TTM Technologies, Inc.
Q3 2008 Earnings Call Transcript

Published: 18 Nov 2008

[Operator:]

Good afternoon, ladies and gentlemen. Thank you so much for standing by. Welcome to the TTM Technologies third quarter 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 conference is being recorded today on Wednesday, October 29, 2008. I will now turn the conference over to Mr. Kent Alder, President and CEO. Please go ahead, sir.

[Kent Alder:]

Good. Thank you. And good afternoon, and thanks for joining us for our 2008 third quarter conference call. I’m here in Santa Ana with TTM’s CFO, Steve Richards. Before we get into any details, let me mention that during the course of this call, we will make forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, fluctuations in quarterly and annual operating results, the volatility and cyclicality in various industries that the company serves, the impact of the current economic crisis, and other risks described in TTM's most recent SEC filings. The company assumes no obligation to update the information provided in this conference call. As you will note, in our press release issued today that we provide GAAP and non-GAAP financial information, specifically with reference to EBITDA. The reconciliation between GAAP and non-GAAP information is provided in the press release. Okay. Now, before Steve reviews the numbers in detail, I’ll provide a quick overview of the business. As you’re all aware, the macroeconomic issues have converged to create an overall challenging environment. However, I’m pleased to report that we again delivered solid financial performance with the aerospace/defense end market showing continued strength. On a segment basis, printed circuit board manufacturing continued its strong contribution. For the printed circuit board manufacturing segment, third quarter net sales were $148 million, compared with $149.6 million in the second quarter, a slight decrease of about 1%. Third quarter operating segment income was $14.3 million compared to $17.8 million in the second quarter. Average price per panel increased by 2% sequentially due mainly to a shift in mix toward higher technology products. Panel production declined by approximately 7% sequentially. For the backplane assembly segment, third quarter net sales were $29.3 million, compared with $31.2 million in the second quarter, a decrease of about 6%. Third quarter operating segment income was $2.1 million, compared with $2.2 million in the second quarter. Okay. Now let’s look at each of our four end markets. The main driver this quarter continued to be the aerospace and defense end market. Together with networking/communications, these two markets accounted for more than three quarters of our net sales. Historically, networking/communications has been the company’s largest end market. This quarter, for the first time, aerospace/defense tied to the number one slot, with both representing 39% of net sales. The networking/communication end market was down slightly from 40% in the second quarter to 39% in the third quarter. This was due primarily to a softer sales to a key Chinese customer in our backplane assembly segment, which we had expected and discussed on our last call. In our printed circuit board manufacturing segment, sales to our networking/ communication customers were down slightly due to slower orders from the networking and communication’s infrastructure portion of this end market. Aerospace/defense increased from 36% of net sales to 39% in the third quarter. This increase was based on overall strength with most of our customers in this end market. The computing storage peripherals end market remains flat at 11% of net sales in the third quarter. The medical/industrial/instrumentation end market decreased to 11% of net sales in the third quarter from 13% of net sales in the second quarter. We experienced an overall softness in this end market. In addition, a portion of our more volume oriented products sometimes move to low cost regions when demand decreases. Historically, most of these products have returned when global demand increases. Now let’s talk about our customers. Our top five customers comprised about 30% of third quarter net sales, and represent a strategic mix of commercial, aerospace/defense customers. No customer represented more than 10% of sales for the quarter. In alphabetical order, our top five OEM customers in the third quarter were BAE, Cisco, Hamilton Sundstrand, Juniper, and Raytheon. Now let’s look at our technological and operational capabilities. The average layer count of our printed circuit boards in the third quarter was 13.8%, as compared to 13.7% in the second quarter. We continue to maintain a very high average layer count while improving our technological capabilities and increasing our higher tech product mix with more HDI sequential lamination and Rigid Flex work. Quick-turn as a percentage of revenue decreased from 13% in the second quarter to approximately 11% in the third quarter. The quick-turn percentage was diluted by the increase in the aerospace/defense end market, which generally includes very little quick turn. In addition, the quick turn market was slightly softer overall. Lead times decreased by approximately one week across all of our facilities for the second quarter. Lead times for our commercial customers range from three to five weeks, while lead times for aerospace/defense customers are five to eight weeks. And lead times for some of our higher tech aerospace/defense products are at 14 to 20 weeks. At the end of September, our PCB book-to-bill ratio was 0.98 that compares to the IPC book-to-bill ratio of 0.96. While our book-to-bill ratio has moved down, we remain above the industry average. And we all know this is a challenging market environment. And we will respond accordingly and manage our business as we always have, with a tight focus on financial discipline and cost controls and a long term view of the future growth opportunities. We have diversified and strengthened our customer base with an increased contribution from the aerospace and defense end market, and decreased our reliance on the overall commercial market. And importantly, we continue to generate strong cash flow. We have the right business model. And as the leader in high technology in aerospace and defense, we are strategically well positioned for the long run. And we have an experienced and dedicate team who will strengthen the company in challenging times. Now I’ll let Steve review our financial performance for the third quarter and discuss our outlook for the fourth quarter.

