TTM Technologies Inc (TTMI) 2002 Q4 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the TTM Technologies fourth quarter 2002 conference call.

At this time I would like to inform you that this conference is being recorded, and all the participants are in a listen-only mode.

At the request of the company we will open the conference up for questions and answers after the presentation.

I will now turn the conference to Ms. Stacey Peterson, TTM's Chief Financial Officer.

Please go ahead.

Good morning and thanks for joining us for our fourth quarter conference call.

Before we get started and I turn the call over to Kent Alder our CEO I would like to make the following statement.

During the course of this call we will make forward-looking statements, subject to known and unknown risk and uncertainty, that could cause actual results to differ materially from those expressed or implied by such statements.

Such risks and uncertainties include but are not limited to fluctuations in quarterly and annual operating results, the volatility and cyclicality of the various industries that the company serves, and other risks described in TTM's form 10-K, form 10-Q and the other reports and statements as filed by the Securities and Exchange Commission.

The company assumes no obligation to update the information provided in this conference call.

Now let me turn the call over to our CEO, Kent Alder.

Thanks, Stacey.

In the fourth quarter, we achieved one of our major strategic objectives with the purchase of Honeywell's Advanced Circuit operations known as ACI.

ACI is a leader in the very high technology end of the printed circuit board industry, with the high average layer count and specialty materials expertise, that make it among the highest, if not the highest of the high-tech board competitors.

With the acquisition, TTM is the only printed circuit board competitor with true high-tech and quick turn capabilities.

With the combination of ACI and TTM, we expect to capture benefits on the cost as well as the revenue side of the equation.

First, on the cost side, we expect to improve operating efficiencies at ACI as well as integrated with our core business.

We will also continue to improve our operating efficiencies at our Redmond and Santa Ana divisions and corporate overhead, as part of TTM, should be significantly lower.

More importantly, we expect to enhance revenues through the combination of ACI's largest customers, Cisco, Sun, IBM, Celestika [ph], and Selectron, Selectron is the only one we currently do a lot of business with.

Consequently, we believe there are excellent opportunities to cross-sell our quick turn capabilities to ACI's blue chip customers.

Likewise, we can cross-sell ACI's high end technology to TTM's existing customer base of more than 560 customers.

And finally, not only does ACI provide a great strategic fit, we were able to acquire the operations at a very attractive price.

Stacey will cover some of the deal specifics during her conversation.

Now, back to the current business conditions.

Demand remained weak in the fourth quarter of 2002.

Revenues were roughly flat with third quarter levels.

Nevertheless, we remained pleased with our ongoing efforts to manage costs and proud of our financial performance relative to the industry and our peer group.

In 2002, we announced a production realignment of and subsequent closure of our Burlington, Washington facility.

Together these actions are expected to produce an annual cost savings of approximately $7 million, or $1.8 million on a quarter basis.

In the fourth quarter, we realized about 65% of our expected cost savings, or $1.1 million.

We are well on our way to achieving our cost reduction goals and expect to realize the full amount in the first quarter of 2003.

And today, we announce further head cut reductions at the Redmond facility.

This was due to a mixed shift and relative demand weakness at Redmond.

Additionally, it reflects the elimination of several high level positions that became redundant with the acquisition of ACI.

As a result of these lay-offs, we expect to generate annual cost savings of approximately $1.8 million.

We should see part of this in the first quarter of 2003 and realize the full amount in the second quarter.

During the fourth quarter, our production continued to reflect the high value end product mix, with quick turn boards, representing 52% of revenues up from 39% in the fourth fourth quarter of 2001, and 45% in the third quarter of 2002.

As for the average layer count statistics, obviously the numbers will increase significantly going forward with the inclusion of ACI, which has an average layer count of 18.

For the fourth quarter of 2002, our average layer count was 8.6.

And products with 12 or more layers accounted for 26% of revenues.

On a proforma basis, our Chippewa Falls [ph] plant, increased TTM's average layer count to 13 and products with 12 or more, account for 58% of revenues.

So now let me turn the call back to Stacey who will discuss business conditions and the outlook.

Thanks, Kent.

As Kent said the big news of the fourth quarter was our acquisition of ATI.

Let me give you some specific details about what we paid and what we actually received in return.

The acquisition cost including all fees and expenses was approximately $1 million.

For that, we received $10 million in networking capital and PP&E with a book value on Honeywell's third quarter balance sheet of approximately $32 million.

