TTM Technologies Inc (TTMI) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the TTM Technologies fourth-quarter 2012 earnings 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, February 5, 2013. I would now like to turn the call over to Diane Weiglin. Please go ahead, ma'am.

During the course of this call, the Company will make forward-looking statements that relate to future events or performance. These statements reflect the Company's current expectations, and the Company does not undertake to update or revise these forward-looking statements, even if experience and future changes make it clear that any projected results expressed or implied in this or other Company statements will not be realized.

Furthermore, we wish to caution you that these statements involve risks and uncertainties, many of which are beyond the Company's control, which could cause actual results to differ materially from the forward-looking statements.

These risks and uncertainties include, but are not limited to, the Company's dependence upon the electronics industry, contemplated significant capital expenditures and related financing requirements, the Company's dependence upon a small number of customers, the unpredictability of and potential fluctuation in future revenues and operating results, and other risk factors set forth in the Company's most recent SEC filings.

The company also will present non-GAAP financial information in this call. For a 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.

Participating on today's call from our Hong Kong office is TTM's Chief Executive Officer Kent Alder, and from our corporate office in Costa Mesa, California, is TTM's CFO Steve Richards. I would now like to turn the call over to Mr. Alder. Please go ahead, Kent.

Okay. Thank you, Diane. Good afternoon, and thanks for joining us for our fourth-quarter and fiscal-year 2012 conference call. As in our previous calls, I will begin with a review of our business and Steve will follow with a discussion of our financial performance. Then we will open the call to your questions.

So let's start with a review of the highlights from the fourth quarter. Net sales were $382.4 million. Gross margin was 16.3%. Non-GAAP net income was $21.5 million, or $0.26 per diluted share. For the fiscal year 2012 net sales were $1.3 billion. Non-GAAP net income was $72 million, or $0.87 per diluted share. So while we still have more work to do, we were pleased with the close of the year, with better than expected revenue and earnings in the fourth quarter.

We benefited from increased contributions from our advanced flex, our advanced HDI rigid flex business, primarily for touchpad tablets and smartphones. While we did see an improvement in our networking end market, the overall demand environment for conventional printed circuit boards remained choppy.

During the fourth quarter, advanced HDI products represented 29% of our Asia-Pacific segment's revenue, up from 23% last quarter. By capturing multiple new programs for hand held devices, we significantly expanded our business in HDI, substrate, rigid flex and flex assembly. These product types accounted for approximately 60% of our Asia-Pacific revenue in the fourth quarter, up from 45% in the first quarter of 2011.

Achieving this level of progress in growing our advanced technology business is a solid accomplishment and is particularly important, given the softer demand for conventional printed circuit boards.

I would now like to quickly comment on the results of our operating segments for the fourth quarter, and then Steve will answer and provide more details later in the call. The Asia-Pacific segment had sales of $259.4 million in the fourth quarter, a 20% increase from the $215.7 million in the third quarter. Gross margin for Asia-Pacific was 15.7% in the fourth quarter, compared to 14.6% in the third quarter.

The increase in gross margin was primarily due to multiple customer program ramps, which contributed to improved product mix and stabilized our capacity utilization. Capacity utilization in our advanced HDI facilities in Asia-Pacific during the fourth quarter was approximately 90%. Utilization for our conventional facilities in Asia-Pacific was approximately 65%, and our blended utilization rate across all of our Asia-Pacific facilities was 77%.

North America segment recorded fourth quarter sales of $123.9 million, essentially flat with the third quarter. Gross margin for North America increased to 17.4%, from 16.8% in the third quarter. The improved gross margin was mainly due to product mix. Our capacity utilization in North America remained consistent with the third quarter, at approximately 65%.

On a year-over-year basis, fourth-quarter sales in Asia-Pacific increased 18.7%, from $218.4 million in 2011. In North America, sales decreased 14%, from $144 million in 2011.

Now, moving on to our end markets. Fourth-quarter sales in our largest end market, networking and communications, comprised 30% of our total sales, compared to 29% in the third quarter. Sales in this end market were better than expected and increased sequentially due to improved demand, particularly in Asia-Pacific. This is certainly a positive sign, but our visibility into sustained growth in this market is still limited.

Ongoing momentum will be dependent on the macroeconomic recovery, and in particular, on the timing of the 4G LTE network build-out in China, which we expect in the second half of 2013. The networking end market will remain constant at about 30% of sales in the first quarter.

