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

Good afternoon, ladies and gentlemen. Welcome to the TTM Technologies' Second Quarter 2021 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, July 28, 2021. Sameer Desai, TTM's Vice President of Corporate Development and Investor Relations, will now review TTM's disclosure statement. Please go ahead, sir.

Thank you, Travis. Before we get started, I would like to remind everyone that today's call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to TTM's future business outlook. Actual results could differ materially from these forward-looking statements due to one or more risks and uncertainties, including the factors explained in our most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission. These forward-looking statements are based on the management's expectations and assumptions at 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 reports on Form 10-K, 10-Q, 8-K, the registration statement on Form S-4 and the company's other SEC filings. We will also discuss on this call certain non-GAAP financial measures such as adjusted EBITDA. Such measures should not be considered as a substitute for the measures prepared and presented in accordance with GAAP, and we direct you to the reconciliation of non-GAAP to GAAP measures included in the company's press release, which was filed with the SEC and is available on TTM's website at www.ttm.com. We have also posted on our website a slide deck, which we'll 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 Second Quarter 2021 Conference Call. I'll begin with a review of our business strategy, followed by highlights from the quarter and a discussion of our second quarter results. Todd Schull, our CFO, will follow with an overview of our Q2 2021 financial performance and our Q3 2021 guidance. We will then open the call to your questions. I am pleased to report that in the second quarter of 2021, TTM generated revenues and non-GAAP EPS above the high-end of the guided range. All commercial end markets were better than guidance and year-on-year growth was led by strength in the Automotive and Data Center Computing markets. These results were achieved despite supply chain constraints, inflationary challenges, and foreign exchange headwinds. Last quarter, I discussed with you the increasing prices and lead times of laminates, a key raw material for the manufacture of printed circuit boards. We have been actively managing both supply constraints and higher raw material costs through such measures as supplier diversification, ongoing operational efficiency efforts, and quotation adjustments to mitigate the impact to TTM. The magnitude of the impact to our cost of goods sold will be larger in Q3 and Q4 since higher laminate prices in Q1 and Q2 takes some time to work through our suppliers and inventory. I am proud of how TTM employees have worked to deliver excellent performance despite the formidable challenges of this environment. Next, I would like to provide an update on our long-term strategy. TTM is on a journey to transform our business to be less cyclical and more differentiated. We believe that over time investors will be rewarded with more stable growth, strong cash flow performance, and improving margins. As part of this strategic transition, we sold our Mobility business last year. We are now able to generate more consistent cash flow with our strong set of technologies and broad exposure to longer-cycle end markets. In the second quarter, we generated $56.9 million of cash from operations or 10% of revenue. 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 further acquisition -- to pursue further acquisitions as well as to support our organic investment needs. Another benefit of our strategic shift is the seasonality of our business. Historically, we experienced significant seasonality in revenues with a softer first half and ramping volumes in the third quarter, which usually peaked in the fourth quarter. Post the Mobility divestiture, this pattern has changed. We now experienced modest seasonal softness in the first and third quarters due to holidays and vacation periods in China and North America, respectively. And stronger revenue levels in the second and fourth quarters. This seasonality, combined with some pull-forward of demand from Q3 into Q2, is resulting in a sequential decline in our revenue guidance. I would also like to update you on the COVID situation. The vaccine rollout in the United States has resulted in a decline in new COVID cases, and we have seen the same dynamic within our employee base. However, many parts of the world have much lower vaccination rates and the rise of the Delta variant has led to significantly increasing case counts in a number of countries with the potential of another round of lockdowns. We are watching these developments very closely to monitor impacts on demand and supply. We are using a data-driven process, monitoring vaccination rates and the local case counts to determine safety precautions at our facilities as we welcome back visitors, begin traveling again, and return a number of our remote employees back to the workplace. Our global manufacturing facilities have