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TTM Technologies Inc (NASDAQ:TTMI)
Q2 2020 Earnings Call
Jul 29, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the TTM Technologies Second Quarter 2020 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, July 29, 2020.

Sameer Desai, TTM's Senior Director of Corporate Development and Investor Relations, will now review TTM's disclosure statement.

Sameer Desai -- TTM Technologies, Inc.-Senior Director, Corporate Development and Investor Relations

Thanks, Dan. 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 the factors explained in our more recent 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 disclosures regarding the risks that may affect TTM, which may be found in our 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. A 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 financial measures included in the company's press release, which was filed with the SEC and is available at TTM's website at www.ttm.com.

I will now like to turn the call over to Tom Edman, TTM's Chief Executive Officer. Please go ahead, Tom.

Thomas Edman -- President and Chief Executive Officer

Thank you, Sameer. Good afternoon, and thank you for joining us for our second quarter 2020 conference call. These continue to be unprecedented times, and I hope that all of you and your loved ones are safe and healthy. I'll begin with an update on how COVID-19 has impacted our business, followed by a review of our business strategy, including highlights from the quarter and a discussion of our second quarter results. Todd Schull, our CFO, will follow with an overview of our Q2 2020 financial performance and our Q3 2020 guidance. We will then open the call to your questions. I am pleased to report that in the second quarter of 2020, TTM generated revenues and non-GAAP EPS above the guided range.

Our diversified end markets allowed us to grow revenues year-on-year despite weakness in the automotive and commercial aerospace end markets. In addition, strong operational execution overcame production inefficiencies and extra costs due to COVID-19. The the COVID-19 pandemic has created operational difficulties, macroeconomic uncertainty and employee concerns. I am extremely proud of how TTM employees have worked to deliver excellent performance despite the formidable and unprecedented challenges of this environment. Finally, I'd like to highlight that we've received the proceeds of the mobile business unit divestiture and have applied them to repay our term loan B. which has driven our net debt-to-EBITDA ratio to approximately 2.1.

We have had approximately 65 employees in North America and one in Asia, who have tested positive for COVID-19 this year, with many returning to work after being cleared following testing and quarantine protocols. We continue to use contact tracing and quarantine individuals who are in close contact with the infected team member in addition to deep cleaning affected work areas. We also continue other measures. Such as extensive internal communications, masking, temperature checks and proper distancing in our facilities worldwide. Because of the stringent preventative measures in place and our culture of transparency in communications, these events have had minimal impact on our manufacturing operations to date. Moving on to the mobility divestiture.

On April 19, we announced that we closed the divestiture of our mobility business unit to AKMMeadville, a Chinese consortium for an enterprise value of $645 million. We had previously commented that it could take up to August seven to receive the proceeds from this transaction. Due to the process of remitting funds from China to the U.S. I am pleased to report that we have received the majority of the proceeds earlier than expected. And today, we were able to repay $400 million of our term loan. This transaction provides us the balance sheet flexibility to continue the journey to increase TTM's focus on differentiation and less capital intensive, less seasonal, long cycle end strong cycle end markets. Finally, on April 29, and we issued a press release that discussed the restructuring of our E-MS business unit.

This restructuring involved closing two plants and absorbing one into our commercial sector operations. We had said previously that the complete wind down of these two plants would take place through 2020 as we support our customers during their transition to other suppliers. As we support last time bias for these two plants, we saw sequential growth in Q2, but we continue to be on track for final shipments by the end of 2020. The strategic rationale for this move is based on TTM's increasing focus on differentiated higher-margin products such as PCBs and RF components and subassemblies. Additionally, local government authorities have communicated to TTM that they intend to appropriate the land where the Shanghai E-M Solutions facility is located. Now I'd like to review our end markets. All historical reported end market disclosures exclude the mobility business unit.

