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TTM Technologies, Inc. (NASDAQ:TTMI)

Q1 2010 Earnings Call Transcript

May 6, 2010 4:30 pm ET

Executives

Diane Weiglin – Executive Assistant

Kenton Alder – President and CEO

Steven Richards – CFO, EVP and Secretary

Canice Chung – CEO of Asia-Pacific Region

Analysts

Matt Sheerin – Thomas Weisel Partners

Shawn Harrison – Longbow Research

Amitabh Passi – UBS

Jiwon Lee – Sidoti & Company

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the TTM Technologies first quarter 2010 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) This conference is being recorded today, Thursday, May 6, 2010. And now I would like to turn the conference over to Diane Weiglin, Executive Assistant. Please go ahead ma'am.

Diane Weiglin

During the course of this call, the company 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 of various industries that the company serves and the impact of the current economic crisis and other risks described in TTM’s most recent SEC filing.

The company assumes no obligation to update the information provided in this conference call. 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 majors under GAAP, please refer to the company’s press release, which we filed with the SEC and is posted on TTM’s website.

I would now like to turn the conference over to Kenton Alder, President and Chief Executive Officer. Please go ahead Kent.

Kenton Alder

Okay. Thanks Diane. And good afternoon and thanks for joining us for our 2010 first quarter conference call. Joining me on today's call are TTM’s CFO, Steven Richards; and from Hong Kong, Tom Tang, Managing Director of the ; the Asia Pacific region; Canice Chung, CEO of the Asia Pacific region and Audrey Sim, Vice President of investor relations and business development for the Asia Pacific region.

I will begin with a review of the business, and Steve will follow with the review of the financial performance, and after that we will discuss Meadville, and then open the call up to your questions. Now before I discuss our first quarter results, I would like to offer a high-level view of where we stand strategically.

Over the course of 2009, we undertook several company transforming actions designed to strengthen TTM operationally and become a global company. With the closure of three North American divisions, we restructured our business to better align our footprint to North American demand, and we announced the combination with Meadville Holdings Limited printed circuit board business, a transaction that closed on April 9 of this year, involves us with one of the largest printed circuit board companies in the world based on 2009 revenue estimates. This is an exciting time for TTM.

With the restructuring largely complete and the combination with Meadville closed, we are well on our way to transforming TTM into a stronger world-class printed circuit board manufacturer with the scale, production capabilities, market breath and extended customer service to lead in today's competitive global printed circuit board business.

Okay, now moving on to our first quarter highlights. Gross margin increased for the second quarter in a row from 18.5% in the fourth quarter to 19.5% in the first quarter of 2010 due primarily to cost savings and improved capacity utilization achieved through our restructuring. Our balance sheet and cash position remain strong with an increase in our cash accounts of 7.2 million in the first quarter to a total cash position of $222.9 million.

Improved market conditions enabled us to have firmer pricing in our commercial business, while pricing in our aerospace and defense business benefited from a higher mix of technological products. Steve will provide more details later in our presentation. Now let me provide an overview of our operating segments for the first quarter.

Our printed circuit board manufacturing segment recorded first-quarter net sales of $122.9 million compared with $128.2 million net sales in the fourth quarter. The decrease was due to the closure of our Los Angeles facility, and a return to normal order patterns following a spike in demand at the end of the fourth quarter.

First quarter operating segment income was $10.5 million compared to $5.1 million in the fourth quarter. Fourth quarter operating segment income reflected charges of $6.7 million associated with our Meadville transaction, and our previously announced PCB plant closures. These costs totaled $2.4 million in the first quarter.

Excluding these charges, first quarter operating segment income was $12.9 million compared to fourth-quarter operating segment income of $11.8 million, an increase of $1.1 million or 9%. On a sequential basis, average price per panel increased almost 5% due to product mix and improved market dynamics as business has picked up.

For the backplane assembly, first quarter net sales were $21.7 million compared with $29.3 million in the fourth quarter. The decrease was primarily due to the winding down of our Hayward facility during the first quarter. First quarter operating segment income was $158,000 compared with $2.4 million in the fourth quarter. The significant decline in income was due to a $1 million [ph] operating loss at our Hayward facility.

Operating segment income reflected $368,000 in costs associated with the closure of our Hayward facility in the first quarter and $93,000 in the fourth quarter. Excluding these charges, first quarter operating segment income was $526,000 compared to fourth-quarter operating segment income of $2.5 million.

Now, I would quickly like to review our end markets. The aerospace and defense end market represented 42% of sales in the first quarter, unchanged from the fourth quarter. This reflects continued stability in this end market due to the broad base of customers and numerous programs we are involved in. We anticipate continued stability in the second quarter.

Networking communications decrease to 33% of sales in the first quarter from 38% of sales in the fourth quarter, primarily due to the order timing at the end of 2009. In other words, orders were rescheduled from the first quarter to the fourth quarter. Going forward, we anticipate a return to a more normal business and inventory levels that reflect a healthy order pattern.

Our computing storage peripheral end market increased to 13% of sales in the first quarter from 10% of sales in the fourth quarter. The increase was due primarily to strength from one of four large server and storage printed circuit board customers, as well as to a new backplane assembly customer at our Shanghai division.

The medical, industrial, and instrumentation and other end market also grew sequentially to 12% of sales in the first quarter compared to 10% of sales in the fourth quarter. As in past quarters, movement in this end market tends to be relatively broad-based due to the large number of small customers. However, we did experience somewhat stronger results from a few of our major customers in the medical and instrumentation portion.

