Q3 2023 TTM Technologies Inc Earnings Call
[music].
Good morning, ladies and gentlemen, thank you for standing by small come to the TTM technologies third quarter fiscal 2023 financial results Conference call.
During todays presentation, all parties will be in a listen only mode. Following the presentation. The conference will be open for questions.
To ask a question you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised.
So withdraw your question. Please press star one again.
As a reminder, this conference is being recorded today November 1st 2023.
Sameer Desai Ttm's, Vice President of corporate development and industrial Relations will now review Ttm's disclosure statement.
Before we get started I would like to remind everyone that today's call contains forward looking statements, including statements related to ttm's future business outlook.
Actual results could differ materially from these forward looking statements due to one or more risks and uncertainties, including risk factors, we provide in our filings with the Securities and Exchange Commission, which we encourage you to review. These forward looking statements represent managements expectations and assumptions based on currently.
Available information TTM does not undertake any obligation to publicly update or revise any of these forward looking statements whether as a result of new information future events or other circumstances, except as required by law we.
We will also discuss 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.
Direct you to the reconciliations between GAAP and non-GAAP measures.
In the Companys earnings release.
It is available on the Investor Relations section of Ttm's website investors Dot two dot com.
Also posted on our website a slide deck that we will refer to during our call.
I will now turn the call over to Tom Edman, Ttm's Chief Executive Officer. Please go ahead Tom.
Thank you Samir good morning, and thank you for joining us for our third quarter fiscal year 2023 conference call.
I'll begin with a review of our business highlights from the quarter and a discussion of our third quarter results followed by a summary of our business strategy.
Dan Bailey, our CFO will follow with an overview of our Q3 2023 financial performance and our Q4 2023 guidance. We will then open the call to your questions.
The quarters results are also shown on slide four of the Investor presentation posted on Ttm's website.
We delivered an outstanding quarter, despite the current uncertain macroeconomic environment.
And I would like to thank our employees for their hard work and contribution to generating these results.
In the third quarter of 2023, non-GAAP EPS was well above the guided range as a result of better operational execution, particularly in our North America region.
Revenues were within the guided range due to better than expected results from our aerospace and defense and data Center computing end markets, which were offset by lower than expected results from our medical industrial and instrumentation automotive and networking end markets.
Demand in our aerospace and defense market, which was 45% of revenues continues to be solid with strong backlog offset by weaker demand in some of our commercial end markets.
As we look into Q4, we see a mixed picture in our end markets with sequential growth in our automotive market stability in the aerospace <unk> aerospace and defense and <unk> markets and the decline in the data center computing and networking markets.
I would now like to provide a strategic update.
TTM is on a journey to transform our business to be less cyclical and more differentiated.
Over the past several years TTM has consistently emphasized that a key part of our strategy is to add value to the product solutions that we deliver to our customers, particularly in the aerospace and defense market.
In 2018, we acquired Anaren, which broadened ttm's product portfolio into highly engineered RF components and sub assemblies as well as adding critical RF engineering capability and resources.
In 2022, we acquired telephonics, which builds on Anaren and Ttm's customer driven culture, and disciplined approach to engineering and manufacturing.
The addition of Telephonics expanded ttm's aerospace and defense product offering vertically into higher level engineered system solutions and horizontally into the surveillance and communications markets.
While strengthening our position in radar systems.
As a result of these strategic moves over 50% of A&D revenues are from engineered and integrated electronic products with PCB as being less than 50% of the overall contribution.
Another important element of our differentiation strategy is our investment in a new state of the art highly automated PCB manufacturing facility in Penang Malaysia.
The decision to build this new factory as a direct response to our customers' increasing concerns about supply chain resiliency and regional diversification and.
And in particular, the need for advanced multilayer PCB manufacturing options in locations outside the time, the greater China region.
The new facility in Malaysia will support customers in our commercial markets, such as networking data center computing and medical industrial and instrumentation.
We continue to make progress on the Malaysia facility and the commissioning process is almost completed.
We began to install equipment in the second quarter and are presently in the startup phase in a number of work areas.
We remain on track for first product samples in the fourth quarter and will begin customer qualifications and ramp in the first quarter of 2024.
I'd also like to update you on the consolidation of our manufacturing footprint.
We previously announced our plan to close three small manufacturing facilities in order to improve total plant utilization operational performance customer focus and profitability.
<unk> manufacturing operations in Anaheim, and Santa Clara, California, and Hong Kong are being closed and consolidated into Ttm's remaining facilities.
We ceased production at our Hong Kong manufacturing facility during the second quarter.
<unk> production at the Anaheim facility in the third quarter and will cease production at the Santa Clara facility.
The end of the year.
Customers have been supportive of the consolidation and we expect to retain the majority of the business that will be transitioning from the closed facilities.
Finally, I would like to discuss the separate press release, we issued regarding the announcement of our intent to expand our advanced technology capability for the aerospace and defense market through the construction of a new facility immediately adjacent to our Syracuse, New York campus.
Our new facility will bring disruptive domestic production of high technology Ultra high density interconnect or HDI printed circuit boards and support of National security requirements.
This new facility will focus on the high technology PCB production in North America, providing customers with reduced lead times and a significant increase in domestic capacity for ultra HDI Pcbs.
In addition, it will be our most sustainable facility in North America.
Groundbreaking is anticipated in the first half of 2024 with initial production in the latter half of 2025.
Phase one of the proposed projects.
<unk>, including capital for campus wide improvements is estimated to be $100 million to $130 million and is anticipated to run through 2026.
TTM is planned capital investment commitments will be determined after finalizing terms with various stakeholders.
Now I'd like to review our end markets, which are referenced on page four of the earnings presentation on our website.
The aerospace and defense end market represented 45% of total third quarter sales compared to 38% of Q3, 2022 sales and 47% of sales in Q2 2023.
The solid demand in the defense market is a result of a positive tailwind in previous defense budgets are strong strategic program alignment and key bookings for ongoing franchise programs.
At the end of the third quarter, our A&D program backlog was $135 billion.
During the quarter, we saw a significant bookings for key programs, including the advanced medium range air to air missile or M Ram and the MH 60.
We expect sales in Q4 from this end market to represent about 45% of our total sales.
On the U S budget, though the specific trajectory of the future U S. Defense budget is still in process between the administration and Congress.
The global threat landscape is increasingly elevated.
As Congress continues to work through the fiscal year 2024 appropriation bills. We are optimistic that there will be consistent support for the national defense strategy and the funding of its priorities.
Sales in the data center computing end market represented 17% of total sales in the third quarter compared to 14% in Q3 of 2022 and 12% in the second quarter of 2023.
This end market performed better than expected and return to year on year growth due to strengthened our data center customers building products for regenerative AI applications.
We expect revenues in this end market to represent approximately 16% of fourth quarter sales.
The medical industrial instrumentation end market contributed 16% of our total sales in the third quarter compared to 19% in the year ago quarter and 16% in the second quarter of 2023.
The year over year decline was caused primarily by inventory reductions at a number of our customers.
