TTM Technologies Inc (TTMI) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the TTM Technologies first quarter 2010 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 today, Thursday, May 6, 2010.

And now I'd like to turn the conference over to [Diane Wagland], Executive Assistant.

Please go ahead, ma'am.

During the course of this call, the Company 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 conference call.

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

For reconciliation of TTM's non-GAAP financial information to the equivalent measures under GAAP, please refer to the Company's press release, which was filed with the SEC and which is posted on TTM's website.

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

Kent Alder, President and Chief Executive Officer.

Please go ahead, Kent.

Okay, thanks, Diane.

Good afternoon and thanks for joining us for our 2010 first quarter conference call.

Joining me on today's call are TTM's CFO, Steve Richards; and from Hong Kong, Chung Tang, Managing Director of the Asia-Pacific region; Canice Chung, CEO of the Asia-Pacific region; and [Audrey Simm], Vice President of Investor Relations and Business Development for the Asia-Pacific region.

I will begin with a review of our business, and Steve will follow with a review of the financial performance.

And after that, we'll discuss Meadville and then open the call up to your questions.

Now, before I discuss our first quarter results, I would like to offer a high-level view of where we stand strategically.

Over the course of 2009, we undertook several company-transforming actions designed to strengthen TTM operationally and become a global company.

With the closure of three North American divisions, we restructured our business to better align our footprint with North America demand; and we announced the combination with Meadville Holdings Limited printed circuit board business, a transaction that closed on April 9 of this year, and bolts us to one of the largest printed circuit board companies in the world, based on 2009 revenue estimates.

This is an exciting time for TTM, with the restructuring largely complete and the combination with Meadville closed, we are well on our way to transforming TTM into a stronger, world-class, printed circuit board manufacturer with the scale, production capabilities, market breadth, and expanded customer service to lead in today's competitive global printed circuit board business.

Okay.

Now, moving on to our first quarter highlights.

Gross margin increased for the second quarter in a row from 18.5% in the fourth quarter to 19.5% in the first quarter of 2010, due primarily to cost savings and improved capacity utilization achieved through our restructuring.

Our balance sheet and cash position remains strong, with an increase in our cash accounts of $7.2 million in the first quarter to a total cash position of $222.9 million.

Improved market conditions enabled us to have firmer pricing in our commercial business, while pricing in our aerospace and defense business benefited from a higher mix of technological products.

Steve will provide more details later in our presentation.

Now let me provide an overview of our operating segments for the first quarter.

Our printed circuit board manufacturing segment recorded first quarter net sales of $122.9 million compared with $128.2 million net sales in the fourth quarter.

The decrease was due to the closure of our Los Angeles facility and a return to normal order patterns, following a spike in demand at the end of the fourth quarter.

First quarter operating segment income was $10.5 million compared to $5.1 million in the fourth quarter.

Fourth quarter operating segment income reflected charges of $6.7 million associated with the Meadville transaction and our previously announced PCB plant closures.

These costs totaled $2.4 million in the first quarter.

Excluding these charges, first quarter operating segment income was $12.9 million compared to fourth quarter operating segment income of $11.8 million, an increase of $1.1 million or 9%.

On a sequential basis, average price per panel increased almost 5%, due to product mix and improved market dynamics as business has picked up.

For the Backplane Assembly, first quarter net sales were $21.7 million compared with $29.3 million in the fourth quarter.

The decrease was primarily due to the wind-down of our Hayward facility during the first quarter.

First quarter operating segment income was $158,000 compared with $2.4 million in the fourth quarter.

The significant decline in income was due to a [$1.0 million] operating loss at our Hayward facility.

Operating segment income reflected $368,000 in costs associated with the closure of our Hayward facility in the first quarter and $93,000 in the fourth quarter.

Excluding these charges, first quarter operating segment income was $526,000, compared to fourth quarter operating segment income of $2.5 million.

Now I'd quickly like to review our end markets.

The aerospace and defense end market represented 42% of sales in the first quarter, unchanged from the fourth quarter.

This reflects continued stability in this end market due to the broad base of customers and numerous programs we are involved in.

We anticipate continued stability in the second quarter.

Networking communications decreased to 33% of sales in the first quarter from 38% of sales in the fourth quarter, primarily due to the order timing at the end of 2009.

In other words, orders were rescheduled from the first quarter to the fourth quarter.

Going forward, we anticipate a return to a more normal business and inventory levels that reflect a healthy order pattern.

Our computing, storage peripheral end market increased to 13% of sales in the first quarter from 10% of sales in the fourth quarter.

The increase was due primarily to strength from one of our large server and storage printed circuit board customers, as well as to a new Backplane Assembly customer at our Shanghai division.

The medical, industrials instrumentation and other end market also grew sequentially to 12% of sales in the first quarter compared to 10% of sales in the fourth quarter.

As in past quarters, movement in this end market tend to be relatively broad-based due to the large number of small customers.

However, we did experience somewhat stronger results from a few of our major customers in the medical and instrumentation portion.

Also, let me mention that going forward, we will add cell phones and consumer products to our end market analysis, bringing the number of end markets that we report to six.

This reflects the broader customer base and end market diversification gained through the Meadville transaction.

