TTM Technologies - Q2 2024

Transcript

Moderator (participant)

As a reminder, this conference is being recorded today, July 31st, 2024. Sameer Desai, TTM's Vice President of Corporate Development and Investor Relations, will now review TTM's disclosure statement.

Sameer Desai (VP of Corporate Development and Investor Relations)

Thank you. 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 the risk factors that we provide in our filings with the Securities and Exchange Commission, which we encourage you to review. These forward-looking statements represent management's 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-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 redirect you to the reconciliation between GAAP and non-GAAP measures included on the company's earnings release, which is available on the Investor Relations section of TTM's website at investors.ttm.com. We have also posted on that 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.

Tom Edman (CEO)

Thank you, Sameer. Good afternoon, and thank you for joining us for our second quarter 2024 conference call. I'll begin with a review of our business highlights from the quarter and a discussion of our second quarter results, followed by a summary of our business strategy. Dan Boehle, our CFO, will follow with an overview of our Q2 2024 financial performance and our Q3 2024 guidance. We will then open the call to your questions. Highlights of the quarter's financial results are summarized on slide 3 of the earnings presentation posted on TTM's website. We delivered a strong quarter, and I would like to thank our employees for their hard work and contributions in support of these results. In the second quarter of 2024, non-GAAP earnings per share were above the guided range and demonstrated solid year-on-year growth due to higher revenues and improved operating execution.

Revenues were above the guided range, representing the second consecutive quarter of year-over-year growth due to demand strength from our aerospace and defense and data center computing end markets, the latter being driven by generative AI. The growth in revenues was partially offset by year-over-year declines from our medical, industrial, and instrumentation, automotive, and networking end markets, though these markets did see sequential improvements. Overall, the company book-to-bill was 1.11, with the A&D book-to-bill at 1.26. Demand in our aerospace and defense market, which was 45% of revenues for the quarter, continues to be strong, and we now have a record program backlog of approximately $1.45 billion. 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 demonstrated 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. As a result of strategic transactions in the aerospace and defense end market through the acquisitions of Anaren and Telephonics, over 50% of our revenues in aerospace and defense are now generated from engineered and integrated electronic products, with PCBs contributing less than 50% overall. 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, to service customers in our commercial end markets. This new facility in Malaysia is supporting customers in markets such as data center computing, networking, and medical, industrial, and instrumentation. We continue to make progress, ramping volume production as we manage through ongoing customer audits and qualifications.

In several cases, customer qualifications are taking longer than originally expected, though we are making steady progress. We expect our Malaysia facility to register limited revenues in the third quarter as we continue our production ramp. 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. During the course of 2023, PCB manufacturing operations in Anaheim and Santa Clara, California, and Hong Kong were closed and consolidated into TTM's remaining facilities. During the second quarter, we sold the Anaheim facility and one of the small buildings we owned in Santa Clara, and we continue to ramp production for the transferred parts at receiving facilities.

Finally, I would like to update you on the previous 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 existing Syracuse, New York campus. This new facility will focus on specialized high-technology PCB production, providing customers with reduced lead times and a significant increase in domestic capacity for ultra-high HDI PCBs in support of increasing national security requirements for high-technology PCBs. We have broken ground for the new building and expect initial low-rate production within 18 to 24 months. As previously announced, we expect the investment for phase I of the proposed project, including capital for campus-wide improvements, to be in the range of between $100million-$130 million. Final 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 second quarter sales, compared to 47% of Q2 2023 sales and 46% of sales in Q1 2024. The solid demand in the defense market is a result of a positive tailwind in previous defense budgets, including supplemental funding related to conflicts in Ukraine and Israel, our strong strategic program alignment, and key bookings for ongoing franchise programs. We had a strong bookings quarter with a book-to-bill ratio of 1.26, leading to a record A&D program backlog of approximately $1.45 billion at the end of the second quarter. During the quarter, we saw significant bookings for TPS-80 G/ATOR, MH-60R, and a key restricted program.

