Ttm Technologies Inc Q1 FY2020 Earnings Call

Good day, everyone and ladies and gentlemen, thank you for standing by. Welcome to the TTM Technologies First Quarter 2020 Financial Results Conference Call. Following the presentation, the conference will open for questions. As a reminder, this conference is being recorded today, April 29, 2020. Sameer Desai, TTM's Senior Director of Corporate Development and Investor Relations will now review TTM's disclosure statement.

Thanks, Sarah. 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 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 disclosures regarding the risks that may affect TTM, which may be found in the reports on Forms 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 at www.ttm.com. 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 first quarter 2020 conference call. These are unprecedented times and I hope that all of you and your loved ones are safe and healthy. The three of us, Sameer, Todd, and myself, are in our respective homes for this earnings call. I'll begin with an update on how COVID-19 has impacted our business, followed by a review of our business strategy, including highlights from the quarter and a discussion of our first quarter results. Todd Schull, our CFO, will follow with an overview of our Q1 2020 financial performance and our Q2 2020 guidance. We will then open the call to your questions. I am pleased to report that in the first quarter of 2020, TTM generated revenues above the midpoint and non-GAAP EPS above the guided range, despite the extended shutdown of our China operations following Chinese New Year, as our manufacturing plants did a great job of ramping up production following the government-mandated shutdown. In addition, North American governments have deemed TTM products as essential and all of our manufacturing plants are presently operating as we supply defense programs, communications infrastructure, and medical products. The emergence of the COVID-19 pandemic has created operational challenges, macroeconomic uncertainty, and employee concerns. I am extremely proud of how TTM employees have risen to the challenge and contributed during the pandemic. At the end of 2019, TTM had more than 25,000 employees, with the majority of them split between North America and Asia Pacific. Since the earliest signs of the outbreak in China, we immediately established an Asia-based situational leadership team to organize proactive measures to safeguard our employees. After the virus spread to North America, we implemented best practices from our Asia Pacific facilities in our North American facilities. Such practices include, where possible, TTM employees working from home. We have restricted all local and international business travel globally and implemented a regimen in our facilities to protect our employees from the spread of the disease through procedures such as regular facility sterilization, mandatory masks in our facilities, temperature checks for all incoming employees and visitors, mandatory quarantine for employees returning from the impacted areas, and other measures. Our Asia team even began producing masks in order to contribute to the safety of our facilities and employees worldwide. As of yesterday, we have had 10 employees in North America who have tested positive for COVID-19 and are receiving appropriate medical attention. In each of these cases, our North America situational leadership team responded immediately using contact tracing to quarantine individuals who were in close contact with the infected team member, also by sterilizing the area in which they work and alerting our workforce at the six sites involved on all shifts to review measures that have been taken. As a result of the stringent preventative measures in place, these events have had minimal impact on our manufacturing operations to date. At this time, we have had zero cases in our Asia-Pacific facilities. In terms of communications, we have established a task force at the corporate level to coordinate communications with our customers and employees. For our employees, we provide biweekly email updates, I host bi-monthly town halls, and we have daily contacts from our human resources personnel to each employee who is absent from a plant on any given day, so that we can provide the right level of assurance and transparency to our employees. I would like to recognize the extraordinary efforts of our situation leadership teams, operations management, and human resources organization in these efforts. In the second quarter, we have also implemented an incentive bonus as a means of thanking our employees who continue to come to work at our plants. In addition, we are granting one week of paid time off for each employee who needs to be out of the office due to exposure to COVID or a family member who has been exposed to COVID, or an employee who has been exhibiting flu-like symptoms. We also have established a PTO bank where employees can grant their unused PTO to those who are in need of additional PTO for COVID reasons. We feel that these are the right measures for TTM to take to recognize the sacrifice of our employees and to put the safety of our employees first. Moving onto the Mobility divestiture. Ten days ago, we announced that we closed the previously reported divestiture of our Mobility business unit to AKMMeadville, a Chinese consortium for an enterprise value of $645 million. This was a strategic transaction allowing us to focus on longer cycle markets and reducing our exposure to short product cycle and seasonal consumer markets, which historically have been prone to volatility. The consideration was $550 million for four China manufacturing facilities and did not include certain accounts receivable of approximately $95 million. Accounts receivable were lower than previously disclosed due to an earlier than expected closing of the transaction. We felt that the certainty of closing during a period of macroeconomic uncertainty outweighed the lower accounts receivable. Net proceeds are expected to be $580 million, which we plan to use to reduce debt and invest in the company. The receipt of proceeds will take another three to four months as we follow protocols related to transferring funds out of China. In addition, we have bank guarantees that we can exercise to receive U.S. dollars if we do not receive funds by August 7. This transaction aligns with our strategic focus on diversification, differentiation, and discipline, and we expect that in the long term it will pay off for TTM, our investors, and our customers. Finally, we just issued a press release that discusses the restructuring of our E-MS business unit. The E-MS business unit consists of three Chinese manufacturing facilities, with two being in Shanghai backplane and Shanghai E-M Solutions, and one in Shenzhen. TTM will cease operations at the Shanghai E-M Solutions and Shenzhen facilities, while leaving the Shanghai backplane facility operating and absorbing it into our PCB operations. The complete wind down will take place through 