Q1 2020 Earnings Call
Please standby.
Good day, everyone and ladies and gentlemen, thank you for standing by.
Welcome to the TTM technologies first quarter 2020 financial results Conference call.
During today's presentation, all parties will be in listen only mode.
Following the presentation the conference will be open for questions.
At that time, you can press star one to be placed into the question Q.
As a reminder, this conference is being recorded today April 29 2020.
Some of your decide TTM senior director of corporate development and Investor Relations will now review Tpms disclosure statement.
Thank you Sarah.
Before we get started I would like to remind everyone that today's call.
Forward looking statements within the meaning of the private Securities Litigation Reform Act.
Including statements related to TTM teacher business outlook.
Actual results could differ materially from each forward looking statements due to one or more rich.
Certainties, including the factors Explainer. Most recent annual report on form 10-K, and other filings with the ship Securities Exchange Commission. Each forward looking statements are based on management's expectations and assumptions at the date of this presentation. He can't does not undertake any obligation to publicly update or revise and you have each day.
As a result of information future events or other circumstances, except as required by law.
Please refer to the soldiers regarding the risks that may affect TTM.
He filed reports on forms 10-K Cups, you 8-K registration statement on formats for other companies other actually see filings.
We will also that's got to go it's called certain non-GAAP financial measures such as adjusted EBITDA such about your should not be considered if it's such a Q4 the measures prepared and presented in accordance with gap. Yeah. We direct you to the reconciliation of non-GAAP to GAAP measures include it in a company's press release, which is probably DFI is available on two camps.
Much like at Www Dot TTM Dot com.
I'd now like turn the call over to Tom Edman, Cts Chief Executive Officer. Please go ahead.
Thank you from there.
Good afternoon, and thank you for joining us for our first quarter 2020 conference call.
These are unprecedented times and I hope that all of you and your loved ones are safe and healthy.
The three of US, that's a mirror, Todd and myself or in our respective homes for this earnings call.
I'll begin with an update on alcohol coal that 19 has impacted our business followed by a review of our business strategy, including highlights from the quarter.
And by a discussion of our first quarter results.
Todd show, our CFO will follow with an overview of our Q1 2020 financial performance and our Q2 2020 guidance. We we'll then open the call to your question.
I am pleased to report that in the first quarter of Twentytwenty P.T.N. generated revenues above the midpoint and non-GAAP EPS above the guided range. Despite the extended shutdown of our China operations following Chinese new year as our manufacturing plants did a great job.
Of ramping up production following the government mandated shutdown.
In addition, north American governments have deemed TTM products is essential.
All of our manufacturing plants are presently operating as we supplied defense programs communications infrastructure and medical products.
The emergence of the cold at 19 pandemic has created operational challenges macroeconomic uncertainty and employee concerns.
I'm extremely proud of how TTM employees have risen to the challenge and contributed during the pandemic.
At the end of 29 team TTM had more than 25000 employees with the majority of them split between North America and Asia Pacific.
Since the early signs of the outbreak in China, We immediately established and Asia based situational leadership team to organize proactive measures to safeguard our employees.
After the virus spread to North America, we implemented best practices from our Asia Pacific facilities in our North American facilities.
Such practices include where possible TTM employees work from home.
You have restricted to all local and international business travel globally, and we have implemented a regimen in our facilities to protect our employees from the spread of the disease few procedures such as regular facilities sterilization.
Mandatory masks in our facilities temperature checks for all incoming employees and visitors mandatory quarantine for employees returning from the impacted areas and other measures.
Our Asia team, even began producing masks in order to contribute to the safety of our facilities and employees worldwide.
As of yesterday, we have had 10 employees in North America, who have tested positive for cold at 19 and are receiving appropriate medical attention.
In each of these cases, our North America situational leadership team responded immediately using contacts racing to quarantine individuals who are in close contact with the infected team member.
Also by Sterilizing the area in which they worked and by alerting our workforce at the six sites involved on all shifts to review measures that had been taken.
As a result of stringent preventative measures in place. These events have had minimal impact on our manufacturing operations to date.
At this time, we have had zero cases in our Asia Pacific facilities.
In terms of communications, we have established a task force at the corporate level to coordinate communications with our customers and employees.
For our employees, we provide biweekly E mail updates I hosted by monthly town Hall, and we have daily contacts from our human resources personnel to each employee who is absent from a plant on any given day. So that we can provide the right level of assurance and transparency to.
Our employees.
I would like to recognize the extraordinary efforts of our situation a leadership teams operations management and human resources organization in these efforts.
And the second quarter, we have also implemented an incentive bonus as a means of thanking our employees, who continue to come to work at our plants.
In addition, we are granting one week of paid time off for each employee who needs to be out of the office due to exposure to call that a family member who has been exposed to coated or in employee who has been exhibiting flu like symptoms.
We also have establish a P.G.O. bank, where employees can grant there I'm used to P.T. O to those who are in need of additional P.T. O for coated reasons.
We feel that these are the right measures for TTM to take to recognize the sacrifice of our employees and to put the safety of our employees first.
