Thomas T. Edman - Chief Executive Officer, President, Director and Member of Government Security Committee Todd B. Schull - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Treasurer and Secretary.

Prabhakar Gowrisankaran - Canaccord Genuity, Research Division Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division David Rold - Needham & Company, LLC, Research Division.

Good day, and welcome to the TTM Technologies, Inc., Third Quarter 2014 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tony Righetti [ph]. Please go ahead, sir..

Thank you, operator. Before we get started, I'd like to remind everyone that comments made on today's call may be -- may contain forward-looking statements. I wish to remind you that any forward-looking information we provide is given in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

The comments that will be made today are management's best judgments based on information currently available. Actual results could differ materially from any implied projections due to one or more of the factors explained in the annual report on Form 10-K and other documents that the company filed with the Securities and Exchange Commission.

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

Please refer to the full disclosures regarding the risks that may affect TTM and the risk associated with TTM's proposed acquisition of Viasystems Group, Inc., which may be found in the current report on form 8-K that have been filed by TTM with respect to the proposed acquisition and the company's other SEC filings.

In addition to financial measures prepared in accordance with GAAP, we will discuss on this call certain non-GAAP financial measures, such as adjusted EBITDA. Such measures should not be considered as a substitute for GAAP.

We will direct you to the reconciliation included in the company's press release, which was filed with the SEC and is available on TTM's website at www.ttmtech.com.

Please note that the following communication is for information purposes only and is neither an offer to purchase nor solicit -- nor a solicitation of an offer to sell, subscribe or buy any securities. No offer of securities shall be made except by means of a prospectus.

Finally, TTM has filed with the SEC a registration statement on Form S-4, which includes a prospectus, with respect to TTM's shares of common stock to be issued in the proposed merger and a proxy statement of Viasystems in connection with the proposed merger.

Investors and security holders are advised to read the Proxy Statement prospectus carefully because it contains important information about the proposed merger. I would like to turn the call over to Tom Edman, TTM's Chief Executive Officer. Please go ahead, Tom..

Thank you, Tony [ph]. Good afternoon, and thank you for joining us for our third quarter 2014 conference call. I'll begin with a review of our business, and then provide an update on our recently announced agreement to acquire Viasystems. Todd Schull, our CFO, will follow with a discussion of our financial performance.

Then we will open the call to your questions. Let's start with a review of highlights from the third quarter. Net sales in the third quarter were $345.3 million. GAAP net income was $7.7 million or $0.09 per diluted share. Non-GAAP net income was $11 million, or $0.13 per diluted share.

We also announced agreement -- the agreement to acquire Viasystems Group, Inc. Both revenue and our non-GAAP earnings were within our guidance ranges. Our third quarter revenue was up sequentially and on a year-over-year basis, and non-GAAP operating income was in line with the third quarter from a year ago.

As anticipated, the demand environment improved during the third quarter, as we moved into the seasonally strong second half of the year. We were pleased to see better-than-expected sales in our networking/communications end market, as demand for networking and telecom products remains solid, particularly in Asia.

We also experienced a steep ramp in revenues in the mobility market related to customer programs for smartphones and tablets.

In the third quarter, the stronger demand for our advanced HDI and rigid-flex PCBs used in smartphones and tablets shifted our product mix towards advanced technology PCBs, and the resulting improvement in revenues led to an increase in sequential gross margin and operating margin. Frankly, we expected to do even better, given the demand climate.

An unanticipated 5-day power outage at our advanced technology facility in Asia Pacific interrupted our ramp for new products and contributed to a yield shortfall early in the quarter. The power outage occurred just as we were adding a significant number of employees to coincide with the ramp.

The resulting impact on production and our ability to train our production workers affected our July and August ramp plants. By September, we were on track with our targeted yields and expect this progression to continue into the fourth quarter.

Demand for mobile devices has remained strong, as evidenced by the fact that we are presently booked through most of December in our advanced technology facility. During the third quarter, our advanced technology work, HDI, rigid-flex and substrate, accounted for approximately 44% of our company's revenue.

This compares to approximately 34% in the second quarter. The increase in the percentage of our business coming from advanced technologies is consistent with our strategy to grow this area of our business, as it offers better revenue and profit growth opportunities. Our blended capacity utilization in Asia Pacific was 80% compared to 75% last quarter.

We experienced a decline in utilization levels in North America, which operated at 54% during the third quarter compared to 60% in the second quarter, largely due to lower networking activity and the timing of aerospace and defense programs. Now moving on to our end markets.

