TTM Technologies' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 5.13 | About: TTM Technologies, (TTMI)

TTM Technologies, Inc. (NASDAQ:TTMI)

Q4 2012 Earnings Call

February 5, 2013 4:30 PM ET

Executives

Diane Weiglin – IR

Kent Alder – CEO

Steve Richards – EVP and CFO

Analysts

Shawn Harrison – Longbow Research

Param Singh – Stifel Nicolaus

Steven Fox – Cross Research

Rich Kugele – Needham & Company

Jiwon Lee – Sidoti & Company

Chelsea Shi – UBS

Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to the TTM Technologies Fourth Quarter 2012 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions.

(Operator Instructions) This conference is being recorded today, February 5, 2013.

I’d now like to turn the call over to Diane Weiglin. Please go ahead ma’am.

Diane Weiglin

During the course of this call, the company will make forward-looking statements that relate to future events or performance. These statements reflect the company’s current expectations, and the company does not undertake to update or revise these forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied in this or other company statements will not be realized.

Furthermore, we wish to caution you that these statements involve risks and uncertainties, many of which are beyond the company’s control, which could cause actual results to differ materially from the forward-looking statements.

These risks and uncertainties include, but are not limited to, the company’s dependence upon the electronics industry, contemplated significant capital expenditures and related financing requirements, the company’s dependence upon a small number of customers, the unpredictability of and potential fluctuation in future revenues and operating results and other risk factors set forth in the company’s most recent SEC filings.

The company also will present non-GAAP financial information in this call. For a reconciliation of TTM’s non-GAAP financial information to the equivalent measures under GAAP, please refer to the company’s press release, which was filed with the SEC and which is posted on TTM’s website.

Participating on today’s call from our Hong Kong office is TTM’s Chief Executive Officer, Kent Alder; and from our Corporate Office in Costa Mesa, California is TTM’s CFO, Steve Richards.

I would now like to turn the call over to Mr. Alder. Please go ahead, Kent.

Kent Alder

Okay. Thank you, Diane. Good afternoon and thanks for joining us for our fourth quarter and fiscal year 2012 conference call. As in our previous calls, I will begin with a review of our business, and Steve will follow with a discussion of our financial performance, then we’ll open the call to your questions.

So let’s start with a review of the highlights from the fourth quarter. Net sales were $382.4 million. Gross margin was 16.3%. Non-GAAP net income was $21.5 million, or $0.26 per diluted share. For the fiscal year 2012, net sales were $1.3 billion; non-GAAP net income was $72 million, or $0.87 per diluted share.

So while we still have more work to do, we were pleased with the close of the year with better than expected revenue and earnings in the fourth quarter. We benefited from increased contributions from our advanced flex – our advanced HDI, flex, rigid-flex business, primarily for touchpad tablets and smartphones. While we did see an improvement in our networking end market, the overall demand environment for conventional printed circuit boards remained choppy.

During the fourth quarter, advanced HDI products represented 29% of our Asia Pacific segment’s revenue, up from 23% last quarter. By capturing multiple new programs for hand-held devices, we significantly expanded our business in HDI, substrate, rigid-flex and flex assembly. These product types accounted for approximately 60% of our Asia Pacific revenue in the fourth quarter, up from 45% in the first quarter of 2011. Achieving this level of progress in growing our advanced technology business is a solid accomplishment and is particularly important given the softer demand for conventional printed circuit boards.

I’d now like to quickly comment on the results of our operating segments for the fourth quarter. And then Steve will answer and provide more details later in the call. The Asia Pacific segment had sales of $259.4 million in the fourth quarter, a 20% increase from the $215.7 million in the third quarter. Gross margin for Asia Pacific was 15.7% in the fourth quarter, compared to 14.6% in the third quarter. The increase in gross margin was primarily due to multiple customer program ramps, which contributed to improved product mix and stabilized our capacity utilization.

Capacity utilization in our advanced HDI facilities in Asia Pacific, during the fourth quarter, was approximately 90%. Utilization for our conventional facilities in Asia Pacific was approximately 65%, and our blended utilization rate across all of our Asia Pacific facilities was 77%.