We will provide a 2009 pro forma analysis of new end markets later in our presentation.

Moving to slide eight, our top five customers comprised 31% of net sales in the first quarter compared to 34% in the fourth quarter.

In alphabetical order, our top five OEM customers were DAE, [Fisco], Hamilton Sundstrand, Huawei, and Raytheon.

None of these customers represented 10% or more of net sales in the first quarter.

Lead-times remained relatively stable at our commercial facilities.

At these facilities, lead-times ranged from six to 10 weeks, while lead-times at aerospace and defense facilities were unchanged at five to eight weeks.

Keep in mind that some of our defense programs have a 14 to 20-week lead-time.

At the end of March, our printed circuit board book-to-bill ratio was 1.12, up from 1.08 at the end of 2009.

As a reference, the IPC book-to-bill average at the end of March was 1.1.

In summary, our North American restructuring is generating improved margins.

We became a global company as we concluded the Meadville transaction.

The pricing environment has improved and we are experiencing continued strong order momentum.

Now I will turn the call over to Steve to review our financial performance for the first quarter.

Thanks, Kent.

And good afternoon, everyone.

As Kent mentioned, our gross margin improved in the first quarter despite the decline in sales, which indicates that we are controlling costs better and beginning to see some of the improved leverage from our consolidated US factory footprint.

As we anticipated, first quarter net sales of $138.2 million decreased $11.7 million or 7.8% from fourth quarter net sales of $149.9 million, due to the closure of our L.A.

facility as well as $4 million of shipments accelerated from the first quarter into the fourth quarter.

Gross margin for the first quarter of 19.5% increased from fourth quarter gross margin of 18.5%.

Selling and marketing expense increased to $6.7 million in the first quarter from $6.5 million in the fourth quarter, due primarily to increased commission expense.

As a percentage of net sales, selling and marketing expense in the first quarter increased to 4.9% from 4.3% in the fourth quarter.

First quarter G&A expense, including amortization of intangibles, decreased to $9.8 million or 7.1% of net sales from fourth quarter G&A expense, including amortization of intangibles, $11.9 million or 8% of net sales.

First quarter G&A expense included $1.8 million in costs related to the Meadville transaction.

These costs totaled $4 million in the fourth quarter.

During the first quarter, we recorded restructuring charges of $50,000 related to the closure of our Hayward facility.

In the fourth quarter, we recorded restructuring charges totaling $481,000, primarily related to the closure of the Los Angeles facility.

In the first quarter, we recorded an asset impairment charge of $0.5 million to reduce the carrying value of our Dallas, Oregon facility, which we closed in 2007.

Operating income for the first quarter was $9.9 million compared to $6.6 million for the fourth quarter.

Excluding plant closure and transaction costs, first quarter operating income was $12.6 million.

Our effective tax rate declined to about 37% in the first quarter from about 44% in the fourth quarter, when we recorded a true-up of the full year 2009 tax provision.

Net income for the first quarter was $4.5 million or $0.10 per diluted share compared to fourth quarter net income of $2.4 million or $0.05 per diluted share.

Excluding plant closure and transaction costs.

net income for the first quarter was $6.2 million or $0.14 per diluted share.

First quarter non-GAAP net income was $8.6 million or $0.19 per diluted share.

This compares to fourth quarter non-GAAP net income of $8.3 million or $0.19 per diluted share.

Non-GAAP net income excludes amortization of intangibles, stock-based compensation expense, non-cash convertible debt interest expense, asset impairment and restructuring charges, inventory write-down, costs relating to the Meadville Holdings transaction, and miscellaneous closing costs, as well as the income tax effects related to these expenses.

Adjusted EBITDA, which excludes asset impairment charges, for the first quarter was $15.1 million or 10.9% of net sales compared with fourth quarter adjusted EBITDA of $14.7 million or 9.8% of net sales.

Looking at our balance sheet, we continue to build cash.

Cash and cash equivalents, restricted cash, and short-term investments at the end of the first quarter totaled $222.9 million, an increase of $7.2 million from $215.7 million at the end of the fourth quarter.

Restricted cash represents the funds we set aside to complete the Meadville transaction.

Cash flow from operations in the first quarter was $6.3 million.

Capital expenditures for the first quarter were $3 million, offset by $3.4 million in proceeds from the sale of equipment in one of our Redmond, Washington buildings.

Depreciation for the first quarter was $3.9 million.

Now I'd like to turn the call back over to Kent to give an update on the Meadville combination.

Thank you, Steve.

Let me take a moment to remind you of the strategic rationale for the TTM and Meadville combination.

From the pie chart on the left, you can see that we now have all the components to our global strategy in place.

Meadville met all of our M&A criteria, including an excellent management team with deep experience in China, and leading growth and margin profile.

Furthermore, a common business philosophy of being profit-driven, cost-control focused, customer-centered, and growth-oriented, enables us to work together for maximum results.

Our technological capabilities are a solid fit and we have already begun to exchange best practices.

Now, with the completion of the transaction, all the components of our global strategy are in place.

The next slide illustrates our total solution approach to servicing our customer needs throughout the entire product lifecycle.

With Meadville, we now have the ability to service customer needs in all phases of the product lifecycle from prototype to production volume.