Computing storage peripherals is our second-largest end market. Sales in this end market represented 23% of total sales, compared to 21% in the third quarter. Sales to touchpad tablet customers drove this increase. We also experienced improved demand from storage and high-end server customers. Sales to the computing end market will decline to approximately 21% in the first quarter.

Sales in the cell phone end market increased significantly in the fourth quarter, representing 17% of sales, compared to 15% in the third quarter. Growth in this end market was fueled primarily by a ramping of a new program for a key customer. Sales to the cell phone end market will decline to about 14% in the first quarter of 2013, but will be up significantly over the first quarter of 2012.

The aerospace defense end market represented 13% of fourth-quarter sales, compared to 16% in the third quarter. Sales declined during the fourth quarter, due to program timing and slowing defense-related demand resulting from customer uncertainty surrounding US budget cuts and sequestration. We expect first-quarter aerospace defense revenue will increase on a dollar basis and will represent 17% of sales.

Medical, industrial, transportation end market represent 17% of sales in the fourth quarter, compared to 8% in the third quarter. This end market is expected to be about 9% of sales in the first quarter. Sales in the other end market were 10% of total sales in the fourth quarter, compared to 11% in the third quarter.

On a dollar basis, sales were up modestly from the third quarter, primarily due to continued strong demand for wireless module substrate printed circuit boards for hand held devices. We expect this end market to be about 9% of sales in the first quarter. The projected decrease in end markets is related to seasonality, as well as facility closures for the Chinese New Year celebration.

Now, talk about our customers. Our top five customers accounted for 40% of sales in the fourth quarter, compared to 31% in the third quarter. In alphabetical order, our top five OEM customers were Amazon, Apple, Cisco, Ericsson, and Huawei. We had one customer who accounted for 19% of sales during the quarter. ASPs increased 13% in Asia-Pacific from the third quarter, reflecting a shift in our product mix toward more high technology products, including advanced HDI and substrate printed circuit boards. In North America, ASPs increased approximately 3%, primarily due to mix changes.

We focused our capital investments in 2012 on advanced HDI expansion and technological improvements. We invested approximately $55 million in the fourth quarter, which brings our full-year to about $145 million. We believe the capital we have invested in prior years has provided TTM with the appropriate advanced HDI capacity to support our customers and capture additional opportunities.

Therefore, we plan to reduce our capital spending to approximately $100 million in 2013. We will focus our capital expenditures on improving and further diversifying our advanced technology position, with capacity additions in our rigid flex and substrate business, as well as continuing to invest in productivity improvements, environmental compliance and maintenance.

Now before I wrap up my discussion, I would like to note that last weekend we entered into a letter of intent with our minority partner to sell our remaining 70% interest in our SYE plant and to purchase the remaining 20% interest in our DMC plant. Both the SYE and DMC plants primarily manufacture conventional printed circuit boards and are located in Dongguan, China.

As part of our strategy to shift our product mix towards advanced technology products, this transaction will reduce our footprint for conventional printed circuit boards in Asia-Pacific and should improve our capacity utilization and profitability. We expect the transaction to close by the end of the second quarter of 2013. We anticipate this transaction will generate about $84 million net for TTM, and we expect to use $40 million of the proceeds to repay an inter-company loan.

In summary, we are generally pleased with our performance in the fourth quarter. We benefited from our broad customer engagements across our primary end markets. In addition, certain highly anticipated product launches during the second half of 2012 drove our improved results for the quarter.

Looking ahead to the first quarter of 2013, as in the past, we expect a seasonal decline in our business. We also anticipate that the macro environment will remain challenging. Our optimism about longer-term growth is anchored in the success we achieved in 2012 in deepening our customer engagements and expanding our product diversification, despite current difficult business conditions.

As we regularly do, we will continue to evaluate actions to adjust our cost structure, with an emphasis on plant optimization and efficiency improvements. These changes, along with our leading positions in a broad range of end markets, position us for future growth. Now Steve will review our financial performance for the quarter. Steve?

Thanks, Kent, and good afternoon, everyone. Fourth-quarter net sales of $382.4 million increased $43.4 million, or 12.8%, from the third-quarter net sales of $339 million. Gross margin was 16.3% in the fourth quarter, compared to 15.4% in the third quarter. Selling and marketing expense was $9.6 million in the fourth quarter, compared to $8.7 million in the third quarter. As a percentage of net sales, selling and marketing expense in the fourth quarter was 2.5%, down from 2.6% in the prior quarter.

