TTM Technologies Inc (TTMI) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TTM Technologies financial results conference call for the third quarter of fiscal 2007.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session and instructions will be given at that time.

(OPERATOR INSTRUCTIONS)

As a reminder, this call is being recorded for replay purposes.

I would now like to turn the presentation over to Mr.

Kent Alder, Chief Executive Officer.

Go ahead.

Thanks Patty.

And thank you.

Good afternoon and thanks for joining us for our third quarter 2007 conference call.

I am here in Santa Ana with CFO Steve Richards.

Before we get into any detail, let me mention that during the course of this call we will make forward-looking statements subject to known and unknown risks and uncertainties 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 cyclicalities in various industries that the Company serves, and other risks described in TTM's most recent 10-Q.

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

Also you'll note in our press release issued today that we provide GAAP and non-GAAP financial information.

Specifically with reference to EBITDA, the reconciliation between GAAP and non-GAAP information is provided in the press release.

Now before I get started I'd like to discuss the quarter's results.

I'd like to point out that we report our business with two operating segments.

PCB Manufacturing and Back Point Assembly which we used to refer to as Commercial Assembly.

Back Point Assembly more accurately describes this business segment.

We report separate financial results for each segment as well as for the consolidated company.

With the Tyco acquisition finalized, we are fully integrated and operate as one company.

Thus, our historical pattern of breaking out traditional TTM is not applicable as it no longer holds the relevance it once did.

In that same vein, year-over-year comparisons tend to lose their relevance since we are comparing two entirely different entities, so today our focus is primarily on quarterly changes.

We will, however, discuss some broad changes year-over-year.

Now with that I would like to turn to the results and you'll notice our prepared text is rather lengthy today but we think that will make this call be a lot more efficient.

So third quarter results.

An increase in demand for our high-tech manufacturing services as well as our continued strong demand for aerospace defense fueled a solid third quarter with improved financial performance over the second quarter.

Steve will go into the numbers in detail in his remarks; but we are pleased that our performance has resulted in an increase in revenue, gross margins, operating margins, and bottom-line profitability.

As I mentioned, we divide our business into two segments.

The first is our printed circuit board manufacturing segment which is comprised of nine operations in North America.

We strategically focus on lines of business that are both profitable and sustainable in North America, namely Quickturn manufacturing, high technology, aerospace defense and high mix/low volume.

The second segment is our Back Plain Assembly business which is comprised of two operations.

One in Hayward, California and the other in Shanghai, China.

For the printed circuit board manufacturing segment, third quarter net sales of $140.5 million increased by $1.9 million over the second quarter of 2007.

Operating income of $13.8 million increased by $1.9 million over the second quarter.

For the backplane assembly segment, third quarter net sales of $30.7 million declined by $1.5 million over the second quarter of 2007.

Operating income of $2.3 million increased by about $200,000 over the second quarter.

Now regarding our backplane assembly business.

We have been asked is backplane assembly a vital part of TTM's business and if not shouldn't we divest it?

We have examined this carefully and believe that backplane assembly is an important part of our business going forward and represents a sound business strategy.

We have several justifications for retaining the business.

No.

1, it is accretive to earnings.

Globally, we have two of the largest operations -- one in China and one in North America -- and enjoy a leading market position in both regions.

Our Shanghai operation is growing and China is a key location for the Company.

This business presents us with significant growth opportunities, supporting customers in China and Europe that our U.S.

operations cannot support.

No.

2.

Backplane assembly is complementary to our PCB business.

Our Hayward facility purchases more than half its printed circuit boards from our U.S.

facility which provides a profitable synergy for us.

The products that we manufacture are traditional backplane and related chassis level assemblies.

We also manufacture some specialty rigid flex assemblies.

The third reason?

We see opportunities to improve these operations and optimize financial performance.

And No.

4, there is limited competition.

We do not provide PCB assembly circuits services like most contract manufacturers.

Therefore we have limited competition with the traditional EMS companies.

Our strategic plan for the backplane assembly segment is threefold.

No.

1 continue to grow the business in China.

Second, position Hayward to service new product development in U.S.

spaced system integration needs and the third is improve margins with better coordination between Hayward and Shanghai.

Looking more broadly at China, our interest extend beyond the backplane assembly business.

We have several reasons to acquire a print circuit manufacturing operation in China.

No.

1, the growth opportunities in China are compelling.

Printed circuit board manufacturing is expected to grow at a much higher rate in China than in the U.S.

over the next several years.

Second reason, we can gain a competitive advantage over other printed circuit board manufacturers by extending a complete product offering to our customers globally.

Third reason is we complement our facility specialization strategy by adding a low-cost manufacturing component to our mix.

And we truly become a global company.

Our preferred path for expansion into China is to acquire a company.