Moving onto the mobility divestiture 10 days ago, we announced that we closed the previously reported divestiture of our mobility business unit to AK, Yeah, Meadville that Chinese consortium.
Right enterprise value of $645 million.
This was a strategic transaction, allowing us to focus on longer cycle markets, and reducing our exposure to short product cycle and seasonal consumer markets, which historically have been prone to volatility.
The consideration was $550 million for for China manufacturing facilities and did not include certain accounts receivable of approximately $95 million.
Accounts receivable were lower than previously disclosed due to an earlier than expected closing of the transaction.
We felt that the surety of closing during a period of macroeconomic uncertainty outweighed the lower accounts receivable.
Net proceeds are expected to be $580 million, which we plan to used to reduce debt and invest in the company.
The receipt of proceeds will take another three to four months as we follow protocols related to transferring funds out of China.
In addition, we have bank guarantees that we can exercise to receive U.S. dollars. If we do not receive funds by August 7th.
This transaction aligns with our strategic focus on diversification differentiation and discipline.
We expect that in the long term it will pay off for TTM, our investors and our customers.
Finally, we just issued a press release the discusses the restructuring of our E. M S business unit.
The M.S. business unit consists of three Chinese manufacturing facilities with two being in Shanghai, Shanghai, Backplane, and Shanghai, you haven't solutions and one in Shenzhen.
TTM Ob ceasing operations at the Shanghai, Yemm solutions, and sends and facilities, while leaving the Shanghai Backplane facility operating and absorbing it into our PCB operations.
The complete wind down will take place through Twentytwenty as we support our customers during our transition to other suppliers.
For a 2019, the Shenzhen in Shanghai, Yemm solutions plants had $161.2 million in revenue and $9.5 million and non-GAAP operating income primarily in the automotive networking and communications and medical industrial and in.
Fermentation end markets.
The strategic rationale for this move is based on TTM, increasing focused focus on differentiated higher margin products, such as Pcbs, and RF components and sub assemblies.
Commercial Assembly services have always been a lower margin business.
The following particular factors led to this decision.
Number one the recent trade tensions between the U.S. and China I've had a negative impact on the M.S. business as much of our product with imported directly by our customers into the U.S.
Number two Vms business is further weekend following the disruptions of the supply chain and the end market demand by the covert 19 virus.
Number three the town of NAND non shop, and the Gyrating Red District of Shanghai has it has advised us of their intent to expropriate the land Shanghai E.M.S. occupies.
This area is earmarked for other non industrial uses.
Number for the business did not have sufficient scale to adequately adequately compete with larger competitors.
Global manufacturing footprint.
Number five the business had lower profit margins and returns than TTM scored PCB business and finally, the transaction also does reduce our China footprint, which is another positive given continued trade friction between the U.S. and China.
We are determined to make the transition as painless as possible for our customers, but this was a decision that needed to be made Chris strategic as well as financial reasons.
Now I'd like to review our end markets.
All historical reported end market disclosures continue to include the mobility business unit.
Forecast for two to includes results of the mobility business unit up to the closing date of the sale.
The end market disclosures still contain all of the E.M.S. segment revenue revenues.
For a pro forma comparisons excluding these segments. Please refer to the appendix of our investor presentation posted to our web site.
For TTM, the aerospace and defense end market represented 30% of total first quarter sales compared to 27% of Q1, 2019 sales and 26% of sales in Q4 2019.
We expect sales in Q2 from this end market to represent about 34% of our total sales.
We continue to see solid growth and our Andy business with Q1 revenues up 12% year on year, and a and B program backlog growing to $612 million compared to $487 million in a year ago corridor.
Ongoing strength as a result of our strong program alignment and a key new booking for the L. Tam is program.
Stands for lower tier air and missile defense system, and as an upgrade of Raytheon's Patriot missile program.
The medical industrial instrumentation end market contributed 16% of our total sales in the first quarter compared to 15% in a year ago corridor and 13% in the fourth quarter of 2019.
We saw strengthened our instrumentation customers there was offset by weakness in our industrial customers in Rtms segment.
For the second quarter, we expect this market to be 18% of revenues due primarily to increase demand for medical equipment, such as patient monitoring devices and ventilators.
Networking communications accounted for 14% of revenue during the first quarter of 2020.
This compares to 18% in the first quarter of 2019, and 15% of revenue in the fourth quarter of 2019.
Year on year growth for P.C.D.'s for Chinese Fiveg base stations was more than offset by declines in networking customers networking and telecom customers and Rtms segment, and U.S. made wireless components sold to walk away, which were impacted by the trade conflict.
Sales were also impacted by production limitations due to the extended shutdown of production at our China facilities as a result of cold at 19.
In Q2, we expect this segment to be 18% of revenue as demand for fiveg infrastructure and networking equipment increases.
Sales in the computing storage peripherals end market represented 14% of total sales in the first quarter compared to 13% in Q1 of 2019 and 14% in the fourth quarter of 2019.
We saw strengthen our semiconductor and datacenter customers.
The laptop and tablet revenues were approximately 26% of computing revenues in Q1 and are included in the mobility business unit divestiture.
