TTM Technologies, Inc. (TTMI) Q4 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the TTM Technologies Fourth Quarter and Fiscal 2011 Financial Results Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, February 7 of 2012. And I would now like to turn the conference over to Diane Weiglin, Executive Assistant of TTM Technologies, who will review the disclosure statement. Please go ahead.

During the course of this call, the company will make forward-looking statements that relate to future events or performance. These statements reflect the company's current expectations, and the company does not undertake to update or revise forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied in this or other company statements will not be realized. Furthermore, we wish to caution you that these statements involve risks and uncertainties, many of which are beyond the company's control which could cause actual results to differ materially from the forward-looking statements. These risks and uncertainties include, but are not limited to, the company's dependence upon the electronics industry, contemplated significant capital expenditures and related financing requirements, the company's ability to integrate and manage its Asia-Pacific operations, the company's dependence upon a small number of customers, the unpredictability of and potential fluctuation in future revenues and operating results, and other risk factors set forth in the company's most recent SEC filings. The company also will present non-GAAP financial information in this call. For a reconciliation of TTM's non-GAAP financial information to the equivalent measures under GAAP, please refer to the company's press release, which was filed with the SEC and which is posted on TTM's website. I would now like to turn the call over to Mr. Kent Alder, President and Chief Executive Officer. Please go ahead, Kent.