[Steve Richards:]

Thanks, Kent. In light of the challenges in the macro environment, we are pleased to report solid results for the third quarter of 2008 inline with our guidance. The aerospace/defense end market led third quarter net sales of $169 million, which as expected declined from second quarter net sales of $173 million. Gross margin for the quarter of 19% declined from second quarter gross margin of 21.1%. Before I go into detail on the quarter, I want to note that results from the third quarter included a $579,000 unrealized loss related to TTM funds that were invested in the reserve primary fund. As many of you know, this money market fund broke the buck in mid September shortly after Lehman Brothers filed for bankruptcy protection. While we do not know the exact extent, we do expect to realize a loss as the fund is liquidated. And $579,000 is our best estimate at this point in time. Of the $20.1 million that we had invested in this fund as of September 15th, we expect to receive back about $10 million in the next week. As the funds holdings mature, we expect to receive additional funds, and we will update you on a quarterly basis as to the impact on the company. Now back to the third quarter detail, selling and marketing expense of the third quarter was $7.6 million or 4.5% of net sales, which is down slightly from second quarter selling and marketing expense of $7.8 million or 4.5% of net sales. Third quarter G&A expense, including amortization intangibles, was $9.1 million or 5.4% of net sales. Second quarter G&A expense, including amortization of intangibles, was $9.8 million or 5.7% of net sales. Third quarter G&A expense fell due to a number of factors, including lower accounting, consulting, and stock-based compensation expenses. Third quarter total operating expenses of $16.6 million declined from second quarter total operating expenses of $17.5 million. In the third quarter, we incurred stock-based compensation expense of $1.4 million. Sixty four percent of the expense was recorded in G&A, 28% in cost of goods sold, and 8% in selling and marketing. Third quarter operating income of $15.5 million compared to the second quarter operating income of $19.1 million. Interest expense, which includes amortization of deferred financing costs, was $1.6 million for the third quarter, down significantly from $3.3 million in the second quarter. As you recall, interest expense in the second quarter included $1.9 million to amortize the remaining financing costs from our old debt. Interest income was $702,000, which increased from $302,000 in the second quarter due to our higher cash balance. Other net was $384,000 in the third quarter and includes the $579,000 unrealized loss related to our investment in reserve primary fund, which I described earlier. Other net was $1.1 million in the second quarter, and included a $1.2 million charge to unwind the hedge related to our old debt. Our effective tax rate in the third quarter was 33.7% primarily due to a one time tax benefit as well as the annual tax return to tax provision reconciliation. The decrease in our effective tax rate from 36.7% in the second quarter to 33.7% in the third quarter increased diluted EPS by about $0.1 per share. Third quarter net income of $9.5 million or $0.22 per diluted share was inline with guidance and compares with second quarter net income of $9.4 million or $0.22 per diluted share. Adjusting to the unrealized loss on our holdings in the reserve primary fund, we would have reported diluted EPS of $0.23 in the third quarter. We continue to maintain a very strong balance sheet and cash flow, which speak to our financial discipline and operation controls. We generated significant cash during the quarter, and we continue to have a manageable debt position. Cash and cash equivalents and short term investments at the end of the third quarter totaled $135 million, compared to $118.7 million at the end of the second quarter, an increase of $16.3 million. Cash flow from operations was $19.1 million for the third quarter due primarily to solid net income and a net improvement in working capital. Net capital expenditures were approximately $3 million, and depreciation was $5.4 million in the third quarter. I’d like to update you on our expected capital expenditures for the year. We’ve talked before about 2008 CapEx in the range of $20 million to $23 million. In light of current macroeconomic uncertainties, we have gradually and prudently reduced our capital purchases to preserve cash on our balance sheet. We currently anticipate that 2008 CapEx would be about $15 million. Another factor worth mentioning is that inventories for the third quarter dropped $1.4 million. Looking ahead to the fourth quarter of 2008, we’re projecting revenue in the range of $156 million to $164 million and earnings in the range of $0.14 to $0.19 per diluted share. We expect sales before inter-company sales in our backplane assembly segment to remain steady at third quarter levels. And sales before inter-company sales in our PCB manufacturing segment to decrease by about 5% from the third quarter. The gross margin percentage for the fourth quarter is expected to be in the range from 17% to 19%. We expect the selling and marketing expense will be approximately 4.6% of revenue. And the G&A expense including amortization intangibles would be about 5.8% of revenue. And lastly, we expect our tax rate in the fourth quarter of 2008 to be approximately 37%. With that, let’s open the call to your questions.

[Operator:]

Thank you, sir. Ladies and gentlemen, at this time, we will begin our question-and-answer session. (Operator instructions) Our first question is from the line of Steven Fox with Merrill Lynch. Please go ahead.

