TTM Technologies Inc (TTMI) 2008 Q2 法說會逐字稿

Good afternoon ladies and gentlemen, thank you for standing by.

Welcome to the TTM Technologies Inc.

second quarter 2008 conference call.

During today's presentation all parties will be in a listen-only mode.

(Operator Instructions).

This conference is being recorded today, July 29, 2008.

Now I would like to turn the conference over to Mr.

Alder, CEO of TTM Technologies.

Thank you Nicole.

Good afternoon, and thanks for joining us for 2008 second quarter conference call.

I'm here in Santa Ana with our CFO, Steve Richards.

I think as many of you might know we had a little earthquake just before noon today.

Everything is fine, I don't think there is any damage in the area in general that I've heard, and for TTM in particular there is no damage, no consequences whatsoever.

So we're just continuing to march forward.

Before I get into any details, 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 cyclicality in various industries that the Company serves, and other risks described in TTM's most recent SEC filings.

The Company assumes no obligations to update the information provided in this 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.

With that, let's turn to the results for the quarter.

Before I turn the call over to Steve to review the numbers in detail, I will provide a quick overview of the business.

We continued our long history of delivering solid financial performance, with the aerospace and defense end market showing continued strength, coupled with the solid demand for our high-tech manufacturing services.

Our results demonstrate the success we're having as we work to improve our margins.

On a segment basis, printed circuit board manufacturing continued its strong contribution to the Company.

Second quarter net sales, this is before intercompany sales, were 149.6 million compared with 148.7 million in the first quarter.

Second quarter operating segment income before the intangible -- amortization of intangibles, was 17.8 million.

This compares with 19 million in the first quarter, excluding a 3.7 million benefit from a metal reclamation recovery.

Price per panel increased 3.9% sequentially, due mainly to a shift in product mix, while panel production declined by 2.7% sequentially.

For the Backplane Assembly segment, second quarter net sales, and again, this is before intercompany sales, were 31.2 million compared with 32.6 million for the first quarter.

Second quarter operating segment income was 2.2 million compared with 2.7 million in the first quarter.

Now let's look at the end markets.

We serve four end markets.

Network and communications, aerospace and defense, computing storage peripherals, and the fourth end market is medical, industrial and instrumentation.

Our main drivers this quarter continue to be the network and communication and the aerospace and defense end markets, which together accounted for more than three-quarters of our net sales.

As usual, networking and communications was the largest end market this quarter accounting for 40% of net sales, down from 42% in Q1.

This decrease was due primarily to the decline in sales in our Backplane Assembly segment, as well as some slight softness in the networking portion of this end market.

The aerospace and defense end market increased from 34% of net sales in Q1 to 36% in Q2.

We saw sequential increases with many of our aerospace defense customers, and we were particularly pleased to shift the first production orders to the thermal weapons site program that BAE awarded us in April.

This program should be a significant revenue contributor for the rest of 2008.

The computing storage and peripherals end market remained roughly flat.

As a percentage of sales, this end market decreased from 12% of net sales in the first quarter to 11% of sales in the second quarter due to lighter orders from a few server manufacturers.

The medical industrial instrumentation end market increased to 13% of net sales in the second quarter from 12%.

This diverse group of customers delivered solid results across the board, with particular strength coming from a few of our instrumentation customers.

Our top five customers comprised 29% of second quarter net sales.

They represent a strategic mix of commercial and aerospace and defense customers.

No customer represents more than 10 percent of sales in the second quarter.

In alphabetical order, our top five OEM customers were Cisco, Honeywell, Honeywell -- Huawei, ITT and Juniper.

Now let's discuss our technological and operational capabilities.

The average layer count of our printed circuit board in the second quarter was 13.7 compared to the first quarter average layer count of 14.2.

Boards with more than 20 layers represented 27% of second quarter sales compared with 29% of sales in the first quarter.

Quickturn as a percentage of revenue, increased to 13% in the second quarter up from 11.8% in the first quarter.

Leadtimes held roughly steady in the first quarter, from the first quarter.