Sales in our largest end market, networking/communications, were 32% of total sales compared to 40% in the second quarter of 2014. On a dollar basis, networking sales were down about 8% sequentially.

As noted earlier, third quarter sales in this end market were better than expected and also were up 8% year-over-year, due to positive overall demand for telecom equipment and our networking customers' ongoing demands for China-based volume production of high-technology boards.

As anticipated, we are seeing sales related to the 4G rollout in China plateau. Given this trend, combined with limited visibility in networking, we expect sales for this end market to decline modestly in the fourth quarter and represent about 27% of total sales.

The cellular phone end market increased, as sales accounted for 25% of revenue in the third quarter compared to 12% in the second quarter. We experienced a strong seasonal increase in sales related to the ramp of new smartphone devices. We expect sales in this end market to further increase in the fourth quarter to 33% of total sales.

Sales in the computing storage peripherals end market represented 13% of total sales in the third quarter compared to 14% in the previous quarter. On a dollar basis, sales increased about 8% sequentially. The increase in sales reflects a modest ramp in tablet products combined with broad-based improvement in servers and process reference designs.

In the fourth quarter, we expect sales in computing to increase on a dollar basis and represent 13% of sales. The aerospace defense end market represented 15% of total sales, down from 18% in the second quarter. On a dollar basis, sales were essentially flat with the prior quarter.

The performance in this end market continues to be steady, as a result of the diversity of programs in which we are engaged. We expect fourth quarter sales to be down slightly on a dollar basis and represent about 13% of total sales.

The medical/industrial/instrumentation end market contributed 9% of total sales, down compared to 11% in the second quarter. On a dollar basis, sales were essentially flat with the prior quarter.

We are pleased with the sales and stability in this end market, as we continue to participate in a broad spectrum of programs, including semi-test equipment, medical devices and industrial applications. We expect fourth quarter sales to remain flat and represent 9% of sales.

Sales in the other end market were 6% of total sales compared to 5% in the second quarter. The increase in sales was largely due to increases in automotive applications and consumer devices. We expect this end market to be stable and represent 5% of total sales in the fourth quarter.

Our top 5 customers contributed 45% of total sales in the third quarter of 2014 compared with 37% in the second quarter. Our top 5 OEM customers remain unchanged from last quarter. And, in alphabetical order, were Apple, Cisco, Ericsson, Huawei and Juniper. We had one customer account for more than 10% of sales during the quarter.

We are experiencing continued bookings momentum. At the end of Q3, our backlog, which is subject to cancellations, increased $49.7 million from the prior quarter to $239.8 million. And our book-to-bill ratio for PCBs was 1.16. As a result of a favorable product mix towards advanced technology, ASPs increased in the third quarter.

In Asia Pacific, ASPs increased 16% from the second quarter. And in North America, ASPs increased by 5% in the second quarter. In summary, we continue to be encouraged, particularly by booking trends in the cellular phone end market. The operating environment is better than we have seen in some time.

Heading into the fourth quarter, our strong backlog, combined with the ongoing work we are doing to improve new product yields, is expected to drive revenue growth and improved margins. Before turning the call over to Todd, I would like to briefly comment on our recently announced agreement to acquire Viasystems.

I remain very excited about the potential strategic and financial benefits of this combination. Over the last several years, we have been focused on leveraging our global footprint, expanding the end markets we serve and diversifying our customer base.

When the opportunity to combine with Viasystems emerged, we saw a clear path to accelerate our strategy to diversify our business by adding new customers in significant end markets, such as the automotive and medical/industrial/instrumentation end markets.

This expanded customer base and broader penetration should reduce individual customer exposure and the impact of seasonality for TTM, while bringing new growth opportunities to our advanced technologies portfolio. The critical strategic drivers for this acquisition remain very much in place.

As a reminder, we expect that this combination will create an industry leader with the ability to deliver expanded capabilities from a broad global footprint to reach more customers and end markets.

We expect that the combination will significantly enhance the ability of both companies to deliver a one-stop, integrated, global commercial sales and manufacturing platform to a wide range of customers. Both companies will benefit from the expansion within attractive end markets.

TTM will particularly benefit from Viasystems' strong presence in the automotive and the industrial and instrumentation end markets. Viasystems will gain from TTM's expertise in advanced technology PCBs, which are increasingly being utilized in end markets, such as automotive infotainment, medical and industrial applications.