Okay. Thank you, Diane. Good afternoon, and thank you for joining us for our Fourth Quarter and Fiscal Year 2011 Conference Call. Joining me on today's call are TTM's CFO, Steve Richards; and Canice Chung, CEO of Asia-Pacific region. I'll begin with a review of our business and then Steve will follow up with a discussion of our financial performance, and then we'll open the call to questions. First, I'd like to begin with a review of the highlights of the fourth quarter. Net sales were $361.5 million. GAAP net income was $8.4 million or $0.10 per diluted share. As noted in our press release, our results for the fourth quarter include a non-cash goodwill impairment charge of $15.2 million at our Shanghai backplane assembly plant which we acquired from Tyco in 2006. Excluding this charge, our Q4 net income was $21 million or $0.26 per diluted share. Non-GAAP net income was $27.7 million or $0.34 per diluted share. Gross margin was 19.7%. For the fiscal year 2011, net sales increased to a record $1.4 billion. GAAP net income was $39.1 million or $0.48 per diluted share, and non-GAAP net income was $124.8 million or $1.52 per diluted share. Our fourth quarter results were towards the upper end of our expectations for both revenue and non-GAAP EPS. We expect continued solid demand for advanced HDI interconnect or HDI printed circuit boards. However, the overall demand for conventional multilayer printed circuit board weakened during the quarter. Advanced HDI products continue to represent a growing part of our overall product mix, comprising approximately 23% of our Asia-Pacific revenue in the fourth quarter. As a point of reference, in the fourth quarter of 2010, advanced HDI products represented 7% of our Asia-Pacific revenue. I would now like to comment on the results of our operating segments for the fourth quarter. And then as usual, Steve will add more details later in the call. Asia-Pacific had sales of $218.4 million, down from $222.3 million in the third quarter. Gross margin for Asia-Pacific was 18.5% in the fourth quarter compared to 20.4% in the third quarter. The decline in gross margin was primarily due to lower absorption on lower production in our facilities that manufacture conventional printed circuit boards. Reflecting this lower capacity utilization, a greater-than-normal share, approximately $15 million of our $218.4 million in Asia-Pacific revenue came from shipments out of inventory. Despite the lower utilization rates in our conventional printed circuit board facilities, we continue to experience strong utilization in our advanced HDI facilities. Overall, average capacity utilization in Asia-Pacific was approximately 80%. The North American segment recorded fourth quarter sales of $144.1 million, up 5% from the $137.4 million in the third quarter. Gross margin was 21.6% compared to 18.5% in the third quarter. The increase in gross margin was due primarily to improved operating leverage and a better mix of work from key commercial end markets customers such as -- end markets such as networking and high-end computing. We are pleased with our strong performance in North America. The outlook for several key customers in this operating segment remains positive. As you might suspect, our capacity utilization in North America increased from the high 70s in the third quarter to the low 80s in the fourth quarter. On a year-over-year basis, fourth quarter sales in Asia-Pacific fell slightly from $220.2 million in 2010. In North America, sales decreased approximately 8% from the $156.4 million in 2010. Now moving on to our end markets. Networking communications is our largest end market. Sales in this end market were 33% of fourth quarter sales compared to 38% in the third quarter. We experienced solid demand for advanced technology routers and enterprise networking equipment, while sales to our telecom infrastructure customers were more challenged. We expect this trend to continue in the first quarter. Longer term, we anticipate that we will continue to benefit from our diverse participation across the enterprise, service provider and telecom infrastructure markets. Computing, storage and peripherals is our second largest end market. Sales in this end market represented 20% of fourth quarter sales versus 21% in the third quarter. As expected, sales in this end market declined sequentially due to softer shipments from a key customer. We expect sales to increase with this key customer in the first quarter. Partially offsetting this decline was an increase in sales in the high-end computing and storage market, primarily served by our North American division, where some of our customers address the fast-growing cloud server market. We expect this end market to represent a greater percentage of sales in the first quarter as we experience continued strength in the high-end computing and storage markets, and a return to higher touch pad tablet shipments. The aerospace and defense end market represented 15% of fourth quarter sales, compared with 16% in the third quarter. While we experienced continued solid sales to commercial aerospace customers during the quarter, sales to defense customers declined due to end-of-year rescheduling and lower defense demand related to federal budget issues. Going forward, we expect this end market to remain at approximately 15% of sales in the first quarter of 2012. In the cell phone end market, sales increased sequentially to 13%, up from 10% in the third quarter. We experienced both market share gains and expanded strength in smartphone sales to China-based manufacturers as our mix continued to shift toward more smartphone products which require both advanced HDI capabilities and rigid-flex capabilities. We expect sales in this end market to decrease in the first quarter due to seasonality. The medical, industrial and instrumentation end market represented 8% of sales in the fourth quarter, up from 7% in the third quarter. Sales increased sequentially, as we saw improved revenue from medical customers, as well as other customers in this broad category. We expect this end market to be relatively stable as a percent of sales in the first quarter. As expected, sales in the other end market increased sequentially, growing to 10% of sales in the fourth quarter from 8% in the third quarter. The increase in sales was driven by a new product launch and strong holiday demand at a key customer in the e-reader market. We expect this end market to decline in the first quarter, due to minimal e-reader production in the quarter. Now our top 5 customers did not change in the third quarter and, in fact, the top 5 customers have remained the same for all of 2011. These customers accounted for 31% of sales in the fourth quarter. In alphabetical order, our top 5 OEM customers were Apple, Cisco, Ericsson, Huawei, and ZTE. Lead times for both of our segments remained unchanged at 4 to 6 weeks, which reflects normal lead times in both Asia-Pacific and North America. Our mix shift to more advanced technology resulted in ASPs increasing approximately 2% in both Asia-Pacific and North America during the quarter. Now before I wrap up my discussion, I would like to note that we are temporarily closing our SYE plant, located in Dongguan, China for repairs and upgrades to the facility. We expect to transfer a majority of production, as well as many of the employees, to our other facilities located in Asia. We estimate expenses of approximately $6 million for maintenance and repair work, and expect the project to be completed by the end of the second quarter in 2012. Ongoing cost associated with this project will create a slight drag on margins in the first half of 2012. As we repair the SYE facility, we will continue to meet our customer needs in our other Asia-Pacific facilities. We anticipate a reduction in revenue of about $3 million to $6 million during each of the first quarters -- first 2 quarters of 2012 as the transition to other facilities occurs. We expect production at the SYE facility to resume during the third quarter of 2012. So in summary, the softness in demand for conventional printed circuit boards that we experienced in Asia-Pacific is likely to continue in the second quarter, as weaker macro environments persist. However, demand for advanced HDI work remains solid. We continue to see new product launches that require advanced HDI printed circuit boards and rigid-flex print circuit boards, and we expect this trend to continue. We remain confident that we are targeting the right diverse group of end markets and customers. In fact, we have greater product diversification opportunities that keep customers than before. We believe this diversity in our customer base, end markets and geography provides more demand stability relative to industry averages. The benefits of this diversity were evidenced by the increased revenue and profit contributions of our North American operations in the first quarter. We believe our global footprint is expanding our customer engagements and enabling us to grow market share. Cross-selling has taken root, and quarter by quarter we are gaining more traction. As we have previously noted, our CapEx program focused on technology enhancement, bottleneck areas and maintenance. We plan to invest $100 million to $120 million in 2012, as we continue to expand our capability in advanced HDI and rigid-flex printed circuit board manufacturing capabilities. Our Flex and Rigid-flex business, which is primarily associated with smartphone and touch pad tablets, has grown from 2% of sales in Asia-Pacific in the fourth quarter of 2010, to 6% of sales in the fourth quarter of 2011. We believe the underlying long-term drivers for advanced technology printed circuit boards remains intact. The trend towards the proliferation of converged mobile and media devices, and the surge in networking applications remains unchanged. We are well-positioned to capitalize on these growth opportunities. Now based on customer input about new product introductions, the overall prospect of our business in the second half of the year are strong, and we expect the majority of our revenue and earnings for 2012 to come in the second half of the year. Now, Steve will review our financial performance for the fourth quarter.