We recognize that like all acquisitions there will be challenges yet we are confident in our ability to evaluate, choose wisely and profitably execute an acquisition in China.

We have stringent acquisition criteria and we undertake a judicious assessment of the capabilities of any company that we buy ensuring that it matches the needs of our customers on a global basis.

To be successful, we will only consider expansion opportunities in China that are an extension of our long-standing time and technology strategy that meet our strategic and financial objectives and that represent a clear value to our shareholders.

We have in the past evaluated prospective acquisition candidates in China and will continue to do so.

In fact, we will evaluate wait more opportunities over the coming months as companies recognize the opportunity that exists for a truly global printed circuit board supplier.

With our established track record of successful acquisitions, we have proven our ability to wisely select and quickly integrate strategic acquisitions profitably.

I'm confident in our management team and their ability to successfully integrate and operate a foreign entity just as successfully as we have integrated our domestic acquisitions.

Now turning back to the third quarter results.

Print circuit board production increased 3% sequentially due to renewed demand for our high-tech manufacturing services and continued strong demand from our aerospace defense customers.

Offsetting this was a slight decline of less than 1% in our average panel price.

A shift in product mix was the main driver of panel price decrease.

Market pricing for our printed circuit boards remained essentially stable, quarter-over-quarter.

Because of normal fluctuations in order patterns, we experienced lower demand for our backplane assembly products in the third quarter, primarily with our domestic networking customers.

However a mix shift towards more complex products drove average prices sequentially higher.

Orders in this segment increased towards the end of the third quarter and should remain strong for the fourth quarter.

Now that's look at end markets.

Aerospace and defense increased from 30% of sales in the second quarter to 32% of sales in the third quarter.

A big part of this increase was from a customer ramping orders as they built product that is being directly deployed in Iraq to prevent roadside bomb attacks.

In addition, we began to see our strategy of supporting aerospace defense customers in more of our facilities begin to take root.

In the third quarter many of our traditional commercial facilities increased their sales to aerospace defense customers.

Now sales to our computing and storage customers decreased from 15% in the second quarter to 13% in the third quarter.

This was primarily due to the cyclical nature of programs in this end market, especially among semiconductor customers.

We experienced an increase in sales to our medical, industrial customers in the third quarter.

This end market represented 13% of sales in the second quarter and 15% of sales in the third quarter.

The increase was primarily due to the transfer of work from our Dallas, Oregon facility which we closed earlier this year.

As we mentioned on prior calls, we expect to be able to retain about half of that facility's annual revenue or approximately $20 million per year.

In the third quarter we recorded $5 million in revenue to these customers, most of whom are in the medical industrial end market.

The run rate of this transferred work is right in line with our expectations.

Sales to our networking communication customers declined from 42% of our second quarter sales to 40% of our third quarter sales.

This decline was mainly due to softness in our backplane assembly segment, Partially offsetting this was a return to more normal ordering patterns from a key networking customers in the printed circuit board manufacturing segment.

Our top 10 customers represent a strategic mix of commercial and aerospace defense customers, roughly half from each part of the business.

Almost all of the top 10 customers are customers with whom we have long-standing relationships, some lasting more than 30 years.

I might mention that no customer, no OEM customer was greater than 10%.

In alphabetical order our top five OEMs in the third quarter were BAE Systems, Cisco, Juniper, Northrop Grumman and Raytheon.

Now let's discuss our technological and operational capabilities.

The average layer count of our printed circuit boards in the third quarter was 13.9, an increase from 13.5 in the second quarter.

Forged with more than 12 layers represented 58% of our third quarter sales, up from 57% in the second quarter.

Forage with more than 20 layers represented 28% of our third quarter sales, up from 24% in the second quarter.

In a broader sense we have seen the high-tech nature of our product increase throughout 2007.

We are producing more printed circuit boards that utilize sequential lamination and HDI.

We are also using more lead free and low-loss materials in our manufacturing processes.

These technologies raise our manufacturing costs but we are also able to increase the prices our customers pay.

More importantly, our increase in capabilities with these fast-growing technologies enable us to further strengthen our relationship with many customers and continue to diversity our customer base.

Lead times in general have increased one to two weeks from the second quarter.

Demand from high-tech and aerospace defense customers has pushed lead times to eight to 10 weeks for those product types while lead times for other products have extended to -- slightly to four to six weeks.

Now in closing TTM is the largest company in North America printed circuit board industry with leadership positions in Quickturn, Aerospace Defense, High Technology, High Mix and Backplane Assembly.

Our footprint positions us to support our customers in all aspects of their product lifecycle.

We have a clear direction of where we need to go, what we need to do and how to execute and we look forward to the future.

Now I will let Steve review our financial performance in the third quarter and discuss our outlook for the fourth quarter.

Thanks, Kent.