We expect revenues in this end market to represent approximately 13% of second quarter sales as only three weeks of laptops and tablets sales are included.
Automotive sales represented 12% of total sales during the first quarter of 2020 compared to for 17% in the year ago quarter and 14% during the fourth quarter of 2020.
Automotive sales declined year over year due to reduced production days, resulting from the government mandated shutdown in China as well as demand weakness, particularly in Europe and China.
Approximately 36% of the year on year decline was due to weakness in the M.S. segment.
We expect automotive to contribute 13% of total sales in Q2 with ongoing global weakness in demand is expected.
The cellular phone end market accounted for 11% of revenue in the first quarter compared to 7% in Q1 of 2019 and 16% in Q4 of 2019.
We expect cellular to represent 2% of revenues in Q2 as only three weeks of mobility revenues are included.
Next I'll cover some details from the first quarter.
During the quarter, our advanced technology business, which includes H.T.I. rigid flex substrate and RF sub systems and components accounted for approximately 39% of our company's revenue.
This compares to approximately 33% in the year ago quarter and 42% in Q4.
The sequential and year over year changes were due to combined effects in our cellular and computing end markets.
We are continuing to pursue new business opportunities and increased customer design engagement activities that will leverage our advanced technology capabilities in new markets.
[noise] capacity utilization in Asia Pacific was 47% in Q1 due largely to the impact of the extended Chinese new year shutdown and slow recovery period during February.
Compared to 55% in a year ago quarter and 72% in Q4.
Our overall capacity utilization in North America was 67% in Q1 compared to 62% in the year ago quarter and 58% in Q4.
Our top five customers contributed 34% of total sales in the first quarter 2020, compared to 29% in a year ago quarter and 37% in the fourth quarter of 29 team.
Our largest customer accounted for 13% of sales in the first quarter versus 9% in a year ago quarter and 18% in Q4.
At the end of Q1, our 90 day backlog, which is subject to cancellations was $587.4 million compared to $438.3 million at the end of the first quarter last year and $511.2 million at the end of Q.
Before.
Our PCB book to Bill ratio was 1.15 for the three months ending March Thirtyth.
I'd like to conclude by again thanking our employees for continuing to contribute to TTM and our critical mission of inspiring innovation for our customers.
Their efforts are particularly appreciated during these times by our customers in the medical industry.
Well, we are facing short term uncertainty from covert 19, we're taking the right strategic moves to strengthen TTM for the long term.
Now Todd will review, our financial performance for the first quarter Todd.
Thanks, Tom and good afternoon, everyone.
As Tom mentioned earlier on April 19th TTM announced the closing of the sale of its mobility business unit.
Such the disclosure you can't GAAP results reflects the mobility business unit as a discontinued operation.
To facilitate comparison, if you can't results to prior periods ended previously issued guidance I will also discuss non-GAAP financial information, which includes the results of the mobility business unit.
This business unit or the electromechanical solutions business units is also included in the results that we've reported.
For the first quarter GAAP net sales from continuing operations were $497.6 million.
Fair to $536.4 million in the first quarter of 2019 and $535.7 million into fourth quarter of 29.
Year over year decrease in revenue was due to just due to declines in our networking and communications and automotive end markets, partially offset by growth in our aerospace and defense and medical industrial and instrumentation in markets.
GAAP operating income from continuing operations for the first quarter of 2020 was $16.2 million compared to $30.1 million in the first quarter of 2019 and $29.4 million into fourth quarter of 29 gene.
On a GAAP basis.
Yes from continuing operations in the first quarter of 2020 was $3.2 million or three cents per diluted share.
This compares to net income from continuing operations of $6.2 million or six cents per diluted share in the first quarter of last year.
And $7.3 million or seven cents per diluted share in the fourth quarter 2019.
The remainder of my comments will focus on our non-GAAP financial performance.
Non-GAAP performance includes hard suggested mobility business unit, but excludes.
M&A related costs restructuring costs, certain non cash expense items and other unusual or infrequent items.
We present non-GAAP financial information to enable investors to see the company through the eyes as management.
And the facility comparison was expectations in prior periods.
For the first quarter net sales were $610.8 million compared to $620.2 million in the first quarter of 2019 and compared to fourth quarter 2019, net sales of $719.3 million.
Year over year decrease in revenue was due to declines in our networking and communications and automotive end markets, partially offset by growth in our aerospace and defense cellular and computing end markets.
Gross margin in the first quarter was 14.5 per cent compared to 14.6% in the first quarter of 2019 and 17.6% in the fourth quarter of 2019.
The year over year declining gross margins was due primarily to the changes in revenue noted earlier, which was largely offset by improved performance in our mobility plans.
Selling and marketing expense was $16.9 million in the first quarter or 2.8% of net sales.
Versus $18.4 million or 3% of net sales a year ago and $18.3 million for 2.5% of net sales in the fourth quarter.
First quarter chain expense was $30.9 million or 5% of net sales compared to $23.7 million for 4.4% of net sales in the same quarter, a year ago, and $32 million or 4.4% of net sales in the previous quarter.