[Steven Fox:]

Hi. Good afternoon, a couple of questions on the gross margin, please. First of all, near term, if you look at your guidance for Q4, I guess we’re talking anywhere from flat to down a couple hundred basis points. Besides volume, is there any certain mix effects that you’re looking for both positive and negative in Q4 to help or hurt the margin? And then longer term on the gross margin, as you go into an economic downturn, I was curious how you anticipate your quick-turn business to react to that. How it usually does during these times?

[Kent Alder:]

Yes, Steve. This is Kent. On the last part of that question with regards to quick turn, we did see just a little softness in the end of the quarter. That isn’t a significant amount. It’s kind of a float over into the fourth quarter. It’s not something that I would get concerned out – concerned about in light of the macro environment that we’re going through. Our quick-turn work sometimes is pretty strong in the fourth quarter. When we get to around the holidays and so forth it kind of tapers off at the end of the fourth quarter. So generally, we’re probably a little stronger right now than we are. So I think that’s a direct impact of some of the macro environment that we’re going through. With regards to our margins, this is a leveraged business. And we do have a lot of leverage in our models. So when the top line comes down, it has the effect of dropping the gross margins and operating margins. So that’s the main impact that we’re going to deal with in the next quarter. However, I think that when you look at our work with regards to aerospace/defense becoming a bigger portion that’s probably going to be a little flat. We should have a little better mix to compensate for that, but the leverage is a pretty big knot to overcome.

[Steven Fox:]

So overall, the mix is helping a little net, but not in a major way, I guess quarter-to-quarter?

[Kent Alder:]

I would think so. I think when you look at our end markets going forward like networking/communications. We think that’s going to be down a little bit in the fourth quarter just based on a lower infrastructure work. Not only in networking, but also in the communication portion. Aerospace and defense, we think that’s going to be flat this quarter. That’s a little bit harder to forecast due to the end of the year impact, but I think that will be flat. Our computing and storage peripherals, we’re forecasting that to be flat on a dollar basis too. I think there’s some backlog there that indicates that we’ll be fine in that end market. And then the medical/instrumentation that seems to be whether it’s just a general softness throughout that end market segment. We think that will be down in the fourth quarter. We also have a little portion of that work that’s more volume oriented that I’ve mentioned in our prepared comments here. That when global demand gets a little soft, there’s a portion of that work that kind of moves to the low cost regions of the world. And then when demand picks back up, then that comes back to us. Historically, that’s been the pattern. So within that medical/industrial/instrumentation we have that impact going on. So overall, I think we will have a little better mix end market wise. I think we’ll have a better mix from a technology perspective that will help our gross margins. But it’s just not enough in the short run to overcome the soft top line.

[Steven Fox:]

Understood. That’s very helpful. Thank you.

[Operator:]

All right. Thank you. Our next question comes from the line of Shawn Harrison with Longbow Research. Please go ahead.

[Shawn Harrison:]

Hi guys. I was just hoping you could comment on potential cost cutting actions here for revenue state at the current level heading maybe into the March quarter?

[Kent Alder:]

Yes. Shawn, that’s a good question. And certainly at challenging times like these, that’s more than just on our mind. And I’d like to mention that we’re always looking at our business and evaluating what happens if we get soft, or where we can take advantage of the strong upturns. So right now, we’re looking at the latter. When you have a slowdown, kind of the first thing you do is react with any discretionary spending. And we’ve taken that action. We’re controlling any discretionary spending very tightly. Steve commented on the CapEx that we’ve trimmed back. There’s no need at this point in time to invest in CapEx. I think the good news there is that our previous CapEx investments have proven to be very wise because we’ve positioned the company now to be able to produce right in the sweet spot of technology and the sweet spot of high mix. I think our business model that we followed enabled us to invest wisely in the past. So we don’t need a lot of CapEx to be successful here. So along the discretionary spending and the next thing we looked at, we controlled cost across the board. But the main area that you have opportunities, you should look at your hours worked. And you start to reduce the overtime, reduce hours worked, and just kind of escalate the controls there as you control your cost across the board. On the material side, I believe and we’re anticipating that with the decrease in the metals and the decrease in the oil that we’ll see some lower raw material cost going forward. Now I don’t think we’ll see anything in the fourth quarter because that takes a little while to float through the system. But when you move into the first quarter, we’ve seen price increases all the way up. And we fully anticipate to see price decreases all the way down. So we’ll be better off on a material side. We’re controlling cost across the board. We’re tightly controlling any discretionary spending. And we certainly are controlling the labor side.

[Shawn Harrison:]

I guess on that note, if I take the medical/industrial/instrumentation and other, it looks like that business for the year is going to be down significantly maybe something along the lines of 15% to 20%. Has there been thought potentially consolidating additional work into the facility where majority of that work is done? Or I guess maybe taking some of that work out. What I’m getting at is really just facility consolidation or footprint kind of realignment potentially if things stay the way they are.