Leadtimes for our commercial customers range from four to six weeks, while leadtimes for our aerospace and defense customers are six to ten weeks.

At the end of June, our printed circuit board book-to-bill ratio was 1.0.

That compares to the IPC book-to-bill ratio of 0.94.

As we expected, we remained above the industry average.

As you can see we're very pleased with our industry-leading performance for the quarter.

This challenging economic environment, our performance is a testament to the dedication and commitment of the entire TTM team.

We're financially sound with the recent convertible debt offering expanding our cash position and facilitating growth opportunities in the future.

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

TTM reported solid results for the second quarter of 2008.

As you know, during the quarter we completed a successful convertible debt offering, which had an impact on both the income statement and balance sheet, which I will discuss as we go long.

Strong demand, especially from the aerospace defense and market, fueled second quarter net sales of $173 million, which was in line with our guidance and reflects a slight decrease from first quarter 2008 net sales of $174.1 million.

Second quarter gross margin of 21.1% declined from first quarter gross margin of 21.6%, but slightly exceeded the high-end of our guidance range.

Gross margin for the second quarter reflects our ongoing focus on operational efficiencies.

You may recall that we attributed much of our first quarter gross margin improvement to higher levels of work in process inventory, which had increased significantly at a number of our plants toward end of the first quarter.

The second quarter, however, WIP inventory declined by about $1.3 million, yet second quarter gross margin remained above 21%.

Selling and marketing expense for the second quarter was $7.8 million, or 4.5% of net sales.

This is relatively consistent with first quarter selling and marketing expense of $7.7 million, which is 4.4% of net sales.

Second quarter G&A expense, including amortization of intangibles, was $9.8 million, or 5.7% of net sales, due primarily to increased incentive compensation and stock based compensation expense.

This compares to Q1 G&A expense, including amortization of intangibles, of $9.2 million, or 5.3% of net sales.

Total operating expenses for the second quarter were $17.5 million compared to first quarter total operating expenses of $13.2 million.

You may recall that during the first quarter we recorded a reduction in operating expenses of $3.7 million for a metal reclamation recovery.

Absent this reduction expense, Q1 operating expenses would have totaled $16.9 million.

In the second quarter, we incurred stock based compensation expense of $1.5 million.

66% of the expense was recorded in G&A, 26% in cost of goods sold, and 8% in selling and marketing.

Second quarter operating income of $19.1 million compares to first quarter operating income of $24.4 million, which includes the $3.7 million metal reclamation recovery I discussed a few moments ago.

Second quarter other expense was $4.1 million, as compared to $1.6 million in the first quarter.

In May we issued $175 million in convertible debt and used some of the proceeds to pay off the remaining balance of our term loan.

The increase in interest expense is due primarily to a $1.9 million write-off of the remaining debt financing costs on the loan that we were paid.

We also incurred a $1.2 million expense to unwind the interest rate hedge related to the term loan.

We recorded this as an offset to interest income and other net.

Our effective tax rate in the second quarter was 36.7%.

Second quarter net income of $9.4 million, or $0.22 per diluted share, was in line with guidance and compares with first quarter net income of $14.4 million, or $0.34 per diluted share.

The metal reclamation recovery of first quarter accounted for about $0.05 of the diluted earnings per share.

Amortization of the remaining financing costs and unwind to the hedge reduced second quarter delivery earnings per share by about $0.04.

We continue to maintain a very strong balance sheet and cash flow and a very manageable deposition.

Cash and cash equivalents at the end of the second quarter totaled $118.7 million compared with $32.6 million at the end of the first quarter.

The substantial increase in cash is primarily due to the successful debt offering the Company completed during the quarter.

Cash flow from operations was negative $7.8 million for the second quarter due primarily to an increase in deferred tax assets arising from the call spread on our convertible debt, as well as a net use of cash for working capital purposes.

Net capital expenditures were approximately $5.5 million and depreciation was $5.3 million.

