Q2 2020 TTM Technologies Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen, thank you for standing by welcome to the GTM technologies second quarter two dozen its.
Financial.
Results Conference call. During today's presentation, all parties will be in listen only mode. Following the presentation. The conference will open up for questions at that time, if you'd like to asking questions. Please signal by pressing star one on your telephone keypad. As a reminder, this conference is being recorded today July 29.
2020, Samir decide TTM senior director of corporate development and Investor Relations will now review Tpms disclosure statement.
Thanks, Dan before we get started I would like to remind everyone that todays call contains forward looking statements within the meaning of the private Securities Litigation Reform Act.
Hi, including statements related to TTM speaker business outlook.
Actual results could differ materially from these forward looking statements due to one or more risks and uncertainties, including the factors explained in our more recent most recent annual report on form 10-K, and other filings with the Securities and Exchange Commission. These forward looking statements are based on management's expectations and assumptions as of the data this presentation.
TTM does not undertake any obligation to publicly update or revise any of these statements whether result of new information peaker events or other circumstances, except as required by law.
Please refer to the disclosure regarding the risks that may affect TTM, which may be found in our reports on form 10-K, 10-Q, 8-K, the registry scrapes and statement of form S. Four and the company's other FCC filings.
We will also discuss on this call certain non-GAAP financial measures such as adjusted EBITDA, such metrics should not be consider as a substitute for that measures prepared and presented in accordance with gap and we direct you to the reconciliation of non-GAAP to GAAP financial measures included in the company's press release, which was filed with the FCC Isabel.
A lot Tpms website at Www Dot TTM dot com.
I will now like to turn the call over to Tom Edman TTM Chief Executive Officer. Please go ahead Tom.
Thank you smear good afternoon, and thank you for joining us for a second quarter 2020 conference call.
Continued to be unprecedented times and I hope that all of you and your loved ones are safe and healthy.
I'll begin with an update on alcove at 19 has impacted our business followed by a review of our business strategy, including highlights from the quarter and a discussion of our second quarter results.
Todd Schull, our CFO will follow with an overview of our Q2 2020 financial performance and our Q3 2020 guidance. We we'll then open the call to your questions.
I am pleased to report that in the second quarter 2020, TTM generated revenues and non-GAAP GPS above the guided range.
Our diversified end markets and allowed us to grow revenues year on year, despite weakness in the automotive and commercial aerospace end markets.
In addition, strong operational execution overcame production inefficiencies and extra costs due to covert 19.
The covert 19 pandemic has created operational difficulties macroeconomic uncertainty and employee concerns.
Hi, I'm extremely proud of how T. G. M employees have worked to deliver excellent performance. Despite the formidable and unprecedented challenges of this environment.
Finally, I'd like to highlight that we've received the proceeds of the mobile business unit divestiture and apply them to repay our term loan b, which has driven our net debt to EBITDA ratio to approximately 2.1.
We have had approximately 65 employees in North America, and one in Asia, who have tested positive for covert 19. This year with many returning to work after being cleared following casting and foreign team protocols.
We continue to use contact tracing and quarantine individuals who were in close contact with the infected team member in addition to deep cleaning affected work areas.
We also continue other measures such as extensive internal communications masking temperature checks and proper distancing and our facilities worldwide.
Because of the stringent preventative measures in place and our culture of transparency in communications.
These events have had minimal impact on our manufacturing operations to date.
Moving onto the mobility divestiture on April 19th we announced that we closed the divestiture of our militant mobility business unit to AK M. Meadville.
Chinese consortium friend enterprise value of $645 million.
We had previously commented that it could take up to August 7th to receive the proceeds from this transaction due to the process of remitting funds from China to the U.S.
I am pleased to report that we have received the majority of the proceeds earlier than expected and today, we were able to repay $400 million of our term loan.
This transaction provides us the balance sheet flexibility to continue the journey to increase TTM focus on differentiation and less capital intensive less seasonal long cycle, and so long cycle end markets.
Finally on April 29th we issued a press release the discussed the restructuring of our E. M S business unit.
This restructuring involved closing two plants and absorbing one into our commercial sector operations. We had said previously that the complete wind down of these two plants would take place through 2020, as we support our customers during their transition to other suppliers as.
As we support last time buys for these two plants, we saw sequential growth in Q2, but we continue to be on track for final shipments by the end of 2020.
The strategic rationale for this move is based on Tpms, increasing focus on differentiated higher margin products, such as Pcbs, and RF components and sub assemblies.
Additionally, local government authorities have communicated to TTM that they intend to expropriate the land, where the Shanghai M. solutions facility is located.
Now I'd like to review our end markets.
All historical reported end market disclosures exclude the mobility business unit.
