Q3 2020 TTM Technologies Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen, thank you for standing by welcome to the TTM technologies third quarter 2020 financial results Conference call.
Today's presentation, all parties will be in English in a limit following the presentation. The conference will be open for questions. You May proceed star one on your telephone keypad to be placed into the questioning queue. As a reminder, this conference is being recorded today October 20, Eightth 2020, somewhere just shy TTM senior director of corporate development and Investor.
Relations whenever you teach hams disclosure statement.
Great. Thank you Casey before we get started I would like to remind everyone that today's call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 995, including statements related to teach ins future 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 <unk>. Most <unk>. Most recent annual report on form 10-K, and other filings with the Securities and Exchange Commission.
These forward looking statements are based on managements expectations and assumptions as of the date of this presentation TTM does not undertake any obligation to publicly update or revise any of these statements whether a result of new information future events or other circumstances, except as required by law.
Please refer to the disclosures regarding the risks that may affect TTM, which may be found in the reports on form 10-K, 10-Q 8-K, the registration statement on form S. Four and the company's other assay she filings we.
We will also disclose on this call certain non-GAAP financial measures such as adjusted EBITDA such measures should not be considered as a substitute for the measures prepared and presented in accordance with GAAP and we direct you to the reconciliation of non-GAAP to GAAP measures included in the company's press release, which was filed with the FCC and it's available.
He jumps website at www Dot TTM dot com.
I will now like to turn the call over to Tom Edman <unk> Chief Executive Officer. Please go ahead Tom.
Thank you Samir.
Good afternoon, and thank you for joining us for our third quarter 2020 conference call. These.
These continue to be challenging times, and I hope that all of you and your loved ones are safe and healthy.
I'll begin with a review of our business strategy and then an update on how cold at night gene has impacted our business followed by highlights from the quarter and a discussion of our third quarter results.
Slide show, our CFO will follow with an overview of our Q3 2020 financial performance and our Q4 2020 guidance.
Well then open the call to your questions.
I am pleased to report that in the third quarter of 2020, TTM generated revenues and non-GAAP EPS above the guidance range.
Diversified end markets allowed us to grow PCB revenues year on year, despite weakness in the commercial aerospace and automotive end markets.
In addition.
We continued strong continued strong operational execution overcame production inefficiencies and extra costs due to COVID-19.
The gold at 19 pandemic is created operational difficulties macroeconomic uncertainty and employee concerns I.
Hi, I'm extremely proud of how TTM employees have worked to deliver excellent performance. Despite the formidable and unprecedented challenges in this environment.
Finally, I'd like to highlight that in Q3, we received the remaining proceeds or the mobility business unit divestiture and applied them to repay our term loan b.
Bind with strong cash flow from operations, our net debt to EBITDA ratio has dropped to 1.6 at the end of Q3.
Next I would like to provide an update on our long term strategy.
TTM is on a journey to transform our business to be less cyclical more differentiated and more disciplined.
We believe over time investors will be rewarded with more stable growth strong cash flow performance and improving margins.
A key part of that strategy will be to add capabilities and products that are complimentary to our current offerings internally and through acquisitions.
The n. or an acquisition in 2018 represented a key step in this direction.
Her and provided us with engineering capabilities, and a new market adjacent C of RF sub assemblies and components that enabled us to provide more value to our customers.
We effectively paid for that transaction with the sale of the mobility business unit in 2020, which reduced our exposure to the volatile cellular end market that has been slowing growth and that hasn't been seen slowing growth and lower margins in recent years.
In addition in 2020, we are in the process of shutting down two of our best plants, which were sub scale offering limited strategic value and lower margins.
Looking forward our balance sheet is in a strong position to pursue further acquisitions as well as our organic investment needs.
In the a and B market, our focus is to be an indispensable supplier to our customers, providing more capabilities and expanding our addressable market.
In the commercial markets, our focus is to add more RF component capabilities around the endurance core strengths as well is to diversify our manufacturing footprint.
We prefer that acquisitions across both the a and D and commercial markets for maximum benefit to the company.
I would also like to update you on the Covance situation.
We're currently managing through COVID-19, with relatively minor impact to our production.
Those infected are returning to work after being cleared following testing and quarantine protocols.
We continue to use contact tracing and quarantine individuals who were in close contact with infected team members. In addition to deep cleaning affected work areas.
We also continue other measures such as extensive internal communications masking temperature checks and proper distancing in our facilities worldwide.
