TTM Technologies, Inc. (TTMI) Earnings Call Transcript

Good day, and welcome to TTM Technologies Third Quarter 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Sean Hannan, Vice President of Investor Relations. Please go ahead.

Greetings, everyone. Welcome, and thank you for joining us today. I'm Sean Hannan, Vice President of Investor Relations for TTM. With me on the call are Edwin Roks, our President and Chief Executive Officer; and Dan Boehle, our Executive Vice President and Chief Financial Officer. Before we get started, I'd like to remind everyone today that the call contains forward-looking statements, including statements related to TTM's future business outlook. Actual results could differ materially from these forward-looking statements due to one or more risks and uncertainties, including the risk factors we provide in our filings with the Securities and Exchange Commission, which we encourage you to review. These forward-looking statements represent management's expectations and assumptions based on currently available information. TTM does not undertake any obligation to publicly update or revise any of these forward-looking statements whether as a result of new information, future events or other circumstances, except as required by law. We will also discuss on this call certain non-GAAP financial measures such as adjusted EBITDA. Such measures should not be considered as a substitute for the measures prepared and presented in accordance with GAAP. And we direct use the reconciliations between GAAP and non-GAAP measures included in the company's earnings release, which is available on the Investor Relations section of TTM's website at Investors.ttm.com. We have also posted on the website and earnings presentation that we will refer to during the call. Here is Edwin.

