TTM Technologies Inc (TTMI) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you so much for standing by.

Welcome to the TTM Technologies third quarter financial results conference call.

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

Following the presentation, the conference will be open for questions.

(Operator Instructions) As a reminder, this conference is being recorded today on Wednesday, the 29th of October, 2008.

I'll now turn the conference over to Mr.

Kent Alder, President and CEO.

Please go ahead, sir.

Good.

Thank you.

And good afternoon.

And thanks for joining us for our 2008 third quarter conference call.

I'm here in Santa Ana with TTM's CFO Steve Richards.

Before we 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, the impact of the current economic crisis, and other risks described in TTM's most recent SEC filings.

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

As you will 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.

Okay.

Now before Steve reviews the numbers in detail, I'll provide a quick overview of the business.

As you're all aware, the macroeconomic issues have converged to create an overall challenging environment.

However, I'm pleased to report that we again delivered solid financial performance with the aerospace defense end market showing continued strength.

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

For the printed circuit board manufacturing segment, third quarter net sales were $148 million compared with $149.6 million in the second quarter, a slight decrease of about 1%.

Third quarter operating segment income was $14.3 million compared to $17.8 million in the second quarter.

Average price per panel increased by 2% sequentially, due mainly to a shift in mix toward higher technology products.

Panel production declined by approximately 7% sequentially.

For the backplane assembly segment, third quarter net sales were $29.3 million compared with $31.2 million in the second quarter, a decrease of about 6%.

Third quarter operating segment income was $2.1 million compared with $2.2 million in the second quarter.

Okay.

Now let's look at each of our four end markets.

The main driver this quarter continued to be the aerospace and defense end market.

Together with networking communications, these two markets accounted for more than three-quarters of our net sales.

Historically networking communications has been the Company's largest end market.

This quarter for the first time, aerospace defense tied for the number one slot with both representing 39% of net sales.

The networking communication end market was down slightly from 40% in the second quarter to 39% in the third quarter.

This was due primarily to a softer sales to a key Chinese customer in our backplane assembly segment, which we had expected and discussed on our last call.

In our printed circuit board manufacturing segment, sales to our networking communication customers were down slightly, due to slower orders from the networking and communications infrastructure portion of this end market.

Aerospace defense increased from 36% of net sales to 39% in the third quarter.

This increase was based on overall strength with most of our customers in this end market.

A computing storage peripherals end market remained flat at 11% of net sales in the third quarter.

The medical industrial instrumentation end market decreased to 11% of net sales in the third quarter from 13% of net sales in the second quarter.

We experience an overall softness in this end market.

In addition, a portion of our more volume-oriented products sometimes moved to low-cost regions when demand decreases.

Historically, most of these products have returned when global demand increases.

Now let's talk about our customers.

Our top five customers comprised about 30% of third-quarter net sales and represent a strategic mix of commercial aerospace defense customers.

No customer represented more than 10% of sales for the quarter.

In alphabetical order, our top five OEM customers in the third quarter were BAE, Cisco, Hamilton Sundstrand, Juniper, and Raytheon.

Now let's look at our technological and operational capabilities.

The average layer count of our printed circuit boards in the third quarter was 13.8 as compared to 13.7 in the second quarter.

We continue to maintain a very high average layer count while improving our technological capabilities and increasing our higher-tech product mix with more HDI, sequential lamination, and rigid flex work.

Quick turn as a percentage of revenue decreased from 13% in the second quarter to approximately 11% in the third quarter.

But quick turn percentage was diluted by the increase in the aerospace defense end market, which generally includes very little quick turn.

In addition, the quick turn market was slightly softer overall.

Lead times decreased by approximately one week across all of our facilities from the second quarter.

Lead times for our commercial customers range from three to five weeks, while lead times for our aerospace defense customers are five to eight weeks.

And lead times for some of our higher-tech aerospace defense products are at 14 to 20 weeks.

At the end of September, our PCB book-to-bill ratio was 0.98.

That compares to the IPC book-to-bill ratio of 0.96.

While our book-to-bill ratio has moved down, we remain above the industry average.

And we all know this is a challenging market environment.

And we will respond accordingly and manage our business as we always have with a tight focus on financial discipline and cost controls and a long-term view of the future growth opportunities.

We have diversified and strengthened our customer base with an increased contribution from the aerospace and defense end market and decreased our reliance on the overall commercial market.

And importantly, we continue to generate strong cash flow.

We have the right business model.

And as the leader in high technology and aerospace and defense, we are strategically well positioned for the long run.

And we have an experienced and dedicated team who will strengthen the Company in challenging times.

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

Thanks, Kent.

In light of the challenges in the macro environment, we are pleased to be reporting solid results for the third quarter of 2008 in line with our guidance.