Thanks, Kent, and good afternoon, everyone. Fourth quarter net sales of $361.5 million increased $3.2 million or 1% from third quarter net sales of $358.3 million. Gross margin was 19.7% in both third and fourth quarters. Selling and marketing expense was $9.9 million in the fourth quarter compared to $8.7 million in the third quarter. As a percentage of net sales, selling and marketing expense in the fourth quarter was 2.7%, up from 2.4% in the prior quarter. Fourth quarter G&A expense increased to $24.2 million or 6.7% of net sales, which is a return to normal historical levels following onetime savings in the third quarter that led to G&A expense of $21.3 million or 6% of net sales. Amortization of intangibles was $4.5 million in the fourth quarter compared to $4.3 million in the third quarter. As Kent stated earlier, in the fourth quarter, we recorded a goodwill impairment charge of $15.2 million as part of operating expenses. This eliminated the goodwill we carried for our Shanghai backplane assembly facility, which was part of our 2006 acquisition of Tyco's PCB business. Operating income for the fourth quarter was $17.6 million compared to operating income in the third quarter of $36.3 million. Excluding the goodwill impairment charge in the fourth quarter, operating income would have been $32.8 million. The Asia-Pacific segment's fourth quarter operating income, before amortization of intangibles, was $20.1 million compared to operating income of $27.9 million in the third quarter. The North America segment's operating income for the fourth quarter, before amortization of intangibles, was $2.1 million compared to $12.8 million in the third quarter. Excluding the goodwill impairment charge in the fourth quarter, segment operating income would've been $17.2 million, up 35% from the third quarter. Interest expense was $6.8 million in the fourth quarter compared to $6.7 million in the third quarter. Our effective tax rate in the fourth quarter was 30.1%, an increase from the third quarter effective tax rate of 15.9%. The third quarter rate was lower due to research and development tax credit we earned for 2010 and prior years. Net income attributable to stockholders for the fourth quarter was $8.4 million or $0.10 per diluted share compared to net income in the third quarter of $24.5 million or $0.30 per diluted share. The goodwill impairment charge recorded in the fourth quarter negatively impacted net income attributable to stockholders by $12.6 million or $0.15 per diluted share. Excluding this goodwill impairment charge, GAAP EPS for the fourth quarter would have been $0.26 per share. Fourth quarter non-GAAP net income attributable to stockholders was $27.7 million or $0.34 per diluted share. This compares to third quarter non-GAAP net income attributable to stockholders of $31 million or $0.38 per diluted share. Non-GAAP net income attributable to stockholders adds back amortization of intangibles; stock-based compensation expense; non-cash interest expense; asset impairments, restructuring and other charges; as well as the income tax actuated to these expenses. Adjusted EBITDA for the fourth quarter was $60.2 million or 16.6% of net sales compared to third quarter adjusted EBITDA of $59.3 million or 16.5% of net sales. Cash and cash equivalents at the end of the fourth quarter totaled $196.1 million, a decrease of $11.6 million from $207.7 million at the end of the third quarter. Net debt was $317.2 million at the end of fourth quarter, up from $305.2 million in the third quarter. Cash flow from operations in the fourth quarter was approximately $32 million. Capital expenditures for the fourth quarter were approximately $42 million. This reflects approximately $36 million for Asia-Pacific and $6 million for North America. Depreciation for the fourth quarter was $19.9 million. In the first quarter, we expect revenue to reflect normal seasonality as well as the lower number of production days in the quarter. Due to our accounting calendar, which has us closing our first quarter on March 26, there are 10 fewer calendar days in the first quarter than in the fourth quarter. In addition, our PRC plants were closed for the Chinese New Year celebrations. Overall, we expect first quarter revenue to be the range of $310 million to $330 million. We expect GAAP earnings attributable to stockholders in the range from $0.11 to $0.20 per diluted share, and non-GAAP earnings attributable to stockholders in the range from $0.19 to $0.28 per diluted share. This is based on a diluted share count, for the first quarter, of approximately 82 million shares. Factoring in lower utilization at our conventional PCB facility and the costs related to temporary closure of our SYE facility, our first quarter gross margin is expected to be in the range of 17% to 19%. We expect that SG&A expense will be about 10% of revenue in the first quarter. We will record amortization of intangibles expense of about $3.9 million. We expect our blended tax rate to be approximately 28% in the first quarter. Before we address questions, I'd like to mention that we'll be participating in the following upcoming investor conferences: The Stifel, Nicolaus Conference Technology and Telecom Conference in Dana Point, California this Thursday, February 9; the UBS Mid Cap 101 Symposium in Boston on February 28; and the 15th Annual Sidoti Emerging Growth Media Conference in New York on March 19 and 20. We'll provide further details in an upcoming press release. With that, I'd like to open the call to your questions.

