Ttm Technologies Inc Q3 FY2020 Earnings Call

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the TTM Technologies Third Quarter 2020 Financial Results Conference Call. Today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will open for questions. As a reminder, this conference is being recorded today, October 28, 2020. Sameer Desai, TTM's Senior Director of Corporate Development and Investor Relations will now review TTM's disclosure statement.

Great. Thanks, Casey. 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 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 disclose 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 like to turn the call over to Tom Edman, TTM's Chief Executive Officer. Please go ahead, Tom.

Thank you, Sameer. Good afternoon, and thank you for joining us for our third quarter 2020 conference call. These continue to be challenging times. And I hope that all of you and your loved ones are safe and healthy. I'll begin with a review of our business strategy, then an update on how COVID-19 has impacted our business, followed by highlights from the quarter and a discussion of our third quarter results. Todd Schull, our CFO, will follow with an overview of our Q3 2020 financial performance and our Q4 2020 guidance. We will then open the call to your questions. I am pleased to report that in the third quarter of 2020, TTM generated revenues and non-GAAP EPS above the guided range. Our diversified end markets allowed us to grow PCB revenues year-on-year despite weakness in the commercial aerospace and automotive end markets. In addition, we continued strong operational execution, overcame production inefficiencies, and extra costs due to COVID-19. The COVID-19 pandemic has created operational difficulties, macroeconomic uncertainty, and employee concerns. I am extremely proud of how TTM employees have worked to deliver excellent performance, despite the formidable and unprecedented challenges of this environment. Finally, I would like to highlight that in Q3 we received the remaining proceeds of the mobility business unit divestiture and have applied them to repay our term loan B. Combined with strong cash flow from operations, our net debt-to-EBITDA ratio has dropped to 1.6 at the end of Q3. Next, I would like to provide an update on our long-term strategy. TTM is on a journey to transform our business to be less cyclical, more differentiated, and more disciplined. We believe over time investors will be rewarded with more stable growth, strong cash flow performance, and improving margins. A key part of that strategy will be to add capabilities and products that are complementary to our current offerings internally and through acquisitions. The Anaren acquisition in 2018 represented a key step in this direction. Anaren provided us with engineering capabilities and a new market adjacency of RF subassemblies and components that enabled us to provide more value to our customers. We effectively paid for that transaction with the sale of the mobility business unit in 2020, which reduced our exposure to the volatile cellular end market that has seen slowing growth and lower margins in recent years. In addition, in 2020, we are in the process of shutting down two of our E-MS plants, which were subscale, offering limited strategic value and lower margins. Looking forward, our balance sheet is in a strong position to pursue further acquisitions, as well as our organic investment needs. In the A&D market, our focus is to be an indispensable supplier to our customers, providing more capabilities and expanding our addressable market. In the commercial markets, our focus is to add more RF component capabilities around Anaren's core strengths, as well as to diversify our manufacturing footprint. We prefer that acquisitions across both the A&D and commercial markets for maximum benefit to the company. I would also like to update you on the COVID situation. We are currently managing through COVID-19 with relatively minor impact on our production. Those infected are returning to work after being cleared, following testing and quarantine protocols. We continue to use contact tracing and quarantine individuals who are in close contact with infected team members, in addition to deep cleaning affected work areas. We also continue other measures such as extensive internal communications, masking, temperature checks, and proper distancing in our facilities worldwide. Because of the stringent preventative measures in place and our culture of transparency in communications, these events have had much less impact on our operations than we thought at the start of the year. Our leadership team continues to remain vigilant in mitigating the impact of