TTM Technologies, Inc. (TTMI) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the TTM Technologies' First Quarter 2021 Financial Results Conference Call. [Operator Instruction] As a reminder, this conference is being recorded today, April 28, 2021. I would now like to turn the conference over to Sameer Desai, TTM's Vice President of Corporate Development and Investor Relations to will now review TTM disclosure statement.

Thanks, Casey. Before we get started, I would like to remind everyone that today's call contains forward-looking statements within the meaning of the Private Securities and Litigation Reform Act of 1995, including statements related to TTM's future business outlook. Actual results could differ materially from these forward-looking statements due to one or more risks and uncertainties, including factors explained in our most recent annual report on Form 10-K and our other filings with the Securities and Exchange Commission. These forward-looking statements are based on management's expectations and assumptions as of the date of this presentation. TTM does not undertake any obligation to publicly update or revise any of these statements, whether as a result of new information, future events or other circumstances, except as required by law. Please refer to the disclosure regarding the risks that may affect TTM, which may be found in the report on Form 10-K, 10-Q, 8-K, the registration statement on S-4 and the company's other SEC filings. We will also discuss on this call certain non-GAAP financial measures as adjusted EBITDA. Such measures should not be considered as a substitute for the measures prepared and presented in accordance with GAAP, and we direct you to the reconciliation of non-GAAP to GAAP measures included in the company's press release, which is filed with the SEC and is available on TTM's website at www.ttm.com. We have also posted on our web day slide deck, which we will refer to during our call. I will now turn the call over to Tom Edman, TTM's Chief Executive Officer. Please go ahead, Tom.

