TTM Technologies Inc (TTMI) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thanks for standing by.

Welcome to the TTM Technologies first 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)

This conference is being recorded April 30th, 2009.

I would now like to turn the conference over to Kent Alder.

Please go ahead.

Okay.

Thank you.

And good afternoon.

And thanks for joining us for our 2009 first quarter conference call.

Joining me today on the call is TTM's CFO Steve Richards.

I will begin with a review of the business.

And Steve will review our financial performance.

And then we'll open up the call for your questions.

But 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 of various industries that the Company serves, and 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 call.

We will also present non-GAAP financial information in this call.

For a reconciliation of our non-GAAP financial information to the equivalent measures under GAAP, please refer to our press release, which we filed with the SEC and is posted on our website.

Now today, we announced our results for the first quarter of 2009.

Our results, which were in line with our guidance are a clear reflection of the unprecedented challenges companies face today due to the weak macroeconomic environment.

However, during the quarter, we continued to move the Company forward by leveraging our financial discipline and maintaining our strategic focus.

Despite the decline in revenue, we generated $12.7 million of free cash flow, strengthened our operational performance and continued to reduce our costs.

Overall, we have improved TTM's cost structure and strengthened our competitive position.

Our end markets are diversified.

And the stability of our aerospace defense end market again contributed to our success.

In January, we announced that we were closing our underutilized Redmond, WA, facility and shifting production to TTM's other plants to increase utilization and productivity in those facilities.

We ceased operations in Redmond at the end of March.

The transfer of customers and the closure process is proceeding as planned or better.

Now let me provide a quick overview of the first quarter.

Our printed circuit board manufacturing segment recorded first quarter net sales of $132.3 million compared with $144.2 million in the fourth quarter.

The decrease was mainly due to weakness in the networking communications end market.

First quarter operating segment income was $4.4 million compared with a loss of $107.5 million in the fourth quarter of 2008.

First quarter 2009 and fourth quarter 2008 operating income included asset and goodwill impairment charges of $0.3 million and $120.6 million, respectively.

Excluding these charges, operating segment income for the PCB manufacturing segment was $4.7 million for the first quarter compared with $13.1 million for the fourth quarter.

On a sequential basis, average price per panel increased 7%, due primarily to a higher-tech product mix and an increase in our aerospace defense business.

In general, market pricing was similar to last quarter.

However, we are seeing more random price competition this quarter than last quarter, particularly as we attempt to gain market share.

However, at this point in time, there are no major trends developing.

Panel production declined by approximately 13% sequentially, due primarily to softer orders from our commercial customers.

Now for the backplane assembly segment, first quarter net sales were $24.9 million compared with $31.1 million in the fourth quarter.

As in our printed circuit board segment, the decrease was due to weakness in the US networking communications marketplace.

First quarter operating segment income was $1.5 million compared with a fourth quarter operating segment loss of $0.4 million, which included a fixed asset impairment charge of $2.7 million.

Excluding this charge, fourth quarter operating income for the backplane assembly segment was $2.3 million.

The 3G rollout in China contributed to the backplane assembly performance in Q1.

And we expect that going forward we will continue to benefit from this project.

Now let's look at our four end markets.

Almost all of the changes in our end markets are directly attributable to the weak macro environment.

Overall, we continue to see stable demand in aerospace and defense offset by lagging demand with our commercial customers, primarily in our networking communication end market.

The aerospace defense end market was up slightly in absolute dollars compared to the prior quarter and increased from 40% of total sales in Q4 to 45% of total sales in Q1.

This reflects a stable base of business with our aerospace defense customers.

And computing storage peripheral end market decreased slightly in absolute dollars, which reflects the current economic conditions but remained flat as a percentage of sales at 12%.

The medical industrial instrumentation end market represented 10% of net sales this quarter, which is down from 11% in the prior quarter.

The majority of the decrease was in the instrumentation portion of this end market and was mostly associated with weakness of test and measurement products.

The networking communication end market showed the largest decline in terms of absolute dollars and as a percentage of sales, dropping to 33% of net sales from 37% in prior quarter.

The decline was essentially across the board with the exception of Chinese customers that benefited from the spending of the 3G infrastructure equipment implementation.

Our top five customers comprised 35% of first quarter net sales and represented a strategic mix of aerospace, defense, and commercial customers.

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

In alphabetical order, our top five OEM customers were BAE, Cisco, Huawei, ITT, and Raytheon.

Operationally, the average layer count of our printed circuit boards in the first quarter was 13.8 compared to 13.7 in the fourth quarter.

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

Quick turn as a total percent of revenues was at 10% in the first quarter, a slight decrease from 11% in the fourth quarter, primarily due to a higher percentage of aerospace and defense sales.

We continue to focus our quick turn capabilities on the high-tech portion of the commercial marketplace.

Lead times were steady quarter on quarter.