Because of the stringent preventative measures in place and our culture of transparency in communications. These events have had much less impact on our operations than we thought at the start of the year.
Our leadership team continues to remain vigilant in mitigating the impact of COVID-19, as we enter the fall and winter and some parts of the world, including the United States see an acceleration of cases.
Now I'd like to review our end markets.
All historical end market disclosures exclude the mobility business unit and the two M.S. plants, we are shutting down.
For more details on end market disclosures, please refer to our third quarter earnings press release.
The aerospace and defense end market represented 37% of total second quarter sales compared to 36% of Q3, 2019 sales and 33% of sales in Q2 2020.
We expect sales in Q4 from this end market to represent about 38% of our total sales.
We continue to see solid growth in our a and B segment with Q3 revenues up 7% year on year, and an a and B program backlog of $625 million compared to $572 million in the year ago quarter.
Weakness in the commercial aerospace end market was more than offset by strength in defense.
Growth in the defense market as a result of our strong program alignment and he bookings for ongoing franchise programs.
As I use a radar systems for the aegis ashore, Japan program, a variant of the U.S.L.R.D.R. program being built by Lockheed as.
As well as upgrading F 16 fighter Jets with scalable agile being radar built by Northrop.
The medical industrial instrumentation end market contributed 19% of our total sales in the third quarter compared to 18% in the year ago quarter and 21% in the second quarter of 2020.
We were pleased to see this end market grow 9% year on year as we saw strength in our medical and instrumentation customers that was partially offset by weakness in our industrial customers are.
For the fourth quarter, we expect this market to be 16% of revenues as industrial customers continued to decline and we returned to less elevated levels of demand for emergency medical products.
Networking communications accounted for 16% of revenue during the third quarter of 2020.
This compares to 16% in the third quarter of 29 gene and 19% of revenue in the second quarter of 2020, we.
We saw relative strength in the in the networking segment compared to the telecom segment as Fiveg builds took a pause.
In Q4, we expect this segment to be 16% of revenue as Fiveg telecom demand remains subdued.
Sales in the computing storage peripherals end market represented 13% of total sales in the third quarter compared to 12% in Q3 of 2019 and 13% in the second quarter 2020.
Its end market grew 8% year on year from strength in our datacenter customers.
We expect revenues in this end market to represent approximately 12% of fourth quarter sales.
Automotive sales represent represented 13% of total sales during the third quarter of 2020 compared to 15% in the year ago quarter and 11% during the second quarter of 2020.
While automotive sales declined year over year due to cold at 19 impacts we saw a 9% sequential growth, which was better than the than the slight decline originally expected.
We expect automotive to contribute 16% of total sales in Q4 as the automotive recovery continues.
Next I'll cover some details from the third quarter.
Note that all of the following operations and Baxters metrics exclude the mobility business unit and the two U.M.S. plants that are closing.
During the quarter, our advanced technology business, which includes H.T.I. rigid flex and RF subsystems and components accounted for approximately 29% of our revenue.
This compares to approximately 25% in the year ago quarter and 28% in Q2.
We are continuing to pursue new business opportunities and increase customer design engaging in activities that will leverage our advanced technology capabilities in new markets.
Capacity utilization in Asia Pacific was 63% in Q3 compared to 60% in the year ago quarter and 70% in Q2.
Our overall capacity utilization in North America was 61% in Q3 compared to 58% in the year ago quarter and 63% in Q2.
Our top five customers contributed 33% of total sales in the third quarter of 2020 compared to 27% in the second quarter of 2020.
Our largest customer accounted for 13% of sales in the third quarter.
At the end of Q3, our 90 day backlog, which is subject to cancellations was $437.8 million compared to $378.8 million at the end of the third quarter last year and $436.6 million at the end of Q2.
Okay.
Our PCB book to Bill ratio was 0.92 for the three months ended ending September 28.
I'd like to conclude by again thanking our employees for continuing to contribute to TTM and our critical mission of inspiring innovation with our customers.
Their efforts are particularly appreciated during these times by our customers in critical essential areas like defense and the medical industry.
Despite the cold at 19 related challenges we faced in the first nine months of this year, our business has performed better than expectations as a direct result of operational excellence and market diversification and our employees concerted efforts to engage and support our customers.
We've also taken positive strategic moves that will strengthen TTM for the long term.
Now Todd will review, our financial performance for the third quarter Todd.
Thanks, Tom and good afternoon, everyone yes.