The end market disclosures still contain all of the E.M.S. segment revenues.
For more details on end market disclosures. Please refer to our press release for a second quarter earnings.
The aerospace and defense end market represented 32% of total second quarter sales.
Compared to 33% of Q2, 2019 sales and 37% of sales in Q1 2020.
We expect sales in Q3 from this end market to represent about 36% of our total sales.
We continue to see solid growth in R&D segment, with Q2 revenues up 8% year on year and they N D program backlog growing to yet another record level of $647 million compared to $504 million in a year ago quarter.
Weakness in the commercial aerospace end market it was more than offset by strength in defense.
Growth in the defense market is a result of our strong program alignment and key programs for our key bookings for programs such as I used to radar systems in F 35, and F 16 fighter Jets.
The medical industrial instrumentation end market contributed 21% of our total sales in the second quarter.
Compared to 17% in a year ago quarter and 18% in the first quarter of 2020.
We saw strength in our medical and industrial instrumentation customers. There was partially offset by weakness in our industrial customers, particularly in our E. M. S segment segment as we wind down two of the plants and that business unit.
Much of the strength in medical stemmed from the support provided by a number of our facilities to the urgent needs for critical medical equipment, such as ventilators and patient monitoring equipment to combat the pandemic.
Hi facilities came through in a big way to meet these needs as we placed first priority on these critical customers.
For the third quarter, we expect this market to be 20% of revenues as the year on year demand trends from Q2 continue into Q3, albeit at a slower pace.
Networking communications accounted for 19% of revenue during the second quarter 2020. This compares to 19% in the second quarter of 29 team and 16% of revenue in the first quarter of 2020.
You're on your growth was driven by demand for Fiveg infrastructure.
In Q3, we expect this segment to be 17% of revenue as deployment for Fiveg infrastructure takes a pause after a strong first half.
Sales in the computing storage peripherals end market represented 13% of total sales from the second quarter compared to 11% in Q2 of 2019 and 12% in the first quarter 2020.
This end market grew 27% year on year from strengthen our semiconductor and datacenter customers.
We expect revenues in this end markets represent approximately 12% of third quarter sales.
Automotive sales represented 12% of total sales during the second quarter of 2020.
Compared to 18% in a year ago quarter.
And 14% during the first quarter of 2020.
Motive sales declined year over year due to cold at 19 related OEM factory closures as well as end market demand weakness.
Approximately 40% of the year on year decline was due to weakness in the E.M.S. plants that are being shut down.
We expect automotive to contribute 11% of total sales in Q3 with ongoing global weakness in demand expected.
We expect our PCB sales in Q3, two decreased by 515% sequentially from the second quarter and did decline year on year by approximately 32%.
Next I'll cover some details from the second quarter.
Note that all over the following operations metrics exclude the mobility business unit.
During the quarter, our advanced technology business, which includes H.T.I. rigid flex and RF sub systems and components.
Accounted for approximately 27% of our company's revenue.
This compares to approximately 25% in the year ago quarter and 27% in Q1.
We are continuing to pursue new business opportunities and increased customer design engagement activities that will leverage our advanced technology capabilities in new markets.
Capacity utilization in Asia Pacific was 70% in Q2 compared to 60% in a year ago quarter and 50% in Q1.
Our overall capacity utilization in North America was 63% in Q2 compared to 62% in a year ago quarter and 67% in Q1.
Our top five customers contributed 26% of total sales in the second quarter of 2020 compared to 31% in a year ago quarter and 32% in the first quarter 2020.
Raytheon technologies was our largest customer accounting for 11% of sales in the second quarter versus 12% in a year ago quarter and 14% in Q1.
At the end of Q2 are 90 day backlog, which is subject to cancellations was $463.2 million compared to $416.8 million at the end of the second quarter last year and $497.7 million at the end of Q1.
Our PCB book to Bill ratio was 1.0 to for the three months ending June 29.
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 critical a central areas like the medical industry.
Despite the cobot 19 related challenges we faced in the first half of this year, our businesses performed better than expectations as a direct result of operational excellence and the market diversification and concerted efforts to engage and support our customers.
We've also taken positive strategic moves that will strengthen TTM for the long term.
As I look towards the second half and beyond I am cautiously optimistic about our continued growth prospects in key sub segments, such as defense data Center Fiveg and medical.
While we expect a slower and longer term recovery in the automotive and commercial aerospace markets.
Now Todd will review, our financial performance for the second 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.
As such the disclosure of TTM GAAP results reflects the mobility business unit as a discontinued operation.
Facilitate comparisons to tens results. The previously issued guidance I will also discuss non-GAAP financial information, which includes the results of the mobility business unit.
