TTM Technologies, Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the TTM Technologies third quarter 2021 financial results conference call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions. To ask a question, you may press star 1 on your telephone keypad. As a reminder, this conference is being recorded today, October 27, 2021. Samir Desai, TTM's Vice President of Corporate Development and Investor Relations, will now review TTM's disclosure statement.

Thanks, James. Before we get started, I would like to remind everyone that today's call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, 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 factors explaining our most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission. These forward-looking statements are based on management's expectations and assumptions as of the date of this presentation. TTM does not undertake any obligation to publicly update or revise any of these statements, whether as a result of new information, future events, or other circumstances, except as required by law. Please refer to the disclosures regarding the risk that may affect TTM, which may be found in the reports on Form 10-K, 10-Q, 8-K, the registration statement on Form S-4, and the company's other SEC filings. 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 you to the reconciliation of non-GAAP to GAAP measures included in the company's press release which was filed with the SEC is available on TTM's website at www.ttm.com. We have also posted on our website a slide deck which we will refer to during our call. I will now turn the call over to Tom Edmond, TTM's Chief Executive Officer. Please go ahead, Tom.

Thank you, Samir. Good afternoon and thank you for joining us for our third quarter for 2021 conference call. I'll begin with a review of our business strategy, followed by highlights from the quarter and a discussion of our third quarter results. Todd Schill, our CFO, will follow with an overview of our Q3 2021 financial performance and our Q4 2021 guidance. We will then open the call to your questions. In the third quarter of 2021, TGM generated revenues and non-GAAP EPS within the guided range, despite a challenging supply chain and labor environment. Year-on-year growth was led by strong demand in automotive, data center computing, and medical, industrial, and instrumentation end markets. These results were achieved despite an unprecedented number of operational headwinds, including supply chain constraints for ourselves and our customers, inflationary pressures, and the labor and logistic challenges in North America resulting in production inefficiencies, and power restrictions in China. Our global operations teams have responded to these immense challenges with a remarkable focus on delivering the customer commitments while flexibly responding to frequent surprises. We have been actively managing supply constraints and the higher raw material costs through such measures as supplier diversification, ongoing operational efficiency efforts, and quotation adjustments to mitigate the impact. The overall impact to our cost of goods sold was larger in Q3 than Q2 and continues to be elevated in Q4, since higher laminate and other raw material prices in the first half of the year take some time to work through our suppliers and our inventory. Furthermore, raw material prices continued to rise in Q3, although at a diminished rate of increase. Production inefficiencies in North America further exacerbated our costs and output challenges in the third quarter and will continue to do so in the fourth quarter. Power restrictions in China did not have a material effect on the third quarter as these impacts came late in the quarter, right before the planned October holidays. Coming out of the holidays, we have not experienced restrictions, but we are continuing to closely monitor the situation as we approach the winter season in China. Next, I would like to provide an update on our long-term strategy. TTM is on a journey to transform our business to be less cyclical and more differentiated. We believe that over time, investors will be rewarded with more stable growth, strong cash flow performance, and improving margins. As part of this strategic transition, we sold our mobility business last year. We are now able to generate more consistent cash flow with our strong set of technologies and broad exposure to longer cycle end markets. A key part of our ongoing strategy will be to add capabilities and products that are complementary to our current offerings, both internally and through acquisitions. As such, we continue to invest organically in differentiated product technology solutions from our advanced technology center, RF&S business unit, and microelectronics businesses. Looking forward, our balance sheet is in a strong position to pursue further acquisitions as well as to support our organic investment needs. I would also like to update you on the COVID situation. The vaccine rollout in the United States had initially resulted in a decline in new COVID cases. the Delta variant created another surge in late summer and early fall. In addition, many parts of the world have much lower vaccination rates, and the rise of the Delta variant led to significantly increasing case counts, resulting in a number of countries imposing lockdowns during the summer. More recently, case counts in the U.S. and Asia are declining, and lockdowns in Asia are being lifted. At TTM, we are seeing similar trends. and are using a data-driven process, monitoring vaccination rates and local case counts to determine safety precautions at our facilities. Our global manufacturing facilities have been operating throughout the pandemic, but in Q3, we dealt with a rising number of cases and resulting quarantines, which along with the general labor shortages contributed to production inefficiencies and capacity constraints in North America. We are presently adjusting to the next normal in which we learn to live with COVID-19 while continuing