As Tom mentioned earlier on April 19th TTM announced the closing of the sale of its mobility business unit.
As such the disclosure to cans a gap results reflects the mobility business unit as a discontinued operation.
I will also discuss non-GAAP financial information, which excludes the results of the mobility business unit.
Dms business unit is still included in both the GAAP and non-GAAP results, we have reported.
Please refer to the earnings schedule for additional details on the exited businesses in continuing operations.
For the third quarter net sales from continuing operations were $513.6 million.
Compared to $534.2 million in the third quarter of 2019.
The year over year decrease in revenue was due to a decline in our automotive end market with the majority of the decline coming from the M.S. plants that we're closing.
This was partially offset by growth in our aerospace and defense.
The medical industrial and instrumentation and computing end markets, yes.
Excluding the impact of the to me that's plants being shut down our revenues grew 3% year over year.
GAAP operating loss from continuing operations for the third quarter of 2020 was $40.3 million compared to a GAAP operating income of $21.1 million in the third quarter a year ago. The.
The current year results include a goodwill impairment charge of $69.2 million related to the commercial portion of the interim business, we acquired back in 2018.
As a result of U.S. government actions imposing trade restrictions on U.S. manufactured products sold to certain Chinese customers revenues and profits had been reduced resulting in the impairment.
On a GAAP basis, the net loss in third quarter of 2020 was $41.5 million worth 39 cents per diluted share. This compares to net income of $15.9 million or 15 cents per diluted share in the third quarter of last year.
The remainder of my comments will focus on our non-GAAP financial performance.
Our non-GAAP performance excludes our divested mobility business unit goodwill impairment M&A related costs restructuring costs, and certain noncash expense items and other unusual or infrequent items.
We 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.
Gross margin in the third quarter was 18.4% compared to 16.4% in the third quarter of 2019.
The year over year increase in gross margin was due primarily to higher revenues in our aerospace and defense medical industrial and instrumentation and computing end markets, which generated production efficiencies as well as increased volumes.
Selling and marketing expense was $15.3 million in the third quarter were 3% of net sales compared to $16.8 million or 3.1% of net sales a year ago.
Third quarter, Gionee expense was $26.9 million or 5.2% of net sales compared to $28.2 million or 5.3% of net sales in the third quarter of 2019.
In Q3 2020.
R&D was $5.2 million or 1% of revenues compared to $4.3 million or 4.8% of revenue in the year ago quarter.
Our operating margin in Q3 was 9.1% discount.
This compares to 7.1% in the same quarter last year.
Interest expense was $12.9 million in the third quarter, a decrease of $4.1 million from the same quarter last year due to lower interest rates and repayment of $400 million of our term loan.
During the quarter, we recorded $4.9 million of foreign exchange losses Governor.
Government incentives reduced the net loss to $2.5 million or approximately two cents of the P. S.
This compares to a net gain of $5.6 million or approximately five cents a D. P. S. In Q3 of last year.
Our effective tax rate was 15% in the third quarter.
Third quarter net income was $26.8 million or 25 cents per diluted share. This compares to third quarter 2019, net income of $23.2 million or 22 cents per diluted share.
Adjusted EBITDA for the third quarter was $67.2 million or 13.1% of net sales.
Compared to third quarter 2019 adjusted EBITDA.
$66.7 million or 12.5% of net sales.
Our balance sheet and liquidity positions remain very strong cash flow from operations was $84.8 million in the third quarter inclusive of $14 million of accounts receivable collected from the mobility business. After we closed the sale.
This compares to $58.7 million in the same quarter last year.
In addition during Q3, we received the remaining proceeds from the $569 million sale of the mobility business unit approximately $305 million net of withholding taxes.
Cash and cash equivalents at the end of the third quarter of 2020 were $663.3 million.
At the end of the third quarter, our net debt leverage ratio was 1.6.
As a reminder, our $250 million convertible debenture comes due in mid December and we intend to repay the principal in cash.
Depreciation for the third quarter was $23.1 million.
Capital spending for the quarter was $29.1 million.
Now I'd like to turn to guidance for the fourth quarter.
Looking ahead, we believe at COVID-19 may continue to cause end market demand disruptions supply chain challenges as well as inefficiencies with our own production.
We expect total revenue for the quarter of 2020 to be in the range of $490 million to $530 million.
We expect non-GAAP earnings to be in the range of 22 to 28 cents per diluted share.
This guidance includes revenue and operating results from the two units plants that we're closing at the end of the year.