Thank you, Sean. Good afternoon, everyone, and thank you for joining us for our third quarter 2026 conference call. At TTM Technologies, we are focused on designing and manufacturing complex advanced interconnect products and printed circuit boards in addition to what we term up as up to chain products and solutions such as sophisticated RF modules resulting in subsystems and fully integrated mission systems for communications and sensing purposes. . Core to the design of all our products and solutions as well as the strategy of our business is the innovative focus to safely next-generation needs for our customers and end markets, particularly regarding swap or size, weight and power. We believe the future of electronics lies in speed to market, high reliability and efficient technology integration, and we consequently engage early with our customers often multiple times, multiple years in the plant as part of their program road maps to ensure this alignment while also enabling optimal management of their complex supply chains. It continues to be a very successful year for TTM so far. Our third quarter sets another new record with over $1.2 billion in revenue and we expect to close out the year strong, aided by increased shipments of our ample product offerings for data center and networking end markets in addition to continuing strong demand for TTM's aerospace defense business and product offerings. Proposal activity in our aerospace and defense business remain at all-time highs with a record backlog of $2 billion. We already have visibility into roughly 65% of our projected A&D revenue for 2027. Our medical, industrial and instrumentation and automotive end markets also outperformed our expectation year-to-date, with all our business performing well in 2026 to date we are increasing our full year 2026 revenue guidance from $4.47 billion to $4.49 billion. Since our last quarterly earnings call, we have had many exciting developments here at TTM, and we continue to execute our long-term business strategy focused on projected value creation for our customers and shareholders. As we said at our Investor Day in May, TTM continues to invest in organic growth opportunities and technological advancements across our product offerings for all our end markets. In addition to strategic M&A to enhance our capabilities and add diversification and longer-term structural enhancements. To that end, we discussed three key strategic directives. First, investment in capacity and innovative technology for advanced interconnect. As previously disclosed in this area, we have invested or committed to invest over $1.3 billion in capacity expansion in the 2025 to 2029 time frame across both our data center and networking and aerospace and defense end markets. While our commercial segment is currently the primary target for these investments, our model has proven over time that our investments in our commercial technology advantages provide critical value to leverage into our A&D offerings as that end market continues to modernize. Last week, we announced an additional $400 million client investments that is expected to begin in the fourth quarter of 2026, and continue into early 2028. And this would primarily support revenue production focused on the 2028 period. The basis of this initial investment provides critical commercial data center and networking end market customer support and their strong demand and low meter requirements to utilize our unique and present product approach. Recall, the majority of our customer business in this market currently is with our industry-leading innovative established and [ chemical AI ] players. We remind investors that our fundamental business model has been -- continues to be what we discussed at the Investor Day, and that is to pursue a very disciplined risk-reduced brownfield expansion approach for internal organic investments with the expectations to fund these efforts from operating cash without any anticipated needs to access our borrowing facilities. These investments have been given substantial forecast are perf aligned with our customers and not simply reactive to the strong demand environment. Our commitment to these investments is driven by our confidence in our projected cash flows supported by our visibility through the anticipated strong demand requirements of our differentiated and advancing technologies. We are also in the early stages of investing in a new innovation center in the Eau Claire Wisconsin facility, very close to our existing technology center in Chippewa Falls, Wisconsin. This is has our intensifying R&D activities focused on pioneering technological advances such as mSAP, SAP, passives and embedded optics, among other technologies. Second, recall that we are extremely focused on our diversified business model and that as part of this, we've pursued our initial geographic expansion in the European region. In June, we announced our intention to acquire two well-established European companies, Swiss Technology Group and the ILFA to begin this effort. We've since closed the Swiss Technology Group acquisition now called TTM GS Swiss and we believe we are nearing the close of ILFA. On Monday, we announced the planned acquisition of Ophir Optics which established a presence in Israel and Romania. I'll share some additional comments on of Ophir Optics in a few moments. Additionally, we engaged last week in plans to acquire two small but strategic printed circuit board companies under the Merlin PCB Group Holding Company in the United Kingdom. We are excited that all these transactions are both strategic from a technology and capability standpoint and also in terms of adding international diversification to our business information model. Finally, our third strategic directive is investment in what we call up the chain of vertical product solutions with focus on communication and sensing. In line with this directive, we acquired Epiq Solutions, which is closed on September 30. We are excited to welcome the Epiq team members into TTM as we continue the integration activities. The announced plan to acquire Ophir Optics also supports the team of up to the chain, and both these companies bring a unique set of competencies that will deliver differentiated and high-value solutions to our end markets. I now provide a few additional comments on the proposed acquisition of Ophir Optics before we move on to discuss our operating results of the quarter. Ophir Optics is a global leader in precision infrared thermal imaging and laser optics solutions for defense, homeland security and industrial applications with locations in Israel and Romania. With Ophir market-leading advanced infrared and laser optical components, we can offer our customers solutions where we -- and we can combine these optics with our other in-house modalities and our interconnect capabilities. This applies for both A&D and industrial applications. In A&D, we expect to have the opportunity to combine infrared optics and RF radar systems to offer customers a highly integrated and very small form factor mission subsystem for unmanned and countermand area systems, both difficult to organize defense priorities. On top of that, Ophir Optics will add processing capabilities. Optics and processing are the key differentiators in any optical sensing system. Consequently, we expect the potential combined offerings of Epiq solutions and of Optics can advance a common strategy moving up the defense value chain and bringing together complementary software-defined radios and infra capabilities. Both are keys to expanding our role in mission critical sensing modalities such as