[Operator Instructions] And our first question is from the line of Steven Fox from Cross Research.

A couple of questions. First of all, with regards to the temporary closing of the plant. Can you provide a little more details as to the rationale behind that? It seems a somewhat unusual action to close the whole plant. And then, secondly, demand drivers for the first half of the year. From a high end telecom standpoint, are you seeing any change whatsoever, relative to what you were seeing? Can you can just sort of go in to more color there. And then, very final question would just be if, Steve, if you have the actual number of days in the quarter, that'd be helpful.

Sure, okay. First of all, with regards to the SYE closure, we have looked at that facility and there is -- it's mainly some infrastructure rebuilding on the facility, quarters and the floors and joists and so forth. And if some repairs -- I guess, we'll probably capitalize most of those repairs, but it extends the life of the building, it's something that we've been looking at and know that we had to do at some point in time. And then when the demand for our conventional circuit boards got low enough, we decided that instead of trying to repair that building piecemeal, we would take advantage of the low demand for conventional circuit boards, jump in, fix that building entirely and then we can have that kind is and be ready in the second half of the year when we think demand will pick up. So it's not something that we just sprung on. We've been looking at this, how to go about it, with different plans and then decided that -- take advantage of the situation and fix that building. And I think like we say in our script here, that we'll take care of almost all of the customer needs, the employees will move to 2 different facilities and we have idle capacity or available capacity in those facilities. So it's perfect time to take advantage of the situation. With regard to your second part, I mean, our Network and Telecom business. The networking, particularly in North America, was very solid for us. With the routers and switches and so forth, they were pretty solid. The telecom part of that end market is still soft, and it's soft here in the U.S. as well as Asia-Pacific, and we don't think that will come back in the first quarter, and maybe some minor comeback in the second quarter. But we're not forecasting a big return for that. And I might add that when we look at the second half of the year, historically in Asia-Pacific, we've always had -- the stronger part of the year has been the second half. And this year is no different, but it is a little more exasperated because we will have some demand that we're looking at from existing customers, that we think most programs will start up in the end of the second quarter into the third and fourth quarter. Let's see, I forgot the third part of your question.