He M. solutions business unit has also included in the results we have reported.
Please refer to the earnings schedule for additional details on the exited businesses and continuing operations.
For the second quarter GAAP net sales from continuing operations were $570.3 million compared to $526.9 million in the second quarter of 29 team.
$497.6 million into first quarter of 2020.
Year over year increase in revenue was due to increases in our medical industrial instrumentation computing aerospace and defense and networking and communications end markets, partially offset by declines in our automotive end market.
GAAP operating income from continuing operations for the second quarter, 2020 was $23 million compared to $29 million in the second quarter of 29 team and $16.2 million into first quarter of 2020.
On a GAAP basis net income in the second quarter of 2020 was $192.8 million or $1.79 cents per diluted share.
These numbers include a net gain of $183.1 million from the sale of the mobility business unit.
This compares to it.
And then to net income of $3.4 million worth three cents per diluted share in the second quarter of last year, and a net loss of $1.2 million or one cents per diluted share in the first quarter of 2020.
The remainder of my comments will focus on our non-GAAP financial performance.
Non-GAAP performance includes our divested mobility business unit, but excludes M&A related costs restructuring costs, certain non cash expense items and other unusual or infrequent items.
Present, non-GAAP financial information to enable investors to see the company through the eyes of management and to facilitate comparison with expectations in prior periods.
For the second quarter net sales were $601.1 million compared to $633 million in the second quarter of 29 team and compared to first quarter net sales of $610.8 million.
Year over year decrease in revenue was due to only three weeks of the mobility business unit and this year versus a full quarter last year and declines in our automotive end market, partially offset by growth in our medical industrial instrumentation computing aerospace and defense and networking and communications end markets.
Gross margin for the second quarter was 17.8% compared to 13.6% in a year ago quarter and 14.5% in the first quarter of 2020 year over year increase in gross margin was due primarily to the growth from continuing operations in the markets discussed above.
As well as the sales the mobility business unit, which lost money in the prior year.
Selling and marketing expense was $16 million in the second quarter or 2.7% of net sales versus $17.5 million or 2.8% of net sales a year ago and $16.9 million or 2.8% of net sales in the first quarter.
Second quarter, Gionee expense was $31.4 million or 5.2% of net sales compared to $27.2 million or 4.3% of net sales in the same quarter, a year ago, and $30.9 million or 5% of net sales in the previous quarter.
In the second quarter.
R&D was $5.1 million or <unk>, 0.9% of revenues compared to $4.5 million or <unk>, 0.7% in a year ago quarter, and $4.9 million or 0.8% of revenues in the previous quarter.
Our operating margin in the second quarter was 9.1%. This compares to 5.9% in the same quarter last year and 5.8% in the first quarter of 2020.
Interest expense was $15 million in the second quarter, a decrease of $2.4 million from the same quarter last year due to lower interest rates.
During the quarter.
Recorded $1.8 million, a foreign exchange losses.
Government incentives reduced the loss to point to point $7 million or approximately one cents a V. P. S.
This compares to a gain of $4.4 million or approximately four cents a D. P. S. In Q2 last year and a gain of $3.9 million or approximately three cents a D. P. S. In Q1 of 2020.
Our effective tax rate was 15% in the second quarter.
Second quarter net income was $33.3 million or 31 cents per diluted share. This compares to second quarter 2019, net income of $21.3 million or 20 cents per diluted share and first quarter 2020, net income of $19.6 million or 18 cents per diluted share.
Adjusted EBITDA for the second quarter was $80.3 million or 13.4% of net sales compared with second quarter 2019, adjusted EBITDA of $82.9 million or 13.1% of net sales in the first quarter adjusted EBITDA was $82.1 million core 13.4%.
Sales.
Our balance sheet and liquidity positions remain strong cash flow from operations was $119 million in the second quarter inclusive of $68.1 million of accounts receivable collected from the mobility business. After we closed the sale.
This compares to $86.1 million in the same quarter last year.
In addition, as Tom mentioned, we received $240 million of proceeds from the mobility sale during the second quarter.
Since quarter end, we have now received all the remaining proceeds from the sale.
Cash and cash equivalents at the end of the second quarter of 2020 were $694.7 million.
And at the ended the second quarter, our net debt leverage ratio was 2.1 and today, we repaid $400 million of our term loan b.
Depreciation for the second quarter was $26.1 million net capital spending for the quarter was $22.4 million.
Finally, I'd like to give a picture of the business on a non-GAAP basis for continuing operations, excluding the two M.S. plants that we are closing.
Revenue for the second quarter was $548.9 million in grew 13% year on year operating margin was 9.9% and grew from 9.5% last year.
Now I'd like to turn to guidance for the third quarter.