By providing a true one-stop solution, we create value for our customers and win business that we would not otherwise be able to win.

The next slide.

We have integrated and aligned our operations to form a structure that allows for consistency in management and coordination between Asia and North America.

Maintaining the Meadville management team was of vital importance in this transaction.

We are very pleased that the existing team will be in place to continue to run operations in China and support the overall organization with their experience and knowledge.

The next slide illustrates the diversification that we have achieved both geographically and in our end of markets.

On a pro forma basis, Americas will represent 39% of TTM's sales and Greater China will represent 45%.

On an end market basis, pro forma for the combination, networking is the largest end market at 37% of 2009 sales; aerospace and defense represents 21%; and computing, storage and peripherals are 18% of sales.

This added diversity will allow us to fully participate in the growth underway throughout Asia, which represents approximately 55% of total sales.

We expect the Meadville combination to improve our financial results, and we estimate that the transaction will be accretive in the third quarter of 2010.

Over time, we expect to generate additional revenue, not only from existing customers, but also from new customers.

Of course, this will be a gradual process.

Since the deal closed, we have been discussing our broader manufacturing capabilities with our customers who have been very receptive to the combination.

However, our Asia facilities are currently running at high-capacity utilization levels, which may limit our ability to take on new work from our US customers.

The qualification process varies by customer, so our current cross-selling efforts will focus on customers with a less rigorous qualification process, while positioning customers with a more comprehensive qualification process to be brought on later in the year and in 2011.

By having global capabilities and providing our customers with a total solution, we expect to grow revenue with new business from existing customers and from new customers.

We do not expect to relocate any business from our North American facilities to Asia.

In fact, this combination will enhance our ability to increase business in most of our facilities.

As you know, this transaction was never driven by cost synergies.

Although we can reduce some public accounting costs, we will face some increases for Sarbanes-Oxley compliance in Asia as well as the cost of adding new directors and other administrative costs.

Nevertheless, our increased scale should enable us to develop win-win strategies with our suppliers, leading to cost reductions.

We will provide an update on both revenue and cost synergies at our next earnings call in August.

We issued 6.3 million shares to Meadville shareholders.

About 70% of those shares will continue to be owned by the Tang family, who have agreed not to sell their shares for 18 months following the close of our deal.

Meadville's other minority shareholders have decided to retain all but approximately 1.3 million of the shares they received in this transaction.

The Tang family, TTM's largest minority shareholder, will own 33% to 35% of TTM's outstanding shares.

TTM is gaining new directors because of the Meadville combination.

First of all, first off, we'd like to welcome Tom Tang, the former Chairman of Meadville Holdings, to our Board.

Tom will serve as Managing Director of TTM's Asia-Pacific region.

In addition, we will appoint three new Directors to our Board, who will serve on a Government Security Committee.

The Government Security Committee will have responsibility for ensuring that TTM maintains the appropriate policies and procedures that will continue to protect our sensitive and export-controlled information.

Now let me turn the call back to Steve to discuss our pro forma financials and our second quarter guidance.

Thanks, Kent.

Looking at our pro forma financial statements, it's clear to see that this deal will transform TTM.

Had we been together during 2009, our revenue would have been $1.2 billion with a gross margin in excess of 20%.

Our operating and net income also would have been significantly higher.

The next slide shows the final transaction costs.

We paid $114 million in cash and issued 36.3 million shares with a market value of $329 million on the day the deal closed.

We also assumed about $433 million of debt for a total purchase price of approximately $876 million.

That reflects a multiple of about 7.6 times Meadville's adjusted 2009 EBITDA.

TTM now will have a pro forma leverage ratio about 3.3 times, which we expect to bring below 3.0 in our first year together.

Before I discuss our second quarter outlook, I'd like to give you a quick update on Meadville's first quarter 2010.

Meadville had a book-to-bill ratio of 1.2 in the first quarter.

In general, sales by end market were steady as a percent of revenue.

The Company benefited in the computer end market from new products and new design launches by a major customer.

In response to increased capacity constraints, Meadville launched a capacity expansion program, which should come online in the first quarter of 2010 and is expected to increase revenue by approximately 10% to 14% in the first quarter of next year.

From the second quarter of 2010 onward, we'll provide guidance for the combined operations of TTM and Meadville.

Please note that the transaction closed 10 days into our second quarter, and we have modified our guidance as well as our share count expectations to reflect that.

We expect revenue in a range from $290 million to $310 million.

The increase is primarily due, of course, to the inclusion of Meadville, but also reflects increased PCB sales to TTM's commercial customers in the US.

We expect GAAP earnings in a range of $0.03 to $0.12 per diluted share and non-GAAP earnings in a range of $0.16 to $0.25 per diluted share.

Our diluted share count from second quarter should be approximately 76.5 million shares, reflecting the 36.3 million shares we issued to Meadville shareholders.

Our gross margin percentage is expected to be in a range from 17.5% to 19.5%.

Purchase accounting rules require capitalizing the profit component of acquired inventory, which will increase cost of goods sold by approximately $4.5 million in the second quarter.

We expect that SG&A expense, including amortization of intangibles, will be about 14% of revenue in the second quarter.