We expect sales in Q3 from this end market to represent about 45% of our total sales. Bookings in the aerospace and defense market ship over a longer period of time than in our commercial markets and provide good visibility into future revenue growth. Sales in the data center computing end market represented 21% of total sales in the second quarter, compared to 12% in Q2 of 2023 and 21% in the first quarter of 2024. This end market performed better than expected and saw 93% year-over-year growth to reach an all-time high due to strength from our data center customers building products for generative AI applications. We expect revenues in this end market to represent 21% of third quarter sales.

The medical, industrial, instrumentation end market contributed 14% of our total sales in the second quarter, compared to 16% in the year-ago quarter and 14% in the first quarter of 2024. The year-over-year decline was generally the result of lower demand and ongoing inventory normalization, particularly in the industrial area. However, the industrial market did improve sequentially. In addition, the medical market remained stable, and we saw pockets of improved demand from our semiconductor testing customers as generative AI drove growth in the DRAM market, leading to increased purchases of automated test equipment. For the third quarter, we expect the medical, industrial, instrumentation end market to be 14% of revenues. Automotive sales represented 14% of total sales during the second quarter of 2024, compared to 17% in the year-ago quarter and 13% during the first quarter of 2024.

The year-over-year decline for automotive was due primarily to continued inventory adjustments and soft demand at several customers. However, we experienced solid sequential growth in Q2 tied to inventory normalization and improved demand for internal combustion engine and ADAS applications. We expect our automotive business to contribute 14% of total sales in Q3. Networking accounted for 6% of revenue during the second quarter of 2024. This compares to 8% in the second quarter of 2023 and 6% of revenue in the first quarter of 2024. We saw sequential growth due to recovering demand from certain networking customers. On a year-on-year basis, demand was softer as customers continued to focus on inventory digestion and experience weak end market demand. In Q3, we expect this end market to be 6% of revenues. Next, I'll cover some details from the second 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 45% of our revenue. This compares to approximately 43% in the year-ago quarter and 48% in Q1. 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. PCB capacity utilization in Asia-Pacific was 64% in Q2, compared to 46% in the year-ago quarter and 52% in Q1. Utilization rates improved as data center demand continues to be strong and other commercial markets started to rebound. Our overall PCB capacity utilization in North America was 39% in Q2, compared to 38% in the year-ago quarter and 38% in Q1.

As a reminder, North America utilization figures are not as meaningful as Asia-Pacific because bottlenecks in these high-mix, low-volume facilities tend to occur in areas outside of plating, which is the core process that we use for calculating utilization rates. Our top five customers contributed 42% of total sales in the second quarter of 2024, compared to 40% in the second quarter of 2023. We had one customer with over 10% of our total sales in the quarter. At the end of Q2, our 90-day backlog, which is subject to cancellations, was $633.5 million, compared to $556.2 million at the end of the second quarter last year. As I mentioned earlier, our aerospace and defense backlog increased from $1.39 billion at the end of Q2 last year to a record of $1.45 billion at the end of Q2 this year.

Our overall book-to-bill ratio was 1.11 for the three months ended July 1st. Now, Dan will review our financial performance for the second quarter. Dan?

Dan Boehle (CFO)

Thanks, Tom, and good afternoon, everyone. I will review our financial results for the second quarter that were included in the press release distributed today and are summarized on slide six of the earnings presentation posted on our website. For the second quarter, net sales were $605.1 million, compared to $546.5 million in the second quarter of 2023. The year-over-year increase was due to growth in our data center computing and aerospace and defense end markets, partially offset by declines in our automotive, medical, industrial, and instrumentation and networking end markets. GAAP operating income for the second quarter of 2024 was $39 million, as compared with GAAP operating income of $21.4 million for the second quarter of 2023.

On a GAAP basis, net income in the second quarter of 2024 was $26.4 million, or $0.25 per diluted share. This compares to GAAP net income of $6.8 million, or $0.07 per diluted share in the second quarter of last year. 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 non-cash 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. We present non-GAAP financial information to enable investors to see the company through the eyes of management and to facilitate comparisons with expectations in prior periods. Gross margin in the second quarter was 20% and compares to 19.2% in the second quarter of 2023.