The combined company will be better positioned to serve our customers around the globe. We will have a remarkable pool of technical talent that few other companies can match, which will serve as a foundation for our ongoing growth.

Since we made the announcement, I have been meeting with customers, investors and employees to talk about the possibilities ahead, and I am encouraged by their responses. We've now made all of the antitrust-related government filings, and are engaged in the early stages of integration planning.

We have committed financing in place, and we are on schedule to close the transaction in the first half of 2015. Looking to the future, after the expected closing with Viasystems, we anticipate realizing both scale efficiencies of a larger enterprise and significant cost savings through the elimination of redundancies across both organizations.

Including the full annual impact of $25 million of cost synergies and duplicate SG&A functions and excluding transaction-related costs and purchase accounting adjustments, we expect that this combination will be materially accretive to TTM's non-GAAP earnings per share in its first year after the closing.

We will also be actively identifying additional synergy opportunities during the integration planning process and will provide further visibility to investors as we approach close. Now Todd will review our financial performance for the third quarter.

Todd?.

Thanks, Tom, and good afternoon, everyone. For the third quarter, net sales were $345.3 million, an increase of $47.6 million or 16% compared to second quarter net sales of $297.6 million. As Tom said earlier, the sequential increase in sales was due to significant gains in the cellular phone end market.

GAAP operating income for the third quarter was $12.3 million compared to operating income for the second quarter of $3.2 million. On a GAAP basis, our net income for the third quarter of 2014 was $7.7 million or $0.09 per diluted share. This compares to a GAAP net loss of $3.1 million or $0.04 per share in the second quarter of 2014.

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

Our non-GAAP performance excludes the amortization of intangibles, stock-based compensation expense, noncash interest expense, restructuring and impairment costs, and costs associated with the early extinguishment of debt, acquisition-related costs and other unusual or infrequent items, as well as the associated tax impact of these items.

Additionally, we exclude nonoperational changes in our tax 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.

Gross margin in the third quarter was 14.3% compared to 13% in the second quarter. The gross margin increase was due primarily to the increased volume of sales at our advanced technology plants, which allowed us to better utilize those facilities.

This improvement was partially offset by the impact of an unanticipated 5-day power outage at our advanced technology facility in Asia Pacific, which interrupted our ramp for new products and contributed to a yield shortfall early in the quarter.

Selling and marketing expense was $8.8 million in the third quarter or 2.5% of net sales, compared to $8.4 million or 2.8% of net sales in the prior quarter. Third quarter G&A expense was $22.6 million or 6.5% of net sales, compared to $21.2 million or 7.1% of net sales in the previous quarter.

Interest expense was $3.5 million in the third quarter compared to $3.4 million in the second quarter. Our effective tax rate in the third quarter was 32% as compared to a rate of 35.1% in the second quarter. The rate decreased due to a change in the geographic mix of our earnings, with an increase portion of our profits coming from Asia.

Third quarter non-GAAP net income was $11 million or $0.13 per diluted share. This compares to the second quarter non-GAAP net income of $3.9 million or $0.05 per diluted share. Adjusted EBITDA for the third quarter was $43.6 million or 12.6% of net sales compared to adjusted EBITDA of $32.8 million or 11% of net sales in the prior quarter.

Moving on to segment performance. The Asia Pacific segment had sales of $214.7 million in the third quarter, up 28.8% from $166.7 million in the second quarter. Gross margin for the Asia Pacific segment was 13.6% in the third quarter compared to 10.6% in the prior quarter.

The increase in gross margin was due to the factors that we mentioned previously. The Asia Pacific segment's third quarter operating income was $10.8 million compared to $0.7 million in the second quarter. The North America segment recorded third quarter sales of $131.1 million, down slightly from $131.6 million in the second quarter.

Gross margin for our North America segment decreased to 15.4% from 16% in the prior quarter. The gross margin decrease was due primarily to unfavorable product mix at our assembly plants. The North America segment's operating income for the third quarter was $7.2 million compared to $8.6 million in the second quarter.

Cash and cash equivalents at the end of the third quarter totaled $248.7 million, a decrease of approximately $33.3 million from the prior quarter. This decrease resulted from a debt repayment of $48 million. Cash flow from operations was $43.8 million, while we incurred capital expenditures for the third quarter of approximately $29.5 million.

Net debt was $307.5 million at the end of the third quarter, a decrease of $14.8 million from the previous quarter. Depreciation for the third quarter was $23.9 million. Now turning to guidance for the fourth quarter. In the fourth quarter, we expect revenue to be in the range of $370 million to $390 million.

