TTM Technologies, Inc. (NASDAQ:TTMI) Q4 2023 Earnings Call Transcript
TTM Technologies, Inc. (NASDAQ:TTMI) Q4 2023 Earnings Call Transcript February 7, 2024
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Operator: Good morning. Thank you for standing by. Welcome to the TTM Technologies Fourth Quarter and Full Year 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, February 7, 2024. Sameer Desai, TTM's Vice President of Corporate Development and Investor Relations will now review TTM's disclosure statement.
Sameer Desai: Thank you. Before we get started, I would like to remind everyone that today's call contains forward-looking statements, 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 risk factors we will provide in our filings with the Securities and Exchange Commission, which we encourage you to review. These forward-looking statements represent management's expectations and assumptions based on currently available information. TTM does not undertake any obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events, or other circumstances, except as required by law.
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 measures prepared and presented in accordance with GAAP, and we direct you to the reconciliations between GAAP and non-GAAP measures included in the company's earnings release, which is available on the Investor Relations section of TTM's website at investors.ttm.com. We also have posted on that website a slide deck which we will refer to during our call. I will now turn the call over to Tom Edman, TTM's Chief Executive Officer. Please go ahead, Tom.
Thomas Edman: Thank you, Sameer. Good morning, and thank you for joining us for our fourth quarter and full year 2023 conference call. I'll begin with a review of our business highlights from the quarter and a discussion of our fourth quarter results, followed by a summary of our business strategy. Dan Boehle, our CFO, will follow with an overview of our Q4 2023 financial performance and our Q1 2024 guidance. We will then open the call to your questions. The quarter's results are also shown on Slide 4 of the investor presentation posted on TTM's website. We delivered a strong finish to the year, despite the current uncertain macroeconomic environment, and I would like to thank our employees for their hard work and contribution to generating these results.
In the fourth quarter of 2023, non-GAAP earnings per share were above the high end of the guided range, due to excellent operating performance and favorable product mix. Revenues were within the previously guided range, due to better-than-expected results from our aerospace and defense and data center computing end markets, which was offset by lower-than-expected results from our medical, industrial and instrumentation and automotive end markets. Demand in our aerospace and defense market, which was 46% of revenues for the quarter, continues to be solid with continued strong backlog offset by weaker demand in some of our commercial end markets. For the full year 2023, revenues declined 11%, driven by the downturn in commercial end markets, offset by growth in the aerospace and defense end market.
While full year non-GAAP operating margins were down year-on-year driven by the revenue decline, fourth-quarter operating margins were actually up year-on-year despite the revenue headwinds. Full year cash flow from operations was $187.3 million, enabling us to strengthen our balance sheet while returning some of the capital to shareholders. In addition, we refinanced our term loan and asset-based loan, improving the tenor with the first maturity date out to 2028. I would now like to provide a strategic update. TTM is on a journey to transform our business to be less cyclical and more differentiated. Over the past several years, TTM has consistently emphasized that a key part of our strategy is to add value to the product solutions that we deliver to our customers, particularly in the aerospace and defense market.
As a result of strategic moves with the A&D acquisitions of Anaren and Telephonics since 2018, over 50% of our A&D revenues are now being generated from engineered and integrated electronic products with PCBs being less than 50% of the overall contribution. Another important element of our differentiation strategy is our investment in a new state-of-the-art highly automated PCB manufacturing facility in Penang, Malaysia. The decision to build this new factory is a direct response to our customers' increasing concerns about supply chain resiliency and regional diversification, and in particular the need for advanced multi-layer PCB manufacturing options in locations outside the Greater China region. The new facility in Malaysia will support customers in our commercial markets such as networking, data center computing and medical, industrial and instrumentation.