COVID-19 as we enter the fall and winter, in some parts of the world including the United States, which see an acceleration of cases. Now I'd like to review our end markets. All historical end market disclosures exclude the mobility business unit and the two E-MS plants we are shutting down. For more details on end market disclosures, please refer to our third quarter earnings press release. The aerospace and defense end market represented 37% of total second quarter sales, compared to 36% of Q3 2019 sales and 33% of sales in Q2 2020. We expect sales in Q4 from this end market to represent about 38% of our total sales. We continue to see solid growth in our A&D segment with Q3 revenues up 7% year-on-year and an A&D program backlog of $625 million compared to $572 million in the year-ago quarter. Weakness in the commercial aerospace end market was more than offset by strength in defense. Growth in the defense market is a result of our strong program alignment and key bookings for key franchise programs such as AESA radar systems for the Aegis, Assure Japan program, a variant of the U.S. LRDR program being built by Lockheed, as well as upgrading F-16 fighter jets with scalable agile beam radar built by Northrop. The medical industrial instrumentation end market contributed 19% of our total sales in the third quarter, compared to 18% in the year-ago quarter and 21% in the second quarter of 2020. We were pleased to see this end market grow 9% year-on-year as we saw strength in our medical and instrumentation customers that was partially offset by weakness in our industrial customers. For the fourth quarter, we expect this market to be 16% of revenues as industrial customers continue to decline and we return to less elevated levels of demand for emergency medical products. Networking communications accounted for 16% of revenue during the third quarter of 2020. This compares to 16% in the third quarter of 2019 and 19% of revenue in the second quarter of 2020. We saw relative strength in the networking segment compared to the telecom segment as 5G builds took a pause. In Q4, we expect this segment to be 16% of revenue as 5G telecom demand remains subdued. Sales in the computing storage peripherals end market represented 13% of total sales in the third quarter compared to 12% in Q3 of 2019 and 13% in the second quarter of 2020. This end market grew 8% year-on-year from strength in our data center customers. We expect revenues in this end market to represent approximately 12% of fourth quarter sales. Automotive sales represented 13% of total sales during the third quarter of 2020, compared to 15% in the year-ago quarter and 11% during the second quarter of 2020. While automotive sales declined year-over-year due to COVID-19 impacts, we saw a 9% sequential growth, which was better than the slight decline originally expected. We expect automotive to contribute 16% of total sales in Q4 as the automotive recovery continues. Next, I'll cover some details from the third quarter. Note that all of the following operations metrics exclude the mobility business unit and the two E-MS plants that are closing. During the quarter, our advanced technology business, which includes HDI, rigid flex, and RF subsystems and components, accounted for approximately 29% of our revenue. This compares to approximately 25% in the year-ago quarter and 28% in Q2. 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 63% in Q3, compared to 60% in the year-ago quarter and 70% in Q2. Our overall capacity utilization in North America was 61% in Q3 compared to 58% in the year-ago quarter and 63% in Q2. Our top five customers contributed 33% of total sales in the third quarter of 2020 compared to 27% in the second quarter of 2020. Our largest customer accounted for 13% of sales in the third quarter. At the end of Q3, our 90-day backlog, which is subject to cancellations, was $437.8 million compared to $378.8 million at the end of the third quarter last year and $436.6 million at the end of Q2. Our PCB book-to-bill ratio was 0.92 for the three months ending September 28. 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. Their efforts are particularly appreciated during these times by our customers in critical essential areas like defense and the medical industry. Despite COVID-19-related challenges we faced in the first nine months of this year, our business has performed better than expectations as a direct result of operational excellence, end market diversification, and our employees' concerted efforts to engage and support our customers. We've also taken positive strategic moves that will strengthen TTM for the long-term. Now, Todd will review our financial performance for the third quarter. Todd?