Looking ahead to the third quarter of 2008, we project revenue in the range of $163 million to $171 million and earnings in a range of $0.19 to $0.25 per diluted share.

The gross margin percentage of the third quarter is expected to be in the range from 19% to 21%.

We expect that selling and marketing expense will be approximately 4.5% of revenue and G&A expense, including amortization of intangibles, will be approximately 6% of revenue.

Interest expense for the third quarter should total about $1.6 million including $200,000 of amortization of deferred financing costs on our convertible debt.

We expect interest income of approximately $600,000.

Interest expense is declining primarily because the fixed 3.25% interest rate on our convertible debt is less than half the 7% to 8% rate on our former floating rate term loan.

We expect our tax rate in the third quarter of 2008 to be approximately 37.3%.

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

(Operator Instructions).

Amit Daryanani, RBC Capital Markets.

Good afternoon.

Just a question, looking at the guidance, midpoint it looks like things would be down about 3% or 4%.

Could you talk about sequentially what are you seeing in end markets that's driving that softness?

That's a good question.

Just let me review maybe the end markets.

The network and communications -- really we're seeing some seasonality there in that end market with some slight I would say softness, maybe that is related to networking equipment and so forth.

So when you get some of the seasonal pressures, some softness in the networking related equipment, plus the slowdown in Shanghai from our backplanes, which are predominantly network and communications, we're seeing just some issues with that end market going forward.

There is nothing significant, really no big changes, but just a few tweaks in that, maybe relate to the lower forecast.

Our aerospace and defense, which went from 34 to 36%, that's pretty solid.

I mean, we see that segment continuing to grow.

Backlogs are strong, and it looks like that will continue into the third quarter.

The computing storage and peripherals, which is down 1%, that continues to be -- I guess one area where there's a little more softness than say the other end markets.

Although it's pretty steady, there's some little seasonality there and a little softness, but still pretty solid.

Medical industrial instrumentation, broad customer base, there's a little more churn in there between customers but overall the order patterns seem fairly steady.

So again some seasonal softness, but no major issues.

So just a few tweaks here and there on the networking and end markets mainly related to seasonality, and some issues with Shanghai back panels associated with kind of onetime events around the Olympics, and then maybe some softness with network-related products.

That's extremely helpful by the way.

If I could look at the gross margin line too, it looks like we're looking at things being down about 100, 110 basis point sequentially.

I would imagine in September we would see a little bit of uptick in quickturn and that should have actually helped the margins out.

A, could you talk about maybe why that's not happening, and B, is the margin delta or downfall purely because of the revenue issues, or is there something else we should be aware of?

I think when we look at a gross margin, and you kind of tied that into quickturn.

You noticed our quickturn went up his quarter from 11.6 -- 11.8 to 13.

So it's interesting that that quickturn went up in kind of our nontraditional quickturn divisions.

So I think as we look into the next quarter coming up, there is some upside for quickturns.

And the issue is -- when our top line is going down because of some of these other factors and some of the leverage involved, that to some degree overcomes some of the increases that we will see on the positive side.

Now this is our forecast, if we have some -- if these positive things hold in there, and seasonality decreases faster than normal and there's a lot of onetime kind of events in here with kind of Shanghai and so forth, the quarter is shaping up pretty good.

Certainly when we look out into the fourth quarter, we feel more positive about the fourth quarter than the third quarter.

And just finally, I'll hop off after this.

Any update on progress towards getting a better footprint in Asia?

That's a good question.

It's a question we get every quarter.

We continue to work really hard to find the right company in Asia, and we're constantly evaluating all acquisition opportunities, not only in Asia but also here in the United States.

It's clear to us that right now we think the best opportunity, return on our investment, would be to become a global company.

That's always been part of our strategy and we continue to work towards that end.

We don't have any update at this time.

I think you know that we are very selective, we're patient.

We're prudent, but we're also working hard to get that to happen.

But it's a long-term decision, we want to make sure we make the right decision.

I'm confident that at some point we will have that -- have a -- be able to execute on that objective of becoming a global company.

