TTM Technologies Inc (TTMI) 2019 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the TTM Technologies Second Quarter 2019 Financial Results Conference Call.

(Operator Instructions) Sameer Desai, TTM's Senior Director of Corporate Development and Investor Relations, will now review TTM's disclosure statement.

Thank you, Amanda.

Before we get started, I would like to remind everyone that today's call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to TTM's future business outlook.

Actual results could differ materially from these forward-looking statements due to one or more risks and uncertainties, including the factors explained in our most recent annual report on Form 10-K and the other filings with the Securities and Exchange Commission.

These forward-looking statements are based on management's expectations and assumptions at the date of this presentation.

TTM does not undertake any obligation to publicly update or revise any of these statements, whether as a result of new information, future events or other circumstances, except as required by law.

Please refer to the disclosures regarding the risks that may affect TTM which may be found in the reports on Form 10-K, 10-Q, 8-K, the registration statement on Form S-4 and the company's other SEC filings.

We will also discuss on this call certain non-GAAP financial measures such as adjusted EBITDA.

Such measures should not be considered as a substitute for measures prepared and presented in accordance with GAAP, and we direct you to the reconciliation of non-GAAP to GAAP measures included in the company's press release, which was filed with the SEC and is available on TTM's website at www.ttm.com.

I would now like to turn the call over to Tom Edman, TTM's Chief Executive Officer.

Please go ahead, Tom.

Thank you, Sameer.

Good afternoon and thank you for joining us for our second quarter 2019 conference call.

I'll begin with a review of our business strategy, including highlights from the quarter, followed by a discussion of our second quarter results.

Todd Schull, our CFO, will follow with an overview of our Q2 2019 financial performance and our Q3 2019 guidance.

We will then open the call for your questions.

As expected, the second quarter proved to be a challenging quarter for TTM.

However, due to the efforts of our employees, their optimized operational performance and the continued strength in our aerospace and defense end market, we were able to minimize the impact of commercial demand softness on our operating margin, delivering non-GAAP EPS that was at the high end of the guided range.

Our diversification and discipline helps us through challenging quarters such as this one.

In addition, we generated strong cash flow from operations of $86.1 million in the quarter.

Looking forward, we see Q2 as the low watermark of the year, and our forecast for Q3 factors in a strong rebound in the cellular end market, which will bring improved profitability.

We remain focused on operational excellence and financial discipline as well as our strategic goals in diversification and differentiation.

In particular, we continue on our path towards differentiation in aerospace and defense and automotive end markets.

Overall market trends continue to support this effort in the aerospace and defense end market.

The President and Congress agreed on a 2-year budget deal, providing the Department of Defense with a budget of $738 billion in 2020 and $740 billion in 2021, which results in growth over the already healthy 2019 budget of $716 billion.

Two significant areas for TTM, missiles and munitions and radar systems, are expected to grow among the fastest.

With the continued adoption of AESA radar technology by all of the services and the conversion of next-generation gallium nitride based platforms, the AESA radar market is expected to grow at an 18% CAGR.

AESA stands for active electronically scanned array and represents the next-generation technology for defense radars.

TTM is a leader in the design and manufacturing of RF subsystems and components for AESA radar systems and stands to benefit as defense programs upgrade from traditional rotating mechanical dish radar to fixed, solid-state AESA radar.

This technology allows our customers greater performance in range, accuracy and sensitivity, which in turn increases detection and defense capabilities.

In addition, the overall environment in the aerospace end market remains strong with commercial aircraft at record backlogs and air travel continuing to forecast significant growth for the rapidly growing global middle class.

We continue to win important programs in aerospace and defense, bringing our overall program backlog to a new record level of over $500 million, a significant milestone for our aerospace and defense business.

Backlog has risen 12% year-over-year and 144% over the past 2 years.

We continue our aggressive alignment on critical programs which now number more than 80.

Our aerospace and defense revenues grew 8% year-over-year in Q2, also achieving a new record level.

We capitalize on positive market trends through our team's dual focus on supporting both customer build-to-print and design-to-specification requirements across a broad base of major defense and commercial programs.

We have seen the first fruits of revenue synergies that we have discussed before with key wins for RF subassemblies on a major land-based radar system and a major satellite system.

RF engineering expertise from Anaren, combined with operational capabilities of TTM, will allow us to secure future business in what we see as over $1 billion of program value opportunities available to TTM in AESA-related applications.