North America segment recorded fourth quarter sales of $123.9 million, essentially flat with the third quarter. Gross margin for North America increased to 17.4% from 16.8% in the third quarter. The improved gross margin was mainly due to product mix. Our capacity utilization in North America remained consistent with the third quarter, at approximately 65%. On a year-over-year basis, fourth quarter sales in Asia Pacific increased 18.7% from $218.4 million in 2011. In North America, sales decreased 14% from $144 million in 2011.

Now, moving on to our end markets, fourth quarter sales in our largest end market, networking and communications, comprised 30% of our total sales, compared to 29% in the third quarter. Sales in this end market were better than expected and increased sequentially due to improved demand, particularly in Asia Pacific. This is certainly a positive sign, but our visibility into sustained growth in this market is still limited.

Ongoing momentum will be depended on the macroeconomic recovery. And in particular on the timing of the 4G LTE network build out in China, which we expect in the second half of 2013. The networking end market will remain constant at about 30% of sales in the first quarter.

Computing/storage/peripherals is our second largest end market. Sales in this end market represented 23% of total sales, compared to 21% in the third quarter. Sales to touchpad tablet customers drove this increase. We also experienced improved demand from storage and high-end server customers. Sales to the computing end market will decline to approximately 21% in the first quarter.

Sales in the cell phone end market increased significantly in the fourth quarter, representing 17% of sales compared to 15% in the third quarter. Growth in this end market was fueled primarily by ramping of a new program for a key customer. Sales to the cell phone end market will decline to about 14% in the first quarter of 2013 but will be up significantly over the first quarter of 2012. Aerospace/defense end market represented 13% of fourth quarter sales, compared to 16% in the third quarter.

Sales declined during the fourth quarter due to program timing and slowing defense related demand resulting from customer uncertainty surrounding U.S. budget cuts and sequestration. We expect first quarter aerospace/defense revenue will increase on a dollar basis and will represent 17% of sales.

Medical/industrial/instrumentation end market represented 17% of sales in the fourth quarter, compared to 8% in the third quarter. This end market is expected to be about 9% of sales in the first quarter. Sales in the other end market were 10% of total sales in the fourth quarter, compared to 11% in the third quarter. On a dollar basis, sales were up modestly from the third quarter, primarily due to continued strong demand for wireless module, substrate printed circuit boards for handheld devices. We expect this end market to be about 9% of sales in the first quarter. The projected decrease in end markets is related to seasonality as well as facility closures for the Chinese New Year celebration.

Now I’ll talk about our customers. Our top five customers accounted for 40% of sales in the fourth quarter, compared to 31% in the third quarter. In alphabetical order, our top five OEM customers were Amazon, Apple, Cisco, Ericsson and Huawei. We had one customer who accounted for 19% of sales during the quarter.

ASPs increased 13% in Asia Pacific from the third quarter, reflecting a shift in our product mix toward more high technology products, including advanced HDI and substrate printed circuit boards. In North America, ASPs increased approximately 3%, primarily due to mix changes.

We focused our capital investments in 2012 on advanced HDI expansion and technological improvements. We invested approximately $55 million in the fourth quarter, which brings our full year to about $145 million. We believe the capital we have invested in prior years has provided TTM with the appropriate advanced HDI capacity to support our customers and capture additional opportunities. Therefore, we plan to reduce our capital spending to approximately $100 million in 2013.

We will focus our capital expenditures on improving and further diversifying our advanced technology position with capacity additions in our rigid-flex and substrate business, as well as continue to invest in productivity improvements, environmental compliance and maintenance.

Now before I wrap up my discussion, I would like to note that last weekend, we entered into a letter of intent with our minority partner to sell our remaining 70% interest in our SYE plant and to purchase the remaining 20% interest in our DMC plant. Both the SYE and DMC plants primarily manufacture conventional printed circuit boards, and are located in Dongguan, China. As part of our strategy to shift our product mix towards advanced technology products, this transaction will reduce our footprint for conventional printed circuit boards in Asia Pacific and should improve our capacity utilization and profitability.

We expect the transaction to close by the end of the second quarter of 2013. We anticipate this transaction will generate about $84 million net for TTM, and we expect to use $40 million of the proceeds to repay an intercompany loan.