2020, as we support our customers during their transition to other suppliers. For 2019, the Shenzhen and Shanghai E-M Solutions plants had $161.2 million in revenue and $9.5 million in non-GAAP operating income, primarily in the automotive, networking, communications, and medical, industrial, and instrumentation end markets. The strategic rationale for this move is based on TTM's increasing focus on differentiated higher-margin products such as PCBs and RF components and sub-assemblies. Commercial assembly services have always been a lower-margin business. The following particular factors led to this decision. Number one, the recent trade tensions between the U.S. and China had a negative impact on the E-MS business as much of our product was imported directly by our customers into the U.S. Number two, the E-MS business has further weakened following disruptions of the supply chain and end market demand by the COVID-19 virus. Number three, the town of Nan Xiang in the JiaDing Red District of Shanghai advised us of their intent to expropriate the land Shanghai E-MS occupies. This area is earmarked for other non-industrial uses. Number four, the business did not have sufficient scale to adequately compete with larger competitors with global manufacturing footprints. Number five, the business had lower profit margins and returns than TTM's core PCB business. And finally, the transaction also reduces our China footprint, which is another positive given continued trade friction between the US and China. We are determined to make the transition as painless as possible for our customers, but this was a decision that needed to be made for strategic as well as financial reasons. Now, I'd like to review our end markets. All historical reported end market disclosures continue to include the Mobility business unit. Our forecast for Q2 includes results of the Mobility business unit, up to the closing date of the sale. The end market disclosures still contain all of the E-MS segment revenues. For pro forma comparisons excluding these segments, please refer to the appendix of our Investor Presentation posted to our website. For TTM, the aerospace and defense end market represented 30% of total first quarter sales compared to 27% of Q1 2019 sales and 26% of sales in Q4 2019. We expect sales in Q2 from this end market to represent about 34% of our total sales. We continue to see solid growth in our A&D business, with Q1 revenues up 12% year-on-year and A&D program backlog growing to $612 million, compared to $487 million in the year ago quarter. Ongoing strength is a result of our strong program alignment and a key new booking for the LTAMDS program, which stands for Lower Tier Air and Missile Defense System and is an upgrade of Raytheon's Patriot Missile Program. The medical industrial instrumentation end market contributed 16% of our total sales in the first quarter, compared to 15% in the year ago quarter and 13% in the fourth quarter of 2019. We saw strength in our instrumentation customers that was offset by weakness in our industrial customers in our E-MS segment. For the second quarter, we expect this market to be 18% of revenues, due primarily to increased demand for medical equipment such as patient monitoring devices and ventilators. Networking communications accounted for 14% of revenue during the first quarter of 2020. This compares to 18% in the first quarter of 2019 and 15% of revenue in the fourth quarter of 2019. Year-on-year growth for PCBs for Chinese 5G base stations was more than offset by declines in networking customers, networking and telecom customers in our E-MS segment, and U.S.-made wireless components sold to Huawei, which were impacted by the trade conflict. Sales were also impacted by production limitations due to the extended shutdown of production at our China facilities as a result of COVID-19. In Q2, we expect this segment to be 18% of revenue as demand for 5G infrastructure and networking equipment increases. Sales in the computing storage peripherals end market represented 14% of total sales in the first quarter, compared to 13% in Q1 of 2019 and 14% in the fourth quarter of 2019. We saw strength in our semiconductor and data center customers. The laptop and tablet revenues were approximately 26% of computing revenues in Q1 and are included in the mobility business unit divestiture. We expect revenues in this end market to represent approximately 13% of second quarter sales as only three weeks of laptop and tablet sales are included. Automotive sales represented 12% of total sales during the first quarter of 2020, compared to 17% in the year ago quarter and 14% during the fourth quarter of 2020. Automotive sales declined year-over-year due to reduced production days resulting from the government-mandated shutdown in China, as well as demand weakness, particularly in Europe and China. Approximately 36% of the year-on-year decline was due to weakness in the E-MS segment. We expect automotive to contribute 13% of total sales in Q2 with ongoing global weakness in demand expected. The cellular phone end market accounted for 11% of revenue in the first quarter, compared to 7% in Q1 of 2019 and 16% in Q4 of 2019. We expect cellular to represent 2% of revenues in Q2 as only three weeks of mobility revenues are included. Next, I'll cover some details from the first quarter. During the quarter, our advanced technology business, which includes HDI, rigid-flex, substrate, and RF subsystems and components, accounted for approximately 39% of our company's revenue. This compares to approximately 33% in the year ago quarter and 42% in Q4. The sequential and year-over-year changes were due to combined effects in our cellular and computing 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 47% in Q1, due largely to the impact of the extended Chinese New Year shutdown and slow recovery period during February, compared to 55% in the year ago quarter and 72% in Q4. Our overall capacity utilization in North America was 67% in Q1, compared to 62% in the year ago quarter and 58% in Q4. Our top five customers contributed 34% of total sales in the first quarter of 2020 compared to 29% in the year ago quarter and 37% in the fourth quarter of 2019. Our largest customer accounted for 13% of sales in the first quarter versus 9% in the year ago quarter and 18% in Q4. At the end of Q1, our 90-day backlog, which is subject to cancellations, was $587.4 million compared to $438.3 million at the end of the first quarter last year and $511.2 million at the end of Q4. Our PCB book-to-bill ratio was 1.15 for the three months ending March 30. I'd like to conclude by again thanking our employees for continuing to contribute to TTM and our critical mission of inspiring innovation for our customers. Their efforts are particularly appreciated during these times by our customers in the medical industry. While we are facing short-term uncertainty from COVID-19, we are taking the right strategic moves to strengthen TTM for the long term. Now, Todd will review our financial performance for the first quarter.