The last part was number of days. So, Steve, we had 96 days in Q4, we'll have 86 days in Q1. So 10 fewer days quarter versus quarter. That's the funk of our accounting calendar.

And that's in Asia-Pacific. And I think, Steven, even in North America our working days, we kind of do it by working days, we'll go from 67 days down to 60. So we had about 10% less days in both North America and Asia-Pacific.

And our next question comes from the line of Steve O'Brien with JPMorgan.

If I can go back and talk about the Asia-Pac weakness in conventional printed circuit boards. Can you just help me understand a little bit of what the products you were talking about there are? Because it seems like when you take about cell phones and you take out the advanced HDI, probably to use HDI maybe in the computing category, maybe what you're left with is networking. But that would kind of be a different trend than what you're seeing in North America. So I don't want to jump to that conclusion. I'm just curious to learn more there.

Yes. So you're right Steve, the cell phone and much of the computing work we do is indeed HDI. As Kent mentioned, that business is doing quite well. So the Rigid PCB business or Conventional PCB business in Asia is mostly characterized by work for a variety of networking equipment providers. Obviously, 2 key companies in China, as well as a couple of very large European networking companies. And whereas those European guys are really strong in Q2 and Q3 of this year, we saw some softening in Q4, and that's continuing into Q1. The 2 Asian players in that networking arena have been pretty soft for most of this year in the networking part of their business. Although the cell phone business for those 2 Chinese companies has been quite good. So I think those are the biggest drivers that kind of, by and large, networking on a global basis for Asia is softer right now. You are correct in that North American networking sales are still doing quite well and, actually, were part of the reason why we had a better-than-expected Q4 in North America. So our U.S.-based networking customers, for whom we mostly support their advanced technology products, are doing quite well for us in North America and that's expected to continue in the first quarter. And that's a bit kind of surprising, given some of the broader sentiment on networking in the U.S.

Steve, that really cleared it up. Can we just touch on margins briefly? I'm just curious as to your expectations for any headwinds from materials and then looking at sort of the pace of operating expense in the first quarter, maybe even as it relates to the working days and then how it trends through the year? Kind of 2 parts there.

I think on our margins, I guess, just a couple of comments. When you look at North America and the improvement in margins in the fourth quarter, it was due to a lot of the networking demand that Steve has talked about. And the thing I like about that is the fact that, overall, we might have been a little soft on our margins in Asia-Pacific, but North America was up. So looking at our company, overall, I think the strength that we have in North America and Asia-Pacific complement each other really well. When you look at our margins and you kind of go forward, and one point that's always on our mind is how do we improve our margins. And when we look at Asia-Pacific margins that have come down a little bit the last couple of quarters, some of that has -- most of that has been demand-driven because we have this underutilized conventional facilities. What we’re looking at going forward is certainly on the cost side of things. We're looking at how do we improve our cost. Our headcount in Asia-Pacific is down about 10% and a lot of that is through attrition. But that's down, and we're addressing some issues with Asia-Pacific in that direction. But when you look at our opportunities in our investment going into advanced HDI and rigid-flex printed circuit boards, I mean, that's -- how we're going to move the margins up is to get a better mix and to get higher value-added and then get our utilization up. And I think, when we accomplish those things, then you'll see the margins come back. On the material side, materials have been favorable for us. I think the cost of materials has been coming down. Gold kind of bounces all over the place. I don't know how to forecast gold exactly, but it is down from the high. But on a material basis, I think that's helping us in the first quarter, actually, that materials are trending down.

And our next question comes from the line of Rich Kugele from Needham & Company.

Just a couple of questions. I guess, first on the defense side. What's the feedback you're getting from your long-standing customers over there, about how the balance of 2012 may roll out?

Yes. I mean, defense, when you look at 2012 there's kind of 2 parts. There's defense work associated with the wars, which is definitely coming down, and then there's like the non-war or the base budget coming out of Washington and that would be pretty flat. If you look at this year versus last year, it's pretty flat and then kind of the forecast is down just slightly. So I think our customers are forecasting flat to down slightly, but we're not experiencing any fall-offs. And a lot of times, it depends on the programs you're involved in. And when you look at the programs we're involved in, it's the high-tech technology, it's the modernization of the armed services. A lot of it is focused on Navy and the Air Force-type products, programs. So I think while it probably won't be a growth end market for us, it's not going to be something that will be a big negative for us. And I think you look at -- even in the fourth quarter, it was 15% of sales and in the first quarter, it's going to be 15% of sales. So it's kind of right in line with kind of the rest of our end markets.