And I think the one thing that maybe takes us a little longer is we want to buy well-run companies that fit our technology, fit our business, so it takes some time to find the right companies.

We are continuing to move forward, but we don't have any progress update.

Fair enough.

Thanks a lot, glad to see the upgrade had no real impact you.

Kevin Kessel, JPMorgan.

I just wanted to follow up on your comments around the Shanghai facility.

Is there a way you can help us understand what this potential impact is in terms of, given the top line from specifically maybe from the back panels?

And maybe you could parse that out from the networking softness that you're described that you're seeing now.

I can take on the China piece.

Basically we expect to see the Backplane Assembly operation down about $2 million, $2.5 million probably in the third quarter, primarily due to softness in China.

There's been a lot of press both about the Olympics and about this China Telecom convergence.

Both those things are playing a role in the third quarter.

As you know, the pace of growth with a key networking customer for us in China has been pretty significant for the first half of the year.

Obviously China has been -- growing very aggressively as a country over the course of the first half of this year.

I think that growth is coming to a bit of the slowdown in the third quarter due to the Olympics.

So a lot of orders were accelerated in the first half of the year from those Chinese customers.

That's benefited us in the first half of the year, kind of caused a little softness in the third quarter.

And also this whole China Telecom convergence towards the [TS] -- CDMA platform and kind of around the 3G interface too, is causing some kind of uncertainty on the order patterns of -- for the customers that we support there.

So once the three China Telecom companies sort out which piece each one is going to be getting and they start placing orders with our key customers there, we'll see an upsurge in orders after that.

I think that will probably be in the fourth quarter and the first half of next year.

That's the China piece of it.

And I think you also want to talk more about the networking -- broader, is that right?

Yes, because Kent was talking -- obviously networking is down five and then he was mentioning he was starting to see some weakness there.

It's interesting, as Steve was talking I was just reflecting back on our -- on the backplane division.

Since we've owned that division it seems like every quarter we're explaining that orders are really good, and there's been some delay in orders, so it's kind of -- you noticed there's a lot more choppiness in that backplane section.

When I looked at the end markets in the fourth quarter, the network and communications reported 42%, and the first quarter it was 40%.

Now we are going back and forth there a little bit, and it's mainly a lot of timing on the orders.

But the softness we're seeing in networking is probably on the same magnitude dollar-wise that Steve is talking about with regards to the Shanghai operation.

And then we've got some overall slowness in a few specific customers.

The aerospace and defense business is kind of making up for some of that slowness.

I think in the third quarter and when you look at the description that Steve just explained with Shanghai, some of the specific softness in networking and with these other customers, my sense is that is temporary in nature.

And that the third quarter will see an end in some of those things and we can pickup hopefully towards the end of the third quarter.

Maybe we can do a little bit better than what we talked about here.

It's a little bit hard for us to see right now, but certainly I think these are nothing long-term in nature, but just events that we're dealing with in the third quarter that we're hoping will be behind us, and the march forward again in the fourth quarter.

And even with these events we're talking about, even at the level midpoint of our guidance there, it's still at a pretty good level that we're clipping along here.

Are they telling you anything, though, the specific customers outside of Shanghai, the ones that you're seeing some slowness from, are they pointing to anything in particular, like are they saying there's a particular buildout they're waiting on, or they're being delayed because the Olympics are there?

Or is it just macroeconomy they're not saying anything?

They are really not saying anything.

I wouldn't comment -- the way we judge that is we look at our orders and we look at order rates and we look at these programs that we're associated with.

And a lot of times the programs we're associated with could be booming while our end customers could be saying a little the slow and vice versa.

So it's really particular to us on some of the networking softness that we're seeing now.

If that ties in with what some of the other comments are being made, that's fine.

But we are looking just particularly at TTM and order patterns here.

Got it.

And then just in terms of cash flow, Steve, working capital was a little bit of a use of cash in this quarter and you mentioned some value -- some reversals there I think you said on the tax side?

Yes.