been operating throughout the pandemic. Given the rapid reopening in the United States, along with the summer holiday season, we are seeing more challenges in attracting and retaining labor, which is resulting in elevated costs and production inefficiencies in North America. Our employees are paramount to the success of TTM, and we actively endeavor to demonstrate their value to our company through a combination of financial and non-financial methods. We are also hopeful that the expiration of elevated unemployment benefits in the U.S. and increased vaccination rates will encourage potential employees to join TTM as we work to support our customers. Now I'd like to review our end markets. All historical end market disclosures exclude the Mobility Business Unit and the 2 E-MS 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 is posted on our website. The Aerospace & Defense end market represented 33% of total second quarter sales compared to 34% of Q2 2020 sales, and 36% of sales in Q1 2021. We continue to experience a positive defense climate, with our A&D program backlog at $671 million compared to $647 million a year ago. On a year-on-year basis, Defense continues to outperform commercial Aerospace, which saw meaningful year-on-year declines in the quarter. The relative stability 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's upgrade of F-16 fighter jets with scalable agile beam radar. We expect sales in Q3 from this end market to represent about 33% of our total sales. The Medical, Industrial, Instrumentation end market contributed 19% of our total sales in the second quarter compared to 21% in the year-ago quarter and 17% in the first quarter of 2021. The MI&I market exceeded $100 million quarterly run-rate and performed much better than expectations, as Instrumentation customers in the semiconductor capital equipment end market were stronger than expected, and Medical as well as Industrial customers rebounded. For the third quarter we expect MI&I to be 18% of revenues. Automotive sales represented 18% of total sales during the second quarter of 2021 compared to 11% in the year ago quarter, and 17% during the first quarter of 2021. Automotive grew almost 80% year-over-year and continued to grow sequentially above our expectations, exceeding $100 million quarterly run-rate, which is a level not seen since 2018. We are aware that the shortage of semiconductors is currently limiting automotive production, but this phenomena has not directly affected our business since we do not purchase semiconductors. While we are monitoring this situation closely, to date, it has had very limited indirect impact on our non -- on our PCB demand. We expect Automotive to contribute 19% of total sales in Q3. Networking, Communications accounted for 15% of revenue during the second quarter of 2021. This compares to 19% in the second quarter of 2020 and 15% of revenue in the first quarter of 2021. We saw relative strength on a year-on-year basis in Networking compared to telecom as the 5G build-out in China faced difficult year-on-year comparisons. In Q3, we expect this end market to be 15% of revenue. Sales in the Data Center Computing end market represented 14% of total sales in the second quarter compared to 13% in Q2 of 2020, and 14% in the first quarter of 2021. This end market was up 15% year-on-year, due primarily to growth from our Data Center customers. We expect revenues in this end market to represent approximately 14% of third quarter sales as Data Center continues to drive year-on-year growth. Next, I'll cover some details from the second quarter. All of the following operations metrics exclude the Mobility Business unit and the 2 E-MS plants that we 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 Q1. We are continuing to pursue new business opportunities and increased customer design engagement activities that will leverage our Advanced Technology capabilities in new programs and new markets. Capacity Utilization in Asia Pacific was 88% in Q2 compared to 70% in the year ago quarter, and 80% in Q1. Our overall Capacity Utilization in North America was 49% in Q2 compared to 63% in the year ago quarter, and 55% in Q1, as we added plating capacity in 2 of our North American sites for the first time in several years. Our top 5 customers contributed 29% of total sales in the second quarter of 2021 compared to 33% in the first quarter of 2021. We did not have any customers above 10% in the quarter. At the end of Q2, our 90-day backlog, which is subject to cancellations, was $553.1 million compared to $436.6 million at the end of the second quarter last year, and $540.5 million at the end of Q1. Our PCB book-to-bill ratio was 1.26% for the 3 months ending June 28th. I'd like to conclude by again thanking our employees for continuing to contribute to TTM, and our critical mission of inspiring innovation with our customers. Despite the raw materials and labor-related challenges we are facing, our business performed better than we expected as a direct result of our employees and our supply chain partners' concerted efforts to support TTM and our customers. Now Todd will review our financial performance for the second quarter. Todd?

