TTM Technologies Inc (TTMI) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the TTM Technologies third-quarter 2013 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. If you have a question, please press the star followed by the 1 on your Touch Tone phone. If you would like to withdraw your question, please press the star followed by the 2. If you are using speaker equipment, please lift the handset before making your selection. This conference is being recorded today, October 30, 2013.

I would now like to turn the conference over to Ellen Davis with Blueshirt Group. Please go ahead, ma'am.

Thank you. 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 or 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 risk 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 -- general market and economic conditions, including interest rates, currency exchange rates, and consumer spending; demand for the company's products; market pressures on prices of the company's products; warranty claims; changes in product mix; contemplated significant capital expenditures and related financing requirements; the company's dependence upon a small number of customers; competition in the labor market in which the company operates; and other risk factors set forth in the company's most recent SEC filings.

The company will also 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 is filed with the SEC and which is posted to TTM's website.

I would now like to turn the call over to Kent Alder, TTM's Chief Executive Officer. Please go ahead, Kent.

Okay, thank you, Ellen. Good afternoon, and thanks for joining us for our third-quarter 2013 conference call. I'm joined on the call today by Todd Schull, our CFO; and Thom Edman, our President.

As in previous calls, I'll begin with a review of the business. Todd will follow up with a discussion of our financial performance, and then we'll open the call to your questions.

Before we get into a discussion of the third-quarter results, I would like to discuss this afternoon's announcement on my planned retirement. Effective January 1, 2014, Thom Edman will become CEO, and I will continue to serve as a board member and for the next year serve as an advisor to the CEO.

As part of our succession plan, Thom became President of TTM in January 2013, after serving as a board member since 2004. After 14 years at the helm of TTM, I look forward to supporting Thom in the company's ongoing efforts to further increase profitability and extend our leadership position in the printed-circuit-board market.

Thom, congratulations to you and a formal welcome to our investor call.

Thanks, Kent, and thanks for the introduction, and really for all of your support since I joined TTM in January. I've enjoyed watching you lead TTM since 2004, and I'm really excited to be part of the organization, which you have built over the last years.

I look forward to meeting our investors over the next several quarters as we progress with our transition. Thanks again.

Okay, thanks, Thom. And now, back to the third-quarter highlights.

Net sales were $338.7 million. Non-GAAP net income was $11.6 million, or $0.14 per diluted share. Revenue and non-GAAP earnings were within our guidance range for the quarter, and we were pleased with a strong sales performance in our cell phone and computing end markets.

However, our third-quarter operating results were negatively impacted by costs related to a warranty claim. As noted on our last-quarter's conference call, we became aware of a quality issue in the second quarter and worked closely with the customer to resolve this issue.

Our relationship with this customer is unaffected, and we were able to maintain order flow; and we believed the issue was contained to the second quarter.

However, our assessment on the number of boards in the field that had this quality issue was underestimated, and therefore our estimate of potential warranty claims at the end of the second quarter was understated.

The costs associated with warranty claims for those boards, along with the expense for components attached to the boards, totaled $6 million during the third quarter, which includes a $3-million reserve for potential claims. Without this warranty issue, our EPS would have been $0.20.

Third-quarter revenue was roughly flat on a year-over-year and on a sequential basis. As a reminder, this quarter's sales no longer include revenue from our divested plant SYE, which totaled approximately $25 million in the second quarter of 2013. Absent this revenue reduction, our sequential revenue grew 8%.

Our advanced-technology work increased during the third quarter. High density interconnect, substrate, rigid flex, and flex assembly accounted for approximately 63% of our Asia-Pacific segment's revenue in the third quarter. This compares to 53% in the second quarter.

Our blended capacity utilization in Asia-Pacific was 76%, compared to 67% last quarter, reflecting increased utilization at most of our Asia-Pacific plants, plus the benefit of divesting the SYE facility.

In North America, a number of our facilities remained underutilized during the third quarter, with the exception of our Chippewa Falls facility, which has been operating near full capacity for the past two quarters.

Overall, our North America plants were operating at 62% utilization in the third quarter. This compares to a utilization level for the second quarter of 63%.

Now, please note that we updated our methodology for calculating capacity utilization in North America to reflect the changing mix of our product and provide for a more accurate report. Second-quarter data has been restated for comparative purposes.