Last year, and during the fourth quarter, our revenue was $366.1 million. We expect sequential improvement in our operating performance and are anticipating that our non-GAAP earnings will range between $0.22 and $0.28 per diluted share. This is based on a diluted share count of approximately 84 million shares.

We expect that SG&A expense will be about 9% of revenue for the fourth quarter. We expect an interest expense will total about $3.2 million, and we estimate our effective tax rate to be between 30% and 34%. To assist you with your financial models, we offer the following additional information.

We expect to record, during the fourth quarter, amortization of intangibles of about $1.9 million, stock-based compensation expense of about $2 million, noncash interest expense of approximately $2.6 million, and we estimate depreciation expense will be approximately $24 million.

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

Operator?.

[Operator Instructions] We'll take our first question from Prab Gowrisankaran with Canaccord..

I just want to get some color on the power outage at the advanced tech facility. Did it impact -- I know it impacted the margins a bit. Was there any impact on revenues? And was there a shift that you see? And I -- looks like the problem is solved now.

So if you can just provide any more color on it?.

Sure. Yes, there was an impact on revenue, losing 5 days of advanced technology work. Fortunately, it was early in the ramp, so as we were, at that point, building early product, we were able to make up for -- in terms of customer demands, later in the quarter. However, from an overall revenue, yes, we lost a little bit in that month.

The greater impact, however, was really on our yield ramp. And you can imagine when you're early in the quarter and you lose significant -- or you have to experience significant downtime. At that point, you're also hiring a significant number of people, and so those people lose the training time that is required in order to improve yields.

So now you're doubling up on the force that you have to train, once the equipment comes online again. So you have training challenges and the training challenges then directly lead to your ability to get that yield ramped. Along with the fact that you're bringing up equipment again, bringing it online, and improving processes.

So you lose quite a bit of momentum there, in terms of yield improvement..

Okay. And the other question I had was just on the utilization rate that you saw of 80%. I'm assuming Q4 in Asia-Pac would be higher, just because the higher smartphone and advanced tech being used more fully. If you can add some color there. And then on the North America utilization, I know it dropped off.

Do you expect the 50%, 54% to be the new baseline? Or you expect a pickup there?.

So in terms of our advanced technology facilities, we were at about 81% in Asia Pacific in this last quarter. So you're absolutely right, as we point to the fourth quarter, we're going to be looking to substantially improve that utilization rate in Asia Pacific, particularly in those advanced technology facilities.

In terms of North America, of course, we're looking at a high mix, low volume product focus in North America, so you always expect to have lower utilization rates. We are looking, at this point, at a relatively flat to slightly down in revenue in North America.

So from that perspective, I wouldn't expect an immediate improvement in the utilization rates. We also did add a -- some plating capacity into one of our facilities -- our networking telecom facility at Chippewa Falls. That was mainly to address technology requirements of our customer base, but it slightly tilts the utilization calculation as well.

And so that was also part of the reason for the downtick in utilization rate as calculated. Longer term, of course, we'll continue to look at the footprint, see -- and look at how we can improve utilization rates in North America..

[Operator Instructions] Our next question comes from Matt Sheerin with Stifel..

Just another question regarding the power outage.

Is that -- was that just a local issue? What was the reason behind that?.

Sure. Thanks, Matt. It was actually the -- as you know in China, every one -- every year, in the summer, the grid is strained. Sometimes in some -- and often, they are able to make it through the summer months. This year, with about a week's notice, we were informed of a planned outage. That was scheduled for 2 days.

And unfortunately, when they took down the power, they discovered that they needed a spare part that wasn't readily available. It took them additional time to bring in that spare part, and that added to the downtime. So that's where they ended up as, actually, as slightly more than 5 days of sustained downtime.

So it was local to the industrial park area, and chiefly attributed to the need for a spare part that they just didn't have readily available..

Okay.

So well, going forward, do you -- is that they -- and is that something that's just could happen every summer, where you don't really have much visibility?.

Well, so the -- it often depends on their maintenance plans, and the strain on the grid. So generally, it's -- of course the efforts are always made to avoid any impact on industrial production. And I don't think we've had a power outage at least for -- been at least 4 years, 3 or 4 years.

So it's not like this happens every year, but with the maintenance cycle and maintenance requirement on top of the summer month strain, I think that's why they chose that particular time to do it. And it is typical to get about a week's notice prior to the maintenance..