Thanks, Tom, and good afternoon, everyone. I'll be reviewing our financial results for the second quarter, which are also shown in the press release distributed today, as well as on Page 7 of our earnings presentation which is posted on our website. For the second quarter, net sales were $567.4 million compared to $570.3 million from continuing operations in the second quarter of 2020. The year-over-year decrease in revenue was due to the closure of our 2 E-MS facilities, which generated $21 million of revenues in Q2 of last year, and no revenues in this most recent quarter. Excluding that impact, revenues of our ongoing business grew 3.4% year-on-year as growth in our Automotive and Data Center Computing end markets more than offset declines in other end markets. GAAP operating income for the second quarter of 2021 was $40.9 million compared to GAAP operating income from continuing operations of $23 million in the second quarter of 2020. On a GAAP basis, net income in the second quarter of 2021 was $28.3 million or $0.26 per diluted share. This compares the net income from continuing operations of $9.3 million or $0.09 per diluted share in the second quarter of last year. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes our divested Mobility Business Unit, non-routine tax items, M&A-related costs, restructuring costs, certain non-cash expense items, and other unusual or infrequent items. We present non-GAAP financial information to enable investors to see the company through the eyes of management and to facilitate comparison with expectations and prior periods. Gross margin in the second quarter was 18% compared to 18.4% in the second quarter of 2020. The year-on-year decline was largely due to the appreciation of the Chinese currency versus the U.S. dollar in our China facilities, and production inefficiencies in certain North American plants. Selling and marketing expense was $14.2 million in the second quarter or 2.5% of net sales versus $15.7 million or 2.7% of net sales a year ago. Second quarter G&A expense was $28.6 million or 5% of net sales compared to $30.4 million or 5.3% of net sales in the same quarter a year ago. In the second quarter, R&D was $4.1 million or 0.7% of revenues compared to $5.2 million or 0.9% in the year ago quarter. Our operating margin in the second quarter was 9.7%. This compares to 9.4% in the same quarter last year. Interest expense was $10.5 million in the second quarter, a decrease from the $15 million in 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, as well as lower interest expense following our debt refinancing in the first quarter. During the quarter, there was a negative $1.8 million foreign exchange impact below the operating line. Government incentives and interest income reduces to a negative $0.7 million or approximately $0.01 of EPS. This compares to a gain of $0.2 million in the second quarter a year ago. Our effective tax rate was 8.7% in the second quarter. Second quarter net income was $40 million or $0.36 per diluted share. This compares to second quarter 2020 net income of $33 million or $0.31 per diluted share. Adjusted EBITDA for the second quarter was $75.6 million or 13.3% of net sales, compared with second quarter 2020 adjusted EBITDA of $76.8 million or 13.5% of net sales. Depreciation for the quarter was $21.2 million. Net capital spending for the quarter was $22.7 million. An ongoing focus for us is cash flow from operations. During the second quarter, we continued to deliver consistently strong results, generating $56.9 million or 10% of revenue from operations. Our balance sheet and liquidity positions remain very strong. Cash and cash equivalents at the end of the second quarter of 2021 were $558.3 million, and our net debt divided by last 12 months' EBITDA was 1.4x. We are using that strength to repurchase stock and to avoid issuing new shares related to our warrants. We previously announced $100 million stock repurchase program. And during the second quarter, we bought back 411,000 shares for $6.1 million. We also spent $3.1 million to cash settle 60% of the stock warrants that matured during the quarter, thus avoiding the issuance of approximately 210,000 shares. Now I'd like to turn to guidance for the third quarter. As Tom stated earlier, the nature and amount of seasonality we experience has changed since the divestiture of the Mobility business. As a result of that change and the demand pull forward into Q2 that we witnessed, we expect sequentially lower revenue in Q3. In addition, we expect a larger inflationary impact in Q3 which will contribute to lower sequential operating margins. Given that, we expect total revenue for the third quarter of 2021 to be in the range of $530 million to $570 million, and we expect non-GAAP earnings to be in the range of $0.31 to $0.37 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 as the current stock price is under the stock of the strike price of $14.26. We expect that SG&A expense will be about 8.2% of revenue in the third quarter, and R&D will be about 0.9% of revenue. We expect interest expense to total approximately $10 million. Finally, we estimate our effective tax rate to be 10%. To assist you in developing your financial models, we offer the following additional information. During the third quarter, we expect to record amortization of intangibles of about $9.7 million, stock-based compensation expense of about $5 million, non-cash interest expense of approximately $0.5 million, and we estimate depreciation expense will be approximately $21 million. Finally, I'd like to announce that we will be participating virtually in the Jefferies Industrial Conference on August 3rd, the Needham Industrial Technology Conference on August 9th, and the Jefferies IT Hardware, Communications Infrastructure Conference on August 31st. That concludes our prepared remarks, and now I'd like to open the line for questions. Travis?