As far as liabilities go we assumed payables in the normal course of business and a contingent separate severance liability for about one year.

Moving on to the highlights of our financial performance for the fourth quarter, I'll start with revenues.

Year over year, revenue comparisons were still negative given the decline in the market and continued weakness.

But looking at revenues sequentially, you can see the business seems roughly stable.

Fourth quarter results including five days of ACI, eliminating the contribution of ACI adjusted revenues from $20.1 million.

This puts the fourth quarter about even with the third which had revenues of $20.6 million.

While ACI had a slight positive impact on revenues, the effect on operating and net income was immaterial.

As ACI operated as essentially break even for the five-day period.

Moving to the gross profit line, gross margins were 11% in the fourth quarter of 2002, compared with $13.8 in the third.

As Kent mentioned we experienced some mix shift, and demand weakness at Redmond which led to higher labor costs.

Additionally, we experienced some temporary labor inefficiencies during the consolidation and shut down of our Burlington facility into Redmond.

We think we have addressed these issues with the lay offs at Redmond announced today.

Our balance sheet remains very strong.

We ended the year with net cash of $8.9 million, compared with net debt of $1.8 one million of 2001.

Our cash level declined by $16 million sequentially from the third quarter to the fourth.

Following the acquisition of ACI, we paid down debt by $17 million which going forward will cut our interest expense in half and more than double our interest coverage.

We have been holding higher cash balances in anticipation of an acquisition that would utilize that cash.

Since we were able to purchase ACI for such a modest amount that cash balance proved unnecessary and we wanted to reduce our costs.

The acquisition of ACI actually enhanced our balance sheet as we gained significant net tangible assets at an attractive acquisition cost.

In the fourth quarter we continued to proactively manage all aspects of our working capital.

Looking at TTM without ACI we made additional progress sequentially from the third quarter to the fourth.

DSOs improved from 43 days to [INAUDIBLE].

However the addition of ACI caused the metrics to expand significantly in the fourth quarter, due to the fact we only included five days of ACI's income statement but consolidated the entire balance sheet.

Looking forward to the first quarter of 2003, we will not have the distortion as we will consolidate an entire quarter's income statement and balance sheet.

Nevertheless, ACI's DSO inventory payable days and cash cycle are all longer than TTMs.

So going forward we expect levels to be higher than they have been historically.

Let me return to a review of the business by type of of services.

On a sequential basis,, overall volume declined 8% in the fourth quarter, offset by an average price increase of 8%, breaking that down, for quick turn fourth quarter volume, increased 16% sequentially while prices declined 1%.

For standard lead time products, volume declined 15% sequentially while prices increased 4%.

Before I move on to the first quarter outlook let me run through some important statistics for the year.

For 2002, depreciation was $10.4 million, cash flow from operations was $9.2 million, and capital expenditures were $7.7 million, which included a $3.8 million dollar expenditure for the building adjacent to our Redmond facility and free cash flow was approximately $1.6 million.

Looking ahead to the first quarter of 2003, we are not assuming any improvement over in overall business conditions in the PCB industry demand.

With a full quarter contribution from ACI, we are projecting first quarter revenues of $38.40 million.

As you may have noticed in the earnings release, going forward, we will limit our EPS guidance to GAAP numbers.

For the first quarter of 2003, we are projecting GAAP earnings per share between break even and a loss of three cents.

Implicit of the guidance for the first quarter of 2003, we anticipate gross margins in the range of 10 to 14%, sales and marketing should remain at 7% of revenues we expect G&A expense of about $3 million which conservatively includes some expenses related to our ACI integration.

Finally, let me comment on our excellent operating leverage.

At the current product mix, each incremental dollar of revenues should generate gross margins of more than 50%.

With that let me open the call to your questions.

Thank you.

The question and answer session will begin at this time.

If are you using a speaker phone, please pick up the hand set before pressing any numbers.

Should you have a question, please press star one on your push button telephone.

If you wish to withdraw your question, please press star two.

Your question will be taken in the order it is received.

Please stand by for your first question.

Our first question comes from John McManus from Needham & Company.

Please state your question.

Yes, good morning.

Good morning, John.

As you go forward with ACI through the year, where is the leverage?

Is the leverage that gross margins will rise from the 10-14%?

Or is the leverage there that sales and marketing and G&A expenses there would come down further?

Could you give us some idea of how those -- those numbers might track there as you go through the year with ACI?

Yeah, John, the numbers and the guidance I gave include ACI.