We further strengthened our technology position in the aerospace and defense market with the recently announced acquisition of assets and technology from i3 Electronics.

A core differentiator of the acquired technology is the ability to create very fine lines and spacing, which is becoming an increasing requirement for new programs across defense and commercial end markets.

We believe this technology will allow us to address key future growth opportunities for advanced applications in our defense markets with the ultimate goal of providing differentiated technical support and value-add solutions for our customers.

Notwithstanding near-term global demand weakness in the automotive sector, we continue to develop positions in new programs related to the megatrends of vehicle safety and autonomous driving, hybrid and electrical vehicles, advanced infotainment and increased connectivity requirements.

Unfortunately, these business development efforts have not been able to compensate for global demand softness in automotive and particularly in diesel, which has impacted our base business and has caused significant short-term pain for certain parts of our global customer base as the world begins to transition away from the internal combustion engine.

Our goal will be to support our existing customers as they adapt to this new world while also building business with a set of new, innovative, technology-focused customers.

Because of the above macro trends, there continues to be a tremendous amount of innovation in the automotive electronics industry.

Our design activity remains robust, which bodes well for future revenues.

In the automotive market, customer engagement begins well before a product ramps.

In this quarter, we won 57 new automotive designs with a lifetime program value of $94 million, of which 22 were ADAS-related.

Designs that we are winning this year will contribute to revenues in future years.

Now I'd like to review our end markets.

For TTM, the aerospace and defense end market represented 28% of total second quarter sales compared to 23% of Q2 2018 sales and 27% of sales in Q1 2019.

Total program backlog at the end of Q2 was $504 million versus a backlog of $450 million in Q2 of last year and $487 million in Q1 of 2019.

We expect sales in Q3 from this end market to represent about 25% of our total sales.

Networking/communications accounted for 17% of revenue during the second quarter of 2019.

This compares to 17% in the second quarter of 2018 and 18% of revenue in the first quarter of 2019.

While we saw strong growth in 5G-related revenues, many of our networking customers declined year-over-year due to softness in enterprise and cloud spending.

In Q3, we expect this segment to be 14% of revenue.

Automotive sales represented 16% of total sales during the second quarter of 2019 compared to 19% in the year ago quarter and 17% during the first quarter of 2019.

Automotive sales were weaker than expected in Q2 and down year-over-year due to the declines in global demand across all regions.

We expect automotive to contribute 15% of total sales in Q3.

The medical/industrial/instrumentation end market contributed 15% of our total sales in the second quarter compared to 15% in the year ago quarter and 15% in the first quarter of 2019.

We saw strength in our medical customers that was more than offset by weakness in our industrial and instrumentation customers due to declines in global industrial demand and weakness in the semiconductor capital equipment market.

For the third quarter, we expect this market to be 13% of revenues.

Sales in the computing/storage/peripherals end market represented 15% of total sales in the second quarter compared to 15% in Q2 of 2018 and 13% in the first quarter of 2019.

We saw strength in high-end notebooks that was more than offset with weakness in data center and semiconductor customers as cloud spending is in a digestion phase and the semiconductor market remains soft.

We expect revenues in this end market to represent approximately 14% of third quarter sales.

The cellular phone end market accounted for 6% of revenue in the second quarter compared to 8% in Q2 of 2018 and 7% in Q1 of 2019.

We expect cellular to represent 17% of revenues in Q3 as we begin our seasonal production build prior to the release of new smartphone models in the second half.

Next, I'll cover some details from the second quarter.

During the quarter, our advanced technology business, which includes HDI, rigid flex, substrate and RF subsystems and components, accounted for approximately 36% of our company's revenue.

This compares to approximately 32% in the year ago quarter and 33% in Q1.

The sequential and year-over-year increases reduce the growth in our computing and aerospace and defense end markets.

We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology capabilities in new markets.

Capacity utilization in Asia-Pacific was 56% in Q2 compared to 71% in the year ago quarter and 55% in Q1.

The year-over-year declines were due to softness in our commercial end markets.

Our overall capacity utilization in North America was 60% in Q2 compared to 61% in the year ago quarter and 60% in Q1 as our A&D end market continued to drive strong utilization levels in North America.

Our top 5 customers contributed 30% of total sales in the second quarter of 2019 compared to 27% in the year ago quarter and 29% in the first quarter of 2019.