This reflects $7.7 million in transactions costs and combined amortization of intangibles of about $3.3 million.

We also expect to record a restructuring charge of about $400,000.

This represents the remaining few months of lease expense on our closed Hayward facility.

We expect our blended tax rate to be approximately 25%.

Please keep in mind that we have not completed purchase accounting for the acquisition nor the required opening balance sheet audit.

Changes to these balances could impact the projections I have discussed here.

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

Alicia?

(Operator Instructions).

Matt Sheerin.

So, just looking at -- let's start on the revenue side.

So, the revenue guidance basically excludes 10 days or I'm not sure how many business days of Meadville.

So the run rate is higher, is that right?

Yes, you're exactly right, Matt.

So, 10 days of Meadville's revenue obviously stayed with them in their stub period for the first part of April.

Okay.

And the gross margin guidance, 17.5 to 19.5, that included the inventory costs.

So on a pro forma basis, would that be higher, then?

Will be back -- would it be over 20%?

You know, it's like the range -- if you add the $4.5 million of inventory, basically lost profit component because of the purchase accounting rules, you'd up those margins -- I think the bottom end of the range, you'd still be just under 20%.

But you definitely could add that $4.5 million back safely as you look ahead for Q3 and Q4, because all the purchase accounting impact of inventory will be flushed through the system in [Q2].

Okay, so it will be more like the 19.5% to 22.5% or something like that?

Probably right.

I'd have to actually do the math, but that sounds right.

(inaudible) Okay.

And then on SG&A, you said 14%.

That includes $7.7 million charge of costs?

But that's not a normalized rate at all.

So if you back those out, you get a much better sense.

And keep in mind, that includes amortization of intangibles and we had a pretty significant customer, largely customer intangibles, related to this transaction because of the new customers we're gaining in the Meadville acquisition.

So we are going to have about $2.5 million per quarter for this year on amortization of the Meadville intangibles, along with our standard about $800,000 for legacy TTM -- so about $3.3 million.

Okay.

So, $3.3 million.

And okay so and then the S&A -- if you back out the [7.7] on the amortization but then you still have to add a couple of weeks worth of cost that you're not counting because you closed the deal late, right, for the September quarter?

Exactly right.

Also didn't get the revenue, so probably if you adjust out the [$7.7 million] in acquisition costs and understand that intangibles are what they are, you probably could get to a pretty good percent of revenue, apply that to a consolidated revenue run rate for, say, Q3 and Q4.

Okay.

And just last question for now, just regarding the Meadville outlook.

It sounds like business is strong but sounds like there's capacity constraints.

So is Meadville relatively capped in terms of upside for revenue over the next two to three quarters until that capacity comes online?

Matt, this is Kent.

I think I'll let Canice Chung Answer that question.

Canice?

In our Q2 update operation we are pretty capped to about [95%] maximums of the utilization, okay.

And then looking ahead, we are already well planned ourselves for two of our plants, one in Guangzhou and one in [Shenzhen] to expand ourselves, which we expected to have all of the installations of machines completed within the Q3.

So by the end of this year on an annualized basis, we should be able to have increased capacity, okay, by about 15%.

All in all, I'm trying to say if you can analyze it on the next year, we should be able to grow our capacity by about 15% to 18% range in a full-year basis for the 2011, looking ahead there.

Okay.

But in the meantime then, there's not much room to grow unless you increase pricing or use some alternative manufacturing?

It's true that in the same quarters of the business we are running to about 95% of the capacity utilization already.

That looking ahead, we have the new capacitor for in the (inaudible), okay, that may account for about a single-digit growth because it won't be running the [full] quarters.

But in Q4 of 2010, it will be effectively to be 15% growth already.

Okay, so by Q4 you'll have the capacity in place.

Okay.

And then could you tell us what end market where that capacity is dedicated toward?

Is that on the computing side or the handset side?

In fact, our capacity expansion roughly classified into two -- one is HDI capacity and the other one will be a conventional [highly] account.

And then for conventional [highly] account we are dedicated to communication, infrastructure [box].

Okay, very much similar to that of TTM manufacturing in the USA, we are seeing a huge outsourcing trend into Asia's.

S

So for the HDI [box] these are [link leaded] to the high-end mobile, okay, the PDA phone types or even to a high-end consumer like the iPhone types of things, iPad types of things, as well as okay for some designs of the systems but they are also running into 1 plus 12 plus 1 or 1 plus 14 plus 1 [techs] of HDI [box].

It is both the capacity includes covering both of these technology capabilities for the plants.

Okay, thank you very much.

Shawn Harrison, Longbow Research.

A number of questions.

What is, I guess, the consolidated incremental gross margin going forward, Steve?

The incremental gross margins?

Yes.

Honestly, historically for TTM, it's been 40% to 50%.

It will be a lower level or Meadville because they don't have the same fixed costs and labor that we have.

On a blended basis, I probably expect it to be in the 30s, but we have to actually do some more math.

Once we get it through the purchase accounting adjustments to get a clean new balance sheet [and] projections for Meadville.

But probably diluted down to more like the 30s.

Okay.

In terms of the SG&A guidance as well as the non-GAAP guidance, what is the total stock-based compensation number that we should be using going forward to back out of the numbers?