The end market disclosures still contain all of the E-MS segment revenues. For more details on end market disclosures, please refer to our press release for second quarter earnings. The aerospace and defense end market represented 32% of total second quarter sales compared to 33% of Q2 2019 sales and 37% of sales in Q1 2020. We expect sales in Q3 from this end market to represent about 36% of our total sales. We continue to see solid growth in our A&D segment with Q2 revenues up 8% year-on-year. And A&D program backlog growing to yet another record level of $647 million compared to $504 million in the year ago quarter. Weakness in the commercial aerospace end market was more than offset by strength in defense. Growth in the defense market is a result of our strong program alignment and key programs for key bookings for programs such as AESA radar systems in F-35, and and F-16 fighter jets.

The medical industrial instrumentation end market contributed 21% of our total sales in the second quarter compared to 17% in the year ago quarter and 18% in the first quarter of 2020. We saw strength in our medical and instrumentation customers that was partially offset by weakness in our industrial customers. Particularly in our E-MS segment as we wind down two of the plants in that business unit. Much of the strength in medical stemmed from the support provided by a number of our facilities to the urgent needs for critical medical equipment such as ventilators and patient monitoring equipment to combat the pandemic. Our facilities came through in a big way to meet these needs as we place first priority on these critical customers. For the third quarter, we expect this market to be 20% of revenues, as the year-on-year demand trends from Q2 continue into Q3, albeit at a slower pace.

Networking communications accounted for 19% of revenue during the second quarter of 2020. This compares to 19% in the second quarter of 2019 and 16% of revenue in the first quarter of 2020. Year-on-year growth was driven by demand for 5G infrastructure. In Q3, we expect this segment to be 17% of revenue as deployment for 5G infrastructure takes a pause after a strong first half. Sales in the computing storage peripherals end market represented 13% of total sales in the second quarter compared to 11% in Q2 of 2019 and and 12% in the first quarter of 2020. This end market grew 27% year-on-year from strength in our semiconductor and data center customers. We expect revenues in this end market to represent approximately 12% of third quarter sales. Automotive sales represented 12% of total sales during the second quarter of 2020, compared to 18% in the year ago quarter and 14% during the first quarter of 2020.

Automotive sales declined year-over-year due to COVID-19 related OEM factory closures as well as end market demand weakness. Approximately 40% of the year-on-year decline was due to weakness in the E-MS plants that are being shut down. We expect automotive to contribute 11% of total sales in Q3 with ongoing global weakness in demand expected. We expect our PCB sales in Q3 to decrease by 15% sequentially from the second quarter and the decline year-on-year by approximately 32%. Next, I'll cover some details from the second quarter. Note that all of the following operations metrics exclude the mobility business unit. During the quarter, our advanced technology business, which includes HDI, rigid flex and RF subsystems and components, accounted for approximately 27% of our company's revenue. This compares to approximately 25% in the year ago quarter and 27% in Q1.

We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology capabilities in new markets. Capacity utilization in Asia Pacific was 70% in Q2 compared to 60% in the year ago quarter and 50% in Q1. Our overall capacity utilization in North America was 63% in Q2 compared to 62% in the year ago quarter and 67% in Q1. Our top five customers contributed 26% of total sales in the second quarter of 2020 compared to 31% in the year ago quarter and 32% in the first quarter of 2020. Raytheon Technologies was our largest customer, accounting for 11% of sales in the second quarter versus 12% in the year ago quarter and 14% in Q1. At the end of Q2, our 90-day backlog, which is subject to cancellations, was $463.2 million compared to $416.8 million at the end of the second quarter last year, and $497.7 million at the end of Q1.

Our PCB book-to-bill ratio was 1.02 for the three months ending June 29. I'd like to conclude by again thanking our employees for continuing to contribute to TTM and our critical mission of inspiring innovation for our customers. Their efforts are particularly appreciated during these times by our customers in critical essential areas like the medical industry. Despite the COVID-19 related challenges we faced in the first half of this year, our business has performed better than expectations as a direct result of operational excellence, end market diversification and concerted efforts to engage and support our customers.

We've also taken positive strategic moves that will strengthen TTM for the long term. As I look toward the second half and beyond, I am cautiously optimistic about our continued growth prospects in key subsegments, such as defense, data center, 5G and medical. While we expect a slower and longer-term recovery in the automotive and commercial aerospace markets.