surveillance, recognizance, communications and electronic warfare. In Industrial, this proposed acquisition provides laser optical subsystems used for shaping laser beams in industrial cutting, welding and PCB drilling machines. We are very excited for the opportunities ahead. From a financial perspective, the proposed acquisition of Ophir Optics is projected to incrementally benefit our financial model by adding more high-margin long-cycle business to our mix. Let me go through the financial highlights with you. We are acquiring Ophir Optics business for an all-cash purchase of $650 million as a carve-out from [ MKS ]. The transaction is expected to be funded through a combination of cash on hand and borrowings under TTM's existing revolving credit facility. And at this time, we believe it's important to compare to all our shareholders that we do not have any current incremental needs or plans to come to the financial markets to access capital. On timing, we expect to close this in the second quarter of 2027, subject to regulatory approvals and other customary closing provisions. Ophir Optics experiencing strong revenue growth and margin expansion and the transaction is expected to be immediately native to our adjusted EBITDA margins and our non-GAAP diluted EPS. The transaction multiple is estimated to be roughly 10x the expected Ophir Optics full year 2027 adjusted EBITDA without synergies. TTM's net leverage at casing is expected to be less than 2x adjusted last 12 months EBITDA and therefore, within our targeted leverage range. I'll now move on to an overview of our business highlights from the quarter. Then we'll follow up with a summary on our Q3 2026 financial performance, our Q4 and full year 2026 guidance and our initial preliminary guidance for 2027. From a demand standpoint, product developments with our partners, bookings and backlog and broader signals in both AI and defense remain strong and are expected to provide very healthy growth momentum for the remainder of this year and as we look in 2027. We interact very closely with our customers and strategic partners and jointly engaged in very diligent conversations to plan for the future with thoughtful investments and take a disciplined approach to vet our outlook, which we believe provides us with a lot of optimism as will be evidenced in the guidance that Dan will share shortly. We delivered an excellent third quarter of 2026. And as always, I would like to thank our employees for delivering these results. we achieved a sales of $1.2 billion and non-GAAP EPS of $1.46 per diluted share, both above our guidance and both all-time quarterly highs. Sales for consolidated TTM grew 60% year-on-year, reflecting demand strength in our data center networking and markets, driven by AI while our medical, industrial and instrumentation sales almost doubled from a year ago. And the aerospace and defense end markets experienced very strong double-digit growth. The company's adjusted EBITDA margin was 20.1% in the third quarter of 2026, up an impressive 400 basis points year-over-year and over 350 basis points sequentially, reflecting positive mix impacts and operational excellence. Non-GAAP EPS of $1.46 per diluted share was 118% improvement year-on-year. The aerospace and defense end market represented 34% of third quarter 2026 sales. Sales in the aerospace and defense market grew 21% year-on-year in the third quarter with the vast majority of our facilities performing at strong levels. The sales growth in the defense market continues to be the result of positive tailwinds in defense budgets our strong strategic program alignment and key bookings for new and ongoing programs. Our ability to support sustained Long-term growth is also very encouraging and further enabled by our recent strategic acquisitions. Our focus on product innovation is tracking well against our internal road maps for many new capabilities, including unique advances in printed circuit board technologies for materials that enable high frequency in support for all our applications. During the third quarter of 2026, our A&D team's effective execution continued in securing another strong bookings quarter. Executing business related to the service surveillance by six radar, the APS 143 maritime surveillance radar, Golden Dome and a number of projected priority restricted programs. A&D's book-to-bill ratio was roughly 1.6% for the quarter, which led the total program backlog of $2 billion, a record level, up from just under $1.5 billion a year ago. Within our backlog, we are excited to report that we have strong momentum in securing new business from new primes as well as restricted programs. Expected programs are incredibly sticky and very difficult for competitors to try in this place. For the fourth quarter of 2026, we expect this end market to represent approximately 31% of our total sales and continue to delivering both year-on-year and sequential growth. For the full year 2026, we now expect this end market to deliver approximately 20% growth compared to 2025, including contributions from acquired businesses or roughly 80% on an organic basis. Sales in the data center and networking end market represented 41% of third quarter 2026 sales. These end markets experienced 115% year-on-year growth in the third quarter, reflecting the strong ramp of our high-technology N+M asymmetric printed circuit boards and continued demand from data center and networking customers. For the fourth quarter of 2026, we expect this end market to represent approximately 49% of net sales as our most Board continue to experience strong uptake at customers. For the full year 2026, we continue to expect sales in this end market to be more than double year-on-year. The medical, industrial and instrumentation end market represented 18% of the third quarter 2026 sales. This end market saw year-on-year growth of 97% during the third quarter aided by price adjustments to fully capture the value add of our technology in addition to particular demand strength in instrumentation for automated test equipment supporting AI solutions. For the fourth quarter of 2026, we expect the medical, industrial and instrumentation end market to represent approximately 14% of total sales, growing roughly 90% year-on-year. For the full 2026, we now expect sales in this end market to grow nearly 70% year-on-year. Automotive sales represented 7% of third quarter 2026 sales and was up 11% year-on-year. We continue to be very selective in this market to focus on higher value-add products that carry margin profiles consistent with our financial goals. Given conversations with customers, we are seeing additional share opportunities as some competitors reduce their market participation while long-term business cycles are showing signs of migrating back towards our advanced capabilities. For the fourth quarter of 2026, we expect the automotive end market to represent about 6% of total sales, which reflects encouraging double-digit growth as we digitally push out the challenge of supply chain materials availability discussed last quarter. For the full year 2026, we now expect sales in this end market to improve mid-single digits versus our prior expectations for a mid-single-digit decline year-on-year. The overall book-to-bill was a remarkable 2.1% for the third quarter of 2026, with the commercial reporting segment at 2.5% and the A&D reporting segment at $1.6 billion. At the end of the third quarter of 2026, the 90-day backlog, which is subject to cancellations, was $1.3 billion compared to $610 million a year ago at 111% increase year-on-year. Now then we'll summarize the financial performance in more detail. Dan?