Also let me mention that going forward, we will add cell phones and consumer products to our end market analysis, bringing the number of end markets that we report to 6. This reflects the broader customer base and end market diversification gained through the Meadville transaction. We will provide 2009 pro forma analysis of new end markets later in our presentation.

Moving to slide eight, our top five customers comprised 31% of net sales in the first quarter compared to 34% in the fourth quarter In alphabetical order our top 5 OEM customers were; BAE, Cisco, Hamilton Sundstrand, Huawei, and Raytheon. None of these customers represent 10% or more of net sales in the first quarter.

Lead times remained relatively stable at our commercial facilities. Add these facilities lead times ranged from 6 to 10 weeks, while lead times at aerospace and defense facilities were unchanged at 5 to 8 weeks. Keep in mind that some of our defense programs have 14 to 20 week lead times.

At the end of March, our printed circuit board book to bill ratio was 1.12 up from 1.08 at the end of 2009. As a reference, the IPC book to bill average at the end of March was 1.1.

In summary, our North American restructuring is generating improved margins. We became a global company as we completed the Meadville transaction, the pricing environment has improved, and we experienced continued strong order momentum. Now I will turn the call over to Steve to review our financial performance for the first quarter.

Steven Richards

Thanks, Kent, and good afternoon everyone. As Kent mentioned, our gross margin improved in the first quarter despite the decline in sales, which indicates that we are controlling costs better, and beginning to see some of the improved leverage from our consolidated US factory foot print.

As we anticipated, first quarter net sales of $138.2 million decreased $11.7 million or 7.8% from fourth quarter net sales of $149.9 million, due to the closure of our LA facility, as well as $4 million of shipments accelerated from the first quarter into the fourth quarter.

Gross margin for the first quarter of 19.5% increased from fourth quarter gross margin of 18.5%.

Selling and marketing expense increased to $6.7 million in the first quarter from $6.5 million in the fourth quarter due primarily to increased commission expense. As a percentage of net sales, selling and marketing expense in the first quarter increased to 4.9% from 4.3% in the fourth quarter.

First quarter G&A expense, including amortization of intangibles decreased to $9.8 million or 7.1% of net sales from fourth quarter G&A expense, including amortization of intangibles, of $11.9 million or 8% of net sales.

First quarter G&A expense included $1.8 million in costs related to the Meadville transaction. These costs totaled $4 million in the fourth quarter.

During the first quarter, we recorded restructuring charges of $50,000 related to the closure of our Hayward facility. In the fourth quarter, we recorded restructuring charges totaling $481,000 primarily related to the closure of the Los Angeles facility.

In the first quarter, we recorded an asset impairment charge of $0.5 million, reduced the carrying value of our Dallas, Oregon facility, which we closed in 2007.

Operating income for the first quarter was $of 9.4 million compared to $6.6 million for the fourth quarter. Excluding plant closure and transaction costs, first quarter operating income was $12.6 million.

Our effective tax rate declined to about 37% in the first quarter from about 44% in the fourth quarter, when we recorded a true up of the full year 2009 tax provisions.

Net loss for the first quarter was $4.5 million or $0.10 per diluted share compared to fourth quarter net income of $2.4 million or $0.05 per diluted share. Excluding plant closure and transaction costs, net income for the first quarter was $6.2 million or $0.14 per diluted share.

First quarter non-GAAP net income was $8.6 million or $0.19 per diluted share. This compares to fourth quarter non-GAAP net income of $8.3 million or $0.19 per diluted share. Non-GAAP net income excludes amortization of intangibles, stock based compensation expense, non-cash convertible debt interest expense, asset impairment and restructuring charges, inventory write down, costs related to Meadville Holdings transaction and miscellaneous closing costs, as well as the income tax effects related to these expenses.

Adjusted EBITDA, which excludes asset impairments charges, for the first quarter was $15.1 million or 10.9% of net sales compared with fourth quarter adjusted EBITDA of $14.9 million or 9.8% of net sales.

Looking at our balance sheet we continue to build cash. Cash and cash equivalents, restricted cash, and short term investments at the end of the first quarter totaled $222.9 million, an increase of $7.2 million from $215.7 million at the end of the fourth quarter. Restricted cash represents the funds we set aside to complete the Meadville transaction.

Cash flow from operations in the first quarter was $6.3 million. Capital expenditures for the first quarter were $3 million, offset by $3.4 million in proceeds from the sale of equipment in one of our Redmond, Washington, buildings.

Depreciation for the first quarter was $3.9 million.

Now I would like to turn the call back over to Kent to give an update on the Meadville combination.

Kenton Alder

Thank you, Steve. Let me take a moment to remind you of the strategic rationale for the TTM and Meadville combination. From the pie chart on the left, you can see that we now have all the components to our global strategy in place. Meadville met all of our M&A criteria, including an excellent management team with deep experience in China and leading growth and margin profile.

Furthermore, a common business philosophy of being profit driven, cost control focused, customer centered and growth oriented enables us to work together for maximum results. Our technological capabilities are a solid fit, and we have already begun to exchange best practices. Now with the completion of the transaction, all the components of our global strategy are in place.

The next slide illustrates our total solution approach to servicing our customer needs throughout the entire product life cycle. With Meadville we now have the ability to service customer needs in all phases of the product life cycle, from prototype to production volume. By providing a true one-stop solution we create value for our customers and win business that we would not otherwise be able to win.