The aerospace defense end market led third quarter net sales of $169 million, which as expected declined from second quarter net sales of $173 million.

Gross margin for the quarter of 19% declined from second quarter gross margin of 21.1%.

Before I go into detail on the quarter, I want to note that results for the third quarter included a $579,000 unrealized loss related to TTM funds that were invested in the reserve primary fund.

As many of you know, this money market fund broke the buck in mid-September shortly after Lehman Brothers filed for bankruptcy protection.

While we do not know the exact extent, we do expect to realize a loss as the fund is liquidated.

And $579,000 is our best estimate at this point in time.

Of the $20.1 million that we had invested in this fund as of September 15th, we expect to receive back about $10 million in the next week.

As the fund's holdings mature, we expect to receive additional funds.

And we will update you on a quarterly basis as to the impact on the Company.

Now back to the third quarter detail.

Selling and marketing expense for the third quarter was $7.6 million or 4.5% of net sales, which is down slightly from second quarter selling and marketing expense of $7.8 million or 4.5% of net sales.

Third quarter G&A expense, including amortization of intangibles, was $9.1 million or 5.4% of net sales.

Second quarter G&A expense, including amortization of intangibles, was $9.8 million or 5.7% of net sales.

Third quarter G&A expense fell due to a number of factors, including lower accounting, consulting, and stock-based compensation expenses.

Third quarter total operating expenses of $16.6 million declined from second quarter total operating expenses of $17.5 million.

In the third quarter, we incurred stock-based compensation expense of $1.4 million.

64% of the expense was recorded in G&A, 28% in cost of goods sold, and 8% in selling and marketing.

Third quarter operating income of $15.5 million compared to second quarter operating income of $19.1 million.

Interest expense, which includes amortization of deferred financing costs, was $1.6 million for the third quarter, down significantly from $3.3 million in the second quarter.

As you'll recall, the interest expense in the second quarter included $1.9 million to amortize the remaining financing costs from our old debt.

Interest income was $702,000, which increased from $302,000 in the second quarter due to our higher cash balance.

Other net was $384,000 in the third quarter and includes the $579,000 unrealized loss related to our investment in the reserve primary fund, which I described earlier.

Other net was $1.1 million in the second quarter and included a $1.2 million charge to unwind the hedge related to our old debt.

Our effective tax rate in the third quarter was 33.7%, primarily due to a one-time tax benefit as well as the annual tax return to tax provision reconciliation.

The decrease in our effective tax rate from 36.7% in the second quarter to 33.7% in the third quarter increased diluted EPS by about $0.01 per share.

Third quarter net income of $9.5 million, or $0.22 per diluted share, was in line with guidance and compares with second quarter net income of $9.4 million, or $0.22 per diluted share.

Adjusting for the unrealized loss on our holdings in the reserve primary fund, we would have reported diluted EPS of $0.23 in the third quarter.

We continue to maintain a very strong balance sheet and cash flow, which speak to our financial discipline and operation controls.

We generated significant cash during the quarter.

And we continue to have a manageable debt position.

Cash and cash equivalents and short-term investments at the end of the third quarter totaled $135 million compared with $118.7 million at the end of the second quarter, an increase of $16.3 million.

Cash flow from operations was $19.1 million for the third quarter, due primarily to solid net income and a net improvement in working capital.

Net capital expenditures were approximately $3 million.

And depreciation was $5.4 million in the third quarter.

I'd like to update you on our expected capital expenditures for the year.

We've talked before about 2008 CapEx in the range of $20 million to $23 million.

In light of current macroeconomic uncertainties, we have gradually and prudently reduced our capital purchases to preserve cash on our balance sheet.

We currently anticipate that 2008 CapEx will be about $15 million.

Another factor worth mentioning is that inventories for the third quarter dropped $1.4 million.

Looking ahead to the fourth quarter of 2008, we're projecting revenue in the range of $156 million to $164 million and earnings in the range of $0.14 to $0.19 per diluted share.

We expect sales before intercompany sales in our backplane assembly segment to remain steady at third quarter levels and sales before intercompany sales in our PCB manufacturing segment to decrease by about 5% from the third quarter.

The gross margin percentage for the fourth quarter is expected to be in the range from 17% to 19%.

We expect that selling and marketing expense will be approximately 4.6% of revenue and that G&A expense, including amortization of intangibles will be about 5.8% of revenue.

And lastly, we expect our tax rate in the fourth quarter of 2008 to be approximately 37%.

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

Thank you, sir.

Ladies and gentlemen, at this time, we will begin our question and answer session.

(Operator Instructions) Our first question is from the line of Steven Fox with Merrill Lynch.

Please go ahead.

Hi.

Good afternoon.

A couple questions on the gross margin, please.