to support our customers and keeping our employees safe. Like many other companies, we continue to see more challenges in attracting and retaining labor. Our employees are paramount to the success of TTM, and we actively endeavor to demonstrate their value to our company through a combination of financial and non-financial methods. We continue to be hopeful that the expiration of elevated unemployment benefits in the US, increased vaccination rates, and our strong company culture will encourage potential employees to join TTM as we work to support our customers. Now I'd like to review our end markets. All historical end market disclosures exclude the divested mobility business unit and the two EMS plants which halted production in December of 2020. For more details on end market disclosures, please refer to page four of our earnings presentation, which is posted on our website. The aerospace and defense end market represented 31 percent total third quarter sales compared to 37 percent of Q3 2020 sales and 33% of sales in Q2 2021. We continue to experience a positive defense climate with our A&D program backlog at $723 million compared to $625 million a year ago. The solid demand in the defense market is a result of our strong strategic program alignment and key bookings for ongoing franchise programs. We saw significant bookings in the quarter for the AN-SPY-6 AESA radar program, and our overall book to bill for A&D was 1.32. On a year-on-year basis, A&D revenues declined due to commercial aerospace weakness, defense program timing, and production inefficiencies in North America. We expect sales in Q4 from this end market to rebound, and represent about 32 percent of our total sales. Given the year-over-year weakness in commercial aerospace, as well as the labor challenges in North America, we do not expect to meet this year's growth target of 2 to 4 percent. The medical industrial instrumentation end market contributed 20 percent of our total sales in the third quarter, compared to 19 percent in the year-ago quarter, and 19% in the second quarter of 2021. The MI&I market exceeded $100 million in Q3 revenue and performed much better than expectations as medical and industrial customers continued to rebound. For the fourth quarter, we expect MI&I to be 18% of revenues with continued strong orders from the medical and industrial markets. However, revenue will be limited by capacity constraints and component shortages. Given the strength in this end market in the first nine months of the year and the fourth quarter forecast, we expect to exceed the 2% to 4% growth target for 2021. Automotive sales represented 18% of total sales during the third quarter of 2021 compared to 13% in the year-ago quarter and 18% during the second quarter of 2021. Automotive grew 57% year over year. We are aware that the shortage of semiconductors has been limiting automotive production, but this phenomenon has not directly affected our business since we do not purchase semiconductors. However, we are monitoring this situation closely and are starting to see a modest reduction in our PCB demand as more automotive OEMs are reducing production plans due to the semiconductor shortage. We expect automotive to contribute 18% of total sales in Q4. Networking communications accounted for 16% of revenue during the third quarter of 2021. This compares to 17% in the third quarter of 2020 and 15% of revenue in the second quarter of 2021. We saw relative strength on a year-on-year basis in networking compared to telecom as the 5G build-out in China continues to be weak. In Q4, we expect this end market to be 15% of revenue as telecom demand continues to be soft. Sales in the data center computing end market represented 14% of total sales in the third quarter compared to 13% in Q3 of 2020 and 14% in the second quarter of 2021. This end market was up 29% year on year due primarily to growth from our data center customers. We expect revenues in this end market to represent approximately 15 percent of fourth quarter sales as strong data center demand continues to drive year-on-year growth. Next, I'll cover some details from the third quarter. All of the following operations metrics exclude the Mobility Business Unit and the two EMS plants that we close. This information is also available on page five of our earnings presentation. During the quarter, Our advanced technology business, which includes HDI, RigidFlex, and RF subsystems and components, accounted for approximately 29% of our revenue. This compares to approximately 29% in the year-ago quarter and 31% in Q2. We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology capabilities in new programs and new markets. Capacity utilization in Asia Pacific was 91 percent in Q3 compared to 63 percent in the year-ago quarter and 88 percent in Q2. Our overall capacity utilization in North America was 50 percent in Q3 compared to 61 percent in the year-ago quarter and 49 percent in Q2. Our top five customers contributed 28% of total sales in the third quarter of 2021 compared to 29% in the second quarter of 2021. We did not have any customers above 10% in the quarter. At the end of Q3, our 90-day backlog, which is subject to cancellations, was $594.8 million compared to $437.8 million at the end of the third quarter last year and $553.1 million at the end of Q2. Our PCB book-to-bill ratio was 1.29 for the three months ending September 27th. Our backlog is higher than our revenue forecast due to uncertainty around both labor and supply chain challenges for our customers and ourselves. I'd like to conclude by again thanking our employees for continuing to contribute to TTM and our critical mission of inspiring innovation with our customers. Despite the raw materials and labor related challenges we are facing, our business performed in line with what we expected as a direct result of our employees and our supply chain partners concerted efforts to support TTM and our customers. Now, Todd will review our financial performance for the third quarter. Todd?