Okay. And then just to go back to SYE a little bit. The changes that you're putting in place from an infrastructure perspective that prevents you from being able to actually manufacture there while it's going on. Do those provide the margin upside in the second half because of what they enable you to build there? I mean, I think it'll be easier for investors to understand if it was tied to capabilities.

Yes. I mean, that's a good question, but the repairs to that building -- this is one of our older facilities, and the facility itself started to get some cracks and some fissures in some of the pillars and the braces across the -- so it wasn't like we had an option here. Eventually, we had to fix that building. And so the timing was set, so we said, let's do it now. Because when you look at it long-term, it's better to get in, fix the building, while demand is down, and then we can be ready to go in the second quarter. So there's a few things we can do to improve the flow and relocate equipment and so forth. But for the most part, it's basically taking an old building and fixing the infrastructure and that's basically what we're doing.

And obviously, you do have enough capacity to take on that business. It doesn't make sense to go and just buy a new one? Or have nothing else?

No. I mean, we have idle capacity in our other facilities, so we're going to move this work to our other facilities, some of the employees, and I think that's the best way to preserve our margins and service our customers. And I mean, we're taking a fairly sizable facility and putting $6 million into the infrastructure, it certainly extends the life. And so I think that's the best outcome and, Canice, do you want to -- is there anything you want to add to that? To the SYE facility? Maybe, I've lost Canice.

Just one last question for me. When you look at the overall industry and then the portion that you address, what would you expect this year's growth rate to be from a top line or revenue perspective for the segments you serve?

Usually we don't talk about longer term, but I think in this particular case, since our second half of the year is going to be a real strong half. When I look at it in North America, we'll be maybe flat to down slightly in North America, at least that's our feeling set in here year early part of the year. And in Asia-Pacific, we'll grow and maybe to the tune of 5% to 8%, something in that area. And if the program's timing come on line as we anticipate towards the end of the second quarter, we could have even a little more upside in that. But all these programs, again, are around our HDI and rigid-flex capabilities.

And, Rich, I guess I'd add to what Kent said. We're not building our optimism about the back half of the year based on an economic recovery. We really feel that the back half of the year strength is going to come from programs that we are in discussions with customers about now, that look to be a significant ramp in the back half of the year. So any kind of broader economic recovery would just be an additional boost to the overall results.

And our next question is from the line of Amitabh Passi from UBS.

Steve, perhaps I can ask it a different way. If I look at the 170-basis point decline quarter-over-quarter in gross margins, is there a way to parse that, what the impact is from just lower volumes versus fewer days versus the SYE plant going offline?

I guess, maybe if I were to rank those in terms of priority, I think the biggest factor would be kind of the continued low utilization of our Asian facility, then the number of days/Chinese New Year which actually does have a significant impact on us, since all of our Asian facilities were shutdown for the week of Chinese New Year. And lastly, the SYE impact. The SYE impact, as we mentioned in script, most of that is a transfer, except maybe $3 million to $6 million per quarter. So on the revenue side, we're not really missing much of anything, and the drag this is just going be from some workers that aren't needed in the other facilities where the work is transferring, so forth, we're securing people a little longer. So I'd say a few, 20, 30 basis points, maybe, from the SYE impact. The other few are more important.

And then just to clarify, the SYE drag, is that persistent to the second quarter?

Yes. We will probably not revise the modified and renewed plant on line until start of the third quarter or late in Q2. So it would be the same kind of scenario for Q2.

And then maybe you can just help me understand. It looks like at the midpoint, you're guiding revenues to be down, call it 11%, 12% sequentially. I missed your commentary, what should we expect occurring in the networking communications segment? Would it be in line with that decline and company sales would be less than that? And then maybe related to that, if you can help me understand what your expectations is for cellular phones and the other segment into the first quarter.