Looking ahead, we believe that covert 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 third quarter of 2020 to be in the range of $470 million to $510 million, we expect non-GAAP earnings to be in the range of 16 cents to 22 cents per diluted share.
This guidance does not include any contribution from the mobility business unit, but still include revenue and operating results from the two he and that's plants that we are closing.
He has forecast is based on a diluted share count of approximately 107.5 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 our fruit your future stock price.
As a reminder for every dollar increase in the average share price about $14 in 26 cents during the quarter our shares outstanding would increase by approximately 1.5 million shares.
We expect it S. DNA expense will be about 8.7% of revenue in the third quarter and R&D to be 1.1% of revenue.
We expect interest expense the total about $15 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 third quarter, we expect to record amortization of intangibles of about $10.9 million stock based compensation expense of about $4.7 million noncash interest expense of approximately $3.4 million and we estimate depreciation expense will be approximately $22.7 million.
Finally, I'd like to announce that will be participating virtually in the Jefferies Industrial conference on August stuff. The Needham Industrial Technology Conference on August 10th the Jefferies semiconductor hardware and Telecom summit on September 2nd and the Deutsche Bank Leveraged Finance conference on October 2nd.
That concludes our prepared remarks now we'd like to open the line for questions Dan.
Thank you Sir at this time over the four for questions if you'd like to ask your question. Please signal by pressing star one.
Telephone keypad, if you're using the speakerphone. Please make sure your mute function is turned off to lag or signal to reach our equipment again press star one if you'd like to ask a question and just pause for a moment to while everyone opportunity to signal for questions.
Well take our first question Q comes from William Stein Suntrust. Please go ahead.
Great. Thanks for taking my question and congrats on the good results.
Hoping you can comment on the trends expected in M.S. in September and beyond maybe the linearity of the decline over time and.
What is the sort of final level.
But the level at which you'll still have.
Business from the one facility, but the other two are no longer contributing.
Sure Yeah. So the one facility and when we really talk about Dms and you know just to make that that clear for you will we're going to that that facility has already been integrated into our PCB operations.
And that facility runs at you know anywhere between 40 and $50 million a year.
So do you know you're going to that that facility already incorporated into PCB operations. The balance of the two facilities will be winding down again in Q3 in Q4, there. It's it's hard to forecast exactly how how.
So we're going to wind them down.
But you could pretty much a you know that bring them down equally each quarter down too.
Effectively.
At the end of Q4 will be will be shut down. So you know reasonably a smooth.
Transition as we as we move to close those facilities.
And then one follow up if I can.
Talk about the progress you're making in.
I'm trying to bring the RF capability.
Was.
Acquired in the entering business to the non defense and market in particular automotive or any others for that matter any progress [laughter]. Thanks.
Yes, sure. So yeah. We've we've actually there are few areas of focus there and and if you start thinking about RF.
Performance and and the importance of RF speeds in particular, where they are where they are becoming more challenging.
Think about networking optical networking or some medical activity and then yes, you have automotive.
And so we've been working on efforts in and all of those areas.
You had to dress automotive in particular.
As for you know moving into a 77 gigawatt gigahertz world, what we're finding as you know our customers.
Our challenge in terms of improving RF performance.
And that is particularly true of customers that are.
Smaller customers, who may be resource constrained.
And so we've been working.
With those customers.
In a number of after its one.
I have to handle.
The thermal up the thermal challenges that that can come a as you start to push RF performance and and also with fine lines, how you're going to start running into potential thermal challenges and we've been working on on modules to address that we've also.
I've been working with several accounts on a developing module specifically for some of their sensor needs a as as you know these are particularly now automotive world. It you know you you a it will typically work on a development cycle that that starts to two sometimes even three.
Two years before model relief. So these efforts.
Are you know some of them are into prototype being stage.
Some are still earlier.
Sure we've got a variety of those engagements, but a pretty pretty excited about the the momentum that we're gaining they're not yet turning into into material revenue.
But but certainly we're making we're making good progress with those efforts and I think were contributing to to solving customer problems.
Great. Thank you.
Our next question. Thank you.
Comes from Matt Sheerin with Stifel. Please go ahead.
Yes. Thank you a couple of questions for me Tom first on on automotive.
Outlook, you sound, a maybe a little bit more cautious and other component suppliers that have a issued guidance I'm trying to figure out how much of that is based on the dms weakness a in perhaps I think at the end of your commentary I know what are you talked about the piece.
He be business. There. So maybe you could you could go over those numbers again, but just trying to figure out where where you sit in terms of this cycle and when would you expect a a bigger uplift in terms of demand in order pools.
Sure thing yeah. Thanks, Bad Yeah. The what I'll do is let me let me talk to this without taking out Dms and you're right. We tried to give.