Thank you, Sameer. Good afternoon, and thank you for joining us for our first quarter 2021 conference call. I'll begin with a review of our business strategy, then an update on how COVID-19 has impacted our business, followed by highlights from the quarter and a discussion of our first quarter results. Todd Schull, our CFO, will follow with an overview of our Q1 2021 financial performance and our Q2 2021 guidance. We will then open the call to your questions. I am pleased to report that in the first quarter of 2021, TTM generated revenues and non-GAAP EPS above the midpoint guided range. All end markets performed better than guidance, while year-on-year growth was led by strength in the automotive and data center computing end markets. These results were achieved despite higher raw material costs and production inefficiencies due to COVID-19. The pandemic continues to create operational difficulties, macroeconomic uncertainty and employee concerns. These challenges are currently compounded by increasing prices and lead times of copper clad laminates, or CCLs, a key raw material for the manufacturer in circuit boards. CCLs are made from epoxy resin, glass cloth and copper foil, all of which pursuing limited supply as price increases. In addition, metals such as copper, gold and palladium are also used in our manufacturing process. We are actively managing higher raw material costs through such measures as supplier diversification, ongoing operational efficiency efforts and quotation adjustments to mitigate the impact to TTM. I'm extremely proud of how TTM employees have worked deliver excellent performance despite the formidable challenges of this environment. I would also like to highlight that in Q1, we generated solid cash flow from operations and our leverage remained at a comfortable 1.4x. Looking into Q2, I am optimistic that we are seeing healthy demand trends across virtually all of our end markets. Which is supported by our stronger-than-normal backlog coverage. Next, I would like to provide an update on our long-term strategy. TTM is on a journey to transform our business to be less cyclical, and more differentiated. We believe that over time, investors will be rewarded with more stable growth, strong cash flow performance and improving margins. As part of the strategic transition, we sold our mobility business last year. As a reminder, our operating margins with mobility as part of our business in Q1 of 2020 were 5.8% and non-GAAP EPS of $0.18, which was greatly impacted by the seasonality of that business, among other factors. We are now able to generate more consistent cash flow and earnings with our strong set of technologies and broad exposure to longer cycle end markets. A key part of our ongoing strategy will be to add capabilities and products that are complementary to our current offerings, both internally and through acquisitions. Looking forward, our balance sheet is in a strong position to pursue further acquisitions as well as to support our organic investment needs. I would also like to update you on the COVID situation. At the time of last quarter's conference call in February, we were seeing a surge in North America COVID-19 cases following the winter holidays, which we expected to have some impact on production. Since then, cases in North America have dropped off, and as a result, we are seeing a significant reduction in new cases in our sites as well. We are hopeful that the vaccine rollout will further reduce new cases, and we are looking forward to being able to welcome customers and other important visitors back into our plants in the not-so-distant future. In the meantime, we will continue TTM's protective measures, such as masking, temperature checks and proper distancing across our facilities worldwide, along with routine internal communications to keep our employees informed. Because of the stringent preventative measures in place and our culture of transparency and communications, COVID-19 has had less impact on our operations that might have been the case without these precautions. Now I'd like to review our end markets. All historical end market disclosures exclude the mobility business unit and the 2 EMS plants, which halted production in December of 2020. For more details on end market disclosures, please refer to Page 4 of our earnings presentation, which are posted on our site. The aerospace and defense end market represented 36% of total first quarter sales compared to 38% of Q1 2020 sales and 38% of sales in Q4 2020. We continued to experience a positive defense climate, with our A&D program backlog increasing to a record $694 million compared to $687 million in Q4. Q1 revenues were up 1% year-on-year as solid growth in defense more than offset sharp year-on-year declines in commercial aerospace. Growth in the defense market is a result of our strong strategic program alignment and key bookings for ongoing franchise programs. We saw significant bookings in the quarter for Northrop Grumman's AESA Radar Systems for the F-35 program. We expect sales in Q2 from this end market to represent about 34% of our total sales. Automotive sales represented 17% of total sales during the first quarter of 2021 compared to 13% in the year ago quarter and 17% during the fourth quarter of 2020. Automotive grew almost 50% year-over-year and continued to grow sequentially despite a normally slow -- seasonal slower period for Chinese New Year. We are aware of the distorted semiconductors is currently letting automotive production. But this situation has not directly affected our business since we do not purchase semiconductors. While we are monitoring the situation closely, to date, it has had a very limited indirect impact on our PCB demand. We expect automotive to contribute 17% of total sales in Q2. The medical industrial instrumentation end market contributed 17% of our total sales in the first quarter compared to 19% in the year ago quarter and 16% in the fourth quarter of 2020. In Q1, instrumentation customers in the semiconductor capital equipment end market were stronger than expected. For the second quarter, we expect AMI&I to be 17% of revenues. Networking communications accounted for 15% of revenue during the first quarter of 2021. This compares to 16% in the first quarter of 2020 and 16% of revenue in the fourth quarter of 2020. We saw relative strength on a year-on-year basis in the networking segment compared to the telecom segment as the 5G build-out has been slower to ramp. In Q2, we expect the segment to be 16% of revenue. Sales in the data center computing end market represented 14% of total sales in the first quarter compared to 12% in Q1 of 2020 and 13% in the fourth quarter of 2020. This end market was up 24% year-on-year, due primarily to growth from our data center customers. We expect revenues in this end market to represent approximately 14% of second quarter sales as data center continues to drive year-on-year growth. Please note that we have renamed this segment to better represent our customer mix and growth opportunities. Next, I'll cover some details from the first quarter. All of the following operations' metrics exclude the mobility business unit and the 2 EMS plants that were closed. This information is also available on Page 5 of our earnings presentation. During the quarter, our advanced technology business, which includes HDI, rigid Flex and RF subsystems and components, accounted for approximately 31% of our revenue. This compares to approximately 28% in the year ago quarter and 31% in Q4. We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology capabilities in new programs, and new markets. Capacity utilization in Asia Pacific was 80% in Q1 compared to 52% in the year ago quarter and 63% in Q4. Our overall capacity utilization in North America was 55% in Q1 compared to 67% in the year ago quarter and 58% in Q4. Our top 5 customers contributed 33% of total sales in the first quarter of 2021 compared to 34% in the fourth quarter of 2020. Our largest customer accounted for 13% of sales in the first quarter. At the end of Q1, our 90-day backlog, which is subject to cancellations, was $540.5 million compared to $470.8 million at the end of the first quarter of last year and $483.9 million at the end of Q4. Our PCB book-to-bill ratio was 1.2x for the 3 months ending March 29. I'd like to conclude by, again, thanking our employees for continuing to contribute to TTM and our critical mission of inspiring innovation with our customers. Despite the COVID-19- and raw materials-related challenges we faced in Q1, our business performed better than we expected as a direct result of our employees' concerted efforts to engage and support our customers. We've also taken positive strategic moves that will strengthen TTM for the long term. Now Todd will review our financial performance for the first quarter. Todd?