Thanks, Tom, and good afternoon, everyone. As Tom mentioned earlier, on April 19, TTM announced the closing of the sale of its Mobility business unit. As such, the disclosure of TTM's GAAP results reflects the Mobility business unit as a discontinued operation. To facilitate the comparison of TTM's results to prior periods and the previously issued guidance, I will also discuss non-GAAP financial information, which includes the results of the Mobility business unit. The E-MS business unit or the Electro Mechanical Solutions business unit is also included in the results that we have reported. For the first quarter, GAAP net sales from continuing operations were $497.6 million compared to $536.4 million in the first quarter of 2019 and $535.7 million in the fourth quarter of 2019. The year-over-year decrease in revenue was due to declines in our networking and communications and automotive end markets, partially offset by growth in our aerospace and defense and medical, industrial, and instrumentation end markets. GAAP operating income from continuing operations for the first quarter of 2020 was $16.2 million, compared to $30.1 million in the first quarter of 2019 and $29.4 million in the fourth quarter of 2019. On a GAAP basis, net loss from continuing operations in the first quarter of 2020 was $3.2 million or $0.03 per diluted share. This compares to net income from continuing operations of $6.2 million or $0.06 per diluted share in the first quarter of last year and $7.3 million or $0.07 per diluted share in the fourth quarter of 2019. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance includes our divested Mobility business unit, but excludes 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 comparison with expectations in prior periods. For the first quarter, net sales were $610.8 million, compared to $620.2 million in the first quarter of 2019 and compared to fourth quarter 2019 net sales of $719.3 million. The year-over-year decrease in revenue was due to declines in our networking and communications, and automotive end markets, partially offset by growth in our aerospace and defense, cellular, and computing end markets. Gross margin in the first quarter was 14.5%, compared to 14.6% in the first quarter of 2019 and 17.6% in the fourth quarter of 2019. The year-over-year decline in gross margins was due primarily to the changes in revenue noted earlier, which was largely offset by improved performance in our mobility plan. Selling and marketing expense was $16.9 million in the first quarter or 2.8% of net sales versus $18.4 million or 3% of net sales a year ago, and $18.3 million or 2.5% of net sales in the fourth quarter. First quarter G&A expense was $30.9 million or 5% of net sales, compared to $23.7 million or 4.4% of net sales in the same quarter a year ago and $32 million or 4.4% of net sales in the previous quarter. Starting in 2020, we are breaking out R&D expenses so that you may better understand the investments we are making to differentiate ourselves. In the first quarter of 2020, R&D was $4.9 million or 0.8% of revenues, compared to $4.8 million or 0.8% of in the year ago quarter and $4.4 million or 0.6% of revenues in the previous quarter. Our operating margin in Q1 was 5.8%. This compares to 6.5% in the same quarter last year and 10.1% in the fourth quarter of 2019. Interest expense was $16.5 million in the first quarter, a decrease of $1.4 million from the same quarter last year due to lower interest rates and debt repayments. During the quarter, we recorded $2.2 million of foreign exchange gains. Government incentives increased the gain to $3.9 million or approximately $0.03 of EPS. This compares to a loss of $3.6 million or approximately $0.03 of EPS in Q1 last year and a loss of $3 million or approximately $0.03 of EPS in Q4 of 2019. Our effective tax rate was 