EPS forecast is based on a diluted share count of approximately 107.9 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 future stock price as.
As a reminder for every dollar increase in the average share price of about $14 from 26 cents during the quarter our shares outstanding would increase by approximately 1.5 million shares.
We expect that SG and expense will be about 8.5% of revenue in the fourth quarter and R&D to be 1.1% of revenue.
We expect interest expense to total about $12 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.
During the fourth quarter, we expect to record amortization of intangibles of about $11 million stock based compensation expense of about $4.3 million noncash.
Non cash interest expense of approximately $2.9 million and we estimate depreciation expense will be approximately $22.6 million.
Finally, I'd like to announce that we will be participating virtually in the Baird Industrial conference on November 12.
Stifel Midwest one on one growth conference also on November 12.
And the Barclays Technology Conference on December 10.
That concludes our prepared remarks, and now we'd like to open the line for questions KC.
Thank you and ladies and gentlemen at this time, we will open the floor for your questions. If he would like to ask a question. Please signal by pressing star one on your telephone keypad now if you're using a speaker phone. Please make sure that your mute function is turned off to allow your signal to reach our equipment and again its star one to ask a question.
Well take our first question from Mike She goes with Needham and company.
Hey, guys. Thanks for taking the questions today.
The thing I wanted to ask about if I'm just looking at the outperformance that we had versus the guidance you had provided on a on revenue and earnings.
This is the second consecutive quarter that we've seen this now and I'm. Just curious is it based on do you guys have greater visibility and confidence in the guidance numbers, you're providing us down based on the move in sync within your portfolio or are you looking at guidance differently than you had previously.
So maybe I can I can address the their revenue.
Piece like.
The.
The as as you know these deals have been.
Very dynamic times, [laughter], and ER and as we looked at a at our markets.
As we were you know in July I would say that what we were surprised to the to the upside by most strongly was automotive and and we felt and commented on the fact that automotive was strengthening.
At that time, but oh, but even a improve beyond what we had expected and and Oh. So that was a really positive or tailwind. If you will the other big sort of al you know outperformer, if you always networking communication.
Communications, and a and that if more than anything was a function of Ah Ah customers pulling pulling products out of inventory towards the end of this last quarter Q3, rather than Q fours as was expected. So you know I'm you know if you look at that at that.
Increase.
Increase that would that would have been very difficult to to forecast a in general with these kinds of dynamic markets. We try to stay as close as we can to to our customers.
And and their forecasts, which are also just very dynamic right now and so you know as we look at the end of the fourth quarter again, where we know we're following our process.
And and I you know I think at this point are our numbers or guidance numbers are solid as they can be based on input from customers.
All right. Thanks for that and then another question I have for you. If I'm just thinking I think there was a comment made as well regarding potential impact from from coated.
Q4 of this year.
And have you guys structured your guidance can you help us think about what that impact looks.
It looks like in relation to Q3, because obviously you guys have been.
Executing against that metric in the end I guess pleasantly surprised by the way that your your internal operations have been able to cope with the pandemic.
Thank you and and I would agree with that comment I think in the face of a real challenges you know our operations team has done an outstanding job of first and foremost protecting the employees.
Our work environment is a very safe environment for our employees to be in.
At the same time.
We're you know we're following the rise.
In cases in the United States, our workers as you know when they leave arts fit our facilities. They enter communities that and if those communities are are seeing spikes and call. These cases.
That you know that back and then in fact, our employees and so yeah. So we have to we have to continue to be to be very cognizant of that situation and particularly as we look at our aerospace and defense.
Guidance, that's something that we always consider because as as you know that you know these cases when it comes to the TTM footprint. These cases are really occurring in North America. They are not occurring in our China facilities, nor in our in our other overseas offices. So it's.
It's really about North America and for US when it comes to North America, that's primarily going to be in aerospace and defense area, where we just have to be careful about production yep.
Potential production limitations from a disruption was called and so that's always that that's encompassed in our guidance in the same way that it would than it was this past quarter.
Great. Thank you.
Thank you.
Our next question comes from Srini, Pajjuri with SMBC Nikko Securities.
Thank you good afternoon, guys I'm first of all congrats on the solid execution.
A question on your defense business to the extent you have visibility can you talk about how did you you know from a planning standpoint, how are you thinking about the next 12 months.
Especially given the you know the upcoming election and.
The potential impact or not that might that might have on the defense budgets going forward.