To the next slide, we have integrated and aligned our operations to form a structure that allows for consistency in management and coordination between Asia and North America. Maintaining the Meadville management team was of vital importance in this transaction. We were very pleased that the existing team will be in place to continue to run operations in China, and support the overall organization with their experience and knowledge.

The next slide illustrates the diversification that we have achieved both geographically and in our end market. On a pro forma basis, Americas will represent 39% of TTM sales, and Greater China will represent 45%. On an end market basis, the pro forma for the combination, networking is the largest end market at 37% of 2009 sales. Aerospace and defense represents 21%, and computing storage and peripherals are 18% of sales.

This added diversity will allow us to fully participate in the growth under way throughout Asia, which represents approximately 55% of total sales. We expect the Meadville combination to improve our financial results, and we estimate that the transaction will be accretive in the third quarter of 2010. Over time, we expect to generate additional revenue, not only from existing customers, but also from new customers. Of course, this will be a gradual process.

Since the deal closed, we have been discussing our broader manufacturing capability with our customers, who have been very receptive to the combination. However, our Asian facilities are currently running at high capacity utilization levels, which may limit our ability to take on new work from our US customers. The qualification process varies by customer. So our current cross selling efforts will focus on customers with a less rigorous qualification process, while positioning the customers with a more comprehensive qualification process to be brought on later in the year and in 2011.

By having global capabilities and providing our customers with a total solution, we expect to grow revenue with new business from existing customers and from new customers. We do not expect to relocate any business from our North American facilities to Asia. In fact, this combination will enhance our ability to increase business in most of our facilities.

And as you know, this transaction was never driven by cost synergies. Although we can reduce some public accounting costs, we will face some increases with Sarbanes-Oxley compliance in Asia, as well as the cost of adding new directors and other administrative costs. Nevertheless, our increased scale should enable us to develop win-win strategies with our suppliers leading to cost reductions. We will provide an update on both revenue and cost synergies at our next earnings call in August.

We issued 6.3 million shares to Meadville’s shareholders. About 70% of those shares will continue to be owned by the Tang families, who have agreed not to sell their shares for 18 months following the close of our deal. Meadville’s other minority shareholders have decided to retain all but approximately 1.3 million of the shares they received in this transaction. The Tang family, TTM’s largest minority shareholder will own 33% to 35% of TTM’s outstanding shares.

TTM is gaining new directors because of the Meadville combination. First off, we would like to welcome Tom Tang, the former chairman of Meadville Holdings to our board. Tom will serve as managing director of TTM’s Asia-Pacific region. In addition, we will appoint three new directors to our board, who will serve on a government security committee. The government security committee will have responsibility for ensuring that TTM maintains the appropriate policies and procedures that will continue to protect our sensitive and export controlled information.

Now let me turn the call back to Steve to discuss our pro forma financials, and our second-quarter guidance.

Steven Richards

Thanks, Kent. Looking at our pro forma financial statements it is clear to see this deal will transform TTM. Have we been together during 2009, our revenue would have been $1.2 billion with the gross margin in excess of 20%? Our operating and net income also would have been significantly higher.

The next slide shows the final transaction costs. We paid $114 million in cash and issued 36.3 million shares with a market value of $329 million on the day the deal closed. We also assumed about $433 million in debt for total purchase price of approximately $876 million. That reflects a multiple of about 7.6 times Meadville’s adjusted 2009 EBITDA. TTM now will have pro forma leverage ratio about 3.3 times, which we expect to bring below 3.0 in our first year together.

Before I discuss our second-quarter outlook, I like to give you a quick update on Meadville’s first quarter 2010. Meadville had a book-to-bill ratio of 1.2 in the first quarter. In general, sales by end market were steady as the percent of revenue. The company benefited in the computer end market, in new product and new design launches by major customer. In response to increased capacity constraints, Meadville launched a capacity expansion program, which would come online in the first quarter of 2010, and is expected to increase revenue by approximately 10% to 14% in the first quarter of next year.

For the second quarter of 2010 onwards, we will provide guidance for the combined operations of TTM and Meadville. Please note that the transaction closed 10 days into our second quarter, and we have modified our guidance as well as our share account expectations to reflect that.

We expect revenue in a range from $290 million to $310 million. The increase is primarily due, of course, to the inclusion of Meadville, but also reflects increased PCB sales to TTM’s commercial customers in the US. We expect GAAP earnings in a range from $0.03 to $0.12 per diluted share, and non-GAAP earnings in a range from $0.16 to $0.25 per diluted share.

Our diluted share account from the second quarter should be approximately 76.5 million shares, reflecting the 36.3 million shares be issued to Meadville shareholders. Our gross margin percentage is expected to be in a range between 17.5% to 19.5%. Purchase accounting rules require capitalizing the profit component of acquired inventory, which will increase cost of goods sold by approximately $4.5 million in the second quarter.

We expect SG&A expense, including amortization intangibles will be about 14% of revenue in the second quarter. This reflects $7.7 million in transaction costs, and combined amortization intangibles of about $3.3 million. We also expect to record a restructuring charge of about $400,000. This represents the remaining few months of lease expense on our closed Hayward facility.

We expect our blended tax rate to be approximately 25%. Please keep in mind that we have not completed purchase accounting for the acquisition, nor the required opening balance sheet audit. Changes to these balances would impact projections I discussed here.

With that, let’s open the call to your questions. Alisha.