In addition, the instrumentation segment is weighted towards the semiconductor capital equipment market, which is seeing weaker demand.
For the fourth quarter, we expect MSI to be 16% of revenues.
Automotive sales represented 15% of total sales during the third quarter of 2023 compared to 15% in the year ago quarter and 17% during the second quarter of 2023, the year over year decline for automotive was due primarily to continued inventory adjustments at several customers.
And the impact of annual production shutdowns, we have not yet seen an impact on sales due to the UAW strike, but we are closely monitoring the situation.
We expect our automotive business to contribute 17% of total sales in Q4.
Networking accounted for 7% of revenue during the third quarter of 2023. This.
This compares to 14% in the third quarter of 2022, and 8% of revenue in the second quarter of 2023.
Demand was softer as customers continue to focus on inventory digestion as well as weak end market demand.
As a reminder, the Shanghai back claim business, which we sold in our second quarter contributed approximately $16 million of sales to this segment in the third quarter of 2022.
In Q4, we expect this end market to be 6% of revenues as we see continued weakness due to softer market conditions, particularly in telecom.
And ongoing inventory management by our customers.
Next I'll cover some details from the third quarter.
This information is also available on page five of our earnings presentation.
During the quarter, our advanced technology, and engineered products business, which includes HDI rigid flex RF subsystems and components and engineered systems accounted for approximately 47% of our revenue.
This compares to approximately 41% in the year ago quarter and 43% in Q2.
We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology, and engineered products capabilities and new programs and new markets.
PCB capacity utilization in Asia Pacific was 46% in Q3 compared to 72% in the year ago quarter and 46% in Q2.
Our overall PCB capacity utilization in North America was 38% in Q3 compared to 45% in the year ago quarter and 38% in Q2.
The lower year over year rate in Asia Pacific was caused by a decline in production volumes, while the lower year over year rate in North America was due to additional plating capacity added as well as a greater mix of higher technology product that requires less finished bleeding.
Our top five customers contributed 43% of total sales in the third quarter of 2023 compared to 40% in the second quarter of 2023.
We had two customers over 10% of our total sales in the quarter.
At the end of Q3, our 90 day backlog, which is subject to cancellations was $606 $8 million.
Compared to $672 9 million at the end of the third quarter last year.
Our book to Bill ratio was <unk> 91 for the three months ended October 2nd.
As we look into Q4, we are seeing our commercial markets somewhat mixed with year on year growth in data center computing, driven by momentum related to artificial intelligence advancements and sequential growth in the automotive market.
Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the TTM Technologies 3rd quarter of fiscal 2023 financial results conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be open for questions. To ask a question, you will need to press star 11 on your telephone, you will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. As a reminder, this conference is being recorded today November 1st, 2023.
Stabilization and medical industrial and instrumentation with continued weakness in networking.
On the A&D side of our business, we continue to make improvements in shipments as we work with supply chain partners to loosen bottlenecks and take advantage of an improving labor market.
I am confident that with the effort of our employees and supply chain partners, we will be able to overcome these challenges as we work our way through the remainder of 2023 and into 2024.
Sameer Desai: Sameer Desai, TTM's Vice President of Corporate Development and Investurulations will now review TTM's disclosure statement. Before we get started, I would like to remind everyone that today's call contains forward-looking statements, including statements related to TTM's future business outlook. Actual results could differ materially from these forward-looking statements due to one or more risks and uncertainties, including risk factors we provide in our filings with the securities and exchange commission, which we encourage you to review.
In the meantime, I wish to thank our employees for continuing to contribute to TTM and our critical mission of inspiring innovation for our customers.
Now Dan will review, our financial performance for the third quarter Dan.
Thanks, Tom and good morning, everyone.
I will review our financial results for the third quarter that were included in the press release distributed today as well as on slide six of the earnings presentation that is posted on our website.
Sameer Desai: These forward-looking statements represent management expectations and assumptions based on currently available information. TTM does not undertake any obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events, or other circumstances, except as required by law. We will also discuss on this call certain non-gap financial measures, such as adjusted EBITOP. Such measures should not be considered as a substitute for the measures prepared and presented in accordance with GAP. It will be directly to the reconcilations between GAP and non-gap measures included in the company's earnings release, which is available on the Investor Relations section of TTM's website at investors.tpm.com.
For the third quarter net sales were $572 6 million compared to $671 1 million in the third quarter of 2022.
The year over year decrease in revenue was due to declines in our automotive medical industrial and instrumentation and.
In networking and markets.
Partially offset by growth in our data center computing end market.
GAAP operating loss for the third quarter of 2023 was $10 2 million.
This compares to operating income of $49 8 million in the third quarter of 2022.
The current year results include a goodwill impairment charge of $44 1 million related to the RFS components reportable segment, which was the commercial portion of the Anaren business, we acquired in 2018.
Due to weak demand from telecom equipment companies in the wireless infrastructure market projected revenues and profits had been reduced resulted in the impairment.
We have also posted on the website a slide deck that we will refer to during our call.
Tom Edmund: I will now turn the call over to Tom Edmund, TTM's Chief Executive Officer. Please go ahead, Tom. Thank you, Samir.
On a GAAP basis net loss in the third quarter of 2023 was $37 1 million or <unk> 36 per diluted share. This.
This compares to GAAP net income of $43 5 million for <unk> 42 per diluted share in the third quarter of last year.
Tom Edmund: Good morning, and thank you for joining us for our third quarter fiscal year 2023 conference call. I'll begin with a review of our business highlights from the quarter, and a discussion of our third quarter results, followed by a summary of our business strategy.
The remainder of my comments will focus on our non-GAAP financial performance.
Our non-GAAP performance excludes M&A related costs restructuring costs, certain noncash expense items, such as amortization of intangibles impairment of goodwill and stock compensation gains on the sale of property and other unusual or infrequent items.
Dan Bailey: Dan Bailey, our CFO, will follow with an overview of our Q3 2023 financial performance and our Q4 2023 guidance.
Tom Edmund: We will then open the call to your questions. The quarter's results are also shown on slide 4 of the Investor presentation posted on TTM's website. We delivered an outstanding quarter despite the current uncertain macroeconomic environment, and I would like to thank our employees for their hard work and contribution to generating these results. In the third quarter of 2023, non-GAP EPS was well above the guided range as a result of better operational execution, particularly in our North America region.
We present non-GAAP financial information to enable investors to see the company through the eyes of management.
Comparisons with expectations in prior periods.
Gross margin in the third quarter was 28% and compares to 19, 7% in the third quarter of 2022.
Year on year increase was due to a more favorable product mix and improved execution in the North America region.
Partially offset by lower revenues and less premium in our commercial markets.
Selling and marketing expense was $17 9 million in the third quarter or three 1% of net sales versus $19 1 million or two 8% of net sales a year ago.