Thanks, Tom, and good afternoon, everyone. I'll be reviewing our financial results for the first quarter, which are also shown in the press release distributed today as well as on Page 6 of our earnings presentation, which is posted on our website. For the first quarter, net sales were $526.4 million compared to $497.6 million from continuing operations in the first quarter of 2020. The year-over-year increase in revenue was due to growth in our automotive, data center computing, and aerospace and defense end markets, partially offset by declines in our medical, industrial and instrumentation, and networking telecom end markets. A portion of which was due to the closure of 2 EMS plants last year. GAAP operating income for the first quarter of 2021 was $19.8 million, compared to GAAP operating income from continuing operations of $16.2 million in the first quarter of 2020. On a GAAP basis, the net loss in the first quarter of 2021, which included $15.2 million of expense associated with the refinancing of our high-yield bonds, was $3.2 million or $0.03 per diluted share. This compares to a net loss from continuing operations of $3.2 million or $0.03 per diluted share in the first quarter of last year. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP financial performance excludes our divested mobility business unit, nonroutine tax items, M&A-related costs, restructuring costs, certain noncash expenses and other unusual or infrequent items. We present non-GAAP financial information to enable investors to see the company through the eyes of management and to facilitate a comparison with expectations and prior periods. Gross margin in the first quarter was 16% compared to 16.8% in the first quarter of 2020. But gross profit was higher by $0.8 million. These results reflect approximately $13 million of headwinds related to stronger Chinese currency, higher raw material costs due to increased quality prices, primarily copper, and continued expenses related to the COVID pandemic. We were able to mitigate most of these headwinds through higher revenue and production and spending efficiencies. Selling and marketing expense was $15.6 million in the first quarter or 3% of net sales versus $15.7 million or 3.2% of net sales 1 year ago. First quarter G&A expense was $26.6 million or 5% of net sales, compared to $29.6 million or 5.9% of net sales in the same quarter last year. In the first quarter, R&D expense was $4.4 million or 0.8% of revenues. Compared to $4.8 million or 1% of revenue in the year ago quarter. Our operating margin in Q1 was 7.2%. This compares to 6.7% in the same quarter last year. Interest expense was $10.9 million in the first quarter, a decrease of $5.4 million from the same quarter last year due to lower levels of debt as we repaid $400 million of our term loan and our $250 million convertible bond. During the quarter, there was minimal foreign exchange impact below the operating line. Government incentives and interest income resulted in a positive $1.8 million or approximately $0.01 of EPS. This compares to a gain of $2.4 million approximately $0.02 of EPS in Q1 last year. Our effective tax rate was 12% in the first quarter. First quarter net income was $25.3 million or $0.23 per diluted share. This compares to first quarter 2020 net income of $16.7 million or $0.16 per diluted share. Adjusted EBITDA for the first quarter was $61 million or 11.6% of net sales. Compared with first quarter 2020 adjusted EBITDA of $60.2 million or 12.1% of net sales. Depreciation for the first quarter was $21.5 million. Net capital spending for the quarter was $21 million. Our balance sheet and liquidity positions remained very strong. We completed the offering of $500 million of senior notes at 4% interest due 2029. We used the proceeds from that issuance to redeem $375 million of senior notes with a coupon of 5 5/8% due in 2025 and to repay $40 million of our U.S. ABL. In addition, cash flow from operations was $41.1 million in the first quarter or 7.8% of payment. Cash and cash equivalents at the end of the first quarter of 2021 were $539.6 million. At the end of the first quarter, our net debt divided by last 12 month EBITDA was 1.4x. Given this financial strength, during the first quarter, we announced a $100 million stock buyback program. However, due to market blackout restrictions, we were able to implement the program until late in the quarter, after we completed the offering of our senior notes. As a result, we had no buyback activity during the first quarter. We also have approximately 25.9 million warrants outstanding related to our redeemed convertible bond, which allowed for holders to acquire TTM stock at $14.46 per share. These warrants expire ratably between March 15, 2021 and January 25, 2022. During the first quarter, we renegotiated or negotiated an amendment that allows TTM to settle 60% of these warrants in cash rather than issuing shares. TTM has exercised that option for warrants expiring through the second quarter. This will help reduce the potential dilution of warrants to our stockholders and effectively acts like a stock buyback program. We will determine whether to exercise that cash settlement option for future quarters at a later date. Now I'd like to turn to our guidance for the second quarter. We expect total revenue for the second quarter of 2021 to be in the range of $525 million to $565 million. We expect non-GAAP earnings to be in the range of $0.27 to $0.33 per diluted share. The EPS forecast is based on a diluted share count of approximately 109 million shares. Our share count guidance includes dilutive securities such as options and RSUs, but no shares associated with our warrants. For every dollar increase in the average share price above $14.26 during the quarter, our shares outstanding would increase by approximately 1 million shares. We expect this impact, however, will decline through the year as we settle the warrants. We estimate that SG&A expense will be about 8.2% of revenue in the second quarter. And R&D to be about 0.8% of revenue. We expect interest expense to total approximately $10 million. Finally, we estimate our effective tax rate to be between 10% and 15%. To assist you in developing your financial models, we offer the following additional information. During the second quarter, we expect to record amortization of intangibles of about $10.4 million. Stock-based compensation expense of about $3.5 million, noncash interest expense of approximately $0.5 million, and we estimate depreciation expense will be approximately $21.4 million. Finally, I'd like to announce that we'll be participating virtually in several conferences this quarter, including Goldman Sachs Leverage Finance and Credit Conference on May 17, The Needham Technology and Media Conference on May 18, the Barclays High Yield and Syndicated Loan Conference on May 25, the Craig-Hallum Institutional Investor Conference on June 2, the UBS Global Industrials and Transportation Conference on June 8, the Baird Global Consumer Technology & Services Conference on June 9 and the Stifel Cross Sector Insight Conference on June 10. That concludes our prepared remarks, and now I'd like to open the line for questions. Casey?