Our largest customer accounted for 10% of sales in the second quarter versus 9% in the year ago quarter and 9% in Q1.

At the end of Q2, our 90-day backlog, which is subject to cancellations, was $503.4 million compared to $534.9 million at the end of the second quarter last year and $438.3 million at the end of Q1.

Our PCB book-to-bill ratio was 1.07 for the 3 months ending July 1.

I'd like to conclude by emphasizing TTM's commitment to operational discipline.

Last quarter, I expressed some concerns about the shape of the recovery of our commercial business in the second half as well as our plans to review our overall cost structure and manufacturing footprint.

While we expect a strong recovery in our cellular business in Q3, other end markets such as automotive and networking/communications remain at depressed levels.

As a result, we implemented reductions enforced in Q2 that generated $13 million of annualized savings, and we'll continue to ensure that our overall cost structure and footprint is aligned with demand realities.

Our goal is for TTM to emerge from this period of softness in an even stronger position to service our customers as their demand cycles improve.

In the longer term, our strategic focus on diversification, differentiation and operational discipline will pay off for TTM, our investors and our customers.

Now Todd will review our financial performance for the second quarter.

Thanks, Tom, and good afternoon, everyone.

For the second quarter, net sales were $633 million compared to net sales of $716.9 million in the second quarter of 2018 and compared to first quarter of 2019 net sales of $620.2 million.

The year-over-year decrease in revenue was due to declines in our commercial end markets partially offset by organic growth at our core aerospace and defense end market.

GAAP operating income for the second quarter of 2019 was $16.8 million compared to $31.7 million in the second quarter of 2018 and $17.5 million in the first quarter of 2019.

On a GAAP basis, net income in the second quarter of 2019 was $3.4 million or $0.03 per diluted share.

This compares to net income of $84 million or $0.65 per diluted share in the second quarter of last year and a loss of $3.3 million or $0.03 per share in the first quarter of 2019.

The results for the second quarter of last year included the release of a tax valuation allowance of $74.6 million related to the purchase of Anaren.

The remainder of my comments will focus on our non-GAAP financial performance.

Our non-GAAP performance excludes acquisition-related costs, restructuring costs, certain noncash expense items and other unusual or infrequent items.

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.

Gross margin in the second quarter was 13.6% compared to 17% in the second quarter of 2018 and 14.6% in the first quarter of 2019.

The year-over-year decrease in gross margin was primarily due to lower volumes in our commercial end markets and ramp-related inefficiencies associated with a major product launch in our cellular end market.

Selling and marketing expense was $17.5 million in the second quarter or 2.8% of net sales compared to $18.1 million or 2.5% of net sales a year ago and $18.4 million or 3% of net sales in the first quarter.

Second quarter G&A expense was $31.7 million or 5% of net sales compared to $34.4 million or 4.8% of net sales in the same quarter a year ago and $31.6 million or 5.1% of net sales in the previous quarter.

Our operating margin for Q2 was 5.9%.

This compares to 9.7% in the same quarter last year and 6.5% in the first quarter.

Interest expense was $17.4 million in the second quarter, an increase of $0.6 million from the same quarter last year essentially due to higher interest rates as the full quarter effect of incremental term loans associated with the acquisition of Anaren was offset by $144 million of debt repayments since last year.

During the quarter, we recorded $2.2 million of foreign exchange gains.

Government incentives brought this total gain to $4.4 million or approximately $0.04 of EPS.

This compares to a gain of $6.2 million or approximately $0.05 of EPS in Q2 last year and a loss of $3.6 million or approximately $0.03 in the first quarter of 2019.

Our effective tax rate was 12.2% in the second quarter.

Second quarter net income was $21.3 million or $0.20 per diluted share.

This compares to second quarter 2018 net income of $52.3 million or $0.48 per diluted share and first quarter 2019 net income of $16.4 million or $0.16 per diluted share.

Adjusted EBITDA for the first quarter was $82.9 million or 13.1% of net sales compared to second quarter 2018 adjusted EBITDA of $115 million -- $115.9 million or 16.2% of net sales.

In the first quarter, adjusted EBITDA was $78.5 million or 12.7% of net sales.

Cash flow from operations was a strong $86.1 million in the second quarter compared to $55.6 million in the same quarter last year.

For the first 6 months of 2019, cash flow from operations was $123 million compared to $41.4 million during the same period last year.