Tom Edmund: Revenues were within the guided range due to better than expected results from our aerospace and defense and data center computing end markets, which were offset by lower than expected results from our medical industrial and instrumentation, automotive, and networking end markets. Markets. Demand in our Aerospace and Defense Market, which was 45% of revenues, continues to be solid, with strong backlog, offset by weaker demand in some of our commercial end markets. As we look into Q4, we see a mixed picture in our end markets, with sequential growth in our automotive market, stability in the Aerospace and Defense and MI and I markets, and to decline in the data center computing and networking markets.
Third quarter, G&A expense was $37 7 million or six 6% of net sales compared to $38 million or five 7% of net sales in the same quarter a year ago.
In Q3, 2023 research and development was $5 9 million or 1% of revenues compared to 7 million also 1% in the year ago quarter.
Our operating margin in Q3 was 10, 1%. This compares to 10, 2% in the same quarter last year.
Interest expense was $9 6 million in the third quarter compared to $10 4 million in the same quarter last year.
During the quarter there was a positive <unk> 9 million foreign exchange impact below the operating income line.
Tom Edmund: I would now like to provide a strategic update. TTM is on a journey to transform our business to be less cyclical and more differentiated. Over the past several years, TTM has consistently emphasized that a key part of our strategy is to add value to the product solutions that we deliver to our customers, particularly in the Aerospace and Defense Market. In 2018, we acquired Annerin, which broadened TTM's product portfolio into highly engineered RF components and subassemblies, as well as adding critical RF engineering capability and resources.
Government incentives and interest income of $2 2 million resulted in a net $3 1 million gain.
Or a <unk> <unk> positive impact to EPS.
This compares to a gain of $10 3 million or <unk> impact on EPS in Q3 last year.
Our effective tax rate was 12, 6% in the third quarter, resulting in a tax expense of $6 $5 million.
This compares to a rate of 15% our tax expense of $10 2 million in the prior year.
Third quarter net income was $44 9 million or <unk> 43 per diluted share.
This compares to third quarter 'twenty to net income of $5 $57 9 million or <unk> 56 per diluted share.
Tom Edmund: In 2022, we acquired Telephonics, which builds on Annerin and TTM's customer-driven culture and disciplined approach to engineering and manufacturing. The addition of Telephonics expanded TTM's Aerospace and Defense product offering vertically into higher-level engineered system solutions and horizontally into the surveillance and communications markets, while strengthening our position in radar systems. As a result of these strategic moves, over 50 percent of ANB revenues are from engineered and integrated electronic products, with PCBs being less than 50 percent of the overall contribution.
Adjusted EBITDA for the third quarter was $84 1 million or 14, 7% of revenue.
Compared with third quarter 2022, adjusted EBITDA of $102 5 million or 53% of revenue.
Depreciation for the quarter was $23 9 million.
Net capital spending for the quarter was $33 7 million.
In Q2, our capital spending was higher than normal due to a $20 million deposit related to fit out costs associated with a new building in Penang.
We expect it to be refunded in Q3 as part of the overall lease structure for the facility.
However, the lease structure has changed and that money will not be refunded.
We expect to complete the fit out in Q4 for an additional $50 million of capital spending.
Tom Edmund: Another important element of our differentiation strategy is our investment in a new state-of-the-art highly automated PCB manufacturing facility in Penang, Malaysia. The decision to build this new factory is a direct response to our customers' increasing concerns about supply chain resiliency and regional diversification, and in particular, the need for advanced multi-layer PCB manufacturing options in locations outside the greater China region. The new facility in Malaysia will support customers in our commercial markets, such as networking, data center computing, and medical industrial and instrumentation.
Cash flow from operations in the third quarter of 2023 was $58 9 million.
We repurchased approximately 1 million shares of common stock for $14 6 million at an average price of $14 33 per share.
Cash and cash equivalents at the end of the third quarter of 2023 totaled $408 3 million.
Our net debt divided by last 12 month's EBITDA was one five times at the low end of our targeted range of one five to two times.
Now I will turn to our guidance for the fourth quarter.
We project total revenue for the fourth quarter of 2023 to be in the range of $550 million to $590 million.
Tom Edmund: We continue to make progress on the Malaysia facility, and the commissioning process is almost completed. We began to install equipment in the second quarter, and are presently in the startup phase in a number of work areas. We remain on track for first product samples in the fourth quarter, and will begin customer qualifications and ramp in the first quarter of 2024.
And non-GAAP earnings to be in the range of 34 to <unk> 40 per diluted share.
The expected sequential decline in EPS is primarily due to lower gross margins from less favorable product mix and costs associated with the ramp of our Penang facility scheduled for completion at the end of the year.
The EPS forecast is based on a diluted share count of approximately 105 million shares which includes the dilutive effect of outstanding stock options and other stock awards.
Tom Edmund: I'd also like to update you on the consolidation of our manufacturing footprint. We previously announced our plan to close three small manufacturing facilities in order to improve total plant utilization, operational performance, customer focus, and profitability. PCV Manufacturing Operations in Anaheim and Santa Clara, California, and Hong Kong are being closed and consolidated into TTM's remaining facilities. We seized production at our Hong Kong manufacturing facility during the second quarter, stopped production at the Anaheim facility in the third quarter, and will seize production at the Santa Clara facility by the end of the year. Customers have been supportive of the consolidation, and we expect to retain the majority of the business that will be transitioning from the closed facilities.
We expect SG&A expense to be about nine 8% of revenue in the fourth quarter and R&D to be about 9% of revenue.
We expect interest expense of approximately $11 4 million and interest income of approximately $2 million.
Finally, we estimate our effective tax rate to be between 12 and 17%.
To assist you in developing your financial models. We also offer the following additional information.
During the fourth quarter, we expect to record amortization of intangibles of about $13 8 million.
Stock based compensation expense of about $6 4 million.
Noncash interest expense of approximately <unk> 5 million and.
And we estimate depreciation expense will be approximately 24 million.
Finally, I'd like to announce that we will be participating in the bank of America leveraged Finance conference in Boca Raton on November 28.
Tom Edmund: Finally, I would like to discuss the separate press release we issued regarding the announcement of our intent to expand our advanced technology capability for the aerospace and defense market through the construction of a new facility immediately adjacent to our Syracuse New York campus. Our new facility will bring disruptive domestic production of high technology ultra high density interconnect or HDI printed circuit boards in support of national security requirements. This new facility will focus on high technology PCB production in North America, providing customers with reduced lead times and a significant increase in domestic capacity for ultra HDI PCBs.
Jefferies Industrials conference on November 29th in Palm Beach.
And the Barclays Technology Conference on December 5th in San Francisco.
That concludes our prepared remarks, and I would like to open the line for questions operator.
Thank you at this time, we will conduct a question and answer session.
A reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
One moment for our first question.
Our first question comes from Jim Ricchiuti with Needham <unk> Company. Your line is open.
Hi.
Good morning, congratulations by the way in the quarter.
Tom Edmund: In addition, it will be our most sustainable facility in North America. Groundbreaking is anticipated in the first half of 2024, with initial production in the latter half of 2025. Phase one of the proposed projects, project including capital for campus wide improvements, is estimated to be 100 to $130 million and is anticipated to run through 2026. TGMs planned capital investment commitments will be determined after finalizing terms with various stakeholders.