A year-on-year increase was due to higher sales volume, particularly in the data center computing end market, and improved operational execution. Selling and marketing expense was $19 million in the second quarter, or 3.1% of net sales, versus $17.5 million, or 3.2% of net sales a year ago. Second quarter G&A expense was $39.4 million, or 6.5% of net sales, compared to $35.1 million, or 6.4% of net sales in the same quarter a year ago. In the second quarter of 2024, research and development was $8.2 million, or 1.4% of net sales, compared with $6.2 million, or 1.1% of net sales in the same quarter last year. Our operating margin in the second quarter of 2024 was 9%, or 60 basis points increase from 8.4% in the same quarter of last year.

Interest expense was $11.7 million in the second quarter of 2024, compared to $11.3 million in the same quarter last year. During the current year quarter, there was a positive $0.5 million foreign exchange impact below the operating income line. Government incentives and interest income totaling $3.4 million resulted in a net $3.9 million gain, or a $0.03 positive impact to EPS. This compares to a net gain of $5.1 million, or a $0.04 positive impact on EPS in the same quarter of last year. Our effective tax rate was 14% in the second quarter, resulting in tax expense of $6.5 million. This compares to a rate of 17%, or a tax expense of $6.8 million in the same quarter last year. Second quarter 2024 net income was $40.1 million, or $0.39 per diluted share.

This compares to second quarter 2023 net income of $33 million, or $0.32 per diluted share. Adjusted EBITDA for the second quarter of 2024 was $84.6 million, or 14% of net sales, compared with second quarter 2023 adjusted EBITDA of $74.7 million, or 13.7% of net sales. Depreciation for the quarter was $26.2 million. Net capital spending for the quarter was $10 million, reflecting cash inflows of $29.3 million from the sale of two buildings vacated by the closure of our Anaheim and Santa Clara facilities in 2023. Cash flow from operations in the second quarter of 2024 was $41.9 million. We purchased 1.39 million shares of common stock for $25.1 million at an average price of $18.09 per share. Cash and cash equivalents at the end of the second quarter of 2024 totaled $446.2 million.

Our net debt divided by last 12 months' EBITDA was 1.4x, below the low end of our targeted range of 1.5x-2x. Finally, we anticipate that tomorrow, August 1st, we will close the refinancing of $346.5 million of a new term loan facility at an interest rate of SOFR plus 2.25%, 50 basis points lower than our previous Term B loans issued in May 2023. Upon closing, the new Term B loans will be issued at par and maintain the same maturity of May 2030. We anticipate using the proceeds from the new term loan facility to refinance $346.5 million of such outstanding indebtedness. We have used cash on hand to pay fees and expenses of approximately $1 million related to the refinancing activity. Once finalized, the new financing is expected to generate annual interest savings of approximately $1.7 million.

Now I will turn to our guidance for the third quarter. We project net sales for the third quarter of 2024 to be in the range of $580 million-$620 million, and non-GAAP earnings to be in the range of $0.37-$0.43 per diluted share, which is inclusive of operating costs associated with starting up our financing facility. The EPS forecast is based on a diluted share count of approximately 103 million shares, which includes the dilutive effect of outstanding stock options and other stock awards. We expect SG&A expense to be about 9.8% of net sales in the third quarter, and R&D to be about 1.4% of net sales. We expect interest expense of approximately $11.3 million and interest income of approximately $2.6 million. We estimate our effective tax rate to be between 10%-14%.

Further, we expect to record depreciation of approximately $26.2 million, amortization of intangibles of approximately $9.3 million, stock-based compensation expense of approximately $8.4 million, and non-cash interest expense of approximately $0.4 million. And finally, I'd like to announce that we will be participating in the Needham Virtual Industrial Technology Conference, August 19th through 20th, the Jefferies Semiconductor IT Hardware and Communications Technology Conference in Chicago on August 27th, and the Jefferies Industrials Conference in New York on September 4th. That concludes our prepared remarks. Now I'd like to open the line for questions. Operator?

Moderator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, press star one one again. One moment while we compile the Q&A roster. And our first question will come from the line of Jim Ricchiuti with Needham & Co.