Starting 2020, we're breaking out R&D expenses, so that you make better understand the investments we are making can differentiate ourselves.
In the first quarter of 2020, R&D was $4.9 million, 4.8% of revenues compared to $4.8 million or 0.8% of in a year ago quarter $4.4 million, 4.6% of revenues in the previous quarter.
Our operating margin in Q1 was 5.8%.
This compares to 6.5% in the same quarter last year and 10.1% in the fourth quarter of 2019.
Interest expense was $16.5 million in the first quarter and decrease of $1.4 million from the same quarter last year due to lower interest rates and debt repayments.
Turning the corner, we recorded $2.2 million a foreign exchange gains.
I remain incentives increased again to $3.9 million were approximately three cents a vps.
This compares to a loss of $3.6 million or approximately three cents.
Yes in Q1 last year, and a loss of $3 million or approximately three cents vps in Q4 is 2019.
Our effective tax rate was 15% in the first quarter.
First quarter net income was $19.6 million or 18 cents per diluted share. This compares to first quarter 2019, net income of $16.4 million or 16 cents per diluted share and fourth quarter 2019, net income of $43.9 million or 41 cents per diluted share.
Adjusted EBITDA for the first quarter was.
$1 million or 13.4% of net sales.
Compared with first quarter 2019, adjusted EBITDA of $78.5 million for 12.7% of net sales.
In the fourth quarter, adjusted EBITDA was $111.3 million or 15.5% of net sales.
Our balance sheet and liquidity positions remain strong.
Cash flow from operations was $27.9 million into first quarter versus $36.9 million in the same quarter last year.
Our net debt labor leverage ratio improved to 2.8 times.
Cash and cash equivalents at the end of the first quarter of 2020 were $430.4 million, including approximately 30 $35 million deposit related to the sale of our mobility business. Excluding this deposit we have ample liquidity would kick where the cash balance of just under $400 million in under.
Ron.
Capacity.
<unk> hundred $99 million.
Reminder, will be receiving approximately $485 million in net proceeds from the sale of our formability plants by August seven and an additional $95 million from mobility related accounts receivable collections over the next three to four months.
Depreciation for the first quarter was $42.6 million.
Capital spending for the quarter was $32.5 million.
Now I'd like to turn to our guidance for the second quarter.
Looking ahead, we believe that Covidien 19 may cause end market demand weakness supply chain disruptions as well as inefficiencies within our own production.
Taking this into account we expect total revenue for the second quarter of 2020 to be in the range of $520 million to $560 million.
We expect non-GAAP earnings to be me in the range of 11 to 17 cents per diluted share.
This guidance includes the mobility business up to the data.
To closing.
We had on the date of this back on April 19, So the first three weeks for the quarter.
EPS forecast is based on a diluted share count of approximately $107.4 million 6 million shares our share count guidance includes dilutive securities such as options in our shoes, but no shares associated with our convertible bonds, which is a function of a huge our future stock price.
As a reminder for every dollar increase in the average share price above $14 in 26 cents during a quarter our shares outstanding would increase by approximately 1.5 million shares.
We expect initiating expense will be about 8.2% of revenue in the second quarter and R&D should be approximately 1% of revenue.
We expect interest expense the total about $17.6 million.
Finally, we estimate our effective tax rate to be between 13 and 17%.
To assist you in developing your financial models, we offer the following additional information.
During the second quarter, we expect to record amortization of intangibles of about $11.1 million stock based compensation expense of about $3.8 million.
Non cash interest expense of approximately $3.5 million and we estimate depreciation expense will be approximately $25.8 million.
Additionally, as announced earlier today, we expect to incur restructuring costs, including asset write downs of approximately $25 million over the next 12 to 15 months as we close two plants in our electromechanical solutions business unit.
This amount, we expect approximately $17 million will be cash expenditures for things like severance and other costs.
Finally, I'd like to announce it will be participating virtually in the JP Morgan Global Technology Media and Communications conference on May 12.
The Needham Technology immediate conference on May 19, Bear Global Technology, and consumer conference on June 2nd and the Stifel Cross sector Insight conference on June nine.
That concludes our prepared remarks, and now we'd like to open the lines for questions Sarah.
Thank you if you would like to ask a question. Please take note by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment a voice pumps on the phone line will indicate when your line is open please state your name.
I mean before posing your question.
Again, Please press star one to ask a question and we'll pause for just a moment.
And we will pick our first question.
Ah, Yes can you hear me.
Yes.
Right well first of all I hope you can employees recoveries safely some testing positive from Feltl 19, and I'm glad to hear about all the corrective steps we've taken the key badly.
Thanks.
So.
Thank you for that and then secondly, just talking about the disruptions you're facing.
What in particular areas with your supply chain are you seeing bottlenecks are they rolling around and how Ah.
Surmountable do you see the supply chain challenges.
The rest of the year.
Okay sure thing that was that was might Greg.
Yes.
Hey, Mike [laughter], maybe yeah. So.
Let me let me address first of all thanks. Thank you for the comments.