Now moving on to our end markets. As expected, third-quarter sales in our largest end market, networking communications, declined on a sequential basis as a result of the loss of revenue from our SYE divestiture. Despite the loss of the SYE revenue, sales in this end market increased slightly on a year-over-year basis.

Networking comprised 30% of total sales, compared to 38% in the second quarter. Excluding the impact of the SYE divestiture, sales to the networking end market would have represented 33% of total sales in the second quarter.

And within this end market, we experienced solid demand for products, supporting mobile-telephone infrastructure in [high-end] networking. Looking forward, we expect sales to decline to 27% in the fourth quarter, due to a softening in Asia-Pacific.

Although we continue to expect a mild up-tick in demand relating to the 4G LTE network build-out in China, the roll-out appears to be more gradual and is not expected to dramatically increase demand in the short term.

Sales in the computing/storage/peripherals end market represented 19% of total sales, up from 16% in the second quarter. As expected, sales in this end market increased due to strong seasonal demand for printed circuit boards used in touch-pad tablets.

Sales to storage and high-end server customers were essentially flat. We expect the computing end market will continue to increase to approximately 23% of sales in the fourth quarter, based on increased tablet sales.

Sales in the cell phone end market increased to 21% of total sales, compared to 17% in the second quarter. As anticipated, we experienced increased demand for smartphone products during the third quarter.

The cell phone end market is expected to be up sequentially to approximately 25% of sales in the fourth quarter.

The aerospace and defense end market represented 16% of total sales, essentially unchanged for the quarter. We continue to benefit from our broad program participation in both defense and commercial aerospace. We expect fourth-quarter sales to continue to be stable and represent 14% of sales in the fourth quarter.

Medical/industrial instrumentation end market represented 9% of sales, compared to 8% in the second quarter. We expect this end market to be slightly down, to about 7% of sales, in the fourth quarter.

Sales in the other end market remain consistent, with the second quarter at 5% of total sales. We expect this end market to be down slightly to about 4% of sales in the fourth quarter.

With the seasonal increase in cell phone and computing end markets, we expect all of the other end markets to represent a smaller percentage of total sales in the fourth quarter.

Now on to our customers. Our top five customers counted for 43% of sales in the third quarter, compared with 38% of sales in the second quarter.

In alphabetical order, our top five OEM customers were the same as last quarter -- Apple, Cisco, Ericsson, Huawei, and Juniper. We had one customer who accounted for 23% of sales during the quarter.

ASPs increased 8% in Asia-Pacific from the second quarter, largely as a result of a shift in our product mix, due to the improved demand for products utilizing advanced printed circuit boards. In North America, ASPs increased approximately 3%, again due to mix changes.

As demonstrated by our higher level of advanced-technology work during the third quarter, we continue to benefit from our prior capital investments in advanced technology.

In 2013, our CapEx investments are focused on enhancing our advanced-technology position, with capacity additions in our advanced HDI, rigid flex, and substrate business, as well as further productivity improvements and maintenance. Our CapEx budget is $117 million for 2013.

In summary, our underlying performance for the quarter demonstrated solid seasonal demand for advanced-technology printed circuit boards. We were pleased to see that in North America, we continued to expand our market share in networking, and our aerospace/defense business remained consistent despite US budgetary concerns.

In Asia-Pacific, we expect seasonal extremes for the remainder of this year, as customer programs ramp in the cell phone and computing end markets. We will continue to focus on leveraging our advanced technology to be a key printed-circuit-board supplier to a broad set of customers across the diverse group of end markets.

Now Todd will review our financial performance for the quarter.

Thank you, Kent, and good afternoon, everyone.

Third-quarter net sales of $338.7 million increased $700,000, or 0.2%, compared with the second-quarter net sales of $338 million.

As Kent said earlier, 8% sequential growth in sales, driven by increased sales in our cellular phone and computing end markets, was offset by the loss of approximately $25 million of revenue as a result of the SYE divestiture in the second quarter.

In the third quarter, we incurred a US GAAP operating loss of $1.2 million, compared to operating income in the second quarter of $28.3 million.