[Kent Alder:]

I think kind of the steps that I outlined earlier, the steps we’re going to take. One of the things that we will always look at and making judgment about is how deep the slow down is and how long it’s going to last, and so given those judgment criteria that lay out what action that we will take. We’re always looking at ways to make the company stronger. I can let you know that we’ll do whatever it takes to protect our profits. And we’ll look at all options, but that kind of depends on what the market place gives us going forward.

[Shawn Harrison:]

Okay. Maybe on a more positive note, if we could – just your thoughts, say over the next six to nine months, about the aerospace and defense market, be it underlying the main trends that you’re seeing. And then secondarily, the opportunities you have for share gains, particularly given that you look at DDI as well as Merrick’s talking significantly about making end roads into that market.

[Kent Alder:]

Yes. Well I think as you know, we’re the leader in aerospace. If you just look at our printed circuit board segment, 46% of our sales, nearly half of our sales come from the aerospace and defense in the markets. That positions us such that we can invest in the front end work that it takes to satisfy these customers and provide them with more value added. So we’re optimistic that we’ll continue to grow in that aerospace and defense end market segment just as we have in the past. If you look at us, say in the fourth quarter of ’07, we were 33%. Now we’re up to 39%. We note that the 2009 defense budget was signed. So we think that’s a good sign. And there’s a lot of work in the pipeline that we are looking at now, and look forward to a pretty year in 2009 in aerospace and defense. The places where we’re seeing most growth is in the defense side. And those products are related to more high technology products where you’re looking at communications radar, improving existing defense jets, planes, and so forth. So that will continue. We believe that will continue. So we’re pretty optimistic about that and about our position and ability to serve our aerospace and defense customers.

[Shawn Harrison:]

Okay. And just Steve, maybe I missed this, but what did you say CapEx was for the quarter?

[Steve Richards:]

$3 million, and we expected to end the year about $15 million. So kind of a similar number for Q4 and in the year at $15 million versus the $20 million to $23 million that we kind of originally expected.

[Shawn Harrison:]

And probably holding that rate here until we get maybe better visibility and demand trends?

[Steve Richards:]

Yes. That’s fair to say.

[Shawn Harrison:]

Okay. Thank you.

[Operator:]

All right. Thank you. And our next question is from the line of Amit Daryanani with RBC Capital Markets. Please go ahead.

[Amit Daryanani:]

Thanks. Good afternoon guys. Just a question on the book-to-bill, I think you guys talked about it being on 0.98 for Q3. Could you just talk about what it is on the month of October? Has it fallen off any more? Is it stable?

[Kent Alder:]

Amit, that’s a good question. And I haven’t looked at that, but I don’t believe that there are any major fall offs. I think we’re pretty flat through October. The month of October is not – I’ll go out on the limb and say I don’t believe it’s negative. So that’s about how confident we are that it’s pretty flat.

[Amit Daryanani:]

Got it. And then I guess, my same question would be, I think you guys obviously can work back in May to raise some money for potentially doing acquisitions in Asia. I mean most of us, those coming out of it, are trading it like $0.60 to $1. And I realized you guys probably want to do a deal in Asia at some point. But any thoughts on buying back these converts that you issued at par for their trading it $0.60 to $1 today?

[Steve Richards:]

Actually, you do have a good question. Obviously, the market has just gone crazy in the last month. And so it’s a viable option for us, but I still think that the biggest intention for us is to use that cash to grow the business as we originally outlined. Although you’re right, it’s mighty tempting to think that we could take our convert off the table entirely with half the cash as we have on our balance sheet right now effectively. But at this point I think our focus – and the same goes for share buyback for many – our focus right now despite the challenging credit market and so forth would be to still pursue opportunities in Asia. While at the same time being ever vigilant about our business here in North America and making sure that we focused primarily on making sure that it’s profitable as possible.

[Amit Daryanani:]

And just maybe extending that conversion a bit, you guys have obviously been looking at Asia for quite a while and hesitation was the valuation how that trended and then also what you guys seen it? If you could find the quality that the company wants? The place and valuation, have you seen that contract pricing market more attractive in Asia at this point?

[Steve Richards:]

Amit, I think that the financial crisis has not been very helpful to this process. If you will, I looked at the valuation of our stock and where it’s at and other companies have had a similar impact. So relatively speaking well, our market capital is down so our other market caps coming down. If there is a kind of a silver lining to this challenging environment that we’re going through. It does create attractive acquisition opportunities. And TTM insists we talk about our cash at a $135 million. Well that gives us a lot of flexibility here. And as acquisition opportunities become more attractive because of this environment, hopefully that enables us to get things across the finish line. But an overall update is that we continue to have conversations and move that ball forward. But it’s not at a phase that we would have anything to talk about or anticipate happening in the near future.

[Amit Daryanani:]

Got it. And just finally, I see you have $10 million. I think you said you’re going to get $10 million of the money market fund back some time soon. What about the remaining $10 million? Is there some sort of maturation that we should be aware of on those assets?