And.
And your the answer on your the first part of your question. So we.
The 10 instances of covert 19 that we've had in North America.
All but one our out of our folks out of the hospital.
Recovering out of the hospital and.
And and actually one of the employees is has now tested negative in his back at work.
So.
Got really glad to see that and.
On the employee that isn't the hospital, we are hopeful as he seems to be recovering.
Stable and recovering at this point so.
So thank you for that are we obviously, we spent we spend a lot of time on this week.
This this is job number one.
For for TTM is that the protection of our employees.
And we take it very very very seriously so.
I appreciate your comments.
There.
As as.
As we look at our potentially disruptions on Q2, they're they're really two areas one.
With so with with our policies.
The way the the importance of employee safety.
We.
Had been and we'll continue to be very forgiving proven for those employees, who just are uncomfortable coming into work.
So.
We have we have some instances of that we have we've actually done I think a very good job managing this week.
Generally.
We have over 90% of our employees in place in North America and.
Asia Pacific its a.
The full full complement of employees.
So I think we're doing a good job of managing that I think the employees Recchi are recognizing the safety measures that were taking and and so that has continued to improve so we have to also be.
Very conscious of.
The need the need to.
If we do have an instance of covered too.
To properly sterilizing area.
In manufacturing and we have to take that into account as we as we think about.
Q2.
The supply chain side.
So to date, we've we've had several instances of suppliers who.
Either needed to shut down.
Or in some way because of inefficient production were not able to.
To meet our needs our supply chain organization, I guess done a very good job of mitigating this to date.
Primarily materials coming out of North America.
And and so in the shutdowns of.
And the few instances that weve experiences have been relatively short.
So again.
You never know what what can come your way in this climate.
So we're careful but to date, it's been managed very well.
Thank you tell lost one more.
It was related question what.
[music].
Well it all can you attribute any reduction in demand too.
Bottlenecks or supply chain disruptions that your customers might be seen other parts of their business.
A very very difficult.
At this juncture for for us to determine.
If we look at markets, which have and if you look at our Q2 guidance the markets that are.
Especially weak.
Right now automotive.
Aerospace. These are markets that are that are being affected by demand.
So really not that not a supply chain related.
The markets, where we're experiencing more sprague's, whether its medical industrial instrumentation.
Computing.
Certainly, a and b and and increasingly improving climate networking communications when it comes to those markets Hey, Andy I can comment on I think that we're continuing to I think there are pockets of shortages, but but again.
The supply base understands the importance of the mission.
And is responding overall when you cross into the commercial side.
I would expect that so certainly computing as a where there's been a short term spike whether its medical or computing datacenter requirements.
Even semiconductor I think in those areas you can start to see shortages emerged just because of the challenge of dealing with demand spikes on top of.
Some restraints on on a supply with Covance. So those are areas that where our customers may I say pop assist they may be experiencing those shortages in certain areas and then they jump on and try to solve the the challenges, but again my my Oh My view on this one is it's not.
As clear as has I'd like it to be and of course the situation is changing regularly.
Okay, great well, thank you very much.
Thank you.
And we will go to our next question.
Hi, guys.
Yeah.
Hey, Jim.
How are you.
Good Okay go ahead.
Question on the automotive I agree.
It looks like.
Yeah that was down here and that year over year and I think you cited fewer production days demand weakness was it.
Demand weakness a bigger component of it because it doesn't seem like you're you're suggesting maybe a bottom at least.
If I heard correctly you're anticipating.
It looks like some some improvement in Q2 in this area.
Yeah. So so I'm going to preface my comment by saying I I've said, this before and I and Unfortunately, I was wrong I thought a.
Approximately a year ago, I thought, we'd really bottomed out in Europe.
But you know just takes a little pandemic really to really so you how depressed demand can get.
So having said that.
Where we were experiencing.
The the challenges in Q1.
It was a combination with the extended Chinese new year and really throughout February relatively low utilization or employee you know the ability for our employees to return.
March was quite as much better.
What.
So that did constrained certainly constrained our ability to produce.
Product across the board in our commercial markets.
But in automotive in addition of course, China demand ace or demand with way way down and <unk> and European demand was very soft.
So you know fast forwarding into what we see coming this quarter.
You're right sequentially.
Relatively flat, maybe a little bit up.
But.
But that's up because we you know we are seeing now from March moving into April we don't have the production constraints any longer. So we are able to get the production out into our hubs.
And and were and we're seeing you know.
I would say a slight certainly flight improvement, but at least an improvement in a in the China.
Demand situation the flip side of that is North America weakening you put that together and we and we see you know again relatively flat, maybe a little bit up but in this kind of environment. Just just overall very weak in automotive.
Got it follow up question just.
Maybe just taking a step back you guys are doing some work here on the yacht business portfolio and it sounds like you're pretty much completed at lease on the.
The divestment side.
Wondering how we.
Thank you know capital deployment going forward.
Specialty, especially now given the environment, we're in what do you guys.
What's the thought process here is it too you know strengthened balance sheet pay down debt is it too maybe look at some other potential growth areas that you might expand again I'm just wondering what how we should think about this going forward.