Included in our operating results for the third quarter of 2013 were restructuring and impairment charges of $14.1 million, resulting from the closure of our facility in Suzhou, China. Excluding these charges, operating income was $13 million.

On a GAAP basis, net loss attributable to stockholders for the third quarter of 2013 was $7.7 million, or $0.09 per share. This compares to GAAP net income attributable to stockholders of $13.1 million, or $0.16 per diluted share in the second quarter of 2013.

The remainder of my comments will focus on TTM's non-GAAP financial information. Our non-GAAP performance excludes the amortization of intangibles; stock-based compensation expense; noncash interest expense; and other unusual or infrequent items, such as the gain realized on the SYE transaction, or restructuring and impairment costs, as well as the associated tax impact of these items.

Additionally, we exclude non-operational changes in our [cash] expense, such as impacts of retroactive changes in the tax law. We present non-GAAP financial information to enable investors to see the company through the eyes of management and to provide better insight into the company's ongoing financial performance.

Third-quarter gross margin of 14.4% was unchanged from the second quarter. Our gross margin was negatively impacted by the $6-million charge for warranty claims discussed by Kent earlier, which impacted our Asia-Pacific segment. Absent this claim, our gross margin would have been 15.9%, consistent with our expectations.

Selling and marketing expense was $8.6 million in the third quarter, compared to $9.2 million in the second quarter. As a percentage of net sales, selling and marketing expense in the third quarter was 2.5%, compared to 2.7% in the second quarter.

Third-quarter G&A expense is $23 million, or 6.8% of net sales, compared to $24.1 million, or 7.1% of net sales in the second quarter. Interest expense was $3.7 million in the third quarter, compared to $3.8 million in the second quarter.

Our effective tax rate in the third quarter was approximately 28%, a decrease from the second quarter effective tax rate of 32%.

Third-quarter non-GAAP net income was $11.6 million, or $0.14 per diluted share. This compares to second-quarter non-GAAP net income attributable to stockholders of $7.7 million, or $0.09 per diluted share.

Adjusted EBITDA for the third quarter was $42.3 million, or 12.5% of net sales. This compares with second-quarter adjusted EBITDA of $39.1 million, or 11.6% of net sales.

Moving on to our segment performance. The Asia-Pacific segment had sales of $206.5 million in the third quarter, down 1.5% from $209.6 million in the second quarter.

Gross margin for the Asia-Pacific segment was 12.6% in the third quarter, compared to 12.3% in the second quarter. The increase in gross margin was primarily due to higher utilization and savings from the sale of SYE, partially offset by the previously discussed quality issue.

Absent the $6-million quality issue, our Asia-Pacific segment's gross margin would have been 15.1%.

The Asia-Pacific segment's third-quarter operating income was $7.6 million, compared to operating income of $6.6 million in the second quarter.

The North America segment reported third-quarter sales of $132.6 million, up 2.3% from $129.7 million in the second quarter. Gross margin for our North America segment decreased to 17.1% from 17.6% in the second quarter.

The gross-margin decrease was primarily due to higher-than-expected equipment maintenance costs and product-mix inefficiencies at certain of our plants. The North America segment operating income for the third quarter was $9.5 million, compared to $8.7 million in the second quarter.

Cash and cash equivalents at the end of the third quarter totaled $270.5 million, an increase of approximately $40 million from the second quarter. The cash settlement was completed for the transaction in which we sold our controlling equity interest in the SYE plant and acquired the remaining equity interest in the DMC plant. We received $85 million net from this transaction in the third quarter.

Additionally, we incurred capital expenditures in the third quarter of approximately $34 million. Our operating cash flow was a use of $9.6 million, resulting from growth in our accounts receivable through our revenue growth and the impact of our divestiture of SYE. Operationally, our DSOs in Q3 improved by 3 days to 66 days.

Net debt was $274.5 million at the end of the third quarter, a decrease of $40 million from the end of the second quarter. Although our total debt outstanding this quarter is essentially unchanged from the second quarter, please note that $48.1 million of our term loan comes due in September 2014 and therefore was reclassified to short term in our balance sheet. Depreciation for the third quarter was $23 million.

Now before I turn to the guidance, I would like to note that we filed a shelf registration today with the SEC. The shelf registration gives us the flexibility we desire, as we evaluate the various opportunities and cash needs facing our company.