Some visibility to that as I as I went through the earnings.
Script, but oh, but to give you a little bit more information on this.
Pulling out yeah mass.
And if you start to look at a at second quarter performance.
You know quarter on quarter, we were we were down approximately 21% or and if you think about unit volume overall in the automotive market down substantially more than that.
Now then you look at at the third quarter, a and in the third quarter. You know, we're looking at being down approximately 31% year on year and if you look sequentially down about 15% so what's going on.
If you start to look at at our customers and and as they look at printed circuit boards versus other components not longer lead time components, what they'll do with printed circuit boards in what we saw in the and the second quarter was as a our.
Tier one.
Parts supplier customers started to service their OEM requirements. They were able to pull early relatively early in the second quarter from our hub inventory to help the started up efforts of of their customers, which really started in may and so we saw some heightened <unk>.
Revenues as a result, but what we were also seeing was it was a sharp decline in bookings.
So that bookings decline then starts to feed into some some of the weakness that were.
Guiding towards a in the third quarter.
And so as we now.
Look at the third quarter.
We are tracking bookings very carefully and what we have seen is since really June or the beginning of June where we sort of hit our low point, we've seen sequentially sequentially almost every week and improvement.
In those bookings.
And so as we look at that that bodes well for shipments into hub and then bookings that and then revenue that we would see as we hit.
Move into late into the third quarter into the fourth quarter. So you know as we look sequentially, yes, a third quarter, we should be down but then as you look ahead into the fourth quarter I think that bookings trend is a nice pot of positive indicator of what we would expect to see in the fourth quarter.
That's helpful. I know last quarter time, you talked about.
Some.
Actually several design wins, a in automotive leveraging your your technologies across the various sectors I could you update us on those trends in are you still seeing positive content, particularly like trends toward electrification.
Ah, yes, so interestingly you know the this quarter, what we what we saw its still a nice nice movement in terms of a of overall bookings.
You program bookings in automotive.
We Oh, we booked a about 43 programs.
Nice program value over all of about $203 million.
But the Ada Es bookings were not as strong as we've seen in some of the past quarters.
I don't I don't make a trend out of one quarter, what I like saying is that a very strong lifetime program bookings I think there maybe a little bit of.
A pause in some of the the new product efforts at our and our customer side that would lead to a little bit a bit of a slowdown in the Ada es.
Related programs.
Overall, a good indication that customers are continuing to move forward with there were there longer term plans in terms of programs themselves.
So hopefully that gives you a feel for it is absolutely and on the I'd just changing.
Subjects to the aerospace and defense and it sounds like you're seeing <unk> really so strong demand on the the military side could you remind us what's the breakdown is commercial versus defense in that sector.
Yes, So 2019 full full year numbers, we were about to about 18% of our aerospace and defense business was commercial aerospace the balance was defense now obviously with commercial aerospace demand worsening, we but you know through 20.
20 that will come substantially down in terms of commercial aerospace as a percentage of of those revenues, but to begin with they were already were relatively small.
As a percentage what we have seen is that the defense side of the business more than makes up for that.
That's why we're still seeing very strong ongoing great growth you know about 8% in the second quarter and as we look forward, while why were Ah Ah why we're still continuing to be optimistic here in terms of Oh that overall aerospace and defense business and that's really fed by again.
Yeah, our radar position.
And then the program breadth that we have in on the defense side.
So hopefully that gives you a feel for the split.
Sure enough. Thanks, a lot.
Next question comes from Steven Fox Fox Advisors. Please go ahead.
Thanks, Good afternoon.
Hi, Steve.
Hi, I'm I guess, just as a backup to the Q2 results on a continuing operations basis.
Relative to your original guidance there was some significant top line upside and you sort of cited some that markets that looked like contributed to it but maybe you can just sort of call out within each segment. What was most surprising to you relative to guidance and then associated with that maybe I got this wrong, but it looks like the dropdown verse from the topline.
Upside was greater than you normally would target I'm wondering if he would agree with that and if so what drove that thanks.
Sure I'll give a general come into the second part and Todd you can jump in there as well on the on the topline.
Performance. We you know I think we were very very pleased obviously.
Where we were able to perform or ahead of a ahead of forecast in a number of our of our end markets. If you look at the medical industrial instrumentation area that was one area where we.
Outperformed.
Versus our guidance driven by really a combination of two things medical.
And then a instrumentation.
Demand being strong.
Working communication, we also did better than than we had.
Expected there a mainly fight that the networking I sorry, the telecom side driving that the five five GE growth.
Being stronger than than we had been forecasting a and then computing also had a tremendous upside against a against our forecast.