Remember we talked on our last call about the convert offering, how we put in place a call spread strategy overlying the convert that actually raises the effective conversion price.

There is a tax benefit.

There's a cost involved in putting that call spread in place, but also a tax benefit we derive from that.

So obviously we used cash to put the call spread in place and recorded a concurrent sort of tax asset of $13.7 million for that call spread strategy.

So over the course of the seven years of that convert's life, we will get a benefit from that deferred tax asset.

So [depending] on the use of cash in cash flow from ops of $13.7 million this quarter.

So that's the biggest single kind of detriment to cash flow for the quarter.

We also had, as you probably saw from our schedule, a $4.6 million increase in inventory, and we also had a net use of cash for Accounts Payable $4.5 million.

So those two working capital changes of about $9 million, and the increase in deferred income tax assets of 13.7 kind of hurt our cash flow for the quarter.

Certainly the income tax impact for the deferred tax asset, it was a onetime thing and what would not recur in the third quarter.

So that's what I was just going to ask.

That's not going to reoccur.

And when you look at the second half, I think last call I believe you commented that you thought kind of cash flow from operations in kind of $18 million to $20 million range was kind of a normalized level to think about.

Is that still the case?

Yes.

If you add back these items, you'd get to about $15 million to $16 million in operating cash flow.

I think we saw some usage of cash in inventory this quarter, about $4.5 million.

Part of that was an increase in raw materials, primarily in our assembly operations for aerospace defense customers, key programs like the thermal weapons site program we announced earlier this quarter.

We saw some inventory increase there.

We also saw some increases in finished goods inventory, so I think both those things will be -- I think finished goods inventory will probably reverse out in the third quarter, and we'll probably see some of that raw increase come down as well.

I think will see probably cash flow from ops for inventories in the third quarter as well as kind of not having this onetime impact from the deferred tax asset.

And from CapEx perspective you guys are undershooting your budgets I think for the year by a little bit?

We are definitely.

First quarter was pretty soft; we're on track more on pace with the $5.5 million CapEx this quarter.

I think we will probably still in the year being $20 million to $23 million in capital expenditure.

20 to 23.

Okay.

Great, thanks so much.

Matt Sheerin, Thomas Weisel Partners.

I just want to get back to the question of demand.

A few questions there.

First, you said the book-to-bill was one at end of the quarter.

What is it hovering around now?

Have you seen bookings decrease as you get into the quarter?

They haven't decreased.

I think the bookings have just kind of continued on into this month at the same rate that we exited the quarter on.

We don't have those numbers.

We're just ending the quarter actually today.

So we don't have any numbers to talk about for the month of July.

But I don't believe there's been much change.

And leadtimes, what are leadtimes now?

Leadtimes are -- again, not much change.

Four to six weeks in our commercial divisions, and 6 to 10 weeks in kind of the higher tech aerospace divisions.

It sounds like you expect some seasonal uptick; of course visibility is limited for everyone here.

It sounds like you expect some seasonal uptick.

But you're not at the point where, for instance, at Chippewa you had some layoffs, sort of temporary furloughs a year ago.

It doesn't sound like you're that alarmed by what you're seeing that you would take those kind of actions.

Exactly right.

Right now, looking at all of our divisions along those lines, I think there's nothing being anticipated along those lines at all.

At some of your larger customers, particularly in North America, given some weakness of some competitors, have you seen any marketshare gains against those competitors with some of those customers?

I think -- with our footprint in our specialized facilities, again our business model I think allows us to provide our customers with a good product and a lot of value added.

And we're in a very strong position here.

So I think when you look at our book-to-bill always being greater than the industry, and talking about our report on top line growth and so forth, I think we're gaining marketshare.

How is pricing holding up relative to last quarter?

And then as a follow-up, if you could talk about materials costs, and any headwind that they continue to present?

Our pricing on a per-panel basis went up 3.9% in the second quarter.

That was mainly due to product mix.

And when you look at our work, product mix was coming from three different directions.

We have a higher level of technology now with more sequential lamination (inaudible) we had a higher mix of aerospace and defense, and our quickturn mix went up.