Your line is open.

Jim Ricchiuti (Senior Analyst)

Hi, thanks. I wanted to go back to the commentary around the utilization in APAC, which, yeah, it increased fairly meaningfully, at least from Q1. And I was hoping you could elaborate on what drove that, how much of a contributor that was to the margin improvement or to the extent it offsets some of the headwinds from financing. Maybe if you could just give a little bit more color on what you're seeing there.

Tom Edman (CEO)

Sure, Jim. You're absolutely right. If you look at the sequential growth in our commercial end markets, that was really what was driving the utilization up. And we had pretty much across the board sequential improvement, but particularly automotive, MII, and networking. So whereas last quarter, most of the facilities were really outside of the data center facility, our other facilities were relatively low on utilization.

We saw the utilization rates climb a bit this last quarter. Certainly, contributed our operating margin in a positive way and helped versus financing. But Dan, any further comments?

Dan Boehle (CFO)

Yeah, I agree with those comments. Financing was still consistent with last quarter, about 180 basis points headwind to the operating profit this quarter. So to Tom's point, that utilization did offset that, which is what we'd expected. But yes, we'll continue to have that headwind. And it's just nice to be able to have the other business offsetting that.

Jim Ricchiuti (Senior Analyst)

And follow-up question. I know you guys don't typically guide beyond the quarter, but I wanted to ask about the two areas of the business where I think you have a line of sight, and that's the A&D business and the data center computing business.

As you think about Q4, is there any reason that you wouldn't see continued strength in those areas? And on data center, how much customer concentration is there in that sector? Thank you.

Tom Edman (CEO)

So sure, sure. The A&D side, as you said, Jim, that's where we have the best visibility. And that program backlog number is a good indicator of the kind of support out there from a booking standpoint. So we have, yeah, certainly good confidence in terms of strength in defense as we go into the Q4 and really into next year, given the program backlog. When it comes to our commercial markets, a little less so, right?

We book programs in. I'd say the second most visibility we usually get is out of auto, where we have at least a six-month strong forecast that we're working from, and that's supplemented by purchase orders that are placed within the quarter. Data center computing comes after that, certainly program visibility, but programs do shift around. And so in that market, as we look into Q4, I think if you look at certainly the momentum behind generative AI, that is a strong indicator for the balance of the year. Certainly, what we hear from our customer base is positive around their expectations. So I think we remain optimistic in terms of certainly through the course of this year. I would just to comment on the other end markets, MII, networking, expected a bit more of an uptick to occur in Q3 heading into the back half of the year.

That hasn't happened to the extent we expected. So Q4, we'll see. Certainly, inventory situations have improved. That's a positive indicator that we'll at least be seeing real demand there. So that's what we're seeing out there in the markets.

Jim Ricchiuti (Senior Analyst)

Tom, just customer concentration, data center, has that changed in these years?

Tom Edman (CEO)

Oh, yeah. Sorry. Thank you.

Jim Ricchiuti (Senior Analyst)

That's okay.

Tom Edman (CEO)

Yeah, yeah. Thank you for the reminder on that. Yeah, the customer concentration does in AI and data center overall remains fairly high. I mean, you really have the hyperscalers and direct chip folks that are driving that demand. So it's a relatively concentrated market, remains so. We have seen a better spread there in terms of customers, but you do still have three, four major customers driving the demand there.

Jim Ricchiuti (Senior Analyst)

Thank you.

Moderator (participant)

And one moment for our next question.

That will come from the line of Matt Sheerin with Stifel. Your line is open.

Matt Sheerin (Managing Director and Senior Equity Research Analyst)

Yes, thank you. Question regarding gross margin. You've had two quarters in a row of sequential margin improvement, and it looks like backing into that for Q3, you're going to have another up quarter. I know one headwind is the ramping of the production in Penang. It sounds like that might be pushed out a little bit because of the, you're saying, qualifications are taking a bit longer. But is that still, I think you said it was 150 basis points headwind to gross margin. So I'm just trying to figure out how should we think about gross margins heading into Q4 and next year once this starts to ramp or is fully ramped?