Lead times for our commercial customers ranged from three to five weeks, while lead times in our aerospace defense facilities are generally at five to six weeks.

Lead times for some of our high-tech specialized aerospace and defense products are at 14 weeks.

At the end of March, our printed circuit board book-to-bill ratio was 0.98, up from 0.92 at the end of 2008.

Our book-to-bill ratio reflects the increased orders from aerospace and defense customers.

As a reference, the IPC book-to-bill average at the end of March was 0.92.

Now Steve will review our financial performance for the first quarter and discuss our outlook for the second quarter.

Thanks, Kent.

And good afternoon, everyone.

As Kent noted, we continue to execute well, despite a challenging business environment.

And our operating results for the first quarter of 2009 were in line with our guidance.

Before I begin, I want to point out that I'll be discussing our results on a GAAP and non-GAAP basis.

Historically, the only non-GAAP measure we report has been EBITDA.

Effective this quarter, we'll discuss non-GAAP net income and earnings per share because we believe this information will give our investors a more accurate view of our business.

As Kent noted, we've included a reconciliation of our non-GAAP financial information in the press release.

With that, let's turn to financial results.

First quarter net sales of $149 million decreased $15.9 million, or 9.7%, from fourth quarter net sales of $164.9 million, due primarily to weaker demand for commercial printed circuit boards.

Gross margin for the quarter of 16.3% declined from fourth quarter gross margin of 18.6%.

Selling and marketing expense for the first quarter was $7.2 million, or 4.8% of net sales, as compared to fourth quarter selling and marketing expense of $7.4 million, or 4.5% of net sales.

First quarter G&A expense, including amortization intangibles, was $9.3 million, or 6.2% of net sales.

Fourth quarter G&A expense, including amortization intangibles, was $8.8 million, or 5.3% of net sales.

First quarter G&A expense includes the cost of our year-end financial statement audit.

In the first quarter, we incurred stock-based compensation expense of $1.6 million as compared with $1.2 million in the fourth quarter.

55% of the expense was recorded in G&A, 26% in cost of goods sold, and 9% in selling and marketing.

During the first quarter, we recorded a restructuring charge of $2.5 million, or $0.04 per diluted share, related to the closure of our Redmond, WA, facility and other layoffs announced January 15th.

Operating income for the first quarter was $5 million compared to an operating loss of $108.9 million for the fourth quarter.

Fourth quarter operating loss included significant non-cash impairment charges of $123.3 million related to goodwill and fixed assets.

First quarter interest expense, which includes amortization of differed financing costs, was $2.7 million.

As noted in the press release, during the first quarter, we adopted FASB Staff Position APB 14-1, which increases the interest expense on our outstanding convertible debt.

The adoption of APB 14-1 resulted in a non-cash increase in interest expense of $1.1 million for the first quarter and is expected to result in increased interest expense of approximately $4.6 million for full-year 2009.

Fourth quarter interest expense was $2.8 million.

We have adjusted fourth quarter results to reflect the retroactive impact of adopting APB 14.1.

First quarter interest income was $99,000 as compared to fourth quarter interest income of $223,000.

First quarter other net was an expense of $108,000.

This compares to fourth quarter other net expense of $416,000.

This consists primarily of foreign currency translation adjustments for our Shanghai operations.

Our effective tax rate in the first quarter was 38.2% compared to 38.1% in the fourth quarter.

Net income for the first quarter was $1.4 million, or $0.03 per diluted share, compared to fourth quarter net loss of $69.2 million, or $1.62 per basic share.

First quarter non-GAAP net income was $5.4 million, or $0.12 per diluted share.

This compares to fourth quarter non-GAAP net income of $9.3 million, or $0.22 per diluted share.

Non-GAAP net income excludes amortization intangibles, stock-based compensation expense, non-cash convertible debt interest expense, asset impairment expense, and restructuring charges, as well as the income tax effects related to the expenses.

Adjusted EBITDA, which excludes asset impairment charges, for the first quarter was $11.1 million, or 7.5% of net sales, compared with fourth quarter adjusted EBITDA of $20.7 million, or 12.5% of net sales.

Now let's turn to the balance sheet, which continues to remain strong.

We again generated significant cash during the quarter and continued to have a manageable debt position.

Cash and cash equivalents and short-term investments at the end of the first quarter totaled $164.2 million, an increase of $12.1 million from $152.1 million reported at the end of the fourth quarter.

In addition, cash grew by approximately $10 million during the month of April.

Balance and short-term investments decreased due to further collections of $1.3 million from our investment in the reserve primary fund.

In addition, we received $903,000 more from this fund in April.

Of the $20.1 million that we had invested in this fund as of September 15th, 2008, to date, we received back $18.1 million.

Cash flow from operations in the first quarter was $16.3 million, due to both solid cash earnings and a reduction in working capital.