So we don't break that out separately.

Now, obviously, they probably had a lower gross margin than our overall business historically, so they probably pulled our margins down slightly.

But remember, the cost structure that we inherited is a lot different than it was historically.

So -- because of the lack of depreciation, the efficiency in the labor force and that kind of thing.

So the margins that I guided you on are total for the year, are not for the year, are for the first quarter of 10-14%, they include ACI and where our real operating leverage comes from, in our entire business, this includes ACI --

That's what I'm asking, right.

Fixed costs, a lot of fixed costs, labor is essentially fixed right now, because utilization levels are so low.

And so what you effectively have is a lot of fixed costs.

So with each incremental dollar falls almost to the bottom line and it's in excess of 50% right now for the three plants combined.

Does that make sense?

I want to make sure you understand.

What I'm saying then is the biggest leverage is going to be in gross margin there, as you go through the year, and hopefully revenue increases.

That's exactly right.

That's where the most operating leverage comes from but you're absolutely right, John, it flows through in all aspects of our business.

In the sales and marketing line, for example, part of that is commission related, that's truly variable with sales.

But there's also a good portion of that, I would say about 3% of it in our model, so 3% of the 7% is roughly fixed.

Our G&A is roughly fixed.

And there will be leverage and G&A going forward.

As we integrate the project, there will be cost initial periods will go down in future periods.

Could you comment a little bit there, what would be the gross margin have been in the fourth quarter with 52% quick turn if you didn't have these other items that, you know, labor problems in Burlington and mix shift and -- I mean what would have -- would the normal gross margin have been there for -- for 52% type quick turn operations?

What I can give you for comparison.

It was 13.8 for the quarter, so you would expect it north of there for the quick turn mixed shift.

That was what we had for the third quarter so it went down roughly 3% sequentially.

And what is tangible book value now at the end of the -- at the end of the year?

Tangible book value was about two dollars.

Okay.

I'll give somebody another chance.

Go ahead.

Thanks, the next question comes from Keith Dunne from RBC Capital Markets.

Please state your question.

Hi, Ken, hi Stacey, lots of confusing things going here, but I got to say if you dig in this looks very, very good.

For example couple questions I have.

Depreciation expense you have been running, that, two, three a quarter and all of a sudden in the fourth quarter it jumps up to 3.7.

Can you explain what went on and what we should be looking at for depreciation, expense going forward?

Sure, Keith.

Going forward, it should still be about 2 million a quarter.

Main reason, although we've got ACI now, there's going to be zero value to the PP&E to be depreciated over time.

There was a $1.6 million kind of depreciation item, that's kind of a one quarter add, when we took the impairment charge for the quarter, in the restructuring that was about $3 million, so of that, $1.6 was noncash depreciation related.

So without that, it would have added two cents or something.

Yeah.

The second question; given the quick turn business, you know, went up so significantly in the first quarter, or the fourth quarter, to 52%, and your layer count, you know, stayed around the 8.6 level, doesn't that kind of mask some of the value added, because with quick turn, isn't layer countless important on a quick turn business, in the normal volume business?

Yeah, Keith, I think in our quick turn environment, we sell time first and then the technology aspects second.

So when we -- we're excited to do a quick turn on an eight layer, on a ten layer, just as we're excited to do a quick turn on a 20 layer.

I think our average layer count would more mirror kind of the available marketplace, reflect the layer count there.

One other thing, with quick turn, which I think you're getting to, at that percentage, that's almost all prototype, so if you see -- I don't want to call it a recovery, just a slight little bit of breadth in products coming to market, you can see that number move each faster and there is a lot more leverage because the higher the quick turn percentage, obviously higher the margin.

This is all proto, so as soon as we ramp there should be something that moves faster.

I don't want to go too far ahead because I imagine you're taking market share with people like DDI having a tougher time.

ACI contribution, I had $20 million in my first quarter expectations but running it at $1.3 million for five days it looks probably more like $16 million or something.

Can you give us some color on what ACI should add in the first quarter, realizing we are not going to get it every time.

We probably won't disclose it every time and break it out because we think of it as one unit, in the fourth quarter it was about $20 million and we disclosed that on previous calls and we expect that to be, you know, roughly flat.

So you expect $20 million, so the run rate is going to be higher in the first quarter than it was for these five days?

That's right.

That's right.

Okay.

And my last one or two more quick ones, COGS, I normally think of material content for printed wire boards, the materials and chemicals, about 40% of the sales dollar, implying the leverage might even be, you know, a good deal higher than 60%.

