Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to TTM Technologies Fourth Quarter 2021 Financial Results Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

[Operator Instructions] As a reminder, this call is being recorded today, February 9, 2021. Sameer Desai TTM's Vice President of Corporate Development and Investor Relations will now review TTM's disclosure statement. Please go ahead..

Thanks Keith. 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 more recent Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission.

These forward-looking statements are based on management's expectations and assumptions as of 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 the 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, www.ttm.com.

We have also posted on our website a slide deck, which we will refer to during our call. I will now 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 fourth quarter and fiscal year 2021 conference call. I'll begin with a review of our business highlights from the quarter and a discussion of our fourth quarter results, followed by a summary of our business strategy.

Todd Schull, our CFO, will follow with an overview of our Q4 2021 financial performance and our Q1 2022 guidance. We will then open the call to your questions.

In the fourth quarter of 2021, TTM delivered revenues above the guided range and non-GAAP EPS at the high-end of guidance, despite a challenging supply chain and labor environment and the impact of the Omicron variant of COVID-19. All end markets performed better than we expected with strong year-on-year growth led by our commercial end markets.

These results were achieved despite ongoing operational headwinds, including supply chain constraints for ourselves and our customers, inflationary pressures, and continued labor and logistics challenges in North America, resulting in production inefficiencies.

Given the time that raw material prices take to work through our inventory, the impact to our cost of goods sold was larger in Q4 than in Q3, but it's stabilizing at an elevated level in Q1. During 2021, we mitigated virtually all of the material price increases through additional cost-savings, adjustment in mix, and product price adjustments.

However, production inefficiencies and labor challenges in North America further exacerbated our costs and output challenges in the fourth quarter, and will continue to do so in the first quarter.

Looking into the first quarter, we are expecting a sequential decline in revenues and profits due to seasonality associated with Chinese New Year having one less week in the quarter and continued labor changes in North America.

For the full-year 2021, excluding divested and closed businesses, TTM grew 10.9% with solid profitability, despite all the challenges we previously mentioned. Full-year cash flow from operations was $176.6 million and we use part of our cash flow to return capital to shareholders, as Todd will discuss later.

This has been and continues to be one of the most difficult manufacturing environments we have ever experienced and I am proud of what our employees have accomplished in the face of these challenges. I would also like to update you on the COVID situation.

As you are aware, the Omicron variant has created another surge of positive cases during the winter in North America, as well as other parts of the world.

At TTM, our employee population was similar impacted with positive COVID cases that continue into Q1 resulting in employee quarantines, which along with the general labor shortages, contributed to production inefficiencies and capacity constraints in North America. In some facilities our absentee rate climbed to as much as 20%.

In late January, we started to see relief as cases began to subside and our absentee rates started to decline. All of our manufacturing facilities have been and continue to be operational. Like many other companies, we continue to see challenges in attracting and retaining labor, particularly in North America.

Our employees are paramount to the success of TTM and we actively endeavor to demonstrate their value to our company through a combination of financial and non-financial methods.

We have done a thorough review of our compensation practices and have embarked on a significant initiative to realign our compensation in North America with a goal of being competitive in the labor markets in which we operate. These changes will increase our cost structure in the first half of the year, while improving our labor positioning.

In the fourth quarter, as it became clear that we needed to make these adjustments, we announced another round of price increases to our customers. Given our extensive backlog and contractual commitments, we do not expect the full impact of the new pricing to take effect until the second half of the year.

As a result, we expect profitability to improve in the second half over the first half. Our long-term strategy remains unchanged. TTM is on a journey to transform our business to be less cyclical and more differentiated. We believe that over time, investors will be rewarded with more stable growth, strong cash flow performance, and improving margins.

As part of the strategic transition, we sold our mobility business in 2020. We are now able to generate more consistent cash flow with our strong set of technologies and broad exposure to longer cycle end markets.

A key part of our ongoing strategy will be to add capabilities and products that are complementary to our current offerings, both internally and through acquisitions. As such, we continue to invest organically in differentiated product technology solutions from our advanced technology center, RF&S business unit, and microelectronics businesses.