Sure I'll I'll start and then I'll turn turn at a two at the two.
Complete the answer but if you look at it you know overall.
We so we have we're we're very pleased with our balance sheet position.
As Todd mentioned, even in the challenges of Q1, we were still from an operating cash flow standpoint positive we've been able to improve our debt leverage ratio. So we are making progress there and we have a very strong balance sheet.
Which will of course strengthened further.
With a with a funds arriving from China for the mobility sale.
So when it comes to then deploying that capital we have obligations that we need to fulfill.
And then we will continue to.
To to work on our working capital can maintain the right level working capital and then finally, yes, we will continue to work on our M&A pipeline, that's a regular effort.
And and we have a pipeline of opportunity.
There that will continue to work if and add again to strategically.
If the right opportunity comes along so those are you know sort of three three a priority for us but Todd.
I would just supplement that a little bit of specific so on the short term side.
And that we've got about $400 million of cash in our balance sheet. We've got on capacity available on our avionics. So we can take a punch or two and certainly a continue to fight the strong fight in that sense, So were pretty pretty comfortable short term longer term with the proceeds coming in from the sale of the mobility business.
We have certain obligations we.
We can use it to reinvest in the business, but as time says were we always evaluate the M&A pipeline, but in the absence of something actionable right now we would be required to pay down the term loan.
So our expectation here is that in the near term, we'll pay down about $400 million or the term loan and that will help reduce our leverage even further.
Which was really give us a lot of strengthen the balance sheet dry powder. If you would that basically gives us future flexibility. If we find a strategic M&A opportunity that we likely would be in a position to take action on that and as we continue to generate cash flow out of the business. We have options in terms of how to deploy that cash whether its.
Reinvesting into the business or somehow returning to show. So all the options are on the table, but in the medium term, we see ourselves good short term and as we collect the proceeds on the sales from the sale mobility, we'll use that in the short term to pay down debt and just even further strengthen our balance sheet.
Got it thank you.
Excellent.
And we will go to our next question.
Hi, good afternoon STI Cox.
I guess you just.
Talk a little bit more about the gross margin comparison that held up extremely well.
Given that you lost a few weeks of production menu customers are down.
It seems like aerospace defense less developed and you have easy comps with.
And sell some business versus a year ago, but can you just sort of walk through the gross margin a waterfall little bit there. Thanks.
I'm, sorry, I assume you're referring to a year over year Steve.
Yeah, I am sorry, yes, okay, that's fine.
Gross margin relatively flat right 14 fibrosis fourteensix.
Really got a couple of moving parts remember a year ago.
The mobility business was in very very difficult strays, we actually lost money in that quarter a year ago.
The mobility business, particularly the cellular business was much better this year compared to last so that really helped on the upside and that helped to offset some of the challenges that we're seeing in some of the other end markets, particularly networking communications and automotive both of those end markets were down significantly from.
A year ago and that hurt us from a profit standpoint, but we were able to mitigate that through better performance out of the mobility business. There's some other very minor puts and takes but that's that's the big picture.
Okay. That's helpful and then just bigger picture Tom.
Even all the disruptions and most likely tougher demand in line and in the next few quarters. The TCV industry is notorious for not behaving well during these types of periods.
So the talk about your expectations for competition and whether you're seeing anything unusual at this point.
Yes, so yeah, the best way enjoy that that's that comment on the PCB industry. They Ah.
Let me let me talk about you know I think I think that really is a strategic direction question from from TTM. His perspective, what we've been working on a for a number of years as you know is.
Really to threats, one where we win in the PCB itself moving into areas, where we are clearly.
Differentiated.
And and and so with the differentiation moving away from areas that we view as a commoditized areas. That's been the thrust of our strategy. We've built on that by effectively building on top of the PCB, if you will by adding that depth and pair.
As of RF components subsystems, and the engineering capability that that that we built with deanne or an acquisition. So if you start then parsing that out the a and B World of course, you know these are long term programs and and we.
Feel we'd have a very good position again very deep position in a number of critical programs.
And so a and B very you know very solid if you look at networking communications.
Sure it more more of a commercial market more commercial competition, there, but very complex boards reboard requirements.
If you crossover into medical I am I I feel that's where the footprint plays in most of our customers are.
Our customers because of our global capabilities, there and you know what I know I've said this before but if if if we reach a point.
Where the customer where they have gone to very high volumes and they've and they've moved into it in may and their wishes to move beyond the the capabilities of our Asia, even our EZO footprint, we will let business go in that area. It's really all about the business development work that we do with our global footprint.
And then computing again, an area that we are very specifically tied to the technologies that differentiate us a there are the more complex builds that we do so so Steve I you know I can't you know nothing need it's not a perfect well, but what I can tell you is that I I am kind.
Confident that we have the right positions in these markets and that we've got the right technologies, and obviously strategically with our with our move here with where the M.S.
You know, we're moving out of one area that we didn't see that differentiation.
For TTM, the mobility move as well well very different challenging technology all of the competition was in Asia and if you think about our differentiation there was a technology play there, but not a global footprint way.