Mainly data center demand semiconductor remains strong, but a data center demand stronger than than we had forecast and if you tie all that back to.
Covidien and what was going on with with our customers I think most of it that you know that really does make sense that we would see that kind of of growth in the quarter.
With that growth sort of company normalizing as we go back and as we move into into the third quarter.
So how that contributed.
You know, particularly a we saw some tremendous utilization improvements in several of our facilities in Asia. They performed very well operationally and then also on the North America side, we from an operation standpoint, we had been deliberately careful given.
Absentee rate concerns with coal that about our ability to push production out and.
And the teams did an amazing job in North America as well.
So I'll stop there Todd any further comments.
Well I think you hit the nail on the head relative to Q2 performance.
Relative to the guidance or expectations that we had said going into the quarter.
As Tom mentioned in his comments is particularly in the medical area, where we were asked to really stretch ourselves by customers on rather can basis and the rally to do that as a group as you look into Q3.
And what's happening you're seeing a coming down and in some of those markets. So were medical and industrial instrumentation was very strong in Q2 with very little notice. If you will its its tapering off here. The initial surge in ventilators are slowing down here as we go into Q3 kind of getting back.
A more normal pattern.
We're also seeing you I think you've seen us with some of the other commentary out in the street data centers.
Pausing a little bit in Q3, we've seen that from some of the chip companies, who have made some comments then to that effect.
And and Tom mentioned in his comments that five GE is pausing a little bit in Q3 on you know a lot of the fiveg growth into first half year was driven in Asia, particularly China and with a with what's going on there politically and otherwise they're definitely pausing a little bit in Q3.
And we're seeing some of that filter down into our business expectations for the quarter.
Operationally as Tom pointed out are we executed pretty well.
One of the even Q2 a lot of the upside in profit was really driven by the revenue and execution and as we look at Q3, no yes were declining quarter to quarter, but a lot of that is really topline drew in fact, all that has to topline driven.
When you look at the impact and even with you know essentially 100 million or $110 million. If you take the midpoint of guidance drop.
Sequentially in revenue.
The incremental margin drop is much smaller than that and so we're doing a pretty good job in managing the cost both up and down as we try to respond to the revenue levels that we're experiencing.
Great. That's very helpful. Thank you.
Thanks, Steve.
Our next question in queue comes from Mike Crawford B. Riley. Please go ahead.
Thank you on a aerospace and defense.
Oh, I imagine that large platform.
And keep you pretty well insulated from the a budget cycle in this election year were working on the he said F 35 F 16 that stays pretty much the same but are there some new programs. They are looking to either get on order to ramp up that will require the new government 21 budget before you can get started in it.
So could you talk about any of those opportunities.
You know that's it that's an interesting question, Mike what we have.
I've seen and you can you can see that in our and our overall program backlog moving up over 640 now a week there there has been tremendous momentum.
In the with the programs that were involved in.
And and a major part of our focus through the years has been to be in not just in a in a broad.
Set a programs to be but to have depth in the right programs now a those programs.
Our.
Particularly where we have depth of involvement.
Usually involve our RF capability, and therefore are usually tied to radar.
Systems and radar requirements.
At this point, while it's it's always good to have a solid budget backdrop.
That's not essential with these programs because they are viewed as core programs.
And so a whether it's the fighter jet programs that we mentioned, whether it's a upgrades.
With a with some of the the naval ships that are out there or whether it's the l. tams type missile programs the need to moved I use a radar is is a core requirement of all the armed services.
And so with that backdrop I'm not I'm not we're not viewing.
Any particular program as being dependent.
On on budget requirements in terms of driving our overall growth says I think we've got a nice solid set of core programs that will be funded going forward that will that will really be provide that that strong backdrop to drive our growth.
At this point.
Okay. Thank you I'll just ask one other question subject so.
Automotive vertical.
I'm not sure if I heard exactly what conventional pcvs was it as a percent of automotive sales into Q and then if there's been any change on where you think that mix might change for two age 20 or 21 or beyond <unk>.
Yeah, Oh, yeah. So we we provide that number.
On an annual basis, because I think it's sort of misleading to provided on a quarterly basis it moves around quite a bit.
But as you know we were we were over 20%.
In terms of content from from the non conventional printed circuit boards at the end of last year, what we're well we're seeing right. Now is you know this year should should lead to.
More than likely a at another increase in that percentage with electrification continuing to occur.
So I expect that to a to happen as we move through the course of the year or so that you know again, we report that number early in the first quarter of next year. You know should you should we should see a pretty solid increase in that percentage.
As you know again as we see growth on a on the sensor and on the infant infotainment.
Side of the business.
The balance again in the face of what is really could be a challenging year.
So if you have a hey, Marty you know a portion of the market that is.