Tom Edman (CEO)

So this is Tom.

Let me start on the Penang status, and then I'll hand over to Dan to talk about the gross margin. In terms of Penang, yeah, there are a few things going on there. The facility continues to ramp steadily. We will have revenue in the third quarter. What's happened there in terms of the delay, and you're right, we are seeing a delay in terms of our break-even point. We thought that that would come in early Q1 next year. We're probably going to see about a 2-quarter delay to get to break-even there. And what is happening is that a couple of things. Our customers' audits are taking longer than expected, particularly the anchor customer audits. And that's just a, that's sort of an outcome of customers now seeing a greenfield facility. They're not too familiar with greenfield facilities for high layer count production.

Audit requirements have shifted a bit there. That's one piece. The other is related to sample qualification and then sample qualification intersection with program ramp. Always tricky to get that timing right. We're working with our customers to synchronize that timing. That's what's really going on there overall in Penang. Good steady progress, though, in terms of the facility preparation and ramp. Dan and gross margin?

Dan Boehle (CFO)

Yes, sir. Thanks, Tom. You mentioned the headwind from Penang currently at the gross profit margin level. It's about 170 basis points in this period. Going forward in the next quarter, we do start seeing some revenue, so it'll decrease to about 160 basis points headwind to gross margin in the third quarter.

But yes, we do see still some sequential improvements or at least staying at the level that we're at right now in gross margin in Q3. And that's, as we discussed on Jim's question, increased utilization throughout Asia-Pacific on the commercial side of the business, as well as North America factories have been running at very good utilization rates as well. As Tom mentioned in his prepared remarks, the way that we measure utilization in North America is not as meaningful as it is in Asia-Pacific because it's lower mix or lower volume, higher mix. However, we are doing quite well in our North America factories as far as utilization and efficiency rates. So that's more than offsetting the Penang headwind right now.

Matt Sheerin (Managing Director and Senior Equity Research Analyst)

Got it. Okay. All right. Thanks for that. And then another question on the data center.

One, in terms of visibility there, I know some of the EMS players in that space say they have about six months of visibility, but beyond that, it's tough. And I know you have multiple customers, so I'd love to get your take there because we've had several strong quarters, or are we going to be entering sort of a digestion period at some point? And then second, if you could talk about the competitive landscape. I know there are just a handful of players with the global abilities to do big volume PCBs for customers. I'm just wondering if you can maybe give us a little bit more color on that competitive environment. Thanks.

Tom Edman (CEO)

Sure. So yeah, on data center, what we're seeing right now, and as you know, when we talk about data center computing, it really is semiconductor demand and data center demand.

But what we're seeing right now, driven by generative AI, is the data center demand, which historically has been about 60% or so of that demand. Right now, it is upwards of 87%. So we really are seeing momentum there on the generative AI side. I think your comment about visibility is very good, Matt. That's approximately what we see as well, is that we can look into Q4, what we're hearing from EMS partners, as well as from the OEM. So similar kind of visibility into the six months. Hard to say when and if there'll be a digestive period there. Right now, it's still a really nice demand environment. In terms of competition, not a lot of changes. We're still seeing major competition out of Taiwan and Korea. A few of the players there, WUS, Gold Circuit out of Taiwan, Unimicron out of Taiwan.

And then in Korea, ISU continues to be a competitor out of Korea. So those are just some representative names of folks that have the same kind of high layer count and HDI position that we have in the marketplace.

Matt Sheerin (Managing Director and Senior Equity Research Analyst)

Okay. Thank you.

Tom Edman (CEO)

Thank you.

Moderator (participant)

Thank you. One moment for our next question. And that will come from the line of Mike Crawford with B. Riley Securities. Your line is open.

Mike Crawford (Senior Managing Director and Head of Discovery Group)

Thank you. Now, correct me if I'm wrong, but I believe most of that data center business now is coming out of China. And you don't necessarily expect much of that to move to Penang, or is that something that could drive further growth in Penang from what you initially envisioned with that facility?

Tom Edman (CEO)

Yeah. So slight distinction there. Yeah. So you're right.