Now guidance for the fourth quarter. In the fourth quarter, we expect revenue to be in the range of $350 million to $370 million. We expect non-GAAP earnings per share to range from $0.18 to $0.24 per diluted share. This is based on a diluted share count of approximately 83.5 million shares.

We expect that SG&A expense will be about 9.5% of revenue for the fourth quarter. We expect interest expense to total about $3.7 million, and we estimate our effective tax rate to be between 24% and 28%.

To assist you with your financial models, we expect to record during the fourth quarter amortization of intangibles and stock-based compensation expense of approximately $2.3 million each, noncash interest expense of approximately $2.2 million; and we estimate depreciation expense will be approximately $24 million.

Lastly, before we turn to your questions, I'd like to mention our upcoming conference participation. We'll be presenting at the UBS Global Technology Conference in the San Francisco area on Thursday, November 21. A press release will be forthcoming with additional details on this event.

Well, that concludes our prepared remarks. Operator, we'd now like to open the line for questions.

Ladies and gentlemen, we will now begin the question-and-answer question. (Operator instructions) Param Singh with Stifel Nicolaus.

This is Param Singh on for Matt Sheerin. Now just on your fourth-quarter guidance, it seems networking is the biggest issue, in terms of top line and then margin [puts it back in the] earnings. Is that correct? And what are the initiatives that are available to you to actually improve your gross margin? And then I have a followup.

Well, on the top line, networking is definitely declining as you look at it, primarily because of the SYE divestiture. So if you look over the course of the year, in terms of our revenue by segment, you can see that networking really peaked in Q2 at almost 100 -- you know, between $125 million and $130 million.

And then with the sale of the SYE facility, that dropped off dramatically in the current quarter. But essentially, all of the entire drop was due to the sale of the SYE facility.

So going forward into the fourth quarter, there's some modest changes in the revenue and networking, but nothing dramatic.

In regard to your question about margins, that's certainly an important question and one that we're sensitive to. As we try to highlight operationally, our Q3 results came out about where we had expected them to and what we had kind of given guidance towards.

Our margin, if you separate out the quality charge, the warranty claim that we have of $6 million, it really came in at right just about 15%, with which we had been expecting. And that's a function of improved utilization, the divestiture of the SYE facility, and better execution.

Obviously, what got us in the second -- in the third quarter, here, was the warranty claim; and we've done our best to try to estimate any potential future exposure related to that claim and capture that cost in the third quarter.

So as we go into the fourth quarter, what our expectations are is a gross margin closer to 17%. How do you get from 14.4% to 17%? Really, a big chunk is we're not going to repeat that quality problem. That's probably worth almost 150 basis points.

And then the remainder of the increase in the fourth quarter is really going to be leverage on our infrastructure to our growing revenue and better utilization of our facility.

And then, Param, this is Kent. Just to add a few comments to what Todd has said. When you look at how we're improving margins, we have sold the SYE facility, which was a conventional, lower-tech facility, didn't fit with our advanced-technology strategy.

We closed our MAS facility, which was losing money. We'll still see some impact of that over the next quarter. It won't be as dramatic as it was in the third quarter.

Those two things alone are pretty sizable. And then you've got the fourth-quarter seasonality that will help drive margins this quarter. Todd mentioned that the quality issue was $6 million. It won't repeat itself.

And then internally, we look at all of our facilities on an ongoing basis. We look at how we're loading those facilities, adjusting capacity between the facilities. That helps us better match the marketplace with the opportunities that we'll have.

We're looking at new business development, going to drive revenue. And then internally, again, we start to look at, how do we reduce our costs through our global supply chain? How do we use best practices across all of our global footprint? How can we run our businesses better?

A lot of it is just a pure execution game, and how do we get more productive in producing products. So we have a lot of activity on all those fronts to improve margins over the next couple of quarters.

On the MAS plant, that should improve your utilization, right, because that was a significant part of your manufacturing foot print in Asia, from what I see in your filings. And then when I look towards networking for the December quarter, that's predominantly, like you mentioned because of the Asia networking companies kind of lowering their expectations and plus either 3G or LTE roll-outs. Is that correct?