In summary, we are generally pleased with our performance in the fourth quarter. We benefited from our broad customer engagements across our primary end markets. In addition, certain highly anticipated product launches during the second half of 2012 drove our improved results for the quarter.

Looking ahead to the first quarter of 2013, as in the past, we expect a seasonal decline in our business. We also anticipate that the macro environment will remain challenging. Our optimism about longer-term growth is anchored in the success we achieved in 2012 and deepening our customer engagements and expanding our product diversification despite current difficult business conditions.

As we regularly do, we will continue to evaluate actions to adjust our cost structure with an emphasis on plant optimization and efficiency improvements. These changes along with our leading positions in a broad range of end markets position us for future growth.

Now Steve will review our financial performance for the quarter. Steve?

Steve Richards

Thanks Kent and good afternoon everyone. Fourth quarter net sales of $382.4 million increased $43.4 million or 12.8% from the third quarter net sales of $339 million. Gross margin was 16.3% in the fourth quarter, compared to 15.4% in the third quarter.

Selling and marketing expense was $9.6 million in the fourth quarter, compared to $8.7 million in the third quarter. As a percentage of net sales, selling and marketing expense in the fourth quarter was 2.5%, down from 2.6% in the prior quarter.

Fourth quarter G&A expense was $28.7 million, or 7.5% of net sales, compared to $23.7 million or 7% net sales in the third quarter. Amortization of intangibles was $2.5 million in the fourth quarter, compared to $4.1 million in the third quarter. The decrease in amortization expense is due to the impairments we recorded in our intangible balance in the third quarter.

Operating income for the fourth quarter was $21.4 million, compared to operating loss for the third quarter of $202.7 million. Included in operating results for the third quarter of 2012 were non-cash charges of $218.4 million to write down goodwill, customer-related intangibles and property, plant and equipment. Excluding these asset impairment charges, operating income for the third quarter would have been $15.7 million.

The Asia Pacific segment’s fourth quarter operating income before amortization of intangibles was $17.6 million, compared to an operating loss of $206.8 million in the third quarter. Excluding the impairment charges, third quarter operating income before amortization of intangibles for the Asia Pacific segment would have been $11.6 million.

The North America segment’s operating income before amortization of intangibles for the fourth quarter was $6.3 million, compared to $8.2 million in the third quarter. Interest expense was $6.6 million in the fourth quarter, compared to $6.4 million in the third quarter.

Our effective tax rate in the fourth quarter was 21%, a decrease from the third quarter effective tax rate adjusted for non-recurring tax benefit of 24%. The decrease was due primarily to the greater contribution to pre-tax income of our operations in China, which bear a lower tax rate as well as non-recurring adjustments including a super R&D tax deduction for one of our Asia Pacific companies.

Net income attributable to stockholders for the fourth quarter was $15.7 million, or $0.19 per diluted share, compared to a net loss for the third quarter of $208.3 million, or $2.54 per share. Net loss attributable to non-inventory interest was $2.1 in the fourth quarter, due to a $3.3 million tax valuation adjustment, which increased net income attributable to stockholders by $0.04 per diluted share. Excluding the non-cash goodwill and asset impairments, net income attributable to stockholders would have been $7.5 million or $0.09 per diluted share in the third quarter of 2012.

Fourth quarter non-GAAP net income attributable to stockholders was $21.5 million, or $0.26 per diluted share. This compares to third quarter non-GAAP net income attributable to stockholders of $18.1 million, or $0.22 per diluted share. Non-GAAP net income attributable to stockholders adds back amortization of intangibles, stock-based compensation expense, non-cash interest expense, impairments, restructuring and other charges, and income tax effects related to these expenses.

Adjusted EBITDA for the fourth quarter was $50.3 million, or 13.2% of net sales, compared to the third quarter adjusted EBITDA of $36.5 million, or 10.8% of net sales. Cash and cash equivalents at the end of the fourth quarter totaled $285.4 million, an increase of $4.6 million from $280.8 million at the end of the third quarter.

Net debt was $289.6 million at the end of the fourth quarter, down $15.8 million from $305.4 million in the third quarter. Cash flow from operations in the fourth quarter was approximately $66 million. Capital expenditures for the fourth quarter were approximately $55 million. This reflects approximately $52 million for Asia Pacific and $3 million for North America. Depreciation for the fourth quarter was $24 million.