As you saw in the press release, TTM reported solid results for the third quarter of 2007 with sequential improvement in every financial metric.

Increasing demand for our high-tech manufacturing services was the main driver of improved third quarter net sales of $163.1 million.

Gross margin of 19.2% represented an increase of 100 basis points in the second quarter.

Selling and marketing expenses for the third quarter were $7.1 million or 4.4% of sales, a sequential decline on both an absolute dollar basis and as a percentage of sales.

G&A expense including amortization intangibles for the third quarter was $9 million or 5.5% of sales.

This is up slightly over second quarter G&A spending in absolute dollars but was consistent quarter-over-quarter as a percentage of sales.

In the third quarter of 2007 we recurred a stock based compensation expense of $922,000.

66% of the expense was recorded in G&A, 28% in cost of goods sold, and 6% in selling and marketing.

Operating income of $15.2 million for the third quarter represented an increase of $2.1 million over the second quarter of 2007.

Third quarter interest expense including debt amortization costs declined as we continued to pay down debt.

Third quarter net income of $8.2 million and earnings per diluted share of $0.19 both substantially increased over the second quarter.

Second quarter net income was $6.2 million or $0.15 per diluted share.

TTM's EBITDA growth has been significant.

It speaks to the leverage in our financial model.

EBITDA for the third quarter of 2007 was $22.2 million compared to $20.1 million in the second quarter.

For your reference there is a reconciliation of this non-GAAP measure in the press release.

On a year-over-year basis, sales increased 115% from net sales of $75.8 million in the third quarter of 2006.

Net sales of $163.1 million in the third quarter of 2007.

The increase in net sales consisted of $93.6 million in sales from our PCG acquisition, offset by a $6.3 million decrease in sales from our historic operations, due primarily to softer market conditions in 2007 versus 2006.

Operating income increased from $15 million in the third quarter of 2006 to $15.2 million in the third quarter of 2007.

Earnings per diluted share decrease from $0.25 in the third quarter of 2006 to $0.19 in the third quarter 2007, due to increased interest expense and lower interest income.

We have a very strong balance sheet, excellent cash flow and a very manageable debt position.

As you can see, during the third quarter we have continued to leverage the business and are paying down debt rapidly and ahead of schedule.

As you recall, the $226 million purchase price of the PCG acquisition was financed with a $200 million six-year term loan with the remaining $26 million coming from cash on our balance sheet.

During the third quarter we reduced debt by $11 million, reducing the debt balance to $109 million at the end of the quarter.

In October, we repaid an additional $10 million.

In one year's time we reduced the Company's debt by more than 50% which is extraordinary and a testament to our focus on reducing leverage in order to keep all of TTM's growth opportunities available.

With the debt paydown continuing at an accelerated pace the corresponding interest expense is expected to continue to decline more quickly than leaders had planned.

Cash and short-term investments at the end of the third quarter of 2007 totaled $27.3 million compared to $26.1 million at the end of the second quarter.

Cash flow from operations was $14.2 million for the third quarter.

Net capital expenditures were $2.9 million in the third quarter and depreciation was $5.6 million.

Looking ahead to the fourth quarter 2007 we project revenues in the range of $164 million to $172 million and earnings in a range of $0.18 to $0.23 per diluted share.

The gross margin percentage for the fourth quarter is expected to be in a range from 19% to 21%.

We expect the selling and marketing expense will be approximately 4.4% of revenue and that G&A expense, including amortization of intangibles, will be approximately 5.7% of revenue.

The reduction in our debt balance as I mentioned earlier will result in interest expense including debt and amortization costs of about $2.7 million, compared to $2.6 million in the third quarter.

This slight increase is solely due to increased debt amortization expense because we expect to repay more debt in the fourth quarter than we paid in the third quarter.

Actual cash in interest expense will decline due to lower LIBOR and our lower debt balance.

With that let's open the call to your questions.

(OPERATOR INSTRUCTIONS) Matt Sheerin from Thomas Weisel Partners.

The first question has to do with the book-to-bill ratio that you stated in your press release, said it was 1.23 which is obviously very strong.

Was that -- is that the number that you have now or was it at the end of the quarter and is that in both sides of the business, Kent?

Good question.

The book-to-bill at 1.23 was for our printed circuit board segment.

Our assembly business was 1.05 and these are numbers through the end of September.

The Company as a whole is 1.2 and that compares with the IPC number on the latest data that came out at 1.08 for September.

So we are significantly above the IPC industry average there.

We had strong bookings in aerospace defense, strong bookings in high-tech.

Bookings kind of were strong across the board and they increased throughout the quarter.

Some of those bookings were scheduled for delivery beyond 90 days; so it is probably a little bit more inflated than one might think.

But no matter how you slice it, we had very strong bookings.