Cash and cash equivalents increased at the end of the second quarter to $284.5 million from $235.2 million in the first quarter as we accumulate cash for the repayment of our convertible bond, which will mature in December of 2020.

Depreciation for the second quarter was $41.2 million.

Net capital spending for the quarter was $34.7 million.

Now I'd like to turn to guidance for the third quarter.

We expect total revenue for the third quarter of 2019 to be in the range of $690 million to $730 million.

We expect non-GAAP earnings to be in the range of $0.35 to $0.41 per diluted share.

The EPS forecast is based on a diluted share count of approximately 106 million shares.

Our share count guidance includes dilutive securities such as options and RSUs but no shares associated with our convertible bonds.

We expect that SG&A expense will be about 7.4% of revenue in the third quarter.

We expect interest expense to total about $17.3 million.

Finally, we estimate our effective tax rate to be between 11% and 15%.

To assist you in developing your financial models, we offer the following additional information.

We expect to record during the third quarter amortization of intangibles of about $11.4 million, stock-based compensation expense of about $4 million -- $4.8 million, noncash interest expense of approximately $3.5 million and we estimate depreciation expense will be approximately $42 million.

Finally, I'd like to announce that we'll be participating in the Needham Industrial Technologies Conference in New York City on August 14, the Jefferies Semiconductor Hardware and Communications Infrastructure Summit in Chicago on August 28, the Deutsche Bank Technology Conference in Las Vegas on September 10 and the Deutsche Bank Leveraged Finance Conference in Scottsdale on September 24.

That concludes our prepared remarks, and now we'd like to open the line for questions.

Amanda?

(Operator Instructions) And we'll take our first question from Steven Fox with Cross Research.

A couple of questions for me if I could.

First of all, can you just sort of clarify -- you mentioned some inefficiencies with the cellular ramp.

Is that something that's ongoing into the quarter?

Has it been resolved?

And then I have a couple of follow-ups.

Yes.

So what happened there -- Steve, this is Tom -- the ramp just started a bit earlier than we had in our forecast.

And because of that, of course, you're starting at really, I would call it, the highlight kind of production quantities very early in the ramp.

And so that's the kind of inefficiency that we saw.

Usually, as we look at our forecast, we would be ramping -- that ramp would occur really in our Q3.

Just started a little bit early this year, and that's why it's a little bit more digital in terms of inefficiencies there.

But we're full on now into ramp with a focus on optimizing yields in the third quarter, and that's what's incorporated in our guidance.

That's helpful.

And then that leads into one of my follow-ups, which is when I look at the outlook, you mentioned cellular being 17% of sales in the current quarter.

So is that reflective of now being on sort of a regular ramp that we've seen in that market in the last few years?

Or is there any other peculiarities you'd point out?

No.

Very similar certainly in the third quarter and that the focus is on optimizing yields.

And on that cellular ramp, that will continue, as you know, in the third quarter.

Fourth quarter, we'll be continuing the ramp.

Usually, just around that December time frame is when we first get some visibility into sell-through.

So that's the situation this year as it has been in the past.

Great.

That's helpful.

And then lastly, just from a big picture standpoint, you mentioned your PCB book-to-bill is now 1.07.

Obviously, there's a lot of puts and takes in there depending on which -- how orders are relative to sales and by market.

Can you maybe provide a little bit of color how you got to that level and maybe what's going on under the covers there?

Yes.

Sure.

The -- interestingly, and if you look at aerospace and defense and then the book of our commercial markets, right, and what you're seeing in aerospace and defense is just a piece.

As I mentioned, we have that program backlog of $504 million.

Only a small piece of that, of course, is in what we are calling official backlog, which is really -- it's a short-term look, 90-day backlog.

So a piece of that comes in.

What you're really seeing there is the back half ramp in cellular.

That's what is the moving piece in terms of that backlog during the quarter.

The rest of the market's relatively flattish in terms of bookings.

So as in the past, it's that phone ramp primarily with a little bit of consumer business that is contributing to the buildup.

We will take our next question from William Stein with SunTrust.

This is Joe Meares on for Will Stein.

Where does the company stand today with regard to its financial and management readiness to engage in another acquisition?

Yes.

So let me be very clear on that one.

We're -- the primary focus for the company continues to be on managing our balance sheet.

Very pleased with the cash flow that we generated in the quarter.

I think that's a great indicator of the discipline that certainly Todd brings to the organization but also our operational's management and how they're executing in -- for TTM even when our markets are a bit more challenged.