Is materials still running chemicals and things like that, running in the 40% range or is it higher than that these days?

It is actually lower than that, Keith.

And the real reason is just as a percentage of sales remember how we talk about how much operating leverage in our model, it's a much greater proportion today of things like labor, fixed overhead, which, you know, effectively depreciation, and the reason why it is, is because labor is fixed and we've got about 30% capacity upside.

So every dollar you bring to the COG comes to the bottom and it kind of diminishes the percent of materials in the cost of goods sold.

And you talked about -- G&A going down, is integration of ACI was complete, can you give us some color, clearly $3 million you're imply something is not the kind of go-forward rate once you get in a steady state.

Can you give us some color on what the go-forward rate is?

Sure I can.

And let me give it to you in a couple different stages because I think that's the most effective.

We believe especially in the G&A line items we can be mostly integrated in the first quarter.

There are ongoing things that will give you future efficiency savings but let's talk about that first.

I've got about $3 million projected for the first quarter, including integration costs, I would expect for the second quarter to get that down to 2.8, 2.7, and over time, I think I can get it down to around 2.4.

Now, like I said, in the short-term I would expect if to go about 2.8, 2.7, by the middle the year.

And my last question, I will turn it over, can you give us a proforma cash cycle, you know, first, second quarter, you know, when we get into a steady state with ACI, because clearly they have a different asset turn type of model.

What does that look like in inventory turns and DSOs?

Sure and you guys knew that the reason why it looks like it is so artificially high is we just got five days of income but we've got a full balance sheet there.

You actually did better on inventories in dollars and ARs than I had because I forecasted that so I was too conservative, I guess.

Let me tell you what it's going to look like going forward.

DSOs it's just a rough model but I think it should be about 48 days, inventory, probably around 30, and our payables around 53.

So when you say inventory, you're talking days then?

Days.

So in terms of 12 --

That's about right.

So in terms about 12.

Thanks very much.

Good job.

Sure.

Thank you, the next question is Adrian Daws from Hartwell.

Please state your question.

Congratulations on the quarter.

Can you talk a little bit about the potential cross-selling opportunities and how long one would expect it would take for some of those developments to come to fruition?

Yeah, sure, we have some very exciting opportunities here with the customer base, I think as you know, we didn't have much overlap between the customer base, so we have a lot of -- over 550 customers that are traditional TTM that we have an opportunity to sell, and then the quick turn capabilities with the blue chip customers.

Now, having said that, with today's market conditions, that that process gets slowed some.

And so we anticipate that over the next three, or I guess five to six weeks, we will begin to maybe crack some barriers there and be able to increase our service to our customers.

But in terms of the guidance you gave or Stacey gave for the $20 million or so, implicit from ACI, not much cross-selling is assumed in that number or guidance?

That's right.

That's exactly right.

And one other thing, there are some -- I think we're hitting it hard and we're doing a good job on the cross-sell but some of the cross-sells will require qualification efforts at each of the individual plants which will take longer.

But as Kent said, we will start to get some cross-selling successes in the next month and a half or so, but when you look, a couple quarters out we should see some pretty big success in that area.

Great.

Thanks a lot.

And congratulations.

Thank you.

Our next question comes from Jim Savage from Thomas Weisel Partners.

Please state your question.

Hi.

Looks like thinks are getting good for you.

There are a few things I want to address in terms of a competitive situation.

One of your competitors preannounced a pretty rotten quarter.

You've got other competitors who are closing plants.

And in southern California, Flextronics, [ph] Sanmena [ph], and Topan [ph] have all announced closures of plants.

Has that affected your business at all in terms of business moving over to you from the plant closures?

Yeah, Jim, I hate to see that with our competitors, but in the long term, that's very positive for us, and we're already getting a look at some of the work that was previously produced in some of those facilities.

I think it takes a little bit of time again to have that come to fruition, given today's market conditions but we're getting a look at some of that work, and I believe that's going to be very positive for us going forward.

Great.

I'm also thinking with a 16% sequential growth in the quick turn business, do you think that that is just an acceleration of quick turn overall or do you think again that that's market share, following up on Keith with the questions on DDI and I guess also with Flextronics.

Yeah, well it never seems to be like one exact thing.

It usually becomes a combination.

So I think there's some definite market share wins in there.

If we continue at the 52% rate, we continue to hope that it goes up from there.