Thanks, Edwin, and good afternoon, everyone. I'll review our financial results for the third quarter of 2026 that were included in the press release distributed today. Key financial highlights are also summarized in the earnings presentation posted on our website. For the third quarter, net sales were $1.2 billion compared to $753 million in the third quarter of 2025. The 60% year-over-year increase was due to growth across all our end markets and most notably continued strength in data center and networking, medical, industrial and instrumentation and aerospace and defense. GAAP operating income for the third quarter of 2026 was $162.3 million compared to GAAP operating income for the third quarter of 2025 of $71.9 million. On a GAAP basis, net income in the third quarter of 2026 was $84.8 million or $0.79 per diluted share. This compares to GAAP net income for the third quarter of 2025 of $53.1 million or $0.50 per diluted share. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes M&A-related costs, restructuring costs, Certain noncash expense items such as amortization of intangibles, impairment of goodwill, stock-based compensation, gains on the sale of property, unrealized gains or losses on foreign exchange and other unusual or improved good items. We present non-GAAP financial information to enable investors to see the company through the eyes of management and to facilitate comparison with expectations and prior periods. Gross margin in the third quarter of 2026 was 24.8%, an increase of 330 basis points from 21.5% in the third quarter of 2025. The year-on-year increase was due primarily to higher sales volume and favorable product mix, particularly in the data center and networking and aerospace and defense end markets. In addition to execution improvements at our facility in Penang, which we continue to expect to approach breakeven in the fourth quarter of 2026. Selling and marketing expense was $23.2 million in the third quarter or 1.9% of net sales versus $20.5 million or 2.7% of net sales a year ago. Third quarter general and administrative expense was $57.3 million or 4.8% of net sales compared to $42.1 million or 5.6% of net sales a year ago. Third quarter research and development expense was $9.5 million or just under 1% of net sales compared to $6.9 million or just under 1% of net sales in the prior year. Our operating margin in the third quarter of 2026 was 17.4%, a 510 basis point improvement from 12.3% in the same quarter last year. The increase in the period was due both to the improvement in gross margin as well as operating leverage resulting from selling, general and administrative expense discipline. Adjusted EBITDA was $242.3 million in the third quarter of 2026, a record quarterly adjusted EBITDA margin of 20.1% and up 400 basis points year-over-year. This compares to adjusted EBITDA of $120.9 million in the third quarter of 2025 and with an associated adjusted EBITDA margin of 16.1%. Interest expense was $12.1 million in the third quarter of 2026 compared to $9.9 million in the same quarter last year. Interest and other income was $3.1 million in the third quarter of 2026 compared to $2.5 million in the same quarter of last year. Realized foreign exchange loss in the third quarter of 2026 totaled $4.1 million as compared to $1.8 million in the same quarter last year, driven by the weakening of the U.S. dollar. Our effective tax rate was 19.5% in the third quarter of 2026, resulted in tax expense of $38.2 million. This compares to an effective tax rate of 15% or a tax expense of $12.5 million in the same quarter last year. Third quarter 2026 non-GAAP net income was $157.8 million or $1.46 per diluted share. This compares to third quarter 2025 non-GAAP net income of $71 million or $0.67 per diluted share. Cash flow provided by operating activities was $154.7 million in the third quarter of 2026, which compares to cash flow provided by operating activities of $141.8 million in the same quarter last year. Free cash flow in the third quarter of 2026 was $74.8 million as compared to free cash flow of $42.6 million in the third quarter of last year. Now I'll provide our financial guidance for the fourth quarter an update to our outlook for the full year of 2026 and an initial preliminary expectation for full year 2027. We project net sales for the fourth quarter of 2026 to be in the range of $1.42 billion to $1.44 billion and non-GAAP earnings to be in the range of $1.77 to $1.83 per diluted share. These projected results include the contributions of recently closed transactions and associated financing. However, they exclude any contribution or impact from pending acquisitions. Consequently, we now expect full year 2026 sales of approximately $4.47 billion to $4.49 billion, and non-GAAP earnings in the range of $4.97 to $5.03 per diluted share. These full year 2026 projections also include the contributions of recently closed transactions and associated financing, but exclude any contribution or impact from pending acquisitions. The fourth quarter 2026 non-GAAP diluted EPS forecast is based on a diluted share count of approximately 107.8 million shares, which includes the dilutive effect of outstanding stock options and other stock awards. Our expected full year 2026 non-GAAP EPS forecast is based on a diluted share count of 107.5 million shares, similarly, including the effect of outstanding stock options and other stockholders. We expect SG&A expense to be approximately 6.7% of net sales in the fourth quarter and R&D expenditures to be approximately 1% of net sales. We expect interest expense of approximately $33.9 million interest income of approximately $3.0 million and realized foreign exchange and other nonoperating expenses of approximately $4.7 million. We estimate our effective tax rate will be between 15% and 19%. Further, we expect to record depreciation of approximately $39.7 million, amortization of intangibles of approximately $12.1 million stock-based compensation expense of approximately $18.7 million and noncash interest expense of approximately $0.9 million. Looking to the preliminary full year 2027 forecast, we are providing our initial net sales forecast to be in the range of approximately $6.5 billion to $6.75 billion, and non-GAAP net income is expected to be in the range of $8.10 and to $8.90 per diluted share based on a diluted share count of 108.1 million shares, including the effect of outstanding stock options and other stock awards. Our initial 2027 full year forecast includes contributions from recently closed acquisitions and associated financing costs, while excluding any contribution or impact from pending acquisitions. And finally, I'd like to announce that we are scheduled to participate in the Bank of America Leveraged Finance Conference in Boca Raton, Florida on December 1 and the UBS TMT Conference in Scottsdale, Arizona on December 2. That concludes our prepared remarks. So I'll turn it back to you, Shire for the Q&A session.