So tremendous job there generating cash flow.

Now that cash flow, in turn, we are focused.

Of course, we will continue to invest in our business, but we will also pay down our debt as a priority and prepare, as Todd indicated, for our convert coming due next year, late next year.

So those -- that managing the balance sheet is priority number one.

So I guess that's the answer for you that we -- of course, we are always looking for M&A opportunities that fit into our strategy.

But the priority for the company is on managing that balance sheet, paying down our debt.

Great.

You guys kind of touched on this in other end markets.

I'm just wondering if you can give us an update with regard to traction and cross-selling Anaren in the automotive end market.

Sure, yes.

So on the commercial side, you're right.

We highlighted the aerospace and defense progress there and largely because there, and as we had expected, we had immediate traction with Anaren and the engineering activities.

What we're doing on the commercial side has tended to be a little bit longer term because there, we're taking RF capabilities that Anaren brings us, and we're now bringing those capabilities to several areas, optical networking being one and then the automotive area being another where we're seeing customers struggle with higher frequency requirements and starting to look outside for support.

And so what I can tell you is that we continue to gain traction there.

It is a longer-term effort for us.

And in the meantime, we are benefiting, of course, from the component -- RF component position that Anaren brought us for immediate opportunities in 5G and on the -- particularly on the antenna side for 5G build-out.

So certainly continue to see the benefits from the Anaren combination there.

We'll take our next question from Matt Sheerin with Stifel.

Just another question regarding the automotive segment.

You've been down double digits year-over-year for 4 quarters now, but it looks like based on the guidance, you're seeing a sort of flattening or a little bit of sequential growth.

Are you getting a sense that orders are starting to bottom here?

I know you talked about some headwinds, diesel being one of them.

I know you've got some exposure to China and China EV.

How do you see that playing out?

Are we going to be bouncing around the bottom here for a while?

Or are there signs that things will start to come back?

Yes.

Thanks, Matt.

So you're right.

I think if you look sequential Q2 to Q1, we were down slightly in automotive.

If you look year-on-year, the numbers of course were substantially down on automotive.

If we start to look forward, yes, as we're guiding Q3, we're looking at a little bit of improvement in automotive.

And what I would attribute that primarily to is just inventory work-through at this point.

In terms of end market demand, continue to see a lot of softness out there.

And frankly, I think there's -- I think this is -- certainly, overall in terms of automotive unit demand, I think we're going to be in a soft period for an extended period of time.

Now how long is that, hard to -- for me to estimate, but I think this is a longer-term situation.

Of course, what we will continue to see is growth in what we call our other automotive market, which is really where we see the activity related to ADAS, the autonomous vehicle and some of the EV activity and continuing to see that grow as a percentage of automotive.

So as we go forward, now that we are sort of bouncing along the bottom, as you said, on the unit sales, our goal is to start -- to continue to gain traction in that growth area so that you start to see that sequential growth come back in automotive.

Okay.

And then on the cellular business where you're seeing a huge uptick in September, and I know that -- and I appreciate -- you don't probably have a ton of visibility into the December quarter, but in prior cycles, you've had growth sequentially in September and December.

But in other cycles, you've been down in December.

So are you getting a sense -- and in terms of your visibility and maybe the bookings number, where you should expect to see at least some sequential growth in December?

Yes.

So I think -- and particularly given last year's experience, it's hard to forecast at this point.

The -- as I said, the Q3 we're very focused on yield optimization.

Q4, early in Q4, we had some visibility.

But then it -- really, the rest is determined by sell-through.

And so what I get, I think -- I believe it's encouraging to say that what we are seeing or believe we're seeing is more disciplined sort of inventory management on the part of customer base, which would mean that yes, we might be flattish on Q4, but that would bode well for Q1, Q2 of next year as we finish out the cycle.

As you remember, this past cycle was particularly difficult because Q4 was down from Q3.

But then really, we still had a big inventory.

There are major inventories in the channel that affected Q1 and Q2.

So we're again hopeful that every one -- that we've all learned the lesson that the inventory management discipline is in place that will help the supply chain in this particular cycle.

And we'll take our next question from Jim Ricchiuti from Needham & Company.

Wondering if -- looking at the range of revenues for Q3, is that range skewed toward any particular vertical, I guess cellular being the bigger wild card?

Thanks, Jim.

Yes.

So certainly, if you look quarter-on-quarter, that's where you're going to see the big one is cellular.