All of those things spoke to higher per-panel pricing.

From a market perspective, I think pricing is stable.

I don't think it's moving one way or the other, it seems pretty flat here.

On the cost side of things, we're seeing just some increases that are -- I guess spotty in nature.

There's no general increases.

It all seems to be based around energy type costs, so overall just some very slight increases, spotty in nature, nothing major, centered around energy and freight.

Freight costs are going up.

Now some of those costs, if you move into the Backplane division on some of the components we buy, some of those costs have gone up.

We're able to pass those on to customers.

But there are some limitations on timing, meaning we have some year-long, six months type contracts.

We have to wait until those run out.

But overall cost trends seem to be relatively stable, just spotty or scattered in nature.

And lastly you talked about your inventory up a bit in the quarter.

You have any visibility into your customers' inventories, particularly whether the EMS or OEMs on -- would be board type of inventory that they might be carrying?

And does that have anything to do with a little softness in the order patterns we're seeing?

We did see an increase in finished goods inventory, about $2 million, $2.1 million this quarter.

So 2.1 of our increase of 4.5 is related to finished goods.

I wouldn't say however -- say backup of inventory in the chain.

I think -- we know with one customer who had about a $600,000 inventory buildup in Q2 that will definitely move out in Q3.

So I think we're just seeing some ebb and flow in orders in the finished goods.

I'm not seeing that the increase in finished goods is emblematic of any kind of buildup in inventory overall.

I would say inventories are still pretty manageable on the EMS side at least from what we're seeing, at least the ones we deal with.

Okay, thanks a lot.

Shawn Harrison, Longbow Research.

Good evening.

A few housekeeping questions, just looking at the G&A number you put out there, it looks like it's ticking up a little bit on a dollar basis sequentially on top of percentage.

Is there something going on there that could trend up over time?

This quarter we actually had a significant amount of stock based comp expense in G&A increasing over first quarter.

Because the restricted stock unit grant we gave to our employees was done almost very last part of March, so we had basically three days of expense in the first quarter, and 13 weeks in the second quarter.

That accounts for about $400,000 or so of the G&A increase.

We also had this quarter a decrease in our bad debt expense reflected from old A/R that benefited us this quarter.

That's part of the reason why we're seeing an increase next quarter in terms of absolute dollars of about $200,000 to $300,000.

So the increase in Q2 of Q1 is largely stock based comp related.

The increase in Q3 over Q2 is largely due to the fact we have some onetime benefit from bad debt expense this quarter.

We don't expect to incur benefit again next quarter.

Is that clear?

That helps out a lot.

Secondly, going back to the raw material question, given that it's spotty right now are there any indications that maybe something can come along in the fourth quarter that you guys would have to deal with, or none of those conversations are being held?

There's no conversations along those lines.

And I don't think there's anything major that would happen.

A lot of the kind of price increases on the cost side have already -- are already behind us.

And I think it's nice to see the oil price come down, so that's a sign -- a step in the right direction.

But there's no major issues that we will have to deal with.

One maybe last question on the back panel business.

I know we talked about -- you talked about Shanghai earlier, maybe if you could just talk about what you're seeing in North America here in the business.

Shanghai, like you referenced there, it's growing.

We're quite excited about Shanghai and where that could go, particularly when you get through the third quarter here.

Our Hayward division is more stable, and we're looking at -- to try and refocus on a little more of a higher mix type product with a little more quickturn, get some more specialties in there.

But it's -- I would say fairly stable in Hayward.

I wouldn't anticipate at this point a lot of growth and our Hayward division, but the right word is stable.

And then just a follow-up, in backplanes in general.

Since EBIT margins declined this quarter, should we expect another sequential decline in terms of the margin given the fall off in revenues?

Or should we expect maybe kind of EBIT margins to hold steady in kind of the 7% range?

I think EBIT margins should be pretty stable in Q3.

Now that's kind of odd to say, given that revenues declined in Shanghai.