Fourth-quarter G&A expense was $28.7 million, or 7.5% of net sales, compared to $23.7 million, or 7% of net sales in the third quarter. Amortization of intangibles was $2.5 million in the fourth quarter, compared to $4.1 million in the third quarter. This decrease in amortization expense is due to the impairment we recorded in our intangible balance in the third quarter.

Operating income for the fourth quarter was $21.4 million, compared to operating loss for the third quarter of $202.7 million. Included in operating results for the third quarter of 2012 were non-cash charges of $218.4 million to write down good will, customer-related intangibles, and property, plant and equipment. Excluding these asset impairment charges, operating income for the third quarter would have been $15.7 million.

The Asia-Pacific's segment fourth-quarter operating income before amortization of intangibles was $17.6 million, compared to an operating loss of $206.8 million in the third quarter. Excluding the impairment charges, third-quarter operating income before amortization of intangibles for the Asia-Pacific segment would have been $11.6 million. The North America segment's operating income before amortization of intangibles for the fourth quarter was $6.3 million, compared to $8.2 million in the third quarter.

Interest expense was $6.6 million in the fourth quarter, compared to $6.4 million in the third quarter. Our effective tax rate in the fourth quarter was 21%, a decrease from the third quarter effective tax rate, adjusted for a non-recurring tax benefit, of 24%. The decrease was due primarily to the greater contribution to pre-tax income of our operations in China, which bear a lower tax rate, as well as non-recurring adjustments, including a super R&D tax deduction for one of our Asia-Pacific companies.

Net income attributable to stockholders for the fourth quarter was $15.7 million, or $0.19 per diluted share, compared to a net loss in the third quarter of $208.3 million, or $2.54 per share. Net loss attributable to non-inventory interest was $2.1 million in the fourth quarter, due to a $3.3 million tax valuation adjustment which increased net income attributable to stockholders by $0.04 per diluted share. Excluding the non-cash good will and asset impairments, net income attributable to stockholders would have been $7.5 million, or $0.09 per diluted share, for the third quarter of 2012.

Fourth-quarter non-GAAP net income attributable to stockholders was $21.5 million, or $0.26 per diluted share. This compares to third quarter non-GAAP net income attributable to stockholders of $18.1 million, or $0.22 per diluted share. Non-GAAP income attributable to stockholders adds back amortization of intangibles, stock-based compensation expense, non-cash interest expense, impairments, restructuring and other charges, and income tax effects related to these expenses.

Adjusted EBITDA for the fourth quarter was $50.3 million, or 13.2% of net sales, compared to the third-quarter adjusted EBITDA of $36.5 million, or 10.8% of net sales. Cash and cash equivalents at the end of the fourth quarter totaled $285.4 million, an increase of $4.6 million, from $280.8 million at the end of the third quarter. Net debt was $289.6 million at the end of the fourth quarter, down $15.8 million, from $305.4 million in the third quarter.

Cash flow from operations in the fourth quarter was approximately $66 million. Capital expenditures for the fourth quarter were approximately $55 million. This reflects approximately $52 million for Asia-Pacific and $3 million for North America. Depreciation for the fourth quarter was $24 million.

Now I'd like to turn to our guidance for the first quarter. In the first quarter, we expect revenue to be in the range of $310 million to $330 million. We expect GAAP earnings attributable to stockholders in a range from break even to $0.05 per diluted share, and non-GAAP earnings attributable to stockholders in a range from $0.07 to $0.12 per diluted share. This is based on a diluted share count of approximately 83 million shares.

We expect that G&A expense will be about 11% of revenue in the first quarter. We will record amortization of intangibles expense of about $2.3 million. We expect interest expense to total about $6 million. We expect our blended tax rate to be approximately 20% in the first quarter.

Before we address questions, I would like to mention that we will be participating at the Stifel Nicolaus Technology Conference in San Francisco on Thursday, February 7, the HSBC Tech Day in Singapore and Hong Kong on February 26 and 27, and the UBS Mid Cap One-on-One Symposium in Boston on February 26 and 27. We will provide further details in an upcoming press release. Now I would like to turn the call back to Kent.