So in our G&A expense, we include about $1 million for stock-based comp for TTM legacy and about $300,000 for Meadville.

Now it remains -- the Meadville employees could be eligible for stock-based awards in the future that of course not -- haven't been awarded yet in the first month.

So that could affect the number in future quarters.

But for this quarter, it's 1.3 in G&A and a very similar number to what you saw in the financial schedule for cost of goods sold and selling.

Okay, so maybe about $400,000 to $500,000?

Across those two?

Yes, I think that's what you did in the first quarter.

That's not right.

Let me look -- in fact, I'm looking at the schedule right now.

I think it was like $450,000 in aggregate or something like that.

[$328,000] was our cost of goods sold number for -- oh, yes, for first quarter and [$108,000] -- yes, about -- more like $450,000 but [that's fine].

Okay.

In the presentation, I know there was at least for Meadville and this is also for the North American business, some commentary on raw material prices going up, particularly I'm guessing [TITO] to move any copper prices.

If you can maybe just give an update on how pricing -- or what you're seeing in terms of raw material costs -- what do raw materials represent as a percentage of COGS in North America and Asia?

And when do you expect to be able to recoup the increases in raw materials?

Yes, Shawn, certainly if you look at the price of copper and then look at some of the laminate suppliers, there is some glass shortages issues, one of the raw materials they build the laminate out of.

And so the prices are going up due to that.

And as we look at those prices and how it impacts our business, it becomes imperative for us to start talking with our customers ,and having them understand that as our costs go up, we need to work with our customers to negate some of those cost increases.

So in North America, it happens a little more gradually because we're quoting on an event-by-event kind of basis.

But as we look at our cost structure and look at the costs, we are working hard to pass those on to customers but it's a customer-by-customer basis, if you will.

I think in Asia, it's pretty clear that most all of the printed circuit board companies, if not all, have been raising prices to their customer.

So, Canice, can you add some more color, particularly with regards to Asia on that issue?

Sure.

The laminate because it's driven by the tighter demand because in general the [company] of the economy and driving okay the [titration] higher than the prepared laminate prices going up quite a bit to as much as about 8% to 10%.

And then we have been trying and then all PCB manufacturers are trying to push back certain of the impact to the customers.

And more than that is our long Meadville strategy that we have been moving ourself okay set up in the technology training that apart from years of the 2009 because of very exceptional of the financial crisis so whatever, that (inaudible) our trend has been slightly distorted.

We are able to continuous upgrading our average (inaudible) account [at AST] every years in the past [five, eight] years.

Okay so our value added things will be more than enough to compensate on the margin erosion.

Of course, not only on raw material (inaudible) inflation costs in China everything (inaudible).

So looking ahead, TTM's merger with Meadville, the total together with the TTM they're leveraging on the sales network in the USA from them as (inaudible) [Europe] on them, we are confident the same strategy will be in place or even more effective than before.

Then we are looking for value add to compensate on the cost rather than just tacking on the cost back to the customers' end.

Good.

And Shawn, let me add that when you look at pricing and market conditions in North America and probably on a global basis also, we're able to firm up on some of our prices because market conditions are pretty solid right now.

And as you look at the combination of TTM and Meadville, the pure mass that that brings to us, we'll be able to provide some win-win situations to our suppliers, giving them more volume and us being compensated in a reduction of price.

So there's some efforts that are being taken here to compensate for the increase in raw materials.

Okay.

I'll hop back into the queue and let others ask a few questions.

(Operator Instructions).

Amitabh Passi, UBS.

Just a quick question on the segment performance, Kent.

A little surprised to see your networking segment down almost 20% [Q-o-Q].

I know you tried to explain part of that being due to orders being pulled into the fourth quarter, but I was hoping you could add some color to that.

And then maybe you could also shed some light in terms of what you meant about the segment returning to more stable levels going to June quarter.

If you could give us an indication in terms of your expectations for growth sequentially -- any additional information would be helpful.

Okay, yes, thanks.

Part of the biggest impact on the network and communications, when we got to the end of the year in 2009, we had some pull-ins due to I think some inventory replenishment as well as we were closing some facilities, so there were some last order buys and things that when you compare the fourth quarter to the first quarter, it's a little bit overstated in the fourth quarter and a little bit understated in the first quarter.

So where we went from 38% of sales in the fourth quarter to 33%, that's kind of an over-correction.

So we won't have those kind of pull-ins or unusual ordering patterns as we go forward, and we would expect the network and the communications to return more towards the 35% level of sales.

And that happened in printed circuit boards but it also was a more impactful in our Backplane Assembly segment, with a customer that rescheduled some orders there.

So when you -- if you take a look at our end markets with networking and communications increasing a couple of percentages to 35%, that's more normal.

The aerospace and defense should run consistently at about 42% and then the other two smaller segments will probably come down 1 or -- about a percentage a piece.

So that's kind of how the end market would break out going forward.

And that -- keep in mind, that's just for the TTM North America.

In the next quarter, we'll be reporting for six segments.

And I think you'll get a better picture of the diversity of our combined company here going forward.

Are you able to give us any sense of what the organic growth is implied in your guidance from March to June?

Yes, I can get you some color on that.