Question-and-Answer Session

Operator

(Operator instructions) We do have a question from the line of Matt Sheerin. Please go ahead.

Matt Sheerin – Thomas Weisel Partners

Yes, thanks, and good afternoon everyone. So, just looking at – let's start on the revenue side. So, the revenue guidance basically excludes 10 days or I'm not sure how many business days of Meadville. So the run rate is higher, is that right?

Steven Richards

Yes, you are exactly right Matt. So, 10 days of Meadville’s revenue was obviously stayed with them in their stub period for the first part of April.

Matt Sheerin – Thomas Weisel Partners

Okay. And the gross margin guidance, 17.5 to 19.5, that included the inventory costs. So on a pro forma basis, would that be higher, then? Will be back – would it be over 20%?

Steven Richards

No, the range – if you add the $4.5 million of inventory with the lost profit component, because of the efforts of accounting rules, you would up those margins. They are in the bottom end of the range. It will still be just under 20, but you definitely can add that 4.5 million back safely as you look ahead for Q3 and Q4, because all the purchase accounting impact of inventory will be flushed through the system in…

Matt Sheerin – Thomas Weisel Partners

Okay, so it will be more like 19.5% to 22.5% or something like that?

Steven Richards

Yes, that is probably right. That actually will be the math, but that sounds right.

Matt Sheerin – Thomas Weisel Partners

21.5% [ph], okay. And then on SG&A, you said 14%. That includes $7.7 million charge of costs?

Steven Richards

That is not a normalized rate at all. So if you get the backflows out, you can get a much better sense. And keep in mind that includes amortization intangibles and we have pretty significant largely customer intangible related to this transaction because of the new customers we are gaining in the Meadville acquisition. So we have about $2.5 million per quarter for this year of amortization of the Meadville intangibles, along with our standard of about $800,000 for legacy TTM. So, about 3.3 million or so.

Matt Sheerin – Thomas Weisel Partners

Okay. So, $3.3 million. And okay so and then the S&A – if you back out the 7.7, and then the amortization but then you still have to add a couple of weeks worth of costs that you're not counting because you closed the deal late, right, for the September quarter?

Steven Richards

It is exactly right. Also didn’t get into revenues, so probably if you adjust out the $7.7 million in acquisition costs, and understand the intangibles what they are, you probably can get to a pretty good percent of revenue and apply that to the revenue run rate for say Q3 and Q4.

Matt Sheerin – Thomas Weisel Partners

Okay. And just last question for now, just regarding the Meadville outlook. It sounds like business is strong but sounds like there's capacity constraints. So is Meadville relatively capped in terms of upside for revenue over the next two to three quarters until that capacity comes online?

Kenton Alder

Matt, this is Kent. I think I will let Canice Chung answer that question.

Canice Chung

In our Q2 update, operation we are pretty capped to above 95% maximums of the utilization, okay. And looking ahead, we already well plan ourself for two of our plants, one in Guangzhou and one in (inaudible) to expand ourself, which we expected all the installation of machines completed with the Q3. So, by the end of this year on an annualized basis, we should be able to increase of capacity by about 15%.

All in all, I'm trying to say if you can analyze it on the mix shift, we should be able to grow our capacity by about 15% to 18% range in a full year basis (inaudible) looking ahead there.

Matt Sheerin – Thomas Weisel Partners

Okay. But in the meantime then, there's not much room to grow unless you increase pricing or use some alternative manufacturing?

Canice Chung

It is true that in the same quarters of the business, we are running to about 95% of the capacity utilization, looking ahead we have the new capacity for the (inaudible) that may account for about a single digit growth, because it won't be running the two quarters, but in Q4 of 2010 it will be effectively 15% growth already.

Matt Sheerin – Thomas Weisel Partners

Okay, so by Q4 you'll have the capacity in place. Okay. And then could you tell us what end market where that capacity is dedicated toward? Is that on the computing side or the handset side?

Canice Chung

In fact, our capacity expansion is roughly classified into two. One is HDI capacity and another one will be a conventional highly [ph] account. As with conventional highly account they are dedicated to communication infrastructure, very much similar to that of TTM manufacturing in the USA. We are seeing a huge outsourcing trend into Asia. For the HDI box, these are linked either to the high end mobile, the PDA phone types or even to high end consumer like iPod types of things, iPad types of things, as well as for some signs of the system, they are also running into one plus 12 plus one, or one plus 14 plus one types of HDI box. The capacity includes covering both of these technology capabilities for the plants.

Matt Sheerin – Thomas Weisel Partners

Okay, thank you very much.

Canice Chung

Thank you.

Operator

The next question is from the line of Shawn Harrison with Longbow Research. Please go ahead.

Shawn Harrison – Longbow Research

Hi, good afternoon. A number of questions. What is, I guess, the consolidated incremental gross margin going forward, Steve?

Steven Richards

The incurred gross margins?

Shawn Harrison – Longbow Research

Yes.

Steven Richards

I would say, historically for TTM it has been 40% to 50%. It will be lower level for Meadville because they don’t have the same fixed cost of labor that we have. On a blended base they are probably expected to be in the 30s, but we actually have to do some more math, and one we get through the purchase accounting adjustments to get a clean, new balance sheet projections for Meadville. But probably diluted down to more like 30s.

Shawn Harrison – Longbow Research

Okay. In terms of the SG&A guidance as well as the non-GAAP guidance, what is the total stock-based compensation number that we should be using going forward to back out of the numbers?