Now, let’s turn to our guidance for the first quarter. In the first quarter, we expect revenue to be in the range of $310 million to $330 million. We expect GAAP earnings attributable to stockholders in a range from breakeven to $0.05 per diluted share, and non-GAAP earnings attributable to stockholders in a range from $0.07 to $0.12 per diluted share. This is based on a diluted share count of approximately 83 million shares.

We expect that SG&A expense will be about 11% of revenue in the first quarter. We will record amortization of intangible expense of about $2.3 million. We expect interest expense to total about $6 million. We expect our blended tax rate to be approximately 20% in the first quarter.

Before we address questions, I’d like to mention that we will be participating at the Stifel Nicolaus Technology Conference at San Francisco on Thursday, February 7, the HSBC Tech Day in Singapore and Hong Kong on February 26th and 27th, and the UBS Smid Cap One-on-One Symposium in Boston on February 26th to 27th. We will provide further details in upcoming press release.

Now, I would like to turn the call back to Kent.

Kent Alder

Okay, thanks, Steve. As you probably have read in our press release, Steve will be leaving our company to pursue other opportunities. I want to thank Steve for his dedication and contributions over the past 12 years. He’s played a vital role in TTM as we have grown from two locations and approximately $100 million in revenue to 15 locations and $1.3 billion in revenue.

Steve will continue to be our CEO until March 2 and we wish him the best. I also want to welcome Todd Schull for the TTM executive team. Todd will be joining TTM as Executive Vice President on February 20, and then assuming CFO responsibilities on March 3.

And with that let’s move on to your questions. Operator?

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question is from the line of Shawn Harrison with Longbow Research. Please go ahead.

Shawn Harrison – Longbow Research

Hi, everyone. I wanted to focus in on the sale of SYE and the purchase of DMC. And maybe if I could get a little more granular detail in terms of what that will do to the fixed cost base in Asia and the potential earnings impact from the sale of that facility?

Kent Alder

Yeah, Shawn, this is Kent. Let me talk about that for just a few minutes here. And the SYE transaction will reduce our conventional capacity and put that more in line with our high-tech strategy focus. It will enable us to better focus our efforts and resources on high-tech printed circuit boards and will simplify our company’s structure, which is better for TTM and GSST. Certainly it will help us improve our capacity utilization and profitability and actually to better service customers.

So, the transaction itself, we believe is a very helpful to the future of our company and better positions us to serve our customers, and longer-term enables us to focus on those areas that are in line with our strategy, so that we can move the company in the direction that we need to move the company for the shareholders and for customers.

Shawn Harrison – Longbow Research

I guess, Kent, on the capacity utilization, if it’s 65% right now utilized conventional in Asia, what would that sale take the capacity utilization up to?

Kent Alder

Yeah. I think that would probably go – get us up to another 5% to 10%, again depending on product mix and how the other facilities are loaded. But it would make a nice difference in our conventional and the rest of our conventional facilities’ utilization goes up probably 5% to 10%.

Shawn Harrison – Longbow Research

Okay, that’s helpful. Second, just with the communications end market, and the growth you saw in the fourth quarter, you sound a little bit, I guess, suspective how that growth will continue into the first half of the year. Did you just see kind of a year-end slush of spending? Was it customer just building up some inventory? I guess what did you see in that business because it was up so substantially?

And then, I guess, a follow-up with that is, what was the mix of that business? Was there a lot of assembly within that, because the incremental margin seemed a little bit light?

Kent Alder

Yeah. I think, Shawn, you’re right. The more flex assembly we do that has a higher material content. So it does get outside of our normal printed circuit board business model.

So when you – we do more flex and flex assembly that we’ll probably begin to highlight that in the future and how that’s impacting, so you can have a comparison quarter-over-quarter. But that – that work in end market. We had pretty much some broad strength both in North America and Asia Pacific, but it was more pronounced in Asia Pacific. We think there is some signs of market momentum there. But in the fourth quarter it was more an inventory replenishment. That market momentum hasn’t continued into the first quarter.