On the networking, we think when we go into the first quarter, our networking will -- I think, we'll see that improve with -- the router switches will continue on this path. But the telecom, that portion of that end market will continue to be weak, at least that's our expectations, that networking might go up as a percentage, it'd probably go down in dollars as most of our end markets do, but it'll probably maybe come up a little bit in percentage. Our cell phone end market, that's seasonal, so that was really strong in the fourth quarter and that will go down in the first quarter just based on seasonal demand. When you look at cell phones, it's important to understand that we're transitioning out of the feature phones, from the real base cell phones, into smartphones. That's where the growth opportunities are, that's where we're investing for our HDI capabilities and that's where you have lower margin improvements. So as we move forward, we'll see a lot less of the feature phones and a lot more cell phones that make up that end market. The computing end market is where we'll see the biggest jump and that's because of the renewed strength with the tablets that'll take place in the first quarter. And also the continued strength in the high-end computing and the high-end servers. So we anticipate that will continue. So that will be, I think, the strongest end market for us in the first quarter. You mentioned that the other category -- we had e-readers in the other category which was a program release that came in the fourth quarter and boosted that end market to 10%. That program won't be there in the first quarter, so we're on board here for the next program release, but that probably won't happen until the second and third quarter. So the other end market will go down. And like I mentioned earlier on aerospace/defense, as a percent, that will say flat. It'll kind of come down in line, dollar-wise, with the rest of the end markets but stay flat on a percentage basis.

And then just my final question, you spoke about having some conviction in your outlook for the year based on programs that you're ramping with key customers. Outside of computing segment, can you shed any incremental light in terms of what these other programs are across your other end markets?

Yes. Most of those programs are in 2 end markets, and they're in the cell phones related to smartphones with existing customers, as well as proselyting some new customers, so there's some opportunities with some new China customers. But most of our optimism is based on existing customers and that's with programs within existing customers. And so, in cell phones and in computing as the other end market, and that is the tablets and the high-end servers and the high-end computing. And as you noticed, our CapEx is going to support that. Our utilization in our HDI business in Asia-Pacific is excess of 90%. So we need more capacity to get ready for that in the second half of the year, and it's definitely with programs that we are involved with currently, in talking to customers and actually producing prototypes for.

And our next question is from the line of Shawn Harrison from Longbow Research.

Kent and Steve, wanted to just -- I guess, what is normal season in terms of just days that you lose into the March quarter? Is it usually you lose 5% of the days or something like that?

Yes, so normally, we're down 10 days quarter to quarter. Historically, we had a 4, 4, 5 calendar that ends right around March 31, the days could slop over into maybe April for a second. Now, we end the quarter always kind of before March 31, or ease the administration from Chinese VAP rules and so forth. So we'd normally lose just maybe 5 days or so quarter-over-quarter. Now last year, we lost about 8, but last year, Q4 and Q1 were both quite strong with the touch pad tablet program that was pretty important for us. So less noticeable last year. Right now, it's 10 days, and that's kind of a high watermark, it should be less in the future quarters, future years.

Okay. I know there was labor inflation last year coming into the June quarter. I guess, what would you expect that labor inflation to be? How should we think about modeling it?

We haven't had any definite notification on what the labor increase would be, but I think we're anticipating another 15%. And right now, I believe we're anticipating that to start in the second quarter, but we haven't had -- the government hasn't come out with any definite timing or amount yet. But I would anticipate it'd be around 15% at around April 1 timeframe.

Is this something you think you'll be able to negate or is it something that we should see some margin erosion?

Well, I think there's nothing we can do to say here's some higher labor, we go to customers and offset that. That just won't happen. Our strategy again is to try to move into the Advanced Technology and capture work from customers that has a higher value-added mix. So I'd love to say that I think we can mitigate that somehow directly, but we can't directly. That's not to say that we're not always looking at how to get more efficient and more productive and looking at headcounts, and I think we've made some good headway there. And the thing that I like probably most of all is the expertise that we're developing, and have, with the advanced HDI. It is one thing to be able to invest in the equipment, it's another thing to be able to execute. And execution on that advanced technology is vitally important and we've been able to execute. In even these new programs that come out, there's a pretty short learning curve. So all of that, Shawn, I think, is how we continue to grow our business and deal with these cost increases. They're nothing new to us. I mean, we've been in this business for 20, 30 years, and we had labor increase, the material come and go and so we make sure that our strategy and our tactics and our ability to execute are in line that we can maximize our profit.