[Operator Instructions] Our first question comes from William Stein, Truist Securities.

Congrats on the good quarterly results. I think op margin took a nice tick up to 9.7% in the quarter. I recall you have historically had a 12% to 14% target on this metric, but that was before the divestitures that you did. And I'm wondering whether you still think 12% to 14% is a good target and whether you have a time frame that you have in mind to achieve it?

I'll take that one. Good to hear your voice again, Will. In response to your question, yes, we still believe in those targets. The key for us was a couple of things. One was getting our utilization levels up in Asia, and we're starting to see that point now. So that's a very favorable development. And then second is continuing to grow our Aerospace and Defense business, particularly our RF components and Subassemblies portion of that business, which has better than usual PCB fabrication margins. So that's a key element that needs to continue -- that we need to continue to drive. And then the other thing we have to do is, some of the good news that we would have expected to have seen already from the improved utilization in Asia has been a little bit muted by the inflationary costs that we've been seeing in terms of raw materials that Tom commented on in his opening remarks, as well as we're seeing a tighter labor force. So we have challenges getting the labor. And then obviously, as a result of that, you're seeing some price inflation or wage inflation from the labor too. So those 2 elements are working against us, headwinds, if you will, that are muting the benefit that we would normally see from the growth and the improved utilization in Asia. But those are -- I view as temporary things that we will work through, mitigating through ongoing cost management actions as well as pricing actions. So I view those as transitionary or temporary in nature. But they will be with us here, have been for a quarter or 2 and probably will be for a couple of more quarters.

A follow-up to that, Todd. I appreciate it. But I just want to dig into that a little bit more with regard to the inflationary cost -- input costs. Labor is one thing. But on the material side, we've seen among other component suppliers, in particular, semis, but other components as well. We've seen a very, I'd say, a strong willingness and ability -- well, a willingness among the suppliers and also willingness among the -- pardon, willingness among the sellers, but a willingness also among the buyers to accept higher prices in this environment. Lead times are stretched. Maybe they're not quite as stretched for your parts. Their input costs are going up, in particular, costs at Foundry, semiconductor costs are going up. Semis are raising prices to their customers pretty well across the board, even in markets where you really don't expect this, namely automotive, and the customers are paying it. I'm wondering if this is a matter of -- well, I'm wondering why we're not seeing that in your business really, is what I concern to?

Yes. So Will, this is Tom. Let me cover that. First of all, just to explain some of the dynamics of work here in the printed circuit board business in particular, but also in our entire business. We have a set of businesses approximately, it depends on the given quarter, but if you think about 40% to 50% of our commercial business is related to more spot type non-contractual business. And then if you think about our A&D business, about half of the business in A&D is related to either, again, spot or non-contractual business, or contracts with escalation provisions. So the balance of the business, about 50%, would be related to contracts that we have with our customers. So we have, obviously, immediately as we receive increases or even forecasted increases, we're able to incorporate that in our quote models and take care of the 40% to 50% of commercial and the 50% of A&D that I talked about. It's the balance that we're really addressing now. And that takes negotiations. Obviously, the best time to negotiate with the contractual customers is when the contract comes up for renewal, which we which they do. We -- most of our contractual relationships come up for renewal every year, if not more often. And so that's when you have your price negotiation. In some cases, we've had to go back to even those customers and talk about the present situation and ask for their understanding. I would say that on balance, we've been able to mitigate approximately 75% of that -- of the increases that we've been receiving. And frankly, I consider that that's pretty good given the portion of our business that is contractual. We've also, of course, as we always do, we're focused on the cost side of the equation and improving our operational efficiencies, and that's a constant for us. So that continues to be the other area of focus. And as we go through contractual negotiations with our customers, we'll be talking through the pricing situation. So that's how -- that's really the how it works in the printed circuit board world, and we're going to continue to work through this. And as Todd said, we have confidence that we'll be able to mitigate. It's just a question of time as we work through those mitigation strategies.

[Operator Instructions] Our next question comes from Jim Ricchiuti, Needham & Company.

I may have missed it, but you're talking about pull-ins. Can you say -- elaborate on where you are seeing the pull-ins, which market verticals? And maybe what was driving and how unusual is that to see?