I guess the longer than 90 days booking that we are backlogged, that explains why your guidance was up 4% or so in the midpoint right?

Or higher than that?

Right.

And then just on the computing business I understand that there's seasonality there but if you look at the absolute number, you know it's been down several quarters in a row now and certainly down on a year-over-year basis and there has been concern about losing customers to more competitive pricing in Asia.

So could you just talk about your strategy within that segment and your relationships with customers and how you see that playing out?

Yes.

Sure.

With the computing end market -- in the second quarter we had some development and ramp work that really wasn't there in the third quarter.

Mostly around the semiconductor industry.

So that's probably why that is down this particular quarter.

And when in any end market that we look at realize that we have 200 or 300 customers in each one of these end markets.

So sometimes it is a little hard to spot trends, but we are pretty optimistic that any situation where we were losing work because of price to Asia has stabilized and in fact we will see some upside in some of those situations.

So that's good news for this end market and we are also working to develop some key customers.

So I think that in the next quarter we will see some increases in this end market segment on a dollar bases.

I'm not quite sure how it will come out percentage wise, I think in all four of our end markets we are forecasting up on $1.00 basis in all four of those markets.

We will probably be up more in airspace aerospace and defense and networking and communications, but dollar to dollar we are going up in all four end markets.

This is my last question.

Regarding Chippewa Falls where you had layoffs early in the year because of some issues at Cisco.

I understand that you brought some people back.

Could you tell us with a headcount situation looks like there?

And as you are ramping new people and also I understand some new customers, what does the margin profile look like there?

I will talk about Chippewa Falls.

We pretty much got through that situation with the sizable networking customer.

That is all behind us.

We are back to normalized run rates.

That did -- we took that opportunity to have some new customers introduced into that facility so we have a lot more customer diversification than we've ever had.

Some of those technologies are new to that facility so they are a little bit challenging, but I think as we go through the learning curve on those new processes I think we will see some improvements in our efficiencies and yields and so forth.

So overall that turned out to be a real positive for us, given that we had an opportunity to introduce new customers, diversify away, reduce our customer concentration.

So the profit profiles for that facility probably won't be as -- at least in the short-term -- won't be as high as it has been, but we are confident that we diversified that facility so that the long-term profile is much more secure now.

So we are pretty excited about what's taking place with the customers in that particular facility and we've got, I think, all of the employees we can back and probably looking for more.

Brian White.

Jefferies & Company.

When you look at the sequential growth and just look at what your sales were versus the street, you know you didn't quite meet the street sales number.

And I'm wondering because it sounded like the tone is pretty positive throughout the quarter and you did a great job with your expenses.

But what was it in your end market that maybe surprised you during the quarter?

Another good question, Brian.

I guess I'm very pleased that we are able to operate at higher margins.

I think that speaks highly for what we have been able to do with the Company after we have started going to this integration process and we are now starting to run the Company.

It feels like one company and I think that's coming through with improved margins.

So we've done I think an excellent job integrating the company.

I think in the second or in the third quarter the Dallas (inaudible) transfer work came through as we projected at 5 million.

The networking customers come back but we did have some other customers kind of around the semiconductor industry and other just normal cycles that took a pause in the third quarter.

So they should be back in the fourth quarter.

And we are back running with the other situations corrected that I talked about earlier.

So that's why we are confident that the third quarter is going up to the level that we forecasted.

And then when you look at the networking, the Cisco staff bounced back, but the backplane took away from that and was that a backplane -- was it the same customer?

No.

1, and was it a market share shift?

Was it an end market softness or what happened?

Why was the backplane in networking soft?

Yes the -- I mean our back -- about 80% of what we do in backplane is in this networking communication.

And the work that comes to us in the backplane segment is more lumpy.

It comes in kind of chunks.

So we had a quarter there where we didn't have the chunkiness was worked against us if you will.

So that's what took that segment lower.

Now when we look through the fourth quarter, we had strong bookings at the end of the last month in the third quarter and so that particular situation is now reversing itself in the fourth quarter.

And I think as we go forward we'll see a little more of that -- ups and downs just do the normal order patterns in the assembly business.

Inside that segment, the networking portion was very solid and continues to be solid.

The telecommunications was just a little soft.

So we are looking for that segment or that end market to be up in the fourth quarter.

Because assembly is coming back and we're getting solid orders through the rest of the customers that are in that segment.

So softness in backplane was more related to telecom than networking?

That's correct.

Is that wireless or wireline?

I'm not sure.

Okay.

Great.

Thank you.

And Brian, I don't think I answered the rest of your question and it's a different set of customers also.

Amit Daryanani from RBC Capital Markets.

Just a quick question with leadtimes starting to stretch up a little bit over here, should we start expecting I guess a little bit better pricing next quarter?

And if so what are you building into your guidance in terms of pricing Quickturn and leadtimes products?