Steven Richards

In our G&A expense, we include about $1 million for stock based comp for TTM legacy, and about $300,000 for Meadville. Now, the Meadville employees could be eligible for stock-based awards in the future that of course have not been awarded yet in the first month. So that could affect the number in future quarters, but for this quarter it is 1.3 in G&A and a very similar number to what you saw in the financial schedule for cost of goods sold and selling.

Shawn Harrison – Longbow Research

Okay, so maybe about $400,000 to $500,000?

Steven Richards

(inaudible)

Shawn Harrison – Longbow Research

Yes, I think that's what you did in the first quarter.

Steven Richards

That is about right. I am looking at the schedule right now.

Shawn Harrison – Longbow Research

I think it was like $450,000 in aggregate or something like that.

Steven Richards

328 was our cost of goods sold number for first quarter and about – more like 450, but…

Shawn Harrison – Longbow Research

Okay. In the presentation, I know there was at least for Meadville, and this is also for the North American business, some commentary on raw material prices going up, particularly I'm guessing tied to movement in copper prices. If you can maybe just give an update on how pricing – or what you're seeing in terms of raw material costs – what do raw materials represent as a percentage of COGS in North America and Asia? And when do you expect to be able to recoup the increases in raw materials?

Kenton Alder

Yes, Sheerin, certainly if you look at the price of copper and then look at some of the laminates suppliers, there is some glass shortage issues, and what raw materials that go to (inaudible), and so prices are going up to do that. And as we look at those prices and how it impacts our business, it becomes imperative for us to start talking with our customers, and having them understand as our costs go up, we need to work with our customers to negate some of those cost increases.

So in North America it happens a little more gradually, because we're floating on a kind of an event by event kind of basis, but as we look at our cost structure and look at the cost, we are working hard to pass those on to the customer, but it is a customer by customer basis, if you will. I think in Asia, it is pretty clear that almost all of the printed circuit board companies, if not all, have been raising prices to their customers. So, Canice can you add some more color, particularly with regards to Asia on that issue?

Canice Chung

Sure. The laminate because it is driven by the demand, and the general recovery of the economy that is driving the utilization higher, that the prepared laminate has gone up quite a bit to as much as about 8% to 10%, and then we have been trying, all PCB manufacturers are trying to push back certain of the impact to the customers. And more than that is our (inaudible) that we will be moving ourself further out in the technology training, that apart from the year of 2009 because of the very exceptional financial crisis or whatever (inaudible) that our training has been slightly distorted.

We are able to continuous upgrading our average lead time, and so ASPs every year in the past five years. Okay, so our valued added things will be more than enough to compensate on the margin erosion, on cost, not only on raw material, (inaudible) inflation cost in China.

So, looking ahead TTM's merger with Meadville, the total together with the TTM they're leveraging on the sales network in the US continent, as well as in Europe continent. We are confident the same strategy will be in place or even more effective than before. And we're looking for value-add to compensate on the cost, rather than just passing on the cost back to the customers there.

Kenton Alder

Good, and Shawn let me add, when you look pricing and market conditions in North America, and probably on a global basis also, we are also to firm up on some of our prices, because market conditions are pretty solid right now. And as you look at the combination of TTM and Meadville, the pure mass that that brings to us will be able to provide some win-win situations to our suppliers, giving them more volume and us being compensated in a reduction of price. So there are some efforts that were being taken here to compensate for the increase in raw materials.

Shawn Harrison – Longbow Research

Okay. I'll hop back into the queue and let others ask a few questions.

Kenton Alder

Thanks Shawn.

Operator

(Operator instructions) We do have a question from the line of Amitabh Passi with UBS. Please go ahead.

Amitabh Passi – UBS

Hi, thank you. Just a quick question on the segment performance, Kent, a little surprised to see your networking segment down almost 20% QoQ. I know you tried to explain part of that being due to orders being pulled into the fourth quarter, but I was hoping you could add some color to that. And then maybe you could also shed some light in terms of what you meant about the segment returning to more stable levels going to the June quarter. If you could give us an indication in terms of your expectations for growth sequentially – any additional information would be helpful.

Kenton Alder

Okay, yes, thanks. Probably the biggest impact on the network and communication, when we got to the end of the year in 2009, we had some pull in, due to I think some inventory replenishment as well as we were closing some facilities, so there were some last order buys that when you compare the fourth quarter to the first quarter, it is a little bit overstated in the fourth quarter and a little but understated in the first quarter.

So where we went from 38% of sales in the fourth quarter to 33% that is kind of an overcorrection. So we won't have those kinds of pull-ins or unusual ordering patterns as we go forward, and we would expect the network and communications to return more towards the 35% level of sales. And that happened in printed circuit boards, but also was more impactful in our backplane assembly segment where a customer rescheduled some orders there.

So if you take a look at our end markets with network and communications increasing a couple of percentages to 35 that is more normal. The aerospace and defense should run consistently at 4% to 2%, and then the other two smaller segments will probably come down about a percentage a piece. So, so that is kind of how the end market would break out going forward and that – keep in mind that is just for the TTM North America.

From the next quarter, we will be reporting for 6 segments, and I think you will get a better picture of the diversity of our combined company here going forward.

Amitabh Passi – UBS

Are you able to give us any sense of what the organic growth is implied in your guidance from March to June?