15% in the first quarter. First quarter net income was $19.6 million or $0.18 per diluted share. This compared to the first quarter 2019 net income of $16.4 million or $0.16 per diluted share and fourth quarter 2019 net income of $43.9 million or $0.41 per diluted share. Adjusted EBITDA for the first quarter was $82.1 million or 13.4% of net sales, compared with first quarter 2019 adjusted EBITDA of $78.5 million or 12.7% of net sales. In the fourth quarter, adjusted EBITDA was $111.3 million or 15.5% of net sales. Our balance sheet and liquidity positions remain strong. Cash flow from operations was $27.9 million in the first quarter versus $36.9 million in the same quarter last year. Our net debt leverage ratio improved to 2.8 times. Cash and cash equivalents at the end of the first quarter of 2020 were $430.4 million, including approximately a $35 million deposit related to the sale of our Mobility business. Excluding this deposit, we have ample liquidity with a cash balance of just under $400 million and undrawn ABL capacity of $199 million. And as a reminder, we'll be receiving approximately $485 million in net proceeds from the sale of our four Mobility plants by August 7 and an additional $95 million from Mobility related accounts receivable collections over the next three to four months. Depreciation for the first quarter was $42.6 million. Net capital spending for the quarter was $32.5 million. Now, I'd like to turn to our guidance for the second quarter. Looking ahead, we believe that COVID-19 may cause end market demand weakness, supply chain disruptions, as well as inefficiencies within our own production. Taking this into account, we expect total revenue for the second quarter of 2020 to be in the range of $520 million to $560 million. We expect non-GAAP earnings to be in the range of $0.11 to $0.17 per diluted share. This guidance includes the Mobility business unit up to the date of closing that we had on April 19, so the first three weeks of the quarter. The EPS forecast is based on a diluted share count of approximately 107.4 million shares. Our share count guidance includes dilutive securities such as options and RSUs, but no shares associated with our convertible bonds, which is a function of our future stock price. As a reminder, for every dollar increase in the average share price about $14.26 during the quarter, our shares outstanding would increase by approximately 1.5 million shares. We expect that SG&A expense will be about 8.2% of revenue in the second quarter and R&D to be approximately 1% of revenue. We expect interest expense to total about $17.6 million. Finally, we estimate our effective tax rate to be between 13% and 17%. To assist you in developing your financial models, we offer the following additional information. During the second quarter, we expect to record amortization of intangibles of about $11.1 million, stock-based compensation expense of about $3.8 million, non-cash interest expense of approximately $3.5 million, and we estimate depreciation expense will be approximately $25.8 million. Additionally, as announced earlier today, we expect to incur restructuring costs, including asset write-downs of approximately $25 million over the next 12 months to 15 months as we close two plants in our Electro Mechanical Solutions Business Unit. Of this amount, we expect approximately $17 million will be cash expenditures for things like severance and other costs. Finally, I'd like to announce that we will be participating virtually in the JPMorgan Global Technology Media and Communications Conference on May 12, the Needham Technology and Media Conference on May 19, the Baird Global Technology and Consumer Conference on June 2, and the Stifel Cross Sector Insight Conference on June 9. That concludes our prepared remarks and now, we'd like to open the line for questions.