Thanks, Tom, and good afternoon, everyone. Now, 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. I will also discuss non-GAAP financial information, which excludes the results of the mobility business unit. The E-MS business unit is still included in both the GAAP and non-GAAP results we have reported. Please refer to the earnings schedule for additional details on the exited businesses and continuing operations. For the third quarter, net sales from continuing operations were $513.6 million compared to $534.2 million in the third quarter of 2019. The year-over-year decrease in revenue was due to a decline in our automotive end market, with the majority of the decline coming from the E-MS plants that we are closing. This was partially offset by growth in our aerospace and defense, medical, industrial and instrumentation, and computing end markets. Excluding the impact of the two E-MS plants being shut down, our revenues grew 3% year-over-year. GAAP operating loss from continuing operations for the third quarter of 2020 was $40.3 million compared to a GAAP operating income of $21.1 million in the third quarter a year ago. The current year results include a goodwill impairment charge of $69.2 million related to the commercial portion of the Anaren business we acquired back in 2018. As a result of U.S. government actions imposing trade restrictions on U.S. manufactured products sold to certain Chinese customers, revenues and profits have been reduced, resulting in the impairment. On a GAAP basis, the net loss in the third quarter of 2020 was $41.5 million or $0.39 per diluted share. This compares to net income of $15.9 million or $0.15 per diluted share in the third quarter of 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, goodwill impairments, 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. Gross margin in the third quarter was 18.4% compared to 16.4% in the third quarter of 2019. The year-over-year increase in gross margin was due primarily to higher revenues in our aerospace and defense, medical, industrial instrumentation, and computing end markets, which generated production efficiencies as well as increased volumes. Selling and marketing expense was $15.3 million in the third quarter or 3% of net sales compared to $16.8 million or 3.1% of net sales a year ago. Third quarter G&A expense was $26.9 million or 5.2% of net sales compared to $28.2 million or 5.3% of net sales in the third quarter of 2019. In Q3 2020, R&D was $5.2 million or 1% of revenues compared to $4.3 million or 0.8% of revenue in the year-ago quarter. Our operating margin in Q3 was 9.1%. This compares to 7.1% in the same quarter last year. Interest expense was $12.9 million in the third quarter, a decrease of $4.1 million from the same quarter last year due to lower interest rates and repayment of $400 million of our term loan. During the quarter, we recorded $4.9 million of foreign exchange losses. Government incentives reduced the net loss to $2.5 million or approximately $0.02 of EPS. This compares to a net gain of $5.6 million or approximately $0.05 of EPS in Q3 of last year. Our effective tax rate was 15% in the third quarter. Third quarter net income was $26.8 million or $0.25 per diluted share. This compares to third quarter 2019 net income of $23.2 million or $0.22 per diluted share. Adjusted EBITDA for the third quarter was $67.2 million or 13.1% of net sales compared to third quarter 2019 adjusted EBITDA of $66.7 million or 12.5% of net sales. Our balance sheet and liquidity positions remain very strong. Cash flow from operations was $84.8 million in the third quarter, inclusive of $14 million of accounts receivable collected from the mobility business after we closed the sale. This compares to $58.7 million in the same quarter last year. In addition, during Q3 we received the remaining proceeds from the $569 million sale of the mobility business unit, approximately $305 million net of withholding taxes. Cash and cash equivalents at the end of the third quarter of 2020 were $663.3 million. At the end of the third quarter, our net debt leverage ratio was 1.6. As a reminder, our $250 million convertible debenture comes due in mid-December, and we intend to repay the principal in cash. Depreciation for the third quarter was $23.1 million. Net capital spending for the quarter was $29.1 million. Now I'd like to turn to guidance for the fourth quarter. Now looking ahead, we believe that COVID-19 may continue to cause end market demand disruptions, supply chain challenges, as well as inefficiencies with our own production. We expect total revenue for the quarter of 2020 to be in the range of $490 million to $530 million. We expect non-GAAP earnings to be in the range of $0.22 to $0.28 per diluted share. This guidance includes revenue and operating results from the two EMS plants that we are closing at the end of the year. The EPS forecast is based on a diluted share count of approximately 107.9 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 above $14.26 during a quarter, our shares outstanding would increase by approximately 1.5 million shares. We expect that SG&A expense will be about 8.5% of revenue in the fourth quarter and R&D to be 1.1% of revenue. We expect interest expense to total about $12 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 fourth quarter, we expect to record amortization of intangibles of about $11 million, stock-based compensation expense of about $4.3 million, non-cash interest expense of approximately $2.9 million, and we estimate depreciation expense will be approximately $22.6 million. Finally, I'd like to announce that we will be participating virtually in the Baird Industrial Conference on November 12, the Stifel Midwest One-on-One Growth Conference also on November 12, and the Barclays Technology Conference on December 10. That concludes our prepared remarks, and then we'd like to open the line for questions. Casey?