But remember, this business is not nearly as subject to kind of operating leverage as our PCB business is, because so much of the cost is already factored into materials.

I think given some of the puts and takes, maybe the Hayward operation in Shanghai in Q3, I expect EBIT margin to be right around that level for Q3.

On a lower revenue base.

Thank you very much, very helpful.

Jiwon Lee, Sidoti & Co.

Just one quick question.

I'm not sure, Kent, if I clearly understood your update on Asian opportunity that you see out there.

What I'm saying is, this has been quite a long process with TTM.

We have been looking for the right opportunity for a number of years now with making trips, talking with different companies.

We eliminated many, many what we originally thought would be opportunities.

And so we have identified companies that we believe would be a nice fit for us, and we're in the process of having just discussions at this point.

And when -- as we try to move those discussions along, it just takes a little while to have the concept of becoming a global company solidify.

And we're looking at all kinds of things with cultural fits and so forth.

I guess -- I know it was a little hard to grasp, because we don't have anything definite to talk about, but we are active, we're looking.

We're just making sure we get the right opportunity.

It's a long-term decision and it's a big one for our company.

I think becoming a global company is clearly -- would provide a competitive advantage in the industry, and certainly would give us a nice return on any investment we make.

So we need to make sure we get a nice well-run company, and that takes a little time.

We're working hard, but at the same time we're selective.

That's it for me, thank you.

Kevin Kessel, JPMorgan.

Just wanted to follow-up on the comment you made about BAE and that program you're saying you think should be a significant program for the company and continue I guess at the levels it's currently at.

Can you remind us, is BAE currently like a top 10 customer for TTM, or do you expect them to become that?

They're a top 10 customer, and I think with this program they might stay -- they'll certainly stay in the top 10.

I don't know if that will be enough to break into the top five or not, but the program was awarded in April.

It was about $8 million, and at some point there could be some follow-on orders depending on how that program goes with the government and so forth on the BAE side.

So it's an announcement that we made to help keep investors informed.

I think it helps with just an overall marketing of TTM, to let people know that we are active, that military is a big part of what we do.

And the nice thing -- I guess I'll digress just a little bit and tell you that this aerospace and defense has been a good end market for us.

It's I think in the second quarter of 2007 it was 30%, and now we're up to 36% and it still remains strong.

So we're pretty excited about not only BAE but all the other programs and activities we have going on in the aerospace and defense.

And in terms of just going back to the Olympic impact on the Shanghai side, when you guys look at forecasts now from the customers out there that are being affected, did you actually see in those forecasts some sort of indication that this is somewhat temporary, that it should rebound in the fourth quarter, or is it just your instinct?

We're actually getting confidence in some of our customers that some of third quarter softness in Shanghai is indeed that, third quarter softness.

It will be bouncing back in the fourth quarter.

Some of uncertainty we have is how long it takes those three telecom companies to sort out who's doing what piece and so forth.

I think the other impact is, the only part that's a bit uncertain in the third quarter which is how many steps will the Chinese government take to ensure that the Olympics are conducted in a city that is not too polluted, and how much manufacturing will shut down in the five-province area around Beijing.

That's one of the reasons why we have some softness in our forecast that could wind up being better than we expect.

But I think by and large, the softness we're seeing in the networking customer, the key networking customer in China is expected to be kind of back on track in Q4 I think.

And what about on the computing side?

That was -- I know it's a smaller segment, but that was the one was down in the most significantly in the quarter that was just reported --

In the computing side, (technical difficulty)

Hello?

One moment ladies and gentlemen, the conference will resume momentarily.

We're back, I guess.

Had we been gone for a minute?

Yes.

Can you still hear me?

Did you hear the question I asked about the computing?

Yes.

Is that where we left off, what's the question?

Yes, I assume so.

Now I forgot the answer.

I gave the answer but evidently nobody was listening.

I think the question was again, back to the computing storage peripherals, and over the last couple quarters we trended down a little bit there.

In that end market, that is where more of a volume type product resides.

In fact about 65% of that market is servers.