Yes, sure. And predominantly, where we saw that was in our -- in the Data Center Computing end market and a little bit in the Networking, on the Networking side as well. And not unusual, Jim, the -- if you look at the blending of Q2, Q3. And so I would consider that sort of not -- it's normal to think about it in terms of multiple quarters. And generally, we were -- because in Q2, as we highlighted, Q2 we have that many more days of production in North America, coupled with the excellent utilization rates that we have in Asia Pacific. So we were able to push that product out and our customers were pulling that product. As we go into Q3 here in those 2 areas, we're expecting that we'll see a little bit of a more subdued demand, but really on the edges, if you will, still a very strong environment. And then the other factor is just the ability with vacations in North America, Q3 is always going to be, from a production output standpoint, a lower production output quarter for us versus Q2. So those are the 2 factors that we're absorbing at this point in Q3.

And I don't know if you want to size it, quantify it, Tom. And the other question, the last question I have is just on the utilization rates. You guys alluded to the higher utilization rates in Asia Pacific. But I'm just wondering, are you at all concerned about your North American utilization rates?

Yes, I think the way to look at it on -- in terms of sizing is just look at the end market forecast that we provided. And if you look at sort of Q3 versus Q2, you'll see in the Data Center area down about 6% and Networking telecom down about 2%. Bulk of that's going to be related to the inventories and sort of that quarter-to-quarter blurring, if you will, of the demand. And then if you look at A&D Q3 to Q2, down about 3%, and a portion of MII, which is down again about 6%. That's more related to production limitations in North America. So that's how -- a good way to look at it. If -- in terms of utilization, I can't tell you how excited we are about -- it's funny to say that. Yes, North America utilization rates are down. But what that really signifies is the fact that we added 2 plating lines in the quarter. And those are vertical plating lines. They are core to our process, represents a -- our ability in the future here to respond to the robust demand that we are feeling out there in the marketplace and to continue our ability to respond to quick-turn requirements as well in those facilities. We obviously have to continue to work on our staffing in our North America facilities, but this gives us the equipment capacity that we need, particularly in those 2 facilities that were bottlenecked by plating. And again, adding plating lines, great indicator to our customers that we are prepared to service their heightened demand levels.

Next question comes from Matt Sheerin, Stifel.

Just a question regarding the margin headwinds that you're seeing both on the labor side and on the materials side. It sounds like -- and you're not the only one saying conditions have probably worsened today since a quarter or 2 ago. Do you have any visibility into sort of when this stabilizes? And it sounds like you're catching up a little bit on passing those costs along. But do you see any further progress in the December quarter?

So kind of to add to what Tom said earlier about the process and how we can deal with pricing in our process. What we've seen now is increases over a period of time. They've been working themselves through the pipeline at our suppliers and then to our inventory and then out to customers. And as we try to balance that cost increase, which we've seen pretty steadily and significantly over the last few quarters. We're now -- we're working to kind of try to get in front of that and work with our customers on pricing. But on that 50% or so of the revenue stream that takes longer to deal with, that Tom was referring to earlier, we're making progress. Q3 has got a bit of a gap. We did really well, I think, in Q2. It was a smaller hill decline. The team did a really good job getting in front of it and working with customers and more or less mitigated the impact of that particular component of inflation for our business. In Q3, though, these costs keep ramping. And we've been working with our customers, and we see it into Q4. At this point, we don't -- it's hard to forecast all of customers -- all of our suppliers are going to be -- continue to increase pricing on us in August and September. But where we are today, we're implementing solutions to mitigate what we see today. And that will have a better benefit in Q4 than in Q3. We have better coverage already. Tom alluded to the 75% or so. I liken it a climbing a mountain and we're 75% of the way up that mountain in Q3, and the team is still working hard to try to get over that hump, but it's going to be tougher this quarter. But the Q4 piece of that, we're in a better position because we have more runway, and we've been working that issue for a longer period of time. That is, of course, subject to what our suppliers might continue to do to us here over the next few months. That is a moving target that has been increasing here over time. But we think we've got a plan in place. We're executing, we're closing that gap. We think Q3 at this point looks to be the most challenging quarter from that perspective, but that's subject to what happens in the marketplace from our suppliers, as we go forward here.