We'll obviously be looking at segments in the future that will probably be a bit different than what we have now in terms of (inaudible) and [BPA].

We'll probably do more of a US and Asian look.

So if you look at, say, on legacy TTM, which of course, still includes the Shanghai facility, we'll be up, as I said in the script, about 5% in our commercial plants and pretty stable with aerospace defense.

In the aggregate, I think we'll probably be at the legacy TTM operations up to about $142 million, maybe low 142's for revenue versus our $138.2 million we saw in the first quarter.

And that actually is overcoming a bit of a downside with the closure of the Hayward Plant and reduction of about $2 million in revenue from that plant assembly.

So I think $138 million up to about $142 million should be a good bump that reflects the better US economy and demand for boards here.

Yes, we're seeing some significant, I guess, improvement in market conditions, both as our prices firm up and order patterns, backlogs, lead-time -- just not much but extended just slightly there.

And that's in North America.

And then when you look at Asia and China, they're still a pretty hot market place over there with the economy still doing well, which will have even more growth in Asia.

So, Canice, if you have some more color to add to those comments with Asia, go ahead.

Sorry, sir, I didn't catch what you just said.

What I said, Canice, was that the growth in North America is pretty solid, but when you look at China, I mean, growth in our business, certainly from the fourth quarter to the first quarter and what we're projecting from the first to the second quarter, we have much higher growth rates than what we're experiencing in [North America].

In the Asia business, there is a slightly different cycle (inaudible) 2009, we saw a very strong of the desktop business recovering after they affirmed the recovery of the global economy.

Whereas on the other hand, in 2009, we relied quite a bit on the local China business to support with the 3G set up everything there.

But then in the 2010, the business cycle was totally reversed.

We saw that we are enjoying and sharing the same sections of business that TTM has been enjoying, exporting to a lot of the OEMs globally.

Whereas on the other hand, the China business has slowed down quite a bit versus that of 2009, because they have been pulled ahead quite some of the infrastructure expenditures in the year, of the 2009 year.

Having said that, the [old] business has been more than enough to offset order slowed down in the local business versus 2009.

So all in all, our Q2 of the facility utilization were in [food] and we are expecting [a couple] close to 15%, 20% growth in the revenue line in the same quarters over the first quarter there.

But just on the China business, I mean, as you look through the rest of the year, any expectations of that picking up?

And then, Steve, I just had a couple of (multiple speakers) -- sorry, go ahead.

I think the China business will come back to a reasonable level [into Q3] or along from a seasonal standpoint.

China business are PC in Q1 and Q3.

That Q2 will be a conventional of the slower season all along.

So I'm not surprised at [orders here].

We're also hearing the customers inquiries and a lot of a the samples are under a building or whatever, that we should be able to see the China business even stronger in the third quarter.

And this is one of the reasons we are preparing ourselves for both of the pickup of the local business and our overseas business in the Q3 with new additional capacities to be in place.

Got it.

And then just my final question, Steve.

Any thoughts around Capex for the full year?

And then how do we think about the impact of gross margin as additional capacity comes online?

In terms of the Capex program, TTM's -- legacy TTM's program is about $15 million for 2010.

Obviously, the program from Meadville is significantly higher.

Canice can probably give you full-year numbers for 2010 for the Asian business, but of course, keep in mind that that's -- part of that will have been in the first quarter for them on their set of books before they come to us.

Canice, you want to give a sense of the Capex budget for Meadville?

For the full year if everything runs to plan, that we are able to set up everything at growing the business development, I think we will spend in the range of about [$70 million to $80 million] range for the full years of the 2010.

And that of course would reflect on the top the piece that they've already spent for the first quarter.

We can get that number for you later on.

Yes, it would be about $10 million, $15 million has been spent in the first quarter.

And then impact on gross margin as additional capacity comes online?

You know, it's like -- certainly, it's like the gross margin would be added on as the same -- at least the same level if not better.

And certainly, we know in our business that we have a very large fixed cost base, both in labor and especially in the equipment and especially in Asia.

So I think you'll get better absorption going forward after the stuff comes online.

But keep in mind, as Canice has already said, you won't get a full run rate in the third quarter, because it will just start coming online than.

And then even in the fourth quarter, my hunch is that maybe some online -- bringing things up and bringing things online efficiency issues, I would expect that in the first quarter, you'll probably start seeing really some beneficial margin expansion coming from that additional Capex.

Okay, thanks, guys.

Jiwon Lee, Sidoti & Company.

First off, going back to the North American networking and communication side of the business, I wonder whether or not the dynamics or the order patterns are different among your different tiers of customers there?

Yes, certainly within the networking and communications end market, I mean, there are hundreds of customers there and they're all coming from kind of different portions.

But certainly those that are associated with the Internet and some kind of infrastructure seem to be growing at a more rapid pace.

Okay, great.

That's helpful.

And then I missed out on Steven's comment on the TTM side of the Capex plan for this year.

We're planning to spend $15 million here in legacy TTM in North America.

And one other comment.

On our Capex here at $15 million, this is probably the first time in a number of quarters where we're looking to spend Capex for expansion purposes.

I mean, historically, in the last three or four quarters, it's been to maintain or move into different technologies and so forth.