The generative AI demand, which really looks at higher layer count demand, that remains out of our principal China facility in Dongguan, where we have been cross-qualifying another facility in China, our Guangzhou facility as well. When it comes to Penang, particularly in the first stages of ramp, the primary customer demand will be coming out of data center computing, but it'll be more of the traditional data center requirements. So you'll be looking at layer counts in the 16-18 kind of layer count as the sweet spot. That tends towards what we think of as more standard technology versus the advanced technology that's required for the generative AI applications. So at least in this initial stage, that's going to be the case.

Of course, as we look longer term at the Penang facility, and particularly as we get into phase two expansion plans, we'll be planning to continue to add plating capacity there that would allow efficient production of that higher layer count and HDI production as well.

Mike Crawford (Senior Managing Director and Head of Discovery Group)

Okay. Thank you. And then just shifting gears, I know that last year, at least for the first three quarters, you had extremely high automotive program lifetime value wins slowed down a little bit in Q4, really slow in March. And that overall vertical does not seem to have improved very much. Does that still remain weak? And what was the win number in Q2?

Tom Edman (CEO)

Sure. Yeah. So our win number did improve. We were up to about $61 million in this most recent quarter. That compares to about $95 million last year. So we are seeing a lower program win number there.

What's really happening is the customers are not releasing programs. Much of this is related to the shift that we're seeing in that market from EV and a strong emphasis in terms of programs being let for EV. Now customers recalibrating as they're starting to see more demand for traditional internal combustion engine, less demand than expected, less demand growth than expected coming out of EV. So they're looking at their own portfolios, their own designs, and sort of taking a step back to reevaluate as they look at what designs to go forward with. So that's what's been going on there. Mike, I think you're right to call it out as a relatively weak environment in terms of program release.

Mike Crawford (Senior Managing Director and Head of Discovery Group)

Okay. Thank you. Then final questions on capital allocation. So you're below targeted leverage. You have $41 million remaining on your buyback.

You have these investments in Malaysia and Syracuse, yet still excess capital deployed. So what are the priorities with that excess?

Tom Edman (CEO)

Sure. We'll continue to look at the share buyback. As you mentioned, we have $41 million remaining there. We did do quite a bit of buyback in Q2 to offset the dilution from our insider vestings of stock. And then we'll continue as well, always looking at the market at opportunities for M&A, as well as whether there's an opportunity to buy back some of our debt. Now, we did just, as I mentioned in my prepared remarks, we are hoping to close tomorrow on a repricing to decrease the interest expense on that current debt. As you've mentioned before, there is some benefit to potentially paying that down. But that's not a priority. As you mentioned, we're at the low end of our leverage range.

So really, we're keeping the powder dry for potential if there's an opportunity in the M&A market. We're continuing to look at that opportunistically.

Mike Crawford (Senior Managing Director and Head of Discovery Group)

Great. Thank you very much.

Tom Edman (CEO)

Thank you.

Moderator (participant)

Thank you. One moment for our next question. And that will come from the line of William Stein with Truist Securities.

William Stein (Managing Director and Senior Analyst of Technology)

Great. Thanks. Tom, can you hear me?

Tom Edman (CEO)

Sure can, Will.

William Stein (Managing Director and Senior Analyst of Technology)

Thanks for taking my question. I thought it might be appropriate to take a second and recognize what a great job you guys did in the quarter. It was a very good result, both revenue and margins. And we deserve some recognition for that. I wanted to ask about two topics.

First, can you remind us with Penang which end markets are ramping there and whether I still sort of have a vague memory of whether or not this is revenue that's going to transition from another GO that you already have, or whether this is more going to be new incremental revenue? Can you refresh my memory on that, please?

Tom Edman (CEO)

Sure can, Will. And thank you. Thank you for your comment. So when it comes to Penang, our anchor customers there come from, as I mentioned earlier, data center computing. That's one critical end market. The other is medical industrial instrumentation and really the industrial and instrumentation space. And so that's where the end market mix is predominantly coming from. And again, that 16-18 layer sweet spot in terms of layer count.