Now Todd will review our financial performance for the second quarter. Todd?

Todd Schull -- Executive Vice President and Chief Financial Officer

Thanks, Tom, and good afternoon, everyone. As Tom mentioned earlier, on April 19, TTM announced the closing of the sale of its mobility business unit. As such, the disclosure of TTM's GAAP results reflects the mobility business unit as a discontinued operation. To facilitate comparison of TTM's results to previously issued guidance, I will also discuss non-GAAP financial information, which includes the results of the mobility business unit. The E-M Solutions business unit has also included in the results we have reported. Please refer to the earnings schedule for additional details on the exited businesses and continuing operations.

For the second quarter, GAAP net sales from continuing operations were $570.3 million compared to $526.9 million in the second quarter of 2019 and $497.6 million in the first quarter of 2020. The year-over-year increase in revenue was due to increases in our medical, industrial and instrumentation, computing, aerospace and defense and networking and communications end markets, partially offset by declines in our automotive end market. GAAP operating income from continuing operations for the second quarter of 2020 was $23 million compared to $29 million in the second quarter of 2019 and $16.2 million in the first quarter of 2020.

On a GAAP basis, net income in the second quarter of 2020 was $192.8 million or $1.79 per diluted share. These numbers include a net gain of $183.1 million from the sale of the mobility business unit. This compares to net income of $3.4 million or $0.03 per diluted share in the second quarter of last year and a net loss of $1.2 million or $0.01 per diluted share in the first quarter of 2020. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance includes our divested mobility business unit but excludes M&A related costs, restructuring costs certain noncash expense items and other unusual earn frequent 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. For the second quarter, net sales were $601.1 million compared to $633 million in the second quarter of 2019 and compared to first quarter net sales of $610.8 million. The year-over-year decrease in revenue was due to only three weeks of the mobility business unit in this year versus a full quarter last year and declines in our automotive end market partially offset by growth in our medical, industrial instrumentation, computing, aerospace and defense and networking and communications end markets. Gross margin for the second quarter was 17.8% compared to 13.6% in the year ago quarter and 14.5% in the first quarter of 2020.

The the year-over-year increase in gross margin was due primarily to the growth from continuing operations in the markets discussed above as well as the sale of the mobility business unit, which lost money in the prior year. Selling and marketing expense was $16 million in the second quarter or 2.7% of net sales versus $17.5 million or 2.8% of net sales a year ago and $16.9 million or 2.8% of net sales in the first quarter. Second quarter G&A expense was $31.4 million or 5.2% of net sales, compared to $27.2 million or 4.3% of net sales in the same quarter a year ago and $30.9 million or 5% of net sales in the previous quarter. In the second quarter, R&D was $5.1 million or 0.9% of revenues compared to $4.5 million or 0.7% in the year ago quarter and $4.9 million or 0.8% of revenues in the previous quarter. Our operating margin in the second quarter was 9.1%, this compares to 5.9% in the same quarter last year and 5.8% in the first quarter of 2020.

Interest expense was $15 million in the second quarter, a decrease of $2.4 million from the same quarter last year due to lower interest rates. During the quarter, we recorded $1.8 million of foreign exchange losses. Government incentives reduced the loss to $0.7 million or approximately $0.01 of EPS. This compares to a gain of $4.4 million or approximately $0.04 of EPS in Q2 last year, and a gain of $3.9 million or approximately $0.03 of EPS in Q1 of 2020. Our effective tax rate was 15% in the second quarter. Second quarter net income was $33.3 million or $0.31 per diluted share. This compares to second quarter 2019 net income of $21.3 million or $0.20 per diluted share and first quarter 2020 net income of $19.6 million or $0.18 per diluted share.

Adjusted EBITDA for the second quarter was $80.3 million or 13.4% of net sales compared with second quarter 2019 adjusted EBITDA of $82.9 million or 13.1% of net sales. In the first quarter, adjusted EBITDA was $82.1 million or 13.4% of net sales. Our balance sheet and liquidity positions remained strong. Cash flow from operations was $119 million in the second quarter, inclusive of $68.1 million of accounts receivable collected from the mobility business after we close the sale. This compares to $86.1 million in the same quarter last year. In addition, as Tom mentioned, we received $240 million of proceeds from the mobility sales during the second quarter. Since quarter end, we have now received all the remaining proceeds from the sale. Cash and cash equivalents at the end of the second quarter of 2020 were $694.7 million.