We'll take our first question from Mike Cikos with Needham & Company.

Thank you for taking my question. I wanted to start by discussing the outperformance we've seen compared to the revenue and earnings guidance you provided. This marks the second consecutive quarter of such results. I'm curious if your increased visibility and confidence in the guidance numbers now relates to the changes in your portfolio, or if you're approaching guidance differently than before.

So maybe I can address the revenue piece, Mike. As you know, these have been very dynamic times. And as we looked at our markets as we were in July, I would say that what we were surprised to the upside by most strongly was automotive. And we felt and commented on the fact that automotive was strengthening at that time, but it even improved beyond what we had expected. And so that was a really positive tailwind, if you will. The other big outperformer, if you will, is networking communications. And that more than anything was a function of customers pulling product out of inventory towards the end of this last quarter, Q3, rather than Q4 as was expected. So, if you look at that increase, that would have been very difficult to forecast. In general, with these kinds of dynamic markets, we try to stay as close as we can to our customers and their forecasts, which are also just very dynamic right now. So as we look into the fourth quarter, again we're following our process. And I think at this point, our guidance numbers are as solid as they can be based on inputs from customers.

All right. Thanks for that. And then another question I have for you. If I'm just thinking, I think there was a comment made regarding potential impact from COVID in Q4 of this year and how you guys structured your guidance. Can you help us think about what that impact looks like in relation to Q3? Because obviously, you guys have been executing against that metric? And I guess pleasantly surprised by the way that your internal operations have been able to cope with the pandemic? Thank you.

I agree with that comment. Our operations team has excelled in addressing real challenges, particularly in ensuring the safety of our employees. We maintain a very safe work environment. However, we are closely monitoring the rise in COVID cases in the United States. When our workers leave our facilities, they return to communities that may experience spikes in COVID cases, which can affect our employees. Therefore, we need to remain vigilant about this situation. Specifically, as we consider our aerospace and defense guidance, we always take this into account. The COVID cases we observe are mainly occurring in North America, not in our facilities in China or other international offices. Consequently, in North America, especially in the aerospace and defense sector, we must be cautious about potential production limitations due to COVID disruptions. This consideration is reflected in our guidance, just as it was in the previous quarter.

Great. Thank you.

Our next question comes from Srini Pajjuri with SMBC Nikko Securities.

Thank you. Good afternoon, everyone. First of all, congratulations on the solid execution. Tom, I have a question regarding your defense business. If you have any visibility, could you share your thoughts on planning for the next 12 months, particularly in light of the upcoming election and how it might affect defense budgets moving forward?

Thank you. As we look ahead, it's difficult to predict due to the dynamic situation, including the elections and the impact of COVID on global economies, especially as we approach winter. However, regarding our defense business, which makes up about 38% of our operations, we feel confident about continuing to grow in that area. We anticipate some challenges due to weakness in aerospace, which will likely moderate our growth rate compared to the 8% to 9% we've seen in recent years, but we expect to exceed the Prismark market forecast of around 2% to 4%. The aerospace headwind will be a significant challenge. In the automotive sector, we have observed a recovery and expect this trend to continue in the early part of next year. We are closely monitoring European automobile demand, especially with another COVID spike and potential shutdowns, which creates some uncertainty. Nonetheless, there is positive momentum as we move into 2021. In computing, we've seen increased demand for data centers, which forms the largest part of our computing business. We anticipate returning to normal demand levels, likely seeing growth rates around the 2% to 4% range. The medical industrial instrumentation area experienced strong performance in Q2 and Q3, which may set a tougher comparison for next year, particularly on the medical side. However, we expect industrial performance to improve barring any significant COVID disruptions, and we aim to achieve growth in the 2% to 4% range. The first half of the year may be challenging, but we hope for better results in the second half. For networking communications, we are currently affected by a slowdown in 5G spending, primarily from China, which has been a major driver for equipment purchases related to 5G infrastructure. I expect the U.S. and Europe to pick up some of that demand, and we should see a resurgence in Phase 3 developments in China. Overall, we have good reasons to maintain a positive outlook in the networking sector, especially in telecommunications, which represents slightly more than a third of our business and can peak at about half when demand is strong. The mix of our businesses allows us to be optimistic, as some markets will continue to improve significantly, while others that experienced increased demand during COVID may see some normalization.