[Steve Richards:]

Yes. I kind of refer all you guys to the reserve primary fund website, which actually is hosting updates on a daily basis on what their plans are. So just so you guys could stay abreast of the changes as we are here. But effectively, the money market fund was Rule 287 complaint. So it means that the average weighted maturity of their assets is basically 90 days, but they can have things out to 13 months. So effectively what they’re doing now is just letting the stuff mature because it will not play any market right now or any of the commercial paper and other investments they hold. Although the Fed have of course move into that market and hopefully we’ll some loosing of that market between the next few weeks because of that action. But with that said, as the money, as the funds they hold mature, they get more cash and they will distribute it to us. They have about $50 billion in assets of which now about $25 billion is in cashed. So they should and they said that they expect to make a distribution at the end of this week. And it would be about half their assets therefore, about half of what we have. The rest of it, if it goes by maturity will come in probably in another big chunk towards the end of this quarter. And the rest could completely come in drips and drabs throughout the next year if they have to wait for maturity for that cash to come in. If the money markets loosen up a little bit and actually instrument a steady hand then I think we hope that the money will come back to us sooner than that. But that’s a bit of an open question until we see what that action takes root and actually make those markets open more.

[Amit Daryanani:]

Got it. And then, just lastly, if I could, just given this macro environment way to – any thoughts on risk of inventory absolutism? So if you just maybe talk about your AR range. If there’s any risk to the AR numbers there?

[Steve Richards:]

Sure. That’s a real good question. The question that we’re actually are focusing on now, especially looking at the credit quality of our customers and making sure that all the AR we have is collectible. And of course we do have a reserve as all companies do against AR for possible lack of flexibility. We have increased that reserve particularly we all obviously track it every quarter and update it. By and large, we’re fortunate in that most of our customers are large of course in the aerospace/defense side it’s customer like Northrop Grumman, BAE, Raytheon, good companies that pay their bills. And of course even on the condor and manufacturing side, large customers like Flextronics, Plexus and so forth. So by and large, it’s the little companies that we deal with that we’re more concerned about the AR front. And we’re reviewing those more closely and we’ll be quick to put companies on credit hold that need be if they start slowing down at payment. In terms of inventory, we also keep a reserve for excess inventory. And that’s both general and specific. So we have general reserve based on right option that we do have the right inventory of the past. We also have particular – if there are particular items that the customers have to reserve again, we do that as well. So I think our processes on both those fronts have been quite good throughout the last couple of years we could have done the immigration of Teiko. And we’re just kind of beating up that process. Making sure we do an extra check on say, the credit quality customers. And we’ll be checking to make sure that our inventory reserves are adequate, but I’m not expecting any significant uptake in either of those items for the fourth quarter. And they’re in fact not in our guidance because we don’t think that we need to.

[Amit Daryanani:]

Perfect. That was helpful. Thanks a lot.

[Operator:]

Our next question is form Matt Sheerin with Thomas Weisel Partners. Please go ahead.

[Matt Sheerin:]

Yes. Thanks. Regarding the guidance, it looks like the networking/communications area is the one area that’s really getting hit in terms of booking trend that you’re seeing. Is that mostly with your North American customers? Because I remember you talked about weakness in China due to the Olympics in China mobile et cetera and that you expected that to come back. Is that business coming back? Is it mostly the US based customers that we’re seeing weakness?

[Kent Alder:]

Yes. Good question, Matt. We’re seeing some weakness like I’ve mentioned in the kind of the infrastructure for networking, and the infrastructure for communications in North America. We talked about a key customer last quarter being soft. That key customer is as we’ve expected has placed orders in the fourth quarter now. So we’ll be increasing our operations, ordering components and so forth. We would anticipate just a portion of that being shipped in the fourth quarter, but most of that being shipped in the first quarter and beyond. So China, our China operation is going to be pretty flat this year, excuse me, this quarter. And about 92% of what we do in Shanghai backplanes is in the network and communications. So it’s almost like all of that work is network and communications. So being flat this quarter and if – it’s hard to forecast beyond that, but based on the one key customer coming back, hopefully the first quarter could be up.

[Matt Sheerin:]

Okay. But looking at the US customers, did you start to see the order rates just drop off in September where a lot of other companies have reported to seeing weakness? Has it come later? And what kind of demand leads are you getting from those customers now in terms of the rest of the quarter? And even your rolling forecast that point to the March quarter.

[Kent Alder:]

As far as how it went to the quarter, it probably was a little bit more dramatic towards the end of the quarter, and we’re making some general statements because not all of the customers were down. Some of the customers were up. And as we are looking out going forward this quarter, we talked about a continued softness in that end market segment. So that will probably decrease $2 million or $3 million somewhere in there in just a $1 basis.

[Matt Sheerin:]

Okay. Got it. And on the gross margin, you’ve explained why it was down in the quarter and the mix played an issue as well to lower revenue. Has pricing begun to weaken at all?

[Kent Alder:]

You know, Matt, we have not seen pricing start to be more competitive. Our price, of course, price for panel was up 2% this quarter, but that was mainly due to the mix ship. On a market basis, prices seemed to be holding in there at this point.