Looking forward, our balance sheet is in a strong position to further -- to pursue further acquisitions as well as to support our organic investment needs. Now I'd like to review our end markets. All historical end market disclosures exclude the divested mobility business unit and the two EMS plants, which halted production in December of 2020.

For more details on end market disclosures, please refer to Pages 4 and 5 of our earnings presentation, which is posted on our website. The aerospace and defense end market represented 30% of total fourth quarter sales compared to 38% of Q4 2020 sales, and 31% of sales in Q3 2021.

We continue to experience a positive defense climate with our A&D program backlog at $768 million, a new record compared to $687 million a year ago. The solid demand in the defense market is a result of our strong strategic program alignment and key bookings for ongoing franchise programs.

We saw significant bookings in the quarter for the SPY-6 AESA Radar program, and our overall book-to-bill for A&D was 1.25. We expect sales in Q1 from this end market to represent about 33% of our total sales.

For the full year, aerospace and defense decreased 2.3% due to significant declines in commercial aerospace, and ongoing production inefficiencies in North America. We were happy to see the National Defense Authorization Act, or NDAA, for fiscal 2022 signed into law last December, providing a roughly 5% increase in topline defense spending.

In addition, the new section 851 of the 2022 NDAA requires that the Department of Defense purchase products that contain printed circuit boards manufactured by U.S. suppliers or from U.S.

allied countries that are part of the weapon systems and other telecom and datacom or other critical commercial applications used by the Department of Defense starting in January, 2027. This should provide long-term benefits to TTM due to our strong North America footprint.

In 2022, we expect growth to be in line with market projections of 2% to 4% driven by the defense side of our business as we expect a slow recovery in our commercial aerospace segment. Automotive sales represented 19% of total sales during the 4th quarter of 2021 compared to 17% in the year-ago quarter, and 18% during the third quarter of 2021.

Automotive grew 30% year-over-year. We are aware that the shortage of semiconductors has been limiting automotive production, but this phenomenon has not directly affected our business since we do not purchase semiconductors. However, we will continue to monitor the situation closely.

We expect automotive to contribute 20% of total sales in the first quarter. For the full year, automotive increased 51% as supply and demand rebounded after COVID impacts in 2020. In 2021, advanced technology was 24% of our automotive end market compared to 26% in 2020.

While our advanced technology revenues grew 41% year-on-year, our standard technologies grew even faster. In Q1 despite Chinese New Year we are starting the year with solid year-on-year growth, and we expect the market in 2022 to be above longer-term forecast of 3% to 6%.

The medical industrial instrumentation end market contributed 19% of our total sales in the fourth quarter, compared to 16% in the year-ago quarter, and 20% in the third quarter of 2021. The MI&I market exceeded $100 million in Q4 revenue and performed much better than expectations as we saw a broad-based strength across all segments.

For the first quarter, we expect MI&I to be 18% of revenues with a continued strong demand environment. For the full-year, MI&I grew 11% following 12% growth the previous year, well above trend line for two years in a row due to strength in our industrial customers in particular.

In 2022, we expect growth to be in line with the 2% to 4% forecast as these segments see moderated demand following the extraordinary strength of the past two years. Networking communications accounted for 16% of revenue during the fourth quarter of 2021.

This compares to 16% in the fourth quarter of 2020, and 16% of revenue in the third quarter of 2021.

We saw relative strength on a year-on-year basis in networking compared to Telecom, as the 5G build-out in China continues to be weak and as we made several strategic decisions to use our higher layer count capacity for data center and key networking customers.

In Q1, we expect this end market to be 13% of revenue, as Telecom demand continues to be soft, and due to supply constraints in Networking.

For the full-year, Networking communications declined 0.3% with strengthened networking offset by weakness in Telecom We expect this market to grow, but be below the longer-term forecast of 5% to 8% growth in 2022 due to the anticipated soft start in the early part of the year.

Sales in the Data Center Computing end market represented 15% of total sales in the fourth quarter, compared to 13% in Q4 of 2020 and 14% in the third quarter of 2021. This end market was up 34% year-on-year, due primarily to growth from our data center customers.