[Operator Instructions] We'll take our first question from William Stein of Trust Securities.

I actually apologize for any background noise here. I'm still working from home. I wanted to ask about long-term operating margin trends. You just delivered, I think, of a 7.2% op margin. At the last Analyst Day you established a goal of 12% to 14%, quite a bit higher than where we are, and you've sold one business that I don't know if it was lower on average, but certainly much more volatile and, I think, lower in most of my recollection. And you also shut down most of your EMS business, but I would think both of which certainly have a stabilizing effect and probably net higher effect on operating margins. So I understand you're probably not going to set a new target for us today. But I wonder what investors can expect the path to be, whether we should still expect a path to significantly higher operating margins from here, and what it will take to achieve that.

Will, thank you for the question. And I think that's a pretty practical question, given the performance of the quarter. We did pretty well on the top line, and we're seeing some growth there. And that growth is delivering incremental margin that we would expect, kind of in that neighborhood of 25%, but it was fortunately offset, if you will, from the issues that we're facing in terms of significant challenges of foreign exchange, commodity pricing and still some residual challenges with COVID as we try to wind down our -- or the impact of the virus on our operations. And I highlighted the fact that we had $13 million of headwind in the quarter. And those are things that are -- we don't view as permanent. We are -- in some cases, they'll correct themselves. In others, we are taking steps and measures to mitigate the impact of that -- some of that $13 million. So point in highlighting that is that if you looked outside the $13 million, our operating margins would have been quite strong. And that's really what we're looking at on a long-term basis. We have these challenges short term. And when you have steep adjustments in foreign exchange rates or commodity pricing, in particular, if those changes happen very rapidly, it will negatively impact our operating margins temporarily while we work through a period of digestion. And how do we work on these things? Well, obviously, in the case of commodity pricing, we're working to diversify the supply base. And we're also working on making sure that we're adjusting our pricing models so that we're passing these costs on to our customers. So with that in mind, back to the original statement you made about our target margins, we're still believers of those. We just -- we have to get through this issue in the short-term with the market that we're dealing with, both in terms of the virus that's out there as well as commodity pricing that we're dealing with. And then -- and have continued growth in the revenue, which we are starting to see now. So hopefully, that gives you some kind of context. And some confidence that we have in the business model itself.

And we will take our next question from Mike Crawford of B. Riley Securities.

Are there any changes in conversations you're having with your defense customers, given the new administration and/or the reopening of the Pentagon with less severe travel restrictions?

Yes. So this is Tom. I'll answer that one, Mike. Thanks for the question. What I would say at this point, first of all, encouraging news on the budget. Sort of what we commented on last quarter has been coming to pass. I think the Biden administration recognizes that -- how important defense is. There have been some shifts in strategy. But in terms of overall budget, looking at a relatively flat budget, which is great news for us because we're in the programs that are still benefiting from that budget. So I think that's continued to be a positive trend for us. As you mentioned, things gradually opening up. There's a couple of developments here, right? The government, certainly Defense Department looking at strategically, how can we continue to -- or how can we return the building of our manufacturing infrastructure, both for defense and also for dual use kind of requirements? Then while there's nothing short-term to report there, I think that's an encouraging trend certainly for a company such as TTM with such a strong footprint in North America. And then, as you mentioned, yes, there's an opening up in terms of the ability to have dialogue with the Defense Department. And that, again, not our direct customer, our customer's customer, in most cases, but being able to have that dialogue as needed allows us to learn more about the strategic priorities, make sure that we are, in turn, meeting those requirements from a technology development standpoint and also that our footprint continues to meet those requirements from a production, ongoing production standpoint. So all positive developments, I would say.

Okay. And just one follow-up, just on the footprint. In addition to that strong North American footprint, is there any updates on your aspirations to get anything in Europe and/or Southeast Asia?

Continuing to actively look. I think nothing has changed in terms of the meat. Let's put it that way. The -- from our customers, the desire to see that support in Europe is still there. We're doing -- I think our team does a great job of meeting requirements out of North America, but there are opportunities in Europe as well. And then Southeast Asia from a volume standpoint, with the shift in administrations, really, there hasn't been -- there may be a shift in tone in terms of the absolute urgency to move the footprint, but no shift in tone in terms of the long-term need to move that footprint. So our dialogue with our customers continues around how do we ensure that we have the right footprint for their long-term needs. So continuing to look at that, Mike.

We'll take our next question from Christian Schwab of Craig-Hallum.

This is Tyler on behalf of Christian. First question, I wanted to revisit these headwinds you're seeing. You quantified almost $13 million in Q1 for the foreign exchange and broad commodity price increases and some residual COVID impacts. I was just wondering if you could maybe give a little more color on a time line you expected these to ease? And maybe how much costs are you assuming continues in Q2? Because your guidance does apply a relatively nice step-up in margins. So any color there would be great.

Tyler, thanks again for asking the question because I think this is really the key topic that we're dealing with. So if you take the three pieces, right? COVID, we're certainly seeing some progress here in North America, where we're most impacted the last several quarters. In the general population and what's happening with the decline now since the year-end or the beginning of the year in COVID cases, the increasing rate of vaccinations for people, these are all favorable. Our employees live in the general population, so they're subject to those same challenges as the average person is in America. So that progress is encouraging. We will -- we still expect to see some challenge in Q2 as we begin to come out of -- we're spread across the country, and different states and regions have different protocols. And as we work through those issues and able to support our business and get our people back to work more consistently, we'll see some effect in Q2. But that should start to wind pretty consistently with what you're looking at in terms of vaccination rates in general, virus -- new virus cases in the general population. So I think that's something you can monitor and kind of have a sense of direction from as you watch the news. In the case of raw material pricing, that continues to be a challenge. And typically, we adjust quotations going forward. But obviously, you have product that's already in the pipeline with fixed pricing. And so there's challenges as to how you can adjust pricing to mitigate those cost increases, which tends to lag, right? Pricing changes tend to lag the actual cost changes. And so we continue to see pressure there. So I think we'll continue to face some challenges with that as we go into the second quarter, certainly. And how much beyond that is difficult to say. But certainly, the second quarter will continue to feel some pressure from that. Foreign exchange started to look a little bit better during Q1. But then since the start in April, we've seen it strengthen -- the Chinese currency strengthen again, which puts a little more pressure on us. Year-over-year, it continues to be a challenge, but that's something that we build into the cost structure and we work on in terms of pricing and, particularly, we work on in terms of cost management. Our team does a great job of trying to get more efficient all the time. And we saw some of the benefits of that in Q1. Even though we had $13 million of headwinds, we -- our margins came down a little bit, but not $13 million worth. We mitigated some of that with revenue increase, but a big chunk of that was through production and other spending efficiencies, which is a reflection of the efforts of the team to improve yields on products and to just manage costs very carefully, and becoming more productive. So we just -- we do that all the time. We just need to keep doing that to help offset some of these challenges over longer term. So we'll continue to face some pressure on that in Q2. We've tried to reflect that in the forecast, but also noting some improvement as we continue to make progress on these things. And we'll just have to watch and see what happens in the market on commodities and whatnot as we go through the second quarter to have a better sense of what it's going to look like when we get to the third quarter. So I hope that helps a little bit.