[Operator Instructions] And our first question will come from the line of Steven Fox with Fox Advisors.

I guess my first question, I was wondering if we could sort of dig into the results to date and expectations going forward. Can you give us a sense for how much of the quarter was driven by the new product, where you think you are in terms of ramping yields, et cetera. And then how broad-based the product is expected to be used. I'm just trying to understand like how dominant this is becoming within your traditional PCB sales? And then I had a follow-up.

Yes. Steve, yes. Happy to do that. Our N+M program is will be a substantial part of our data center networking group, as you know. Ramp-ups are going really well. It's currently about 30% of the data center and networking activities. And it will grow next year to about 50% of that group. The ramp-up is going really well. We have three major programs, two of them are doing really well, one of them is, let's say, a bit moving to the right. This has nothing to do, by the way, with any technical issue, has nothing to do with our performance. It basically has to do with the program schedule of that customer, which is a normal thing with these way programs. So far, we're getting very, very positive feedback on our N+M program. There are more N+M programs coming. I mentioned before, this will be 5 to 10 programs all around. So that's going well. Yes, Steve, there will always be a bit of fluctuation in these programs. These programs are so big, so there will always be a bit of fluctuation. There is also a bit of pull forward I can tell you, some of the things are even enhanced. So that will be a fact. But again, currently, about 30% of the data center networking business going into next year to about 50%. So that technology is working really well.

Great. That's helpful. And then just to be crystal clear on all the M&A you've done and how you're planning to finance it. Can you sort of talk about where this leaves you like what's the potential for more M&A once you close all these deals? And just big picture thoughts on balance sheet since you've been pretty active in the acquisition market in the last few months.