Even though our leadtimes have gone out is not like we have gone out to the point where we feel like we can raise prices.

We forecasted relatively flat pricing into the fourth quarter and where prices on a market basis were pretty flat in the third quarter.

It seems like any changes in our pricing now come from changes in mix.

The marketplace seems to be about flat.

Now having said that when you look at our activity on the Quickturn, those prices through the quarter were probably up some.

So Quickturn activity was pretty good particularly towards the end of the quarter.

There was a little soft in the July timeframe.

Picked up in August and was back to normal solid levels in September -- month of September.

So I think the softness in July, it was why our percentage went down from 16 to 13.9.

But we are back now and pretty confident that we will be hitting on some nice cylinders in the Quickturn side of our business.

What percentage do you see Quickturn being next quarter?

Do you expect to remain flat or potentially improved from that 13.9% rate range?

Well if the trends continue like they did in the end of the third quarter, the month of September, that percentage should come up.

So we are seeing a lot of Quickturn not only in Santa Ana, but some of our other facilities.

The big question is what happens at the end of year around the Christmas holidays.

And sometimes that's a real plus, sometimes it is not quite a plus.

So a little bit of an unknown there but we have certainly taken back into consideration as we went into our forecasting and modeling.

Then you spoke about your -- the backplane assembly business and the Hayward side I think you said 50% of the boards come are essentially [endsourced] from TTM.

How high do you think that number can get?

I mean can it get to the extent where your [Miller Arrow] business I think is essentially 100% endsourced?

I think there's one point to remember that, in our backplane assembly segment, that comprises Hayward and Shanghai.

And Hayward, I think last quarter the number was closer to 55, 60% of what they did.

They bought from the North American facilities.

Nothing from Shanghai comes out of any of our facilities.

That is all bought locally there.

I think that number would -- I don't think that's going to go up.

I think it would probably maintain about where it's at right now would be our best guess.

I think it's important to also note that our Stafford Springs which is our Mill Aerospace Assembly business -- it is kind of an extension of Stafford -- about 90% of what that facility does buys boards from our Stafford assembly.

So there is a real positive synergy there, but that is all within the print circuit board segment.

I guess when you look at the backplane assembly for a product that cost of goods, what percent is PCB of the cost of goods sold for that business?

Let's see -- .

Well, the overall material content for the assembly business is about 70%.

Of that because these assemblies are usually like file cabinet-sized devices the PCVs actually are a small complement of the overall material spend.

Just rough numbers.

They probably bought close to $13 to $14 million of circuit boards out of that Hayward facility and probably $8 to $9 million come out of our facilities.

Then just the last question.

If you guys could just talk a little bit on the raw material pricing, if you are starting to see laminate suppliers start to increase pricing over here or is that side pretty stable?

Yes, we had some prices relative to price increases related to copper over the last 18 months, but their whole material pricing seems very stable right now.

I don't think there will be any challenges in the fourth quarter.

It was like it should be pretty calm in the first quarter also.

Thomas Dinges from J.P.

Morgan.

Just to follow on the last question taking a slightly different tact on the pricing front.

Kent, you did talk a little bit about no longer seeing as much potential loss of business from folks over in Asia and maybe just a little bit more clarity there.

Is that because even those folks over there are starting to get a little bit more disciplined on the pricing front, which is putting a little less pressure on the domestic suppliers like yourself?

Or is there something else in particular you think that's going on there.

And also in regards to pricing negotiations, correct me if I'm wrong, but usually around this time of year you start to have some discussions with a lot of your customers around what the next 12 months kind of pricing environment is going to look like.

And if there's any color that you can share there around your discussions, is it feeling different than it has in years past, one direction or the other, that would be helpful?

A lot of components to that question.

If I miss one ask again, but with regards to Asian competition I -- couple of things going on there.

I think that probably costs there are going up due to new requirements on water treatment and water requirements, pollution control and so.

Forth, but in our particular case, we are seeing stabilization because we don't have any more products in that gray area.

Now we are really isolated on aerospace and defense and if you look at all of our products now they are very high-tech and they are small volume lots.

So the distance between us and, say, Asian competition has increased and I talked about last time we lost a little bit and that was some products that were in that gray area that left.

But that situation is now very stable and I think we will see some upside now, relative to where we are today.

So that's the major impact as to why I think we are stable and able to compete with Asia.

It is because we are more in line with what works for us -- technology, time and so forth.

Well, their costs are going up but I think that's less of a situation and when we talk about price negotiations at the end of the year, I think that maybe was in the olden days, but right now we do a lot of just pricing with Quickturn work and it happens kind of over and over again on a daily basis.

So we don't see too much negotiations at the end of the year relative to what we did five or six years ago.

We have some quarterly pricing event that take place, but for the most part the yearly pricing situation is not a situation with us anymore.