Net capital expenditures for the quarter were approximately $3.6 million.

And depreciation was $4.9 million.

Looking ahead to the second quarter of 2009, we expect revenue in a range of $141 million to $149 million.

We expect GAAP earnings in a range from $0.08 to $0.14 per diluted share and non-GAAP earnings in a range from $0.13 to $0.19 per diluted share.

Gross margin percentage is expected to be in a range from 17% to 19%, reflecting cost savings generated from the Redmond plant closure and headcount reductions in the first quarter.

We expect that selling and marketing expense will be approximately 5% in revenue and G&A expense, including amortization intangibles, will be about 5.8% of revenue.

We also expect to record a restructuring charge of $200,000 for retention payments to some remaining Redmond employees.

We expect our tax rate to be approximately 38%.

As a result of the adoption of APB 14-1, we will record an additional non-cash interest expense of about $1.1 million, or about $0.02 per diluted share, in the second quarter.

As a reminder, our $175 million convertible debt bears interest at 3.25% per year or about $1.4 million per quarter.

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

Thank you, sir.

We will now begin the question and answer session.

(Operator Instructions).

Our first question comes from the line of Shawn Harrison with Longbow Research.

Please go ahead.

Hi.

Good afternoon.

Just really, first thing's clarification on the guidance.

Non-GAAP gross margins in the first quarter, were they about 16.6%?

And then how does that translate into the gross margin guidance you gave for the second quarter?

Does that include or exclude amortization and stock-based compensation?

So, Shawn, you'll look at our schedule that we included with our earnings release.

And it spells out all the add backs.

Very little of those add backs are in cost of goods sold.

So our 16.3% gross margin is going to be pretty constant on a GAAP or non-GAAP basis.

The only piece that you'd add back for that would be a sliver of the stock-based comp expense or --

I think that was --

-- cost of goods sold.

I think it's like 20%.

But it's definitely on our schedule.

And I just outlined it in the --

Yes, it was about $400,000 and then, say, another $20,000 of amortization.

Yes, so that's how you would add that to cost of goods sold, not a lot.

So pretty much the gross margin guidance in both cases is very close to the same, maybe 20, 30 basis points higher for the non-GAAP gross margins.

But most all those add backs are in the G&A line, except for the $1.1 million of non-cash expense on the interest that's in the interest expense line.

Okay.

And then the guidance you provided for sales and marketing and G&A, that's a GAAP basis.

So we'll have to -- there's a few basis points there.

Yes, very little on selling and marketing.

But yes, the G&A expense would include a portion of the stock-based comp I expected.

Okay.

Okay.

Getting into more of the demand side, now that we're kind of almost through April here, do you have a sense of where your book-to-bill is running, kind of what the April run rate you're seeing in orders implies for the June quarter?

Where would that put you in guidance?

And maybe just elaborate a little bit on what you're seeing in that pricing since it sounds like a little bit more competitive but not maybe rational.

Yes, Shawn, this is Kent.

Our book-to-bill ratio we mentioned at the end of the first quarter is 0.98.

March was not that strong.

It was a little off of that number.

Just for the month of April alone, it was like 0.94.

So it slipped back a little bit.

But I guess the good news is April was a little higher than the January number.

So on a book-to-bill ratio, 0.98, a little softer in April.

On the pricing front, I mean, really what we're seeing there is stable pricing I would think.

We're having some spot issues where it gets a little bit competitive.

But there's no real major trends.

And we see pricing become a factor as we try to win new business.

It seems like people try to hang onto what they've got right now.

We also see a little more price competition on the products that don't require a lot of technology, I mean, kind of on the low end of products that we produce.

So most of the price competition we're seeing I would say is random.

But it's still -- and where it is, it's on the lower technology work that we produce and probably not so much on high technology and certainly not aerospace and defense.

Okay.

And then just one last follow up -- on the backplane assembly business, does the guidance imply there, given the strength you're seeing in China, through a sequential uptick in revenues?

Yes, it does, really.

It's about -- we look at the forecast in kind of round numbers.

Backplane assembly should be up about $5 million.

Our commercial work will be off maybe about $8 million, aerospace and defense off slightly just near $1 million, somewhere in there, mainly on program timing issues.

So that's a decrease of about $4 million.

It's rounding numbers, so backplane up $5 million and printed circuit board down about $9 million.

Okay.

Thanks a lot.

Thanks, Shawn.

Thank you.

Our next question comes from the line of Ryan Jones with RBC.

Please go ahead.

Hi.

Thanks.

I was wondering based on the recent announcements from the Defense Department about certain programs going away and certain programs getting ramped up how that would impact your aerospace and defense segment.

Yes, I mean, that's the same question we had.

We listened to Gates' speech.

We got copies of his speech.

We went through and broke out all the programs that were mentioned in that speech and did our own analysis.

And we contacted customers to confirm our thinking.