First of all, near term, if you look at your guidance for Q4, I guess we're talking anywhere from flat to down a couple hundred basis points.

Besides volume, is there any certain mix effects that you're looking for, both positive and negative, in Q4 to help or hurt the margin?

And then longer term on the gross margin, as you go into an economic downturn, I was curious how you anticipate your quick turn business to react to that how it usually does during these times.

Yes, Steve, this is Kent.

On the last part of that question with regards to quick turn, we did see just a little softness in the end of the quarter.

That isn't a significant amount.

It's kind of flowed over into the fourth quarter.

It's not something that I would get concerned about in light of the macro environment that we're going through.

Our quick turn work sometimes is pretty strong in the fourth quarter.

When we get to around the holidays and so forth, it kind of tapers off at the end of the fourth quarter.

So generally, we're probably a little stronger right now than we are.

So I think that's a direct impact of some of the macro environment that we're going through.

With regards to our margins, this is a leveraged business.

And we do have a lot of leverage in our models.

So when the top line comes down, it has the effect of dropping the gross margins and operating margins.

So that's the main impact that we're going to deal with in the next quarter.

However, I think that when you look at our worth with regards to aerospace and defense becoming a bigger portion, that's probably going to be a little flat.

We should have a little better mix to compensate for that.

But the leverage is a pretty big nut to overcome.

So overall, the mix is helping a little net but not in a major way I guess quarter to quarter.

I would think so.

I think when you look at our end markets going forward, like networking communications, we think that's going to be down a little bit in the fourth quarter just based on the lower infrastructure work, not only in networking, but also in the communication portion.

Aerospace and defense, we think that's going to be flat this quarter.

That's a little bit harder to forecast due to the end of the year impact.

But I think that will be flat.

Our computing and storage peripherals, we're forecasting that to be flat on a dollar basis, too.

We think there's some backlog there that indicates that we'll be fine in that end market.

And then the medical instrumentation, that seems to be -- well, there's just a general softness throughout that end market segment.

We think that will be down in the fourth quarter.

We also have a little portion of that work that's more volume oriented that I mentioned in our prepared comment here that when global demand gets a little soft, there's a portion of that work that kind of moves to the low-cost regions of the world.

And then when demand picks back up, then that comes back to us.

Historically, that's been the pattern.

So within that medical industrial instrumentation, we have that impact going on.

So overall, I think we will have a little better mix end market wise.

I think we'll have a better mix from a technology perspective that will help our gross margins.

But it's just not enough in the short run to overcome the soft top line.

Understood.

That's very helpful.

Thank you.

All right.

Thank you.

And our next question is from the line of Shawn Harrison with Longbow Research.

Please go ahead.

Hi, guys.

I was just maybe hoping you could comment on potential cost cutting actions here if revenues stay at the current level heading into maybe the March quarter.

Yes, Shawn, that's a good question.

And certainly at challenging times like this, that's more than just on our mind.

And I'd like to mention that we're always looking at our business and evaluating what happens if we get soft or where we can take advantage of the strong upturns.

So right now, we're looking right now at the latter.

When you have a slowdown, kind of the first thing you do is react with any discretionary spending.

And we've taken that action.

We're controlling any discretionary spending very tightly.

Steve commented on the CapEx that we've trimmed back.

There's no need at this point in time to invest in CapEx.

I think the good news there is that our previous CapEx investments have proven to be very wise because we've positioned the Company now to be able to produce right in the sweet spot of technology and the sweet spot of high mix.

I think our business model that we've followed enabled us to invest wisely in the past.

So we don't need a lot of CapEx to be successful here.

So along with discretionary spending, then the next thing we look at is we control costs across the board.

But the main area that you have opportunities is you look at your hours worked.

And you start to reduce the overtime, reduce hours worked, and just kind of escalate the controls there as you control your costs across the board.

On the material side, I believe and we're anticipating that with the decrease in the metals and the decrease in the oil that we'll see some lower raw material costs going forward.

Now I don't think we'll see anything in the fourth quarter because that takes a little while to flow through the system.

But when you move into the first quarter, we've seen price increases on the way up.

And we fully anticipate to see price decreases on the way down.

So we'll be better off on a material side.

We're controlling costs across the board.

We're tightly controlling any discretionary spending.

And we certainly are controlling the labor side.

I guess on that note, if I take the medical industrial instrumentation and other, it looks like that business for the year is going to be down significantly, maybe something along the lines of 15%, 20%.

Has there been thought potentially of consolidating additional work into the facility where a majority of that work is done or I guess maybe taking some of that work out?

What I'm getting at is really just facility consolidation or footprint kind of realignment potentially if things stay the way they are.