Kevin Kessel from Bear Stearns.

Just a question here.

So Kent on the PCB side when I look at the breakdown in the operating segments it looks like sales were up a little less than $2 million.

And you said that you got to Dallas and if my recollection is correct I think that you were only looking for $3 million I thought (inaudible) 5 in the quarter but it has like all 5 came through and then you had Cisco or large customer comeback and contribute, I'm sure at least 1 million or two.

So all the rest of weakness then came out of the semi [cap sites] primarily?

It's hard to -- there's probably no absolutes in any answer that we give or any statement that we made, but there was some softness in our work that's associated with semi cap.

So we did fulfill our expectations with the return of work, relative to the lean manufacturing.

The Dallas work at $5 million, that was right on line and I might add that not only have we captured the work from the Dallas closure but we have been able to expand with each one -- with most of those customers and begin capturing more market share of the customers that we have transferred.

So that's good.

I think the main challenge that we've had is just some customers outside of the areas that we've talked about just going on a pause in the third quarter.

There's certainly no trend here.

It's clearly with us just some order patterns that were a little soft in the third quarter and we think they're coming back.

And then in addition to recovery and stabilization with the other situations and the growth that we are working on, I mean we are working real hard to develop new business.

And we had a lot of nice programs in the work and we're being very successful there with capabilities.

So we will see the return of those customers.

We will see some new business development going on.

And I think a lot of that is because we are through this integration process and we are now starting to take advantage of the combination of TTM and the strengths and the cross selling are beginning to come to fruition here.

So we are pretty excited about the fourth quarter and beyond.

And then just -- but looking at this I guess the segments that are down the high-end computing or computing storage segment was down, I think, the most.

Was that the remaining amounts of that work that's kind of in the gray area that transitioned out or was it just weakness in forecast or --?

The network and communications?

I'm sorry.

The computing storage peripheral.

That was mostly work associated with semiconductor and it was kind of just more timing.

It definitely was some of that work being transferred out and now we are stable.

Now it's stable and you said you think it could improve?

I think we could see some upside there.

Absolutely.

Then the other question, just looking at the assembly because you said the assembly was one of the main reasons that networking was down, but to me, it appears like networking -- I'm sorry, that the assembly was down less than expected.

It was only down about 1.5 million or something and profitability actually improved.

So that was surprising.

I don't know if you can help explain that.

I think profitability improving is directly related to how we manage that business.

I think again we are able to recognize trends, take action, reduce hours, do what it takes to make sure we can generate profit with whatever the marketplace gives us.

And in the assembly business we talk about that being down 1.5 million but that's almost entirely in the networking communication business.

I mean 80% of what we do in assembly is in that end market.

When that goes down it impacts that segment.

I got it and just for Steve.

Steve, is there any expectation for how much you plan to pay down?

Maybe I missed it in the fourth quarter.

I can give you some color on that.

We paid down $10 million are ready in October.

I'd like to pay down $22 million this quarter so another $12 million.

We are currently at $99 million now which reflects the $10 million we paid in October.

So we expect to be down between $85 and $90 million of debt outstanding at the end of this quarter.

We are expecting a dividend from the China operation this quarter and I had talked in prior quarters about getting lower than that the $5 million level by the year end and that was predicated on the assumption that we'd probably sell our Dallas facility building this year.

That probably will slip into the first quarter of next year.

And then we use that money to pay down debt at that time.

Is there anything that you can say about the expected proceeds from those?

You know, we are still in negotiation with buyers so I don't want to quantify a number yet for fear of it being different than what I tell you, but I think it will be helpful towards paying down our debt.

And then, the last question is on the cash flow outlook for the fourth quarter.

How does it look now?

Do you expect it to be similar to what we just saw in the third quarter?

Or should it look more like the first quarter?

The first quarter probably is a bit of an anomaly.

I may have mentioned this in prior conversations, but in the first quarter we had unplugged from the Tyco print circuit group (technical difficulties) take electronics corporate parent cash collection operation was consolidated and was not very attentive to our operation.

So once we got our folks in charge of collecting cash in the first quarter, we had this big operating cash flow of $28 million.

It's been $14 million for Q2 and a little bit higher than that but still in the $14 million neighborhood in Q3.

I think with higher net income projected for next quarter we will see that probably rise to more like $15 to $18 million level.

I don't think we will be at $20 million again.

I think we kind of realized that was a onetime benefit.

If you look back at the components of that first quarter cash flow you'll see a lot of it was collections and AR.

That is probably not likely to happen again because we aren't neglecting our AR anymore.

We are actually paying close attention to it.

Is there I guess any way to move your payables closer to your receivables because there is such a large gap between the two?

Or get your inventory churn?

I know they won't be at the prior levels because the business is different and on assembly of course.