Thank you. And we will take our first question.

Yes. Can you hear me?

Yes.

Great. Well, first of all, I hope your 10 employees are recovering safely from testing positive for COVID-19, and I'm glad to hear about all the proactive steps you've taken to keep everybody safe. So, thank you for that. And then secondly, just talking about the disruptions you're facing. What in particular areas of your supply chain are you seeing bottlenecks and are they rolling around? And how surmountable do you see the supply chain challenges through the rest of the year?

Okay. Sure thing. That was Mike, right?

Yes.

Hi, Mike. Maybe – so let me address – first of all, thank you for the comments and the answer on your – the first part of your question. So we, on the 10 instances of COVID-19 that we've had in North America, all but one are out of – are folks out in the hospital recovering out of the hospital and actually one of the employees has now tested negative and is back at work. So, I'm really glad to see that. And the employee that is in the hospital seems to be recovering – stable and recovering at this point. So thank you for that. Obviously, we spend a lot of time on this. This is job number one for TTM, is the protection of our employees, and we take it very, very seriously. So, I appreciate your comments there. As we look at potentially disruptions in Q2, there are really two areas. One, with our policies regarding the importance of employee safety, we have been and will continue to be very forgiving for those employees who just are uncomfortable coming into work. So, we have some instances of that, we've actually done I think a very good job of managing this. We have over 90% of our employees in place in North America and Asia Pacific, it's the full complement of employees. So, I think we're doing a good job of managing that. I think the employees recognize the safety measures that we're taking, and so that has continued to improve, but we also have to be very conscious of the need – the need to, if we do have an instance of COVID to properly sterilize an area in manufacturing, and we have to take that into account as we think about Q2. On the supply chain side, still to date, we've had several instances of suppliers who either needed to shut down or, in some way, because of inefficient production were not able to meet our needs. Our supply chain organization has done a very good job of mitigating this to date, primarily materials coming out of North America. The shutdowns and the few instances that we've experienced have been relatively short. Again, you never know what can come your way in this climate. So, we're careful, but to date, it has been managed very well.

Thank you, Tom. I'll ask one more, kind of a related question. What reduction in demand should be related to bottlenecks or supply chain disruptions that your customers might be seeing in other parts of their business?

Very, very difficult at this juncture for us to determine. If we look at markets, and then if you look at our Q2 guidance, the markets that are especially weak right now are automotive, aerospace, these are markets that are being affected by demand. So, it's really not supply chain related. The markets where we are experiencing more strength, whether it's medical, industrial, instrumentation, computing certainly A&D, and an increasingly improving climate networking communications. When it comes to those markets, A&D, I can comment on, I think that we're continuing to see pockets of shortages, but again the supply base understands the importance of the mission and is responding overall. When you cross into the commercial side, I would expect that, certainly computing as – where there has been a short-term spike, whether it's medical or computing, data center requirements, even semiconductor, I think in those areas you can start to see shortages emerge just because of the challenge of dealing with demand spikes on top of some restraints on supply with COVID. So, those are areas that our customers may, this is a hypothesis, they may be experiencing those shortages in certain areas and then they jump on and try to solve the challenges, but again, my view on this one, it's not as clear as I'd like it to be, and of course, the situation is changing regularly.

Okay. Great. Well, thank you very much.

Thank you.

And we will go to our next question.

Good to hear. Question on the automotive, it looks like that was down a fair amount year-over-year and I think you cited fewer production days and demand weakness. Was demand weakness a bigger component of it, because it doesn't seem like you're suggesting maybe a bottom at least in the near term because if I heard you correctly, you're anticipating it looks like some improvement in Q2 in this area?

Yes. So, I'm going to preface my comments by saying, I've said this before and unfortunately, I was wrong. I thought approximately a year ago, I thought we had really bottomed out in Europe, but just takes a little pandemic to show you how depressed demand can get. So, having said that, where we are experiencing the challenges in Q1, it was a combination with the extended Chinese New Year and really throughout February with relatively low utilization or employee – the ability for our employees to return. March was much better. That did constrain our ability to produce product across the board in our commercial markets, but in automotive in addition, of course, China demand, Asia demand was way down and European demand was very soft. So, fast-forwarding into what we see coming this quarter, you're right sequentially, relatively flat, maybe a little bit up, but that's up because we are seeing now from March moving into April. We don't have the production constraints any longer. So, we are able to get the production out into our hubs and we're seeing, I would say slight – certainly slight improvement, but at least an improvement in the China demand situation. The flip side of that is North America weakening. You put that together and we see again, relatively flat, maybe a little bit up, but in this kind of environment, just overall very weak in automotive.

Follow-up question, just – and maybe just taking a step back, you guys are doing some work here on the business portfolio and it sounds like you are pretty much complete at least on the divestment side. I'm wondering how we should think about capital deployment going forward, especially now given the environment we're in. What's the thought process here? Is it to strengthen the balance sheet, pay down debt? Is it to maybe look at some other potential growth areas that you might expand in? Just wondering how we should think about this going forward?

Sure, I'll start, and then I'll turn it to Todd to complete the answer. But if you look at overall, we are very pleased with our balance sheet position. As Todd mentioned, even in – with the challenges of Q1, we were still from an operating cash flow standpoint, positive. We've been able to improve our debt leverage ratio. So, we are making progress there, and we have a very strong balance sheet, which will of course strengthen further with the funds arriving from China for the mobility sale. So when it comes to deploying that capital, we have obligations that we need to fulfill. And then, we will continue to work on our working capital to maintain the right level of working capital. And then finally, yes, we will continue to work on our M&A pipeline that's a regular effort, and we have a pipeline of opportunity there that we will continue to work on. If and again strategically, if the right opportunity comes along. So, those are sort of three priorities for us. Todd, your comment.