There -- as we've just covered a little bit, we're looking at a little bit of an uptick in automotive, that's -- and then a very slight uptick in aerospace and defense and computing.

Frankly, the aerospace and defense situation is -- this is the summer period.

So we're more constrained by just our ability to push product out the door than anything else.

So that's why you'll see a big year-on-year improvement in Q3, but sequentially a little bit harder to generate that improvement.

But if you look sequentially, I'd say that again, the big mover is cellular and then a little bit of an uptick in automotive as well.

And then thinking about auto -- aerospace and defense looking out to Q4, seasonally, that -- is that a stronger quarter where you would see that business pick up a bit?

Or maybe if you could just talk a little bit about the seasonality in that portion of the business.

Yes.

It's interesting.

The aerospace and defense is the -- from an order standpoint, you're absolutely right.

We would usually expect, as we sort of close out a calendar year, that there'll be an uptick in bookings.

Not always the case, but certainly there's a push to sort of close up purchase orders and get those purchase orders in the hands of the supply base.

So we do see that.

But from a revenue standpoint, we're relatively consistent if you look at the revenues.

And what we'll be, of course, seeing is as we've been adding capability and adding capacity, our ability to push out more products out the door is what's enabling us to continue to grow in aerospace and defense.

And so you'll -- you should see a steady buildup from that standpoint in terms of our revenue capability.

But that's really what you'd be seeing rather than a cycle that would be tied to the end market.

And then Tom, just the final question for me.

On the auto vertical, looking at the Q2 performance, you talked to customers, I'm sure.

Is that -- how has that -- how has the tone changed as you've kind of had recent discussions with customers?

And maybe is it mainly in Europe?

Or is it pretty broadly based across geographic regions?

Yes.

So great question.

I think the interesting thing this past quarter, whereas in the previous quarter, we had seen pronounced weakness in Europe and in China, what we saw in this past quarter was that the weakness was broader.

So we saw North America come in too as an area where we saw softer demand.

And so that was, I would say, a new development.

As I've been talking to customers, what I'm hearing is more caution around the longer-term situation in terms of unit sales and the belief -- and I'm certainly a subscriber in this -- to this that there is now certainly, in Europe and in China, a longer-term conversion that is occurring towards the electric vehicle, towards alternative energy vehicles and primarily like EV, but also hybrids.

And as that now is becoming -- because of that shift that there's -- certainly, we're in this period of pause that consumers are being forced to make decisions on what type of vehicle they need to buy in the future and whether it makes sense to buy a traditional internal combustion engine-based vehicle or to push into some of the new technologies.

And I'm hearing from the customers that they're now feeling that, that really is a -- that is going to be -- that structural shift is now commencing, which is why again, short term, I think we're going to see some challenges in terms of this transition but in the longer term, feeds into higher and higher electronics content and therefore, more and more value in terms of PCB that's used per vehicle.

So that's why our emphasis has been really on developing, continuing to support the -- what, again, is sort of a new set of customers that we're seeing around autonomous vehicle, around EV and even some sort of Internet of Things type customers that are pushing into automotive applications.

So from that standpoint, the development activity is very exciting.

I think the shift in customer and consumer behavior is -- right now is causing that damper on demand but bodes well for the longer term.

We will take our next question from Maynard Um with Macquarie.

What were the biggest impacts in the sequential decrease in the gross margins in the quarter?

Was it primarily product mix?

Maybe if you could walk us through what the biggest factors were.

From a sequential perspective?

Yes.

I think the -- 2 things.

One, obviously, there's been some volume fluctuations so that we had a little bit of growth in A&D and that's good news.

But some of the commercial markets were softer and so that created some challenges.

The other issue was one that Tom talked to, I think, at our first question.

And that really regards the ramp and the timing of the ramp at our new -- at our annual products launch cycle that we do in cellular.

Last year, that ramp really didn't get going in earnest until more in July.

This year, it started more in June.

And so you saw costs in Q2 that we didn't have in Q1.

And that's -- and onboarding of labor.

That's yield and productivity type of challenges that are very typical on a ramp.

But it's really just kind of a timing issue.

That's the biggest difference.

So if I look at your guidance for next quarter, and I just look at -- pick all the midpoints, it looks like your gross margin guidance is maybe 16%, 16.2%.

If -- is -- I guess how much of that is utilization versus the sort of reversals of some of the other issues that you had in Q2?