Wanted to talk to you a little bit about this.
The strength you saw on the gross margins you talked about some of the factors that contributed to it.
Yeah, clearly mix utilization in North America, I wanted to understand that a little more because.
It looks like it didn't change.
The PCB capacity utilization didn't change from Q2, yet you are talking about better efficiencies in North America contributing to the performance. So maybe you could start there and just give me a little better understanding.
As it relates to that thanks.
Tom Edmund: Now I'd like to review our end markets, which are referenced on page four of the earnings presentation on our website. The aerospace and defense end market represented 45% of total third quarter sales compared to 38% of Q3 2022 sales and 47% of sales in Q2 2023. The solid demand in the defense market is a result of a positive tailwind in previous defense budgets, our strong strategic program alignment and key bookings for ongoing franchise programs.
Sure Jim Let me let me.
I'll comment first on the utilization and then I'll, let Dan cover the gross margin.
In terms of the utilization in North America.
We always look at this is when it comes to North America, not a great indicator, because we're really focused on palladium capacity.
Tom Edmund: At the end of the third quarter, our AMD program backlog was $1.35 billion. During the quarter, we saw significant bookings for key programs, including the advanced medium range air to air missile or AMRAM and the MH60. We expect sales in Q4 from this end market to represent about 45% of our total sales.
In terms of the calculation.
And as we highlighted in the script and this is a great example, this quarter, where we actually with some of the more advanced product that we were running.
We found that the <unk> was not the bottleneck, we are running into bottlenecks elsewhere in the process.
And so in that case, when we're running high mix low volume product were running a bit higher asps more advanced product.
Plating capacity indicator isn't really all that accurate.
So it was a.
Tom Edmund: On the US budget, though the specific trajectory of the future US defense budget is still in process between the administration and Congress, the global threat landscape is increasingly elevated. As Congress continues to work through the fiscal year 2024 appropriation bills, we are optimistic that there will be consistent support for the national defense strategy and the funding of its priorities. Sales in the data center computing end market represented 17% of total sales in the third quarter, compared to 14% in Q3 of 2022 and 12% in the second quarter of 2023.
Better quarter, certainly in North America, then that utilization number indicates I also wanted to just highlight that we have added grading capacity.
Actually very efficient plating capacity we've added.
Into several of our facilities in North America over the last 18 months or so we've added that capacity primarily for capability purposes.
Because we were seeing customers move.
In a direction in terms of quality requirements demanded an upgrade in our plating capacity also allowed us to incorporate more automation.
Tom Edmund: This end market performed better than expected and returned to year on year growth due to strength in our data center customers building products for generative AI applications. We expect revenues in this end market to represent approximately 16% of fourth quarter sales. The medical industrial instrumentation end market contributed 16% of our total sales in the third quarter, compared to 19% in the year ago quarter and 16% in the second quarter of 2023.
And therefore, lower the labor content.
And those facilities those are the primary reasons for adding plating capacity, but again, if you look at the total plating capacity.
Calculation that means were adding <unk> capacity, and therefore utilization rates would would fall. So hopefully that gives you an explanation for utilization Jim over to you Dan on gross margin.
Thank you Tom and hygiene.
Primarily the gross margin improvements sequentially in both North America, and Asia Pacific are driven by labor and production efficiencies improvement.
Tom Edmund: The year over year decline was caused primarily by inventory reductions at a number of our customers. In addition, the instrumentation segment is weighted towards the semiconductor capital equipment market, which is seeing weaker demand. For the fourth quarter, we expect MI and I to be 16% of revenues. Automotive sales represented 15% of total sales during the third quarter of 2023, compared to 15% in the year ago quarter and 17% during the second quarter of 2023.
North America in particular.
Improvement in our <unk>.
Supply chain management, we are still working down that.
The path towards managing the supply chain.
E area, but we are getting better there so that's improved a bit.
And then favorable mix in both North America, and Asia Pacific, primarily in Asia Pacific as well as favorable product mix in Q3 versus Q2.
And just as a reminder.
When Dan or first I E. That's the integrated electronics portion of our North America production. So it's the non PCB.
Tom Edmund: The year over year decline for automotive was due primarily to continued inventory adjustments at several customers and the impact of annual production shutdowns. We have not yet seen an impact on sales due to the UAW strike, but we are closely monitoring the situation. We expect our automotive business to contribute 17% of total sales in Q4. Networking accounted for 7% of revenue during the third quarter of 2023. This compares to 14% in the third quarter of 2022 and 8% of revenue in the second quarter of 2023.
A portion of North America production.
Got it and then the follow up question I have.
In terms of you alluded to it since the unfortunate increased.
Geopolitical crisis I'm wondering what.
If any specs are you seeing or hearing from your your defense customers in light of what's going on.
Yes.
So it usually takes a while Jim.
For that to filter through to us I think.
Tom Edmund: Demand was softer as customers continue to focus on inventory digestion, as well as week and the market demand. As a reminder, the Shanghai backplane business, which we sold in our second quarter, contributed approximately $16 million of sales to this segment in the third quarter of 2022. In Q4, we expect this end market to be 6% of revenues as we see continued weakness due to softer market conditions, particularly in telecom and ongoing inventory management by our customers.
You look at Ukraine as an example.
Our customers about 12 months to sort of get.
Defense Department departments signals through to their order book and then they did redesigns and started placing orders to us.
12 to 18 months before we started seeing heightened demand.
Javelin being a great example of that.
Certainly have seen that heightened demand coming coming.
Due to the Ukraine conflict.
Dan Bailey: Next, I'll cover some details from the third quarter. This information is also available on page 5 of our earnings presentation. During the quarter, our advanced technology and engineered products business, which includes HDI, rigid flex, RF subsystems and components, and engineered systems, accounted for approximately 47% of our revenue. This compares to approximately 41% in the year ago quarter and 43% in Q2. We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology and engineered products capabilities in new programs and new markets.
I would expect the same as as you know.
As the government supports Israel.
Again, I would expect that to take a while.
18 months the good indicator in terms of how long it takes for those signals to travel through.
Through the chain.
In the meantime of course demand signals continue to be very strong from from our defense customers.
And again, we enjoyed a strong bookings quarter.
Expecting the same if not better in the fourth quarter.
Got it thanks very much.
Thank you.
Our next question.
Dan Bailey: PCV capacity utilization in Asia Pacific was 46% in Q3 compared to 72% in the year ago quarter and 46% in Q2. Our overall PCV capacity utilization in North America was 38% in Q3 compared to 45% in the year ago quarter and 38% in Q2. The lower year over year rate in Asia Pacific was caused by a decline in production volumes, while the lower year over year rate in North America was due to additional plating capacity added as well as a greater mix of higher technology products that requires less finish plating.
Our next question comes from Mike Crawford with B Riley Securities. Your line is open.
Thank you also in defense.
So you're breaking out space separately now at 7% of A&D revenue.
I know you're chasing commercial space opportunities there a lot of commercial space players out there, although some are way bigger than others are there any of that.