Yes. I would just supplement that a little bit of specifics on the short-term side. I mentioned we've got about $400 million of cash on our balance sheet. We've got capacity available on our ABLs, so we could take a punch or two and certainly continue to fight the strong fight in that sense. So, we're pretty comfortable short-term. Longer term with the proceeds coming in from the sale of the mobility business, we have certain obligations. We can use it to reinvest in the business, but as Tom says, we're always evaluating the M&A pipeline, but in the absence of something actionable right now, we would be required to pay down the term loan. So, our expectation here is that in the near-term, we will pay down about $400 million of the term loan, and that will help reduce our leverage even further, which will really give us a lot of strength in the balance sheet by dry powder, if you would, that gives us future flexibility. If we find a strategic M&A opportunity that we like, we would be in a position to take action on that. As we continue to generate cash flow out of the business, we have options in terms of how to deploy that cash, whether it's reinvesting into the business or perhaps returning it to shareholders. So all the options are on the table, but in the immediate term, we see ourselves good short-term, and as we collect the proceeds on the sale – from the sale of mobility, we'll use that in the short-term to pay down debt and just even further strengthen our balance sheet.

Got it. Thank you.

Thanks, Jim.

And we will go to our next question.

Hi. Good afternoon. I guess, can you just talk a little bit more about the gross margin comparison? They held up extremely well given that you lost a few weeks of production and your customers are down. It seems like aerospace, defense must have helped and they have easy comps with the cell phone business versus a year ago, but can you just sort of walk through the gross margin waterfall a little bit there? Thanks.

So, I assume you're referring to year-over-year, Steve?

Yes, I'm sorry. Yes.

Okay. That's fine. Gross margin relatively flat right at 14.5% versus 14.6%, and really, you've got a couple of moving parts. Remember a year ago, the mobility business was in very, very difficult straits. We actually lost money in that quarter a year ago. The mobility business, particularly the cellular business was much better this year compared to last. So that really helped on the upside and that helped to offset some of the challenges that we're seeing in some of the other end markets, particularly network and communications and automotive. Both of those end markets were down significantly from a year ago and that hurt us from a profit standpoint, but we were able to mitigate that through better performance out of the mobility business. There are some other very minor puts and takes, but that's the big picture.

That's helpful. And then just bigger picture Tom, given all the disruptions and slightly tougher demand inline in the next few quarters. The PCB industry is notorious for not behaving well during these types of periods. Can you sort of talk about your expectations for competition and whether you're seeing anything unusual at this point?

Yes. So yes, I enjoy that comment on the PCB industry. The – let me talk about, I think that really is a strategic direction question. From TTM's perspective, what we've been working on for a number of years, as you know, is really two threats. One where we – in the PCB itself moving into areas where we are clearly differentiated. With the differentiation moving away from areas that we view as commoditized areas; that's been the thrust of our strategy. We've built on that by effectively building on top of the PCB if you will, by adding the depth in terms of RF components, subsystems, and the engineering capability that we've built with the Anaren acquisition. So, if you start then parsing that out, the A&D world, of course, these are long-term programs and we feel we have a very good position again very deep position in a number of critical programs. A&D is very, very solid. If you look at networking communications, sure, more of a commercial market, more commercial competition there, but very complex board requirements. If you crossover into the medical, MII field, that's where the footprint plays in most of our customers are our customers, because of our global capabilities there. What I know I've said this before, but if we reach a point where the customer, where they have gone to very high volumes and they've moved into and their wishes to move beyond the capabilities of our Asia – even our Asia footprint. We will let business go in that area. It's really all about the business development work that we do with our global footprint. And then computing, again, an area that we are very specifically tied to the technologies that differentiate us there, the more complex builds that we do. So, Steve, I can't – it's not a perfect world, but what I can tell you is that I am confident that we have the right positions in these markets and then we've got the right technologies. Strategically, with our move here with the E-MS, we're moving out of one area that we didn't see that differentiation for TTM. The mobility move as well, while very challenging technology, all of the competition was in Asia. If you think about our differentiation, there was a technology play there, but not a global footprint play. So, hopefully that gives you an answer. We're comfortable that we are in the right position here, no matter what happens.

Yes. That's really helpful. Makes me feel a lot better. Thanks.

Thanks, Steve.

And we'll go to our next question.