But we're now looking to see if we can expand for capacity purposes with Capex investments.

Okay.

And then onto the China side, just wanted to make sure that I understood correctly that some of the softness on the networking and communication side was nothing outside of some seasonality that they were seeing.

And then thinking about the expansion in the second half, would the expansion be sort of a 50/50 split between high density connect and the high layer count work?

Or would there be some other work?

Canice, I think that's your question.

From the Asia-Pacific standpoint, it has all along been the company speak between to have about 35% to about 38% of the HDI business, that's a good mix of the -- about 60%, 70% of the conventional high layer counts of the business.

So going ahead they are still predicting this mix of the things that we don't foresee.

There will be not the kind of the transform the design of the conventional (inaudible) to that of the HDI application because no other OEM also worry about the capacity constraint.

So our capacity expansion will be with a good mix of the customers in terms of the redesign into HDI, so it will be likely to be about as much as about 60 over percent we will still be maintaining on the very high layer of the conventional (inaudible).

Okay, that's helpful.

And then lastly for me, I wonder whether there were significant margin differences between the networking, communications, the handset and computing from the Meadville?

There's no doubt.

The higher conventional layer part that we have been manufactured they are a higher contribution of gross margin.

Regarding the (inaudible) and HDI of the business there, the handset is also classified into two types, one is very conventional types of the one plus (inaudible) plus one, they are more compatible.

And then looking to more commodity type projects.

And the group is also migrating our (inaudible) two layer plus or even three layer plus of the HDI, as well plus the very large performance of the system HDI one plus 12, one plus 14 plus 1 types of the HDI.

And these, of course, are -- the margin is equivalent to that of a very high layered conventional.

And then the group is also shifting and migrating ourselves in this.

We have more of the N plus N of the HDI to (inaudible) or even all layers of the designs are required (inaudible) capacity on the Copperfield (inaudible) process, at the margin that shows the ASP for these types of products are even higher.

There's no doubt, in general, the HDI better at more than better the conventional if you compared it from the same layer standpoint.

Okay.

That's helpful.

One more thing.

The customer qualifications.

Can you give us some sense as to the shortest time to perhaps -- what is the realistic timeframe for most of these qualifications to be done?

There's a pretty wide difference in customer qualifications and so forth.

On some of the more basic qualifications it can be giving out a price, maybe us filling out a survey, sometimes a sample board.

And then you are -- then the customer will allow you to move that board into the right facility.

With the larger more blue chip type customers, it becomes a much longer process can go two, three, four, five months, where you go through a plant survey, you submit sample boards, you go through a pricing exercise.

And there can be sample boards of different natures and so forth.

And that can be quite a long process.

So where we're at today with TTM is the facilities in China are near capacity.

So we are looking at customers that have the more basic qualification process to move to China.

That will allow our facilities in China to stay focused on producing boards and satisfying customers.

And as we go forward longer-term, we'll start to get through some of those longer qualification processes.

So, the exciting news is that as we talked about our combination with our customers, there was not one that said this is not -- they were not favorable.

Everyone was very much in favor of the transaction.

Everyone is looking to find a home for some new products that is not currently within TTM.

So there's a lot of opportunity out there as soon as we can have capacity.

So we're going to use the capacity now to service the current customers and current base and bring on new ones as we go forward.

But we have -- we are certainly well positioned here to grow our business.

Perfect.

Thank you very much.

Shawn Harrison, Longbow Research.

I've got a number of follow-ups.

What would be the combined depreciation number now for the two companies?

I can give you a ballpark for that, Shawn, but just keep in mind that that's probably the biggest issue that is still being resolved in purchased accounting be quantified.

It's probably going to be about $17 million to $19 million.

And we still have to rationalize or harmonize our useful lives for assets and so forth.

But that's a good range to work with.

And we'll have a lot better precision at the end of the quarter when we got purchased accounting done.

Okay.

Back to the prior question in terms of the qualifications.

Kent, do you have a sense of maybe what percentage of your customers would be considered more -- or fall under more than short-term qualification which would -- versus what it would require there in a three to five-month timeframe?

It's hard for me to throw out a number, Shawn.

I think it varies and then the circumstances vary also.

So sometimes you can have that qualification process shortened due to end market demand and so forth.

I think what you need to keep in mind, though, is there is some significant demand that as we obtain capacity, that we're very confident we can fill that capacity.

And that would be capacity that matches what the facilities can produce.

So we're pretty excited where we're at.

Now, Meadville running near capacity, that's a different situation and it's a better situation than when we combined the two companies.

So the fact that we are running near capacity, we didn't even have to tap our cross-selling efforts.

I think that speaks highly to where we're at as a company.

So as we fill the facilities with existing work, we still have untapped demand through our cross-selling efforts.

Okay.

Steve, in terms of the cost of debt, the interest expense next quarter, is it correct to assume you have the 140-ish million of convertible debt at the same interest rate and $435 million of Meadville at around a cost of 3%?

First of all, Shawn, I should mention that you apply that TTM debt to $175 million, that's actually we owe on our convertible debt.

That crazy converted accounting rules have marked down our debt.

But just make sure that you're using --

Yes, I guess I'm looking at it on a non-GAAP basis.

Okay, got you.