And all the major programs that we are involved in and ones that have quite a bit of printed circuit board content will not be affected through 2009 and into 2010.

You talk about the F-22, 187 planes.

We're still on target there through 2010.

You've got the joint strike fighter, the F-35s coming in play through 2010.

In fact, on the joint strike fighter, there's possibly some upside in there.

So as we went through and analyzed that, there's really no impact to our business.

Some of the losses that they talked about cutting like the Presidential helicopter, I'm sure that we had some parts in there, but nothing significant.

And one of the things that isn't talked about when we talk about those programs, a big part of our business here is providing spare parts and replacement parts and upgrade parts on all the equipment that's already in the field.

So we feel pretty confident about our aerospace and defense business through 2010.

All right.

Thanks.

And then one follow-up question -- just curious on the inventory balance because it only seemed to fall about 3%.

And yet sales were down about 10% sequentially.

So I was hoping you could provide a little color on movement in that account.

Sure.

It's like, as you know, the inventory's down $2 million quarter to quarter from $71 million at year end to $69 million now.

And you're right that you'd think that with sales being down, inventory might be down a bit more.

Certainly, what we saw this quarter was both work in process and finished goods inventory down.

We are seeing a bit of a ramp up in raw materials at the Shanghai operation because of the increasing backlog there due to the strength of the 3G rollout and the customers that have benefited from that.

So we're seeing increased sales in the second quarter, as Kent mentioned, from backplane assembly, largely from Shanghai.

And that drove up their inventory balance in preparation for shipping those.

All right.

Thanks.

I'll get back in the queue.

Thank you.

Our next question comes from the line of Brian White with Collins Stewart.

Please go ahead.

Yes, I'm just wondering on the networking area, it sounded like it was weak in the March quarter as it was for a lot of companies in the supply chain.

I'm just curious what type of decline you're looking for in the June quarter.

Yes, Brian, most of our challenge comes from that networking communication end market.

And you'll notice our percentage went from 37% in the fourth quarter down to 33%.

And of course, all of that's related to the macro environment and lower IT spending, both kind of on the enterprise and the service provider segment.

Looking forward, we'll see more decrease in networking communications associated with the United States.

We have some offset with that 3G implementation with our Shanghai facility.

So going forward in absolute dollars, we'll probably be up a couple of million there and would think our percentage sales would move somewhere from 33% up to maybe 35% in the fourth quarter -- or excuse me -- in the next quarter.

So we should think about the US enterprise service provider networking to actually decline sequentially?

Is that fair?

Yes.

And where are you on the China potential M&A opportunity in China?

Yes, well, we're probably the same place we were the beginning of the last quarter.

We have -- as you know, we talk about this every quarter and give you updates.

And we have identified I think our candidates, spent a lot of time, numerous trips over there, and narrowed it down to three or four companies that we believe would be a good fit for us.

What needs to happen now is to have everyone agree on some valuation issues and look at the marketplace and project into the future.

I think as we talk to potential candidates and we talk about the ideal company on a global basis and how the opportunities we'd have, I think there's a clear vision now of what can be done.

It's just a matter of having everything line up so that a transaction occurs.

Now having said that, we're still in kind of discussion phase.

There's nothing imminent.

But we are, as you know -- want to make sure that when we do an acquisition that it is successful.

And so how we enter into acquisitions and the relationships and looking into cultures and fits and all those things, we need to make sure that we do that correctly.

And we believe that we can do it correctly.

But we need to have the timing come and be on our side here.

Just in Huawei, you have a great relationship on the assembly side.

Have they approached you at all about opportunities on the printed circuit board fabrication side?

No, they haven't.

Okay.

Thank you.

Thank you.

Our next question comes from the line of Shawn Hannon with Needham & Company.

Please go ahead.

Yes.

Thank you.

Good afternoon.

So if I could just actually ask around your raw materials environment, what it is that you're actually seeing today, it's obviously been a pretty significant type for a long period of time.

And could you provide a little bit of color around what that pricing is today and how that's kind of contributed to some of that increase that you have over in China as well as copper pricing?

Thank you.

Yes, our -- I mean, if you look at copper pricing historically, it's up and down a little bit.

Now it's kind of back up.

But our material costs are basically stable.

We're not seeing any issues with costs going up.

Nor are we seeing any probably decreases of a significant nature, although we do continue to reduce our costs on an item-by-item basis.

The kind of the material cost that you read about that seem to be related to copper seem to impact the overseas competitors more so than us.

Of course, their material costs are a significantly higher portion of their total sales.

So it is -- when that happens, that impacts them more so than us.

But we're not seeing anything on a material cost basis that would concern us.

They look pretty stable.

We're not seeing any increases and probably not too many decreases as we move forward.

That's helpful, Kent.

And then secondly, on this competitive pricing or the pockets of competitive pricing that you're seeing, is this pretty much defined by a single or a few select players within North America?