Okay. Thanks, Steve. As you probably have read in our press release, Steve will be leaving our company to pursue other opportunities. I want to thank Steve for his dedication and contributions over the past 12 years. He has played a vital role in TTM as we have grown from two locations and approximately $100 million in revenue to 15 locations and $1.3 billion in revenue. Steve will continue to be our CEO until March 2, and we wish him the best. I also want to welcome Todd Scholl to the TTM executive team. Todd will be joining TTM as Executive Vice President on February 20, and then assuming the CFO responsibilities on March 3. And with that, let's move on to your questions.

(Operator Instructions)

Shawn Harrison, Longbow Research.

Hello, everyone. I wanted to focus in on the sale of SYE and the purchase of DMC, and if I could get a little more granular detail in terms of what that will due to the fixed cost base in Asia and the potential earnings impact from the sale of that facility?

Shawn, this is Kent. Let me talk about that for just a few minutes here. The SYE transaction will reduce our conventional capacity and put that more in line with our high-tech strategy focus. It will enable us to better focus our efforts in resources on high-tech printed circuit boards and it will simplify our Company structure, which is better for TTM and GSST.

Certainly, it will help us improve our capacity utilization and profitability, and actually better service customers. So the transaction itself, we believe is very helpful to the future of our Company and better positions us to serve our customers, and longer-term enables us to focus on those areas that are in line with our strategy, so that we can move the company in the direction that we need to move the Company for the shareholders and for customers.

I guess, Kent, on that capacity utilization, if it's 65% right now utilized conventional in Asia, what would that sale take the capacity utilization up to?

Yes, I think that would probably get us up to another 5% to 10%, again, depending on product mix and how the other facilities are loaded. But it would make a nice difference in our conventional. And the rest of our conventional facilities, utilization goes up probably 5% to 10%.

Okay. That's helpful. Second, just with the communications end market and the growth you saw in the fourth quarter. You sound a little bit suspect of how that growth will continue into the first half of the year. Did you see a year-end flush of spending? Was the customer just building up some inventory? What did you see in that business, because it was up so substantially. And a follow-up with that is what was the mix of that business? Was there a lot of assembly within that, because the incremental margin seemed a little bit light?

Yes, I think, Shawn, you're right. The more flex assembly we do, that has a higher material content, so it does get outside of our normal printed circuit board business model. When we do more flex and flex assembly, that will -- we'll probably begin to highlight that in the future and how that is impacting, so you can have a comparison, quarter over quarter.

But that networking end market, we had pretty much some broad strength, both in North America and Asia-Pacific. But it was more pronounced in Asia-Pacific. We think there are some signs of market momentum there, but in the fourth quarter it was more an inventory replenishment. That market momentum hasn't continued into the first quarter, so we are a little hesitant on how that is going.

But if you look at the orders, we had some activity that we haven't had in that end market for quite some time. So I think that is a positive sign, but I'm not sure we've turned the corner and have a broad-based recovery in that end market. That end market in Asia-Pacific, though, is continuing to do a little better, where in North America we're back to historical levels for the year.

Okay. Thanks, Ken. Steve, all the best on wherever the road takes you.

Thanks, Shawn. I appreciate it.

Param Singh, Stifel Nicolaus.

Thank you. This is Param Singh on for Matt Sheerin. Firstly, guys, what is the book to bill that you have for each of the segments in the quarter? I know it's lower because of seasonality. But if you would give me a numerical number, that would be great.

Our book to bill in the fourth quarter was 0.99 in North America. That's right in line with the IPC book to bill, at 0.99. I guess a little more color on that. We had a pretty strong quarter in North America, at 1.13 in December, for just that month alone, and then it's dropped off, as we expected, in January, to 0.88.

But you add all that up, and we're moving along pretty nicely on our book to bill. In Asia-Pacific for the fourth quarter, we had a book to bill of 0.94. The month of December was 0.9, and then we picked up to 0.92 in January. So again, that's right in line with what you see in the third and fourth quarter in Asia-Pacific, with pretty strong bookings. And then we get to the end of the fourth quarter, we start to enter the seasonality portion of our Business, and that is where the decline came.

Okay. Great. Obviously, you are improving your structure to get your utilization back up. Now are you doing anything else? Are you thinking about shutting down some plants, temporary utilization? Because it seems networking is not coming back. We've been hearing about it -- telecom improving -- since last year, and we still haven't seen that.