From a geographic standpoint, in the first phase, looking at approximately 20% coming out of China, that's standard technology that we would be moving out of our predominantly the facility that is extremely busy right now with higher layer count requirements for generative AI. So that's been the plan, Will. It's about 20% coming out of China on the balance in new programs. And it's that balance where you really need to you have a number of programs that are starting up. Customers need to make sure that the intersection between our approval for a program and the program ramp make sure that that timing works. And so that's a very delicate situation for our customers and trying to make sure that they can get the forecasts right for these programs as they ramp. And so a little bit of a moving target there.

But again, a lot of really good cooperation with our customers as we look at programs.

William Stein (Managing Director and Senior Analyst of Technology)

Tom, the 80% that's new, that's worth lingering on for a moment, is that new in the sense of new customers or new programs that you never had, or should we instead be more conservative when we think about modeling and think, "Well, this is new, but it's displacing something that you had in the past," like a new program version, but maybe something that you were already building, or is this truly new growth revenue to you?

Tom Edman (CEO)

The bulk of that 80% is new program positioning coming from our customers. And these are existing customers. And what's happening there, Will, is in agreement, particularly again with our anchor customers. We didn't do much standard technology, if you will, in China.

So this is, for us, a market share gain opportunity as they look at standard technology requirements and looking at non-China sourcing for those. So that's where that 80% is coming from. We are working, by the way, on new customers as well. And so I don't want to neglect that. But in terms of the base business plan and as it's associated with anchor customers, it's predominantly that standard technology opportunity and really a market share gain opportunity for TTM.

William Stein (Managing Director and Senior Analyst of Technology)

Right. One other topic I'd like to hit on. In the past, the aerospace and defense business has been challenged by supply chain issues, labor shortages in, I think, upstate New York, if I recall, maybe supply shortages from semis. There've been a bunch of challenges. Can you remind me where we are in terms of addressing those?

Tom Edman (CEO)

Sure. You are absolutely right.

If you step back to, let's just say, early last year, we were in the midst of some tremendous supply chain challenges, over $20 million in terms of revenue impact from those supply chain challenges to TTM and causing real customer pain. And that was a real critical area of focus for us. We stood up a supply chain organization for our non-PCB area, what we call integrated electronics. That was a critical step for us. It's a different supply chain entirely from the printed circuit board area. Really helped. Those folks have been tremendous working with our vendors. We've also seen, of course, an overall improvement in the supply chain. So we're most recent quarter, we still have issues, but we're down to about $5 million. And our prior quarter, Q1, we were at about $8 million to give you a feel for that. So good improvement there.

We're still, like everyone, challenged by labor shortages. That's particularly when we look at incremental labor, not a huge issue. We're able to source labor. It takes a little while, but we're able to source labor. When we're ramping, that's a bit more of a challenge. If you think about these receiving facilities from our shutdowns last year, as we're bringing labor now into those receiving facilities, that's been more of a challenge with facilities that are ramping. Still making progress there. But when you're looking at hiring of, let's just say, more than 20 operators in a facility, that's when it takes a little bit more time than I'd like to see. We are making progress there. Supply chain, certainly, still an area of focus, but good solid improvements.

William Stein (Managing Director and Senior Analyst of Technology)

Great. Thank you.

Tom Edman (CEO)

Thank you.

Moderator (participant)

Thank you.

I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Tom Edman for any closing remarks.

Tom Edman (CEO)

Sure thing. Yeah. I just wanted to thank everyone again for joining the call. I wanted to summarize a few of the critical points that we made. First, we delivered non-GAAP EPS and revenues above the guided range. We had solid growth and improved operational performance on a year-over-year basis. We generated healthy cash flow from operations of $41.9 million. We continued to repurchase stock and maintain a solid balance sheet with a net debt-to-EBITDA ratio of 1.4, which is below our target range. Finally, we refinanced our term loan, resulting in that we'll close, as Dan mentioned, hopefully in the next few days, and will result in a lower interest rate expense for the company going forward.

In closing, I would really like to thank our employees, significant efforts in the quarter there. I also want to thank our customers and certainly all of you, our investors, for supporting TTM. Thank you very much for joining this call. Goodbye.