That's a good question.

I think -- and it kind of depends.

When we get up into higher technology where it's -- there's fewer competitors.

So we can safely say that that price pressure comes from one or two sources.

When you look at broadly across the board, if you get into some of the lower technology that we have that is becoming less and less percentage of our business, we don't see that there's any major one or two competitors there.

It seems to be the smaller guys that continue to maybe have some pricing issues there.

But that's less and less a portion of our business going forward.

So I don't think there's any major trends here, although the random nature -- and we did see some prices, again, price pressure increase through the quarter.

But if I go back in time, it was in lower technology type work or work where we're trying to enter some new marketplaces.

That's helpful.

It seems like there's been a number of opinions that have floated around that some of this -- some of these pricing actions haven't necessarily been necessary.

That's redundant.

But they haven't been necessary.

And at the end of the day, the financial condition of some companies may be creating this pressure.

Are you seeing any of that?

I think as a general rule, as companies start to watch their margins disappear, they come under some pressure to keep their top line coming in.

And they're more likely to lower prices.

So I think that's a phenomenon.

Now if I compare the pricing environment today with what we went through, say, years ago when this was kind of a broad-spread problem that we had in the industry with too much capacity, back then there was a significant amount of irrational pricing going on.

In today's world, I think the industry has matured.

And there is more rational pricing.

It's not the same situation as we've had in the past.

So I think there's I guess a lot better business wisdom being applied in our industry today.

I do want to say that when you get with some of the smaller competitors, we just don't see the smaller competitors that much.

I mean, I look at our business and the level of technology that we have and the technology that we produce.

The aerospace and defense work that we produce, it's very high tech, very specialized.

And there's not that many competitors.

So when a small company drops their prices to try to stay in business, we hardly feel that.

I mean, we've seen a couple of smaller companies do that or even go out of business.

And we don't directly feel the impact of that.

I think if enough of that happened over time, perhaps that would be beneficial.

But the space that we're operating in is a very high tech aerospace and defense oriented marketplace.

That's helpful.

Thanks so much.

Thank you.

Our next question comes from the line of Michael Bertz with Kennedy Capital.

Please go ahead.

Good afternoon, gentlemen.

Just a couple of quick little things to follow up -- so in the backplane assembly business, how much of that is -- I mean, obviously, it's in China -- but how much of it is for the Chinese market directly?

I think almost most of it.

We ship some of that into Europe.

But it's probably, what, 80%, probably 80% would you say, Steve?

Probably about our rough guess here is about 80% with the balance going into Europe.

Okay.

And then in terms of -- if I'm thinking about mix on some of that and opportunities to improve margins, is it pretty much flat across that business in terms of where margins are?

Is there any opportunity where some of the circular business you can see with the 3G build out or anything, where that's going to have a little bit better margin for you?

On the 3G build out, because that is sizable in nature and everybody wanted a piece of that business, it's a little more competitively priced compared to our regular business.

And the 3G build out is kind of what's driving our China business right now.

So it's a little less profitable work.

But when you line it up with everything else we got and put the leverage back in place, it makes a lot of sense to us.

In that backplane assembly business, a lot of it is the material cost.

So we're working to drive material cost down wherever and whenever we can in that business.

Okay.

So I guess I flip that over and make the argument then your operating margin through that business in theory's going to be better with the better volume through it, even if the gross margins are a little bit light.

In terms of absolute dollars, yes.

Okay.

In terms of margins, it might be just a little softer.

But we're not talking big drops here, so.

Okay.

Fair enough.

And then the other question on the inventories, Steve, do you have any sense about how that's changing over the course of this quarter and just the month of April?

I mean, would we expect to see that raw material piece come down some?

Or has that been pretty steady during the month?

Raw is staying pretty steady.

Some of it's moved into [width], continue the flow of work.

But in general, I think the inventory balances haven't changed a lot so far in the month.

We're just now closing our books for the month of April.

So I'm still getting data in.

Just a bit more color, though, on the inventory number -- it's like of the balance, we did see the PCB business decline by about $4.5 million in inventory.

And the backplane assembly actually went up as part of that surge in work for the rollout.

So just so you don't think that we're not managing our inventory, the business that we're -- that's currently most challenged is our kind of domestic PCB business.

And we are seeing inventories come in there, whereas it's the Shanghai business that's benefiting most from the surge and therefore is seeing an uptick in inventories.

Okay.

Great.

Thanks, gentlemen.

Sure.

Thanks.

Thank you.

Our next question comes from the line of Alberto Mann with Thomas Weisel Partners.

Please go ahead.

Yes, thanks.

This is Alberto calling in for Matt Sheerin.

So the first question is on the gross margin.

You're guiding it up sequentially a fair amount.

And given that revenues are going to be down sequentially and the backplane business is going to be up sequentially, I was hoping you could walk me through how you actually get there to such a steep gross margin increase.

