TTM Technologies, Inc. (TTMI) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the TTM Technologies Fourth Quarter 2013 Earnings Call. [Operator Instructions] This conference is also being recorded today, February 5, 2014. I would now like to turn the conference over to Ms. Ellen Davis. Please go ahead, ma'am.

Thank you, operator, and welcome, everyone. 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 these 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, general market and economic conditions, including interest rates, currency exchange rates and consumer spending; demand for the company's products; market pressures on prices of the company's products; warranty claims; changes in product mix; contemplated significant capital expenditures and related financing requirements; the company's dependence upon a small number of customers; competition in the labor market in which the company operates; and other risk factors set forth in the company's most recent SEC filings. The company also will present non-GAAP financial information on 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 Tom Edman, TTM's Chief Executive Officer. Tom, please go ahead.

Thank you, Ellen, and good afternoon, and thank you for joining us for our fourth quarter 2013 conference call. I'm pleased to lead today's call, the first one since my transition to the role of CEO. I'd like to start with my priorities as CEO. I am fortunate to be following Kent Alder, as Kent has put in place the critical initiatives and created the culture at TTM which will allow for our success. Our priorities in 2014 will be focused on the following areas: leveraging our global capabilities to strengthen our position in the key end markets of networking/communications, mobility, which encompasses cell phones and tablets and aerospace and defense; secondly, building on the key structural initiatives, which we implemented in 2013 with the SYE divestiture and the MAS closure that were targeted at improving our long-term factory utilization and continuing our strategic progress towards advanced technologies; third, tasking our operational leadership, particularly in Asia, to improve our ramp cycle time for new products and to improve our yields; fourth, we will be making necessary investments in a global ERP system to enable us to make necessary longer-term step function improvements in our efficiencies. These investments will have a minimal impact on our short-term SG&A cost as we remain committed to keeping our SG&A cost in line with a very competitive market climate. Finally, as we have done in the past, we will continue to focus on leveraging our advanced technology to be a key PCB supplier to a broad set of customers across a diverse group of end markets. Now I'd like to move on to our highlights for the fourth quarter. In the fourth quarter our net sales were $366.1 million. Gross margin was 19.2%. Non-GAAP net income attributable to stockholders was $22.1 million or $0.27 per diluted share. For the fiscal year 2013, net sales were $1.4 billion. Non-GAAP net income attributable to stockholders was $51.3 million or $0.62 per diluted share. Revenue came in toward the high end of our guidance range, and non-GAAP earnings were above our expectations for the quarter. Sales performance in each of our end markets was consistent with our expectations, and we experienced particular strength in our computing and cellular phone end markets. Strong seasonal demand for our advanced HDI and rigid-flex PCBs used in smartphones, tablets and eReaders drove a product mix shift towards Advanced Technology PCBs. The higher mix of Advanced Technology products and increased volumes resulted in improved factory utilization levels and contributed to gross margins, increasing 480 basis points sequentially. We believe our fourth quarter performance demonstrates TTM's ability to meet or exceed our target operating model at the appropriate revenue levels. Fourth quarter revenue was up 8% sequentially and was down 4% on a year-over-year basis. However, after adjusting the year-earlier period to remove revenue associated with the SYE facility that we sold, revenue increased 2% year-over-year. Our Advanced Technology work increased during the fourth quarter. HDI, rigid-flex, flex assembly and substrate accounted for approximately 68% of our Asia Pacific segment's revenue in the fourth quarter. This compares to approximately 63% in the third quarter. Our blended capacity utilization in Asia Pacific was 90% compared to 76% last quarter, reflecting increased utilization at most of our AP plants and the benefit of divesting the SYE facility. In North America, a number