Yes, we're always looking at our Business and how do we match what the marketplace presents to us, how do we capture market share from our customers -- from our competitors to get utilization up. So, we look at it on the work coming in, how do we get more coming in, as well as what do we do to adjust our current capacity. So, the SYE DMC transaction will certainly help. That's not a rationalization, that's a sale of our facility. That will help capacity utilization. That's a major action we are taking.

We're looking at our other facilities, in a couple facilities on downsizing our workforce. And we are always adjusting -- looking at how we can adjust our capacity between our facilities to better match utilization with what's happening there. So, that's kind of the operational side of what we're doing on capacity utilization and improving capacity utilization. We are also, like I mentioned, have seen some market momentum, so we don't want to adjust too much.

Those adjustments -- sometimes you don't want to make a long-term adjustment for a short-term issue. So we are seeing some market momentum here. And when you look to the second half of the year, on the conventional side, particularly in China, with the 4G implementation, we expect that that will improve our utilization in the second half of the year.

Great. One other question. Obviously, you supply print circuit boards into Boeing. What impact do you see from the Dreamliners getting grounded, and have you heard anything from the OEM itself?

No, we haven't been notified of any issues with our TTM products. We are pretty confident that our products are not involved with the battery and the power supply. So, we are continuing to supply product. I guess if that was to totally halt, it would have maybe a $5 million impact to us over the course of a year. So, for that particular program, as it currently stands, a $5 million impact out of $1.3 billion sales is the relative size of that. But we are just moving along, as we have in the past.

Okay. Great. Thank you.

Steven Fox, Cross Research.

Thanks. Good afternoon, guys. First of all, in terms of capital investments for 2013, it doesn't sound like there is a significant amount going into the advanced HDI side. So, I was wondering if you could just talk about how your utilization looks smoothed out over the course of the year right now? I don't know if you plan on improving efficiencies to get more utilization of it, but relative to what your customers -- some of your top customers could be looking at, how do you plan on keeping up with their demand as the year goes on?

Yes. Thanks, Steve. I think when you look at our CapEx investments over the past year or two, we've invested fairly significantly in the advanced HDI capabilities. And looking at our capacity that we have for advanced HDI, which services the smartphones, and touch pad tablets, hand-held device, we are fairly well-positioned right now for the short-term future. Now, as we look at some of the programs that we are doing samples for, involved with, if some of those program ramp a little faster than we have currently, then we will be looking at a new investment in advanced HDI. But for right now, advanced HDI capacity utilization, to hit the peak parts of the year, I think we are in pretty good shape with.

On the conventional side, again, we have utilization rates that are lower than we are satisfied with, at 65%, that's both in North America and Asia-Pacific. So our CapEx program going forward, on the expansion side, will be more investing into the rigid flex, the flex and flex assembly, and our Substrate business. There 's opportunities that we are capturing there that will be kind of the growth engine for our Business going through 2013. And if you look at advanced HDI, substrate, rigid flex and flex, that makes up about 60% of our total revenue in Asia-Pacific, and that is up from about 45% in the beginning of 2011.

So, those are the growth opportunities. Those are some of the more profitable opportunities we have. So, our CapEx will be focused on those. We do have some environmental requirements on waste treatment in Asia-Pacific that we are investing in. Those are longer-term investments. Taking care of that this year, then the normal maintenance and so forth. So we are anticipating about $100 million, I think, as we said in the script here, to CapEx 2013.

Thanks. That is helpful, Kent. And then just one big picture question. This is a fairly meaningful transaction, it sounds like, in terms of straightening out your own footprint, but it is not really taking capacity out of the industry. You have companies like Flextronics that are consolidating their print circuit board operations. Also, there's been some announcements out of individual plants there in the last few days.

I guess what I'm trying to understand is, do you feel like the conventional print circuit board industry has hit some sort of bottom, or do you need to see capacity come out relative to where the competitive dynamics are, and the long-term growth prospects of that. How do you see that playing out in the next year or so?

That's a good question. First, let me talk about TTM. And with the SYE DMC transaction, I think that puts our capacity for conventional printed circuit boards for our company in the right spot. We're pleased with the footprint that we have, both in North America and Asia-Pacific, and the technical capabilities of each one of those facilities, and how they enable us to service our customers. So, we don't anticipate any more changes within TTM.

Now we will look at each one of those facilities and see how we can better utilize the capacity within those facilities by maybe adjusting one lower, one higher, those kind of things, and putting a little more emphasis on technology in one rather than the other.