<unk> that is just vertically integrated and youre not pursuing are you are.
Are you talking to everyone or is anyone more promising than others.
Okay.
You're doing.
Wanted to.
Yes, so on commercial space.
In particular.
Dan Bailey: Our top five customers contributed 43% of total sales in the third quarter of 2023 compared to 40% in the second quarter of 2023. We add two customers over 10% of our total sales in the quarter. At the end of Q3, our 90-day backlog, which is subject to cancellations, was 606.8 compared to 672.9 million dollars at the end of the third quarter last year. Our book to Bill Ratio was 0.91 for the three months ended October 2nd.
They are interesting developments going on there I would say that we.
Talk to most of the major players in commercial space.
Some of those players are intent on.
More on cost reduction and supply chain resiliency.
And when that becomes the case we're busy.
Business that we may not pursue.
Theyre looking at quality requirements and or supply chain resiliency requirements that we can service out of North America or in the future out of Malaysia. That's when there is a decent fit.
Tom Edmund: As we look into Q4, we are seeing our commercial markets somewhat mixed with year-on-year growth and data center computing driven by momentum related to artificial intelligence advancements and sequential growth in the automotive market. Stabilization in medical industrial and instrumentation with continued weakness in networking. On the A&D side of our business, we continue to make improvements in shipment as we work with supply chain partners to loosen bottlenecks and take advantage of an improving labor market. I am confident that with the effort of our employees and supply chain partners, we will be able to overcome these challenges as we work our way through the remainder of 2023 and into 2024.
And so certainly heightened interest.
There from the customer bases in terms of supply chain resiliency as you may know today, Taiwan.
Is the main source of supply the commercial satellite area.
And some of the customers are comfortable with that some of the customers are.
Concern that that really isn't a long term supply chain resiliency strategy and are looking at moving some business. So.
We're going to continue to try to build the connections overall and.
The last thing I would highlight Mike as we as Ed and I have mentioned this.
Last quarter.
We have now two business units within our aerospace and defense business, which is over $1 billion. Now one is focused on radar. The other is really focused on <unk> for ISR plus space.
Tom Edmund: In the meantime, I wish to thank our employees for continuing to contribute to TTM and our critical mission of inspiring innovation for our customers.
Dan Bailey: Now, Dan will review our financial performance for the third quarter. Dan? Thanks, Tom, and good morning, everyone.
That business really is working on developing.
That commercial satellite and defense space business, So definitely an area that we're focused on.
Dan Bailey: I will review our financial results for the third quarter that were included in the press release distributed today, as well as on slide six of the earnings presentation that is posted on our website. For the third quarter, net sales are 572.6 compared to 671.1 million in the third quarter of 2022. The year-over-year decrease in revenue was due to declines in our automotive, medical, industrial, and instrumentation, and networking in markets. Partially offset by growth in our data center computing in market.
Okay. Thank you just just one more.
If you have this you have had this customer engagement side for a long time and it shows.
Time from concept to prototype pilot production with <unk> being the.
The longest but <unk> seen those cycles shorten given the department of defenses.
Herb did shift to improve cycle times and move to more rapid iterative deployments like particularly with the space force, but other parts of the Dod as well.
Dan Bailey: Gap operating loss for the third quarter of 2023 was 10.2 million- This compares to operating income of $49.8 million in the third quarter of 2022. The current year results included goodwill and paramet charge of $44.1 million, related to the RF and S components reportable segment, which was the commercial portion of the Anoron business we acquired in 2018. Due to weak demand from telecom equipment companies in the wireless infrastructure market, projected revenues and profits have been reduced, resulted in impairment.
So definitely that's the intent of the Dod.
To start to shorten that I talked about that 18 months.
Sometimes 24 months in terms of how long it takes for.
Given program to work its way through there is a.
Definitely a heightened sense of urgency coming out of the Pentagon.
Dan Bailey: On a gap basis, net loss in the third quarter of 2023 was $37.1 million, or $0.36 per diluted share. This compares to gap net income of $43.5 million to $0.42 per diluted share in the third quarter of last year.
I would say Mike.
That has yet to really translate into concrete.
Our concrete activity or changes in process.
So certainly I know our customers are focused on this are the primes are focused on this that are working with the department of defense.
Dan Bailey: The remainder of my comments will focus on our non-gap financial performance. Our non-gap performance excludes M&A related costs, restructuring costs, certain non-cast expense items such as amortization of intangibles, impairment of goodwill and stock compensation, gains on the sale of property, and other unusual or unproductive items. We present non-gap financial information to enable investors to see the company through the eyes of management and to facilitate comparisons with expectations and prior periods. Gross margin in the third quarter was 20.8% in comparison in 19.7% in the third quarter of 2022.
I think that would be a really positive development.
And defense and certainly the intent is there so.
Again, thats going to take some some decisions some critical process related decisions.
And we'll see how that all unfolds, but so far it hasnt hasnt happened, but good good positive signals that it may in the future.
Okay. Thank you very much.
Thanks, Mike.
Our next question.
Dan Bailey: The year on year increase was due to a more favorable product mix and improved execution in the North America region, partially offset by lower revenues and less premium in our commercial markets. Selling and marketing expense was $17.9 million in the third quarter, or $3.1% of net sales, versus $19.1 million or $2.8% of net sales a year ago. Third quarter GNA expense was $37.7 million or 6.6% of net sales compared to $38 million or 5.7% of net sales in the same quarter a year ago.
Our next question comes from William Stein with <unk> Securities. Your line is open.
Great. Thanks for taking my question.
I would like to ask for an update on supply chain conditions in particular in the aerospace defense.
Part of the business as I recall this is Ben.
This has created.
Very long lead times.
For you to deliver and I wonder if there's been any change in that or any.
Dan Bailey: In Q3 2023, research and development was $5.9 million or 1% of revenues compared to $7 million, also 1% in the year ago quarter. Our operating margin in Q3 was 10.1%. This compares to 10.2% in the same quarter last year. Interest expense was $9.6 million in the third quarter compared to 10.4 million in the same quarter last year. During the quarter, there was a positive $0.9 million foreign exchange impact below the operating income line.
Okay.
Any anticipated change in the near future.
Yes, okay. Thanks.
The.
So we've been focused.
For.
Since the acquisition of Telephonics.
As you move up in terms of complexity. So if you start at the at the printed circuit board foundational level.
Not where the major constraints are it really is concentrated in that integrated electronics area that Dan highlighted right, that's about 50% of our defense business.
Dan Bailey: Government incentives and interest income of $2.2 million resulted in a net $3.1 million gain or a $3 cents positive impact EPS. This compares to a gain of $10.3 million or an 8 cents impact on EPS in Q3 last year. Our effective tax rate was 12.6% in the third quarter resulting in tax expense of $6.5 million. This compares to a rate of 15% or tax expense of 10.2 million in the prior year.
That's where we're focused on that.
Assembly has is relatively complex, but when you move to a full system build that's when it really gets complex.
<unk>.