of our facilities remained underutilized during the fourth quarter, with the exception of our Chippewa Falls facility, which has been operating near full capacity the past 3 quarters. Overall, our North America plants were operating at 59% utilization in Q4. This compares to utilization level for Q3 of 62%. Now moving on to our end markets. As expected, fourth quarter sales in our largest end market, networking/communications, declined modestly on a sequential basis. Networking comprised 27% of total sales compared to 30% in the third quarter. The softened demand in the sector was somewhat mitigated by our participation in the 4G LTE network buildout in China. Although we continue to expect the rollout to be gradual, we are starting to see some benefits from it. Looking forward, we expect sales to decline on a dollar basis due to inventory adjustments at several customers and the effect of the Chinese New Year holiday, partially offset by the positive effects of the China 4G rollout. And we expect this end market to be about 31% of total sales in the first quarter. Sales in the computing, storage, peripherals end market represented 23% of total sales, up from 19% in the third quarter. We experienced broad-based demand in this end market, and sales increased due to strong seasonal demand for PCBs used in touchpad tablets, as well as increased demand in the storage segment. We expect the computing end market will decline to approximately 19% of sales in the first quarter due to seasonality for tablet and lower server and storage sales. Sales in the cellular phone end market increased to 24% of total sales compared to 21% in the third quarter. As anticipated, we experienced increased demand for smartphone products during the fourth quarter. The cellular phone end market is expected to be down sequentially to approximately 19% of sales in the first quarter. The aerospace and defense end market represented 14% of total sales, down from 16% in the third quarter. We continue to benefit from our broad program participation in both defense and the commercial aerospace. We expect first quarter sales to continue to be stable on a dollar basis and represent about 16% of total sales. The medical/industrial/instrumentation end market represented 8% of sales compared to 9% in the third quarter. We expect sales in this end market to be modestly up to about 10% of total sales in the first quarter due to inventory replenishment in the medical segment. Sales in the Other end market were 4% of total sales compared to 5% in the third quarter. We expect this end market to be stable on a dollar basis and to represent about 5% of sales in the first quarter. As far as customer and order updates are concerned, our top 5 customers accounted for 47% of sales in the fourth quarter compared with 43% of sales in the third quarter. In alphabetical order, our top 5 OEM customers were Amazon, Apple, Cisco, Huawei and Juniper. We had one customer who accounted for 29% of sales during the quarter. ASPs increased 15% in Asia Pacific from the third quarter, largely as a result of a shift in our product mix due to improved demand for products utilizing advanced printed circuit boards. In North America, ASPs increased slightly, again due to mix changes. As evidenced by our increased level of advanced technology work during the fourth quarter, we continue to benefit from our prior capital investments in advanced technology. In 2013, our CapEx investments focused on enhancing our advanced technology position with capacity additions in our advanced HDI, rigid-flex and substrate businesses, as well as productivity improvements and maintenance. We invested a total of $103 million in CapEx during 2013, down from $140 million in 2012. We expect to invest a similar amount of CapEx in 2014 as we focus on improving our return on invested capital through operating cash flow improvements. In summary, we had an excellent fourth quarter with solid revenue, strong gross margins and robust demand across our end markets. We executed well against our operating metrics. Our strong Q4 performance demonstrates our ability to achieve our target model with the right product mix and utilization levels. At the same time, we see a more challenging Q1 environment due to a seasonal decline in sales to the mobility area, which will affect both our cellular phones and computing end markets and a less favorable product mix. We remain encouraged, however, by TTM's longer growth -- longer-term growth prospects as we make the operational improvements that I outlined at the onset of this call. Now, Todd will review our financial performance for the fourth quarter. Todd?