So so hopefully that gives you an answer I'm sure. We're comfortable that were in the right position here no matter what happened.
Yeah, that's really helpful. It makes me feel a lot better thanks [laughter] safety.
And we'll go to our next question.
Hi, Bill Stein here, Thanks for taking my question.
You had a pretty strong book to bill in the quarter and I Wonder if you had been concerns about customers ordering safety stock or you know what some people called double ordering or something similar to that it's really about going on or is this more sort of extend the backlog interesting.
In circle on this would be helpful. Thanks.
Sure well and yeah, I agree with a strong book to Bill a portion of that and especially year on year was mobility. So remember.
As we went into the quarter, we had had mobility.
Mobility business as part of TTM, So and it was certainly on a year on year compare far stronger in terms of of bookings going into the quarter. So that that's a piece of it and then yes, you're right the aerospace and defense.
Certainly the bookings there have helped.
And a and the other piece that I would say is a big swing factor there was medical bookings.
Coming in towards the end of the quarter.
Number of medical bookings that then play out will be playing out here in terms of revenue over several quarters, which is unusual.
For usually that usually that's.
You don't see that kind of visibility.
In the medical World is usually a shorter time span so little bit unusual there.
I don't I haven't seen any any of that double booking.
Activity in particular with the bookings we havent.
Seen cancellations, but certainly a portion of that.
Those bookings went away as we as we sold the mobility business.
That's helpful. Maybe I can begin to DNS restructuring for a minute.
Just want to make sure I understand this is a is this an exit that business I think that is but I'm just not sure. If its explicitly stated and then.
What is the exit look like over a protracted number of quarters is it just one or two that anything left in that business.
And is there anything at all there to sell or is this just walk away sort of situation.
So yeah, we'll take thanks for the question. So the the restructuring that we announced effectively we had three facilities and yen solutions to of the three.
We'll be closed.
And one will remain which is our backplane facility that will be folded into our operations and in Asia.
So we will keep that's a relatively small business on the order of you know if you think about $40 million is revenue.
So relatively small, but we'll we'll be holding onto that business tied mainly the networking communications.
The other two the two plant locations have a different time horizon in terms of shutdown, but if you think about the next through the course of a year or will be winding down operations, taking care of customer obligations in both instances.
And.
And so you know certainly by the end of the year or we should have will be at that point have completed the obligations that we have with our customers and be in full shutdown and cleanup mode from a where you know residual value. If you will in the and the assets of course, there's the equipment.
There's a you know to there there was an equipment value there potentially and and then the land value of where we own and in our Shanghai.
Yeah, that's facility, where we own where we actually on the land.
So there there is value there that that out that's outstanding but a you know difficult certainly in these conditions to add to be able to count on that at this point.
Maybe just one clarification, if I can tell me the pile on but.
Is this does it stay in the non-GAAP guidance or do they go to disc ops.
Thank you.
Yeah, Let me just trying to clarify whether it will continue well run the business as we fulfill our customer obligations over the next few quarters as Tom indicated.
Two to three quarters, let's say on it included in our guidance in that respect to the extent there are.
Extra cost specific to the restructuring process, we will carve those out and that was the guidance and I tried to provide on the roughly $25 million that will take place over the next 12 to 15 months.
A lot of that is severance related so as we complete are working and our people roll off from the company.
That will.
Show up.
Over time, I don't think it'll be a quick situation I think it'll be gradual as we complete or you know gradually wind down but from a revenue and ongoing profit standpoint that is reflected in our guidance the ongoing part of it.
Thanks very much.
Thank you will.
And we'll take our next question.
Hey, guys, it's a pop song JP Morgan snow.
Couple of quick ones just on the mobility business.
Given the.
Nation that occurs.
In that vertical do you see any time since our last since June exit there or kind of stayed had a trends or is there. Another vertical that provides insights your view.
<unk>.
Sure. Thanks, Paul the.
So when when we're looking at really the simple way to think about it is lines and spacing.
And what the cellular phone.
Business has driven into.
Our lines in spacing that are very very close to the semiconductor like a in terms of you know moving below 30, microns and Ah we adopted some technologies that helped us to get to between the 20 and 30 micron level, what we're seeing and we've talked to this in the past we are seeing age.
Trend and at our other businesses.
And move towards narrower lines and spacing.
But as we look at the sheer capacity requirements there they're much smaller.
And frankly most of the requirements are.
And you know above 50 micron.
We have some technology some capabilities that that we've acquired with the three acquisition.
That will help us in that kind of area.
That 50 Micron to 80 Micron type area and then we have retained the m. SAP or the substrate like PCB technology and know how.
And and our facilities so that to the extent that there are smaller capacity requirements or we can certainly.
Go forward and invest in those but today that demand is very very small.
And we have the capability resident with what we inherited from my three to the to service those needs. So.
Pretty comfortable with where we said in technology.
Actually that and then just on your.
Your operating margin targets were slides.
12.
12% to 14% to cash flow to 32 cents, they're kind of timeframe, that's hitting the targets and.