We continue to make progress on the Malaysian facility with all major processes now running, and we are currently sampling product to customers for qualifications. I'd also like to update you on the consolidation of our manufacturing footprint. We previously announced our plan to close three small manufacturing facilities in order to improve total plant utilization, operational performance, customer focus, and profitability. During the course of 2023, PCB manufacturing operations in Anaheim and Santa Clara, California, and Hong Kong were closed and consolidated into TTM remaining facilities. We ceased production at our Hong Kong manufacturing facility during the second quarter, Anaheim in the third quarter and Santa Clara at the end of 2023.
We are presently ramping production for the transferred parts at receiving facilities throughout our North America footprint. Finally, I would like to update you on the previous announcement of our intent to expand our advanced technology capability for the aerospace and defense market through the construction of a new facility immediately adjacent to our Syracuse, New York campus. Our proposed new facility will bring disruptive domestic production of high technology Ultra HDI PCBs in support of national security requirements. This new facility is expected to focus on high technology PCB production in North America, providing customers with reduced lead times and a significant increase in domestic capacity for Ultra HDI PCBs. Provided we are able to complete discussions with various stakeholders regarding their support for this facility, we anticipate that we will be prepared to break ground in the first half of 2024 with initial production within 18 months after groundbreaking.
Phase one of the proposed project, including capital for campus-wide improvements, is estimated to be $100 million to $130 million, and is anticipated to run through 2026 with TTM's final capital investment commitments determined after finalizing terms with various stakeholders. Now, I'd like to review our end markets, which are referenced on Page 4 of the earnings presentation on our website. The aerospace and defense end market represented 46% of total fourth quarter sales, compared to 40% of Q4 2022 sales and 45% of sales in Q3 2023. The solid demand in the defense market is a result of a positive tailwind in previous defense budgets, our strong strategic program alignment and key bookings for ongoing franchise programs. At the end of the fourth quarter, our A&D program backlog was $1.3 billion.
During the quarter, we saw significant bookings for a key restricted program. We expect sales in Q1 from this end market to also represent about 46% of our total sales coming off a seasonally high Q4. For the full year, aerospace and defense revenues grew 17%, primarily due to a full year of Telephonics in 2023 compared to six months in 2022. Excluding that impact, organic growth was 6%. In 2024, we expect end-market growth to be above longer-term market projections of 3% to 5%. Sales in the data center computing end market represented 17% of total sales in the fourth quarter, compared to 14% in Q4 of 2022 and 17% in the third quarter of 2023. This end market performed better than we expected and saw 15% year-on-year growth due to strength in our data center customers building products for generative AI applications.
We expect revenues in this end market to represent approximately 17% of first-quarter sales. For the full year, data center computing declined 16%, due to inventory corrections for semiconductor and data center customers early in the year, following 17% growth in 2022, 25% growth in 2021, and 9% in 2020. In 2024, we expect to be above the longer-term end-market growth of 4% to 7%, driven primarily by generative AI applications. The medical industrial instrumentation end market contributed 16% of our total sales in the fourth quarter, compared to 17% in the year-ago quarter and 16% in the third quarter of 2023. The year-over-year decline was caused primarily by inventory reductions at a number of our customers, particularly in the industrial and instrumentation areas.
For the first quarter, we expect MI&I to be 16% of revenues. For the full year, MI&I declined 25% due to the inventory correction at many customers and weak demand from semiconductor test companies following 16.7% growth in 2022, 11.5% growth in 2021, and 12.4% growth in 2020, well above industry forecasts three years in a row, as we took advantage of megatrends in faster-growing subsegments of this end market. In 2024, we expect growth to be in line with the 2% to 4% longer-term industry forecast for this end market. Automotive sales represented 15% of total sales during the fourth quarter of 2023, compared to 16% in the year-ago quarter and 15% during the third quarter of 2023. The year-over-year decline for automotive was due primarily to continued inventory adjustments at several customers.