I think that rate is up because of some of the softness our production work, however.

So we're pleased with our quick turn portion of our business and how that continues to improve and be stable and be, you know, a good solid portion of our business.

Okay.

Remember, kind of just on a sequential basis that you do see some seasonality in the quick turn in the first quarter of the year.

Yeah, I know, but if you look on a year over year basis, your quick turn actually grew during the course of the last year.

Absolutely and it has.

So that is -- and remember, Jim, we just talked about this, because we think we've got a lot of opportunity here, that that is almost all prototyping.

It's a very good mix for us when there is any slight in market demand pickup.

And particularly now that you have more volume capabilities than you had before.

Exactly.

More volume, more high-tech capabilities, so I mean the acquisition positions us very well to exploit our quick turn capabilities.

We have a demand pickup.

One last thing.

Have you seen in terms of your -- of the pricing environment, have you seen stabilization there, what do you think is happening in terms of pricing with, again, with all the capacity coming offstream?

You know, Jim, it's still really, really competitive out there, even though our average prices are up, which is a really positive thing.

We've been really good on prices and had some good opportunities but a lot of it reflects a mixed shift also so just want to make sure that's perfectly clear.

It's pretty much dog-eat-dog out there.

I think you've got a lot of competitors as they start to either shut their shop or consider those kinds of conditions in a tough economic like this, that are pricing to stay alive.

So we're not building in any kind of pricing improvement in our forecast because we realize the risk out there, but we feel like it could -- it's probably roughly stable, but I tell you, it's still pretty tight out there, as competitors are trying to stay alive.

I think on the high tech side, though, probably the company that has been most pointed to is -- as being disruptive of pricing was ACI, so if you stabilize pricing at ACI, that may have a real impact.

Yeah, I think, Jim, too, we -- ACI's customer base is pretty important.

And they are a customer base that we want to make sure that they are happy over time.

So you know, there's some market factors in there that we'll take into consideration as we move forward.

But we don't intend on being the low price guy at any time, we think we've got some excellent technology, some great value-added services that we provide, and we believe that we can -- we don't have to be the lowest cost person all the time to create value for our customers.

Okay.

One last thing.

Do you know whether Topan [ph] which is closing their plant in southern California, whether they were doing their Cisco business there?

They were doing some of the lower layer count Cisco business.

And the higher layer count was in Japan?

I'm not sure about that.

I would assume so.

Okay.

Thanks.

Thank you.

Our next question comes from Mark Hassenberg, from Nottingham Capital.

Please state your question.

Good morning and congratulations.

When I looked at ACI three or four years ago they had some exceptional technology but also pretty exceptional costs and lots of excess capacity.

Can you bring us up to date on what happened to the company over the last two or three years, under Allied or under Honeywell, where it is now and how much more opportunity you have going forward and getting it to look for like TTMI?

Let me make a few comments about that, Mark and then Stacey can add to that.

And we've looked at ACI and known them throughout the years, also, and I think we first had some conversations back in maybe 1999.

Right.

And I think at that time, there were six facilities, maybe 2800 employee, and pretty diverse, they had some work involved with the cell phone business, the HDI business and they had to reinvent themselves several times.

When we began conversations, midpoint of the year, we had three facilities and I believe about 1500 employees, and as late as October, that was still at about 1100 employees, and when we assumed the ownership of ACI, the operations had been consolidated down into the one facility at Chippewa Falls [ph] which was the very high-tech facility, within that group, the old Cray research so they've had technology as part of that culture for a significant amount of time.

It's been part of the culture since the -- I guess the birth of that facility.

The head count was less than 700 employees when we took over.

So a lot of the costs that they historically had in that operation and a lot of the volume type product was removed and we -- they were able to right-size that company, and put the company in a position when we took ownership that we felt like would be running at about a break-even.

And so far, we're into this about a month and we haven't been disappointed.

We're pretty excited about the opportunity.

There's been no major surprises.

And so we're excited about the future.

And the nice strategic fit it is -- it is with our company.

The book value that you picked up, the tangible book that you picked up had that been written off by either Allied or Honeywell at any point?

Mark, let me make sure I understand your question.

The value we picked up, had that been reduced over time?

Right.

Yeah, they had taken some significant write-downs in inventory from the various three plants and some of the stuff that I would say was overproduced when they had the three plants earlier in the year and then they this already taken a significant write-down on the PP&E that we assumed so when you look at the PP&E that was on the third quarter balance sheet, it was already written down significantly and a lot of the current assets.