Thank you. That's great color. And then I have one question for Todd as well. Todd, utilization at roughly 63% and then the gross margins have come up nicely here. So just as we look into the next 12 to 18 months, can you talk about some of the puts and takes of gross margin? And any potential for further improvement here outside of the mix itself? And how high do you think that utilization can go before you need to increase capacity?

Well, so utilization is a challenging metric. It's an important metric, but I say it's challenging because we have kind of two different business models. In North America, we have more of a high-mix low-volume business model, and so utilization levels are inherently going to be lower. So when we say we're operating in North America at around 63% to 65%, that's actually a very good number in North America. Getting up close to 70% really stretches us, and we've been selectively adding capacity here and there in North America to try to increase our ability to produce. Now, in Asia though, it's a different story. The business model there is more geared towards mid to higher volumes and lower mix. And so utilization becomes a much more important factor. And quite frankly, 63% utilization in Asia is not a good number. And there is a lot of upward opportunity to improve. We have capacity in several of our key plants. These plants in China tend to be driven by our commercial end markets. As Tom mentioned, A&D is really a North America market. So, you have to watch what's going on with our networking and communications end market, our medical industrial instrumentation end market, and automotive end markets particularly, and computing will play into there also. So what's happening in those end markets will really drive utilization. And utilization is a key factor for us because we have a fairly significant fixed cost element in our business. There's a lot of equipment involved in what we do and a lot of technology. So, there's quite a bit of opportunity to grow on the commercial side, more constrained in North America although we still have some upside opportunity there too.

Got it. And just one clarification. You said you're going to retire the convert in the December quarter. Does that or will that have any impact on the share count going forward? Thank you.

At this stage, the impact on the share count is really expected to be zero. There is a warrant. When we entered into the convertible seven years ago, we included a call spread option which protected the company from dilution up to $14.26. The second part of that strategy involves a warrant that a couple of the banks we worked with during the transaction may exercise in 2022. The warrant becomes valuable above $14.26. At that point, it could become dilutive during 2022, but the warrant will expire at the end of 2022. The impact is roughly for every dollar above $14.26 stock price, on average for a quarter, our share count could be diluted by about 1.5 million shares or 1.5%. So, there is some exposure still at the tail end of the convertible. However, as of this year, I really don't expect any dilution at all.

We'll take our next question from Alvin Park with Stifel.

Yes. Hi. Thank you for taking the call. I'm just on for Matt Sheerin. I just wanted to follow up on the telecom and the 5G pause. You did mention that in an eventual U.S. and Europe pickup will end that pause. But out of curiosity, when China does resume their 5G infrastructure investments, will you see that tailwind? Or will there be potential impediments and headwinds associated because of the trade restrictions?

Yes. China is currently investing significantly in 5G base stations, with their investments being more than double that of the rest of the world combined. This makes it a very important market. While it is difficult to predict future trends, to date, Huawei and ZTE have been the main beneficiaries, with some business also going to Ericsson. From a trailing twelve months standpoint, we are still able to supply products manufactured in China, such as printed circuit boards, backplane assemblies, and resistor components, to Huawei. This business has remained unaffected and will benefit from ongoing investments in China. Additionally, Phase 3 is expected to involve substantial investments there.

I understand. That's great. I have a follow-up on that. Another supplier mentioned they expect to have some insight into the calendar year 2021, indicating that the December quarter is likely to peak in global auto production for the next year. Do you have any insights on auto production or order bookings that might extend beyond the December quarter, especially if sentiment aligns with that supplier or even reflects a more optimistic outlook? Can you share any information, or is visibility still too limited to assess this?