And at the end of the second quarter, our net debt leverage ratio was 2.1. And today, we repaid $400 million of our Term Loan B. Depreciation for the second quarter was $26.1 million. Net capital spending for the quarter was $22.4 million. Finally, I'd like to give a picture of the business on a non-GAAP basis for continuing operations, excluding the two E-MS plants that we are closing. Revenue for the second quarter was $548.9 million and grew 13% year-on-year. Operating margin was 9.9% and grew from 9.5% last year. Now I'd like to turn to guidance for the third quarter. Looking ahead, we believe that COVID-19 cause end market demand weakness, supply chain disruptions as well as inefficiencies within our own production.

Taking this into account, we expect total revenue for the third quarter of 2020 to be in the range of $470 million to $510 million. We expect non-GAAP earnings to be in the range of $0.16 to $0.22 per diluted share. This guidance does not include any contribution from the mobility business unit but still includes revenue and operating results from the two E-MS plants that we are closing. The EPS forecast is based on a diluted share count of approximately 107.5 million shares. Our share count guidance includes dilutive securities such as options and RSUs, but no shares associated with our convertible bonds which is a function of our future stock price. As a reminder, for every dollar increase in the average share price above $14.26 during the quarter, our shares outstanding would increase by approximately 1.5 million shares.

We expect that SG&A expense will be about 8.7% of revenue in the third quarter and R&D to be 1.1% of revenue. We expect interest expense to total about $15 million, and finally, we estimate our effective tax rate to be between 13% and 17%. 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 $10.9 million, stock-based compensation expense of about $4.7 million, noncash interest expense of approximately $3.4 million and we estimate depreciation expense will be approximately $22.7 million.

Finally, I'd like to announce that we will be participating virtually in the Jefferies Industrial Conference on August 5, and the Needham Industrial Technology Conference on August 10, the Jefferies Semiconductor Hardware and Telecom Summit on September two and the Deutsche Bank Leveraged Finance Conference on October 2. That concludes our prepared remarks.

Now we'd like to open the line for questions. Dan?

Questions and Answers:

Operator

[Operator Instructions] We'll take our first question in queue comes from William Stein, SunTrust. Please go ahead.

William Stein -- SunTrust -- Analyst

Great, thanks for taking my question and congrats on the good results. I'm hoping you can comment on the trends expected in E-MS in September and beyond maybe the linearity of the decline over time? And what is the sort of final level the level at which you'll still have business from the one facility, but the other two are no longer contributing?

Thomas Edman -- President and Chief Executive Officer

Sure. Yes. So the one facility, and when we really talk about E-MS and just to make that clearer for you, will, we're going to that facility has already been integrated into our PCB operations. And that facility runs at anywhere between $40 million and $50 million a year. So you're going to that facility already incorporated in the PCB operations.

The balance of the two facilities will be winding down again in Q3 and Q4. The it's hard to forecast exactly how we're going to wind them down. But you could pretty much say, bring them down equally each quarter down to effectively at the end of Q4 will be shut down. So reasonably smooth transition as we move to close those facilities.

William Stein -- SunTrust -- Analyst

And then one follow-up, if I can. Talk about the progress that you're making in trying to bring the RF capability that was acquired in the interim business to the non defense end market, in particular, automotive or any others for that matter? Any progress in that?

Thomas Edman -- President and Chief Executive Officer

Yes. Sure. So yes, we've actually there are a few areas of focus there. And if you start thinking about RF performance and the importance of RF speeds, in particular, where they're becoming more challenging to think about networking, optical networking some medical activity. And then, yes, you have automotive. And so we've been working on efforts in all of those areas to address automotive in particular, as we're moving into a 77 gigahertz world, what we're finding is our customers are challenged in terms of improving RF performance. And that is particularly true of customers that are smaller customers who may be resource constrained.