That was great. That was great color. I appreciate that. Second question, if you could. I was hoping to maybe get an update on your kind of outlook on the telecom market, in particular, China's progress or time line to begin their phase 3 5G rollout. Any update or your outlook from conversations with customers there would be great.

Sure. Yes, I think if you look at the telecom situation, the critical point in terms of China is when does the phase 3 investment cycle really start? It sounds like that's going to be -- versus sort of being a single auction. It looks like it's going to be more phased in here as we go through Q2 and into Q3, which is a new development. So more of a phased-in approach. I don't -- I haven't seen any change in terms of certainly the official forecast. I think the official forecasts are still somewhere around 600,000 base stations, up from about 580,000 last year being required. So that number hasn't changed. Where we are seeing activity and as we had forecast last quarter, is in the non-China piece of telecom and strong activity in North America, certainly, activity in Japan, South Korea, Southeast Asia starting to warm up. Balance of the world, slow. So EU, slow, certainly, Latin and South America slow, but a pickup in the rest of world that is pretty much as we had forecast last quarter. So with TTM, of course, you see -- you tend to see that our revenues are pretty well balanced. But if anything, a little bit weighted towards China on the revenue side. If you start thinking about our component business, more weighted for rest of world. So we're still agnostic. We'd love to see all of our customers succeed here and certainly look forward to China, the demand coming out of China as that phase 3 starts to kick off.

We'll take our next question from Alvin Park of Stifel.

Going on, on behalf of Matthew Sheerin. I wanted to follow-up on the book-to-bill. You mentioned that at 1.2, which is relatively elevated. And you did mention for auto that the current semi shortages, supply shortages, is not having a direct impact to your overall bookings volume. But in terms of that elevated bookings level, how much of that, do you think, is involved with inventory builds versus true demand follow-through? And looking further into the year, how do you think the -- those order trends might progress given what's going on with the general industry and the supply chain?

Sure. Yes. I think the -- certainly, the comment overall on the bookings level on the commercial side, very strong. That's reflected in that backlog number. Glad to see the commercial bookings really move now across our footprint, not just Asia Pacific, but benefiting our North America footprint as well, which is a great development. And then if you start looking specifically, where the inventory concerns have been raised is predominantly around the automotive side. What we're hearing from customers at this point, as I mentioned earlier, is that they continue to want to see a ship. And in discussions with those customers, they're saying, look, the demand is still there that they need us to continue to ship. Part of that is, frankly, inventory replenishment from last year. So there is a little bit of inventory replenishment, I'd say, there. But in terms of potential inventory adjustments, we certainly haven't seen that. And the demand has continued to remain there. It remains strong for us here. And certainly, that's what we're seeing in the second quarter as well. What we're looking to, particularly in automotive, is what does the end market look like as we head into the second half of the year. We've been encouraged -- encouraging trends in Asia. North America, encouraging as well. I think the only question out there right now, as we look at our business, is Europe, and when do we see a stronger recovery out of Europe. And how does that then impact the second half of the year? So still, I would say, second half of the year, we're not yet sure yet. But certainly, through the first half, it looks strong, looks like the end market demand really across the commercial sector is holding up very well. So very pleased to see that.

And if I may, for a follow-up, you clearly detailed the COGS in your gross profit margin and the associated commodities headwinds and FX headwinds and the like. But could we get more color on how you're looking into OpEx later into the year and beyond, once, hopefully, the world gets back into post-pandemic recovery and things go back to normal? And I believe for the OpEx guidance, including R&D, the guide was around 10% of revenue versus last quarter guide, which was at 9.6%, and that has been trickling up slightly. Should we be looking at OpEx going up or down with the increase of travel, but COVID costs are decreasing? With all the puts and takes, how should we be looking at that going forward?