That continues to grow, albeit slowly in the face of overall unit volumes dropping.
That's a you know you're going to see that percentage increase so.
That's what I, we I would expect to see as we you know as we move towards the second half.
Okay, great. Thank you very much.
Thank you.
Our next question comes from General acuity with Needham and company. Please go ahead.
Hi team, yet Mike Cikos here instead of June maturity.
Couple of quick questions for you the first being on the in this business I just wanted to make sure I heard it correctly in his prepared remarks, but with your comment that.
Some of this does this mean seen a temporary benefited customers were trying to place orders ahead of your your wind down did I hear that correctly and if so did you did you quantify what that benefits it was.
So you'll find so you'll you'll find in the tables and the press release, you'll see you'll find some really nice.
Data on on the split so probably you know with both mobility and then also M.S.
So you'll be able to to do the math, if you will but just to give you feel it the Oh, we did talk about yeah mass being up.
From you know from.
Last year because of the last time buys and that that's just a short term.
Situation.
And overall, but so so that's the.
And I I should let me, let me caveat that it's actually up sequentially. So so, but but that you can sort of remove that noise. If you will buy by referring to those tables and then you can really see where where the printed circuit board business. The ongoing business will be here as we go through.
You know as as as we look at the year to date.
At any rate for for TTM.
Okay. Thank you for that don't have to circle up on those tables and just.
Another question I know again, it's a little difficult to forecast because we're expecting this wind down through the back half a 2020.
But is there I guess you help us understand what you're baking into your Q3 sales guidance for this for the in this division.
Why don't I hate why don't I do this if if.
Let me just walk through you know approximately if you look at the printed circuit Board business.
And you look at had where we're going to be a year on year with the end markets.
That can that can probably give you a you know feel for it and Oh so.
If you think about the the guidance.
And if you look year on year Aerospace and defense, we should and printed circuit board, we should be up about 4% of course is very little CMS content there.
The motive where.
There's there's obviously more CMS content for PCB is only we should be down about 31% a year on year.
If you look at a computing will be roughly flat.
Year on year Am I, where there is some M.S. content, we should be up you know roughly EUR nine percentage points with PCB.
And then if you look at the networking calm.
Down roughly 9% 88.7 or so there so.
That that should give you a field for for where we are in the on the PCB side.
Todd I need anymore guidance you'd like to have item on the table, yeah, I can help them out a little bit you don't have the benefit of the table that is that as an exhibit to the press release, but when you look at that you'll see that the two plants that were talking about that are being fairly fully contributed about $21 million of revenue in the second quarter.
And as you look at Q3 in Q4, although the numbers can fluctuate a little but it's going to be in that neighborhood, plus or minus 5 million. So it's relatively immaterial and it's not going to have a huge swing one way or the other as we can see it right now.
That's helpful very helpful. And then one final if I may just coming to the the Kogut 19 pandemic and how you guys have been handling is.
Again with the results from the upside in the execution from you guys want it to get a sense hedge costs that you guys are currently incurring to help with the contact treating are protecting your personnel are those fully reflected in in Q2 results and should we assume the continuation of that in Q3 or is there could be.
Central step down as things somewhat normalized in Mosul upfront costs or hopefully behind you at this point.
I'm doing it maybe I think are yeah, I'll take a shot at a so yes, we incur costs and yeah, they're a little here in a little there things like you know deep cleaning and more frequent cleaning masks.
Equipment for temperature checking obviously, the time spent doing contact tracing and we follow up with all of our employees on a daily basis. So there's a lot of.
I'll call hidden costs, a little here and a little there and are difficult to capture there's some things that are a little more direct like I said, the masks or something like that and then there's a whole issue of productivity.
So those costs are expenses expensed as incurred and they are reflected in our Q1 in Q2 numbers as we've incurred those costs and we as best as we can we tried to include our expected cost associated with that in our Q3 guidance.
You know, it's cobiz not going away I think if you look to stats.
No. It's it's a.
Being rather difficult obviously, when you look around the nation, particularly in the U.S. and it's even starting their rear its head again at Hong Kong. So we're very concerned and we're being very vigilant with our people in our sites to make sure that we're taking care of our people and we're very fortunate that you know were the those.
That are getting sick or not getting sick at work, we're trying to protect our people at work.
But there will continue to be costs associated with that we're going to continue to do our protocols to protect our people as best as we can within the work environment, but those costs are reflected already in our forecast.
Thank you for the color guys.
Sure.
Well take our next question in queue comes from Paul Coster with JP Morgan. Please go ahead.
Hey, guys. It's Paul Chung on for costs are thanks for taking my questions. So I'm just on your long term kind of operating margin targets.