Have been focused on incremental quarter by quarter improvement we made some some critical decision soon after the acquisition in terms of.
Larger orders with our with our supply base to get their attention on critical bottleneck areas I am glad to say that those parts are now arriving.
Dan Bailey: Third quarter net income was $44.9 million or $0.43 per minute share. This compares to third quarter 22nd income of $5.57.9 million or 56 cents per minute share.
So think about that lead time, so we're looking at essentially a year that it took to get to get a number of those bottleneck parts and start to see them showing up on our docks.
Dan Bailey: Adjusted EBITDAF at the third quarter was $84.1 million or $14.7% of revenue. Compare with third quarter 2022, adjusted EBITDAF of $102.5 million or $15.3% of The depreciation for the quarter was $23.9 million. Net capital spending for the quarter was $33.7 million. And Q2, our capital spending was higher than normal due to a $20 million deposit related to fit out cost associated with the new building and the name. It's expected to be refunded in Q3 as part of the overall least structure for the facility.
And but they are showing up now.
That's great. So the decisions that we made then starting to pay off now.
We're going to continue to work on that incremental quarterly improvement.
But we do still see supply chain constraints.
Outside of the business.
And better.
Dan Bailey: However, the least structure has changed and that money will not be refunded. We expect to complete the fit out in Q4. For an additional $50 million capital spending.
Better than it was partly because the decisions we made partly because the climate has improved a bit our suppliers have been able to ramp a bit labor availability has improved allowing them to do that but we.
Dan Bailey: Cash flow from operations in the third quarter of 2023 was $58.9 million. We repurchased approximately 1 million shares of common stock for $14.6 million at an average price of $14.33 per share. Cash and cash equivalence at the end of the third quarter of 2023 total $408.3 million. Our net debt divided by last 12 months, EBITDA was 1.5 times at the low end of our targeted range of 1.5 to two times.
We still have those constraints.
And I think they will.
Gary.
As I've said through the end of this year into into early next year.
We'll continue to see those constraints.
<unk>.
Making progress that's the key.
I do have a follow up if I can.
I'd like to ask you about the new facility.
Youre building in Syracuse.
Is that intended to address incremental demand.
Dan Bailey: Now I will turn to our guidance for the fourth quarter. We project total revenue for the fourth quarter of 2023 to be in the range of 550 to 590 million and non-gap earnings to be in the range of 34 cents to 40 cents per diluted share.
In the future or will this be more a matter of shifting and consolidating where you build into a new more efficient factory.
Dan Bailey: The expected sequentially client in EPS is primarily due to lower gross margins from less favorable product mix and cost associated with the ramp of our Penang facility scheduled for completion at the end of the year. The EPS forecast is based on a diluted share count of approximately 105 million shares, which includes the dilutive effect of outstanding stock shoppers and other stock awards. We expect SGNA expense to be about 9.8% of revenue in the fourth quarter and R&D to be about 0.9% of revenue. We expect interest expense of approximately 11.4 million and interest income of approximately 2 million. Finally, we estimate our effective tax rate to be between 12 and 17%.
So so two part two part answer.
Number one absolutely. This is new program requirements. These are future requirements.
For obvious reasons I can't go into great detail, but.
What I can tell you is as in our commercial world right, where customers are driving towards miniaturization, so trying to get more components onto a smaller space smaller footprint. That's that's a critical carrying faster and faster signal speeds.
Critical right.
Then material changes to handle the thermal management required to carry those speeds.
Dan Bailey: To assist you in developing your financial models, we also offer following additional information. During the fourth quarter, we expect to record amortization of intangibles of about 13.8 million. Stock-based compensation expense of about 6.4 million. Non-touch interest expense of approximately 0.5 million and we estimate depreciation expense will be approximately 24 million.
<unk> is also critical so.
All of those facets.
Are feeding into program demand this is future program demand.
And.
While I would say that future ramped demand. So the second part of that question is we are building.
Dan Bailey: Finally, I'd like to announce that we will be participating in the Bank of America leveraged finance conference in Boca Raton.
Some ultra HDI boards today in our existing footprint.
On November 28th, the Jeffries industrial conference on November 29th and Palm Beach and the Barclays Technology conference on December 5th and San Francisco.
It is rather inefficient and the yields are not optimized.
So relatively small volumes today thank goodness.
Operator: That concludes our prepared remarks.
Now we'd like to open the line for questions. Operated? Thank you.
As you know.
So some of this demand could overwhelm given small facility. So the facility that we are going to build in Syracuse will be purpose built.
At this time, we'll conduct the question and answer session. As a reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for our first question.
To handle to build ultra HDI printed circuit boards in them.
Efficient process.
Jim Rashidi: Our first question comes from Jim Rashidi with Need Him & Company. Your line is open. Hi. Good morning. Congratulations by the way of the quarter. I wanted to talk to you a little bit about this. The strength you saw in the gross margins, he talked about some of the factors that contributed to it, you know, clearly mix the utilization in North America. I wanted to understand that a little more because it looks like it didn't change the PCB capacity utilization, didn't change from Q2 yet you're talking about better efficiencies in North America contributing to the performance.
That deals with the bottleneck areas that are that we struggled with today.
So.
So that's how we're looking at is developing that will free up.
A bit of the capacity.
And some of our smaller facilities today that are that are struggling to build this.
These boards.
Access really building them, but not as efficiently as we as we will be able to in the future.
Thank you.
Thank you will.
One moment for our next question.
As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Jim Rashidi: So maybe you could start there and just give me a little better understanding as it relates to that. Thanks. Sure, Jim, let me let me cop I'll comment first on the utilization, then I'll let Dan cover the gross margin. In terms of utilization in North America, we always look at this is when it comes to North America, not a great indicator because we're really focused on plating capacity in terms of the calculation.
Our next question comes from Tien Park with Stifel. Your line is open.
Good morning, and thanks for taking my question I just had one on your data center business you saw some nice upside in the quarter. So could you talk a little bit about how you're differentiated versus some of the.
The Asian peers or competitors, you guys compete against and I'm doing the math correctly. Your Q4 guide implies a sequential decline. So can you talk about the sustainability of some of these AI ramps into 24 and the visibility of getting into it.
<unk> ability you're getting from some of your customers.
Jim Rashidi: And as we highlighted in the script, and you know, this is a great example this quarter where we actually with some of the more advanced product that we were running, we found that that plating was not the bottleneck we were running into bottlenecks elsewhere in the process. And so in that case, you know, when we're running high mixed low volume product, we're running a bit higher ASP, more advanced product, that plating capacity indicator isn't really all that accurate.
Sure.
Yes so.
Differentiation in terms of competition, but what we focus on.
And this is true of <unk>.
All of our commercial areas is really differentiating through our field application engineering support for.
For those customers so as their early in their design phase.
Supporting that design supporting supporting that design and then doing the proper design for manufacturing for those customers.
Sponsored Lee.