So we’re a little hesitant on how that’s going but if you look at the orders, we had some activity that we haven’t had in that end market for quite some time. So I think that’s a positive sign, but I’m not sure we turn the corner and have a broad based recovery in that end market. That end market in Asia Pacific though, is continuing to do a little better, where in North America, we are back to kind of historical levels for the year.

Shawn Harrison – Longbow Research

Okay. Thanks, Kent. And Steve, all the best on wherever the road takes you.

Steve Richards

Thanks, Shawn. I appreciate it.

Operator

Thank you. And our next question comes from the line of Param Singh with Stifel Nicolaus. Please go ahead.

Param Singh – Stifel Nicolaus

Hi, thank you. This is Param Singh on for Matt Sheerin. So firstly, guys, what’s the book-to-bill that you have for each of the segments in a quarter? I know, I mean it’s slower because of the seasonality, but if you could give me a numerical number, that would be great.

Kent Alder

Yeah. Our book-to-bill in the fourth quarter was 0.99 in North America. And that’s right in line with the IPC book-to-bill of 0.99. I guess, a little more color on that; we had a pretty strong quarter in North America at 1.13 in December, for just that month alone and then it’s dropped off as we expected in January to 0.88. But you add all that up and we’re moving along pretty nicely on our book-to-bill.

In Asia Pacific for the fourth quarter, we’ve had a book-to-bill of 0.94. The month of December was 0.9, and then we picked up to 0.92 in January. So again that’s right in line with what you see in the third and fourth quarter in Asia Pacific with pretty strong bookings, and then we get to the end of the fourth quarter, we start to enter the seasonality portion of our business, and that’s where the decline came.

Param Singh – Stifel Nicolaus

Okay, great. And obviously you’re improving your structure to get your utilization back up. Now are you doing anything else? Are you thinking about shutting out some plants to improve that utilization because it seems networking is not coming back. I mean, we’ve been hearing about it, telecom improving since last year, and we still haven’t seen that?

Kent Alder

Yeah, I mean we’re always looking at our business and how do we match the – what the marketplace presents to us, how do we capture market share from our customers to get our – from our competitors to get utilization up. So we look at it on the work coming in, how do we get more coming in, as well as what do we do to adjust our current capacity. So the SYE, DMC transaction will certainly help. That’s not a rationalization, that’s a sale of our facility.

That will help capacity utilization. That’s the major action we’re taking. We’re looking at our other facilities and a couple of facilities on downsizing our workforce. And we’re always adjusting – looking at how we can adjust our capacity between our facilities to better match utilization with what’s happening there. So, that’s kind of the operational side of what we’re doing on the capacity utilization and improving capacity utilization.

We’re also, like I mentioned have seen some market momentum. So I’m not – we don’t want to adjust too much. Those adjustments, sometimes you don’t want to make a long-term adjustment for a short-term issue. So we are seeing some market momentum here. And when you look through the second half of the year on the conventional side, particularly in China with the 4G implementation, we expect that that will improve our utilization in the second half of the year.

Param Singh – Stifel Nicolaus

Great. And then one other question. Obviously you supply printed circuit board into Boeing, what impact do you see from the Dreamliners getting rounded and have you heard anything from the OEM itself?

Kent Alder

Yeah. No, we haven’t been notified of any issues with our TTM products. We’re pretty confident that our products are not involved with the battery and the power supply. So we’re continuing to supply product. I guess if that was to just totally halt, it would have maybe a $5 million impact to us over the course of the year. So for that particular program. As it currently stands at $5 million impact out of $1.3 billion sales is...

Param Singh – Stifel Nicolaus

Right.

Kent Alder

The relative size of that. So – but as – we’re just moving along as we have in the past.

Param Singh – Stifel Nicolaus

Okay, great. Thank you.

Operator

Thank you. And our next question is from the line of Steven Fox with Cross Research. Please go ahead.

Steven Fox – Cross Research

Thanks. Good afternoon guys.

Kent Alder

Hi, Steve.

Steven Fox – Cross Research

Just first of all in terms of capital investments for 2013, it doesn’t sound like there is a significant amount going into the advanced HDI side. So I was wondering, if you could just sort of talk about maybe how your utilization looks smoothed out over the course of the year right now? And I don’t know if you plan on improving efficiencies to get more utilization out of it but relative to maybe what your customers could – some of your top customers could be looking at, how do you plan on keeping up with sort of their demand as the year goes on?