But absolute inventory dollars are essentially at the same level now that they were when you closed the deal.

Like on the inventory front, there's some opportunities to manage inventory I think more closely across our backplane assembly operations in that we can use common systems and buy -- leverage our larger buy in that area.

But your put up payables is very well taken.

That's something that we are very attentive to and I've got my staff has done a really great job in tracking kind of on the facility by facility basis, the AR days and payables days.

The things that we can kind of more closely control in the finance and accounting arena and so on Friday I am meeting with our regional controllers to roll out an approach to more accurately manage our payables days to help benefit that.

And I think you'll see some initiatives that we undertake in the fourth quarter to improve our payable days.

I might add to that, Kevin, when you look at our cash flow, I mean we generate a lot of cash in our CapEx for the third quarter was $2.9 million.

CapEx for 2007 in total probably $13 to $13.5 million.

So I think we are doing a nice job managing our CapEx and investing back in the Company wisely.

We just generate a lot of cash.

Shawn Harrison from Longbow Research.

Just a quick point of clarification.

The Quickturn was 13.9% of sales this quarter versus 16% last quarter?

It was 13.4 versus (inaudible) .7 last quarter.

Versus what last quarter?

15.7.

15.7.

Second question just has to deal with the backlog beyond 90 days.

Is some of that associated with the new customers you were able to backfill in Chippewa Falls?

And maybe if you could just provide some end market commentary associated with that backlog beyond 90 days?

Yes.

You can almost sum that up by saying most of that is in the aerospace and defense end market.

We won some programs there and the big programs that we win, they spread the deliveries about beyond 90 days.

Having said that, however, we still have a pretty sizable backlog that's due within 90 days and that gives us a significant amount of confidence in the fourth quarter in meeting our projections.

The new programs that you won with new customers at Chippewa Falls.

Have they've begun the ramp to volume or is that more of kind of a 2008 story?

No, it's this quarter.

Yes, it's in the fourth quarter.

And there'll be upside in the 2008 also, but it is this quarter.

And then just on the -- if we look ahead to maybe 2008, the interest expense, it looks like at least my math may be below a little bit -- a little below $2 million, Steve, to start the year?

Yes, I believe this is a tricky point.

On the interest expense that you guys see in the 10-Q and so forth, it combines the interest expense with the amortization of debt issuance costs because as we pay down our debt as aggressive as we have, we have to take out a chunk of that out of the picture as well.

So I am expecting interest expense -- like cash interest expense, the actual interest piece of it to be about them $2 million in the fourth quarter and about $700,000 of debt amortization cost.

It's for a total of $2.7 million that I mentioned in the script.

So I think that run rate of, say, $2 million a quarter would be lower for each quarter next year as they continue to aggressively pay down debt.

And we are also in an environment I think where interest rates -- we are obviously on a LIBOR plus rate where interest rates are likely to decline I think at least for the first half of 2008.

So that $2 million per quarter run rate would probably more like in the -- I would think 1.5 kind of range, although we don't have firm guidance yet for Q1 of next year.

But I think that's probably a reasonable 1.5 to 2.

1/4 and then declining each quarter throughout the year.

The inference then that you are going to just continue to use free cash flow to pay down debt in 2008?

Yes, that's our plan.

Obviously it's like as Kent mentioned we are always evaluating opportunities to expand at this point, primarily overseas.

So that could lead us to make different decisions about how to use our cash, but right now we are going to continue to pay down debt with our cash.

And then just one last point of clarification on the high end computing business.

When you mentioned some upside there is that business coming back, that was in the gray area with customers that had gone to Asia or is that just new program wins with customers in that end market classification?

It's probably new program wins more than work coming back.

Customers go through these development cycles where they kicked out new programs and sometimes that doesn't tie in with kind of the old program being stabilized.

So we think it will be with new program wins.

We are already experiencing the wins today.

So I think we will have some upside there and like I said in every end market, we are going to be up on a dollar basis.

Probably be up more significantly in aerospace defense than our networking end markets.

(OPERATOR INSTRUCTIONS).

Rich Kugele from Needham & Co.

Since we are going to keep the assembly business, can you talk about where those margins are today and how far you think you can improve them over time?

Yes.

Our margins in the assembly business, I think they are pretty close to 14%.

In the last quarter we were at print circuit boards were close to 20, 20.5%.

So as far as tagging a number to how much we think we can improve that, I would be a little reluctant to do that because there always is -- becomes a lot of moving parts as you go through that.

But it is clear to us that we have some significant opportunity in our purchasing realm opportunity to have better coordination allocating products between Shanghai and Hayward.

And then just as you can see, we -- our topline went down in last quarter yet we still can -- improved on the bottom line.