Well, big strokes here.

I would venture to say that about 75% of that improvement is -- sequentially is volume driven.

We had an extreme situation with challenges in utilization.

Tom quoted some of our Asia utilization numbers.

The last 2 quarters, they've been in the 50s, which is extremely low for our Asia footprint.

You're seeing a big recovery and there's some good flow-through from that.

So that's driving about 3/4 of the improvement.

And then we expect to improve on yields as we go through the quarter.

And so that's some of the bounce-back from what we talked about in Q2.

Okay.

And then sort of bigger picture, if I look into next year on the automotive side, you've got tightening emission standards, which I think will drive a lot of the OEMs, I think, to potentially become more aggressive on hybrids and electric.

If I just look at your share across the OEMs, if we were to, let's say, go for one, one decline for ICE and one increase on EV, is your share commensurate on both sides that you feel like it would be an incremental benefit because of the content increase?

Or how should we think about sort of that transition that happens and then your share within that?

That's a fascinating question.

And the reason I say that is because there's so much movement in EV right now.

And so I would come back at you and -- with a question of who's going to win because I think that's critical.

Today, given the volume that's out there, I would say that we're -- and you're probably right, it's sort of 1 to 1 in terms of share position for us overall.

But what we have our eyes on is how is that business going to shift over time.

Where -- who is going to be the winner in China is a big one and how do we build position in China.

So that's certainly an area of focus for us.

The other big question is what happens with the Tier 1s and how has the Tier 1s evolved in terms of their positioning on EV.

Right now they're very strong.

I would say they're relatively strong in Europe, less so perhaps in the U.S. and certainly less so in China.

So we -- our goal is to certainly maintain our position there with the Tier 1s and build a position outside of North America in terms of EV presence in China.

So that's certainly going to be an ever-changing situation.

You're absolutely right.

The dollar content per PCB will benefit us, and we're looking -- you're looking at again upwards of $200 per vehicle on average with an EV versus $70 -- in the $70s on average for a standard vehicle.

So definitely, PCB content benefits us.

The drive for us now is to make sure that, again, we continue to grow that, what we call the other customer mix and maintain our position of the Tier 1s.

Okay.

And then on the free cash flow side, with the exception of last year, you've had actually a pretty good track record of generating as much free cash flow as you do in net income.

And it sounds like you're trying to manage and improve the cash flow.

So I'm just curious if you think you can actually generate above what your net income this year will be.

So free cash flow is obviously a combination -- or the net of cash flow from operations and less our CapEx investment.

We've been -- we've provided generally guidance on our CapEx expectations.

We still expect to be in that $150 million to $170 million range on cash CapEx in 2019, and that's inclusive of that i3 acquisition that Tom mentioned.

So we've absorbed that at our kind of normal CapEx plan.

When you look at our cash flow from operations, we are focused on improving our working capital metrics.

That had been a focus of ours for several years now with the -- when we acquired Anaren, they had a different working capital model and processes and we've been working to digest that and to try to bring additional discipline to that.

And we're starting to bear a little bit of fruit, but that is tough ground.

That's 1 million little things to try to improve working capital.

There's no big home runs there.

And we're making progress.

Some of that, I think, is reflected in our results in the second quarter, and we continue to focus on that as a company on a regular basis here as part of our operating model.

To quote an exact number, I'm not really in a position to do that.

But certainly, we would expect we -- when you look at cash flow from operations, we've had a good first half of the year compared to last year.

And typically, we see seasonality in our cash flow from operations.

So as the second half ramps up, any given quarter, it can fluctuate.

But if you look over a couple of quarter period of time, you should see an uptick there in cash flow from operations.

And then if you pick up the -- your estimates there from -- deduct the CapEx from there, you would get your cash flow estimates.

We don't really provide cash flow from operations guidance, so I can't give you a specific free cash flow number from a guidance standpoint.

Got it.

Okay.

And last one just on the A&D side.

I think you were working on optimizing some constrained capacity and getting other lines validated by the customers.

You also made an asset acquisition with a machinery, I think, that's going to be relocated to the Chippewa plant.

I guess any update there on relieving some of that backlog in the business?

Because it sounds like there won't be any sort of step function increases to the capacity, but maybe if you can just give us an update on how that's going.

Yes.

So the first one is, I think as you said, is not incremental.

It's more part of our optimization of capacity and so should lead to a steady improvement in our capacity in aerospace and defense.