Okay. Thank you. Thank you and yeah. It's you know as as as we look out in and of course, no. One has a crystal ball on this and I'll be the very first through a admit that given.
Given the the very dynamic situation, you mentioned and what mentioned one factor with the elections the impact of coded and.
On the world's economies.
Particularly as we go into the winter is very hard to forecast. So let me just comment on you know what we what we generally see out there as we as we look into 2021 I think you know the defense business Ah, So again, 38% or so of our bid.
Yeah, we have some we have reason to be confident there that oh that we can continue to grow that business.
There will be an impact on the business from the aerospace a weakness and so as opposed to the you know, 8% to 9% kind of or even slightly higher than that growth rates that we've been seeing over the last several years.
You know I think we're probably looking at something.
A lesson that are certainly higher than the the prisons, Mark marcon forecasting guidance, which is around a round or 2% to 4% I think we're.
Still looking at a at being above that but Ah, but struggled you know it's going to be facing that aired that headwind on aerospace is going to be the the biggest challenge in that area as we look at the automotive we've all of course seen automotive recover.
I think automotive will continue to to recover as we enter into the first part of next year again, I think we all are watching European demand automobile demand as.
They encounter another spike in cold cases, and shutdown situation. So.
That's there that is not certain but certainly there's momentum there that Ah that's positive as we go into 2021, and so continuing to see some improvement there. When you look at a at computing. We've all seen a you know a real impact of heightened demand.
And for data center on the datacenter side.
Again, that's the largest portion of computing for us.
I would say that that you know are returning to normal demand levels.
Returning to a growth rate that would be more normal for the our computing area around the 2% to 4% kind of range would be a general expectation.
And by the medical industrial instrumentation area.
We this is a this is interesting because we had such a strong Q2 and Q3 are that you're going to we're going to be looking at a different you know a tougher compare as we go into next year on the certainly on the medical side.
On the other hand industrial should should ER again, if if barring no a huge disruption on the corporate front should start improving as we go into 2021. So you know the the the forecast there in that in the 2% to 4% kind of range.
That's where we would be fighting to achieve I think the first half of the year may be tough, but the second half could get a little bit better and then ER networking communications.
We are impacted right now by Oh, the slow down in Fiveg spend predominantly out of China, China has been driving the bulk of the equipment purchases for Fiveg infrastructure requirements I would expect that the U.S. and Europe will pick up.
That demand and that we will see a a phase three out of China.
So I think good reasons to be positive on the networking or certainly the telecom portion of networking communications, which is about you know slightly higher than a third of the business for US and then can peak at around half of that business for us when it really is moving so.
Ah So networking communications should you know looking do more positive too.
2021, so that's the mix a you know I think it's a great benefit of having this diversified end market exposure I think we'll be seeing.
Seeing some markets.
Continuing to prove strongly some markets that may slow that may have experienced heightened demand with the coated situation you know falling back a bit.
But a good mixture of businesses.
Thank you that's great color and then I have one question for Todd as well [noise] Todd.
Todd utilization at a roughly 6% to 3% and then you know the gross margins have come up nicely here. So I'm just you know as we as we look into the next 12 to 18 months.
Can you talk about some of the puts and takes if gross margin and any potential for further improvement to you know sort of the mix itself and and how high do you think that utilization can go before you need to increase capacity.
Well, so utilization is a challenging metric, it's an important metric, but I say its challenging because if we have kind of two different business models in North America, we have more of a <unk> a high mix low volume business model and so utilization levels are inherently going to be lower.
So when we say we're operating in North America at around 63% to 65% that's actually a very good number in North America I'm getting up close to 70 really really stretches us and weve been selectively adding capacity here and there in North America to try to increase our ability our production.
I'd now in Asia, though it's a different story the business model there is more geared towards mid to higher volumes and lower mix.
So utilization becomes a much more important factor and quite frankly, 63% utilization in Asia is not a good number and there is a lot of upward opportunity to improve we have capacity in several of our key plant. These plants in China tend to be driven by our commercial end markets as Tom mentioned.
Andy is really a north American market.
So you have to watch what's going on with our networking and communications end market, our medical industrial instrumentation that market and automotive end markets, particularly and computing will play into their also those who so what's happening in those end markets will really drive utilization and utilization is a key factor for us because.
We have a fairly significant fixed cost elements in our business. There's a lot of equipment involved in what we do a lot of technology and so there's a lot of leverage in the business model. So there's quite a bit of opportunity to grow on the commercial side more constrained in North America, Although we still have some upside opportunity there too.