Yes, I think kind of the steps that I outlined earlier, the steps that we're going to take, one of the things that we will always look at and make a judgment about is how deep the slowdown is and how long it's going to last.

And so given those judgment criteria, that lays out what action that we will take.

We're always looking at ways to make the Company stronger.

I can let you know that we'll do whatever it takes to protect our profits.

And we will look at all options.

But that kind of depends on what the marketplace gives us going forward.

Okay.

Maybe a more positive note if we could -- just your thoughts, say, over the next six to nine months about the aerospace and defense market, be it underlying demand trends that you're seeing and then secondarily the opportunities you have for share gains, particularly given that you look at DDI as well as [Merricks] at least talking significantly about making in roads into that market.

Yes, well, I think as you know, we're the leader in aerospace.

If you just look at our printed circuit board segment, 46% of our sales, nearly half of our sales come from the aerospace and defense end market.

That positions us such that we can invest in the front end work that it takes to satisfy these customers and provide them with more value added.

So we're optimistic that will continue to grow in that aerospace and defense end market segment just as we have in the past.

I mean, if you look at us, say, the fourth quarter of '07, we were 33%.

Now we're up to 39%.

We note that the 2009 defense budget was signed.

So we think that's a good sign.

And there's a lot of work in the pipeline that we are looking at now and look forward to a pretty good year in 2009 in aerospace and defense.

The places where we're seeing most growth is in the defense side.

And those products are related to more high technology products, where you're looking at communications, radar, improving existing defense jets, planes, and so forth.

So that will continue.

We believe that will continue.

So we're pretty optimistic about that and about our position and ability to serve our aerospace and defense customers.

Okay.

And then just, Steve, maybe I missed this.

But what did you say CapEx was for the quarter?

$3 million.

And we expected to end the year about $15 million, so kind of similar number for Q4 and in the $15 million versus the $20 million to $23 million we kind of originally expected.

Okay.

And probably holding that rate here until we get maybe better visibility on demand trends.

[Yes, sir.]

Okay.

Thank you.

All right.

Thank you.

Our next question's from the line of Amit Daryanani with RBC Capital Markets.

Please go ahead.

Thanks.

Good afternoon, guys.

Just a question on the book to bill -- I think you guys talked about it being around 0.98 for Q3.

Could you just talk about what it is in the month of October?

Has it fallen off anymore?

Is it stable?

Amit, that's a good question.

And I haven't looked at that.

But I don't believe that there are any major fall offs.

I think we're pretty flat through October.

The month of October is not -- I'll go out on a limb and say I don't believe it's negative.

So that's about how confident we are that it's pretty flat.

Got it.

And then I guess my second question really was I think -- I mean, you guys obviously did a convert back in May to raise some money for potentially doing acquisitions in Asia.

Most of those converts right now, they are trading at like $0.60 to the $1.

And I realize you guys probably want to do a deal in Asia at some point.

But any thoughts on buying back these converts that you issued at par but are trading at $0.60 on the $1 today.

Actually, that's a really good question.

Obviously, the market has just gone crazy in the last month.

And so it's a viable option for us.

But I still think that the biggest intention for us is to use that cash to grow the business as we originally outlined, although you're right.

It might be tempting to think that we can take our convert off the table entirely with half the cash that we have on our balance sheet right now effectively.

But at this point, I think our focus -- and the same thing goes for share buyback.

I think our focus right now despite the challenging credit markets and so forth would be to still pursue opportunities in Asia while at the same time being ever vigilant about our business here in North America and making sure that we focus primarily on making sure that this was possible.

And just maybe extending that conversation a bit, you guys have obviously been looking at Asia for quite awhile.

And the hesitation was the valuation and how that trended and also what you guys -- if you could find the quality of the company you wanted.

At least on the valuation front, have you seen that contract pretty dramatically get more attractive in Asia at this point?

Yes, Amit, I think that the financial crisis has not been very helpful to this process if you will.

I look at the valuation of our stock and where it's at.

And other companies have had a similar impact.

So relatively speaking, while our market cap is down, so are other market caps coming down.

If there is a kind of a silver lining to this challenging environment that we're going through, it does create attractive acquisition opportunities.

And TTM -- and Steve talked about our cash at $135 million.

Well, that gives us a lot of flexibility here.

And as acquisition opportunities become more attractive because of this environment, hopefully that enables us to get thing across the finish line.

But an overall update is that we continue to have conversations and move that ball forward.

But it's not at a pace that we would have anything to talk about or anticipate happening in the near future.

Got it.

And just finally, Steve, I think the $10 million -- I think you said you were going to get $10 million of the money market fund back sometime soon.

What about the remaining $10 million?

Is there some sort of maturity that we should be aware of on those assets?