We expect revenues in this end market to represent approximately 15% of first quarter sales as strong data center demand continues to drive year-on-year growth. For the full year, data center computing grew 25% as we saw growth across our data center customers.

In 2022, we expect to be above the forecasted end market growth of 1% to 3% driven primarily by data center growth. Next, I'll cover some of the details of the 4th quarter. All of the following operations metrics exclude the mobility business unit and the two EMS plants that we closed.

This information is also available on Page 5 of our earnings presentation. During the quarter, our advanced technology business, which includes HDI, rigid flex, microelectronics, and RF subsystems and components, accounted for approximately 31% of our revenue. This compares to approximately 31% in the year-ago quarter and 29% in Q3.

We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology capabilities in new programs and new markets. Capacity utilization in Asia Pacific was 88% in Q4 compared to 63% in the year-ago quarter, and 91% in Q3.

Our overall capacity utilization in North America was 50% in Q4 compared to 58% in the year-ago quarter, and 50% in Q3. Our top five customers contributed 32% of total sales in the fourth quarter of 2021 compared to 28% in the third quarter of 2021. We had one customer above 10% in the quarter.

At the end of Q4, our 90-day backlog which is subject to cancellations, was $597.2 million compared to $483.9 million at the end of the fourth quarter last year, and $594.8 million at the end of Q3. Our PCB book-to-bill ratio was 1.20 for the three months ending January 3rd.

Our backlog is higher than our revenue forecast due to uncertainty around both labor and supply chain challenges for our customers and ourselves. I'd like to conclude by again thanking our employees for continuing to contribute to TTM and our critical mission of inspiring innovation with our customers.

Despite the raw materials and labor-related challenges we are facing, our business performed better than we expected as a direct result of our employees and our supply chain partners concerted efforts to support TTM and our customers. Now Todd will review our financial performance for the fourth quarter. Todd..

Thanks Tom, and good afternoon, everyone. I'll be reviewing our financial results for the 4th quarter and some highlights for the year, which are also shown in the press release distributed today, as well as on Slide 7 of our earnings presentation which is posted on our website.

For the 4th quarter, net sales were $598.1 million, compared to $523.8 million from continuing operations in the 4th quarter of 2020.

The year-over-year increase in revenue was due to strong growth in our commercial end markets, which more than offset a modest decline in our aerospace and defense end market due to commercial aerospace softness and production challenges in North America.

In addition, there was a headwind from the closure of our two EMS facilities which generated $23.7 million in revenue in the year-ago quarter, and no revenues in the current year quarter. Excluding the impact of the EMS closures, revenues of our ongoing business grew 19.6% year-on-year.

For the full year, revenues grew 10.9% driven by our Automotive, Data Center Computing, and Medical Industrial and Instrumentation end markets. Both the fourth quarter and the full-year 2021 numbers include an extra week when compared to the comparable periods in 2020. That extra week contributed approximately $42 million of revenue.

GAAP operating income for the fourth quarter of 2021 was $33.1 million compared to $29.2 million in the fourth quarter of 2020. On a GAAP basis, net income for the fourth quarter of 2021 was $8.4 million or $0.08 per diluted share. This compares to net income of $39 million or $0.34 per diluted share in the fourth quarter last year.

The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes our divested mobility business unit, non-routine tax items, M&A related costs restructuring costs, certain non-cash 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 facilitate comparisons with expectations in prior periods. Gross margin in the fourth quarter was 16.7% compared to 17.5% in the fourth quarter of 2020.

The year-on-year decline was largely due to labor and production challenges in North America. During the quarter, we did experience significant material cost increases, but we were able to substantially mitigate the profit impact of those increases through customer price increases and manufacturing efficiencies.

Selling and marketing expense was $15.6 million in the fourth quarter, or 2.6% of net sales versus $15.2 million or 2.9% of net sales a year ago. Fourth quarter G&A expense was $30.4 million or 5.1% of net sales compared to $24.4 million or 4.7% of net sales in the same quarter a year ago.