As you move to the marketplace itself, or current market conditions, I think clearly there's more capacity in the industry than we need. I like TTM and how we are positioned with our offerings to our customers, with our capabilities, the relationships we have with our customers. So, I truly believe that as we go forward, we'll be able to win market share, as the business and our industry goes through some consolidation. I think that will provide opportunities for us.

And I don't know where the bottom of the market is, but it does seem to having some signs of life, a little bit of choppiness in there, but nothing that we would be totally optimistic about. I believe that it will get better. And I think in 2013, we will see some better times than we have in 2012.

Thanks for that. And Steve, best of luck going forward.

Thanks a lot, Steve.

Rich Kugele, Needham and Company.

Thank you. Good afternoon, gentlemen. A couple questions for me. First, in terms of the transactions for the facilities, how should we look at this for the second half on potentially changing your 17% to 19% gross margin target?

Yes, Rich. That's a good question. We haven't taken it all the way through and totally modeled that out. But as you look at our capacity utilization -- and it kind of depends in what happens as we go forward with some of the work as it gets transferred to facilities. And there is a bigger, probably a broader impact of the overall marketplace. But it certainly will, in 2013, improve our margins. But, when you look at it on a longer-term basis, it gives us the ability to have a little more flexibility for our customers and improve our margins longer-term.

Okay. And then if I heard you correctly, I think that you were talking about defense being up in the March quarter. Was that right? And can you elaborate a little bit on what you're seeing in that market, and the susceptibility to the cuts that could or could not happen?

Yes. You are correct. Our Business in aerospace and defense in the first quarter will increase on a dollar basis, as well as a percentage of our sales. We'll go back to 17% of sales in the first quarter. The sequestration is causing some issues with our customers around uncertainty. And there are certain programs that are involved in the modernization of the Defense Department. Those programs are the ones that are continuing. So, we have a lot of involvement in those new programs, or military modernization-type programs, well-positioned there. So that's, I think, why our Business continues to do well in the aerospace and defense.

And let me mention, too, that of that aerospace and defense, about two-thirds of that business is defense. So, if you look at two-thirds of 17%, you get a little more definition around defense. And a 10% cut there would be 1% to 2% impact in our total revenue, probably on a worst-case, if sequestration did happen, and it was a 10% cut. But then it depends on the programs we're on. And so we take a look at the programs, we're thinking that defense, aerospace business will be, I won't say growing for us, but relative to the press that it gets, I think we're in good shape there with our programs and with our ability to continue to win and move forward on the programs we're involved with currently.

Thanks. And a great quarter, and let's hope some of these trends continue.

Thank you.

Jiwon Lee, Sidoti and Company.

Thank you and good afternoon.

Hello, Jiwon.

Most of my questions were answered, but just wanted to ask you, Kent, the 4Gs and the LTEs in China, your growth expectation for this year. Why second half?

I think that the second half is certainly out of our hands, and that depends on when the government releases licenses to our customers and then they start to build product. We are seeing some product orders right now for certain cities, and so we are pretty confident that in the second half, that it will be a pretty significant increase for us. But that is kind of out of our hands and into when the licenses are issued and so forth.

Okay. That's fair enough. And then you mentioned rigid flex in Asia, including the HDI work, was in excess of a 60% of Asian revenue base. And looking into 2013, how should we expect that mix to happy up?

I don't have any numbers for you, but it will continue to increase. And the business that we group in that category is like the non-conventional. So you go to the advanced HDI, the flex, the rigid flex, flex assembly, and substrate business, we mentioned, has grown to 60% of our Business. And that's driven by the smart phones, the touch pad tablets, the hand-held devices. So, that's the growing end market and the growing products that we have.

The good thing that we have is the ability to build flex and the ability to build rigid, and then the ability to put those two together to provide our customers with rigid flex. And that's creating opportunities that are much more limited from a competition-wise basis. So, there's less competition on those areas. So as we continue to move our Business forward, we are going along those end products, and that is certainly in line with our high technology strategy. So you'll continue to see that percentage increase throughout 2013.

And the other good thing is if the marketplace would continue and we could get our conventional facilities up to a higher utilization rate, that certainly would allow our financial statements to dramatically improve, as we eliminate the underutilization and continue to move forward on our advanced technology strategy.

That's very sensible. And Steve, best of luck.

Thanks, Jiwon.