Yes, Steve, this is Dan. I'll take that. Thanks for the question. Yes, I think this will be the end of the big stuff for a while. There may be a few little things that we've announced a few that we need to close. And they're one of those kind of medium size, the other smaller. So we'll focus on strengthening our balance sheet, getting our leverage back down now. We've got a lot of strong cash flow coming in next year. We'll have positive free cash flow to continue to fund our capital expenditures as well as start paying down that debt. But in our Q4 guide, so the difference between where we were last quarter and this quarter, we do have two of the businesses that have closed or expected to close in this period or closed right at the end of Q3 into Q4, will impact positively on our EBITDA but we did raise significant debt for the purchase of Epiq as well as to finance the Ophir product that we just announced. So that has an increase of interest expense of about $20 million a quarter, so that drags on our EPS. And so you look at the change in EPS guidance from last quarter to where we are now, up from the transactions, but then offset by the debt.

One moment for our next question. That will come from the line of Will Stein with Truist.

First, I want to recognize and say congratulations on the great results overall. But I want to also recognize that the data center networking end market came about 10% below your prior guidance in Q3. And so I'm hoping you can help us understand what happened there? Was it supply or like material availability or yield or something else?

None of these things. These things basically have to do with project timing on the customer side. Again, these large customers, these big customers we have they have multiple programs, and there are always fluctuations in these programs. Some of them move to the left, some of them move a bit to the right. Again, there are no technical issues. Ramp is going well. Yield number yield numbers are where they should be. Again, they have always multiple suppliers. There's always a bit of, let's say, everybody has to be in that same window technology wise. So that's sometimes there's also a bit. But again, two out of these three programs we initially had are doing really well. The third one is ramping up now that will be in ramp-up in the second half of fully in production in Q1. So that's going smooth. And it's like I said before, there are more N+M programs coming. But again, there will always be a fluctuation and we always try to be as accurate as possible in our guidance. But yes, there are no major issues there. I appreciate that.

As a follow-up, and when last quarter, I believe you told us that N+M would be approximately $200 million in and approximately $400 million in Q4. It sounds like in Q3 that might have been a little light, but not entirely sure. Maybe you can update both these numbers for us, please?

Yes, sure. In Q3, of the full data center networking business, it was about 30% of our business was based on N+M. So call it, let's say, 31% or $400 million, something like that. In Q4, we expect about the same percentage, about 30% out of, let's say, a $700 million data center networking forecast. So these are about the numbers. So the ramp-up is going well. Is it exactly the $200 million and the $400 million. No, probably not. It will be slightly more than $200 million and slightly below the $400 million. But again, like I said, next year, it's about 50% of the full data center networking business. So things I'm just fluctuating a bit. But again, no big deal there.

One moment for our next question. And that will come from the line of Mike Crawford with B. Riley Securities.

Can you give some color on supply availability of key materials like [ CCL and T glass ]? And also how you match any increasing prices with quotes?

Sure, Mark. Lead times, let's say, are, let's say, in the order of, let's say, 12 weeks, sometimes a bit longer, sometimes 24 weeks, sometimes even a bit longer depending on the materials. So far, I think we are handling this very well. On the A&D side, I think everything is solid. On the data center networking side, we -- it's an ongoing activity. Yes, lead times are going up, but we are also, let's say, these programs are getting bigger. So we have much more visibility on these things. If you look at the costs, yes, the costs are going up. But so far, let's say, we are very transparent with our customers and the customers will take these price increases. And it's like I said, the [ emploxam ] is having higher ASPs, so that's helping us a lot. So price increases, yes, the customers will absorb that.

Okay. And then just to follow up related. The higher ASPs for the [ emploxam ], we understand that, but would you say that's higher than corporate average gross margin. And I guess, related, where do you see gross and EBITDA margins progressing throughout 2027?

Yes, yes, yes. These ASPs are growing faster than our cost, and that has to do with the complexity of the Board. the complexity is increasing a lot for these bars. So basically, it's all about the value. I rather don't talk about cost and ASP. I'd rather think about the value taking much more value in these data centers and networking configurations. So that's helping us a lot. It's about a factor 4 if you compare it with, let's say, conventional architectures. And plaza is really adding a lot, let's say, in complexity. And of course, the customers are willing to pay for that.

Mike, maybe I'll just add. You mentioned about EBITDA. Our EBITDA margins will be increasing our gross margin on that nose product. is significantly higher than our corporate average. And so as that becomes more than [ megas ], our gross margin as well as our EBITDA margins will be increasing more than 200 basis points in the next year.