Thanks, Tom, and good afternoon, everyone. For the fourth quarter, net sales were $366.1 million, an increase of $27.4 million or 8.1% compared to the third quarter net sales of $338.7 million. As Tom said earlier, our sequential growth in sales is primarily driven by strength in our cellular phone and computing end markets, which resulted in strong seasonal demand for our advanced HDI and rigid-flex printed circuit boards. GAAP operating income for the fourth quarter was $29.3 million compared to an operating loss for the third quarter of $1.2 million. Including in our operating results for the third quarter of 2013 were restructuring and impairment charges of $14.1 million for severance and asset impairments resulting from the closure of our facility in Suzhou, China. Excluding these charges, operating income was $13 million. On a GAAP basis, net income attributable to stockholders for the fourth quarter of 2013 was $11.3 million or $0.14 per diluted share. This compares to a GAAP net loss attributable to the stockholders of $7.7 million or $0.09 per share in the third quarter of 2013. The fourth quarter's results include $10.7 million of expenses associated with the early extinguishment of our 2015 convertible notes. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes the amortization of intangibles, stock-based compensation expense, noncash interest expense and other, unusual or infrequent items, such as the gain realized in the SYE transaction, restructuring and impairment cost or cost associated with the early extinguishment of debt, as well as the associated tax impact of these items. Additionally, we exclude nonoperational changes in our tax expense such as items -- such as impacts of retroactive changes in the tax law. We present non-GAAP financial information to enable investors to see the company through the eyes of management and to provide better insight into the company's ongoing financial performance. Gross margin in the fourth quarter increased to 19.2% from 14.4% in the third quarter. Our gross margin benefited from increased volumes and a product mix shift towards more advanced technology product, which increased the utilization rate at most of our advanced technology facilities in Asia Pacific. Also contributing to the improvement was the absence of the $6 million warranty claim incurred in the third quarter. Selling and marketing expense was $9.2 million in the fourth quarter compared to $8.6 million in the third quarter. As a percentage of net sales, selling and marketing expenses in the fourth quarter was unchanged from the third quarter at 2.5%. Fourth quarter G&A expense was $27.2 million or 7.4% of net sales compared to $23 million or 6.8% of net sales in the third quarter. Interest expense was $3.8 million in the fourth quarter compared to $3.7 million in the third quarter. Our effective tax rate in the fourth quarter was approximately 29% as compared to a rate of 28% in the third quarter. Fourth quarter non-GAAP net income attributable to stockholders was $22.1 million or $0.27 per diluted share. This compares to the third quarter non-GAAP net income attributable to stockholders of $11.6 million or $0.14 per diluted share. Adjusted EBITDA for the fourth quarter was $58.4 million or 16% of net sales compared with third quarter adjusted EBITDA of $42.3 million or 12.5% of net sales. Moving on to our segment performance. The Asia Pacific segment had sales of $231.6 million in the fourth quarter, up 12.2% from $206.5 million in the third quarter. Gross margin for the Asia Pacific segment was 20.6% in the fourth quarter compared to 12.6% in the third quarter. The increase in gross margin was primarily due to increased volumes and a favorable shift in our product mix, which led to higher utilization rates. Also contributing to the improvement was the absence of the $6 million warranty claim incurred in the third quarter. The Asia Pacific segment's fourth quarter operating income was $26.8 million compared to an operating income of $7.6 million in the third quarter. The North America segment recorded fourth quarter sales of $134.9 million, up 1.7% from $132.6 million in the third quarter. Gross margin for our North America segment decreased to 16.8% from 17.1% in the third quarter. The gross margin decrease was due primarily to an unfavorable shift in our product mix. The North America segment's operating income for the fourth quarter was $7.2 million compared to $9.5 million in the third quarter. Cash and cash equivalents at the end of the fourth quarter totaled $330.6 million, an increase of approximately $60 million from the third quarter. We incurred capital expenditures for the fourth quarter of approximately $22.8 million. Operating cash flow in the fourth quarter, excluding payments related to the early extinguishment of debt, was $39.6 million. We recently announced the issuance of $250 million of 1.75% convertible senior notes due 2020. As the full exercise of the underwriters overall allotment option of $30 million didn't occur until January 14, our year-end financial statements only reflect the sale of $220 million of the notes. We used $136 million of the proceeds to repurchase approximately 80% of our outstanding 2015 convertible notes. In order to reduce the potential dilution to TTM's shareholders, we used the portion of the net proceeds to enter into convertible note hedge transactions that will effectively increase the convert price of the bonds from the company's perspective to $14.26 per share. This represents an 85% premium to our stock price from the date of the transaction. Net debt was $298.4 million at the end of the fourth quarter, an increase of $24 million from the end of the third quarter. Depreciation for the fourth quarter was $23 million. Now I'd like to turn to guidance for the first quarter. Typically, we experience significant seasonality in our revenue. Approximately 45% of our revenue was generated in the first half of the year and 55% in the second half. Additionally, as we look at revenue in Q1 as compared to Q1 a year ago, keep in mind that the prior year's first quarter included $23 million of revenue generated by SYE, which was sold. With that background, we expect Q1 revenue to be in the range of $290 million to $310 million. We expect non-GAAP earnings to range from $0.03 to $0.09 per diluted share. This is based on a diluted share count of approximately 83.5 million shares. In addition to the impact of lower revenue, our profitability has been impacted by an unfavorable shift in product mix. We expect that SG&A expense will be about 10.5% of revenue in the first quarter. We expect interest expense to total about $3.8 million, and we estimate our effective tax rate to be between 26% and 30%. To assist you in your financial models, we offer the following additional information. We expect to record, during the first quarter, amortization of intangibles and stock-based compensation expense of about $2.3 million each, noncash interest expense of approximately $2.5 million, and we estimate depreciation expense will be approximately $24 million. Lastly, before we open up to your questions, I would like to mention our upcoming conference participation. We'll be presenting at the Stifel Technology Conference in San Francisco on Tuesday, February 11 at 1:30 p.m. A press release was issued Monday with additional details on this event. That concludes our prepared remarks, and now we'd like to open the line for questions. Colton?