Yes. Basically, the drop in the networking is coming from Asia-Pacific. North America -- as you recall through the second and even into the front part of third quarter, we had a nice, significant increase in work coming from the higher end of that networking end of market.

It was coming from, like, core routers, edge routers. So we had some good strength there. We've got a good backlog buildup in North America.

So the drop, too, comes a little bit because of the over-ordering pattern we had in the second and third quarter, and then the decrease in Asia-Pacific. Mainly, like Todd said, though, it's the SYE facility that's not there.

If I could sneak one in. If you could give me book-to-bill numbers for both Asia-Pac and North America, that'd be great, and I'm good. Thank you.

Our book-to-bill for the third quarter was 1.05 in North America; and it was 1.14 in Asia-Pacific. That compares with the IPC at 0.98.

Thank you.

Shawn Harrison with Longbow.

I just want to be 100% crystal clear, here, that that charge would have had you at $0.20 [of the] non-GAAP EPS, which would have been ahead of guidance for the September quarter, if you wouldn't have had that incremental warranty charge? Is that the best way to think about it?

Yes, the $6 million was about $0.06 a share. We reported $0.14. So without that, we would have been at $0.20.

And so I guess within that, what factors -- and I missed a little bit of the early part of the call -- but where did you do better in the quarter that led to that margin upside? Was it mix? Because it doesn't sound like North America was all that fantastic [ex] Chippewa Falls.

I think if you set aside the quality issue, which I think is a discrete event, I think our execution was actually pretty much along the lines of expectations.

Gross margins came in at just right under 16%, which is what we were expecting. Our overhead expenses were a little bit favorable, actually, so that was a little bit of upside.

And we did have a little bit of favorable help on the foreign-exchange line, a little pick-up there. So I think all in all, we were at guidance and then add some favorable OpEx spending and favorable [FX] to get us to the $0.20.

And then the shelf-registration statement, just seeing that, is that looking at solely refinancing the debt you have out there? I know you have that $40-million piece coming due next year, but I'm just wondering what will be the uses? Because it looks like you're able to self-fund your capacity-expansion efforts. It doesn't look like you need any cash for any large restructuring programs. So, just the usage of that potential either equity or debt offering.

That's a fair question. We wanted to highlight the fact that we did file that registration today because we took the opportunity so we could communicate to the investment community and during our call today what was going on.

But this is really just one action in a fairly complicated process. First, keep in mind, as you observed, we have a fair amount of cash on hand, right? $270 million at the end of the quarter. We generate cash from operations, and so that's really important to keep in mind.

But we have a lot of opportunities for potential uses of cash. Obviously, there's the growth in our business, CapEx and working capital the debt draws on.

We have historically been an acquisitive company, and so potential M&A opportunities are always something that we're open to, if the right situation presents itself.

You observed, accurately so, that we have debt repayments due in 2014, 2015, and 2016. So basically, all of our long-term debt comes due during that time frame.

And then thirdly, the printed-circuit-board business has historically been a volatile industry, and we like to consider ourselves a fairly conservatively managed company. And it's prudent to make sure that we have sufficient resources to tide us through any kind of a down-turn situation.

So you have all these factors or competing elements that need to be evaluated and traded off against each other, in terms of what's the highest priority at any point in time.

So when we're looking at that, we're saying, it's probably smart to have a shelf registration in place, because that gives us the flexibility to execute whatever we think would be the most-appropriate strategy at a point in time.

We used to have one out there. It lapsed awhile back, and we just think it's prudent to have one out there now. Will we refinance? Will one of these other opportunities come to play? All of that is possible. We just thought it was appropriate to make sure we had that flexibility.

And then just one final question. Versus your original expectations with, say, coming into the summertime, how much was the China business down versus your original expectations for the fourth quarter? And do you see that coming back to you in the first half of next year?

Shawn, are you referencing Asia-Pacific in the fourth quarter, and our expectations there?

Yes, essentially -- I am sorry, Kent -- yes, so essentially how much did it fall versus what you thought it would have been, say, six months ago?

I think when you look at this fourth and third quarter, it's a little difficult to size it up and compare it to prior quarters because of the SYE and the MAS. Both those two facilities are not with us.