In the fourth quarter of 2021, R&D was $4.8 million or 0.8% of revenues compared to $4.6 million, or 0.9% in the year ago quarter. Our operating margin in Q4 was 8.2%, this compares to 9% in the same quarter last year.

Interest expense was $11.2 million in the fourth quarter, a decrease of $0.4 million from the same quarter last year, due primarily to lower levels of debt as we repaid our $250 million convertible bond in December of 2020, partially offset by the extra week of expense in the current quarter.

During the quarter, there was a negative $2.5 million foreign exchange impact below the operating line. Government incentives and interest income reduced this to a negative $1.1 million or $0.01 impact on EPS. This compares to a loss of $1.9 million or $0.02 of EPS in Q4 of last year.

Our effective tax rate was 1.6% in the fourth quarter, resulting in tax expense of $0.6 million. This compares to a tax benefit in the prior year of $6.4 million or $0.06 per share. Fourth quarter net income was $36.2 million or $0.34 per diluted share. This compares to fourth quarter 2020 net income of $40.2 million or $0.37 per diluted share.

For the full year, net income was a $138 million or $1.28 per diluted share compared to $116.7 million or $1.10 per diluted share last year. Adjusted EBITDA for the fourth quarter was $70.4 million or 11.8% of net sales, compared with fourth quarter 2020 adjusted EBITDA of $68.2 million or 13% of net sales.

Depreciation for the quarter was $22.2 million. Net capital spending for the quarter was $19.5 million. Cash flow from operations was $62.4 million. And for the full year, cash flow from operations was $176.6 million. Our balance sheet and liquidity positions remain very strong.

Cash and cash equivalents at the end of the fourth quarter of 2021 were $537.7 million. And our net debt divided by last 12 months EBITDA was 1.4.

During the fourth quarter we repurchased 2.2 million shares of our common stock under our previously announced $100 million stock repurchase program at an average price of $13.47 per share for a total out-expenditure of $29.6 million. For the year, we have spent a total of $64.6 million for stock repurchases to buy back 4.7 million shares.

Now I'd like to turn to our guidance for the first quarter. As Tom stated earlier, our first quarter sees normal seasonality associated with Chinese New Year, and this year the first quarter has one less week than our fourth quarter. In addition, we are adjusting the compensation for our employees in North America to improve our competitiveness.

While we are increasing prices to balance these higher costs, these increases won't have a significant impact until the second half of the year as we work through our existing backlog. Given that, we expect total revenue for the first quarter of 2022 to be in the range of $540 million to $580 million.

And we expect non-GAAP earnings to be in the range of $0.20 to $0.26 per diluted share. EPS forecast is based on a diluted share count of approximately 105 million shares. Our share count guidance includes dilutive securities such as options and RSUs, but no shares associated with our warrants since all of those have settled now.

We expect that SG&A expense will be about 8.5% of revenue in the first quarter and R&D to be about 0.9% of revenue. We expect interest expense to total approximately $11 million. And finally, we estimate our effective tax rate to be between 12% and 18%. To assist you in developing your financial models, we offer the following additional information.

During the first quarter, we expect to record amortization of intangibles of about $9.7 million, stock-based compensation expense of about $4.8 million, non-cash interest expense of approximately $0.5 million, and we estimate depreciation expense will be approximately $21.3 million.

Finally, I'd like to announce that we will be participating virtually in the Cowen Aerospace/Defense & Industrials Conference tomorrow and the J.P. Morgan IEO and Leveraged Finance Conference on March 1st. That concludes our prepared remarks. And now I'd like to open the line for questions.

Keith?.

Thank you. [Operator Instructions]. We'll take our first question from Srini Pajjuri with SMBC Nikko Securities. Please go ahead..

Thank you. Thanks for taking my question and great job on the quarter, guys. So I guess Todd or Tom, as we look out to the first half, you are guiding for profitability to decline which is not a surprise given the cost inflation that you talked about, but as we go into second half you did mention that your price increases will kick in.