Kent Alder

Yeah. Thanks, Steve. I think when you look at our CapEx investments over the past year or two, we’ve invested very significantly in the advanced HDI capabilities. And looking at our capacity that we have for advanced HDI, which services the smartphones and touchpad tablets, handheld devices, we’re fairly well positioned right now for the short-term future.

Now, as we look at some of the programs that we are doing samples for, involved with, if some of those programs ramp little faster than we have currently, then we’ll be looking at a new investment in advanced HDI. But for right now, advanced HDI capacity utilization to hit the peak parts of the year, I think, we’re in pretty good shape, where on the conventional side, again, we have utilization rates that are lower than we are satisfied with, at 65% that’s both in North America and Asia Pacific.

So, our CapEx program going forward on the expansion side, we’ll be more investing into the rigid-flex, the flex and flex assembly, and our substrate business. There is opportunities that are – that we’re capturing there, that will be kind of the growth engine for our business going through 2013. And if you look at advanced HDI, substrate, rigid-flex and flex that makes up about 60% of our total revenue in Asia Pacific, and that’s up from about 45% in the beginning of 2011.

So, those are the growth opportunities. Those are some of the more profitable opportunities we have. So, our CapEx will be focused on those. We do have some environmental requirements on waste treatment in Asia Pacific that we are investing in. Those are longer-term investments taking care of that this year than the normal maintenance and so forth. So we’re anticipating about $100 million I think, as we said in the script here to CapEx 2013.

Steven Fox – Cross Research

Thanks. That’s helpful, Kent. And then just one big picture question, your – this is a fairly meaningful transaction. It sounds like in terms of straightening out your own footprint, but it’s not really taking capacity out of the industry. You have companies like Flextronics that are consolidating their printed circuit board operations, also there has been some announcements out of individual plants there in the last few days. I guess, what I’m trying to understand is, do you feel like the conventional printed circuit board industry has hit some sort of bottom or do you need to see capacity come out relative to where the competitive dynamics are in sort of the long-term growth prospects? How do you see that playing out over the next year or so?

Kent Alder

Yeah, that’s a good question. And first, let me talk about TTM and with the SYE, DMC transaction, I think that puts our capacity for conventional printed circuits boards for our company in the right spot.

We’re pleased with the footprint that we have both in North America and Asia Pacific. And the technical capabilities of each one of those facilities, and how they enable us to service our customers. So we don’t anticipate any more changes within TTM. Now, we will look at each one of those facilities, and see how we can better utilize the capacity within those facilities by maybe adjusting one lower, one higher those kind of things and putting in a little more emphasis on technology in one rather than the other.

As you move to the marketplace itself for current market conditions, I think, clearly there is more capacity than in the industry than we need. I like TTM and how we’re positioned with our offerings to our customers with our capabilities, the relationships we have with our customers. So I truly believe that as we go forward, we’ll be able to win market share as the business and our industry goes through some consolidation. I think that will provide opportunities for us.

And I don’t know where the bottom of the market is but it does seem to be having some signs of life, some little bit of choppiness in there, but nothing that we would be totally optimistic about. So, it – I believe that it will get better and I think in 2013, we’ll see some better times than we have in 2012.

Steven Fox – Cross Research

Thanks for that. And Steve, best of luck, going forward.

Steve Richards

Thank you, Steve.

Operator

Thank you. And our next question is from the line of Rich Kugele with Needham & Company. Please go ahead.

Rich Kugele – Needham & Company

Thank you. Good afternoon, gentlemen. A couple of questions for me. First, in terms of the transactions for the facilities; how should we look at this for the second half on potentially changing your 17% to 19% gross margin target?

Steve Richards

Yeah, Rich, that’s a good question. We haven’t taken it all the way through and totally modeled that out. But as you look at our capacity utilization, and it kind of depends on what happens as we go forward with some of the work as it gets transferred to facilities. And there is a bigger and probably a broader impact of the overall marketplace that it certainly will, in 2013, improve our margins. But when you look at it on a longer-term basis, it gives us the ability to have a little more flexibility for our customers and improve our margins longer-term.