[Operator Instructions] And our first question comes from the line of Param Singh. Paramveer Singh - Stifel, Nicolaus & Co., Inc., Research Division: This is Param Singh on for Matt Sheerin. So firstly, on the networking segment that's obviously impacting your utilization in North America, is there any plan to divest those other plants similar to what you guys would have done in Asia? And then I have a follow-up.

Okay, yes. Param, this is Tom Edman. The -- if you actually look at the networking/communications, and if you're to look at our Q1 where we've said that we'll be in approximately in terms of percent of revenue in Q1, I think you'll -- and if you start looking at that on a year-on-year basis, what you'll find, particularly if you pull out the approximately $23 million in revenue that SYE contributed in our Q1 of a year ago, on a year-on-year basis, you'll find actually there's growth in networking/communications. We're still finding tremendous synergy between our organizations, global organization as we focus on our global customer base in networking/communications, with our Chippewa Falls facility in Wisconsin and our Dongguan facility in China. So actually we're very comfortable with our positioning there. Overall, as I was saying, overall, we're continuing -- we're always looking at our footprint and utilization rates and just ensuring that on a go-forward basis, we have the capacity necessary to meet our customer demand, and that we're situated in the right places. Paramveer Singh - Stifel, Nicolaus & Co., Inc., Research Division: Right. I was speaking specifically about North America. But following up on that particular detail, so do you have a decent pipeline? Are you seeing enough 4G buildouts to justify that footprint because your utilization is pretty low in North America?

Yes. So the -- just to make sure we're clear. The utilization rates when we talk about the North America segment, that encompasses all of our businesses across North America. So that's networking/communications. That's our -- the work that we do in computing there, as well as aerospace and defense. Aerospace and defense, by its nature, you'll find that there are very complex requirements from our customers, that volume tends to be small and the complexity puts pressure on different areas of our plants. So the pure utilization, the overall general utilization figures, can be a little bit misleading. So just to give you the backdrop there. In terms of networking/communications in North America, actually, as I mentioned earlier, the utilization rates have been pretty high in North America for the last 3 quarters. So this coming quarter will be a little bit more challenging in North America, but that doesn't change the fact that longer term, our advanced technology work in North America for that market is critical. And I expect utilization rates will come back up.

And our next question comes from the line of Shawn Harrison.

I guess getting back to North America, 2 parts. Is any of the inventory correction you're seeing in networking/comms occurring in North America or is that more within Asia? And then just secondarily, on the utilization question in North America, what would be target utilization in North America, understanding that the complexity requirements are a little bit different than in Asia?

Sure. So on the networking/communications piece, our -- this really is a global market. So when we're servicing our customers, we're servicing them generally out of both our North America and out of Asia Pacific. Our sales force is common. And so difficult to comment on in terms of where we would see inventory corrections. I can point to the fact that in the router area in particular, we did see a couple of factors in Q4. We saw inventory, some inventory correction, and we also saw some emerging market weakness in the router area. That was countered by increasing strength from the China 4G LTE rollout and base station demand associated with that rollout. So while we're seeing a little bit of weakness on the router side, what we saw was some gaining strength in terms of base station demand. So second part of the question, North America utilization rates, where would we be comfortable? If we can eventually move into the 70% rate up to the towards 80%, if we were up at 80%, I would consider ourselves just screaming in terms of North America utilization rates. But very challenging to get to that level, again, because of the product mix from our customers, particularly aerospace and defense.

Okay. And then I guess, 2 follow-up questions. If my math is right, based upon your guidance, it looks as if your computing/storage/server business for the March quarter would be flat to down a little bit year-over-year. Are there any factors in there beyond kind of market trends? And if it's down, maybe why? And then secondarily, this is the other follow-up question is just on SG&A. It looks like coming into the year, it's still running a little higher than I would have thought. Maybe just the factors of why it's up versus this point in time last year.

Yes. So on the computing side, the -- you're right. I think year-on-year Q1, we're slightly down. I believe, if you dig into that, what you'd find is a little bit of relative weakness in terms of tablet demand and then relative weakness on the storage side. I think that's -- again, this is a -- Q1 is usually a down quarter seasonally. So from that standpoint, I don't read anything in particular into this outside of the fact that we are seeing slightly dampened demand environment versus last year. What was the second? I'm sorry, the second part?

The SG&A profile, it's still running a little, I guess, heavier than I would have thought coming into the year.

Got it.

Shawn, maybe I'll take that one. We finished up the year last year looking at our SG&A overall for 2013 at around $135 million. Our expectations for this year is a number very similar to that, notwithstanding the investments that we plan to make in our new ERP system for this year. So in terms of the overall year-to-year change, I'm not sure I see the big difference that you're noting, but...

Maybe on a non-GAAP basis, it was around $24 million to $25 million in the first parts of 2013, and now we're looking at more -- at least just solely on a G&A basis, it's probably kind of the 27-ish range. And so that's the disconnect I'm trying to figure out.

Okay, the only number we disclosed is the combination of SG&A from a forecast standpoint, and that's what I was referring to in terms of being relatively constant year-over-year. So I don't have a significant change in our overhead or operating expenses in general.

Okay. And then the ERP cost, what is that, layering it on top of the current run rate?

Well, when we look at our expectations for cost for that program, we've estimated that this new system is going to be anywhere between $15 million and $20 million. Now that's going to be split between CapEx about, and let's say, roughly 50-50 between CapEx and operating expenses. And then that's going to be further diluted by the fact that, that's the cost of the program that we're estimating over a 4-year time horizon. So the impact in this year assuming it's all even, and nothing's ever quite that precise, you're looking at a $2 million number this year in 2014. Perhaps a touch more than that, $2.5 million, something like that. But we're if -- what worked on other initiatives to try to mitigate that impact, try to keep our year-over-year SG&A spending flat, even with that incremental spending on the ERP system.

And our next question comes from the line of Jiwon Lee with Sidoti & Company. Jiwon Lee - Sidoti & Company, LLC: Todd, I couldn't actually hear the gross margin guidance. My line went buzzy.

Well, because I didn't exactly quote it. But we are saying our -- implicit in the guidance that we gave is a gross margin in the neighborhood -- it's in the low 14%, so 14% to 14.5%. Jiwon Lee - Sidoti & Company, LLC: Okay. Well, that's very helpful. And then, let's turn to your Asian operations. Understand the seasonality, but wondering what kind of a visibility do you have beyond the first quarter? And how do you tie that in with your CapEx budget?

Sure. Yes, I think it's best to think about this in terms of what we see in our overall market environment longer term. And just to speak to that, and a lot of this is mainly tied to what we see in Asia Pacific. As we come out of the first quarter, I think we'll start seeing with mobile devices, with smartphones and tablets, we should start to see that usual seasonal pickup. And if you remember, in general, if you look at our revenue, we're about 55% weighted towards the back half of the year. I expect that, that will continue. A lot of that is driven by what we see in terms of mobile device demand. The complexity there continues. So we're encouraged by the complexity that is being introduced in terms of device structures. That continues to challenge to the industry, but it's also, for us, a real opportunity. So as you look at mobile devices, I think there is -- and if you look at most of the market forecasters, they're still a high single-digit to low double-digit forecast rate for smartphones. If you were to look at networking and telecom market, again, with the 4G rollout in China, I think we got a strong environment that is starting to build around us. Of course, there are always going to be challenges in different parts of the world, but the overall economic -- or economies are favorable at this point. And that, coupled with the China 4G rollout, should be -- should provide some positive momentum. And again, I think you're looking at about a 5% to 7% kind of growth rate by the end of the year. The computing end market, as we already covered, it's tough to -- has its puts and takes. Tablet market's growing at low double digits, but that's -- on the other side, we've got server demand, and that's a -- I think that's been a challenging market for us. So relatively flat, slight growth there. And then A&D remaining constant. So overall picture, as we look out into the second quarter and then through the end of the year, I think is positive, and it gives us the -- some confidence that we'll be up modestly year-over-year based on those market conditions. Jiwon Lee - Sidoti & Company, LLC: Okay. And then kind of staying on Asian side, the ASP obviously was very strong, and I would imagine that based on the type of work that you do, but also based on the level of demand. And if we look out at the growth projected this year, there could be at the OEM front some ASP pressure, given the projected growth on -- the volume growth on the lower-priced cellphones and related gadgets. How do you plan to tackle that and manage your ASP?

So good, great question. The ASPs -- first of all, the primary driver of the ASP growth that we saw in the fourth quarter was really that complexity, the advanced technology requirements. Our customers are continuing to pack more information into a small package, and that means that we're going to be adding layers to our printed circuit boards. We also may see some format changes down the road as well. So those are positive developments. And as each new product is rolled out, you sort of have the reset in terms of the ASP for that technology. So that's a positive development. As you look at older products, absolutely, your point is valid. You will always have ASP pressure. It's a constant in technology, and it's something that we've lived with in past years. And we'll continue to see this year is pressure on the older products. We react to that by pushing on our yield and improving yields. And as I mentioned, a big priority for us is to work on our ramp cycles this year in AP, in our Asia Pacific operation, work on ramp cycles and improve yields on our volume products. So you improve the yields on the volume products, and you can counter that pressure. So that -- those are sort of the 2 sides of the ASP question. Jiwon Lee - Sidoti & Company, LLC: Okay. Well, that's helpful. And then the North American questions were asked, but just kind of try to stay on the revenue side because the questions are asked differently. Are there ways to be a little more proactive beyond the first quarter on the revenue side? Or how do you generally see that market progressing? If you could make a comment on that.

Sure. Aerospace and defense, which is, of course, a major part of what we do in North America is -- I think, there's some good news there with the budget situation at least resolved for the short term. That should help to enable some of the critical programs that we've been waiting on to come through. It's still hard, though, to forecast significant growth on the defense side. Commercial aerospace, I'm a little bit more comfortable projecting some growth there towards -- through the course of the year as we see replacement cycle for older equipment continue. So that's a pretty positive demand environment. So that -- while we're forecasting relatively flat, we are focused on gaining share there. And we're also focused on the growth pieces of the A&D market. Networking/communications I already commented on. I think after we get through the first quarter, as we go forward, I would expect that we're going to start to see -- we're going to see some strength there. So overall, it's been -- over the years, North America, of course, is a difficult market for printed circuit boards, but TTM has done a very good job focusing on our share and also focusing on our profitability. And I'm hopeful that this year, we're going to actually see a decent revenue story.

[Operator Instructions] And our next question comes from the line of Steven Fox with Cross Research.

A couple of questions for me. First of all, if I understand correctly, nothing in the Q1 guidance is surprising me from a seasonal standpoint. In other words, there's no major inventory corrections in your larger markets or customers. Can you just sort of confirm that or add any color around how Q1 looks to you relative to maybe 3 months ago?

Yes. Let me -- in terms of -- let's just talk again. I like to look at Q1 from a year-over-year perspective. I think that's a good way to look at the first quarter. And if you look at it on a year-on-year basis, you have to first pull out SYE. That was about $23 million. So then when you look at our year-on-year revenue, you'll see that it's relatively flat, but that we are seeing a significant mix shift in several areas away from -- so we're seeing our mobility market associated revenue come down slightly. And you have to remember that we added significant capacity last year in that -- in the areas of advanced technology. So utilization rates there become a challenge for us. And then on the North America side, with the LTE buildout, 4G buildout in China, we're seeing a shift towards that area, which tends to be, for us, less of a PCB market and more of an assembly market and therefore, we see lower margins in that market. So from that standpoint, what we're seeing is product mix shift that, on a year-on-year basis, are unfavorable to us from a margin standpoint. From an end market standpoint, I think we're not seeing significant moves outside of -- we were hoping to see mobile device demand hold up a little bit better.

Great. That's helpful. And then my second question, just looking at your customer concentration, and I understand what you're talking about seasonality for the second half of the year, but with 2 customers like Apple and Amazon, I guess, can you sort of describe your level of confidence that you will be able to maintain your position at those customers into the second half, as maybe they introduce new products and change their supply base around as they tend to do annually?