Yes. We certainly have visibility beyond the current quarter for our business, which is based on automotive forecasts that extend past this period, although these forecasts can be quite volatile. To start, in the third quarter, we observed that production levels in China had reached their optimal peak. Our regional sales reflected that trend already in Q2. What we were lacking was strong performance in North America and Europe, which has begun to pick up in Q3, and we anticipate this momentum will carry into Q4. This will lead us to a more balanced regional performance, indicating stability in our business and meeting steady automotive demand. Moving forward, we hope to see consumer demand in these markets stabilize. There are various factors at play, both positive and negative. Government incentives for electric vehicles are beneficial for us, particularly in Europe and China where there are strong pushes towards EV adoption, potentially increasing the demand for printed circuit boards and enhancing vehicle electronics content. However, if COVID impacts overall consumer demand, that could negatively affect unit demand. If unit sales can stabilize at levels closer to those seen in 2018, it would be very positive for us. Additionally, an increase in EV demand and the integration of advanced driver-assistance systems into vehicles would further strengthen our outlook. This is the trend we are hoping to see as we head into next year.

I see. Thank you very much.

Our next question comes from Mike Crawford with B. Riley Securities.

Thank you. Tom, you mentioned wanting to enhance your RF component capabilities within your unique product lineup. How much of that is expected to come from internal sources and how much from external sources?

Yes, that's a great point. We are leveraging our commercial RF and specialty component capabilities on the commercial side to support our organic business development efforts. As I've previously mentioned, these efforts are centered around photonics opportunities and enhancing our automotive solutions to provide our customers with more comprehensive engineered solutions rather than just discrete components. We are actively pursuing this. Additionally, on the aerospace and defense side, we are focusing on early engagement with customers as they release specifications, which opens up large program win opportunities. This is the second area of focus. Lastly, on the mergers and acquisitions front, we aim to strengthen our position in the component segment of the commercial business while also continuing to build our engineering capabilities in aerospace and defense.

Okay. On the defense side, as you're looking at early engagement opportunities in addition to agile radars, are there any other key programs of record that currently generate little revenue but could become significant in the next few years?

Absolutely. I believe any program, whether it's a retrofit or a new initiative involving an active electronically scanned array, presents opportunities. A prime example moving forward is the F-35 program buildup. I have previously mentioned the Low Tier Air and Missile Defense system, which is another opportunity. Additionally, there are upgrades being implemented in some of the legacy patriot missile programs. Our submarine fleet is also undergoing upgrades, transitioning from analog systems to digital ones. There are many opportunities. It's quite broad, and we will continue to update every quarter on the programs where we see significant wins. A straightforward way to approach this is to note that our depth of capability is primarily concentrated on areas where an array or radar opportunity exists, whether in space, land, or at sea. This is where we anticipate substantial opportunities, although we will also maintain our service across a wide range of programs.

Okay. And then last question just relates to the commercial portion of what had been the Anaren base. So you took this non-cash goodwill charge a number of years after the acquisition. Today does that in any way diminish your thoughts about what that acquisition brought you or your satisfaction with the acquisition or change anything else going forward?

So yes, the process of allocating goodwill at the start of an acquisition is always intriguing. We divided goodwill between the commercial sector and the aerospace and defense sector of our business. On the commercial side, we anticipated that the Huawei business would persist and grow, especially regarding the production of components in Syracuse. The primary factor leading to the charge was our inability to export components from Syracuse. Although our business development efforts are gaining traction, they are still in early stages, making forecasts challenging. Meanwhile, on the defense side, we've continued to see significant progress. This is reflected in our program backlog, which grew from approximately $440 million to $450 million at the time of the Anaren acquisition, to about $625 million today, and reached $647 million last quarter. This success has greatly benefited TTM on the aerospace and defense side. In short, I am just as excited about the business now as I was at the time of the acquisition, if not more so. However, we had a goodwill allocation issue that needed addressing this quarter.

Great. Thank you very much.

Certainly. Thank you.

And we'll take our next question from Woo Jin Ho with Bloomberg Intelligence.