Got it and just one clarification, you said, you're getting a return to convert in the December quarter does that does that have any impact on the share count going forward. Thank you.
The at this stage the impact on the share count is really expected to be zero quite frankly.
There is a war so when we entered into the convert seven years ago. We did a calls what's called a call spread option, which protect the company from dilution up to $14.26. This.
The second piece of that strategy involves a warrants that we issued that.
A couple of the banks that we you know good did the transaction with have the opportunity to exercise that worn during 2022. If this is the end to end the war becomes into money above $14.26 a day.
That point it could become dilutive during 2022, but that warrant will expire at the end of 2022 and the impact is roughly for every dollar above $14.26 stock price on the average for the quarter, our share count could be deluded about one and a half million.
Shares or 1.5%. So there is some exposure still at the tail. If you will on the convert but as of this year I really don't expect any dilution at all.
Got it thank you.
Well take our next question from Allison packed with Stifel.
Hi, Thank you for taking the call just on for Matt Sheerin.
I want to follow up on the telecom and the Fiveg pause.
You did mention that I didn't eventually you listen you're not pickup will be a bull and that pause, but out of curiosity when China does resumed their fiveg infrastructure.
Investments, where you see that tailwind or will there be potential impediments in headwinds associated because of the trade restrictions.
Oh, yes so.
Certainly you know China is a if they're continuing to pace right. Now if you look at Fiveg base station investments China. The good total out of China is more than double the rest the entire rest of the world in terms of investment.
So no question very important market the market to date, you know, it's hard to predict the future, but today are primarily walkaways EG.
I had been the beneficiaries of that a little bit of with with some business going to Ericsson as well.
From a TTM standpoint, the Oh, we continue to to be able to provide our products out of China, which had been engineered in China. So.
Printed circuit boards are backplane assemblies, and our resistor components, which all of which are manufactured in China, we continue to be able to supply or to walk away and Ah and so that business is.
It has not been impacted in and would be the beneficiary of that of that investment and ongoing investment in China and certainly you know page three again I think will be a very large.
Investment that occurs there.
I see I understand that's good and follow up on it. So another supply mentioned that they were expecting you mentioned some visibility into calendar year 21 states.
Steven Oh right at least the next 12 months that the December quarter is going to be basically a peak in terms of global auto production.
The next 12 months that the last at least do you have any visibility on potential on production order bookings that go beyond the December quarter is you see a similar sentiment tonight supplier or possibly more optimistic bullish scenario, where any color possibly.
Or is it just more visibility still relatively limited to me Thats termination, yeah definitely visibility beyond you know for our business. We work off of automotive forecast that that do go beyond a quarter.
But they're very volatile beyond the quarter so.
I'll start with that with that comment I think you know what that comment may be referring to it and certainly what we saw in the third quarter regionally or was the fact that we reach sort of you know optimal or or or high levels of production in China, we resell or not.
Regional sales reflected that are already in and Q2, what we were missing was really North America and Europe and that's a that's what really started to come in in Q3, and we expect to continue and into Q4. So that we end up really again regionally balanced, which which is great.
Sign for a stable a stable business in servicing stable automotive demand so.
At that point I think we'll be in a you know hopefully as a stable state and.
And then from there as we go into next year, we're going to be really really seeing what consumer demand it looks like.
In in those markets again, I think a lot of different impacts both positive and negative I think the government incentives started towards electric vehicles.
And therefore as towards improving electric electrical content.
In electronics content in cars is a positive.
For Us I think both Europe, and China are very active in that area and very aggressively incentivizing a move to E V, which is generally a positive from a printed circuit board a demand standpoint and produced content per vehicle.
So that's what that's going to be a real positive I think to the extent cold it impacts overall consumer demand a that would be that would be on the flip side you know suppressing a unit unit demand. If we can see unit demand sales the sales of cars stabilize.
At levels that are let's just say where are closer to 2018 levels that would be that would bode really well for TTM, a and then the real adder to that would be the conversions to even add a need in the increasing incorporation of Adas features safety features into.
End of vehicles so.
So that that's the trend that we certainly hope to see here is as we go into next year.
I see thank you so very much.
Mhm.
And as a reminder to our audience if he would like to ask the audio question. Please signal by pressing star one now.
Our next question comes from Mike Crawford with B. Riley Securities.