Do you have a target profitability as we go through the second half, and do you know how long it might take for you to get back to whatever the normalized rate is?.

I'll try to answer that and Tom can add to it if you feel so inclined. But let me just go back and talk about where we've come from in 2021. Very, very challenging year with all of the material cost increases, supply chain challenges that we witnessed.

We had a lot of growth in the cost of our materials that go into our product and we worked very hard -- we talked about this over the last few quarters to mitigate that and to adjust our pricing model, we talked extensively about how we do that.

And I'm pleased to say that we've pretty well gotten there here by the end of the year, which was our hope and expectation, only to find now that labor is raising its head from an inflation perspective. And we're having to deal with that. And we've taken actions, we've been proactive on this one.

But as noted, our backlog is going to take a little bit of time to work through, and so those price increases really don't become effective until later in the year.

So we're going to have -- we're going to incur the cost inflations starting in Q1, but later in the year, we expect to have that mitigated through pricing, as well as ongoing initiatives that we have internally to be more efficient. So in terms of expectations, we are looking to get back to a more normal position later in the year.

I've seen some other unforeseen circumstances, but we've been through a lot the last year as Tom highlighted, and our team has done a really good job of fighting through all of this and we have a little bit more to go, but I think we've seen what we need to do, and at this point we have a plan that will get us in a much healthier position by the second half of the year..

And the only thing I'd add just to get a little bit more color on the labor adjustment that we will be taking. This is actually part of the longer-term process that we launched after the Anaren acquisition.

We began a project related to the global leveling of our organization and our compensation, as well as responsibilities and making sure that we had strong global alignment. As an outgrowth of that process, we've -- we're now looking at a situation in North America where we need to make adjustments.

And those adjustments designed to really -- to make sure -- ensure that TTM is competitive and competitive for the long term. But I do want to highlight, this has been a process in terms of looking at our overall levels.

We're excited about this, where we stand on this project, being in the implementation phase now coming up and then being able to offer our employees a much better-defined roadmap in terms of career development that offers them global opportunities, so there was really -- it's a big move on TTM's part, something that they we're excited about..

Got it. That makes total sense. And then one question about, again, pricing -- potential price increases. I would suspect that that will have some impact, or some beneficial impact on your top-line growth as well as we go into second half.

And when I look at your annual guidance by segment, it doesn't look like you're changing a whole lot here, generally consistent with what you've been telling us.

I'm just curious, in are we just being somewhat conservative here, given the potential price increases as we go into second half?.

What I would say there and as we talk through the end markets, I'm sure later in the call we'll go through this. But if you certainly -- we benefited from strong growth this past year being at that close to 11% level certainly a little -- a portion of that were price adjustment related.

But also, really driven by our customer demand and I have to say by particularly our Asia side of the house and the ability to maximize output there. As we look at this year, I think you're right to point out that we really don't incorporate the pricing adjustments as much as we look at real demand.

And so we're still excited to be looking at a situation I think if you're looking at again, returning to that solid mid-single-digit growth rate which has given our mix of businesses where we've liked to be traditionally, particularly coming off of an elevated growth year.

So again, yes, I think there's potentially a portion of that that we're missing, but really solid growth that we foresee here..

Got it. Thanks, and good luck..

Thank you..

We'll take our next question from Jim Ricchiuti with Needham & Company. Please go ahead..

Hi. Good afternoon.

I'm wondering if you're seeing any, putting aside the labor challenges, I'm wondering if you're seeing any signs of cost stabilizing in other areas of the business? Or is this still a case where you may be having to react as you go through the next one to two quarters and potentially have to take other pricing actions?.

Yeah. Jim, I think we have seen a stabilization at that -- material prices, generally stabilizing at high levels. This last quarter, we did see some increase in some of the chemical-related inputs in our China facilities. We worked our way through that. We have -- we do see elevated electricity costs here in the winter, again primarily in China.

But those are relatively minor compared. to laminate -- the laminate situation, which of course is our major raw material. And overall, I would say that again, high levels, levels that we certainly hope will come down over time but at least a stabilizing trend there..