Particularly inventory was written down, too.

So a lot of the things you might have seen in the 8-K were big charges for those items.

So you assume this is a fairly conservative assessment of the book?

Absolutely.

We have actually gone in, you know, we have high quality receivables so that's pretty easy to verify and we have gone in and assessed all of the inventory, the levels, you know, was it written off before, and that's something we worked out actively with Honeywell prior to taking it on, because we weren't going to take any slow-moving inventory that we were going to have to write down.

And one final question.

Over the last two years, you've made some, you know, significant changes in your marketing efforts, and with the acquisition of ACI, does your new thrust in sales fit well with ACI?

Do you need to change it in any way because of the higher tech product that they have?

I think the -- Mark, the customer base had very little overlap, so when we start to look at the sales force that traditionally serviced ACI and the sales force that traditionally serviced TTM, we're bringing the high-tech segment to the TTM sales force, the quick turn and the mid mix volume capability to the ACI sales force.

So you know, we have had some -- we have a few overlaps, we took some action there, with this recent reduction in our head count.

But it's pretty opportunistic for both sales forces at this time.

There are a lot of technical type sales people as you might imagine with the ACI sales force.

We think that is going to be a real positive and we continue to provide value add to to your traditional TTM customers.

Good luck.

Thanks.

Thank you.

Thank you, our next question comes from Ben Ruff from J.P. Morgan.

Please state your question.

Hi, good morning.

When you announced the advanced circuit transaction, you had alluded to the possibility of there being customers who had recently left or at least reduced volumes at the Honeywell plant, perhaps being able to come back into the operation after it had been stabilized.

Is it too early to report any progress on that front?

Mark, I don't think there were any customers that really left, but the -- but certainly the uncertainty that existed at that time was I'm sure in the forefront of everybody's mind and I know that customers were thinking about contingency plans with the uncertain future of ACI.

Now that's been stabilized that's a real positive fact that customers appreciate.

I think most of our customers are pretty excited about the opportunity here and excited about the fact that they have a supplier that they've been doing business with for a long period of time, that is now -- that now has a certain future.

So I think that will be very beneficial moving forward and having that uncertainty eliminated.

Could you maybe talk a little bit about what happened with your segment breakdown by end market I guess.

There are interesting dynamics it looks like high end computing for example was up almost 50% sequentially.

Is that due to the inclusion of the ACI revenue?

No, the numbers that are reported there are totally the TTM fourth quarter revenue.

The market segment breakdown, of course the network remained about the same, the high end computing was basically a product mix shift that generated some more revenues, in that segment of the marketplace.

I might add our industrial and medical, it was down, there was some seasonality and I guess involved in that, and so forth, and we had a nice pick-up with a few computer-based type companies that fit into that category.

So we were grateful for the appreciation that we had in those market segments, we think that we'll continue to improve in all segments of the marketplace.

And lastly, could you provide us a sense of what your segment breakdown is going to look like when a full quarter of ACI is included in the revenue lines?

Yeah, it is will be -- networking communications with ACI, we'll forecast it at about 40%.

High end computing, about 30%.

Industrial, medical, 15%, computer peripherals about 4 -- excuse me, 11%.

That reflects the concentration of ACI customers and the networking communications segment as well as the high end computing.

Okay.

Great.

And should we think of all of ACI's revenue as being standard lead time revenue?

We have some quick turn work that we do out of that facility.

But it's very limited.

And it's more of a five to ten day nature.

But it's --

It's a very small --

There are some customers that want some quick turn product produced out of that same facility.

So we will have that capability there, but it's somewhat limited.

Okay.

Thanks so much.

Thank you, our next question comes from Michael Walker from Credit Suisse First Boston.

State your question.

Thank, hi guys.

Hi.

I'm having a hard time getting to your tangible book number, too.

Is there a quantity of intangible assets that's factoring in?

Yes, it is.

It's got -- we've got intangibles and goodwill of about $77 million.

And so I was kind of rough in my number before.

Actually for the fourth quarter, if you calculated it out, it is $2.30 and book value per share is $6.24.

Okay and what was operating and free cash flow in Q4?

Operating was $1.6 million and free cash flow was about a half a million.

And the cost savings you talked about in terms of the new $1.8 million per year, is that accrued mostly to the gross margin or the operating margin?

Gross margin.

And do you have a target, kind of a longer term target SG&A type percentage?