Got it. And then looking at your guidance for Q4, you're looking at some modest revenue growth year-over-year. But the midpoint of your guidance implies that margins -- gross margin and operating margin will be slightly below where it was last year.

Does the yield issues that you had coming into the quarter, does that still weigh on it a little bit? I'm just trying to figure out why your margins are not at or better than they were a year ago..

Yes so -- sure. So as we look forward at Q4, from a revenue standpoint, very favorable climate, particularly driven by mobile demand. From an operating standpoint, no question that the sequence of new products that we're working on today present greater yield challenges.

I'm pleased to see the improvement, but we -- we're also looking year-on-year, that's going to -- the complexity of the product is going to challenge our ability to get to where we were last year. On top of that, we are seeing this mix in North America and the shift towards assembly also impact our margins.

In North America, as I mentioned earlier, is slightly -- being slightly down in terms of our forecasted revenue, would also have an effect..

I just might add one other comment to that. Tom's comments are right on and focused primarily on the gross margins. I think if you looked at our operating margins, I think we're expecting to be relatively similar to last year. So we will get some leverage in our overhead structure and that will yield similar margins.

And then in terms of items like below the line, foreign exchange or the tax rates, those are a little bit more unfavorable this year, and that plays into the EPS projections that we provided for this year also..

Got it, that's helpful. And then, if I may, I know it's hard to look out past the quarter, but given the product cycle that your largest mobile customer is going through, trying to get a sense of seasonality heading into Q4.

Do you think that it might be less pronounced than typical in the last -- in recent years because of this product cycle? Or is it too hard to tell at this point?.

Always difficult to forecast, but a few comments for you, Matt. The -- I think the fact that we're booked well into December on the cell phone side is a real positive, something that we haven't typically seen in past years. So that is -- that's certainly an indicator of strength going into Q1.

We have, on the networking telecom side, continued to receive feedback that 4G growth is expected to resume late in Q4 into early Q1. So that is an encouraging signal. And then thirdly, if you think about Chinese New Year, this coming year, it will actually come later than it has in the past 2, so about 2 weeks later.

And that leads to potential for a longer peak season, in terms of seasonal peak. So that, I think, is a third reason to be cautiously optimistic here, as we're heading into Q1 from Q4..

Okay. And just lastly for me, just quickly on the Viasystems acquisition. Any change -- I mean, you've got a schedule to close it in the first half of next year, in terms of expectations for regulatory approval.

How's that going?.

Yes, I think we have all the filings in. That's, as you know, after close, that's the critical piece and that is in our control. And a lot of work from the teams here and certainly at Viasystems, but we've now been able to get those filings in.

Now it's always hard to handicap the process, but at least we've been able to pass the baton over to the government authorities. And of course, we're -- we are still confident in our position here. So still hoping for that and looking at that first half of 2015..

[Operator Instructions] Our next question comes from Rich Kugele with Needham & Company..

David Rold actually in for Rich. So pleased to see the 4G activities expected to resume. I'm wondering if you could kind of give some color there on what changed.

And how much visibility you have on that activity beyond next quarter?.

I think, first of all, if you look year-on-year at networking/communications for TTM, we have a pretty positive situation. So if you look year-on-year Q3 against Q3, we're up about 8% in networking/communications overall. On the telecoms side, we characterized this as plateauing, and I really do think we've been accurate in that characterization.

So we've come down slightly sequentially, but the year-on-year strength is still there. And as we head into Q4 again, we're projecting slightly down sequentially overall, but the indications from our customers are that they expect that the rollout momentum will pick up. Again, just as I mentioned, late Q4 early into Q1.

That seems to be the consistent indication from our customers, and leads us again to be pretty positive about the prospects of that pickup coming again..

Okay. And just one more, if I may.

Did you guys quantify the bottom line impact of the power outage? Do you have a rough estimate?.

It depends on your comparisons, but generally speaking, if you look at what the impact was to us on our gross margins, on a dollar basis, it's going to be -- I hesitate to give you an exact number here, but it probably cost us a percent order of magnitude on our gross margin..

And this is Tom, I'll just add to that. The quantification is difficult because what we were able to quantify very clearly is the revenue impact of the lost production. What's more difficult to quantify is the effect on yields. And so that's why it's a little bit difficult to quantify that number..

And we have no further questions at this time..

Okay. Well, thank you very much. Thank you for joining us. And we look forward to talking with all of you next quarter..

That does conclude today's conference. Thank you for your participation..