But looking at the ramp of our advanced HDI work going from 53% to 63%, that's pretty much in line with what we thought. The work, as it's come in to us in Asia-Pacific in (inaudible) our advanced HDI facilities -- their capacity is in excess of 90%. They're running at pretty nice capacity.

And the margins we're generating from that, that's satisfactory. I think it's the fact that we need to get some of the other facilities to not be somewhat of a drag on our income.

So the fourth quarter, I think, is going to be pretty much what we expected with the seasonality ramp. Then you move into the first quarter. Historically, we don't have the smartphone or the touch-pad tablet work coming to us. So we'll drop off about 15% in the first quarter. But we're going to return to a level that's much higher than it was a year ago.

So we continue to work with the seasonality, but over quarter over quarter and year over year, it's continued to gain in the revenue side.

I guess the other thing is -- in terms of the China LTE business, how much of that is -- do you have a dollar amount of how much lower versus your original expectation of what that's going to be? And do you see that coming to you in the first quarter or second quarter? Just trying to triangulate maybe when that business comes to you.

And Shawn, we didn't have a dollar amount attached to that, but it was certainly much further below our expectations. We thought it would be more of a dramatic up-tick in the fourth quarter, similar to what happened when the 3 was released.

But this time, it looks like it's been happening. It's going to be more gradual. It's not going to have the same impact that you can just point to in one quarter.

So I think, actually, that's not bad news, other than we'd love to have seen it come in in the fourth quarter. But then you look into the first, second, and third quarter of next year, if it's more gradual we'll still have some pretty nice demand there.

I think the other benefit of the 4G is, you look at the phones that need to be switched out from 2G and 3G into 4G -- that alone will create some demand for smartphones. And then that helps the utilization of the internet, too. So hopefully there's some networking build-out as a result of that.

Thanks a lot. And, Kent, I don't know if this is the last call you'll be leading, but if so, all the best.

Thank you very much, Shawn.

Bobby Burleson with Canaccord.

Congratulations on operation (inaudible).

Thank you.

So it looks like a lot of progress on the (inaudible) happening in Asia-Pacific, as you guys were expecting (inaudible) gross margin (inaudible) warranty issue. Is there any change to where you think peak utilization could be this year? We look at the advanced factory supplying smartphones, etc. Is peak utilization in November? Are there things that could happen in your order books that could kind of shift that one direction or another by a month?

When you look at our utilization, you almost have to look at it by end-market segment. If you go to the aerospace and defense, you'll notice that we've been marching along at a pretty stable rate there, in spite of government sequestration and so forth. It's been pretty stable.

The mix has been a little different. It's caused us a little bit of a challenge in some of the inefficiencies caused by the mix. But that work will need some help with sequestration to have that part of our business go up.

Next year with the networking, that just depends on pretty much the internet and the infrastructure build-out. And with our capabilities in Asia-Pacific and our capabilities in North America with our Chippewa Falls facilities, we're well positioned there. So that basically depends on the demand.

Our advanced HDI facilities, I think we're extremely well positioned there. We've got the right customer base, the right relationships with our customer, preferred supplier with those customers; and so we'll continue to look for the seasonality to be strong this year and next year.

So we'll have some of our facilities run at near full capacity when the seasonal work impacts us. And then it depends on the other work and how much capacity utilization we can get in our other facilities.

So overall, you look at all those factors, there's a lot of pluses and minuses flowing through there. But the position we have the company today with the facilities, the footprint we have, the profit-improvement margins that we've taken with SYE, MAS, and others -- we're pretty well positioned to drive margins as we capture more work.

And you mentioned that foreign exchange was a positive tail wind (inaudible) couple other issues that have come up in the past (inaudible) of labor and some of the pricing that you've had to kind of put in place in order to get that allocation appropriate for your advanced HDI product -- have those things stabilized? Pricing (inaudible) customers, the kind of issues that we were seeing on (inaudible) inflation, are those now stable or even (inaudible)?

I think those are good questions. And when you -- first let me talk about the labor increase. In Asia-Pacific, if you go back a couple years ago, we were having 15% to 16% increases. Last year was closer to the 8%.

We anticipate this year it'll be again closer to the 8%. So it's coming in at much lower levels than we thought. So that's, I think, the positive news there.