Steven Richards

Yes, I can give some color on that. I mean, we obviously will be looking at segments in the future to be a bit different than what we have now in terms of (inaudible). We will probably do more of a US and Asian look. So, if you look at say our legacy TTM, which of course, includes the Shanghai, we will be up as I said in the script about 5% in our commercial plants. It is pretty stable at aerospace and defense.

In the aggregate, I think we will probably be at the legacy TTM operations up to about $142 million, maybe low 142s for revenue, versus our $138.2 million we saw in the first quarter. And that actually is overcoming a bit of a downside with the closure of the Hayward plant and the reduction of about $2 million in revenue from that plant assembly.

So, 138 up to about 142 should be a good bump that reflects the better US economy and demand for boards here.

Kenton Alder

Yes, we are seeing some significant, I guess, improvement in market conditions both as our prices firm up and order patterns, backlogs, lead times, just not much but extended just slightly there. And that is in North America. Then when you look at Asia and China, it is still a pretty hot marketplace over there with the economy still doing well, which will have an even more growth in Asia.

So, Canice if you have some more color to add to those comments with Asia, go ahead.

Canice Chung

Sorry. I didn't catch what you just said.

Kenton Alder

What I said, Canice was that the growth in North America is pretty solid, but when you look at China, I mean growth in our business certainly from the fourth quarter to the first quarter, and what we are projecting from the first to the second quarter we are having much higher growth rates than what we are experiencing in North America.

Canice Chung

In the Asia business, there is a slightly different cycle versus that of 2009. We saw very strong of the – business recovering. Upon the recovery of the global economy, as on the other hand in 2009, we (inaudible) by a bit of the low cost China business to (inaudible). But in the 2010, the business cycle was totally worse. We saw that we are enjoying or sharing the same segments of business that TTM has been enjoying, exporting to a lot of the OEMs globally. Whereas on the other hand, the China business has slowed down quite a bit versus that of the 2009 results, because they have been pulled ahead quite some of the infrastructure expenditures in the year 2009.

Having said that, the overseas business has been more than enough, okay, to offset the slowdown in the local business versus 2009. So, all in all, our (inaudible), we are expecting close to 15%, 20% growth in the revenue line in the second quarter over the first quarter there.

Amitabh Passi – UBS

But just on the China business, I mean, as you look through the rest of the year, any expectations of that picking up? And then, Steve, I just had a couple of – sorry, go ahead.

Canice Chung

I think the China business will come back to reasonable level in the Q3, because all along from the seasonal standpoint, China business we see in Q1 and Q3, that Q2 will be a conventional of the lowest season all along. So I'm not surprised at all that we are also hearing the customer’s enquiry again and a lot of the (inaudible) or whatever, and we should be able to see the China business even stronger in the third quarter. And this is one of the reasons we're preparing ourself for both the pickup of the local business and overseas business in Q3 with renewed additional capacity to be in place.

Amitabh Passi – UBS

Got it. And then this is my final question, Steve, any thoughts around CapEx for the full year? And then how do we think about the impact of gross margin as additional capacity comes online?

Steven Richards

In terms of the CapEx program, legacy TTM’s program are up $15 million for 2010, (inaudible) is significantly higher. Canice can probably give you full year numbers for 2010 for the Asian business, but of course keep in mind that that is part of that would've been in the first quarter for them on their set of books before they come to us. Canice can you give us a sense of the CapEx budget for Meadville.

Canice Chung

For the full year, (inaudible) that we are able to set up everything regarding the business development. I think we will spend in the range of about $70 million to $80 million range for the full year.

Steven Richards

And that of course, will reflect on the top a piece, but they have already spent for the first quarter, we will get that number for you later on?

Canice Chung

Yes. It will be about 10 million, 15 million has been spent in the first quarter.

Steven Richards

Great

Amitabh Passi – UBS

And then impact on gross margin as additional capacity comes online?

Steven Richards

No, it is like, certainly it is like the gross margin would be added on as a same, at least the same level if not better, and certainly we know in our business that we have a very large fixed cost base, both in labor, especially in equipment especially in Asia. So I think you will get better absorption going forward after the stuff comes online, but keep that Canice has already said, you won't get a full run rate in the third quarter, because it will just coming online then. And then even in the fourth quarter, there may be some – online, bringing things up, and bringing things online, efficiency issues.

I think that in the first quarter, you will probably start seeing really some beneficial margin expansion coming from that additional CapEx.

Amitabh Passi – UBS

Okay, thanks, guys.

Operator

The next question is from the line of Jiwon Lee with Sidoti & Company. Please go ahead.

Jiwon Lee – Sidoti & Company

Thanks. First off, kind of going back to the North American networking and communication side of the business, I wonder whether or not the dynamics or the order patterns are different among your different tiers of customers there?

Kenton Alder

Yes, certainly within the network and communications end market, I mean there are hundreds of customers there. And they are all coming from kind of different portions, but certainly those that are associated with the internet and some kind of infrastructure seem to be growing at a more rapid pace.

Jiwon Lee – Sidoti & Company

Okay, great. Well, that's helpful. And then I missed out on Steven's comment on the TTM side of the CapEx plan for this year.

Steven Richards

Yes, we are planning to spend 15 million a year in TTM in North America.

Jiwon Lee – Sidoti & Company

Okay.

Kenton Alder

And one other comment on our CapEx here at $15 million, this is probably the first time in a number of quarters that we're looking to spend CapEx for expansion purposes. I mean historically in the last three of four quarters, it has been to maintain or move into different technologies and so forth. But we are now looking to see if we can expand for capacity purposes with CapEx investments.