Yes. And I'd only add, Matt, that we -- so that -- what Todd was talking about also is inclusive of what we are seeing or forecasting with -- from our vendors as we look at their -- what we understand to be their plans. And as you know, this is sort of -- these are the times when you really understand the true partnership with vendors. The vendors that are able to forecast and that are doing their utmost to meet demand requirements in a transparent fashion. Those are the 2 partners, and we have a number of them that really have stepped up. And so from that standpoint, we really are trying to understand where the market is going and make sure that our customers understand that as well.

Okay. And could you remind us what percentage of cost of goods is represented by the laminate, the copper-clad laminate?

So it is probably our single largest material cost that goes into our overall cost of goods sold. And in total, if you look at laminate as a percentage of our total cost of goods sold, it's about 14.5%. If you look at all of the copper-related stuff and precious metals that we use, it's maybe in aggregate about 20% of our total cost of goods sold, is really what we're talking about here.

Okay. That's helpful. And then just secondly -- my second question, just regarding M&A, Tom, and obviously, that's been a key part of your growth strategy and you've had a lot of success with integrating acquisitions and Anaren, obviously, broadened your product portfolio. What's your thoughts there in terms of opportunities? Obviously, your balance sheet has been improving. What should we think about the M&A here?

Yes. I think you pointed out, it has been core to our strategy, and it will continue to be a critical element of our strategy. We're still working the revenue synergies, if you will, on the Anaren side, and that certainly on the commercial side of the business, that involves the cross-selling efforts that we're involved in. And then there's a very close relationship between our RF component design efforts and our printed circuit board support. And so we've -- obviously, it's now -- we're approaching -- well, we've been 3 years. And that relationship now is just optimal. And so we have a product now that is out in the market. We've been building our catalog beyond just couplers and resistors and adding transceivers and other components there and actively working on new markets beyond telecom, where we've done very well, but continuing to look at opportunities in Automotive, some in optical networking as well. So I really would like to complement our team on how they continue to focus on that business development. That's really about differentiation and direction that we are going in as a company. As we look at M&A, absolutely looking at building on that capability on the RF component side, looking at our Aerospace and Defense strength and adding engineering capability there. And then continuing to build out, make sure that we have the right footprint to support our customers on the commercial side of the business is the third element. And so we're continuing to work on -- work that pipeline. That's a longer-term effort for us. Strategically, the first sort of hurdle, if you will, internally, is to make sure that there's a strong strategic fit. But then over and above that, we need to make sure that acquisitions satisfy financial criteria. We continue to see elevated multiples in the market and elevated multiple expectations that will change here going forward. It always does adjust. That certainly, as we look at our second critical hurdle, which is the financial metrics, that's going to open up some of those strategic opportunities. So we're going to continue to work that. And it's a process that is very much alive and well and a critical part of our strategy, Matt.

Our next question comes from Mike Crawford, B. Riley Securities.

Regarding the Automotive business, can you talk about design wins and conventional mix versus EV, which I think in the past have been around 77%? And also regarding design wins, I think in '19 and '20 combined, you had over $1 billion of design wins. So where does that stand today in 2021 and the outlook for the future?

Sure. Yes. Let me start with the design wins. We, in this most recent quarter, won about 47 new automotive design wins lifetime program value of about $121 million, and a good -- a decent portion of that was on the non-conventional side of the business. So that gives -- should give you a flavor of this most recent quarter. And what I would say in terms of the overall automotive product mix, relatively constant with what we reported last year, about 26% of the overall business was non-conventional, so Advanced Technology capability for about 26%. The balance would be conventional. And clearly, our focus continues to be on building that advanced technology content in that automotive business. And with that focus on new design wins. So good progress -- solid progress, I would say, in the quarter and certainly strong prospects here. And finally, just to comment on the revenue. I think we're hitting again 2018 levels, very nice to see. In particular, we saw a demand growth in Europe as a region. North America and Asia still remained at high levels, but to see Europe come in into the mix and grow was really the change quarter-to-quarter for us. So, good strong demand there.

Okay. Thank you. And then just further regarding Advanced Technology, what percent of revenue -- I know, I assume it's quite slow as attributable to i3. And given that you divested some capabilities with the Mobility business, how important are differentiated solutions you can provide with the i3 intellectual property and assets that you acquired a couple of years ago?