Yes, I kind of refer all of you guys to the reserve primary fund website, which actually is posting updates on a daily basis on what their plans are just so you guys can stay abreast of the changes as we are here.

But effectively, the money market fund was Rule 287 compliant.

So it means that the average weighted maturity of their assets are 90 days but that they can have things out to 13 months.

So effectively, what they're doing now is just letting the stuff mature because there's really not any market right now for any of the commercial paper and other investments they hold, although the Fed has, of course, moved into that market.

And hopefully, we'll see some loosening of that market between the next few weeks because of that Fed action.

But that said, as the money -- as the funds they hold mature, they get more cash.

And they will be able to distribute to us.

They have about $50 billion in assets, of which now about $25 billion is in cash.

So they should -- and they've said that they expect to make a distribution at the end of this week.

And it would be about half their assets, therefore about half of what we have.

The rest of it, if it goes by maturity, will come in probably in another big chunk towards the end of this quarter.

And the rest could conceivably come in, in drips and drabs throughout the next year if they have to wait for maturity for that cash to come in.

If the money markets loosen up a little bit and actually [instantly] trading hands, then I think we hopefully see that money come back to us sooner than that.

But that's a bit of an open question until we see what the Fed action takes root and actually makes those markets open more.

Got it.

And then just lastly, if I could, any -- just given just the macro environment we're going through, any thoughts on risk of inventory obsolescence?

Could you just maybe also talk about your AR aging if there's any risk to the AR numbers there?

Sure.

Those are real good questions.

They're questions that we actually are focusing on now, especially like looking at the credit quality of our customers and making sure that all the AR we have is collectible.

And of course, we do have a reserve, as all companies do against AR for possible lack of collectibility.

We haven't increased that reserve particularly.

We obviously track it every quarter and update it.

By and large, we're fortunate in that most of our customers are large.

Of course, on the aerospace defense side, it's customers like Northrop Grumman, BAE, Raytheon, good companies that pay their bills.

And of course, even on the contract manufacturer side, it's large customers, like Flextronics, Plexus, and so forth.

So by and large, it's the little companies that we deal with that we're more concerned with on the AR front.

And we're reviewing those more closely and will be quick to put companies on credit hold if need be if they start slowing down on their payments.

In terms of inventory, we also keep a reserve for excess and obsolete inventory.

And that's both general and specific.

So we have general reserve based on write offs and had to do an inventory in the past.

And we also have particular -- if there are particular items or particular customers we have to reserve against, we do that as well.

So I think our processes on both those fronts have been quite good throughout the last couple years.

[We've done] the integration with Tyco.

And we're just kind of beefing up that process, making sure we do an extra check on, say, the credit quality of customers.

And we'll be checking to make sure that our inventory reserves are adequate.

But I'm not expecting any significant up tick in either of those items for the fourth quarter.

And they aren't factored into our guidance because we don't think that we'll need to.

Perfect.

That was helpful.

Thanks a lot.

All right.

Thank you.

Our next question is from Matt Sheerin with Thomas Weisel Partners.

Please go ahead.

Yes, thanks.

Regarding the guidance, it looks like the networking communications areas is the one area that's really getting hit in terms of booking trends that you're seeing.

Is that mostly with your North American customers because I remember you had talked about weakness in China due to the Olympics, China Mobile, et cetera, that you're expecting that to come back.

Is that business coming back?

And is it mostly the U.S.-based customers where you're seeing weakness?

Yes, good question, Matt.

We're seeing some weakness, like I mentioned, in kind of the infrastructure for networking, the infrastructure for communications in North America.

We talked about a key customer last quarter being soft.

That key customer, as we expected, has placed orders in the fourth quarter now.

So we will be increasing our operations and ordering components and so forth.

We would anticipate just a portion of that being shipped in the fourth quarter, but most of that being shipped in the first quarter and beyond.

So China -- our China operation is going to be pretty flat this year -- or excuse me, this quarter.

And about 92% of what we do in Shanghai backplanes is in the networking communications.

So it's almost like all of that work is networking communications.

So being flat this quarter and then if -- it's hard to forecast beyond that.

But based on the one key customer coming back, hopefully, the first quarter would be up.

Okay.

But looking at the U.S.

customers, did you start to see the order rates just drop off in September where a lot of other companies had reported seeing weakness?

Or did -- has it come later?

And what kind of demand leads are you getting from those customers now in terms of the rest of the quarter and even your rolling forecasts that point to the March quarter?

Yes, as far as how it went through the quarter, it probably was a little bit more dramatic towards the end of the quarter.

And we're making some general statements because not all of the customers were down.

I mean, some of the customers were up.

As we are looking out going forward this quarter, we talked about a continued softness in that end market segment.

So that will probably decrease $2 million to $3 million, somewhere in there in just a dollar basis.