With regard to negotiations with our customers, on the tier-one customers, generally you'll go through a quarterly price negotiation. Again, going back in time when one of our customers was consolidating their supplier base, we incurred some significant price reductions.

But on the positive side, it expanded our penetration into a major account, here. So not only did we provide touch-pad tablets, but now we provide smartphones.

So it was kind of a win on the side of driving revenues and penetrating customers and becoming like a preferred supplier. But at that time, we did have to pay a little bit of a price with some more significant price reductions.

Since that time, it's more normalized with more standard quarterly price negotiations. The technology continues to increase, so we are able, to some degree, reset prices. We're able to offset that with the experience and the lower rejects that we have.

So we have a lot of history behind us through a pretty complex technology sector -- or marketplace that we've going through over the last couple years.

And so, as you look at us today and the investments we made in CapEx and the improvements in our processes and quality systems and the just normalized price negotiations, we're optimistic about 2014.

That's great. Just one more quick one, if I can sneak it in. Mentioning 2014, are there things happening on the product front (inaudible) tier-one customer base that could allow for maybe a little less seasonal headwinds entering the calendar year next year, in terms of (inaudible) products launched? Is there potential for stuff that's either been delayed or maybe things that have been chosen to launch at different times maybe spilling over the beginning of next year and kind of counteracting some of that negative seasonality we normally see?

Let me have Thom -- Thom spent about six months in Asia, travels there regularly. I'll see -- Thom, do you have an answer?

Sure. Just to talk a bit about mobility and the smartphone demand. First of all, I don't think we'll see a dramatic shift in seasonality. I think seasonality is here to stay, as long as consumer buying patterns are seasonal.

But what we do see more of is customers diversifying, in terms of their product offering, starting to introduce -- targeted at the Chinese consumers. So there, you're looking at the February holiday or the October holiday, so slightly different timing.

So as we go forward, we certainly will still see that end-of-the-year seasonality, but I think we're going to start seeing some other, smaller, peaks from both the major tier-one smartphone suppliers and also the Chinese smartphone suppliers who are coming on fast and are also customers of ours.

Thank you.

Rich Kugele with Needham.

Good afternoon. A couple questions. First, can you just remind us, Kent, on how much of the networking business is coming from Asia, or if you even want to more finely slice it, how much do you think would have typically been addressing the LTE opportunity? Just trying to gauge the impact, both as it eventually shows up and what it is now.

When we look at our networking, it's a little bit different in Asia-Pacific than it is in North America. North America is on the advanced side of the networking, sort of in the higher-technology products. And then our Asia-Pacific facility is serving the mid-level.

So it's a nice complement to the networking industry, that we have a facility in North America, mid-level level technology -- in Asia-Pacific, mid-level; North America, high-level technology.

That enables us to really have a nice service platform for our customers. When I look at the networking, about 50-50. It's pretty close to half coming from Asia-Pacific, half out of North America.

And then, I recall the last quarter, the lead times on some of the networking equipment because of Chippewa's utilization were getting fairly extended, even if the overall utilization is still manageable. Can you just update us on where we have with the lead times in Chippewa?

The lead times -- basically Asia-Pacific and North America haven't changed. They're like four to six weeks in Asia Pacific, about six to ten weeks in North America. And the ten weeks in North America is a reference to the networking end market, mainly in our Chippewa Falls facility.

We still have a sizable backlog there. When you look at our book-to-bill, in the second quarter -- let's see, it was 1.16 in North America; and most of that was the backlog build for the networking in Chippewa Falls.

So our lead times got extended there. We kind of lost some flexibility in order to meet our customers' needs. We didn't lose any customers, by any means, but we probably lost a few orders because of that. But we still were able to keep our customers happy. And now we're working through that backlog; and I think through the fourth quarter you'll see our lead times come down maybe -- possibly and maybe probably by the end of the fourth quarter, we could be back to normalized lead times.

Great. And Kent, thank you for many years of great insights, and you leave the company in good hands, and probably with those exact same strategies since you've been on the board for so long (laughter).

Thank you, Rich. We appreciate that. You know, the transition, we've been working on that. I think it's gone very smoothly, and I think the culture that we have will continue. So, pretty excited about the transition.

Thank you.

Jiwon Lee with Sidoti & Company.