Sure, Alberto.

The biggest single factor is going to be the labor cost savings due to the headcount reductions we had in January and of course the closure of Redmond, which effectively took place at the end of March.

So I've given guidance in the past that we said to be about $5 million per quarter.

Of that $5 million in savings, we did see about $1.2 million in the first quarter because of the employees that we terminated.

About 140 were laid off on January 15th.

And of course, we had some savings for the first quarter for that.

But effectively, we're going to have another probably $3 million to $4 million in savings in the second quarter from the closure of the Redmond facility, which didn't really give us any benefit in the first quarter.

In addition, as you know, our business is a large fixed absorption kind of business.

So the fact that Redmond revenue is largely transferring to other facilities, primarily the one in Utah that are somewhat underutilized, increasing the utilization there improves our margin as well.

So it's a combination of cost savings in labor and some better operating leverage as well.

Okay.

So two follow ups on that -- has all that business transferred out of Redmond?

And if not, how much is left to go in September quarter?

Sure.

It's like Redmond in the first quarter was operating at just under a $9 million quarterly run rate or, say, $36 million annually.

So we expect to have about $6 million of Redmond customer revenue in our other facilities in the second quarter.

And that should rise to about $7.5 million by the third quarter.

In some cases, some of the customers placed orders to build up their stock a little bit and in light of the transfer of the work to a new facility.

So it's a little bit softer in Q2, $6 million, and then $7.5 million or so in Q3 and Q4, which will be effectively about 80% of the run rate that Redmond had.

Let me add just a comment to Steve's comments there.

And that is that at that run rate that we saw in Redmond, it was probably declining some, too.

So if we are able to keep the $7.5 million a quarter and get to the $30 million level, I mean, that's an excellent retention rate.

It's probably close to 80%, 90% of what we planned, which is -- I think demonstrates probably the strength of our company that we're able to close a facility and move customers to our other facilities and basically improve our service to the customer.

So we're quite pleased with how that's gone and certainly as planned or better.

Definitely.

And then a question on Chippewa -- I know there were some furloughs recently that were announced and just wanted to know, given that you think that that business, the Cisco and Juniper business is going to be down again sequentially in June, what the visibility is into possibly bringing those workers back at some point and what that would mean to margins.

The furlough ended probably about a month ago.

And so we brought those employees back.

But we still don't have the top line to support that number of employees.

But we are confident that in the long run those employees will become valuable to us.

So right now, we have our Chippewa Falls facility on a reduced work week.

And so rather than doing a furlough, we just decided to go to a four-day work week rather than five.

So they're working four days until the networking and communication marketplace improves.

Okay.

And then just a question on the military and then aerospace market -- can you break it down between military and commercial aerospace?

Are you seeing a relative weakness in commercial aerospace?

Or is that still also holding up well?

Yes, that's a good question, again.

And about 70% of that aerospace and defense market is military.

Another 30% is aerospace.

And our commercial aerospace business is the soft part of that end market.

That's associated with Boeing and Airbus that we're involved on some programs there.

And so that -- the softness in that market is related to the commercial aerospace.

So that's going to be down sequentially.

But the military portion will be not -- won't be done in June, or --?

Over the long haul, that military business will be solid.

I don't think it's going to be down.

I haven't broken it down I guess between military and aerospace.

But for the most part, as just general comments, high-level comments, the defense work is going to be stronger.

It could be some possible timing situations on programs.

But we're able to look out into the future and see some good stability in the defense work.

If the aerospace business were to come back and air travel would pick up and the demand for planes increase, that's pretty much upside for us.

We didn't -- it's not as if we had that business and it went down.

It just is soft.

It's soft.

But we have the opportunity to gain market share if that business comes back.

Okay.

Thank you, guys.

Thank you.

Our next question comes from the line of Jiwon Lee with Sidoti & Company.

Please go ahead.

Yes, thanks.

Most of my questions were answered.

But if I can just ask one question on the interest income -- understanding even the low rate environment, it seems like that was a fairly low amount of income generated from the cash holding.

So I was wondering what kind of instruments you're mainly holding for cash.

Jiwon, I share your kind of frustration with the very low interest rate the market's giving us for our very large, sizable cash position, which is more like $175 million now at the end of April.

Unfortunately, with treasuries yielding basically zero, that is our largest instrument that we're holding.

It's about 75% treasuries and about 25% federal agency securities, so like federal home loan, federal farm loan, that kind of stuff.

So all those things are yielding very little.

And as you saw, the Fed announced it this week, said they were going to hold rates basically steady almost at zero.

So we obviously love our large cash position.

I think our investors enjoy that as well.

We are very conservative in our investment choices simply because I think liquidity for possible future acquisition is important to us as well as preservation of capital.

So right now, we're keeping to the conservative spectrum and rating for rates to start rising.