For 12% to 14% now that you as you know you sold the mobile business and.
You know you're exiting parts of Vms can you give a sense, where the timeline to hitting that long term range and then can you also comment on the seasonality of your operating margin now you know is it fair to kind of assume you know a lot less volatility between the quarters moving for you know parts.
It could be in once you into Q.
Tom you only try to run that take a ticket tried to absolutely.
So let me take the second question first and that is seasonality <unk>. So we used to be have very very major seasonality impacts. When we were we had a large element of the consumer business with the sale of our mobility business unit that gets us out of a big piece of that no there's still be.
Some subtle differences yeah, we still have Chinese new year in the first quarter and that impacts our ability produced in our customers' ability to produce and so they're always tends to be a little little bit of an impact there and and oftentimes in Q3, particularly in North America, you have vacation season.
This year is a bit weird because of cove, it but generally speaking we see a little pattern there, but I don't think the seasonality well I know the seasonality won't be as pronounced as it wasn't the past and and I'm not even sure how significant it will be but you will see some subtle differences with Q1 in Q3, probably being the most impacted.
In regards to your first question on targets.
I think we've made the comment in my notes that if you take out the businesses that we either have exited or our or the two plants that were closing.
Operating margin would've been about 9.9% this past quarter.
And so that's an indication of the improvement in the financial model that work, we're driving towards so our goal of getting to 12% to 14% doesn't seem so far away now.
We do need topline help or we have plants, particularly in Asia.
That are not as utilizes they need to be in terms of their financial contribution and so we need some topline growth to get there but is assuming the economy writes itself here from the cold and buyers and that's a big if I'm not I don't have a great crystal ball, they're looking at 21 or 22, but assuming those are more normal years.
And we have our organic revenue growth that we would expect and that you.
You know afford us the mid single digits kind of number on you know, it's it's a two year stretch that we need to get a you know a few hundred million dollars of topline to let's say 300 million could get us into that solid into that that margin range and those who levels. We've been asked before and different end markets. We just need the end markets to kind of get there.
I think back we saw some of that in Q2, but we're seeing some of it you know slide a bit back in Q3, we need to kind of get some of that consistent growth, which comes from a healthy economy and that's that's the big Wild card right now.
Gotcha, and then just to follow up on that 200 to 300, you know is acquisitions kind of in the cards or you know now focused on the existing business. Now you know it has been two years since you bought and are in and you seem to you know kind of add to your portfolio around.
Two to three year gap, So Oh man for another one [laughter].
Thanks, Paul Yeah, sure I'll jump on that when they the so so the 203 under the that a that Todd was referring to really is about our organic efforts to grow the business and we believe we can I get there is as we returned to more normal times and as we look.
At the.
The real macro factors driving driving our growth rates and in our end markets. So that's organic but as we you are certainly right from a balance sheet perspective, we're in we're in a very strong shape now I'm really pleased to see that the company, though is it.
Pursues M&A as as part of our overall strategic.
Growth and Ah and we've identified a few areas of focus one is to continue to look at our footprint make sure that we've got the right footprint from a a.
Hey support a customer support perspective.
The other and bigger thrust of our M&A efforts will be to continue to deepen our engagement on on our RF.
Side of the business both.
From an aerospace and defense standpoint, and also commercially.
So.
We will continue to move forward with that strategy, a when you know when those opportunities opportunities materialize to always it's always difficult to estimate.
But it's a process that we run.
So we run as a regular part of a of our core one of our core processes. So we continue to work that and in the meantime is as Weve a informed our investors consistently our first priority was to pay down the debt Oh, we've done that will you know, we really pleased with with.
The shape of our balance sheet and we'll continue to work our strategies for for growth. So I hope that it gives you an answer Paul yeah perfect. Thank you.
Thank you.
There are no more questions in the queue at this time on I'll turn it over to Tom Edman for closing remarks.
Great. Thank you very much and thank you all for joining us I'd just like to close by summarizing some of the points that I made earlier.
First we delivered revenues and earnings above the guided range. Despite cobot 19 related challenges and labor productivity, which really is a demonstration of our focus on operational excellence.
Second our end market diversification has allowed us to to settle has allowed our continuing operations to grow.
Despite weakness in a couple of a of sub segments.
Third we received proceeds from the sale of the mobility unit divestiture and repaid our term loan so in closing I'd like to thank our employees. Our customers are of course you are investors.
For there and your continued support.
As we navigate challenges around our business is associated with Covance 19.
We will continue our long term strategic focus on diversification differentiation and discipline.
And so with that I'll close the call. Thank you again for joining us when asked that you all stay safe. Thank you very much.
Thank you ladies and gentlemen. This concludes today's presentation you may now disconnect.
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