[noise]. Thank you Tom you talked about wanting to add more RF component capabilities into geared differentiated product set and there's some of that I think is internal how much of that would be external.
Yeah, so great great point or both we are Oh, we are using the commercial our our RF and specialty component capability on and our commercial business side to help with our organic business development areas and and as I've said in the past those those are.
Focus on photonics opportunities on me.
The opportunity and auto as well to build out to provide more of a a complete.
Engineered solution for our customers versus.
Versus just a the discrete components.
And we continue those efforts. So so that's one one piece of it or we continue on the a and b side to focus on early engagement with our customers as they release specifications and a and again those large program when opportunities.
As a result of that so that's the second area and then the third area that that I commented on is is on the M&A side, where we will look to to improve that positions. Both on the component side I'm on the car in the commercial business as well as continuing that.
To build on that engineering capability and aerospace and defense.
[noise], Okay, and then just on the defense side as you're looking.
To.
The early engagement opportunity. In addition to agile radars are there any other.
He programs of record that you're not generating much revenue from today, but could be important in the next few years.
Oh, absolutely the way the way I would I would think you know think about as any any.
Where do you have a program or whether its retrofit or or new program and where they are incorporating and an active electronically scanned a you know rate re that's where that's where you see opportunities so going for.
David You know one example would be of course, the F 35 program or build out would be an example, the I've talked in the past about El Paso, the low tier air and missile defense system going.
Going in place that that's an opportunity, but then you can even go back and look at and some of the legacy Patriot missile programs and there's their upgrades occurring there. If you look at our submarine fleet, we are looking at and upgrades there as well as the card in the fleet is still.
Really analog and needs to be digitalize, so opportunities there so very broad Mike and we'll continue every quarter to comment on those programs, where we really you know saw that the bigger wins, but but the easy way to think about it is that that depth of capability that we.
We have as good is mainly focused on where you're going to see a and ray or have a radar opportunity whether that's the way that space land based ocean based.
That's where we're going to see the the bigger opportunities, though we will continue to serve us a broad range of programs.
Okay. Thank you and then last question just relates to the commercial portion of what had been the anyone big. So you took this you know noncash goodwill charge a number of years. After the acquisition today does that in any way diminish your thoughts about what that acquisition brought you or your satisfaction with.
With the acquisition or change anything else going forward [noise].
So yeah. It as you know the the art of allocating goodwill at the beginning of an acquisition is always an interesting one we we took it you know we allocated goodwill between the commercial side of the business and the aerospace and defense side of the business and of course on the commercial side of the business.
We expected the walk away or two.
He can't walk away business to continue into end to grow frankly.
As a.
For for our Syracuse.
Production of components. So that's really what led to the charge is the fact that we are no longer able to export components out of Syracuse, and new business development efforts, while they're gaining traction our early enough that yeah. It makes it very difficult to forecast in the meantime on the defense.
Side is as I've commented and we have continued to see great track.
Traction on the defense side, and you can see that evidence Stephen our in our program backlog, which which has grown from 400 and let's just say 440 to 450 million when we acquired.
Add one or.
To about 625 million today up to $647 million last quarter, so tremendous traction that that they've helped us deliver to TTM.
As an organization on the aerospace and defense side, So a long way of saying I am I am as excited about the business today as I was then if not more.
But we have a you know goodwill allocation issue that we needed to take care of in this quarter.
Oh, great. Thank you very much but sure.
Sure thing thank you.
And we'll take our next question from lesion Ho with Bloomberg intelligence.
Oh, great. Thank you for taking my questions I'm, just thinking a little bit on the automotive piece.
It looks like on a pro forma basis, you're approaching a a quarterly revenue level. That's a close to one to 19. So it's a very nice rebound there.
I understand the visa European a potential headwinds.
Ahead of us so well to says that that doesn't take risks I mean, what do you think this business couldn't go into fiscal 2021.
[laughter].
Yeah. This is this is the big question isn't it.
You know again.
But let's just say that this year is all about getting back to that to that level would mean, you know really getting bringing it back to it.
If we in Q4 can bring this business back to what I would call 2019 levels. Right. Then then the go forward for US is going to be all about you know what what we've traditionally talked about which is electronics content.
Taking taking the the printed circuit board content in a vehicle a up from a you know today, it's somewhere around $85 in PCB content, but that's up from from about in this mid Seventys in 2018, so in two years time continuing to.
To improve that electronics content as vehicles as he these come into play and he's looking at the $150 plus in terms of PCB content.