But I think for Q2, we'll still see some pretty small returns.

But if there's any consolation, you guys can count on the fact that our cash should be very secure.

So when was the decision made?

Or did you always hold treasuries and agencies?

Or did you move to something a little more conservative recently.

So not recently.

It's like, well, I guess, I mean, basically after the Lehman bankruptcy in September, and we had held a piece of our investment, about $20 million in that reserve primary fund that broke the buck.

So prior to that period, we had a pretty significant amount of our cash invested in what are called prime money market funds and hold a host of investments from, say, short-term securities to also commercial paper, that kind of stuff, nothing long in tenor but, say, a more diversified portfolio.

After the reserve primary fund broke the buck, we and I think most other companies in America moved their cash holdings towards more secure investments.

And then of course, a supply and demand equation means that as more and more companies bought treasuries, the rate the treasury paid started falling.

Understood.

Thank you.

Sure.

Thanks.

Thank you.

Our next question comes from the line of Amitabh Passi with UBS.

Please go ahead.

Thank you.

Hi, can you hear me?

Yes.

Steve, my first question for you was I just wanted to clarify the reported EPS versus the guidance you gave.

If memory serves me right, I think you'd guided to $0.01 to $0.06, which included about $0.04 of restructuring charges and about $0.02 of the non-cash interest expense.

Yes, so our guidance was exactly that, $0.01 to $0.05, $0.04 restructuring charge and $0.02 for non-cash.

And of course, both those things were pretty much exactly how they came in.

So effectively, your guidance was like $0.07 to $0.11 or so?

Yes, so you add $0.04 back to, say, our range.

Midpoint of our range was, say, $0.03.

Add $0.04 back restructuring charge will get you to $0.07.

Add $0.02 back for the convertible debt interest.

You get to, say, $0.09.

And just for apples-to-apples comparison, I mean, in the past, historically, you've included amortization of intangibles.

And you've included stock option expense because I think the $0.12 you reported, now you're excluding those.

I just want to make sure that on an apples-to-apples basis you probably did about $0.09 in the quarter, correct?

Yes, I think $0.08 to $0.09 is right.

It's --

Okay.

The convert expense, which you're adding back for first quarter will be basically flat in Q2.

And you'd be adding that back as well.

So you want to make sure that you're kind of adding apples-to-apple numbers as well.

Correct.

So for Q2, I mean, is the appropriate range just relative to what you've done historically, more like $0.08 to about $0.14 if I back out $0.04 to $0.05 for amortization of intangibles and option expense?

We gave guidance for both GAAP and a non-GAAP basis.

And our non-GAAP numbers, effectively the first share effective with add backs is about $0.05.

So our range is $0.08 to $0.14 --

Okay.

-- in GAAP numbers.

So the midpoint would be $0.11.

And so the midpoint per se, the non-GAAP range would be, say, $0.16, $0.05 higher.

Okay.

Thanks.

That helps.

And then I guess for you, Kent -- and I apologize if you covered this.

Just on your aerospace and defense business, I was just wondering if you could give us some sense of how much visibility you have into that segment.

Do you think that segment can still grow this year?

And then a similar question just for your China 3G opportunity, again, because we've heard some concerns about there being potential [pauses] on the bills.

So just trying to get some sense of your visibility.

Yes.

First on the aerospace and defense, I mean, our visibility is we look out four or five, six months.

It's pretty solid.

I mean, we are on these long-term programs.

And even on some of the programs that run over the course of the year were involved in the program.

So we have some pretty nice visibility.

Maybe the timing on those actual builds becomes a little different.

Whether the aerospace and defense can increase is still to be determined.

There are some possibilities for the balance of the year.

It could go up.

We're looking at aerospace and defense since we do have some visibility there to being maybe flat to up slightly as we look out to the end of the year.

Relative to your question on 3G in China, we are -- we have experienced some push backs on delivery dates.

But that is all included in our forecast.

And we're pretty confident that the amount of sales we have for our China operation is including some push backs that are already in the forecast.

Okay.

Great.

And then just one question on your capital structure -- I mean, it looks like things might be [fine] a little bit.

Just wondering, you guys happy with the balance sheet?

Or would you consider maybe coming back and raising incremental cash just to further bolster your balance sheet and give you some dry powder for further acquisitions?

That's a good question, Amitabh.

And we, of course, meet with banks and discuss our capital structure on a regular basis.

I think, obviously, for our near-term needs, our $175 million cash balance end of April is going to be more than enough for what we need to kind of keep the business going.

I don't think that the current banking climate, which is pretty risk averse and pretty expensive in terms of interest rates, is probably a good climate in which to raise dry powder.

I think any financing we would do would need to be driven by a goal beyond, say, general corporate purposes, probably more like an acquisition, something that I think would serve as a driver and an understandable rationale among the lenders for why we're doing it.