Okay.

And on the gross margin, you explained why it was down in the quarter.

I know mix played an issue as well as the lower revenue.

Now has pricing begun to weaken at all?

Matt, we have not seen pricing start to be more competitive.

Our price -- of course, price per panel was up 2% this quarter.

But that was mainly due to the mix shift.

On a market basis, prices seem to be holding in there at this point.

Okay.

And then I know a bunch of people asked about the cost cutting.

It sounds like you're sort of making some plans, but nothing set in stone yet.

You want to see how business goes.

I know a year or so ago you had some [fellows] at Chippewa Falls and some other actions like that.

I mean, those are the times of things that you would consider doing again?

Yes, Matt, I mean, right now, we're monitoring over time hours worked very closely.

And it's not in all of our facilities that we have the challenge.

But in those that we do, we are certainly monitoring the hours worked.

We're also looking at what we do if we need to reduce those hours further with reduced work weeks or maybe extended shutdowns around holidays and so forth.

So we have all those options on the table.

And we look at this on a daily basis.

And the one thing that we have experience at is controlling our costs.

We I think have demonstrated that we know how to do that in the past.

I guess that's a skill set that I wish we did not have.

But we've got it.

And we need to use that when it's appropriate.

I think we can also manage on the upside.

But right now, our challenge is to control our costs, preserve our profits, which we will do.

And we will take whatever actions we think are necessary.

The judgment is -- are there short-term issues?

Or are they long-term issues?

How deep?

How long?

What's the appropriate action because we'll match our cost side with the decrease in sales as we need to?

Got it.

And just back to the revenue picture, are you seeing opportunities or have you been taking share from smaller competitors, particularly in this environment where shaky balance sheets obviously will put some of these companies at risk?

Yes, good point, Matt.

I'm not sure that we've -- we continue to capture market share because our book to bill is higher than the industry.

And our sales continue to go up higher than the industry.

I think one of the things that's been very helpful to us in 2008 is the market share gains that we've had.

Now having said that, I still think there's more opportunity out there because those market share gains have been based on our capabilities and our value that we provide our customers.

We still have the upside relative to weak competitors and customers being nervous about weak competitors.

And TTM with our strong balance sheet being the largest manufacturer of print circuit boards in North America, that's a pretty quality company.

And when times get tough, I think we'll be able to take advantage of that because not only can we service customers and provide value, but we are certainly less risky to do business with.

Got it.

Okay.

Thank you.

Thank you.

And our next question's from the line of Kevin Kessel with J.P.

Morgan.

Please go ahead.

Yes, hi there.

It's Kevin Kessel from J.P.

Morgan.

Kent, I just wanted to clarify what you just said about the networking and communications business.

Did you say you thought probably on an absolute dollar basis it would be down about $2 million to $3 million in the December quarter?

And that's all PCB related?

That's correct, Kevin.

Yes, it'll probably be down about $2 million to $3 million on a quarter-over-quarter basis and maybe a little bit more.

We also will see kind of the medical industrial down a couple of million dollars in that end market segment.

And then if you plug in kind of an overall decrease of $2 million to $3 million because of the market conditions, you get to about a $6 million or $7 million decrease is where we're forecasting our printed circuit board operation to be.

Okay.

Because yes, because what I'm looking at -- I mean, I'm looking at just the midpoint of your guidance at about $9 million down quarter on quarter.

And so this is $2 million to $3 million of it.

And I remember earlier you were saying you thought peripherals were going to be flat and aerospace would be flat.

So then that would imply kind of the remainder of the weakness would be coming all out of that one industrial medical instrumentation segment?

Yes, there's about $2 million to $3 million in medical industrial and $3 million in the networking and communications.

And these are kind of rough numbers, Kevin.

And then you've got the overall.

We're looking at the overall kind of depressed situation across the board.

And so that would make up the difference between the $7 million to $8 million, $9 million decrease.

Okay.

I got it.

And so when you look at I guess where we kind of are right now just overall, I mean, clearly, companies don't have a lot of visibility.

And obviously, that's true for your industry, too, here.

But I'm looking kind of backwards at your June 2007 quarter, where you had I guess a very similar profile in terms of top line margins, essentially everything.

It almost looks identical to what you were guiding to for December '08.

But June '07 kind of marked the bottom I guess of that last period of decline.

And I guess at this point, while this is the third straight quarter of decline from a top line perspective, is there any sense that you have at all that things are getting to a point where they might be bottoming?

Or is it just impossible to say?

Or do they think like they're going to go down lower?

Kevin, I don't have an answer.

I wish I had an answer to that.

But I don't.

We've got our forecast out there for the fourth quarter.

And then trying to predict what's going to happen beyond that is -- we just don't have a crystal ball.