Hi. Will Stein here. Thanks for taking my question. You had a pretty strong book-to-bill in the quarter. I wonder if you have any concerns of our customers ordering safety stock or what some people call double ordering or something similar to that. Is any of that going on or is this more sort of extending the backlog in the aerospace, defense? Any sort of color on this would be helpful. Thanks.

Yes. Sure, Will. I agree with you, a strong book-to-bill. A portion of that especially year-on-year was Mobility. Remember, as we went into the quarter, we had the Mobility business as part of TTM. It was certainly on a year-on-year comparison much stronger in terms of bookings going into the quarter. So, and it was certainly on a year-on-year compare – far stronger in terms of bookings. The aerospace and defense, certainly the bookings there have helped. The other piece that I would say is a big swing factor there was medical bookings coming in toward the end of the quarter. A number of medical bookings that then play out here in terms of revenue over several quarters, which is unusual – for usually, that usually that's – you don't see that kind of visibility in the medical world; it's usually a shorter time span. So, a little bit unusual there. They haven't seen any of the double booking activity, in particular with the bookings. We haven't seen cancellations, but certainly a portion of those bookings went away as we sold the Mobility business.

That's helpful. Maybe if I can dig into the E-MS restructuring for a minute. I just want to make sure I understand this is an exit of that business? I think it is, but I'm just not sure if it was explicitly stated. And then what does the exit look like over a protracted number of quarters? Is it just one or two, or is there anything left in that business? And is there anything at all there to sell or is this just walk away sort of situation?

Yes, Will, thanks for the question. So, the restructuring that we announced effectively, we had three facilities in the end solutions. Two of the three will be closed. And one will remain, which is our backplane facility that will be folded into our operations in Asia. So, we will keep that relatively small business on the order of, if you think about $40 million-ish revenue. So, relatively small, but we'll be holding onto that business tied mainly to networking communications. The other two, the two plant locations have a different time horizon in terms of shutdown, but if you think about the next, through the course of the year, we'll be winding down operations taking care of customer obligations in both instances. So certainly by the end of the year, we should have completed the obligations that we have with our customers and be in full shutdown and cleanup mode. From a residual value, if you will, in the assets, of course, there is the equipment – there is an equipment value there potentially. And then the land value of what we own in our Shanghai E-MS facility where we actually own the land. So, there is value there outstanding but difficult certainly in these conditions to be able to count on that at this point.

Maybe just one clarification, if I can; I don't mean to pile on, but does this stage in the non-GAAP guidance or does it go to discontinued ops? Thank you.

Yes. Let me just try to clarify, it will continue. We'll run the business as we fulfill our customer obligations over the next few quarters as Tom indicated, two to three quarters, let's say. It is included in our guidance in that respect. To the extent there are extra costs specific to the restructuring process, we will carve those out and that was the guidance that I tried to provide on the roughly $25 million that will take place over the next 12 months to 15 months. A lot of that is severance related, so as we complete our work and our people roll off from the company, that will show up over time. I don't think it'll be a cliff situation; I think it will be gradual as we gradually wind down. But from a revenue and ongoing profit standpoint, that is reflected in our guidance – the ongoing part of it.

Thank you very much.

Thank you, Will.

And we'll take our next question.

Hi, guys. It's Paul Chung with JPMorgan. So, a couple of quick ones. Just on the Mobility business. During the innovation that occurs in that vertical, do you see any benefits or loss of benefits during the exit there or kind of stay ahead of trends or is there another vertical that provides you these insights in your view? And then I have a quick follow-up.

Sure. Thanks, Paul. So, when we're looking at really the simple way to think about it is lines and spacing and what the cellular phone business has driven to our lines and spacing that are very, very close to semiconductor levels in terms of moving below 30 microns. We've adopted some technologies that helped us to get to between the 20 and 30 micron level. What we're seeing and we've talked about this in the past, we are seeing a trend in our other businesses to move towards narrower lines and spacing, but as we look at the sheer capacity requirements there, they're much smaller and frankly most of the requirements are above 50 microns. We have some technologies and capabilities that we've acquired with the i3 acquisition that will help us in that kind of area, in that 50 micron to 80 micron type area. We have retained the mSAP or the substrate-like PCB technology and know-how in our facility. So, to the extent that there are smaller capacity requirements, we can certainly go forward and invest in those. But today, that demand is very, very small, and we have the capability resident with what we inherited from i3 to service those needs. So, pretty comfortable where we sit in technology.

Thanks for that. And then just on your operating margin targets in your slides of 12% to 14% free cash flow of $230 million to $270 million, what's the kind of timeframe of hitting the targets and are you comfortable now with your product mix and kind of to the end markets to kind of hit these goals or should we expect to see any kind of changes to your portfolio over time? Thanks guys.