Most of my questions were answered. I just wanted to ask is, the number-one OEM that you had 23%. If my recollection is correct, this is the highest they've ever done business with you? Is that correct?

Yes, I think you wanted the -- the 23% is probably if not the highest, at least one of the highest. And remember, that's the seasonality that we have there. And it'll probably jump a little bit higher in the fourth quarter, even.

But when you look at it on a year-long basis, it'll be closer to about 20%. So on a year-long basis, 20%, I think we're okay with that.

Okay, helpful. And not to rehash what's happened, but could you go into a little more detail about the claims that you dealt with and how that is now totally behind you?

We can do that. I'll try to do that rather quickly, but it is a little bit of a longer story. But I think it's important that everybody understands the situation.

When we go back into the second quarter, that's when a customer brought a problem to us. We reacted immediately, started trouble-shooting, running tests.

We were able to affirm that there was an issue. It was an issue that was related to one particular part number. We looked at how we were manufacturing that part number. We modified our processes. That corrected the problem. The customer worked with us on that side by side, audited our processes, and so forth.

We then quickly resolved all of the work in process that we had, a few field failures that had come back to us; and at the end of the second quarter, we took a $2-million charge. And a big part of that $2-million charge was an accrual for what we thought was any future returns.

So then at the end of the -- beginning of the third quarter, we started to see some more field returns that we didn't anticipate. And I think it's important that everyone understand that this is an issue that is kind of a delayed quality issue. It doesn't show up immediately.

So in the third quarter, as we started to get returns back, we again looked at where we were at. We took a $6-million charge in the third quarter; and part -- about $3 million of that charge is a reserve against any future claims, warranty claims.

So we think that is adequate. Our customer has a one-year warranty on their product, and most of that product would have been shipped by December. So we're confident we're coming to the end of that. But it basically boiled down to the fact that we did underestimate the warranty charge at the end of the second quarter.

Again, when you look at the warranty charge, itself, we're standing behind our product, and we're standing behind all the components that were attached to the circuit boards. So the cost of each board is about 20 to 25 times the cost of the raw circuit board that we're standing behind.

So it was not a prevalent problem. It was on a few part numbers -- or excuse me, a few parts that had a pretty significant consequence. So we've filed the -- are in process of filing an insurance claim. We're having a claim with the chemistry provider. We don't know what the outcome of those are going to be, but that's where we're at today.

So we're comfortable with the reserve that we have set up.

Thank you for that explanation, and good luck to both Kent and Thom.

Thank you.

Thank you.

Steven Fox with Cross Research.

Good afternoon. Kent, congratulations. Being a CEO of TTM industries should probably have a retirement age of 40, but (laughter) good job (inaudible).

Thank you for your insight.

So anyway, just -- a lot of good questions have been asked. Two things, really. One is, with the SYE behind you guys, what kind of CapEx ratio should we be looking at going forward, if we're thinking about next year? And secondly, just in terms of fully understanding what you're saying about wireless infrastructure -- how much relative to your expectations has this slowed, and what type of growth to you expect from that market, say, over the next several quarters and where? Thanks.

Just on our CapEx side, we'll probably be at about $117 million this year, 2013, which is down from the $140 million of 2012. Looking forward, we'll be -- we're still in the process of working through all the budgets and looking at our forecasts and how much more advanced HDI work our investments will -- but it's not going to be anything significantly lower or higher. It'll probably be right in that category again next year.

Again, with the wireless, it's hard for us to look out and see how much that slowed, but it seems like it's not a dramatic drop-off; and it's just one of the fluctuations that we go through.

So I think that when you look at the way we run our business, and you got the seasonality in there, we do our forecasting. We adjust our business per our forecast. We're getting very good at adjusting our cost structure as we learn how to deal with the seasonality.

I think you'll see an improvement in our business as we are now wiser and able to adjust on the upside and the downside more quickly.

Thanks for the insights, and congratulations to everyone going forward.

Thank you.

And I am showing no further questions. I would like to turn the call back over to management for any closing remarks.

Okay, thank you, everyone, for joining us. We appreciate your interest in TTM. If you have any further questions, we're here. Todd is here. We can answer your questions in the future. We look forward to meeting with you again next quarter. Thank you.

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