I'll try to respond to that, Tom. Alvin, you're correct in observing that last year's OpEx numbers were probably -- well, certainly suppressed because of the virus, right? We curtailed all travel. We also took aggressive actions proactively to be very cautious, and we ran as lean as we possibly could in terms of headcount and managing the business. And so we're below average or below what we -- what I would call as a normal sustainable run rate when you look at the 2020 kind of OpEx numbers. As you go into this coming year and you start to look at Q -- what we've given guidance on in terms of Q2 and how that compares to Q1, we're gradually starting to ramp up. Travel is still relatively muted. But will increase as the virus gets under better control here throughout the year. That would probably be one of the biggest factors influencing some of our spending. And we're not talking $5 million worth of OpEx here. We're really focusing on modest growth as we deal with some of the one-offs, travel being one. Also you get fluctuations quarter-to-quarter depending on what happens sometimes with like accounts receivable with bad debt reserves and things like that. We did have a little bit of a recovery in Q1 that probably -- well, suppressed our results or our G&A expense by about $1 million. That's not likely to repeat next quarter. So you got to take out some of those one-off anomalies. When you look at our overall run rate on OpEx, a number up in that $50 million range is not unreasonable for kind of a normal number. So that's probably something you should look at longer term in terms of expectations as we go through the year.

We will take our next question from Tyler Bailey of Needham.

I'm filling in for Jim Ricchiuti. You mentioned again you guys continuing to build a strong balance sheet. So just wondering if you could maybe provide some insight into your M&A pipeline and maybe possibly more on which verticals you might be targeting?

Sure. Yes. So the theme for us and really strategically, the direction for TTM is to continue to focus on differentiation. And that differentiation comes in a couple of forms that tie directly to our M&A strategy. One is in terms of really how we build on top of our printed circuit board, and that's really oriented around RF, our building on the Anaren acquisition of several years ago, continuing to add RF expertise in the component area for our commercial business and in the -- and with RF engineering strength for our aerospace and defense business. So that's the primary thrust of our M&A direction. From -- a secondary area of differentiation for us is in our footprint capability between our North America strength and backed up by volume production in Asia. As we see customer needs shift in terms of requirements, we'll continue to look at M&A opportunities as related to our footprint expansion as well. So those are the -- really, the 2 primary areas. I would comment that the market or the valuation expectations out there, still a little bit of a disconnect in terms of where we believe, when we look at cash flow analysis, which is critical for us. When you look at our cash flow based valuations, still a little bit of a gap there in between expectations and what we would look at as really a discounted cash flow-based valuation. But that will -- that changes over time. It hasn't shifted our strategic direction here as we look at M&A. So hopefully, that helps you with that question.

[Operator Instructions] we'll take our next question from Paul Coster of JP Morgan.

This is Paul Chung on for Coster. So just on seasonality, today, now with cellular gone, that kind of lessens the volatility of 3Q and 4Q. But how do we kind of think about sequential trends throughout the year? 2Q you got a bump from your guidance, but should we still expect a larger second half relative to the first half? Any comments there would be helpful.

Maybe I can start, Todd, and you can jump in if I miss anything. I think that from -- you're absolutely right, Paul. From a seasonality standpoint, really, the seasonality that's left in our business model is mainly just around Chinese New Year. And that's based on our customers' production schedules being impacted by Chinese New Year as well as well as our own factories and production being limited. So that's the seasonality that we have left. It mostly now we're looking at markets that work on cycles. And so it's very much end-market specific. Now as we start looking at the second half of this year, and, certainly, as we've indicated in the second quarter, we're seeing commercial market strength generally. If you look at -- start with just running quickly through the businesses, if you look at automotive, certainly, automotive continuing a rebound. I covered the second half. I do think we're going to get to a steady state here, but still good, solid strength there driven by the end market. Data center, continuing to grow. We had a very good year last year in data center computing. And it looks, again, this year, a lot of design activity with our customers and very encouraging environment. MII, if you look at medical industrial instrumentation, I highlighted semiconductor capital equipment. Everyone knows that's been a strong area, certainly has impacted our business. What I'm excited about is we're now seeing medical -- really the elective surgery related medical business start to come back. Last year, we were dealing with urgent requirements for ventilator and patient monitoring systems. Now we're back to seeing that mix shift towards more steady, solid growth in that medical business. I'm really excited to see that coming into our mix now. And industrial, for us, industrial, a lot of our industrial work is automation, robotics related, starting to really come back now. So our MII area is now looking to be much better balanced and that certainly bodes well here as we go through the course of the year. And I commented on networking communications and that telecom piece, again, from a revenue standpoint, I would expect China to reemerge on that side as we go through Q2 and Q3 and complemented by rest of world demand. Networking continues to look solid. So overall, commercial business looks very good here as we go through the course of the year. And as the economies overall recover post-COVID. Aerospace and defense, defense remains solid. And what -- again, slight encouragement here in terms of commercial aerospace. And what has been really a business bumping along the bottom, we're starting to see a little bit of positive movement there that's encouraging to see we'll see if it holds up. But certainly, a better situation than a quarter ago, though still subdued on a year-on-year basis. So hopefully, I'll give you a quick run-through, but much more related to these end markets and their demand trends now than any particular consumer-based seasonality.