[Matt Sheerin:]

Okay. And then I know a bunch of people asked about the cost cutting, it sounds like your sort of making some plans, but nothing set in stone yet. You want to see how business goes. I know a year or so ago you had some furrows at triple the falls and some other actions like that. I mean are those the types of the things you would consider doing again?

[Kent Alder:]

Yes. Yes, Matt. I mean right now we were monitoring overtime hours worked very closely. And it’s not in all of our facilities that we have the challenge. But in those that we do, we are certainly monitoring the hours worked. We’re also looking at what we do if we need to reduce those hours further. With reduced work weeks or maybe extended shut downs around holidays and so forth. So we have all those options on the table and we look at this on a daily basis. And the one thing that we have experienced at is controlling our cost. We think it demonstrated – we know how to do that in the past. I guess that’s a skill set that I wished we did not have, but we got it. And we need to use that when it’s appropriate. And I think we can also manage on the upside. But right now are challenge is to control our cost, preserve our profits, which we will do. And we will take whatever actions we think are necessary. The judgment is, are they short term issues or they long term issues, how deep, how long, what’s the appropriate action. Because we’ll match our cost side with the decrease in sales as we need to.

[Matt Sheerin:]

Got it. And just back to the revenue picture, are you seeing opportunities? Or have you been taking share from smaller competitors, particularly in this environment where shaky balance sheets obviously will put somebody’s company at risks?

[Kent Alder:]

Yes. Good point, Matt. I’m not sure that we – we continue to capture share because our book-to-bill is higher than in the industry and our sales continue to go up higher than the industry. I think one of the things that we – that’s been very helpful to us in 2008 is the market share gains that we’ve had. Now having said that, I still think there’s more opportunity out there because those market share gains have been based on our capabilities and our value that we provide our customers. We still have the upside relative to weak competitors and customers being nervous about weak competitors. In TTM, with our strong balance sheet, being the largest manufacturer of print circuit boards in North America, that’s pretty quality company. And when times get tough, I think we’ll be able to take advantage of that because not only can we service customers and provide value, but we are certainly less risky to do business with.

[Matt Sheerin:]

Got it. Okay. Thank you.

[Operator:]

Thank you. And our next question is from the line of Calvin Cofield with JP Morgan. Please go ahead.

[Calvin Cofield:]

Yes. Hi there it’s Kevin Castle from JP Morgan. Kent, I just wanted to clarify with you, you’ve said about networking and communications business, did you say you saw it on a probably absolute dollar basis that it would be down about $2 million to $3 million in the December quarter? And that’s all PCB related?

[Kent Alder:]

That’s correct, Kevin. It’ll probably be down about $2 million to $3 million on a quarter-over-quarter basis. And maybe a little bit more. We also will see kind of the medical/industrial down a couple of million dollars in that end market segment. And then if you plug in kind of an overall decrease of $2 million or $3 million because of the market conditions, you get until about a $6 million to $7 million decrease is where we’re forecasting our circuit board operation to be.

[Calvin Cofield:]

Okay. Because what I’m looking at, I mean I’m looking at just the midpoint of your guidance and says about $9 million down quarter-over-quarter and so if this is due for peripherals, I remember earlier you’re saying you thought peripherals are going to be flat, aerospace will be flat. And so that would imply kind of the remainder of the weakness would be coming all on that one, industrial/medicals/instrumentation segment?

[Kent Alder:]

Yes. Yes. There is a about $2 million to $3 million in the medical/industrial and $3 million in the network and communications. And these are kind of rough numbers, Kevin.

[Calvin Cofield:]

Yes.

[Kent Alder:]

And then you got the overall, we’re looking at the overall kind of depressed situation across the board. And so that would make up the difference between the $7 million to $8 million, $9 million decrease.

[Calvin Cofield:]

Okay. I got it. And so when you look at I guess where we kind of are right now and just overall, I mean clearly, you don’t have a lot of visibility and obviously that’s true for your industry too here. But I’m looking kind of backwards at your June 2007 quarter where you had a very similar profile in terms of top line margins, essentially everything. It almost looks identical to what you’re getting to for December ’08, but June ’07 kind of marked the bottom of that last period of decline and I guess at this point this is while this is the third straight quarter of decline from a top line perspective. Is there any sense that you have it all – that things are getting to a point where they might be bottoming? Or is it just impossible to say? Or do they think like they are going to go down lower?

[Kent Alder:]

I don’t have an answer. I wish I had an answer to that, but I don’t. We got our forecast out there for the fourth quarter. And then trying to predict what’s going to happen beyond that. We just don’t have a crystal ball. And so I just don’t have an answer.