Jim Rashidi: So it was a, you know, a better quarter certainly in North America than that utilization number indicates. I also wanted to just highlight that we have added plating capacity, actually a very efficient plating capacity we've added into several of our facilities in North America over the last 18 months or so. We've added that capacity primarily for capability purposes because we were seeing customers move in a direction in terms of quality requirements that demanded an upgrade in our plating capacity also allowed us to incorporate more automation and therefore lower the labor content in those facilities.
That allows us to do the prototyping.
And that prototyping developing developing into commercial production and ramp in our facilities.
Jim Rashidi: Those were the primary reasons for adding plating capacity. But again, if you look at the total plating capacity calculation, that means we're adding plating capacity in there for utilization rates would fall. So hopefully that gives you an explanation for utilization Jim over to you Dan on gross margin. Thank you Tom and hi Jim. Primarily the gross margin improvements sequentially in both North America and Asia Pacific are driven by labor and production efficiencies improvement and in North America in particular, you know, increased improvement in our supply chain management.
Unfortunately that has gone well with the latest generation of <unk>.
AI degenerative AI.
<unk>.
And that product generally right now, we're seeing about 50% of our data center computing demand coming from from that.
Generally of AI area.
You are correct that sequentially, we're looking at being slightly down in the fourth quarter in data center.
<unk>.
But year on year still strong double digit improvement.
And what's happening there so.
A few things on the positive side, we are seeing a little bit of a better spread from a customer standpoint. So that's good to see.
And what we expected to see and Thats starting to happen here as we are moving into the fourth quarter.
In the meantime, our customers are dealing with tight supplies, particularly of chips as we understand it.
Theyre seeing terrific very strong demand.
<unk>.
But a little bit of tight supplies.
In certain areas that are.
That are that are supporting a slight decline in demand.
Jim Rashidi: We're still, you know, working down that the math towards managing the supply chain in the IE area, but we are getting better there, so that's improved a bit. And then favorable mix in both North America and Asia Pacific primarily and Asia Pacific as well, favorable product mix in Q3 versus Q2. And just as a reminder that when Dan refers to IE, that's the integrated electronics portion of our North America production, so it's the non PCB portion of North America production.
And then in anticipated pick up again through the course of next year.
So I would view that as a short term situation.
Also just as a reminder, we really.
It's a fantastic growth this last quarter, we were up 55% sequentially and data center.
So those were orders to fill requirements early stage requirements and into ramp for our customers.
Also quite natural that there would be a little bit of a.
Jim Rashidi: Got it in the follow-up question I have, and time to get alluded to it, which is the unfortunately increased geopolitical crisis. I'm wondering, yeah, what if any effects are you seeing or hearing from your defense customers and light of what's going on? Yeah, so it usually takes a wild gym for that to filter through to us. I think if you look at Ukraine as an example, our customers about 12 months to sort of get defense department signals through to their order book and then they did redesigns and started placing orders to us.
Little bit of a Scott.
Slowing down their demand.
As the customers now that we've got the inventory in place.
Jim Rashidi: So as you know, 12 to 18 months before we started seeing heightened demand, javelin being a great example of that. Certainly have seen that heightened demand coming, coming due to the Ukraine conflict. I would expect the same as, you know, as the government supports Israel. Again, I would expect that to take a while, you know, 18 months to good indicator in terms of how long it takes for those signals to travel through the chain.
As the customers now.
Take that inventory into into their product.
So that's really what we're what we're seeing in data center.
Thanks very much.
Mhm. Thank you that concludes the question and answer session. At this time I would like to turn it back to Tom Edman for closing remarks.
Okay sure I do want to cover one one area usually asked a question about which is automotive.
To.
Let you all know that we did have a strong.
Bookings quarter in terms of programs and automotive.
We booked a lifetime program value.
Approximately $125 million.
That compares to the second quarter of last year when.
Alright second quarter of this year, when we booked $95 million.
And year to date.
We have now both from a program booking standpoint.
<unk> value of $564 million all of last year, we booked a value of $530 million.
So really strong success there those programs of course feed into production of record generally the following year to 18 months after we've registered the.
Jim Rashidi: In the meantime, of course, demand signals continue to be very strong from our defense customers. And again, we enjoyed a strong bookings quarter, expecting the same if not better in the fourth quarter. Thanks very much. Thank you. One moment for our next question.
Booking.
And then those programs are spread out over multiple years, but good to see that kind of momentum.
And then finally I just wanted to thank everyone for joining us.
Reiterate a few of the critical points number one we delivered non-GAAP EPS well above our guided range.
Was due to improved execution in North America.
Mike Crawford: Our next question comes from Mike Crawford with the Riley Securities. Your line is open. Thank you also in defense. I know if you're breaking out space separately now at 7% of AMD revenue and I know you're chasing commercial space opportunities. There are a lot of commercial space players out there, although some are way bigger than others. Are there any that like SpaceX that that is just vertically integrated and you're not pursuing or are you talking to everyone or is anyone more promising than others.
Revenues were in line with our guided range.
Second strong cash flow from operations at 10, 3% of revenue.
That enabled us to repurchase stock and maintain our solid balance sheet.
Third we announced our intent as you saw and to build a new advanced printed circuit Board facility in North America in Syracuse.
Jason to our existing Syracuse facility to serve our aerospace and defense customers really excited to be able to announce that greenfield effort for our defense customers feeding future demand.
Okay, Mike, how you doing? We wanted to, yeah, so on commercial space in particular, they're interesting developments going on there. I would say that we talk to most of the major players in commercial space. Some of those players are more on cost reduction than supply chain resiliency. When that becomes the case, we're, you know, that's business that we may not pursue. When they're looking at quality requirements and or supply chain resiliency requirements that we can service out of North America or in the future out of Malaysia, that's when there's a decent fit.
So really tremendous quarter again, I'd like to thank our employees, our supply base as well our customers and of course all of you for your support thank you very much.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Okay.
Okay.
[music].
Okay.
Okay.
And so certainly heightened interest there from the customer basis in terms of supply chain resiliency. As you may know today Taiwan is the main source of supply, the commercial satellite area. And some of the customers are comfortable with that. Some of the customers are concerned that that really is in the long term supply chain resiliency strategy and are looking at moving some business. So, you know, we're going to continue to try to build the connections overall.
Yes.
[music].
Thanks.
Okay.
[music].
Mike Crawford: And the last thing I highlight, Mike, is we, and I mentioned this last quarter, we have now two business units within our aerospace and defense business, which is over a billion dollars now. One is focused on radar. The other is really focused on C4, ISR plus space. And that business really is working on developing that commercial satellite and defense space business. So definitely an area that we're focused.
Okay, thank you, just one more. You've had this customer engagement slide for a long time and it shows, you know, time from concept to prototype, to pilot to production with A&A, A&D being the longest, but aren't you seeing those cycles shortened given the Department of Defense's attempted shift to improve cycle times and move to more rapid iterative deployments like particularly with the space force but but other parts of the DOD as well.
So definitely that's the intent of the DOD to start to shorten, you know, I talked about that, that 18 months, sometimes 24 months in terms of how long it takes for a given program to work its way through. There, there is a, definitely a heightened sense of urgency coming out of the Pentagon I would say, Mike, that that that has yet to really translate into into concrete, you know, a concrete activity or changes in process.