And so I can't -- I just am not -- I just don't have an answer.

Okay.

And then just another question on the industrial medical instrumentation sector, is there any way you could kind of help parse that out for us so we kind of have a better understanding of maybe where the bigger weakness is coming from because I know that [semi-cap] equipment's in there.

And that's clearly one of the worst performing markets across all of technology at the moment.

So that's not so surprising.

But medical doesn't seem to be overall under as much pressure nearly.

And clearly, industrial's under pressure.

But I guess it depends on what you're doing in industrial.

So if there's a way to maybe parse it amongst those segments where maybe you're seeing more weakness versus another and maybe from a product perspective so I can just get a better sense for where the boards are going into.

Kevin, yes, certainly the test equipment is impacting that end market significantly.

When I look across the medical industrial instrumentation, there's a portion of work in there that I talked about earlier that's a little bit volume oriented.

And that's in that bubble area so that when global demand goes down, there's a 15% of that that kind of migrates over to the low-cost region.

And then as global demand gets more healthy, most of that work comes back to us.

So those are -- that's probably what's compounding that particular end market.

We don't have that kind of bubble migration to the low-cost regions in our other end market segments.

That work left a long time ago.

This is work that has been a little more resistant.

Even a lot of companies in the low-cost regions don't want this work.

But when it gets to the point of low enough demand, then they -- even though it's not attractive, they can take that.

The rest of our work is work that belongs here in the U.S.

So I think you're getting a little double whammy in the medical industrial instrumentation.

And the 15% -- approximately 15% -- of that end market that's subject to this bubble phenomenon is in all three of those categories of that end market.

That's across -- and that's where the flight -- is the flight -- as well, the flight to Asia happening across all three of them?

Or is it more medical?

No, it's pretty much all three.

All three, just the higher volume programs that have that sort of a characteristic.

Yes, it's just more of a volume-oriented nature.

These are medium technology work.

And generally, while we say volume, it's not volume that's attractive to a volume printed circuit board manufacturer.

But when you don't have anything in your facility, it's better than nothing.

So this is kind of the next step.

But as -- like I said earlier, as the global demand increases and there's other opportunities, then this work kind of comes back to us.

Now those are pretty broad, general statements, again.

But that's kind of what happened.

That's what's happening.

I can't put a finer point on it because we really can't tell.

I understand.

Okay.

Great.

Thanks so much.

All right.

Thank you.

(Operator Instructions) Rich Kugele with Needham & Company, please go ahead with your question.

Yes, hi.

Good afternoon.

Just a couple questions -- I guess, first, what things can you do over the next 6 to 12 months if we have this similar environment continue throughout to improve your gross margins?

Yes, good question, Rich.

I think it depends on what level we stay at.

I think as we stay at the level we're at right now with our discretionary spending controls, looking at cost cutting in all areas.

And one of the things that happened in these kinds of times as we start to really drill down and really tighten up our cost control side of the equation, we generally find ways to become more efficient and more productive.

So I think we'll have some of that as we go forward.

But maybe from a modeling perspective, should we just assume that most of the leverage winds up at the operating line, rather than gross?

Certainly, the leverage flows through.

We've looked at like 30% to 40% leverage down and leverage up when the top lines goes.

That's in the printed circuit board segment.

It's not that great of leverage in the backplane segment.

But certainly in the circuit board segment when you go down top line, the leverage is what makes a challenge for us as operators to overcome.

So what we need to do then is look at all of the variable costs and some of the fixed costs that can become variable and drive those costs outside of our business.

And that's what -- kind of what we're going to do.

The good thing, Rich, is this isn't anything new for TTM.

I mean, we have a cost control type culture here.

It's always in place.

Now it going forward will be more of a major focus and a major impetus to look at what we can do.

And then what action we take longer term depends on our judgment of how long we'll be down and how deep it stays.

And we will take the right action.

I mentioned earlier that we're here to protect our profits and here to grow those profits.

Right now, it's more of a protection of profits.

And we're going to take the action that it takes to protect those profits.

Okay.

And then just lastly, I know we always ask you about going to Asia.

But the situation's changed a little bit with the stock prices, market caps of both Merricks and DDI where they are.

I mean, Merricks is just $16 million, DDI now just over $80 million.

Does that now in your mind bring North America back to the table as a potential roll up in this environment as certainly being easier to integrate than an Asian situation?

Or any thoughts on just consolidating during this downturn.

I think that's an insightful question.

And as we look at all our opportunities, both in Asia and in North America, what happens in these volatile times is that acquisitions -- companies that are challenged become more attractive.

They actually become less expensive.

On the other side of the coin is in these challenging times those companies become a little more risky.

So acquisitions at the same time become more attractive or less costly.

But they become a little more risky.