So we get a little subject to more price pressure than we do in the other end markets.

So there was a little seasonal softness in there that we think will come back, but I don't think the market is going to go up in a big way.

So I don't think it will go down.

I think it will stay at a pretty good spot here, or the spot it's at.

One other thing, it is that a lot of things we're talking about here, like the seasonality, we believe that will come to end sometime in this quarter.

Certainly this Shanghai event that Steve's talked a lot about are kind of onetime particular to this quarter events that should be reversing out in the fourth quarter, and the softness that we see in the networking, and it's also just a slight softness.

This is not major issues we're talking about.

But these things will all end.

So we're looking into the future to have a brighter quarter, if you will.

Amit Daryanani.

I may have missed these things, but inventory looks like it was up 4.5 million or so despite the fact that we worked down the work in progress and you are guiding for Q3 to be down.

Could you about talk why the pickup in absolute inventory dollars?

Let me give you the breakdown specifically.

It's a $4.6 million increase quarter-to-quarter, of which as we talked about already, $1.3 million was a decline in work in process inventory.

So basically raw materials is up $3.8 million, primarily due to an increase in programs for our aerospace defense customers in our aerospace defense assembly operation.

So including the BAE thermal weapons site program we talked about in our press release, about a month ago.

So that's been a big increase in raw that I think will probably work out primarily over the course of the quarter.

And the other piece was a $2 million increase in finished goods inventory, primarily in our Chippewa Falls plant, and that's mostly going probably also reverse out in the third quarter.

I think we'll probably see our inventory levels decline in Q3 and see a matching cash flow for operations from that.

Thanks a lot for that.

And stock option expense was a little higher than what you have seen for the last several quarters.

Should it kind of revert back to that 900,000 to 1 million range, or does it sit as 1.5 million range going forward?

It's going to stay at 1.5 million going forward.

Obviously, when we do this type of acquisition, we added many people to our stock option plan.

We actually changed some options to restricted stock units last year (technical difficulty) [as] awards.

But we give those awards out once a year in the first quarter, so we saw an increase in expense in the second quarter as a result of the late first quarter grant.

And so I think we'll still probably get $1.5 million for the next couple quarters because you vest those grants over the three-year life in a steady manner.

Got it.

And finally could I go back to the backplane business, Kent you kind of talked about how revenues in orders have essentially been volatile for the last few quarters.

Could you just update us on -- I know you viewed this as a core part of your business.

Does that remain the thought process of today, and is there room to do some belt tightening really in that segment to potentially boost margins?

It's still a core part of our business, and like I mentioned the Shanghai has some pretty significant growth opportunities.

We have learned a lot since we have owned the business, related to backplanes and how to manufacture that.

We're looking at how do we work Shanghai and Hayward more closely together to gain some efficiencies, and keep our costs as low as possible.

We're stabilizing Hayward into the fact that we are looking at -- I guess becoming a more specialized type manufacturer with some specialty capabilities around the higher mix, a little more quickturn, a little more engineering and so forth.

And I think as we do that and work a little closer between the two facilities, I believe that will provide a good solid opportunity to generate improved margins going forward.

It's going to take a little time, but I think certainly the fundamentals are there that we can improve that.

There really has not been any headcount trimming, especially in the Hayward side in Q2, has there?

Yes.

I think during the quarter we had a reduction in Hayward of about 36 employees.

And that was to match the level of work that was coming in to us.

Sometimes you get optimistic, and optimism doesn't happen and you have to adjust to make sure that the headcount matches the topline revenue.

And so we had -- we took action in the end of June, I believe, to right size that facility to match the top line.

(Operator Instructions).

We have no further questions at this time.

Please continue with any closing remarks.

We appreciate the interest in TTM.

The questions were all good, and we enjoy the meetings we have together.

We will look forward to the call next quarter.

Thanks again for your interest.

Goodbye.

Ladies and gentlemen, this concludes the TTM Technologies Inc.

second quarter 2008 conference call.

We thank you for your participation, and you may now disconnect.