Roughly, instead of giving you a percentage, so you can calculate it out, let me give you a fixed dollar out.

To me, I would like to get it down to about -- mid year, you know, go down from 3 to about that sort of 2.7, 2.8 number, and then hopefully by the end of the year, get some additional synergies and things we can get, bringing the three companies together of around kind of roughly 2.4.

And that's --

That's my end of the year target, kind of mid range target of 2.7, 2.8.

And then $3 million for the first quarter.

So that was the G&A side were you talking about?

Yeah, the G&A, sorry.

And then sales is roughly going to be 7%.

And then when you model, remember I don't include in the G&A the amortization of our intangibles which is about $300,000 per quarter.

Okay.

And just back on the industrial end market, I know you said there was some seasonality, but that market has been basically cut in half over the last year, so it seems like there is a secular down trend in an end market that has otherwise kind of held in.

I'm wondering if there is anything else going on there, long term.

You're talking about the industrial medical?

Yeah.

We had at the beginning of the year and even last year, we had some volume type products in the industrial section that were moved to the lower cost provider.

So I think we've taken our hits on that.

And the level we're running at right now would probably be a comfortable level with some normalized growth in the coming quarters and years.

Yeah, but I think overall, Michael, you're right.

You have seen just some kind of flat to some weakness there where we had typically seen like around an 8-10% growth rate in that market.

So we're not seeing that anymore in the underlying market.

I agree with Kent, probably flat for a while with us.

Within that market, there are some positives, some negatives but when you round it all out, I think you end up at the numbers we're at.

Okay.

And then finally, just housekeeping, do you have the top five and ten customers, percent of sales.

The top five was about 35%, top 10, 46%, for the fourth quarter.

I guess give you some information, as we combine ACI, we would anticipate the top five to move to closer to 57%.

With the bigger customers there, and the concentration.

Great.

That should take care of it.

Thanks a lot.

Thanks.

Thank you, our next question comes from Collin Campbell from Brookside Capital.

Please state your question.

Hi guys, hi Kent, hi Stacey.

Great quarter.

Hi.

I joined a little late so I may have missed a few of these.

I apologize if it's redundant but can you give volumes and ASPs by quick turn and standard lead times sequentially, how these are changing?

Sure I will give you the changes.

Basically, volume, sequentially, was down 6%.

And what we saw was -- and this is on a daily basis.

On a daily basis, quick turn was up 18%, standard was down 14.

So you see a mix in percentage.

That's why it doesn't tie to 6.

Quick turn up, 18, standard down, 14, sequentially?

That's exactly right, a total of 6 and the reason that doesn't just add is merely because of the mixed shift and the weighting of each one.

On a price basis, quick turn was down 1% sequentially, and standard was up 4%.

And the --

Once again, the average price was up 8 and that was due to mixed shift from 45 to 52% quick turn.

Okay.

And just to clarify, Keith Dunne's question from earlier, I thought I heard you guys say you expected ACI's run rate to be flat but then I think you said you expected ACI's run rate to actually increase.

In the March quarter and you had said, I thought you said that Q4 ACI was a 20 million run rate.

Yeah I think that was a little confusing, because I think Keith or what I was addressing, so let's make sure we've got it all straight, the five day run rate was probably not on a $20 million rate and that was kind of the end of the year, typically the last week, are not producing as much, your customers are a lot slower so if you just took the five days that we included in our sales, which is about $1 1/2 million, that won't go to a $20 million run rate, but for the quarter, overall, we expect it to be flat with the fourth quarter at $20.

Is that clear?

Yeah it is.

Those were the numbers I was comparing.

Okay.

And the square footage, is there any reduction in the square footage with the additional Redmond restructuring?

No, that didn't change.

Okay.

And can you guys talk about capacity utilization at TTMI legacy facilities versus the ACI facilities and whether or not there's been any trends or changes in that in January, especially in light of Merics's [ph] comments last night on the com sector?

Our capacity utilization from the cap ex standpoint, the equipment we have in place, we're running about 50% level, probably both in the Redmond and in the Santa Ana facilities.

In our Chippewa Falls [ph] facility, that's a little bit higher, probably 65 to 70% capacity utilization.

That utilization, with the softness up in Redmond, we didn't change the utilization from the equipment standpoint, our head count reduction, again kind of brought us in line with more of the market conditions.

Okay.

And did you guys give average layer count?

It was 8.6 for the quarter.

And pro forma, it will be 13.