Great. Thank you for taking my question. Tom, I just wanted to dig in a little bit on the automotive piece. It looks like on a pro forma basis, you're approaching a quarterly revenue level that's close to 1Q 2019. So it's a very nice rebound there. I understand the European potential headwinds ahead of us relative to the pandemic risks. I mean, where do you think this business can go into fiscal 2021?

Yes, this is indeed the key question. This year is focused on returning to the performance levels of 2019. If we can achieve that in Q4, our future will depend on traditional areas we've discussed, particularly electronics content. Currently, the printed circuit board content in vehicles is around $85, up from the mid-70s in 2018. In the next two years, we expect to see improvements in electronics content, especially as electric vehicles come into play, potentially raising PCB content to over $150. The advancement of ADAS technology will also contribute to this increase. Ideally, we want to stabilize unit volumes and see consumer demand rebound. If that happens, we'll be in a strong position to enhance PCB content, driven by the electronics in vehicles. The major question remains: how quickly will unit volumes exceed Q4 levels, and what can we anticipate regarding consumer demand for next year?

Let me rephrase that question. Considering the demand aspect, how should we view your design pipeline's visibility over the next couple of years? Specifically, how can we integrate your auto business into the 2021 and 2022 timeframe?

That's a good observation. To update everyone, in the last quarter, we secured around 40 designs with a total program value of about $170 million. If we look back to the same time last year, we were at a similar level. However, for the entire year last year, the program value was slightly under the $170 million we achieved this quarter. This indicates that our customers remain confident in placing new automotive design work with us. The $170 million from this quarter will lead to business opportunities starting next year and continuing into the following year, reflecting a solid level of design wins. In the previous quarter, we won about 43 designs with a program value of $203 million. This shows that our program wins have remained consistent, contributing to growing confidence that these programs will advance and generate revenue in the coming years. This establishes a strong sense of confidence for TTM regarding our current position.

Got it. And then my follow-on question on the networking side. You talked about the China phase three 5G build-out. Any commentary around the visibility into the U.S. build out going into 2021? And any comments around the wide networking piece, it looks like you commented that that pulled in a little bit into the third quarter. How are you feeling about over the next couple of quarters, please? Thank you.

Yes. On the telecom side in the U.S., I won’t predict election results, but I see infrastructure spending as a focus. When looking at the key factors driving 5G, there are commercial drivers as well as an increasing defense requirement for adequate 5G infrastructure. The government is clearly prioritizing this, with discussions from the defense department highlighting this necessity, which creates momentum. I anticipate that if there is an infrastructure bill, 5G will be included. Even without something from Congress, 5G will remain a priority for the U.S. government. This focus needs to translate to service providers and their activities, but it sets a positive backdrop for them to invest in this area. As you've seen, they are already advertising their initial expenditures, and if this picks up steam, we should witness significant progress in the U.S. On the networking side, while we have seen some fluctuations, the market has remained fairly stable. This is largely because there has been a cautious approach, with spending allocated to 5G implementation before developing additional networking structures. I expect a slight decline in Q4 compared to Q3 in the networking sector, but it should be minor. I truly believe that improvements in networking will begin after the 5G infrastructure is established, which is when we can expect to see renewed momentum in the networking market.

Okay. Thank you very much.

Thank you.

This concludes today's question-and-answer session. I will now turn it back to Tom Edman for closing remarks.

Thank you. Yes. I'd just like to close by summarizing some of the points I made earlier. First, we delivered revenues and earnings above the guided range despite COVID-19-related challenges that allowed us to demonstrate our operational excellence. Second, our end market diversification has allowed the continuum operations to grow despite weakness in a couple of subsegments. And third, we generated very strong cash flow, received the remaining proceeds from the sale of the mobility unit divestiture, and repaid a good portion of our term loan. As a result, we're able to drive our leverage to 1.6x. So in closing, I would like to thank our employees, our customers, and you, our investors, for your continued support, and your support for TTM as we go forward. Thank you very much.

This concludes today's call. Thank you for your participation. You may now disconnect your phone lines.