Jiwon Lee – Sidoti & Company

Okay. And then onto the China side, just wanted to make sure that I understood correctly that some of the softness on the networking and communication side was nothing outside of some seasonality that they were seeing, and then thinking about the expansion in the second half, would the expansion be sort of a 50/50 split between high density interconnect and the high layer count work? Or would there be some other work?

Kenton Alder

Okay. Canice, I think that is your question.

Canice Chung

From the Asia pacific standpoint it has all along been the company (inaudible) between to have about 35% to about 38% of the HDI business, the mix is a good mix of the above 60%, 70% of the commercial high layer accounts of the business. So going ahead, we are still protecting this mix of the things that we don't foresee, okay, now they can transform the design of the conventional high network to that the HDI application, because the low order OEMs also worry about the capacity constraints.

So our capacity expansion will be with a good mix, okay, of the customers in terms of the HDI [ph]. So it will be likely to be about as much as about 60% odd percent will still be maintaining (inaudible).

Jiwon Lee – Sidoti & Company

Okay, that's helpful. And then lastly for me, I wonder whether there were significant margin differences between the networking, communications, the handset and computing from the Meadville?

Canice Chung

There is no doubt. The higher the conventional part that we had been manufacturing, the higher contribution as well as margin. Regarding the HDI [ph] of the business there, the handset is also classified into two types, one is very conventional types of the 1 plus one, more compatible. And they are looking into more commodity type projects, and the group is also migrating (inaudible) two layer plus or even three layer plus of the HDI, as well as the very large formats of the system HDI one plus, (inaudible).

The margin is equivalent to that of very highly conventional. And then the group is also shifting and migrating ourselves in this. We have more of the n plus n of the HDI to or even (inaudible) the design they require (inaudible). That the margin as well as the ASP that we get from these types of products are even higher. There is no doubt. In general, the HDI better has more than that of the conventional better if you compare it from the same layer standpoint.

Jiwon Lee – Sidoti & Company

Okay. That's helpful. And one more thing, the customer qualifications. Can you give us some sense as to the shortest time to perhaps – what is the realistic timeframe for most of these qualifications to be done?

Kenton Alder

Okay. That is a pretty wide difference in customer qualifications and so forth. On some of the more basic qualifications that could be giving out a price, maybe us doing a survey sometimes a sample board, and then a customer will allow you to move that board into the right facility.

With the larger, more blue chip type customers it becomes a much longer process and can go 2, 3, 4, 5 months before you go through a plant survey. You submit sample boards. You go through a pricing exercise. And there can be sample boards of different natures and so forth and that can be quite a long process. So, where we are at today with TTM is the facilities in China are near capacity. So, we are looking at customers that have the more basic qualification process to move to China.

And that will allow our facilities in China to stay focused on producing boards and satisfying customers. And as we go forward longer term, we will start to go through some of those longer qualification processes. So the exciting news is as we talked about our combination with our customers, there was not one that said this is not – they were not favorable.

Everyone was very much in favor of the transaction. Everyone is looking to find a home for some new products that is not currently within TTM. So there is a lot of opportunity out there as soon as we can add capacity. So we're going to use the capacity now to service the current customers and current base and bring on new ones as we go forward. But we are certainly well positioned to grow our business.

Jiwon Lee – Sidoti & Company

Perfect. Thank you very much.

Operator

And our final question comes from the line of Shawn Harrison with Longbow Research. Please go ahead.

Shawn Harrison – Longbow Research

Hi, I've got a number of follow-ups. What would be the combined depreciation number now for the two companies?

Steven Richards

I can give you a ballpark for that Shawn, but just keep in mind that that is probably that big as it should, and still be resolved in purchase accounting and be quantified. It is probably going to be about $17 million to $19 million and we have to kind of rationalize or harmonize our useful lives for assets and so forth. But that is a good range to work with and you will have a lot better precision at the end of the quarter when you got purchase accounting done.

Shawn Harrison – Longbow Research

Okay. Back to the prior question, in terms of the qualifications, Kent, do you have a sense of maybe what percentage of your customers would be considered more – or fall under more than short-term qualification which would – versus what it would require there in a three to five-month timeframe?

Kenton Alder

It is hard for me to throw out a number Shawn. I think it varies and the circumstances vary also. So sometimes you can have that qualification process shortened due to end market demand and so forth. I think what you need to keep in mind is there is some significant demand that as we obtain capacity, that we are very confident that we can fill that capacity, and that would be capacity that matches what the facilities can produce. So we're pretty excited where we are at now.

(inaudible) running near capacity that is a different situation, and it is a better situation than when we combine the two companies. So the fact that we are running near capacity, and we even have to tap our cross-selling efforts. I think that speaks highly to where we are at as a company. So as we fill the facilities with existing work, we still have untapped demand through our cross selling efforts.

Shawn Harrison – Longbow Research

Okay. Steve, in terms of the cost of debt, the interest expense next quarter, is it correct to assume you have the 140-ish million of convertible debt at the same interest rate and $435 million of Meadville at around a cost of 3%?

Steven Richards

First of all, Shawn makes sure that you apply that TTM debt to 175. That is actually where we own our convertible debt. The crazy convert accounting rules have marked down our debt, but just make sure you are using…

Shawn Harrison – Longbow Research

Yes, I guess I'm looking at it on a non-GAAP basis.