Tom, do you want me to try?

Yes. I was going to let you take a shot at that.

Right. So Paul, you're right. Those are our stated objectives, and we are marching toward that. We've obviously had a couple of hiccups in terms of the commercial markets last year, particularly cellular, but all the commercial markets having challenges, and obviously the virus is really putting a wrench in the gears, if you will, here as we look at 2020. We will weather the storm and we'll move forward. Certainly, some of the changes that we've announced with the divestiture and the plant closures are all going to be beneficial. We are exiting lower margin businesses, and that will certainly help us toward this goal. As far as a specific timeline, we do need a little revenue help. We need the economy to get a little stronger. So, it's hard to say if it’s years or two years to put a specific date on it, but we do need the economy to recover and we need to get some top-line support us there. But those are still our target. We still feel the underlying ability of the business to achieve those is very real. We just need to see the economy a little stronger and last year and this year were both very tough right now.

Okay. Great. Good luck. Thanks, guys.

Thanks, Paul.

And we'll take our next question.

Yes. Hi. It's Matt Sheerin from Stifel. Just another question regarding the automotive market, I know that you've been trending below market in terms of sales reduction in the last two or three quarters, but now you're guiding relatively flat, give or take when other parts of the supply chain are modeling down your 20% sequentially in line with production cuts. I'm trying to figure out the differences there, Tom, and maybe helpful would be the geographic breakdown of the business, maybe more China exposure and that's why you're seeing that recover a little bit earlier than others?

So, yes, Matt, you actually covered it pretty well. There are a couple of things going on. One is, in the first quarter, we lost production in February. If you remember, we generally will – so when – with February production being as low as it was, we were running behind in terms of revenue. In March, we were able to turn we were really able to get in full production again and get product out, but that had a real impact on revenue in the first quarter. So, we had that factor. Of course, now we’re back into full production capability. So now, we're really starting to deal with more true demand. The second factor there is yes, China was way down. If you think about our markets, you sort of split them equally between China, Europe, and North America. We were feeling particularly weak in China, a little bit lesser extent, but still weak in Europe. We hadn't felt really North America that was down, but not down substantially in the first quarter. As we go into the second quarter, what we're really seeing now is North America weaken, China strengthen a little bit sequentially, Europe remaining relatively soft. So, if you look at that the biggest difference is just the production days. The ability to produce throughout the quarter leads to again a slight up; it's relatively flat slight up, and we're seeing that in the quarter.

Okay. And have you seen any big changes in terms of bookings or orders yet from customers, particularly in Europe or North America?

Europe and North – so not really, not really. I think that it's with – very, very, as you know, the plan is to get back into operation. Yes. And of course, our customers, as generally Tier 1s, want to make sure that they have the right inventory levels. So, in some cases, there is a little bit of, hey, we need to replenish inventory in some areas, but I'd say overall still very soft in North America and Europe and a little bit of improvement in China.

Okay. That's helpful. And then in the networking – network communications area where you talked about your weakness, could you talk about where maybe dig a little deeper in terms of the end markets there, service providers versus enterprise and then also on the 5G side?

Yes. Networking side enterprise, so networking overall was weak in the first quarter. Again, we do have the production factor. So again, we were shut down in that – for much of that February period. That has an impact on revenues, but if you start looking at the end markets, particularly enterprise inside of network was weak in the first quarter. And as I highlighted, we did see some improvement, particularly toward the end of the quarter on the telecom side. That improvement has continued as we go, as we move into the second quarter. And we're actually starting to see a better climate again in networking, in particular to enterprise. So, that's where we're seeing improvement now in the second quarter.

Okay. Fine. Alright. Thanks for the time.

Thank you.

And we have no further questions queued. So, I'd like to turn the conference back over to Tom Edman for any additional or closing remarks.

Thank you, Sarah. I'd like to just close by summarizing some of the critical points I made earlier. First, the health and safety of our employees is our highest priority. And we are taking and will continue to take proactive measures to safeguard our employees while we continue to support our customers. Second, we delivered earnings above the guided range, despite extended shutdowns of our Chinese facilities. Third, we closed the sale of the Mobility business unit, which will reduce the volatility we have historically seen in our business performance and fits very well with our core strategies of diversification, differentiation, and discipline. And fourth, we announced the restructuring of our E-MS business unit, which will improve our margin profile. In closing, I would just like to thank our employees and particularly our employees in this environment, our customers, and our investors for your continued support as we navigate the challenges here with our business associated with COVID-19. Thank you. Goodbye, and please stay safe all of you. Thank you very much.

And that does conclude today’s conference call. Thanks, everyone, for joining us. You may now disconnect.