And Tom, in light of the moving parts to the business still within the next couple of quarters and some of the actions you're taking, what can you say about some of the other activities you might be pursuing on the M&A side?.

Continuing to work that side of our strategic direction. And what I can say is overall the pipeline process we have in place still very active.

And just to reiterate the strategic themes there, we’re still looking to bolster our footprint outside of China and North America, looking at what we might be able to do in Europe, what we might be able to do in Southeast Asia.

And then also looking at our -- particularly our RF position strengthening our Aerospace and Defense business primarily in that area is another major priority. So those priorities remain very much in place.

Interesting with the markets moving, we are in a period of a little bit of volatility, but hoping that that also means that we're going to see some more, I would say, from a valuation standpoint, realistic valuation expectations as we go forward..

Got it. Thanks.

[Operator Instructions]. We'll take our next question from Mike Crawford with B. Riley Securities. Please go ahead..

Thank you. Just a follow-up on the M&A question. Given the $20 billion Intel 's investing in fabs in Ohio and other OEMs building on U.S.

footprints, how does that change your calculus regarding your own footprints in the U.S.?.

A few things there.

I think, first of all, we love our position in North America and as you know, Mike, it's -- the position that we use both for defense customers, and I would say primarily for defense customers, but also for some of the prototyping and pilot production requirements of our commercial customers, particularly in the MII area and then also in the computing and communications area.

So now you start fast-forwarding to a time as we start to see reassuring initiatives occur with our customer base, we will be pursuing absolutely the dialogue around their requirements in North America and that will be an effort that we continue going forward.

That requires an understanding on our customer's part that there is a differential -- a cost differential, even with the more advanced capabilities around printed circuit boards. With the material, supply and infrastructure being primarily in Asia, there is a cost differential associated with production in North America.

As I mentioned in in my comments, the fact that the NDAA came through with -- certainly an emphasis on let's say non - China production. And as we go forward with potential interest in supply chain resiliency from our customer base, I think we're going to start seeing a shift in views in regards to North America production.

But I will tell you that that comes with an acceptance of cost differential. And so active discussions there will continue and we'll see where it takes us..

Thanks, Tom. And then I know you mentioned RS for aerospace and defense, but you also talked about your high layer count capacity in North America already being somewhat allocated to more strategic verticals.

Does that mean that there would be some room to add to that high layer count position in North America just through internal investment or?.

Right. When we talk about the demand for data center customers and for networking customers, you really are looking at that high layer count requirement. And you're right, we had to make some allocation decisions, not just around North America it's really around our total capacity. And those are difficult.

On the other hand, we have a pretty clear strategy around continuing to move towards the higher, more advanced technologies, the higher layer count requirements, and so from that standpoint where we've been shifting is towards markets and towards customer needs associated with that.

Now that's being driven by new chipsets primarily, new chipsets demanding more than circuitry to support those chips. And so we expect that trend to continue as it relates to where do we put the capacity.

Absolutely, again, if we see the North American component become more and more important, and if our customers really need to see that capacity about for an automated capability that -- and are willing and understand the cost differential, then, at that point, yeah, that makes -- the North America makes sense.

In the meantime, other regions may make sense as well to service those supply chain resiliency requirements. So yeah, I think -- absolutely we'll continue to look at the footprint as we look at supporting that customer base..

Thank you. And then last question is, you have this production record metric you track in the automotive vertical that was at $629 million in Program [Indiscernible] in 2020.

Do you have that number for '21?.

I sure do. As we look at automotive, let me give you just some of the numbers from the most recent quarter. We had a total -- let's see, just want to make sure I get my numbers right. We had 26 design wins, $146 million in Q4. That compares to the previous year we had a 35 design wins, but only $81 million. And so very strong quarter.

Now, if you step back and you say, okay, let's look at the fiscal year metric, 147 design wins for about $532 million, that compares to an even stronger 2020 which was at $629 million, and then a 2019 figure that was at $475 million.

So what we're seeing or what we saw in this past year in automotive growth, a portion of that is these programs that we won in 2019 and 2020 coming -- beginning their production alive. And what we will see in this coming year is 2020 and 2021 feeding into this coming year as our customers move into production.