And that's a function of moving work effectively between our facilities and making sure that we have -- that we are cross-qualified across facilities for any given program.

That in turn allows us to optimize the utilization in those facilities.

So we continue to make progress there.

I think as I pointed out last quarter, we've been really pleased with the -- our customers' willingness to allow us to do that kind of move.

I think that's a nice statement of confidence from our customer base.

So we're going to continue to do that, and that will help us in terms of adding incremental capability as we continue to increase our capacity there.

In terms of the acquisition, the i3 asset acquisition, you have the timing right.

We're going to be -- again, this is a relatively small acquisition of assets primarily targeted at that finer line circuitry requirements, miniaturization requirement in our customer base.

And we'll be moving that capacity of those assets to our Chippewa Falls, Wisconsin facility early next year.

So we would start to see the capacity -- again, limited capacity but some benefit there in Q -- late in Q1 of next year into Q2.

But the primary -- with that acquisition, it really does fulfill -- give us capability in the U.S. for a more robust or reliable approach to finer line circuitry requirements from our customer base as our customers continue to miniaturize in their requirements.

So I'm very excited about the capability.

From a revenue standpoint, limited immediate contribution, but you'll see over time how critical that kind of capability is for us.

And we'll take our next question from Paul Coster with JPMorgan.

Can you give us some sense of what business you are and you are not doing with Huawei?

And then expand from that to sort of comment on the possibility that you're somewhat disadvantaged now in China in terms of integration into local supply chains given the domicile of the corporation.

Okay.

The Huawei piece, so as you remember that Huawei has traditionally been one of our top 5 customers and from a standpoint of contribution to revenue, somewhere in that 4% to 5% of revenue kind of range.

The -- fortunately, the bulk of our product and supply to Huawei has come out of China and out of our facilities in China based on China materials.

And so we've been able to continue shipments of our printed circuit boards, our backplane assemblies and even some of our components that come out of China.

And so where we have been -- have not been able to continue to ship has been our components coming out of the U.S. And there, we are in the process and have applied for an export license.

And so certainly, we hope that we would again be able to commence shipping, but that's not incorporated in our guidance.

So from a revenue standpoint, very, very limited effect there.

And the good news is we continue to take care of our customer.

And the bulk of our products, we've been able to continue to ship.

If you look at the effect of -- so our production in China for other customers in China, the TTM approach here is to put our customers front and center and to really focus on meeting their requirements.

China, customers outside of Huawei are relatively -- have been relatively limited for TTM.

But we haven't -- we certainly haven't seen a change in behavior there.

We continue to sample and support our customers there in China from our facilities there, and we'll continue to make that a real focus.

So hopefully, that gives you the answer, Paul.

Yes, sure.

Can I just go back to the product questions on autos as well.

I mean I'm wondering if it's possible that as you get to the end of life of ICE systems, the auto manufacturers sort of slowly kind of milked those product lines and don't sort of make massive investments in new features and instead start to swivel, pivot towards the EV vehicles and hybrids and have the innovation really (inaudible) almost.

Is that a possibility?

And is that a problem if it -- if that's the way they kind of manage this transition?

No.

I think that is a possibility.

I think the -- there's a view, at least I've heard from customers lately, there's certainly a view amongst some of the Tier 1s, is they -- that will emerge as the leaders in continuing to service their customers on the internal combustion engine side.

And that would be for us ongoing legacy business that we'll continue to manage.

Huawei pivots then to building -- starting their own -- or building their own capabilities on the EV side.

And so that's what -- effectively what we're doing is continuing to support our customers, particularly.

And again, the traditional structure has been our primary customer base for those Tier 1 part suppliers continuing to support them as they work on development activities in EV and even if that will support them through the life of those programs as they continue their strategy on supporting their customer base.

So it doesn't -- I think that, that is absolutely conceivable and we will be in a good position to support those customers.

I would now like to turn the call back over to Tom for any further closing remarks.

Thank you.

Yes.

I'd just like to close by summarizing some of the points that I made earlier.

First, we delivered earnings at the high end of the guided range and generated strong cash flow despite weakness in our commercial end markets.

Second, while we're facing a tough demand environment in some of our commercial end markets, we continue to execute well on our core strategies of diversification, differentiation and discipline.

And finally, I'd like to thank our employees, our customers and our investors for their and your continued support.

Thank you and goodbye

This concludes today's call.

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