Thanks, Tom, and good afternoon, everyone. I will be reviewing our financial results for the third quarter, which are also shown in the press release distributed today, as well as on page seven of our earnings presentation, which is posted to our website. For the third quarter, net sales were $556.8 million, compared to $513.6 million from continuing operations in the third quarter. 2020. The year-over-year increase in revenue was due to strong growth in our automotive, data center computing, and medical, industrial, and instrumentation end markets, which more than offset a decline in our aerospace and defense end market and the headwind from the closure of our two EMS facilities, which contributed $20.5 million of revenue in Q3 of 2020 and no revenues this year. Excluding the impact of the EMS closure, revenues for our ongoing business grew 12.9% year on year. GAAP operating income for the third quarter of 2021 was $32.2 million, compared to GAAP operating loss from continuing operations of $40.3 million in the third quarter of last year, which included a goodwill impairment charge of $69.2 million. On a GAAP basis, net income in the third quarter of 2021 was $21 million. compared to GAAP operating loss from continuing operations of $21 million or 19 cents per diluted share. This compares to a net loss from continuing operations of $61.5 million or 58 cents per diluted share in the same quarter last year. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes our divested mobility business unit, non-routine tax items, M&A-related costs, restructuring costs, certain non-cash expense items, and other unusual or infrequent items. We present non-GAAP financial information to enable investors to see the company through the eyes of management and to facilitate comparisons with expectations and prior periods. Gross margin in the third quarter was 17.2% compared to 18.4% in the third quarter of 2020. The year-on-year decline was largely due to production challenges in North America and foreign exchange headwinds in our China facilities. During the quarter, we did experience significant material cost increases, but we were able to substantially mitigate the profit impact of those increases through customer price increases and manufacturing efficiencies. Selling and marketing expense was $15.1 million in the second quarter, or 2.7% of net sales, versus $15.3 million, or 3% of net sales, a year ago. Third quarter G&A expense was $29.2 million, or 5.2% of net sales, compared to $26.9 million, or 5.2% of net sales in the same quarter last year. In the third quarter of 2021, R&D was $4 million, or 0.7% of revenues, compared to $5.2 million, or 1% in the year-ago quarter. Our operating margin in Q3 was 8.6%. This compares to 9.1% in Q3 of 2020. Interest expense was $10.6 million in the third quarter, a decrease from $12.9 million in the same quarter last year due primarily to lower levels of debt as we repaid $400 million of our term loan and our $250 million convertible bond in the second half of 2020. During the quarter, there was a negative $0.7 million of foreign exchange impact below the operating line. Government incentives and interest income reduced this to a negative $0.1 million and a negligible impact to EPS. This compares to a loss of $2.5 million, or two cents of EPS, in Q3 last year. Our effective tax rate was 1.1% in the third quarter, as we now estimate our tax rate for 2021 to be 7%. Third quarter net income was $36.5 million, or $0.34 per diluted share. This compares the third quarter 2020 net income of $26.8 million, or $0.25 per diluted share. Adjusted EBITDA for the third quarter was $68.6 million, or 12.3% of net sales, compared with third quarter 2020 adjusted EBITDA of $67.2 million, or 13.1% of net sales. Depreciation for the quarter was $21 million. Net capital spending for the quarter was $19.8 million. Cash flow from operations was $18.6 million, lower than expected due to higher inventories caused by longer transit times and lower hub pulls by our customers. Accounts receivables were also higher than expected due to timing of customer payments. Our balance sheet and liquidity positions remain very strong. Cash and cash equivalents at the end of the third quarter of 2021 were $529.8 million. And our net debt divided by last 12 months EBITDA was 1.5 times. During the third quarter, we repurchased 2.1 million shares of our common stock under our previously announced $100 million stock repurchase program at an average price of 13.71 per share for a total of $28.9 million. As of the end of the third quarter, we have spent a total of $35 million for stock repurchases. Now I'd like to turn to guidance for the fourth quarter. As Tom stated earlier, we will continue to face elevated cost pressures in the fourth quarter, as price increases in the first half of the year take some time to work through our suppliers and our own inventory. Furthermore, Raw material prices continue to rise, though at a slower rate. We also expect continuing production inefficiencies in North America. Additionally, TTM has a 52-53 week fiscal calendar, and 2021 is a 53-week year. The extra week will be included in our fourth quarter. Note, however, that the extra week is the holiday week after Christmas and includes New Year's. As such, The revenue benefit is modest at best, but we do incur an extra week of operating expenses. Given that, we expect total revenue for the fourth quarter of 2021 to be in the range of $530 to $570 million, and we expect non-GAAP earnings to be in the range of 28 to 34 cents per diluted share. The EPS forecast is based on a diluted share count of approximately 107 million shares. Our share count guidance includes dilutive securities such as options and RSUs, but no shares associated with our warrants as the current stock price is under the strike price of $14.26. We expect that SG&A expense will be about 8.9 percent of revenue in the fourth quarter and R&D to be about 0.9 percent of revenue. We expect interest expense to total approximately $11 million. Finally, we estimate our effective tax rate to be between 5 and 10 percent. To assist you in developing your financial models, we offer the following additional information. During the fourth quarter, we expect to record amortization of intangibles of about $10.2 million, stock-based compensation expense of about $5.3 million, non-cash interest expense of approximately $0.5 million, and we estimate depreciation expense will be approximately $22.4 million. Finally, I'd like to announce that we will be participating virtually in the Baird Industrials Conference on November 9th, and the Bank of America Leverage Finance Conference on November 30th. That concludes our prepared remarks, and now we'd like to open the line for questions. James?

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow us to know to reach our equipment. Again, press star 1 to ask a question. And we'll take our first question today from Jim Rusciutti with Needham & Company.

Hi, good afternoon. Just wanted to go through the sequential decline in gross margins. I mean, obviously, there are several contributing factors, but I'm wondering if maybe you could help us by trying to parse it out, maybe quantify some of those factors which had a bigger impact, whether it was higher cost or lower utilization in North America or potentially mix?

Sure, Jim. You know, as we highlight the results, you know, our revenue was down about $10.6 million sequentially, led by A&D, which was down about $11 million. Automotive was down slightly, and that was offset by strength in medical industrial instrumentation. So a net number down about $10.6 million on revenue. Our gross margin decreased about 74 basis points to 17.2%. And what's really driving that, some of it is the revenue decline, okay? So that hurts our margin a bit. But really, the production inefficiencies in North America, driven primarily by various related labor challenges, whether that's COVID direct or the inability to acquire the the staffing levels that we needed were really the big contributors. And that resulted in our gross profit being down about $6 million sequentially. And those two items, revenue and the production inefficiencies in North America, were about a 50-50 split.

Got it. And just follow-up, just with respect to some of the labor challenges here in the U.S., doesn't sound like that is... improving much in the near term. So I'm wondering how we should think about those pressures in Q4. Will they be more significant pressures, or do you see them easing somewhat? Is it something you're anticipating improving in the early part of 22?

So, Jim, this is Tom. Let me just address... How are you doing, Jim? Just let me address... Q4 and then talk a little bit about the longer term situation there. We mentioned, you know, and I think this is being experienced by a number of companies. As you know, a substantial part of our production does come out of North America. That's really what we're talking about here. And the impacts in Q3 were compounded by COVID. So we had Yes, we were dealing with labor shortages. We also had to deal with a spike in COVID cases and the resulting quarantines. As we go forward into Q4, the good news is at least we're seeing that case count come down. So that will be an improvement in the labor situation. The other impact of this is that we are able now to get Tiger teams and have since the last quarter been able to get Tiger teams in some of our facilities that were more challenged in North America. That takes time to affect itself in terms of production yield improvements, but we expect to start to see that those improvements pay off as well as we come through Q4 into next year. What we can't really forecast is the material situation. in terms of material shortages and whether that situation improves. Also, whether the inflation or what happens with the inflationary trends there. So we can't really forecast that piece. And the other piece, of course, is logistics and logistics challenges. So what I'm really saying is, yeah, there's a piece of the situation that will improve, and we can see improving in Q4 around labor. But the overall labor shortage will still be a challenge. And then you've got the ongoing impacts of materials logistics challenges going forward in the Q4 as well. And of course, we, our teams, our operational teams, as I mentioned, are doing a fantastic job of adjusting on the fly in some cases to meet customer demand. And I would remain optimistic that, of course, our supply chain partners will work through some of their challenges here as we go into next year. But certainly for the fourth quarter, that's going to remain, you know, a challenge that we need to confront.

Thank you. Our next question will come from William Stein with Truist Securities.

Great, thanks for taking my questions. First, I'm hoping you can give us an update on lead times. I think typically your lead times are very short, but I don't think they extended the way SME and other component companies did in this cycle that we're still in the midst of, I guess. But if you can update us as to the trajectory there and the sort of pacing of things like pull in versus push out and cancel. Thank you.

Yep, sure. Well, yeah, the demand environment continues to be really robust. If you look at the commercial demand environment for our Asia facilities, our Asia facilities, I think with the exception of one facility pretty much booked through the fourth quarter. You can see that reflected, of course, in the strength of the backlog. So we're looking at, you know, substantial lead time extensions there, Will. It depends, again, on the facility, but, you know, you're looking at, I would say, on average, 16 weeks plus in those facilities. North America, also generally very, very tight in terms of demand. and facilities that, you know, you're absolutely right, would be on average, you know, four weeks kind of lead time in the past, three to four weeks. Now you're looking at lead times that stretch into next year as we book into those facilities. So certainly the demand climate remains overall very strong. I talked about, you know, one area that continues to be A concern is commercial aerospace. That's probably the one market where we've continued to see real softness. But outside of that, really, really strong demand environment.

Paul, if I can. The intensity of buybacks versus M&A and any commentary on the M&A pipeline, I think it's I think it's been a while since you did a significant deal. But any update there, please?

Sure. I can talk about the M&A environment. Todd, maybe you can comment on the buyback. Obviously, both critical parts of our balance sheet strategy and we balance the two. In terms of M&A, the strategy very much will remain in place as we look at potential assets that would help to satisfy some of the strategic needs of the company. One of those is looking at our footprint capabilities and printed circuit board space as we look at the need to move beyond our existing footprint into Europe, into Southeast Asia. That's one area. The even greater focus on adding to our RF engineering expertise both on the commercial side and on the aerospace and defense side, you know, looking at opportunities to build on that capability. We have not, as you point out, we have not had a major acquisition event here for a period of time. And that's really not, you know, we have a decent pipeline in the works. But that pipeline then, you know, you need to work it. You need to see those opportunities come to fruition. And also, we still are dealing with an inflated expectation environment in terms of seller expectations out there. And a second area of focus for us is to really meet not only our strategic needs, but also to make sense to the company financially. as we run cash flow projections and put a valuation to these assets. So, you know, you have to clear both. And at this point, the second is more challenging, I'd say, to fulfill. I will tell you that we continue to work that pipeline. It's still a very active process.

And just to add on to that, You know, when we look at our capital allocation structure and our plans going forward, you know, we recognize that our company has really matured over the last five years, and we're at a different place than where we were before. Notwithstanding the challenges that we talked about, our execution is relatively consistent, and the markets that we're participating in are pretty attractive. That really affords us an opportunity to have a multi-pronged allocation strategy rather than just one option only. Our first choice, without a doubt, is to find opportunities to grow the company, both organically or inorganically. But we feel now we've reached a point in our life that we can also have a shareholder return element to that capital allocation strategy, one that we can keep up as we go forward at some modest level. We've talked about the fact that we announced the program. We hadn't had a whole lot of activity in the first quarter or two for various reasons, which we talked about in the past. We were in the market much more actively here in the last quarter and have now spent about a third of our total program amount that was approved and authorized by the board of $100 million. So that program is still in force. That's out there and will continue to to take opportunities to buy back our stock when it makes sense. But we don't believe it's mutually exclusive to SMA. We think we can balance the two, and that is our intention going forward.

Thank you.

Thank you.

Our next question will come from Srini Pajuri with SMBC NECO Securities.

Thank you. Hi, Tom and Todd. Tom, a question about your backlog versus your revenue guidance. I guess last quarter they were pretty similar. I think I get why you're guiding your revenue a little bit below your backlog. But given that, you know, you said labor situation is actually improving sequentially, I'm a little bit surprised that you're not, you know, um, revenue as your backlog. So, um, if you could talk about what sort of utilization, um, you're assuming for Q4, especially given that you said you have an extra week, um, and then what's causing that discrepancy. Um, I think that'll be helpful.

Sure. Um, yeah, the, the, the, on the labor front, uh, yeah, the good, the good news, um, is, is that, uh, you know, COVID cases have, have been trending downward. But that does not negate the fact that we still have significant labor challenges out there, both in terms of turnover and also in terms of labor availability. And those challenges will continue in the fourth quarter, at least from our vantage point. We also have to take into account the prospects of the supply chain material shortages continuing to impact us with various facilities and the logistics challenges. So as we look at our production capabilities, we have to factor these elements in. And frankly, that leads us to be a little bit conservative on the revenue side. And I would add that, as Todd pointed out, that additional week is really a holiday week. So you're looking at certainly additional expense. The opportunity to push out more revenue is pretty limited during that period of time. And so that doesn't really have much impact on us. Also, Todd mentioned we did build some inventory last quarter. This quarter, we're looking at a situation where we're going to draw, if anything, draw down inventories. That's certainly our goal here, make sure that our inventories are properly in line to generate the cash that we need to as a company. So you put all that together, and I'd say from a revenue standpoint, you know, again, We're comfortable where we are. It's great to be in an environment, such a positive demand environment. We are working now to make the solid improvements that we need to operationally to have an impact on that backlog as we go into next year. Todd, anything to add?

No, I think you hit it. You know, there's a lot of holidays in the fourth quarter. So when you look at a production day basis, Q4 to Q3, there's very little difference, even though it sounds like on paper there's an extra week.

Got it. And then on the cost mitigation actions that you implemented, can you maybe talk about where we are in that process and how receptive your customers have been? Because it's no secret that the supply chain has been going through an inflationary pressures. I think it's well understood. I'm just curious as to where we are in that process and how receptive the customers have been.