So certainly I know our customers are focused on this or the primes are focused on this, they're working with the Department of Defense. I think that would be a really positive development in defense and certainly the intent in the process. So, you know, again, that's going to take some some decisions, some critical process related decisions, and we'll see how that all unfolds, but so far hasn't hasn't happened, but good, good positive signals that it may in the future. Okay, thank you very much.
Thanks, Mike.
William Stein: One moment for our next question. Our next question comes from William Stein with truest securities. Your line is open. Great, thank you for taking my question. I'd like to ask for an update on supply chain conditions in particular in the aerospace defense. Part of the business is I recall this has been, you know, this has created sort of very long lead times for you to deliver, and I wonder if there's been any change in that or any. Any anticipated change in the near future.
Tom Edmund: Yes, thanks. Well, the so we've been focused and really for since particularly since the acquisition of caliphonics, you know, as you move up in terms of complexity. So, if you start at the at the printed circuit board foundational level, that's not where the major constraints are. It really is concentrated in that integrated electronics area that Dan highlighted, right? That's about 50% of our defense business. So, that's where we're focused on. That's assembly is relatively complex, but when you move to a full system build, that's when it really gets complex.
Tom Edmund: We have been focused on incremental quarter by quarter improvements. We made some some critical decisions soon after the acquisition in terms of larger orders with our supply base to get their attention on critical bottleneck areas. I'm glad to say that those parts are now arriving. So think about that lead time. So we're looking at, you know, essentially a year that it took to get to get a number of those bottleneck parts and start to see them showing up on our docs. But they are showing up now.
Tom Edmund: That's great. So the decisions that we made then starting to pay off now. We're going to continue to work on that incremental quarterly improvement, but we do still see supply chain constraints on that side of the business. And better than it was partly because the decisions we made partly because the climate has improved a bit. Our suppliers have been able to ramp a bit labor availability has improved allowing them to do that. But we still have those constraints, Will. And I think they'll carry on as I said, through the end of this year into early next year, we'll continue to see those constraints, but making progress.
That's it.
William Stein: I do have a follow up if I can. I'd like to ask about the new facility that you're building in Syracuse, is that intended to address incremental demand in the future, or will this be a more a matter of shifting and consolidating where you build into a new more efficient factory? So two-part answer will. Number one, absolutely. This is new program requirements. These are future requirements, for obvious reasons, they can't go into great detail.
William Stein: But what I can tell you is, as in our commercial world, where customers are driving towards miniaturization, so trying to get more components onto a smaller space. A smaller footprint, that's a critical. Carrying faster and faster signal speeds, critical. Then material changes, the handle the thermal management required to carry those speeds, and is also critical. So all of those facets are feeding into program demand. This is future program demand. And while I say that, future ramped demand.
William Stein: So the second part of that question is, we are building some ultra-HDI boards today in our existing footprint. It is rather inefficient, and the yields are not optimized. So relatively small volumes today, thank goodness. Because as you know, some of this demand could overwhelm a given small facility. So the facility that we are going to build in Syracuse will be purpose built to handle it, to build ultra-HDI printed circuit boards in an efficient process that deals with the bottleneck areas that we struggle with today. So that's how we're looking at this developing. That will free up a bit of the capacity in some of our smaller facilities today that are struggling to build these boards.
Tom Edmund: Successfully building them, but not as efficiently as we will be able to in the future.
Thank you.
Chan Park: One moment for our next question. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Tom Edmund: Our next question comes from Chan Park with Steve Ful. Your line is open. Good morning, and thanks for taking a question. I just have one on your data center business. I'm just asking my website in the quarter. So could you talk a little bit about how you differentiate versus some of the Asian peers or competitors you guys compete against? And I'm doing the math correctly. Your key for God implies is the control decline.
Tom Edmund: So could you talk about the sustainability is, you know, some of these AI ramps into 24 and the visibility you're getting into. The visibility you're getting from some of your customers. Sure. Yeah, so differentiation in terms of competition. What we focus on, and this is true of several of our commercial areas, is really differentiating through our field application, engineering support for those customers. So, is there early in their design phase supporting that design, supporting that design and then doing the proper design for manufacturing for those customers responsively in a way that allows us to do the prototyping and that prototyping developing and do commercial production and ramp in our facilities.
Tom Edmund: Fortunately, that's gone well with the latest generation of AI, a generative AI on a product, and that product generally right now we're seeing about 50% of our data center computing demand coming from that generative AI area. You're correct that sequentially we're looking at being slightly down in the fourth quarter in data center, but year on year still strong double digit improvement. And what's happening there? So, a few things. On the positive side we're seeing a little bit of a better spread from a customer standpoint.
Tom Edmund: So, that's good to see and what we expected to see and that's starting to happen here as we are moving into the fourth quarter. In the meantime, our customers are dealing with tight supplies particularly of chips as we understand it. They're seeing very strong demand, but a little bit of tight supplies in certain areas that are supporting a slight decline in demand, and then an anticipated pickup again through the course of next year.
Tom Edmund: So, I would view that as a short-term situation, also just as a reminder, we really saw fantastic growth this last quarter. We were up 55% sequentially in data center. So, those were orders to fill requirements, early stage requirements and into ramp for our customers, though it's also quite natural that there'd be a little bit of a slowing down there and demand as the customers now that we've got the inventory in place as the customers now take that inventory into their product. So, that's really what we're seeing in data center. Thank you. That concludes the question and answer session. At this time, I would like to turn it back to Tom Edmond for closing remarks. Okay, sure.
Tom Edmund: I do want to cover one area usually asked a question about which is automotive. To let you all know that we did have a strong bookings quarter in terms of programs in automotive. We booked a lifetime program value of approximately 125 million. That compares to the second quarter of this year when we booked 95 million. And year to date, we have now booked from a program booking standpoint, a lifetime value of 564 million.
Tom Edmund: All of last year, we booked a value of 530 million. So, really strong success there. Those programs, of course, feed into production of record generally the following year to 18 months after we registered the booking. And then those programs are spread out over multiple years. But good to see that kind of momentum.
Tom Edmund: And then finally, I just wanted to thank everyone for joining us, reiterate a few of the critical points. Number one, we delivered non-GAPEPS well above our guided range. That was due to improved execution in North America. And revenues were in line with our guided range. Second, strong cash flow from operations at 10.3% of revenue. That enabled us to repurchase stock and maintain our solid balance sheet. Third, we announced our intent as you saw to build a new advanced printed circuit board facility in North America in Syracuse. Adjacent to our existing Syracuse facility to serve our aerospace and defense customers. Really excited to be able to announce that Greenfield effort for our defense customers feeding future demand. So, really tremendous quarter.
Tom Edmund: Again, I'd like to thank our employees, our supply base as well, our customers, and of course all of you for your support. Thank you very much.
Operator: Thank you for your participation in today's conference.
Operator: This does conclude the program.
Operator: You may now disconnect.
Operator: Thank you for your participation.