Steven Richards

Okay. Then that is different, you are pulling out the non-cash. Just make sure the debt balance straightened out. So, for me it feels it is LIBOR plus 200, and LIBOR plus 220 for the largest pieces of the debt. So, the term loan is LIBOR plus 200, the revolvers are LIBOR plus 220. So, with LIBOR hovering around you know, I think 50 basis points, or quite still a little bit under 3% for this quarter at least.

Shawn Harrison – Longbow Research

Okay. So on a non-GAAP basis with maybe some other items in there, you're looking at $5 million of interest, quarterly interest expense?

Steven Richards

All in, exactly right. Our projections show about 5.1 million of true interest expense, including your non-cash piece, and about 450 or so of amortization debt issuance costs, which under GAAP is also part of the expense. So, those two items together, interest expense including non-cash and debt issuance will be about 5.5 million or 5.6 million for the quarter.

Shawn Harrison – Longbow Research

Okay. So on a non-GAAP basis, we're looking in the low 4's?

Steven Richards

Yes, because it is up $1.4 million of interest non-cash interest expense each quarter. So, saw it is about, I think it is about 1.4 out of that 5.5, you get 4.1.

Shawn Harrison – Longbow Research

Okay. And then the one end market, Kent, we didn't touch on in North America was military. I know there had been some concerns last quarter, given a program going into life, but it sounds like from your commentary that what you're seeing is pretty steady in terms of general underlying demand for the military and aerospace markets. Maybe you could just talk to what the potential is over the next few quarters within that end market.

Kenton Alder

Good question Shawn, and the military market is pretty steady. And our businesses is with numerous customers in and around numerous program. It is a very broad base of customers that we serve in the aerospace and defense work. And a lot of the work that we service is rather high-tech. You can almost look at the aerospace and defense and there is some work that you classify that is more commercial in nature, but it is aerospace and defense.

A lot of our work is in the higher technology segments. It is very specialized. So that puts us on certain programs. As those programs come on and go off, we might have some timing differences there. We were on some programs that were associated with the Iraq and Afghanistan war that are winding down.

But as we tap the other programs that we are involved in, we're replacing that. So, the fact that we are broad based is pretty encouraging. We think that we will have some over the next quarter or two some slight growth in aerospace and defense.

Shawn Harrison – Longbow Research

Okay. And then my final question. In terms of the accretion comment made in the presentation – was that on a GAAP basis? Because maybe on a non-GAAP basis this quarter, you guys could be a little bit accretive. Is that the correct way to view it? And then –?

Steven Richards

I mean, when you see our range of GAAP and non-GAAP, we're closer to accretion on a non-GAAP basis, then we are on a GAAP basis. I think the reason why we weren’t for sanguine about Q2 is just because purchase accounting is still uncertain. But the biggest things to argue why Q3 is going to be a good period is that we won't have the $4.5 million of inventory markup, the profit component from purchase accounting. We won’t $7.7 million of Meadville costs and so forth.

If you adjust those things out, previously non-GAAP, things are looking pretty good for Q2 to be accretive and certainly in Q3, once those things are behind us, I think we will be – we're quite confident about accretion for Q3.

Shawn Harrison – Longbow Research

Okay. And then one final question to round it out, excess cash flow – when are you able to start paying down some of the Meadville debt you acquired?

Steven Richards

We won’t – because of the way the deal was structured, we are prohibited from paying down anything in the first year, or we will be penalized if we do. So that begins from when the debt agreement was signed in November. So, we can’t pay down debt effectively until towards the end of this year. Our first payment is due in mid-February of next year.

So probably we will just stick with that schedule and pay down beginning in mid-February, but of course, it will all depend on obviously where we have as we described already, and cash needs near-term to increase Meadville’s capacity, but of course, that will generate cash in the future.

So, it is obviously, you know, how much we pay down, and how quickly will depend on the extra cash flow generation of the business post expansion, but I think we are quite comfortable with the schedule we have on the debt, and as you know, from our prior experience we do try to delever quickly. It is just in this case we have CapEx needs that are more significant, more beneficial in Asia and then we had in the US historically.

Shawn Harrison – Longbow Research

Okay. In Meadville – how much cash did they bring over?

Steven Richards

You know, I am going to have to differ to Canice that question.

Shawn Harrison – Longbow Research

What was your cash balance prior to your closing period?

Canice Chung

It is about (inaudible) $80 million to $90 million when they are having the closing.

Steven Richards

Great.

Shawn Harrison – Longbow Research

Okay. So you have a little – right around $200 million of cash right now…

Steven Richards

This is with where our projections were.

Shawn Harrison – Longbow Research

Okay, fantastic. Thanks again and congratulations on closing the deal.

Kenton Alder

Thank you.

Steven Richards

Thank you.

Operator

And that is all the time we have for questions. I will now turn it back to management for any closing remarks.

Kenton Alder

I like to thank everybody for joining us on our call today. We're really excited about the combination that we have, know that we are into the combination about four weeks. We're more convinced about the wisdom behind the combination; we are excited about the opportunity for the future. We have two different business models, two different cultures, that we can fit those together real well. We even have untapped selling opportunities that we haven't been able to take advantage of.

So we are excited about the future. We look forward to talking with everyone at our next earnings call. So thank you very much.

Operator

Ladies and gentlemen, this concludes the TTM Technologies first quarter 2010 financial results conference call. If you would like to listen to a replay of today's conference please dial 1800-406-7325 or 1303-590-3030, and entering in the access code of 428-3045. AT&T would like to thank you for your participation. You may now disconnect.

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