So it's a nice base to be positioned from for sure..

Great. Thank you very much..

Thanks, Mike..

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

Yes, thanks. Good afternoon. Just a follow-up questions, particularly on the gross margin. How should we think about -- again, I know this was asked earlier, but as we get through the year, you've got the costs that you're passing along, sounds like material -- raw material prices are starting to stabilize.

Could we expect gross margin expansion in the back half versus the back half of fiscal '21?.

Matt, challenging question because it's hard to project that far out. But what I can do is let me help calibrate things a little bit for you and for everybody else for that matter.

Remember Q1 here as we're giving guidance for is always our seasonally low quarter of the year because of Chinese New Year, and the lost production inefficiencies that that drives. So that's something you got to keep in mind year-over-year. So certainly, we would expect Q1 to be the lowest point of the year.

And if you look at our pattern last year it was consistent with that and has been for several years.

The big issue that we ran into that we're seeing in Q4, that we're addressing, that will impact us in the first half of this year from a negative standpoint is really the North America labor situation, and Tom nicely described the whole process that we're going through there.

Just a sense of magnitude in, Q1 -- in the fourth quarter that challenge impacted us by about a 100 basis points. And in Q1 that will impact us more in the closer in the neighborhood of 120 to 150 basis points.

If we are able to solution that, which we believe we have a plan in place and we're executing that plan, that gives you some sense of mitigating that particular issue. Now there's a lot of other factors that play into margins, overall volume, and revenue growth during the year and other things that can be favorable.

And obviously, we hope we can avoid any more of those supply chain challenges that we've been seeing that hurt us so much in 2021. So I hope that helps gives you a sense of direction, at least in the order of magnitude of this labor challenge that we're working through right now..

And that's all a hit to COGS, not SG&A? Those labor issues in North America because it's mostly factory jobs..

Essentially, yes. There's a minor amount in SG&A, but it's really, really too minor to talk about..

And I know you talked about the utilization rate of 50% in North America, and I know it's always significantly below Asia because of the nature of the products that you do, etc. But certainly, you're well below where I think you wanted to be. What's the optimal level and where do you think you can get it between now and the end of the year..

So, I can start out on that one Todd, and then please jump in and supplement. Where we are, a good way to think about that, we're still where we were last quarter in terms of contribution of North America to revenue. So about 43% of our revenues coming out of North America production, where we have been after the mobility sale was 50%.

So if you start thinking about it versus utilization, that they'd be a better way to think about it, we'd like to be as we get again, this is dependent on labor force, but as we start to show up our labor force and bring that labor force into the plants, we need to bring that mix up again, the 50, 50.

And that will, again, I think will so clearly help us for margin performance standpoint because we'll be utilizing those facilities.

We'd like to see -- to answer your question directly as well, we'd like to see operating utilization in North America above 60%, that's when we're really, really moving things through the plants with our high mix, low volume approach. And if we get much above those levels then we have to start thinking about expansion..

And in terms of the impact on these labor issues on your business, I know you talked about some headwinds. But is it a pretty much across all your end markets? Or mostly areas where you're doing, like you said, a high mix, a lower volume, more complex stuff here in the U.S.

like MilAero? Or is it across the board where you're doing like NPI for [Indiscernible] networking for instance?.

Yes. The biggest way absolutely aerospace and defense, of course, 100% of that is North America production, or not a 100 but it's very close as we do a little bit of commercial aerospace in China. But by far above 90% is North America. The other end market that's affected by this is MII.

We have several facilities that service the MII market and that's mainly a quick turn early development market, and also a niche market, if you will, for some of the applications. So that's a market that is dependent on North America production.

And then a little bit going into Data Center and Netcom, but that's primarily our Chippewa Falls facility, which so fairly small part of the North America footprint..

Okay. And just lastly, your positive commentary on the Data Center, it sounds like you've got really good growth there. You're seeing -- you expect to be above-market, but I think your market growth is in low to mid-single digits.