And then with the Ada Es impact also helping to move that number upward. So again, what I had hoped to see is that we're going to see a unit volumes stabilize consumer demand come back.
The extent that that happens and then we have a great we're going to be able to return to it to really a very positive effort to improve PCB content and that's driven by electronics content in vehicles.
So the yeah the million dollar question is.
Unit volume how quickly does that does.
Does that move beyond.
The levels of Q4, and what really happens as we look at that consumer demand into next year.
Okay, well, let me answer that question in a different fashion then so so that's more of a demand unit or.
I suppose the answer.
How should we think about your design pipeline over the next couple of sure Yeah. Yeah pipeline visibility you know so look assumes same your auto business in the 2021 2022 time timeframe. So yeah. So that's it that's a great great point, just to bring everyone up to speed and in our most recent in.
Last quarter we.
We want about a 40.
Designed a lifetime program value of about 170 million.
Dollars, if you've gone back to last year about this time, we were about the same level, but if you think about last year.
In total.
You know that that program value was you know and it's roughly was roughly.
Think about it as as slightly less than that $170 million that we want in this quarter. So what that means is the.
The the or what I take that to mean is that our customers.
Our continuing to have to have enough confidence that they're placing new automotive design designs design work with us.
Does that $170 million this last quarter will translate that translates into business.
It will roll out starting next year and into the following year, but but represents very good sound that level of design wins, if you step back.
Corridor, we had in the second quarter about 43 designs one in the second quarter program value of 203 million. So you can see relatively constant in terms of program wins.
But feeding into much more confidence that that programs are moving forward.
And that we will see those revenues that occur.
In the upcoming years. So he is a good good good level of confidence to TTM that that we're in good shape there.
Got it and then my follow on question on the networking side.
You talked about the China phase three Fiveg buildouts.
Any commentary around the visibility into the U.S. still does go and get to 21 and any comments around or did the wired networking piece looks like that you commented that got pulled in a little bit.
Into this quarter.
How are you feeling about over the next couple of quarters. Thank you.
Yes, so on the on the telecom side and the U.S. I think I think I again, I'm not won't predict a election results, but I think who.
In either case, we're looking at infrastructure.
Attending there if you if you back up and look at are the big drivers around five key.
Theres a commercial driver and then there's a increasingly now a a defense need to have a a proper fiveg infrastructure and so the government is clearly concerned it's a high priority. If you if you increasingly vocal.
Discussions about about a this need this requirements coming from the defense Department.
And that translates into the mountain so I would expect that to the extent, there's an infrastructure bill that fiveg will be part of that and even if there isn't something coming out of Congress that fiveg will be a priority for the U.S. government standpoint, now that that has to translate to the search.
As providers and their momentum, but I think it's the right kind of backdrop to to encourage the service providers to spend in this area.
And they certainly as you've all seen our advertising it or their advertising their initial spend and to the extent that that gains traction I think we're going to we're going to see a strong move in in the U.S.
On the on the networking side I'm just.
Just just a you know I think weve from from a TTM perspective, we've we've seen the market move around but it's remained relatively constant.
And a and a lot of that I've I've attributed to wait you know sort of a a wait and see at an allocation of spending.
Two five g. and putting fiveg in place before layering networking structures on top of Fiveg. We continue I think in Q4, we're looking at a potentially a little bit of weakness compared to Q3.
Networking side, but that's relatively you know it's relatively small in terms of variance.
And I and I really would expect the improvement and networking do occur after that telecom. The fiveg infrastructure has been has been delayed that's when they are really going to we should start to see momentum again in networking I'm in a in a stronger way.
Great. Thank you very much.
Thank you.
This concludes today's question and answer session I will now turn it back to Tom Edman for closing remarks.
Thank you yeah, I'd, just like to close by summarizing some of the points I made earlier first we delivered revenues and earnings above the guided range. Despite COVID-19 related challenges.
That's allowed us to demonstrate our operational excellence second our end market diversification has allowed the continuing operations to grow despite weakness in a in a couple of sub segment and third we generated very strong cash flow received the remaining proceeds from the sale of the mobility unit divestiture and read.
Paid our term loan a portion of our <unk> a good portion of our term loan as a result, we're able to drive our leverage to 1.6 times or so in closing I would like to thank our employees our customers.
Customers and you our investors for your continued support.
And your support for TTM as we go forward. Thank you very much.
This concludes today's call.
Thank you for your participation you may now disconnect your phone lines.
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