We expect our automotive business to contribute 14% of total sales in Q1, due to typical seasonality in the first quarter from the Lunar New Year and ongoing demand softness. For the full year, automotive decreased 16% due to the inventory correction at automotive customers. In 2023, advanced technology was 36% of our automotive end market compared to 31% in 2022, due to strong growth in our HDI and radar product areas. In 2023, we won new designs with a lifetime value of $608 million compared to $530 million in 2022. Designs that we are winning this year will contribute to revenues in future years. We expect this market in 2024 to be below longer-term forecasts of 3% to 5%, as customers continue to adjust inventories in light of ongoing demand softness.
Networking accounted for 6% of revenue during the fourth quarter of 2023. This compares to 13% in the fourth quarter of 2022 and 7% of revenue in the third quarter of 2023. Demand was softer as customers continued to focus on inventory digestion as well as weak end market demand. As a reminder, the Shanghai backplane business, which we sold in our second quarter, contributed approximately $12 million of sales in this segment in the fourth quarter of 2022. In Q1, we expect this end market to be 7% of revenues. For the full year, networking declined 46%, due to inventory correction at both networking and telecom customers, as well as weak demand at telecom customers. In addition, we sold the Shanghai BPA facility in Q2 of 2023 that had $45 million revenues in 2022, compared to $8 million in 2023.
We expect this market to be below longer-term forecasts of 2% to 5% growth in 2024, due to the softer start of the year. Next, I'll cover some details from the fourth quarter. This information is also available on Page 5 of our earnings presentation. During the quarter, our advanced technology and engineered products business, which includes HDI, rigid flex, RF subsystems and components, and engineered systems accounted for approximately 47% of our revenue. This compares to approximately 39% in the year-ago quarter and 47% in Q3. We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology and engineered products capabilities in new programs and new markets.
PCB capacity utilization in Asia Pacific was 51% in Q4, compared to 69% in the year-ago quarter and 46% in Q3. Our overall PCB capacity utilization in North America was 35% in Q4, compared to 41% in the year-ago quarter and 38% in Q3. The lower year-over-year rate in Asia Pacific was caused by a decline in production volumes, while the lower year-over-year rate in North America was due to additional plating capacity added as well as a greater mix of higher technology product that requires less finished plating. As a reminder, North America utilization figures are not as meaningful as Asia Pacific because bottlenecks in these volume facilities tend to occur in areas outside of plating, which is the core process that we use in calculating utilization rates.
Our top five customers contributed 44% of total sales in the fourth quarter of 2023, compared to 43% in the third quarter of 2023. We had two customers over 10% of our total sales in the quarter. At the end of Q4, Our 90-day backlog, which is subject to cancellations, was $575.9 million compared to $603.1 million at the end of the fourth quarter last year. Our book-to-bill ratio was 0.88 for the three months ended January 1st. Now Dan will review our financial performance for the fourth quarter. Dan?
Dan Boehle: Thanks, Tom, and good morning, everyone. I will review our financial results for the fourth quarter that were included in the press release distributed today, as well as on Slide 6 of the earnings presentation posted on our website. For the fourth quarter, net sales were $569 million compared to $617.2 million in the fourth quarter of 2022. The year-over-year decrease was due to declines in our automotive, medical, industrial and instrumentation and networking end markets, partially offset by growth in our data center computing and aerospace and defense end markets. The sale of our BPA facility in Q2 2023 as well as the previously-announced PCB plant consolidation also contributed to the decline in net sales. For the full year, net sales were $2.2 billion compared to $2.5 billion in 2022, a 11% decline was driven by declines in our commercial markets, partially offset by growth in our aerospace and defense end market, and a full year of the Telephonics acquisition.
The sale of the BPA facility in Q2 2023, as well as the previously-announced PCB plant consolidations, also contributed to the decline in net sales. GAAP operating income for the fourth quarter of 2023 was $34.6 million. GAAP operating income for the fourth quarter of 2022 was $97.6 million and included a gain of $51.8 million in December 2022 from the sale of the property occupied from our former Shanghai E-MS entity. On a GAAP basis, net income in the fourth quarter of 2023 was $17.3 million, or $0.17 per diluted share. This compares to GAAP net income of $6 million, or 6% per diluted share in the fourth quarter of last year. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes M&A related costs, restructuring costs, certain non-cash expense items such as amortization of intangibles, impairment of goodwill and stock compensation, gains on the sale of property and other unusual or infrequent items.