Yes, great question. The critical area for us is, as we look at our customer base, we're focused on high-end requirements for smartphone, high-end requirements for tablets when we're talking about our advanced technologies. So that crosses multiple customers. So while we have named customers in the fourth quarter, that is not, by any means, all of the customers that we service in the advanced technology area. So we're all -- we're constantly positioning ourselves for the new products on the high end as other customers bring those to market. And I think there has been, as you pointed out, there's always movement in the end market that -- and for that reason, we need to be positioned well of the number of customers, as well as movement -- market share movements within our customer base. So our focus is on gaining share and gaining share in the high technology requirements for smartphone and tablet, and that crosses the board in terms of customer base.

Great, and then my last question, just -- Todd, looking at the hedges you entered into, I don't have the number in terms of the amount handy, but can you just remind us of that? And then explain how you decided that, that was a good use of shareholder funds to hedge out the converts versus other options?

That's a good question. It's something we spend quite a bit of time on in terms of understanding and trying to decide how best to proceed with the transaction. We went with -- let's just talk about in terms of the total transaction, $250 million transaction, which was upsized as a result of strong demand from the marketplace. A convertible debt from the perspective of the company is, in this case, under the way we structured it, I think very attractive. The coupon rate of 1.75% is extremely low compared to other financing alternatives that would have been available to us in the high-yield market or whatnot. So on a cash basis and on a P&L basis, it's very favorable. The one challenge that -- or question that gets raised all the time well, what's the impact on shareholders in terms of dilution if, in fact, the shares convert? And that's a fair consideration. And so what we did to try to mitigate that impact is to, in essence, buy insurance. We entered into really a 2-transaction structure, where we buy an option, and we sell an option. And in so doing, the net cost of that is relatively modest to the company. In fact, if you consider it on an aftertax basis, the cost to the company is just over $1 million a year over the 7-year life of the convert. So for approximately $9 million, we were able to increase the dilution standpoint from the $9.64, which was the stated convert price for the bond up to $14.26. So in fact, our shareholders and the company doesn't get diluted until you move past that $14.26 threshold, and so -- go ahead. So from our perspective, we think it's a very good trade-off because for a relatively modest amount of money, less than our interest expense in a single quarter per year, we're able to borrow a significant amount of money and refinance our debt structure and improve our capital structure overall and at relatively low levels of risk to the company or to the shareholders.

And we have a follow-up question from Shawn Harrison with Longbow Research.

Just 2 clarifications. What was -- I missed it. What was CapEx for 2013? And then the second question is, what is your expectation for labor inflation in China as you head into the second quarter?

So I'll take the first question. CapEx for 2013 ended up at just over $100 million. I think it was $103 million, I'm rounding, which is down slightly from our expectations. We had been giving guidance earlier in the year. We thought we'd be up close to $117 million. The difference is really a definitional one. Commitments or purchases of CapEx, in fact, were closer to the $117 million. But under U.S. GAAP accounting and reporting, you disclose only the cash disbursements for CapEx, and that was the $103 million. So our expectations is that difference, that delta of roughly $15 million, rolls into next year when we, in fact, will pay it out. And that has been comprehended in the forecast that we're providing for 2014, which is roughly $100 million in capital -- CapEx disbursements for 2014.

On the labor rate side in China, it's -- we've been pleased to see that the labor rate inflation that we saw several years ago certainly mitigated last year. And we're forecasting again this year, we'll remain at a relatively constant rate of increase. What we're forecasting is approximately 8% in labor rate increase in China. And that, for us, becomes then -- our ability to kind of raise our ASPs, improve our yields, certainly places more urgency on that. But it is a relief to see that we're not seeing the dramatic increases that we saw several years ago.

Can you remind me again, what is labor as a percentage of the total cost to manufacture in Asia for you guys?

In Asia, it's approximately 12%.

[Operator Instructions] And I'm showing no further questions at this time. I'd like to turn it back over to management for closing remarks.

Thank you very much, and thank you, all, for joining us. Just a reminder again, we will be presenting at the Stifel, Nicolaus Technology Conference on February 11. So I look forward to seeing you there. Thank you.

Ladies and gentlemen, this concludes the TTM Technologies Fourth Quarter 2013 Earnings Call. If you'd like to listen to a replay of today's conference, please dial (303) 590-3030 or 1 (800) 406-7325 and enter access code 4663758 followed by the pound sign. Thank you for your participation. You may now disconnect.