So I don't -- I think we're pretty happy with the capital structure.

And I think until we get closer to doing an acquisition, we would probably keep the capital structure we have at just the $175 million of convertible debt, which isn't due until 2013 and has no covenant.

So we pretty much love it.

Yes.

And, Steve, just my last question -- I missed these.

Can you just give me your figures for gross margin, sales and marketing, and G&A for your guidance for next quarter?

Absolutely.

So our gross margin guidance for next quarter is 17% to 19%, so a pretty significant improvement over our 16.3% this quarter.

And our guidance for selling and marketing is about 5% of revenue and G&A, which is also including amortized intangibles, of about 5.8% of revenue.

And then don't forget we'll be adding a $200,000 restructuring charge this quarter in Q2 just to pay some retention payments to some of the [resident] employees.

We have some employees who are staying on post close to help the transition of work to our other facilities.

Okay.

Perfect.

Thank you.

Sure.

Thank you.

Our next question comes from the line of Jim Larkins with Wasatch Advisors.

Please go ahead.

Yes, just a quick question on the balance sheet -- I know you have $175 million of convertible debt.

But how does that -- it's not represented that way on the balance sheet.

Could you just give me a quick tutorial on that?

Yes.

It's a good question you asked.

And just for all of you, just beware that [ATB14-1], if you thought that the non-cash interest expense we have to record now was bad, wait until you see what it does to the balance sheet.

Okay.

Effectively, because you want to look at what the goal of that ATB14-1 was, which was to basically bifurcate the actual debt component from the convert feature that is, say, inherently part of the debt and of benefit to investors.

It's kind of the rationale for why we get a 3.25% interest rate.

So effectively, what's happened is our long-term debt now shows as $136 million owed, even though we owe $175 million.

And that $136 million will accrete over the next several years to the $175 million that we will pay back in May of 2013.

And the additional interest expense is going to be the mechanism for that accretion.

So each quarter we record the, say, $1.1 million of interest expense, that will be added to the term loan balance each quarter you'll see that rise.

So as you fell from $175 million to $136 million on the balance sheet, a number of other accounts were affected.

The largest one was additional paid in capital, which changed by about $27 million.

It's important to know for us and other convertible debt holders that the balance sheet gets kind of unusual.

And our net debt, net cash position will look more favorable.

You just need to keep in mind that eventually we do have $175 million.

Does that help?

Yes, that is helpful.

And then I know the debt is trading at a discount.

And are you allowed to buy it back?

It seems like maybe we addressed that before.

But you're not interested in doing that right now?

Yes, we are allowed to buy it back.

We have discussed it internally on a regular basis and probably will continue to.

It's not trading as low as it was a few months ago because our stock price has recovered quite a bit.

So now it's trading more in the $0.65 on the dollar range, but still at a discount.

I think for us the benefits of keeping our cash intact on a balance sheet for other purposes, to help weather this downturn and also to be ready for acquisitions, is probably the best course of action because any debt we were to take on now in the marketplace would be pretty expensive debt.

And I'm not -- I'm reluctant to pay back 3.25% debt if I have a likelihood of taking on, say, at some point in the future a much higher interest rate debt.

That's great.

Thanks a lot.

Sure.

Thank you.

Our next question comes from the line of Shawn Harrison with Longbow Research.

Please go ahead.

Hi.

Just two quick clarifications -- the CapEx number for this year, is that unchanged at $23 million?

I'm sorry, Shawn.

That should never have been our number.

It's like --

I'm sorry.

I think -- I'm apologize.

I had a lower number than that, $13 million.

Excuse me.

Yes, $13 million's what we expect.

And kind of $13 million's what we're on pace for.

Okay.

And then the cash generation, the $10 million of cash generated this -- here in April, is there an expectation that you could continue to see through the remainder of the year something like a mid-teens free cash flow generation?

Or is there some type of something out there that should limit your cash generation in, say, the back half of 2009?

No, I think that kind of, say, $12 million to $16 million of operating cash flow free of, say, $10 million to $13 million, $14 million should be good for the year.

I mean, barring any kind of worsened downturn, I think that's still reasonable.

At some point, when business starts picking up again, we'll need to build back our A/R and our inventory balances.

That could be a cash drain.

But at that point, I think we'd all be happy that we turned a corner.

But I think certainly our guidance for the second quarter would be cash flow generation akin to what we saw this quarter.

And I think that's reasonable to assume for the rest of the year.

All right.

Thank you very much.

Sure.

Thank you.

(Operator Instructions).

We show no further questions.

I would now like to turn it back over to management for closing remarks.

Okay.

Just briefly, we just appreciate your interest in TTM Technologies.

We appreciate your joining us for this conference call today.

We'll look forward to the next quarter.

Thank you very much.

This does conclude our conference for today.

Thank you for your participation.

You may now disconnect.