(Operator Instructions) Amitabh Passi.

Hello. Thank you. This is actually Chelsea Qiu on behalf of Amitabh. Just wanted to follow-up on the SYE, DMC deal. I just want to make sure I understand this deal [trade today]. There will be some proceeds, like estimate roughly $80 million. Is that right? Or am I missing something here?

Right, Chelsea. It's about $84 million, is what we expect to net. And of that $84 million, we will probably use about $40 million to repay an inter company loan.

Got you. Yes, so that kind of build up the cash position to be about $300 million. So, any plans to bring it back down to $200-something million, or that kind of ideal level you want to run the business, cash position you want to run the business here?

So obviously, with the additional net proceeds of probably about $44 million, we have a number of options. We obviously can use it to fund the about $100 million capital plan for 2013. We also can reduce our $370 million debt balance, too. We don't have any payments required on the term loan over the course of 2013, which is a nice option. We certainly can use it to repay debt. So, we will evaluate the best use of cash. Obviously, it's still just an LOI, and not likely to close until the end of 2013. So, we have some time to plan the use of those proceeds.

Got you. Got you. That's helpful. Another question, in terms of the G&A in the fourth quarter. It's ringing slightly higher than either of the previous quarters, or just in terms of percentage, comparing to the previous year. So just trying to understand here, it that mostly the year-end compensation related, or there is something else into this G&A part? And also wondering going forward, you mentioned about after the deal there will be some head count tests. Just wondering what levels of G&A you would expect for first quarter and going forward?

Sure. So you've got a couple questions there, Chelsea. So yes, G&A in the fourth quarter was higher than third quarter. Keep in mind that the third quarter did include a rollback of much of our bonus accrual for management for the year. That was about a $800,000 benefit in the third quarter. So, the third quarter was a little artificially low.

In the fourth quarter, about $1.3 million of the increased expense was really related to the fact that we had more days, about a week longer number of day in the quarter. And then in addition, we had expenses for the annual dinners in China, the annual Chinese New Year celebration, that's about $750,000. And then we did, as you noted in your question, have some increased bonuses for the plant staff and the plant management staff in China, based on the significant uptick we saw in their performance in the fourth quarter. That was about $650,000.

So a variety of things happened this quarter. There's other little nits and nats, too. But those were, by and large, the largest contributors to the G&A expense. It should be down to a more normal run rate in the first quarter. Although in the first quarter, since it's the start of a new management year, we actually will be accruing for the bonus program again, in Q1 of next year. And we didn't accrue for that plan in Q4, since we are not apt to make a payout there.

The staff reductions we were talking about in North America earlier are pretty modest. They won't have a significant impact in the near term cost structure and G&A, at least the G&A side, because most of the employees would be in the cost of goods sold area. I think that should address all the questions you had.

Yes. Yes, definitely. Very helpful. Just really quick, on the tax rate. I think if I heard that correctly, you guided 20%. Is that only for the first quarter, or you pretty much have the visibility for the full year?

I would say we don't have really great visibility for the full year yet. The 20% is applicable for the first quarter. Many of our plants in China are eligible for, and have applied for, the high and new technology tax exemption, which would reduce our tax rate from 25% to 15%. However, those benefits can only be recorded once the government has awarded you that certificate, or that status.

So, in many cases, we accrue for a plant's income at 25% for taxes, but then can have a rollback benefit when those HNTE qualifications are awarded. So it's a bit challenging to predict the timing of those things, and therefore predict a tax rate for the full year. I think a low 20% tax rate for the year is reasonable. But whether it' 20% or 22% will depend on the timing of some of those other aspects.

Okay. Got you. All right. Thank you.

Sure.

I am showing there are no further questions. I will turn the call back to Kent for closing remarks.

Okay. So, I'd like to thank everybody for joining us on the call today. Just a few comments before we close here. The first quarter will have the normal seasonality involved with our Business. 2013, we are looking forward to improved conditions, because we will be able to better service our customers with our past investments and drive revenue with the capitalizing on the our CapEx investment. So, we look forward to talking again in three or four months. Thank you, everyone, and we will see you next time.

Ladies and gentlemen, that concludes our conference for today. If you would like to listen to a replay of today's call, you can dial -800-406-7325, with the access code of 4591672. Again, that number is 1-800-406-7325, with the access code of 4591672. We appreciate your participation. You may now disconnect.