So I think there is definite operations, operationally; we have a good team of their oath in Shanghai and Hayward and now that they are with TTM I think you are going to see some nice improvements just in operating efficiencies on how we run the business, as well as taking advantage of opportunities with material purchasing and better allocation between Shanghai and Hayward.

But just long-term strategically there's no reason why we can't be in the low to mid 20% range even with the assembly as a portion of the business?

That's correct.

And then just in terms of CapEx since its (technical difficulty) capacity in general since it is so key to the leadtime, any initial ideas on what you're going to do for '08 and given where leadtimes are today do you think they do continue to extend a little bit in the fourth quarter and you'll just let that happen?

Like what's your target for leadtimes, where you are happiest?

That's a good question.

Where we are happy and where our customers are happy are two different things.

But clearly we want to make sure that we service our customers and have a leadtime that's very competitive.

Our CapEx -- we are going to have to be a little heavier on CapEx in 2008 and I think like I said earlier we will be $13 to $13.5 million 2007.

It will probably be closer to $17 -- $18 million in 2008.

And most of that is around bottlenecks in the facilities and a lot of that centers around the new technologies that we're seeing.

So that we have to run our product through the lamination press cycles and plating moreso than we have when we have just high layer count products.

So our investment will be into plating capabilities probably in the press area as well as drill.

So we will come up with a real solid CapEx plan for 2008 that addresses all these issues and keeps our leadtimes in line.

I might say, too, in a lot of our facilities with the new technologies it has created bottlenecks in just one area of the facility.

So as we put some CapEx into, say, plating for example, it frees up the capacity for the entire facility.

So that is a pretty nice position to be in when you look at what kind of returns we are going to get on our investment in CapEx in 2008.

Matt Sheerin from Thomas Weisel Partners.

Just have a quick follow-up for you, Steve, on the SG&A guidance.

If I did the math it implies that it is going to be up I about $0.5 million or so?

That might be a little bit heavy.

I guess on a blended SG&A basis you're probably (multiple speakers).

The revenue increase that we project for the fourth quarter will drive commission expense up which is the biggest variable piece of selling so that will be a little bit probably about $200,000.

And we will probably have about a $200,000 to $300,000 increase in G&A expense for Sarbanes Oxley implementation.

I think I mentioned on a prior call that these plans required from PCG were not part of the Tyco electronics broader [SoX] effort because they are too small.

Of course for us they are all very materials.

So my staff has made an incredible push in Q3 to implement Sarbanes Oxley at all of these new facilities and plus the increase to costs both from the audit point of view and from some consulting, we are bringing in to help with the test script writing and testing during the fourth quarter as well.

I think that should taper off after fourth quarter because we are making every effort to be compliant by the end of the fourth quarter.

And I think those costs are being incurred during next (technical difficulties).

That's very helpful and as we look into March, I know you haven't given guidance yet, but normally you have some standard increase in expenses at the beginning of the year.

But should we assume that some of those onetime costs that you talked about go away then it might be closer to flattish than up?

Yes, I think that's definitely fair.

I think most of the increase G&A cost beyond the norm you've seen so far this year would be all incurred in the fourth quarter.

There will be a little bit in the first quarter just for the year end audit which we accrue for partly in the fourth quarter but also expense more for in the first quarter.

But beyond that I think we should be back to a more stable run rate.

And then my final question for you, Kent, you've gotten a lot of questions about demand and the book-to-bill, etc.

You've been through a lot of cycles here.

We've seen the industry, the PCB book-to-bill creep up and I think it is at the highest level it's been in more than a year now.

What's your general take on where do you think we are in the cycle and where we are headed?

That's a good question.

I wish I had all the answers to that question.

But it appears that the industry has evolved over time to be less cyclical.

I think when the -- a lot of work migrated to Asia it seemed to be consumer type products that are more cyclical.

So the work that we are focused on right now is absolutely less cyclical.

Where we are at in the cycle I'm not sure, but it feels pretty good, relative to the activity that we have seen from customers.

And it's pretty broad-based, I mean, it's not isolated anywhere.

We've got a lot of new programs particularly in military aerospace we are working on.

So I guess I'm having a hard time answering that question, but we're certainly not going to -- the wrong way when you look at the cycle.

(OPERATOR INSTRUCTIONS).

I'm showing that we have no further questions at this time.

Please continue with any closing remarks.

Just in summary, I want to thank our employees publicly here for the excellence from top to bottom throughout our Company.

Everybody has contributed to the success of the Tyco acquisition.

It has been about a year now and we clearly are a different company today than we were a year ago.

I think the employees have made this Company the successful company that it is today.

Other than that I want to thank all the other individuals for joining us today on the conference call.

We appreciate your interest in TTM and we (inaudible) the next quarter.

Thank you.

Ladies and gentlemen, that does conclude our conference for today.

Thank you for your participation.

You may now disconnect.