Would you expect to do much better than that, given the backlog and given the growth we've seen at those customers?.

We certainly would expect to do much better than that. That 1% to 3% is all -- because it's -- the most visibility we have on that market growth is through our -- through the Prismark forecasts, and they include laptop and desktop monitors in that area. That always puts a damper on data center clearly growing at higher rates..

Yeah. Okay. Alright great, thanks a lot..

Thank you..

We'll take our next question from Christian Schwab with Craig-Hallum Capital Group. Please go ahead..

Hey, guys. Can you guys just help us understand the wage inflation in North America.

What were you paying hourly labor in the blend as I know by geography would be modestly different, but just to give us a rough idea, pre -pandemic what you were paying and now what you're paying now on a go-forward basis?.

Maybe I can help characterize that for you. I think, again, we are -- the move we're making is really in the context of structural changes we need to make in our overall compensation. It's more than just the starting pay or this -- or simply the pay to the workforce.

But having said that, you see in the overall numbers, I think lately 5% is the number I've been seeing for inflation this past year in terms of pay. But what I can tell you is for an hourly workforce, it's substantially above that. And we've been seeing more north of 10% kind of increases over time or year, if you go back a year-on-year compare.

Yes, substantial, and again from a starting wage standpoint, I think overall you see a manufacturing moving from what was on average, let's just say a $15 per hour pay scale to closer and closer to that $20 level. It's a -- there has been a major move there for sure..

Have you guys seen any push back from any of your customers? Or as your order book or backlog for future revenue based on price increases due to readily raw materials, but obviously significant increases in labor costs? Have you seen any push back from customers on that?.

I have yet to run into a customer that is really satisfied with us when we increase pricing. Having said that, I think the reasons we're doing this are well-documented. The raw material inflation that we've had to deal with, the labor situation, well understood by the customer base.

There are programs that customers choose to move away from us at volume if -- particularly if they don't see equivalent kind of price movement from our competition on the commercial side.

But frankly, given where our utilization rates are for our commercial business, and given the strength of the end market demand, this is a time where you actually -- it can be a bit of a relief depending on the program.

So what I would say is, absolutely, we've had pushed back in -- around price increases, but also a general understanding of the environment that we are in right now..

That makes sense. And then my last question on the utilization rate in North America which is -- sounds relatively very low.

But given some of the complexity of some of the programs, is -- could you operate those facilities at a 100% utilization or is a 100% utilization really a 75% or 80% utilization?.

The measure that we use for measuring utilization is based on plating capacity use. And that's the core process in a printed circuit board facility. It's a great metric to use and measuring capacity utilization for a high-volume facility. Because that does tend to be a bottleneck area.

When you move over to a North America facility, those bottlenecks will move around because of the high mix low volume nature of the business that's coming into the plant. So you're going to have the bottlenecks in drill, you're going to have the bottlenecks in inspection, they move around quite a bit.

So there's always a need because of the quick turn requirements, and also there's high mix volume nature of the requirements that we received that -- to have excess capacity in place, and that's why we use a measure it. Really, if you start pushing much above 60 at that point, you've got to be thinking about capacity expansion of sorts.

Certainly, if you hit 70 at that point, that's the equivalent of being over a 100% capacity. Of course, right now what we're dealing with on the capacity utilization side is a labor shortage. That is, it's not about the equipment right now, it's really about labor..

Great. That helps on that clarity. Thank you. No other questions..

Sure..

Thank you..

We have no further questions in the queue. I would like to turn the conference back to Tom Edman for any additional or closing remarks..

All right, thank you. Yeah, I'd just like to close by summarizing some of the points that I made earlier. First, we delivered revenues above the high-end of our guidance, and that was despite some of the operational challenges that we covered.

Second, our end market diversification is playing out solid year-on-year growth of 19.6% for the quarter and 10.9% or almost 11% for the year, so very strong growth. Third, we used solid cash generation to continue to repurchase our stock.

And finally, I'd just like to, again, thank our employees, our customers, and you, our investors, for your continued support. Thank you very much..

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect..