TTM Technologies, Inc.

Q3 2021 Earnings Conference Call


spk_0: good afternoon ladies and gentleman interest and by welcome to the tpm technologies third quarter two thousand twenty one financial results conference call during today's presentation api to be endless normally mode on the presentation the convert to be open for questions to ask a question you may press star one on your telephone keep it as reminded that converts being recorded today october twenty seventh two thousand twenty one some your decide tpm vice president of corporate development and investor relations with our view tpm disclosure statement
spk_1: thanks sam's before we get started i would like to remind everyone that today's cop and came forward looking statements with them a meeting of the private securities litigation reform act of ninety ninety five including statements related to see speech or business outlook actual results could differ materially from the forward looking statements do the one or more risk and uncertainty including factors explainer most recent annual report on form ten k and other filings with the securities and exchange commission these more looking statements are based on management expectations and assumptions as of the date of this presentation tpm does not undertake any obligation to publicly update or revise a these statements weather as a result of new ever made in future events or other such circumstances except as required by law please report to the disclosures regarding the referred me affected him which may be found in the reports on form ten k ten que ha the registration statement on form as for and the company's other fcc filings we will also the staff and of call certain nadya financial measures such as adjusted even on such measures should not be considered as a substitute for the measures weren't prepared and present it in accordance with gap and we would direct you to the reconciliation of non gap to get measures included in the company's press release with her father the fcc as about details website at dub yu w w dot tpm dot com we have also posted on our website a slide deck which we will have more to during our call i will now turn the power over to tom admin tts chief executive officer please go adam
spk_2: thank you for mere good afternoon and thank you for joining us for a third quarter be twenty twenty one conference call
spk_1: i'll begin with a review of our business strategy followed by highlights from the quarter and a discussion of our third quarter results
spk_2: todd solar see of whole follow with an overview of our two three twenty twenty one financial performance and argue for twenty twenty one guidance we will then open the call to your questions
spk_1: in the third quarter twenty twenty one tdm generated revenues and non gaap he vs within the guided range despite a challenging supply chain and labour environment you're on year growth was led by strong demand an automotive data center computing and medical industrial and instrumentation and markets
spk_2: 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 and efficiencies and power restriction
spk_3: in china
spk_2: 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 a 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 or cost of goods sold was larger and key for even qq and continues to be elevated into for 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 and que three although at the minister rate of increase production inefficiencies in north america further exacerbated i cough 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 game late in the quarter right before the planned october holidays
spk_1: coming out of the holidays we have not experienced restrictions though we are continuing to closely monitor the situation as we approach the winter season in china
spk_2: next i would like to provide an update on a long term strategy the the amazon a journey to transform our business to be left cyclical and more differentiated we believe that over time investors will be rewarded with more stable growth strong flow performance and improving margins as part of the strategic transition we sold our mobility business last year
spk_1: we are now able to generate more consistent cash flow with are strong set of technologies and broad exposure to longer cycle and markets
spk_2: a key part of our ongoing strategy will be dad capabilities and products that are complimentary to our current offer both internally and through acquisitions as such we continue to invest organically and differentiated products technology solutions from our advanced technology
spk_1: the center i have enough business unit and micro electronics businesses
spk_2: looking forward our balance sheet isn't a strong position different pursue further acquisitions as well as to support or organic investment me
spk_4: i would also like to update you on the coded situation
spk_1: the vaccine roll out in the united states italy had initially resulted in a decline in new coded cases however 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 variants were to significantly increase in case counts resulting in a number of countries imposing lockdowns during the summer more recently case cards in the us and the asia are declining and lockdowns in asia are being lifted at the dm we are seeing similar trends and are using a data driven process monitoring vaccination rates and local case count to determine safety precautions at our facilities i global manufacturing facilities have been operating throughout the pandemic but in three we dealt with a rising number of cases and resulting quarantines which along with a general labor shortages contributed to production inefficiencies and capacity constraints in north america we are presently adjusting to the next normal in which we learned to live with coded nineteen while continuing to support our customers and keeping our employees said like many other companies we continue to see more challenges in attracting and retaining labor
spk_2: our employees are paramount to the success of the dm and we actively endeavor to demonstrate their value to our company through a combination of financial and non financial methods
spk_1: we continue to be hopeful that the expiration of elevated unemployment benefits in the us
spk_2: increase vaccination rates and are strong company culture will encourage potential employees to join tdm as we work to support our customers now i'd like to review our and markets all historical and market disclosures exclude the divest not guilty business unit and the to m s plants plants was halted production and december and twenty twenty for more details on and market disclosures please refer to paid for of our earnings presentation which is posted on our website the aerospace and defense and market represented thirty one percent total coded third quarter sales compared to thirty seven percent of que three twenty twenty sales and thirty three percent of sales in two to twenty twenty one
spk_1: we continue to experience a positive defense climate with our and the program backlog at seven hundred and twenty three million dollars compared to six hundred and twenty five million dollars a year ago the solid demand and the defense market is a result of are strong strategic program alignment and key bookings for ongoing franchise programs
spk_2: we saw significant bookings in the quarter for the and spied six i use a radar program and our overall book to go for a and be was one point three two not a year on year basis a nd revenues decline due to commercial aerospace weakness defense program timing and production inefficiencies in north america we expect sales in queue for from this and my that to rebound and represent about thirty two percent of our total sales given the year over year weakness and commercial aerospace as well as the labour challenges in north america we did not expect to meet this year's growth target of to two to four percent the medical industrial instrumentation and market contributed twenty percent of our total sales in the third quarter compared to nineteen percent in the year ago quarter and nineteen percent in the second quarter of twenty twenty one yeah my and i market exceeded one hundred million dollars and duty revenue and performed much better than expectations as medical and industrial customers continued to revamp
spk_1: fourth quarter with that am i an eye to be eighteen percent of revenues with continued strong orders from the medical and industrial markets
spk_5: however
spk_2: and revenue will be limited by capacity constraints and components shortages given the strength and this and market in the first nine months of the year and the fourth quarter forecast we expect to exceed the two to four percent growth target for twenty twenty one automotive sales represented eighteen percent of total sales during the third quarter twenty twenty one compared to thirteen percent in the year ago quarter and eighteen percent during the second quarter of twenty twenty one automotive group fifty fifty seven percent 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 the situation closely and are starting to see a modest reduction in our the the man as more automotive oh yams are reducing production plans due to the semiconductor shortage
spk_1: we expect automotive to contribute eighteen percent of total sales and queue for networking communications accounted for sixteen percent of revenue during the third quarter of twenty twenty one this compares to seventeen percent in the third quarter twenty two thousand and fifteen percent of revenue and the second quarter of twenty twenty one
spk_2: we thought relative strength on your on your bases and networking compared to tell a gun as the five g build out in china continues to be week thank you for respect his and market to be fifteen percent of revenue as telecom demand continues to be soft sales in the data center computing and market represented fourteen percent of total sales in the third quarter compared to thirteen percent in que three of twenty twenty and fourteen percent in the second quarter and twenty twenty one this and market was up twenty nine percent year on year due primarily to grow the my data center customers we expect revenues and this and my that to represent approximately fifteen percent the 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
spk_1: all of the following operations metrics exclude the mobility business unit and the to dms plants that we close this information is also available on page five of our earnings presentation
spk_2: during the quarter or advanced technology business which includes hd the i rigid flags and rf subsystems and components accounted for approximately twenty nine percent of our revenue this compares to approximately twenty nine percent in the year ago quarter and thirty one percent in two to
spk_1: we are continuing to pursue new business opportunities and increase customer design engage in activities that will leverage are advanced technology capabilities and new programs and new markets capacity utilization in asia pacific was ninety one percent in two three compared to sixty three percent in the year ago quarter and eighty eight percent and you to our overall capacity utilization in north america was fifty percent in two three compared to sixty one percent and the year ago court or and forty nine percent in juju our top five customers contributed twenty eight percent of total sales in the third quarter of twenty twenty one compared to twenty nine percent and the second quarter of twenty twenty one we did not have any customers about ten percent in the quarter
spk_2: at the end of cute three or ninety day backlog which is subject cancellations was five hundred and ninety four point eight million dollars compared to four hundred and thirty seven point eight million dollars at the end of the third quarter last year and five hundred and fifty three point one million dollars at the end of que to
spk_1: rpc be book to bill ratio was one point two nine for the three months and being september twenty seventh
spk_2: our backlog of higher than our revenue forecast you do uncertainty around both labor and supply chain challenges for our customers and ourself
spk_1: i'd like to conclude by again thanking our employees for continuing to contribute to tpm and are critical and of inspiring innovation with our customers despite the raw materials and labor related challenges we are facing our this has performed in line with what we expected as a direct result of our employees and are supplied same partners concerted efforts to support m and our customers
spk_2: now todd will review our financial performance to the third quarter top thanks time and good afternoon everyone
spk_1: i'll be reviewing our financial results for the third quarter which are shown in the pressure be distributed today as well as on page seven of our earnings presentation which is posted to our website
spk_2: for the third quarter net sales five hundred and fifty six point eight million dollars compared to five hundred and thirteen point six million dollars from continuing operations in the third twenty twenty the year over year increase in revenue was due to strong growth and our automotive data center computing and medical industrial and instrumentation and market which more than offset decline a decline in our aerospace and defense and market and the headwind from the closure of our to he enough facilities which contributed twenty point five million dollars of revenue thankyou three of twenty twenty and know revenues this year
spk_1: excluding the impact with the game as closure revenues of our for our ongoing business grew twelve point nine percent year on year
spk_2: gap operating income for the third quarter twenty twenty one was thirty two point two million dollars compared to gap operating loss from continuing operations of forty point three million dollars in the third quarter of last year which included a goodwill impairment charge of sixty nine point two million dollars on a gap basis net income in a third quarter of twenty twenty one with twenty one million dollars compared to gap operating loss from continuing operations afford it scares me twenty one million dollars or nineteen cents per diluted share this compares to a net loss from continuing operations of sixty one point five million dollars or fifty eight cents per diluted share the same quarter last year the remainder of my comments will focus on are not get financial performance or non gap performance excludes or to that mobility business unit nonworking tax items am in a related costs restructuring cost certain on cash expense items and other unusual are infrequent items we present not get financial information to enable investors to see the company to the eyes of manager and if facilitate comparisons with expectations and prior period
spk_1: gross margin in the third quarter with seventeen point two percent compared to eighteen point four percent in the third quarter of twenty twenty
spk_2: the year on year decline was largely due to production challenges in north america and for exchange head when and our china facilities
spk_1: during the quarter we get experience significant material cost increases the we were able to substantially mitigate the prophet impact of those increases to cut through price increases and manufacturing efficiencies
spk_2: selling and marketing expenses fifteen point one million dollars in the second quarter or two point seven percent of that sales versus fifty point three million dollars or three percent of net sales a year ago
spk_1: third quarter g and expensive twenty nine point two million dollars or five point two percent of net sales compared to twenty six point nine million dollars or five point two percent of net failed in the same quarter last year
spk_2: and the third quarter twenty twenty one or the with four million dollars or zero point seven percent of revenues compared to five point two million dollars or one percent and a year ago core
spk_1: are operating margin and que three was a point six percent this compared to nine point one percent and cute three of twenty twenty interest expense with ten point six million dollars in the third quarter and he treats from twelve point nine million dollars and the same quarter last year due primarily to lower levels of debt as we read paid four hundred million dollars of our term loan and are two hundred and fifty million dollar convertible barn in the second half of twenty twenty
spk_2: during the quarter there was a negative zero point seven million dollars of foreign exchange impact below the operating line government incentives and interesting coming due to a negative zero point one million dollars and a negligible impact dps this compared to a lot of two point five million dollars or to censor dps into three last year perfect a tax rate was one point one percent in a third quarter as we now if the made our tax rate for twenty twenty one could be seven percent third quarter net income was thirty six point five million dollars or thirty four cents per diluted share this compares the third quarter twenty twenty net income of twenty six point eight million dollars or twenty five cents per diluted share
spk_1: adjusted ebitda for the third quarter with sixty eight point six million dollars or twelve point three percent of net sales compared with third quarter twenty twenty adjusted he buddha of sixty seven point two million dollars or thirteen point one percent of net sales
spk_2: depreciation for the quarter with point one million dollars
spk_1: nick capital spending for the quarter was nineteen point eight million dollars casual from operation was eighteen point six million dollars lower than expected due to hire inventory caused by longer transit times and lower hutt told by our customers
spk_2: accounts receivable brothel higher than expected due to timing of customer payments our balance sheet and the cookie positions remain very strong cash and cash equivalents at the end of the third quarter of twenty twenty one where five hundred and twenty nine point eight million dollars and our net debt divided by last twelve months he but that was one point five times during a third quarter we repurchase two point one million shares of our common stock under our previously announced one hundred million dollars stock repurchase program at an average price of thirteen points seventy one per share for a total of twenty nine twenty eight point nine million dollars as of the end of the third quarter we have spent a total of thirty five million dollars for stock repurchases no i'd like to turn to guides for the fourth quarter if posted 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 efficiency and efficiencies in north america
spk_6: additionally tdm has a fifty two fifty three week fiscal calendar and twenty twenty one is a fifty three we gear the extra week will be included in our fourth quarter note however that the extra week of the holiday week after christmas and include new years as such the revenue benefit is modest the best but we do encourage extra week of operating expenses
spk_1: given that we expect total revenue for the fourth quarter of twenty point one to be in the range of five hundred and thirty to five hundred and seventy million dollars and we expect non gaap earnings in a range of twenty eight to thirty four cents per diluted share
spk_2: he as forecast is based on a diluted share count of approximately one hundred and seven million shares or share cow guidance includes loot of security such as options in our shoes but no shares associated with our words as the current stock prices under the strike price of fourteen dollars and twenty six cents
spk_1: we expect that as to an expense will be about a point nine percent of revenue in the fourth quarter and are indeed a be about zero point nine percent of revenue base but interest expense the total approximately eleven million dollars finally we estimate are effective tax rate between five and ten percent
spk_2: to assist you in developing your financial models will offer the following additional information during the fourth quarter we expect record amortization of intangible of about ten point two million dollars stock based compensation expense of about five point three million dollars noncash interest expense of approximately zero point five million dollars and we estimate appreciation expense will be approximately twenty two point four million dollars
spk_1: finally i'd like to announce that we will be participating virtually and the baird industrial conference on november ninth and the bank of america leveraged finance conference on november thirtieth that concludes that prepared remarks and now we'd like to open the line for questions james
spk_0: thank you if you like to ask a question please signal by pressing star one on your telephone keep it if using a speakerphone please make sure your mute function is turned off till i know treat our equipment again press star one to ask the question and we'll take our first question dave from gym a shooting with need him and company
spk_6: hi good afternoon i'm just wanted to go through the sequential decline and gross margins a i mean obviously there are several contributing factors good i'm wondering if maybe you could help us
spk_2: by trainer personality to quantify some of those factors which had a bigger impact whether it was higher cost the lower utilization you know in north america or or potentially next
spk_7: sure gym
spk_1: you know as we highlight the the results in our revenue was down about ten point six million dollars sequentially i'm led by by andy which was the down about eleven million automotive with down slightly and that was offset by strengthen medical science mutation so and that number down about ten point six million dollars in revenue are gross margin decreased about seventy four basis points to seventy seventeen point two percent and what's really driving net
spk_2: some of it is the revenue decline okay for that hurts or margin a bit but really the production and efficiencies in north america driven primarily by various related labour challenges with it at kobe direct or the inability to acquire the the staffing levels that we needed a were where the really the big can
spk_8: redditors
spk_2: and that resulted in our gross profit being down about six million dollars sequentially and those two items revenue and the production and efficiencies in north america where about a fifty fifty split
spk_9: that is just follow up with respect to up some of labor challenges here rats doesn't sound like that
spk_2: improving much in the near term some wondering how we should think of about those pressures and and and coupon will they be more significant concerns or you see them using some logic is something you're anticipating improving in the early part of twenty two so love a gym the sitar not a let me just address that hegel gym ah just them is just some q for and talk a little bit about about the longer term situation there we we mentioned you know and and as think this is this is being experienced by number of companies as you know substantial part of our production does come out of north america that's really what we're talking about you here and ah and the impact and que three the were compounded by coded so he had yes we were dealing with labour shortages we also had to deal with where the spike and and coven cases and the resulting quarantines as we go forward in the queue for the the good news that least we're seeing that case count come down so that will be an improvement the labor situation the other
spk_1: the impact of this is that we are able now to get tiger teens and have since the last quarter been able to get tiger teens and some of our facilities that were there were more challenge in north america that takes time to
spk_2: two effected self in terms of production
spk_1: the old improvements ah but are we expect to started to see that those improvements pay off as well as we come through que foreigners into next year what we can't really are forecast is is the material situation i'm in terms of material shortages and whether that situation improves i also whether the the inflation or what happens with the inflationary trans there so we can't really forecasts that the than any other piece of course logistics and logistics challenges so
spk_2: what i'm really saying is yeah there's a piece of the situation that will improve we can see improving and queue for around the labor but the overall labor shortage will still be a challenge and then you got the ongoing impacts of of materials loud logistics challenge challenges going forward mchugh for as well i am the animal course we are teens operational teams i mentioned are are doing a fantastic job of adjusting on the fly in some cases to add to meet customer demand and i and i would remain optimistic that of course our supply chain partners will work through some of their challenges i year as we go into next year
spk_0: that certainly for the for the fourth quarter those that's gonna rename a you know challenge and we need to confront
spk_6: thank you
spk_10: our next question will come from william stein with us securities great thanks for taking my questions first i'm hoping you can give us an update on lead times i think typically your the touch a very short but know and i don't think they extended the way up the knee in other components companies are did in this cycle that we're still in the midst of i guess but he can update us as the that trajectory there and the sort of been
spk_2: pacing of of things like ah i'm a poet night vs push out and cancel they you
spk_4: yeah sure well
spk_2: yeah that the demand environment continues to be of really robust if you look at the that commercial demand environment for asia facilities
spk_1: our age of facilities i think live where the exception of one facility pretty much book through through the fourth quarter you can see that reflected a course in the slang for the backlog they were looking at you know substantial or lead time extensions there are will advance again on the facility but you know you're looking at i would say on average sixteen weeks plus in those facilities north america
spk_2: also generally very very tight in terms of demand and or facilities that you know you're you're absolutely right would be on average you know for weeks kind of lead time in the past three to four weeks now you're looking at the ad lead times that stretch into a into next year as we as we book and into those facilities
spk_3: it's help certainly the demand climate remains overall very strong i talked about you know one one area that continues to be a concerns commercial aerospace
spk_2: that's probably you know the the one market where where we'd we'd continued if he is he real softness
spk_10: but the outside of that that really really strong demand environment all died and but and city of buybacks versus the day and any commentary on a pipeline and than
spk_2: it's been awhile since he did it significant feel but any other any of the airports
spk_4: sure i can talk about the emanate environment i'm todd maybe you can comment on on the buyback and obviously both was critical parts or a balance he'd strategy and i and i and rebalance other do in terms of i am in a add the strategy very much well remains in
spk_1: place as we i look at the ad potential assets that does as would help to satisfy some of the strategic needs of the company or one of those is is looking at our footprint capabilities and printed circuit board states
spk_2: as we look at that the the need to to move beyond our existing footprint in europe into a into southeast asia or that's one area the the even greater focus on adding to our our rf i engineering expertise are both on that commercial side and on the aerospace and then side can you know looking at opportunities to to build on that capability we have not as as you point out we have not the i had a major acquisition of than a year for for a period of time and that's really not here we have a decent pipeline in the works
spk_1: but that pipeline then the you know you need to work at you need to see those opportunities come to fruition
spk_2: i and also we still are dealing with eight inflated i expectation environment in terms of that seller expectations outside out there and i and a second harry a focus for as is to really need not only our strategic needs that also add to make sense to the company financially as we run cashflow projections i
spk_11: and and put evaluation to these assets as hell
spk_1: you know you have to clear both i and and at that point at this point the second is more challenging i'd say no to fulfill i will tell you that we continue to to work that pipeline still in a very active browsers
spk_2: and just add onto that you know we look at our capital allocation structure and in our plans going forward your we've we recognize that our company has really matured over the last five years and we're at a different place and where we were before notwithstanding the challenges that we talked about our execution is relatively consistent in the more
spk_12: could the were participating in her are are pretty attractive
spk_2: that really afford this an opportunity to have a multi pronged allocation strategy rather than just one one option early on our first choice without a doubt is to find opportunity to grow the company both organically or in organically but we feel now reached a point in our in our life that we can also i'll have a a shareholder return element to their capital allocation strategy one that we can keep up as we go for some on that some modest level and we talked about the fact that we now the program we hadn't had a whole lot activity in the in the first quarter to for various reasons that we talked about in the bath and we were in the market much more the actively hearing in the last quarter and
spk_6: and of now spend about a third of our total program amount that was approved an authorized by the board of a hundred million dollars so that that program it is still in force that out there and will continue to
spk_0: to take opportunity to to to buy back our stock wouldn't make sense
spk_13: but we don't believe it's mutually exclusive to at a we think we can balance the two and and that is not our intention going forward like it you honest question will come from sweeney perjury with smbc nico securities thank you hi tom and dad i'm atomic question about your backlog versus your revenue guidance
spk_14: i guess last quarter there are pretty similar i i think i'd get know why your garden your revenue live below your backlog ah but given that you're you said labour situation is actually improving sequentially arm
spk_15: i'm little bit surprised that you're not in a garden for a somewhat similar
spk_2: tom enough revenue as your backlog so she could talk about what sort of utilization you're assuming for queue for especially given that he said you have an extra week and then what's causing that discrepancy i do know baleful sure
spk_16: yeah there's the you be on the labour prime time yeah the good the good news
spk_1: is is that damn you know coded cases have been trending downward
spk_2: but but that does not negate the fact that we still have a significant labour challenges out there can both in terms of of turnover and also in terms of labor availability i and up and those cows those those challenges will continue in the fourth quarter at least from from our vantage point we also have to take into account the v prospects of the supply chain material shortages continuing the impact of arson and with various facilities and the logistics challenge and so so that as we look at at our production capabilities we have to factor these these elements in and i and frankly that that leads us to be a little bit conservative on the on on the revenue side eye and
spk_1: i would add that as as todd pointed out that additional week is is really a our we it's a holiday weeds are you really you know you're looking at certainly additional expense the opportunity to blizzard to push out more revenue is pretty limited our during that period of time i and so on so that's that yeah that that doesn't really have much impact on us
spk_2: i'm also tired mention we did we did build some some revenue of some inventory last quarter this quarter we're looking at that situation where we're going to drive is anything drawdown
spk_13: inventories that that certainly aren't part goal here make sure that our inventories are are properly and line to generate the cast and we have that we do as a accompanied as he put all that together and and i'd say from a revenue standpoint you know again
spk_2: where we're comfortable where we are it's great to be in an environment such a positive demand environment
spk_1: we are by working now to to native the solid improvements are we need to operationally the add the have an impact on that on a backlog die as we go into next year todd anything that at night a good at it you know there's a lot of holidays in the fourth quarter so when you get out of production day basis to forty cupid is very little difference even know how like on paper there's an extra week got it and then on the yeah cos mitigation actions that are you were implemented that can be maybe talk about where we are in that process and how receptive are your customers have been in i guess it's it's it's no secret that enough to supply chain
spk_2: mean i has been going through an inflationary pressures i think it's well understood on am just curious as to where we are in that process and how receptive the customers misery sure i think that egg again is an area like that guy who that our teams have been working tirelessly on and and it's a lot of like like you said generally recognized but by done that doesn't mean that that customers are pleased when they're when they have to face a a price increase and so i what we have been doing here is really coordinating in our supply chain or operations teams and and the sales team make sure that we are as transparent as possible communicating with our customers about of the in the increased cost pressures either we have felt as todd said you know we we those cost pressures filter in
spk_1: really the course of the year certainly
spk_2: we'll continue in the fourth quarter
spk_17: the third quarter we did see some additional increases broad based but not as extreme fortunately as the first half of the year
spk_1: and and so then you move on to the pricing side we did a good job and key three i think that you know he characterized that is the that we were seventy five percent is yes in terms of progress and queue at the beginning of que three in passing on cost increases we were able to to pretty much close that gap and you three i in queue for i you know again the bar goes up and me and the have an additional challenge i as we as we had conversations with our customers i would add that as as you remember about fifty percent of our of our business
spk_2: is non contractual so we're able to adjust quote models
spk_1: immediately as we as we forecasting reaches i and or or
spk_9: his contractual that contains material escalation clauses eyes the balance the fifty percent that we're talking about here which is contractual
spk_2: we add at varying levels of contractual negotiation or frequency and it's that piece that we've really been been working on
spk_6: as a company this is an interesting time and the fourth quarter because a number of our annual played contracts particularly in automotive come up for negotiation in the fourth quarter so so i know our sales team on and business units will be working very hard this quarter on on are communicating with our cost
spk_2: summers i am trying to really be looking forward looking as we are as we look at the an ongoing impact here of in inflation of a newly inflationary environment i just might idea that we need i have got it
spk_6: i would go ahead in on the other part of it it or not
spk_13: or mitigating i use the word mitigating activity because it's not just all about pricing i we have other measures that are working very hard to try to use to help offset the pain of higher or material costs the that looking at alternative suppliers driving are gaining efficiencies as we build volume to help offset some of that are negative cost and driving just cause controlled and general within our facility to try to minimize the pain a ghost because i think the tough road to go customers like time pointed out they understand it but they don't like it
spk_2: and so you have to make sure you're doing everything you can do him to reduce the the need to go to them right the were been working all those angles against the middle of you will the try to mitigate it would not a good job here into to into three i think both quarters we we accomplish the goal or we're looking at you for and and hoping to get to the same place but there's still a little bit of work to be done did you ever find lot of any yeah just one that i'm in a town there's been a lot of noise about potential subsidies for the yeah semiconductor industry and and domestic manufacturing i'm just curious if you have had into discussions discussions in washington
spk_18: the him and if you foresee potentially and tt a my benefiting from any sort of their subsidy that might come out of there
spk_1: yeah that i've given that topic comments on that i think any on the aerospace and defense thousand particular and
spk_2: i think there's has a better understanding out there and and really reflected in in that legislation the budget budgetary legislation rounded defense ben defenses we look at next year i'm around the weaknesses that the that that the supply chain theaters in terms of pt the production in north america i think that of of certainly of concern to i defense customers
spk_1: i am damn and so a and i think it's good it's a positive good to see that that that there's a a developing understanding and in congress
spk_2: i and within the defense department of of how critical printed circuit boards are it to the capabilities and to into our infrastructure needs as as a country
spk_13: hell
spk_0: we'll see how that develops him in terms of specific legislation activity and i laid another aspect with you would you mentioned three the and as as you think about and and as an congress looks at a at semiconductors now we've certainly than encouraging
