company’s management. Our responsibility is to express an opinion on this financial statement
schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
As discussed in Note 2, to the consolidated financial statements, effective January 1, 2006, the
Company changed its method of accounting for stock-based compensation upon adoption of Statement of
Financial Accounting Standards No. 123(R), “Share-Based Payment.”
| /s/KPMG LLP |
| Salt Lake City, Utah March 15, 2007 |
S-1
Table of Contents
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2006, 2005 and 2004
(In Thousands)
(In Thousands)
| Additions | ||||||||||||||||||||
| Balance at | Charged to | |||||||||||||||||||
| Beginning | Additions for | Costs and | Balance at | |||||||||||||||||
| Description | of Year | Acquisition of PCG | Expenses | Deductions | End of Year | |||||||||||||||
Year ended December 31, 2006 |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 926 | $ | 1,762 | $ | 95 | $ | (25 | ) | $ | 2,758 | |||||||||
Allowance for sales credits |
3,168 | 1,934 | 3,308 | (3,967 | ) | 4,443 | ||||||||||||||
Allowance for excess and
obsolete inventories |
1,036 | 5,757 | 313 | (678 | ) | 6,428 | ||||||||||||||
Year ended December 31, 2005 |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 822 | $ | 316 | $ | (212 | ) | $ | 926 | |||||||||||
Allowance for sales credits |
3,196 | 4,004 | (4,032 | ) | 3,168 | |||||||||||||||
Allowance for excess and
obsolete inventories |
883 | 400 | (247 | ) | 1,036 | |||||||||||||||
Year ended December 31, 2004 |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 740 | $ | 279 | $ | (197 | ) | $ | 822 | |||||||||||
Allowance for sales credits |
2,994 | 3,142 | (2,940 | ) | 3,196 | |||||||||||||||
Allowance for excess and
obsolete inventories |
1,533 | 315 | (965 | ) | 883 | |||||||||||||||
S-2
Table of Contents
INDEX TO EXHIBITS
| Exhibit | ||
| Number | Exhibits | |
2.1
|
Form of Plan of Reorganization (1). | |
2.2
|
Stock and Asset Purchase Agreement by and among Tyco Printed Circuit Group LP, Tyco Electronics Corporation, Raychem International, Tyco Kappa Limited, Tyco Electronics Logistics AG, and TTM (Ozarks) Acquisition, Inc. dated as of August 2, 2006 (2) | |
3.1
|
Registrant’s Certificate of Incorporation.(3) | |
3.2
|
Registrant’s Bylaws.(3) | |
4.1
|
Form of Registrant’s common stock certificate.(3) | |
10.1
|
UBS Credit Agreement see ex. 10.1 to November 2, 2006 8-K (4) | |
10.2
|
Employment Agreement dated as of December 31, 2005 between the Registrant and Kenton K. Alder. (5) | |
10.3
|
Form of Executive Change in Control Severance Agreement and schedule of agreements entered into on December 1, 2005. (5) | |
10.4
|
Employment Agreement dated as of October 23, 2006 between the Registrant and Douglas L. Soder. (6) | |
10.5
|
Form of Severance Agreement and schedule of agreements entered into on December 1, 2006.(6) | |
10.6
|
2006 Incentive Compensation Plan.(6) | |
10.7
|
Form of Stock Option Agreement. (6) | |
10.8
|
Form of Restricted Stock Unit Award Agreement. (6) | |
10.9
|
Form of Indemnification Agreement with directors. (1) | |
10.10
|
Statutory Warranty Deeds for Redmond Facility.(1) | |
21.1
|
Subsidiaries of the Registrant (6) | |
23.1
|
Consent of KPMG LLP, independent registered public accounting firm (6) | |
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. (6) | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. (6) | |
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (6) | |
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (6) |
| (1) | Incorporated by reference to the Registration Statement on Form S-1 (Registration No. 333-39906) declared effective September 20, 2000. | |
| (2) | Incorporated by reference to the Registrant’s Form 8-K as filed with the Securities and Exchange Commission (the “Commission”) on August 4, 2006. | |
| (3) | Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on August 30, 2005. | |
| (4) | Incorporated by reference to the Registrant’s Form 8-K as filed with the Commission on November 2, 2006. | |
| (5) | Incorporated by reference to the Registrant’s Form 10-K as filed with the Commission on March 15, 2006. | |
| (6) | Filed herewith. |