[Calvin Cofield:]

Okay. And then just another question on the industrial/medical/instrumentation factor, is there any way you could kind of help parcel it out for us we kind of have a better understanding of where the bigger weaknesses is coming from. Because I know that semi caps equipments in there and that’s clearly one of the worst performing markets across all of technology at the moment. So that sounds not so surprising. But medical doesn’t seem to be overall under much pressure nearly. And clearly industrial’s under pressure, but I guess it depends on what you’re doing in industrial. So if there’s away that maybe parcel amongst those segments where maybe you’ve seen more weakness versus another? And maybe from a product perspective so it’s going to give a better sense where the boards are going into?

[Kent Alder:]

Kevin, certainly the cash equipment is impacting that end market significantly. When I look across the medical/industrial/instrumentation there’s a portion of work in there that I’ve talked about earlier that’s a little bit volume oriented. And that’s in a bubble area so that when global demand goes down, there’s a – 15% of that kind of migrates over to the low cost region. And then as global demands gets more healthy, most of that worth comes back to us. So those are – that’s probably what’s compounding that particular end market. We don’t have that kind of bubble migration to the low cost regions in our other end market segments. That work left a long time ago. This is work that has been a little more resistant. Even a lot of companies in the low cost regions don’t want this work. But when it gets to the point of low enough demand then they even though it’s not attractive they take that. The rest of our work is work that belongs here in the US. So I think you’re getting a double whammy in the medical/industrial/instrumentation. And the 15% that approximately 15% of that end market that’s subject to this bubble phenomenon is in all three of those categories of that end market.

[Calvin Cofield:]

And that’s where the flight as well the flight to Asia happening across all three of them? Or is it more medical?

[Kent Alder:]

No. It’s pretty much all three.

[Calvin Cofield:]

All three, just the higher volume programs that have sort of a characteristic?

[Kent Alder:]

Yes. It’s just more of a volume oriented nature. And these are medium technology work. And generally while we say volume, it’s not volume that’s attractive to a volume printer circuit board manufacturer. But when you don’t have anything in your facility it’s better than nothing. So this is kind of the next step. But as like I’ve said earlier, as the global demand increases and there’re other opportunities then this work kind of comes back to us. Now those are pretty broad general statements again, but that’s kind of what happened – that’s what’s happening. I can’t put a finer point on it because we really can’t tell.

[Calvin Cofield:]

I understand. Okay. Great. Thanks so much.

[Operator:]

All right. Thank you. (Operator instructions) At this time, Rich Kugele with Needham & Company. Please go ahead and put your question.

[Rich Kugele:]

Yes. Hi. Good afternoon. Just a couple of questions, I guess first, what things can you do over the next 6 to 12 months we have this similar environment continue throughout to improve your gross margins?

[Kent Alder:]

Good question, Rich. I think it depends on what level we stay at. I think as we stay at level we’re at right now with our discretionary spending controls looking at cross-cutting in all areas. And one of the things that happened in these kinds of times as we start to really drill down and really tighten up our cost control side of the equation, we generally find ways to become more efficient and more productive. So I think we’ll have some of that as we go forward, but –

[Rich Kugele:]

But maybe from a modeling perspective, should we just assume that most of the leverage winds up at the operating line rather than gross?

[Kent Alder:]

Well certainly the leverage flows through. We looked at 30% to 40% leverage down and leverage up when the top line goes. That’s in the printer circuit board segment. It’s not that great leverage in the backplane segment. But certainly in the circuit board segment when you go down top line the leverage is what makes it a challenge for us as operators to overcome. So what we need to do then is look at all of the variable cost and some of the fix cost that can become variable. And drive those costs outside of our business. And that’s what kind of what we’re going to do. The good thing, Rich is that this isn’t anything new for TTM. I mean we have a cost control tight culture here. It’s always in place. Now going forward, it’ll be more of a major focus and a major impudence to look at what we can do. And then what action we take longer term depends on our judgment of how long will be down and how deep it stays. And we will take the right action. I’ve mentioned earlier that we’re here to protect our profits and here to grow those profits. Right now it’s more of a protection of profits. And we’re going to take the action that it takes to protect those profits.

[Rich Kugele:]

Okay. And then just lastly, I know we always ask you about going to Asia, but the situation changed a little bit with the stock prices, market caps of both Merrick’s and DDI – where they are, I mean Merrick’s is just $16 million. DDI now just over $80 million. Does that now in your mind bring North America back to the table as a potential roll up in this environment as certainly being easier to integrate than an Asian situation or any thoughts on just consolidating during this downturn?

[Kent Alder:]

I think that’s an insightful question. And as we looked at all our opportunities both in Asia and in North America, what happens in these volatile times is that acquisitions – companies that are challenge become more attractive. They actually become less expensive. On the other side of the coin, is in these challenging times, those companies become a little more risky. So acquisition at the same time become more attractive or less costly, but they become a little more risky. So when you line up the risk of Asia versus the risk of North America, it does throw a little more balance in the North American category versus Asia.

[Rich Kugele:]

Okay. Great. Thank you very much.

[Operator:]

Okay. Here’s Scott Coleman with Morgan Stanley. Please go ahead with your question.