We present non-GAAP financial information to enable investors to see the company through the eyes of management and to facilitate comparisons with expectations and prior periods. Gross margin in the fourth quarter was 21.3% and compares to 19.8% in the fourth quarter of 2022. The year-on-year increase was due to a more favorable product mix and improved execution in the North America region, partially offset by lower sales volume and less premium in our commercial markets. Selling and marketing expense was $17.8 million in the fourth quarter, or 3.1% of net sales versus $18.8 million, or 3.0% of net sales a year ago. Fourth quarter G&A expense was $34.9 million, or 6.1% of net sales compared to $37.4 million, or 6.1% of net sales in the same quarter a year ago.
In Q4 2023, research and development was $7.3 million, or 1.3% of net sales compared to $6.4 million and 1% in the year-ago quarter. Our operating margin in Q4 was 10.7%, which compares to 9.7% in the same quarter last year. Interest expense was $12.9 million in the fourth quarter compared to $12.0 million in the same quarter last year. During the quarter, there was a negative $7.0 million foreign exchange impact below the operating income line. Government incentives and interest income of $3.6 million resulted in a net $3.4 million loss, or $0.03 negative impact to EPS. This compares to a net loss of $2.0 million, or a $0.02 impact on EPS in Q4 last year. Our effective tax rate was 4.1% in the fourth quarter, resulting in a tax expense of $1.9 million.
This compares to a tax rate of 6.5% or tax expense of $2.9 million in the prior year. Fourth quarter net income was $43.0 million, up $0.41 per diluted share. This compares to fourth quarter 2022 net income of $42.7 million, or $0.41 per diluted share. Adjusted EBITDA for the fourth quarter was $80.9 million, or 14.2% of net sales. Compared with fourth quarter 2022 adjusted EBITDA of $81.6 million, or 13.2% of net sales. Depreciation for the fourth quarter was $25.1 million. The net capital spending for the quarter was $46.0 million. Cash flow from operations in the fourth quarter of 2023 was $47.5 million. We repurchased 784,000 shares of common stock for $9.8 million, at an average price of $12.52 per share. Cash and cash equivalents at the end of 2023 totaled $450 million.
Our net debt divided by last twelve month's EBITDA was 1.6x, at the low end of our targeted range of 1.5 to 2 times. For the full year, cash flow from operations was $187.3 million, or 8.4% of net sales. Free cash flow for the full year was $27.5 million, or 1.2% of net sales as we invested in our Penang facility. Now I will turn to our guidance for the first quarter of 2024. We project net sales for the first quarter of 2024 to be in the range of $530 million to $570 million, and Non-GAAP earnings to be in the range of $0.24 to $0.30 per diluted share, which is inclusive of costs associated with starting up our Penang facility. The EPS forecast is based on diluted share count of approximately 104 million shares, which includes the dilutive effect of outstanding stock options and other stock awards.
We expect SG&A expense to be about 9.9% of net sales in the first quarter and R&D to be about 1.2% of net sales. We expect interest expense of approximately $12.3 million and interest income of approximately $2 million. Finally, we estimate our effective tax rate to be between 12% and 16%. Further, we expect to record depreciation of approximately $25 million, amortization of approximately $14 million, stock-based compensation expense of approximately $5 million, and non-cash interest expense of approximately $0.5 million. And finally, I'd like to announce that we were participating in the Cowen Aerospace and Defense Conference in Washington DC on February 13th, the JPMorgan Global High Yield & Leveraged Finance Conference in Miami on February 27th, and the JPMorgan Industrials Conference in New York on March 12th.
That concludes our prepared remarks. Now, I'd like to open up the line for questions. Operator?
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