Are you comfortable now if your product mix and hunters to end markets tend to kind of hit these schools.
Should we expect to see any kind of changes to your.
Portfolio over time, thanks, guys.
[noise], Yeah, I was going to let you are getting let you take that side of that right.
So Paul you're right. Those are stated objectives and we are marching towards that we've obviously had a couple of hiccups in terms of the commercial markets last year.
I'm, particularly cellular but all the commercial markets, having challenges and obviously the virus is really putting a wrench into gears. If you will hear as we look at 2020, how we will weather the storm and will move forward, we certainly somebody changes that weve announced with the divestiture and the plant closures.
[noise] are all going to be beneficial we are.
Getting lower margin businesses and that will certainly help us towards this goal as far as a specific timeline, we do need a little revenue will we need the economy to get a little stronger.
So it's hard to say that a year or is it two years to put a specific date on it but we do need the economy to recover and we need to get some top line to support us there.
But those are still our targets, we still feel the underlying.
The ability of the business to achieve those is very real we just need to see the economy, a little stronger and last year initiative in a little tough right now.
Great. Good luck thanks, guys.
<unk>.
And we'll take our next question.
Yeah, Hi, it's Matt Sheerin from Stifel.
Just another question regarding the automotive market I know that you've been trending below market in terms of sales reduction in the last.
Two or three quarters, but now you're guiding in a relatively flat give or take Quinn.
Other parts of the supply chain or modeling down 20, 30% sequentially in line with with production cuts.
So trying to figure out of the difference is there a time and maybe helpful would be the geographic breakdown of the business, maybe more China exposure and that's why you're seeing that.
Recover a little bit earlier than others.
Hi, So so yeah bad you actually covered it pretty well were where there's a couple of things going on one one is in the first quarter.
We lost Oh, we lost our production in February.
And and if you remember we generally a will so when we with February production being as low as it was we were running behind in terms of Oh revenue.
In March we were able to turn really get into full production again, I get product out, but but that had a that had a real impact on on revenue and a in the first quarter. So we had that factor of course now we're back into full full production capability. So now we're really starting to deal with more true true demand.
And the second factor there is yes, China was was way down.
And and China, a if you think about our markets you sort of split them equally between China Europe North America, we were feeling particular weakness in China, a little bit lesser extent, but still weak in Europe.
We haven't felt really North America had was down but not down substantially in the first quarter.
As we go into the second quarter, what we're really seeing now is North America weekend, China strengthened a little bit sequentially, a Europe remaining relatively soft. So if you start to look at that the biggest difference. There is just the production days the ability to.
To actually produce.
Throughout the quarter and that leads to a you know again, it's flat flight.
But it's relatively flat slight up and what we're seeing in the quarter.
Okay and you have you seen any big changes in terms of bookings are orders yet from customers, particularly in Europe or North America.
Yeah, Europe, and north and so not not really I'm not really high we you know I think the its is with the there as you know the the plans to get back into operation. Yes, then of course, our customers as generally tier ones want to make sure that they have the right inventory levels.
So in some cases, there was a little bit of hey, yeah, we need to can you know replenish inventory in some areas, but I'd say overall still very soft in North America, and and Europe, and I'll add a little bit of improvement in China.
Okay. That's helpful. And then the networking network communications carrier, where you talked about the weakness could you talk about maybe dig a little deeper in terms of the end markets. There Oh service providers versus enterprise on look like in the also on the Fiveg side.
Yeah.
Networking side enterprise. So so networking overall was was weak in the first quarter again.
We do have the production factor.
So again, we were shut down in that in that regard for much of that February period. So that that has an impact on on revenues, but if you start talking at looking at the end markets.
You know, particularly a enterprise a in and that we inside of networking I was weak in the first quarter.
And and as I highlighted a we did see some improvement.
Particularly towards the ended the quarter on the telecom side.
That improvement has continued and as we go as we move into the second quarter and we're actually starting to see a better climate again and networking in particular to enterprise.
So.
That's where we're seeing you know seeing improvement now in the in the second quarter.
Okay fine thanks for the time.
Thank you.
[laughter].
And we have no further questions queued at this time, so I'd like to turn the conference back over to Tom Edman for any additional or closing remark.
Thank you Sarah.
I'd like to just close by summarizing some of the critical points I made earlier first the health and safety of our employees is our highest priority and we are taking and we'll continue to take proactive measures to safeguard our employees, while we continue to support our customers.
Second we delivered earnings above the guided range, despite extended shutdowns of our Chinese facilities.
Third we closed the sale of the mobility business unit, which will reduce the volatility we've historically seen in our business performance and fits very well with our core strategies of diversification differentiation and discipline and fourth we announced the restructuring of our E. M. S business unit, which will improve our margin profile a.
In closing I'd, just like to thank our employees and particularly our employees in this environment.
Our customers.
And our investors for your continued support as we navigate challenges here with our business associated with Covance 19.
Thank you Goodbye and please stay safe all of you. Thank you very much.
And that does conclude today's conference call. Thanks, everyone for joining US you may now disconnect.
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