Rich Kugele – Needham & Company

Okay. And then, if I heard you correctly, I think that you were talking about defense being up in the March quarter, was that right? And can you elaborate a little bit on what you’re seeing in that market and the susceptibility to the contract could or could not happen?

Kent Alder

Yeah. You’re correct. We – our business in aerospace/defense in the first quarter will increase to – on a dollar basis as well as a percentage of our sales, will go back to 17% of sales in the first quarter. The sequestration is causing some issues with our customers around uncertainty. And there are certain programs that are involved in the modernization of the defense department. And those programs are the ones that are continuing. So we have a lot of involvement in those new programs or military modernization type programs, well positioned there.

So that’s, I think, why our business continues to do well in the aerospace and defense. And let me mention too that, of that aerospace and defense, about two-thirds of that business is defense. And so, if you look at two-thirds of 17%, you get a little more definition around defense, and a 10% cut there would be 1% to 2% impact in our total revenue probably on a worse case, if sequestration did happen then there was a 10% cut. But then it depends on the programs we’re on. So we take a look at the programs. We’re thinking that defense/aerospace business will be, I won’t say growing for us, but relative to the press that it gets, I think we’re in good shape there with our programs and with our ability to continue to win and move forward on the programs we’re involved with currently.

Rich Kugele – Needham & Company

Thanks and great quarter and want some of these trends continue.

Kent Alder

Thank you.

Steve Richards

Thank you, Rich.

Operator

Thank you. And our next question is from the line of Jiwon Lee with Sidoti & Company. Please go ahead.

Jiwon Lee – Sidoti & Company

Thank you and good afternoon.

Steve Richards

Hey, Jiwon.

Kent Alder

Hi.

Jiwon Lee – Sidoti & Company

Most of my questions were answered, but just wanted to ask you Kent, the 4Gs and the LTEs in China, your growth expectation for this year. Why second half?

Kent Alder

Well, I think the second half is certainty out of our hands and that depends on when the government releases licenses to our customers and then they start to build product. We are seeing some product orders right now for certain cities. And so, we’re pretty confident that in the second half that it will be a pretty significant increase for us. But that – that’s kind of out of our hands and then to win the licensers or issued and so forth.

Jiwon Lee – Sidoti & Company

Okay. That’s fair enough. And then you mentioned rigid-flex in Asia, including the HDI work, was in excess of a 60% of Asian revenue base. And looking into 2013, how should we expect that mix to sort of be up?

Kent Alder

Yeah, I don’t have any numbers for you, but it will continue to increase. And the business that we kind of group in that categories like the non-conventional, so you go to the advanced HDI, the flex, the rigid-flex, flex assembly and substrate business, we mentioned has grown to 60% of our business. And that’s driven by the smartphones, the touchpad tablets, the hand-held devices. So that’s the growing end market and the growing products that we have.

The good thing that we have is the ability to build flex, and the ability to build rigid, and then the ability to put those two together to provide our customers with rigid-flex. And that’s creating opportunities that are much more limited from a competition-wise basis. So there is less competition on those areas.

So as we continue to move our business forward, we’re going along those end products and that’s certainly in line with our high technology strategy. So, you’ll continue to see that percentage increase throughout 2013. And the other good thing is, if the marketplace would continue and we could get our conventional facilities up to a higher utilization rate that would certainly allow our financial statements to dramatically improve as we kind of eliminate the underutilization and continue to move forward on our advanced technology strategy.

Jiwon Lee – Sidoti & Company

That’s very sensible. And Steve, best of luck.

Steve Richards

Thanks, Jiwon.

Operator

Thank you. (Operator Instructions) Our next question is from the line of Amitabh Passi. Please go ahead.

Chelsea Shi – UBS

Hi, thank you this is actually Chelsea Shi on behalf of Amitabh. So I just want to follow-up on the SYE DMC deal. I just want to make sure I understand this deal totally. There will be some proceeds, net proceeds like, we estimate roughly $80 million, is that right or I’m missing something here?

Steve Richards

You’re right, Chelsea. It’s about $84 million. It’s what we expect to net.

Chelsea Shi – UBS

Okay.

Steve Richards

And of that $84 million, we’ll probably use about $40 million to repay an intercompany loan.