And last question, how long will the ACI PP&E last?

You guys are running it down to zero now.

How long will it that last before you have to replace it and start incurring additional depreciation expense on the new equipment?

I think one of the benefits that we had kind of an intangible side benefit was as ACI closed six facilities and three facilities, there were a lot of equipment that was consolidated into the Chippewa Falls [ph] facility.

So we're in extremely good position with our equipment, our cap ex budget.

In Chippewa Falls. [ph] As well as Redmond and Santa Ana.

We reinvested heavily through 2000, 2001 back into our existing facilities here in the traditional TTM locations.

Our cap ex budget going forward is four to six million.

And so that's for the entire company.

So we're in pretty good shape from a cap ex perspective.

We've also, which is a great side note to keep cap ex and depreciation down, because at that kind of levels that Kent mentioned, only a portion of that is ACI.

It won't materially affect depreciation.

You might have a couple hundred thousand a year, but we've been able to pick up anything we needed and even if you think in terms of expanding our servicing machinery, this is a great opportunity, at a lot of the auctions, we've been present at a lot of the auctions including the Honeywell one prior to our purchase of that company, and all the other companies that have shut down, we've been able to pick up things on the cap ex at 20% of what we originally budgeted and we recently attended another auction just last week.

So I think what we're going to see is taking opportunities like that and in addition to not very much requirement in the business you're in the going to see depreciation go up too much.

So it's more a year's time horizon as opposed to quarters in terms of when you would need an increase in the cap ex for that?

That's exactly right.

It's definitely longer term.

Sorry, one last question.

Was there any share buy back in the quarter?

There was in the fourth quarter and it was about 125,000.

Is there an average price?

The average price was at 1.80.

About two dollars.

Wasn't it $1.80 or $2.

$1.80 to $2.

Those numbers aren't quite as fresh in our mind as they were a couple months ago.

Thanks, guys.

Thanks.

Thank you, our next question comes from Keith Dunne from RBC Capital Markets.

Just one or two follow-up, please.

Interest expense, you paid down the debt, so how should we look at, you know, interest expense in the first quarter please?

I would model at around 100 to 110 per quarter.

100 to 110, great.

And as far as -- let me just make that note.

And the seasonal downturn and the quick turn, did you something like $11 million in actual sales.

Should we be looking at the seasonal, you know, down 10% in the first quarter or is the seasonal a greater kind of decline than that typically?

I don't think it would be greater than that, no.

Okay.

Great.

And lastly, the Redmond, how many head count cuts are looking at and what is the total head count as we look right now?

The latest RIF was 44 employees, that included some sales people that weren't necessarily tied into the Redmond facility.

TTM traditionally we are about 600 employees and ACI is just under 700 employees.

Great.

Thanks a lot.

Good job.

Thanks.

Our next question comes from Ben Ruff from J.P. Morgan.

Also a couple quick follow-ups, can you maybe provide a little more color, Stacey into the severance liability that came with the ACI?

Sure, basically, what we've agreed to do is make sure there that we are protecting the workers there for a period of nine months after the acquisition.

So we have a severance obligation if we let anybody go within a nine-month period.

And that liability disappears after nine months?

That's right.

That's right.

And our -- to us, that's truly a contingent liability because we took the -- we bought that asset thinking we could make a lot of money off of it and we've got a great employee base with a competitive advantage.

To us, I don't think it's a real liability but I felt compelled to disclose the contingent liability to you.

The fees on the transaction were about half of what you originally recorded.

Anything specially going on there?

Not really.

I think we were able to do some things more efficiently than we thought we were going to be able to do from a fees perspective, and our outside consultants that helped us on the deal.

Great job.

Thanks.

There are no further questions.

I will turn the conference back to Ms. Peterson to conclude.

Yeah, thank you, everybody for joining us, we certainly appreciate your interest in TTM Technologies.

I know we've talked a lot about the numbers today, but just a few comments with regards to our employees at all of our facilities.

We are extremely pleased with the dedication and the hard work, and the execution level of our employees.

These RIFs are a little bit difficult, but as you look forward to the future, we need to take those actions, and that really adjusts our cost basis.

We've got a great group of customers and we'll continue to support them.

This strategic acquisition has been everything we thought it would be.

We're excited about the opportunities, our sales force is excited about the opportunities.

We look forward to a positive future.

So I want to thank everybody for joining today and we will talk to you next quarter.

Thank you.

Ladies and gentlemen, that concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.