[Scott Coleman:]

Hi. Thanks, and good afternoon. I just want to understand some of the commentary about PCB versus backplane and some of the trends within the networking and comms space. So you’ve mentioned you had one key customer that was soft. This was in your last quarterly call that was soft with order perspective and I’m assuming that impacted revenue in the September quarter. Now it sounds like they’re back from an order perspective. I’m I understanding that correctly?

[Kent Alder:]

Yes. That’s exactly right. They’re back and they place orders and we’re ramping up productions, ordering materials and so forth. The benefit from that order and the ramp and the increased output won’t be felt until next year. We’ll ship some of that product in the fourth quarter, but most of that product will begin shipping in the first quarter and beyond.

[Steve Richards:]

And that’s a customer that’s largely a customer of our backplane assembly business and primarily based in Asia.

[Scott Coleman:]

Okay. That’s helpful because the – so if that plane is going to be steady next quarter and PCB is going to decrease around 5%, I think you’ve said. And obviously there are other customers that are making up the backplane business and then seeing a drop off on some of your other comms customers on the PCB front. Is that right?

[Kent Alder:]

Yes. I’d say the DDI customers that support our backplane assembly business buying large are fairly steady. To nation shifts one customer to the next, but business is going to be roughly flat from the third quarter levels. And so it’s made up of roughly the same customers as normal.

[Steve Richards:]

Okay. So the rest of the weakness that Kent alluded to in networking is going to come from other customers that we have on the PCB side. For most part, we don’t have a lot of customers that do both PCB work and backplane assembly.

[Scott Coleman:]

Okay. And then just to follow-up on a question earlier about inventory. When you looked across the supply chain, what do you see in terms of weeks of inventory at the various hubs at EMS customers for your year-end inventory? Are you getting concerns? I think they’re starting to back up a little bit?

[Steve Richards:]

Actually no. And that’s actually what we’re pretty fortunate about. If you look at our finished goods inventory, which is what’s basically stored in the hubs. It’s gone down over the course of the quarter. It was $8.9 million in finished goods at the end of June. It’s $6 million at the end of September. So it’s down $2.9 million. And actually some of that finished goods inventory to move out in the fourth quarter as well. So I’m not seeing a real back up in inventory. And we’ve seen some growth over the course of the year in our business in inventory. But primarily in the assembly operations and including our military focused assembly operation in Connecticut and we mostly just built the inventory in terms of increased demand and more customers, and increased orders. So I’m not worried about our inventory levels really at all. I think I want to make sure that we get them down solely because it’s not where I want to park my cash. I’d rather park our cash earning interest as opposed to sitting in a shelf in a warehouse.

[Scott Coleman:]

Right.

[Steve Richards:]

But in terms of backing up the supply chain, I think the biggest indication of that would be say, if finished goods were bloating. And it’s clearly not. We’re moving actually in the direction, a real favorable direction on finished goods.

[Scott Coleman:]

Okay. Excellent. And then to shipping back to PCBs, is the softness that you’re seeing this quarter across multiple customers the way you – I think you positioned it in the prepared remarks was due to softness in both enterprise and telecom. So I’m assuming that it’s broad based as opposed to customer specific.

[Kent Alder:]

Yes. That’s exactly right. And I think it’s important to note that not all of our customers are down. It’s not like across the board, they’re all down. We have some up, some down. But there’s nobody, no one customer that’s specifically except for the key customer we’ve talked about in Shanghai, no one in the printer circuit board that’s jumping out and contributing to the majority of the decline.

[Scott Coleman:]

Okay. Great. I appreciate the insight fellows.

[Kent Alder:]

Thanks.

[Operator:]

And there are no further questions. Mr. Alder, please continue with any closing comments.

[Kent Alder:]

Thank you for joining our conference call today. I think a lot of the questions or interests have been around the market place and what’s going on and what we’re doing about it. And hopefully that you can tell through our answers that we are focused on protecting our profitability and that we will do what it takes from cost control to keep our margins as high as possible. We’ve already taken some actions with CapEx, controlling labor, looking at discretionary spending. Longer term I think the company is very well positioned. We’re the largest printer circuit board company in North America that has value. We’re strategically positioned with the right technology, the right capabilities. We’ve got excellent customers, a broad end market. Balance sheet, we can’t say enough about the $135 million in cash on the balance sheet. I think that gives us the flexibility that we need. And we have an experienced management team that knows how to manage in downtime. So we’re united in driving profitability and making sure that we through these challenging times come out stronger as a company. So we will talk to you next quarter and report on the progress we’re making. So we thank you very much for joining us today.

[Operator:]

All right. Thank you. Ladies and gentlemen, this concludes the TTM Technologies third quarter financial results conference call. If you would like to listen to a replay of today’s conference in it’s entirely, you could do so by dialing 1-800-405-2236 or 303-590-3000 input the access code 11121228. Those numbers again, 800-405-2236 or 303-590-3000 again the access code 11121228. HG would like to thank you very much for your participation and you may now disconnect. Have a very positive of the rest of your day.