Chelsea Shi – UBS

Got you. Yeah. So that kind of build up the cash position to be above $300 million. So any plans to bring it back down to $200 million something or that’s kind of the ideal level you want to run the business – with cash position you want to run the business here?

Steve Richards

Yeah. So obviously with the additional net proceeds of probably about $44 million, we have a number of options that they can use it to fund, be about $100 million capital plan for 2013, we also can reduce our $370 million debt balance too. We don’t have any payments required in the term loan over the course of 2013, which is a nice option. We certainly can use it to repay debt. So we will evaluate the best use of cash, obviously it’s still just an LOI and not likely to close till the end of 2013. So we have some time to plan the use of those proceeds.

Chelsea Shi – UBS

Got you. That’s helpful. So, another question in terms of the G&A in the fourth quarter, it’s running slightly higher than the – either the previous quarter or just in terms of percentage comparing to the previous year. So I’m just trying to understand here is that mostly the year-end compensation related or there is something else into this G&A part? And also wondering going forward you mentioned about after the deal there will be some head count cuts. So I’m just wondering what levels of G&A you will expect for first quarter and going forward?

Steve Richards

Sure, you’ve got yet a couple of questions there, Chelsea. So, yes, G&A in the fourth quarter was higher than the third quarter. Keep in mind that the third quarter did include a rollback of much of our bonus accrual for management for the year. That was about $800,000 benefit in the third quarter. So third quarter is kind of a little artificially low.

In the fourth quarter about a $1.3 million of the increased expense was really related to the fact that we had more days, in fact a week longer number of days in the quarter. And then in addition, we had expenses for the annual dinners in China, the annual Chinese New Year celebration, that’s about $750,000. And then we did, as you noted in our question, have some increased bonuses for the plant staff and the plant management staff in China based on the significant uptick we saw in their performance in the fourth quarter, that was about $650,000.

So a variety of things happened this quarter. (Inaudible) too but those are by and large largest contributors to the G&A expense. It should be down to a more normal run rate in the first quarter. Although in the first quarter, since it’s the start of a new management year, we actually will be accruing for the bonus program again in Q1 of next year.

And we didn’t accrue that plan in Q4, since we are not apt to make a payout there. The staff reductions we’re talking about in North America earlier are pretty modest. They won’t have a significant impact in the near-term cost structure of G&A at least the G&A side, because most of employees would be in the cost of goods sold area. I think that should address all the questions you have asked?

Chelsea Shi – UBS

Yes, yeah. Definitely, it’s very helpful. So just a really quick on the tax rate, you – I think if I heard that correctly, you guided 20%, is that only for the first quarter or you pretty much have the visibility for the full year?

Steve Richards

I would say we don’t have really great visibility for the full year yet. The 20% is applicable to the first quarter. Many of our plants in China are eligible for and have applied for the high and new technology tax exemption, which reduced our tax rate from 25% to 15%. However, those benefits can only be recorded once the government has awarded you that certificate of that status. So in many cases, we accrue for our plants income at 25% for the taxes, but then can have a rollback benefit when those HNTE qualifications are awarded. So it’s a bit challenging to predict the timing of those things and therefore predict a tax rate for the full year. I think, a low 20% tax rate for the year is reasonable, but whether it’s 20% or 22% will depend on the timing of some other aspects.

Chelsea Shi – UBS

Okay. Got you. All right thank you.

Steve Richards

Sure.

Operator

Thank you. And I am showing there are no further questions. I’ll turn the call back to Kent for closing remarks.

Kent Alder

Okay, so I’d like to thank everybody for joining us on the call today. Just a few comments before we close here. The first quarter will have the normal seasonality involved with our business. 2013, we’re looking forward to improved conditions, because we’ll be able to better service our customers with our past investments and drive revenue with the capitalizing on our CapEx investment. So, we look forward to talking again in three or four months. Thank you, everyone, and we’ll see you next time.

Operator

Ladies and gentlemen that concludes our conference for today. If you’d like to listen to a replay of today’s call, you can dial 1-800-406-7325 with the access code of 4591672. Again, that number is 1-800-406-7325 with the access code of 4591672. We appreciate your participation, you may now disconnect.

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