Got you. That's very helpful. And then on your capital structure, it's in very good shape. And you mentioned share buybacks may become a priority, which you really haven't been active on in years. So are you kind of signaling a pause on M&A and maybe focused more on increasing margins organically and then more share buybacks?

What maybe I can -- I'll start out and, Todd, you jump in. The -- we view this as complementary. We have -- as you know, we've always had a structure, a balance sheet goal of being in that 1.5x to 2.0x. We're very comfortable operating in that neighborhood. As we saw our sales coming down below that 1.5x. That's when it starts making sense to look at returning money, capital, to shareholders as part of the overall capital allocation strategy. But that by no means reduces the priority around M&A. What it really just says is, Look, we've got another tool in the toolbox here as we manage our overall balance sheet. So think about it that way in terms of certainly the TTM orientation. But, Todd, any other comments there?

No, I think I'd just highlight, we've reached a point where it kind of ties to your seasonality question, Paul With the absence of seasonality, we have much more consistent performance, and we're much more predictable in that way. And so it's increased our confidence level in the ability of the business in terms of the cash generation capability. And as Tom highlighted, we are moving forward on both fronts. We believe that we can do both. They're not mutually exclusive. Now there may be a time if we do a big deal or something like that, that we might have to throttle back on the stock buyback for a period of time. But over the longer haul, we see room for both actions or both opportunities in terms of helping our shareholders increase their value.

Okay. Great. And then last question, free cash flow, if I listen to what you're saying about the steadiness of the quarters on a seasonal basis, does that kind of apply to your free cash flow as well to flow through? And what's kind of your outlook on working cap. You had a pretty big benefit in '20. There's some noise with the sale of cellular, but how should we think about overall free cash flow for the year-end conversion?

So I would just kind of -- I'll go at the answer kind of backwards. Let me do the CapEx part of it first because we manage that pretty carefully. But as we noted, I think, last quarter, Q1, our cash CapEx was $20 million or $21 million, I think. We're expecting cash CapEx for the year to be $80 million, plus or minus. And that's in that 4% to 5% of revenue range, which we talk about as kind of our long-term swim lane for CapEx, making sure that we continue to invest in technology as well as capacity challenges and being a good corporate citizen relative to environmental safety and whatnot. So that's pretty consistent, and we can turn that down if we need to if the economy is soft, but that's certainly not a situation that we're looking at this year. In terms of cash flow from operations, generally speaking, we're -- we expect to be relatively consistent, but Q1 always is a little softer than the rest of the quarters. If you look year-over-year, our Q1 cash flow from operations is up significantly compared to last year. And then we tend to do better as we go through the year. We're targeting -- we'd like to be around 10% of revenue in terms of our cash flow from operations. But that's subject to a lot of different variables. Profit, obviously, is a key piece of that as well as managing working capital. And we are -- we have programs in place internally where we're working to make sure that we're managing both of those aspects appropriately. So I think we're looking for good consistency. Yes, we had some potential with the sale of mobility business, and winding down that working capital helped us a little bit last year. But we will still be producing some pretty strong numbers, and I think we'll be very proud of them by the end of the year here.

Thank you. And this concludes our question-and-answer portion for today's teleconference. I would now like to turn it back over to Tom.

I'd just like to close by summarizing some of the critical points. First, we delivered revenues and earnings above the midpoint of guidance. That's despite some of the challenges we had from COVID-19, currency and supply chain. Second, our end market diversification really enabled solid year-on-year growth in the mid-single digits. And third, we generated strong cash flow and we issued new bonds at a lower rate than the ones we redeemed. So in closing, I'd like to thank our employees again for all of their efforts, our customers, our investors as well for your continued support as we navigate our business challenges and we continue on our long-term strategic direction. Thank you very much, and thank you for the questions. Take care.

Thank you, ladies and gentlemen, for participation in today's teleconference. You may now disconnect.