Sure. I think, again, this is an area that our teams have been working tirelessly on. And it's a lot of, like you said, generally recognized, but that doesn't mean that customers are pleased when they have to face a price increase. And so what we have been doing here is really coordinating between our supply chain, our operations teams, and the sales team, make sure that we are as transparent as possible communicating with our customers about the increased cost pressures that we have felt. As Todd said, you know, those cost pressures filter in through the course of the year, certainly will continue in the fourth quarter. The third quarter, we did see some additional increases, broad-based, but not as extreme, fortunately, as the first half of the year. And so then you move over to the pricing side. We did a good job in Q3. I think, you know, we characterized that as that we were 75%-ish in terms of progress at the beginning of Q3 in passing on cost increases. we were able to pretty much close that gap in Q3. In Q4, you know, again, the bar goes up and we have an additional challenge as we have conversations with our customers. I would add that, as you remember, about 50% of our business is noncontractual, so we're able to adjust quote models immediately as we forecast increases. or is contractual but contains material escalation clauses. It's the balance of the 50% that we're talking about here, which is contractual. We add varying levels of contractual negotiation frequency, and it's that piece that we've really been working on as a company. This is an interesting time in the fourth quarter because a number of our annual-type contracts, particularly in automotive, come up for negotiation in the fourth quarter. So I know our sales teams and business units will be working very hard this quarter on communicating with our customers and trying to really be forward-looking as we look at ongoing impacts here of a newly inflationary environment.

I just might add to that, Srini. Oh, go ahead. I was just going to add, you know, the other part of it, you know, not our mitigating, I use the word mitigating activity because it's not just all about pricing, right? We have other measures that we're working very hard to try to use to help offset the pain of higher raw material costs. Be that, you know, looking at alternative suppliers, driving or gaining efficiencies as we build volume to help offset some of that negative cost, and driving just cost controls in general within our facilities to try to minimize the pain, because pricing is a tough road to go. Customers, like Tom pointed out, they understand it, but they don't like it, and so you have to make sure you're doing everything you can to reduce the need to go to them, right? But we've been working all of those angles against the middle, if you will, to try to mitigate. And we've done a good job here in Q2 and Q3. I think both quarters we accomplished the goal. We're looking at Q4 and hoping to get to the same place, but there's still a little bit of work to be done. Did you have a follow-up, Kenny?

Yeah, just one. You know, Tom, there's been a lot of noise about potential subsidies for the semiconductor industry and domestic manufacturing. I'm just curious if you have had any discussions, uh, discussions in Washington, um, and, and if you foresee potentially, you know, TTMI benefiting from any sort of a subsidy that might come out of there.

Um, yeah, I, I, let me, uh, a couple of comments on that. I think on the, on the aerospace and, you know, on the defense side in particular, um, I think there's a better understanding out there and really reflected in legislation, the budgetary legislation around defense as we look at next year around the weaknesses that the supply chain faces in terms of PCB production in North America. I think that's certainly of concern to our defense customers. And so I think it's a positive to see that there's a developing understanding in Congress and within the Defense Department of how critical printed circuit boards are to the capabilities and to our infrastructure needs as a country. We'll see how that develops in terms of specific legislation activity. I'd highlight another aspect which you mentioned, Srini. As you think about and as Congress looks at semiconductors, we've certainly been encouraging and educating around the need to broaden that definition to think not just about chips, but about the broader electronics manufacturing infrastructure. We like to say that chips don't float is a saying that we use, which really is, you know, I think it's important that it be recognized that there needs to be an entire support structure around chips. Again, how the legislation ends up, I think there has been a broadening of definitions to include microelectronics, and that's a positive, and we'll see what really comes out of Congress this year. But overall, we're certainly encouraged to see that there is more attention being paid to this issue now.

Got it. Thanks, Tom, and good luck.

Thank you.

Our final question will come from Mike Crawford with BeRiley Securities.

Thank you. Just before I ask about defense, could I just again hear your answer about why the midpoint of your fourth quarter guidance would be $45 million below the 90-day backlog you have right now?

Oh, sure. Yeah. So the backlog... As we look at the backlog, it is technically a 90-day backlog, but we are looking at a quarter, particularly in North America, where we have some ongoing challenges related to labor, to material availability, and logistics challenges. And so as we looked at the revenue projections for the fourth quarter, we need to include those challenges, and so there's a bit of a of a shortfall, if you will, from the revenue as compared to the backlog.