spk_2: and educating around the need to broaden their definition the think not just about kfc but about the broader electronics manufacturing infrastructure we like to say that chips don't float is as saying that we use our just it really is in i think it's important that be recognize that there needs to the entire support structure around chips will we'll see again where where the how the legislation ends up i think the that there he has been a broadening of definitions to include microelectronics and and that's a positive and we'll see what blood really comes out of congress or this year but overall you know would certainly encourage to see that the other their that there is more attention being paid to add to the tissue now
spk_19: got it thanks tom and from good luck
spk_2: and you
spk_20: our final question will come from my crawford with be by the securities
spk_2: thank you just before i asked about the fence to just again hear your answer that that was the midpoint of your fourth quarter got into the forty five million dollars below ninety day backlog you never know
spk_1: oh sure yeah yeah i'm so and so the the backlog as we look at the backlog that is it is technically a ninety day backlog but we are looking at a quarter typically north america are where we have some ongoing challenges related to labor go to material availability and logistics challenges lie and so as we looked at the the revenue projections for the fourth quarter we need the money doing clued those challenges and and i and so there's a bit of a of a shortfall of he will from the revenue as compared to add to the backlog
spk_2: out of at that time and i suppose in a different environment sometimes you might actually work and ship and you could actually have a quarter that's above the backlog or is that always sometimes sort of relative backlog this is on this is an unusual circumstance my now i'll be i'll be gone we thought we know we saw a little bit of last quarter if you'll never we are backlog was pretty close to matching revenue last quarter and and of and we spoke about
spk_19: again about the need to be careful as and and we were proven right at him a third quarter but it was really as we look at the third quarter we knew we were in the summer i in the summer we knew we were already saying our challenges on the labour fun and me and we anticipated that as so this is you know again at a second quarter of this
spk_6: it is unusual usually we would we would have a portion of of our revenue the weekend book in the quarter and ship
spk_9: that i talked a little bit will last about the extended lead times
spk_19: that's absolutely part of this he can see an indication as the time stretch that we're just gonna have real challenges booking and shipping within a quarter ads are really does end up you know doing our best to ship as much of our backlog out
spk_2: during the course of the corner calm as possible so yeah a little bit a little bit unusual ah okay thank you so and then
spk_1: someone related but
spk_2: when you're talking about
spk_1: and growth expectations were vertical and market so it it out based on the fence where you had a one point three to book to go on a quarter and near hundred million your be your job as backlog got you're saying you expect to go slower than industry two to four percent growth rate but is that just for fiscal twenty one
spk_2: is not what you mean by up like twenty one or you can i don't think expect to go slower than the industry and the next couple of years oh if i know apple yeah absolutely like i'm yeah where are you know that that is i we as you know if we have grown up for ah the past several years three three four years we've been going well above average actually ever since the and systems acquisition so you can step backwards two thousand and sixteen and and take a look at the numbers we've been drawn well above average ah this this year
spk_1: an aerospace and defense we we got hit by a couple things are one as commercial aerospace weakness
spk_2: hi and and that has an impact on on several of our our facility that that really were focused on on that area primarily a your family needs in that area not that so those facilities were impacted and guy and then the other piece of this has been dealing with with some of the ongoing challenges production efficiency towns in the north america certainly that that's heightened here and in his past quarter as we go in the next year
spk_6: you know certainly from a capital planning standpoint we are we are planning on growth yeah we'd be a strong backdrop by here in terms of program backlog to go out and and service
spk_2: as you know we have we we have them capital capability balance he capability to grow in aerospace and defense and we have differentiated technology offerings here
spk_0: so our plan is to love you know to continue to do to grow in aerospace and defense
spk_2: hopeful that next year will also see that turn on commercial aerospace and start to see i leave you know some some meaningful sequential improvements are they will help feed into that story as well like the taught here just one other thing i like aerospace and defense unlike our commercial do week really we book orders those orders are not necessarily for shipment in the next ninety days off and kind of those orders are super bowl in the next one to two years and so it it
spk_0: although the the foundation if you look at the program backlog for her for growth rate with head over seven hundred million dollars is a great number it's not all ship of and so you're gonna have to look at of down ordered of the earth and that plays into a little bit of of the challenges that we saw this year but when you look at the program that

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