It didn't get that different because you're pulling out the non-cash.

Just make sure you've got the debt balance straightened out.

So for Meadville, it's like it's LIBOR plus 200 and LIBOR plus 220 for the largest pieces of the debt.

So the term loan is LIBOR plus 200, the group (inaudible) of LIBOR plus 220.

So with LIBOR hovering around I think about 50 basis points, you're probably still even a little bit under 3% for this quarter at least.

Okay.

So on a non-GAAP basis with maybe some other items in there, you're looking at $5 million of interest, quarterly interest expense?

All in, exactly right.

Our projections show about $5.1 million of true interest expense, including your non-cash piece, and about another [$450,000] or so of amortization debt issuance costs, which under GAAP is also part of interest expense.

So those two items together, interest expense including non-cash and debt issuance would be about $5.5 million or $5.6 million for the quarter.

Okay.

So on a non-GAAP basis, we're looking in the low 4's?

Yes, because it's about $1.4 million of non-cash interest expense each quarter.

So it's about -- I think about $1.4 million out of that $5.5 million, you get about $4.1 million.

Okay.

And then the one end market, Kent, we didn't touch on in North America was military.

I know there had been some concerns last quarter, given a program going into life, but it sounds like from your commentary that what you're seeing is pretty steady in terms of general underlying demand for the military and aerospace markets.

Maybe you can just talk to what the potential is over the next few quarters within that end market.

Yes, good question, Shawn.

And the military market is pretty steady.

Our business is with numerous customers and we're on numerous programs; it's a very broad base of customers that we serve in the aerospace and defense work.

And a lot of the work that we serve is rather high tech.

It's -- you can almost look at the aerospace defense and there's some work that you classified as more commercial in nature, but it's aerospace and defense.

A lot of our work is in the higher technology segments.

It's very specialized.

So that puts us on certain programs.

And as those programs come on and go off, we might have some timing differences there.

We were on some programs that were associated with the Iraq and Afghanistan war that are winding down.

But as we tap the other programs that we're involved in, we're replacing that.

So, the fact that we're broad-based is pretty encouraging.

We think that we'll have some, over the next quarter or two, some slight growth in aerospace and defense.

Okay.

And then my final question.

In terms of the accretion comment made in the presentation -- was that on a GAAP basis?

Because maybe on a non-GAAP basis this quarter, you guys could be a little bit accretive.

Is that the correct way to view it?

And then --?

I mean, you see our range between GAAP and non-GAAP.

We're closer to accretion on a non-GAAP basis than we are on a GAAP basis.

I mean, I think the thing -- the reason why we weren't more sanguine about Q2 is just because purchased accounting is still uncertain.

But the biggest things to -- that argue why Q3 is going to be a good period is that we won't have the $4.5 million of inventory markup, the profit component from purchased accounting.

We won't have $7.7 million of Meadville costs and so forth.

If you adjust those things out, I'm pretty sure non-GAAP, things are looking pretty good for Q2 to be accretive.

And certainly in Q3, once those things are behind us, I think we'll be -- we're quite confident about accretion for Q3.

Okay.

And then one final question to round it out.

Excess cash flow -- when are you able to start paying down some of the meaningful debt you acquired?

We won't -- because of the way the deal was structured, we are prohibited from paying down anything in the first year -- or we're penalized if we do -- so that begins from when the debt agreement was signed in November.

So we can't pay down debt effectively until towards the end of this year.

Our first payment is due in mid-February of next year.

So probably we just stick with that schedule and pay down beginning in mid-February; but of course, it will all depend on obviously where we have, as we've described already, some cash needs near-term to increase Meadville's capacity.

But of course, that will generate cash in the future.

So it's obviously how much we paid down and how quickly will depend on the actual cash flow generation of the business post-expansion.

But I think we're quite comfortable with the schedule we have on the debt.

And as you know from prior experience, we do try to delever quickly.

It's just that in this case, we have Capex needs that are more significant, more beneficial in Asia than we've had in the US historically.

Okay.

In Meadville -- how much cash did they bring over?

I'm going to have to defer to Canice on that question.

Canice, what was your cash balance prior to your closing period?

It was about [600] -- over 1 million in (inaudible) dollars I think that cash about [$80 million to $90 million] of the US dollars when they are having the closing.

Great.

Okay.

So you have a little -- right around $200 million of cash right now (multiple speakers) close.

This is what our projections were.

Okay, fantastic.

Thanks again and congratulations on closing the deal.

And that's all the time we have for questions.

I will now turn back to management for any closing remarks.

I'd like to thank everybody for joining us on our call today.

We're really excited about the combination that we have now that we're into the combination about four weeks.

We are more convinced about the wisdom behind the combination.

We're excited about the opportunity for the future.

We have two kind of business models, two different cultures and we can fit those together real well.

We even have untapped selling opportunities that we haven't been able to take advantage of.

So we're excited about the future.

We'll look forward to talking with everyone at our next earnings call.

So thank you very much.

Ladies and gentlemen, this concludes the TTM Technologies first quarter 2010 financial results conference call.

If you'd like to listen to a replay of today's conference, please dial 1-800-406-7325 or 1-303-590-3030 and entering in the access code of 4283045.

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