So when you line up the risk of Asia versus the risk of North America, it does throw a little more balance in the North American category versus Asia.

Okay.

Great.

Thank you very much.

Thank you.

Scott Coleman with Morgan Stanley, please go ahead with your question.

Hi.

Thanks and good afternoon.

I just want to understand some of the commentary about PCB versus backplane and some of the trends within the networking and com space.

So you mentioned you had one key customer that was soft -- this was in your last quarterly call -- that was soft from an order perspective.

And I'm assuming that impacted revenue in the September quarter.

Now it sounds like they're back from an order perspective.

Is that -- am I understanding that correctly?

Yes, that's exactly right.

They're back.

And they've placed orders.

And we're ramping up production, ordering materials, and so forth.

The benefit from that order and the ramp and the increased output won't be felt until next year.

We'll ship some of that product in the fourth quarter.

But most of that product will begin shipping in the first quarter and beyond.

And that's a customer that's largely a customer of our backplane assembly business and primarily based in Asia.

Right.

Okay.

And okay, that's helpful because the -- and so if backplane is going to be steady next quarter and PCB is going to decrease around 5% I think you said, is there -- are there -- obviously there are other customers that are making up the backplane business.

And you're then seeing a drop off in some of your other coms customers on the PCB front.

Is that right?

Yes, I'd say that the customers that support our backplane assembly business by and large are fairly steady.

There may be some shifts from one customer to the next.

But that business is going to be roughly flat from the third quarter levels.

And so it's made up of roughly the same customers as normal.

Okay.

But the rest of the weakness that Kent alluded to in networking is going to come from other customers that we have on the PCB side.

For the most part, we don't have a lot of customers that do both PCB work and backplane assembly.

Okay.

Then just a follow up on a question earlier about inventory -- when you look across the supply chain, what do you see in terms of weeks of inventory at the various hubs at EMS customers for your inventory?

Are you getting concerned that things are starting to back up a little bit?

Actually, no.

And that's actually something we're pretty fortunate about.

If you look at our finished goods inventory, which is what's basically stored in the hubs, it's gone down over the course of the quarter.

It was $8.9 million in finished goods at the end of June.

It's $6 million at the end of September.

So it's down $2.9 million.

And I actually expect some of that finished goods inventory to move out in the fourth quarter as well.

Okay.

So I'm not seeing a real backup in inventory.

And we've seen some growth over the course of the year in our business in inventory, but primarily in the assembly operations and including our military-focused assembly operation in Connecticut.

And we've mostly just built up inventory in terms of increased demand from our customers and increased orders.

So I'm not worried about our inventory levels really at all.

I mean, I think I want to make sure that we get them down solely because it's not where I want to park my cash.

I'd rather have our cash earning interest as opposed to sitting on a shelf in a warehouse.

But --

Right.

-- in terms of backing up in the supply chain, I think the biggest indication of that would be, say, if finished goods were bloating.

And it's clearly not.

We're moving actually in the direction of -- a real favorable direction on finished goods.

Okay.

Excellent.

And then just shifting back to PCBs, is the softness that you're seeing this quarter across multiple customers?

The way you I think you positioned it in the prepared remarks was due to softness in both enterprise and telecom.

So I'm assuming that it's broad based as opposed to customer specific.

Yes, that's exactly right.

And I think it's important to note that not all of our customers are down.

It's not like across the board they're all down.

We have some up, some down.

But there's nobody, no one customer that specifically -- except for the key customer we talked about in Shanghai.

Yes.

There's no one in the printed circuit board that's jumping out and contributing to the majority of the decline.

Okay.

Okay.

Great.

I appreciate the insight, fellows.

Thanks.

Okay.

And there are no further questions.

Mr.

Alder, please continue with any closing comments.

Thank you for joining our conference call today.

I think a lot of the questions are interesting, have been around the marketplace and what's going on and what we're doing about it.

And hopefully, you can tell through our answers that we are focused on protecting our profitability and that we will do what it takes from cost controls to keep our margins as high as possible.

We've already taken some actions with CapEx controlling labor, looking at discretionary spending.

Longer term, I think the Company is very well positioned.

We're the largest printed circuit board company in North America.

That has value.

We're strategically positioned with the right technology, the right capabilities.

We've got excellent customers, a broad end market.

Balance sheet -- we can't say enough about $135 million of cash on the balance sheet.

I think that gives us the flexibility that we need.

And we have an experienced management team that knows how to manage in down times.

So we're united in driving profitability and making sure that we through these challenging times come out stronger as a company.

So we will talk to you next quarter and report on the progress we're making.

So we thank you very much for joining us today.

All right.

Thank you.

Ladies and gentlemen, this concludes the TTM Technologies third quarter financial results conference call.

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