Yes. So, you're right. It's, from a percentage of total revenue, still pretty small. We do track the opportunity set that comes out of our ATC, as we call it, our Advanced Technology Center. And that Advanced Technology Center in Chippewa Falls, Wisconsin, is where we moved the i3 assets. In that facility, we're doing substrate-like printed circuit board capability. We supply our own needs there for that. So fine lines and spacing, and you can think about very dense circuits. We don't break that out in terms of revenue. But I can tell you that particularly as we look at our Aerospace and Defense customer road maps, the capability is lining up very well with their interest and as well as with their own technology road maps going forward. So today, we're supporting down to about a 25-micron lines and spacing kind of area. We expect that to continue to push downward here as we go through the course of the next 5 years or so. And our plan is to support that need. So that's probably the -- what I can tell you, Mike, just good, solid progress there coming out of the ATC.

Okay. And then final question, a little switching gears, but it looks like you guys are getting back into actual live trade show circuit in September with the Defense Show in London. But is that -- how does that affect business development going forward?

It's always better to be face-to-face. So you're absolutely right, Mike. I mean I think the -- it's been challenging for our field application engineering team and our sales team to -- they've done a great job of interacting with our customers remotely, but to be face-to-face to be able to get out to trade shows and participate again, more than anything else, it's just that as our mission is really to inspire innovation at our customers and the best way to inspire innovation is to be sitting together and helping on the design process. And also designing to meet specifications that are laid out on the table by our customers. So closer interaction is a real positive.

Our next question comes from Christian Schwab, Craig-Hallum.

This is Tyler on behalf of Christian. First, last quarter, you guys outlined or quantified the impact from these commodity prices and labor and FX impacts of $13 million, I believe. And I don't think I heard you quantify it this quarter, if you could. And then it appears that your Q3 guidance at the midpoint implies gross margins are going to be up sequentially, above 18%, I guess, first, is that correct? And then what's kind of the driver there?

Well, to answer your first question on the second quarter, the headwinds from the inflationary issues, primarily raw material costs, we were able to mitigate those. So that really wasn't a big factor in the quarter. It will be a little more challenging in the third quarter as we look at expectations because there's a bigger mountain to climb, and we have not solutions or mitigated all of the cost pressure that we're seeing in the third quarter. So we have a bit of a shortfall there and that will impact and factors into our guidance. When you look at our Q3 forecast and just contrasting that with Q2 because of the similarity with the inflationary factors, that becomes a bit of a challenge. Yes, you're right. Our margins -- actually, our margins are stable to -- in terms of gross margin, probably stable to slightly down. But when you get down to operating margins, that's going to trickle through, you'll see a similar effect. So, from a margin percentage standpoint as our EPS guidance would suggest, you're seeing a little bit of reduction there. And that shortfall or that decrease sequentially is really being driven by the inflationary pressures. That's the gap between our costs that are increasing and what we've been able to mitigate now. We're going to work to try to close that gap, but that's what we see as of this point in time.

Okay. Great. And then second question, a little bit of a follow-up. Your utilization rates in the United States, you said, I think, it was 49% this quarter and below Asia. But you're encouraged with the plate and machinery you added as a bottleneck. I guess, what's kind of a target rate there at some point in the future, what's the rate in the United States?

Sure, sure. Yes. So we're -- in North America because so much of the business base is quick tur, you have to have excess capacity available to meet those needs. And then you also have bottlenecks that move around because of that high mix, low volume nature of the North American business. So utilization's not a great indicator of profitability, if you will, because of that. But if you were to ask, what are we -- what would we really like to see there? When we're at 60%, we're doing awfully well. If we ever started pushing to 70, we need to dramatically address that. So hopefully, that gives you a flavor. As we bring up the equipment that we've now installed, as we bring in labor, and we certainly hope we're going to start seeing better labor availability in the fall. That will help us to raise up that utilization rate above the 50% area and point towards that 60% again.

There are no further questions in the queue at this time. I would now like to turn the call back over to Tom.

Okay. Great. Yes. Thank you, and I wanted to first thank all of you for attending. Hopefully, you understand, and I'll just highlight a few of the factors from the quarter. We delivered revenues and earnings above the high-end of guidance. We did that despite COVID-19 related and supply chain challenges. And our end market diversification, again, really pulled through for us. Solid year-on-year growth of 3% for our ongoing business. And then thirdly, we generated strong and consistent cash flow, a nice demonstration of financial discipline on the part of our team. And finally, I'd just like to thank you again and thank our employees and customers and vendors as well for your continued support. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.