Okay. And I guess a brief follow-up for you, Steve. Just other income was a little bit, I guess, more than I thought it would be this quarter. And how do we see that going into the March quarter? And then if you just talk about cash generation, I'm guessing maybe up for the year given lower capital spending. How are you going to deploy the cash I'm guessing toward debt reduction but any commentary on that.

Sure. So on your first point, we actually had a nice pickup in other income from foreign currency translation gains. So some of the strengthening of the nondollar currencies, the Hong Kong dollar and the renminbi, actually helped us in that line. It was better than expected. We generally don't forecast for foreign currency translation movements in the quarter because we are not autonomous. So I generally wouldn't model, say no more than like $0.5 each quarter of foreign currency translation benefit in the forecast. We actually had, near about $2 million of foreign currency benefit in that other income line this quarter. And so that's the first question. And...

Yes, excess cash deployment.

As we talked about, on our analyst day, we have $105 million of debt due this year on our term loan. Two payments of $52.5 million, one in February, one in August, those are the primarily uses of any of our free cash flow.

Okay. And so we would exceed interest expense savings in June quarter and September quarter.

Yes. Exactly right.

[Operator Instructions] And our next question comes from line of Jiwon Lee from Sidoti & Company.

Kent, just wanted to quickly ask, mid-last year, you saw some pricing erosion with a key customer or key customers. What are the current pricing dynamics across the board, on the HDI?

That's a good question and we did reference, a year ago, or approximately mid-last year, that we had some pretty onetime kind of negotiations. And we are now looking at just ongoing kind of normal course of business price negotiations as we go forward. So that truly was a onetime event. I mean, just looking at customers in general. They'll have 2 or 3 prime customers or suppliers that they do business with. And I think with our major customers we are, I guess, I've earned the right to be in that group with a customer you're talking about as well as most of our other customers. So we have our preferred relationship with our customers, and that's important for us because that's how we look at being involved in future programs, providing flexible manufacturing, and engineering services, and a lot of value-added to our customers that is a lot more than a circuit board. So we'll have the normal ongoing negotiations, don't anticipate any more of the kind of onetime event there.

Okay. And then, the SYE, I may have missed the comment, but when the plants are back, would they be serving similar end markets and customers or the mix shift a little bit?

Our intent right now is to not change the strategic focus of each one of those facilities. I think we have the right focus there. The SYE facility mainly services China customers. And so it has a little higher mix attached to it and it's more, certainly in the conventional multilayer kind of circuit board areas. And I think we talked earlier that the repairs, or the upgrade to the facility, are mainly to bring the facility up to the condition that it needs to be to go forward. It doesn't necessarily improve our capabilities or our flow, those kind of things. It's an old facility that is vital to the rest of our operation in Asia-Pacific, that we needed to fix. And rather than try to fix one area at a time and move equipment around and outsource equipment and go through what can be very disruptive, I think this was the right approach to minimize the expense on a long-term basis.

Okay. And lastly for me. Was there a 10% customer in the fourth quarter over the whole 2011?

Jiwon, we did not have a 10% customer for the fourth quarter. And I don't know, on a full-year basis, if we had one, but the one that you might be thinking of might be close to it.

I would think, Jiwon, still in the first quarter of 2012, we'll probably have a 10% customer again.

Yes.

Thank you. And I would now like to turn the conference back to Mr. Alder for closing comments.

Okay. I just like to thank everybody for joining us today. Steve and I are here for questions if you have more questions after that, and we'll look forward to seeing you next quarter. So thank you very much.

Thank you, ladies and gentlemen. If you like to listen to a replay of today's conference, you may do so by dialing (303) 590-3030 or 1 (800) 406-7325 and entering the access code of 4509892#. We thank you for your participation. And at this time, you may now disconnect.