Okay. Thank you, Tom. And I suppose in a different environment sometimes you might actually book and ship and you could actually have a quarter that's above the backlog or is it always some kind of shortfall relative to backlog?

This is an unusual circumstance, Mike. I'll be blunt. We saw a little bit of this last quarter. If you remember, our backlog was pretty close to matching revenue last quarter, and we spoke about, again, about the need to be careful, and we were proven right in the third quarter. But it was really as we looked at the third quarter, we knew we were in the summer. In the summer, we were already seeing challenges on the labor front, and we anticipated that. So this is, you know, again, a second quarter of this. It is unusual. Usually we would have a portion of our revenue that we can book in the quarter and ship. But I talked a little bit, Will asked about the extended lead times. That's absolutely part of this. You can see an indication as lead time stretch that we're just going to have real challenges booking and shipping within a quarter. So it really does end up, you know, doing our best to ship as much of our backlog out during the course of the quarter as possible. So, yeah, a little bit unusual.

Okay, thank you. So, and then somewhat related, but when you're talking about TTM's growth expectations for vertical wind markets, I look at aerospace and defense where you had a 1.32 book development quarter, a near 100 million year-over-year jump in defense backlog, yet you're saying you expect to go slower than the industry's 2% to 4% growth rate. But is that just for fiscal 21? Is that what you mean by FY21 view? Or you can't, I don't think, expect to grow slower than the industry in the next couple of years. Oh, I know, absolutely. Yeah.

Absolutely, Mike. Yeah, we're, you know, that is, as you know, we have grown for the past several years, three, four years, we've been growing well above that rate. Actually, ever since the VIA systems acquisition. So you can step back to 2016 and take a look at the numbers. We've been growing well above that rate. This year in aerospace and defense, we got hit by a couple things. One is commercial aerospace weakness, and that has an impact on several of our facilities that really were focused on that area, primarily assembly needs in that area. So those facilities were impacted. And then the other A piece of this has been dealing with some of the ongoing challenges, production efficiency challenges in North America. Certainly that's heightened here in this past quarter. As we go into next year, certainly from a capital planning standpoint, we are planning on growth. We see a strong backdrop here in terms of program backlog to go out and service. As you know, we have capital capability with balance sheet capability to grow in aerospace and defense, and we have differentiated technology offerings here. So our plan is to continue to grow in aerospace and defense. I'm hopeful that next year we'll also see that turn in commercial aerospace and start to see at least some meaningful sequential improvements. that will help feed into that story as well.

Mike, Todd here. Just one other thing I'd highlight. Aerospace and defense, unlike our commercial business, when we book orders, those orders are not necessarily for shipment in the next 90 days. Oftentimes those orders are shippable in the next one to two years. And so although the foundation, if you look at the program backlog for aerospace and defense over $700 million, is a great number. It's not all shippable. And so you kind of have to look at the balance quarter to quarter. And that plays into a little bit some of the challenges that we saw this year. But when you look at the program depth and the strength over the next couple of years, it's very favorable. But you could have little blips quarter to quarter.

Okay, thank you for that clarification. And we saw Boeing today, you know, a firm production increases in next year. And we're hearing the same from Airbus, so I'm sure you'll be fine. Thank you very much.

Thank you, Mike. Appreciate it. That will conclude today's question and answer session. I will now turn the call over to Tom Edmund for any additional closing remarks.

Thank you. I'd just like to close by summarizing some of the points that I made earlier. First, we delivered revenues and earnings in line with guidance despite production and labor inefficiencies in North America and supply chain challenges. Our end market diversification enabled solid year-on-year growth of 13% for our ongoing business. And third, we used our strong cash position to repurchase our stock. So in closing, I'd like to thank you, our investors again, our employees, our customers, and our supply chain partners for your continued support to TTM. Thank you very much.

This concludes today's call. Thank you for your participation. You may now disconnect.