And so we've been working with those customers in a number of efforts. One, to handle the thermal the thermal challenges that can come as you start to push RF performance and also with fine lines. How you're going to start running into potential thermal challenges, and we've been working on modules to address that. We've also been working with several accounts on developing modules specifically for some of their sensor needs. As you know, these are particularly in the automotive world, you will typically work on a development cycle that starts two, sometimes even three years before model release. So these efforts are some of them are into prototyping stage. Some are still earlier, where we've got a variety of those engagements.

But pretty excited about the momentum that we're gaining there. Not yet turning into material revenue. But certainly, we're making good progress with those efforts. And I think we're contributing to solving customer problems.

William Stein -- SunTrust -- Analyst

Thank you.

Thomas Edman -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Matt Sheerin with Stifel. Please go ahead.

Matt Sheerin -- Stifel -- Analyst

Yes, thank you. A couple of questions for me, Tom. First, on automotive outlook. You sound maybe a little bit more cautious than other component suppliers that have issued guidance. And I'm trying to figure out how much of that is based on the the E-MS weakness and perhaps and I think at the end of your commentary on auto, you talked about the PCB business there. So maybe you could you go over those numbers again. But just trying to figure out where you sit in terms of the cycle? And when would you expect a bigger uplift in terms of demand and order pools?

Thomas Edman -- President and Chief Executive Officer

Sure thing. Yes. Thanks, Matt. Yes. The what I'll do is let me talk to this without taking out the E-MS. And you're right, we try to give some visibility to that as I went through the earnings script. But to give you a little bit more information on this, pulling out E-MS and if you start to look at second quarter performance quarter-on-quarter, we were down approximately 21%. And if you think about unit volume overall in the automotive market down substantially more than that. Now then you look at the third quarter, and in the third quarter, we're looking at being down approximately 31% year-on-year. And if you look sequentially, down about 15%.

So what's going on? If you start to look at our customers and as they look at printed circuit versus other components, not longer lead time components. What they'll do with printed circuit boards, and what we saw in the second quarter was as our Tier one parts supplier customers started to service their OEM requirements. They were able to pull early, relatively early in the second quarter from our hub inventory to help the start-up efforts of their customers, which really started in May. And so we saw some heightened revenues as a result. But what we were also seeing was a sharp decline in bookings. So that bookings decline then starts to feed into some of the weakness that we're guiding toward in the third quarter.

And so as we now look at the third quarter, we are tracking bookings very carefully. And what we have seen is since really June, the beginning of June, where we sort of hit our low point, we've seen sequentially almost every week and improvement in those bookings. And so as we look at that, that bodes well for shipments in the hub and then bookings and then revenue that we would see as we move into late into the third quarter into the fourth quarter. So as we look sequentially, yes, third quarter should be down. But then as you look ahead into the fourth quarter, I think that bookings trend is a nice positive indicator of what we would expect to see in the fourth quarter.

Matt Sheerin -- Stifel -- Analyst

That's helpful. And last quarter, Tom, you talked about some actually several design wins in automotive leveraging your technologies across the various sectors. Could you update us on those trends? And are you still seeing positive content, particularly like trends toward electrification?

Thomas Edman -- President and Chief Executive Officer

Yes. So interestingly, this quarter, what we saw is still a nice movement in terms of overall bookings, program bookings. In automotive, we booked about 43 programs. Nice program value overall of about $203 million. But the ADAS bookings were not as strong as we've seen in some of the past quarters. I don't make a trend out of one quarter. What I like seeing is that very strong lifetime program bookings.

I think there may be a little bit of a a pause on some of the new product efforts in our customer side that would lead to a little a bit of a slowdown on the ADAS related programs. But overall, a good indication that customers are continuing to move forward with their longer-term plans in terms of programs themselves. So hopefully, that gives you a feel for it.

Matt Sheerin -- Stifel -- Analyst

Absolutely. And on the just changing subjects to the aerospace and defense, and it sounds like you're seeing really so strong demand on the the military side, could you remind us what the breakdown is commercial versus defense in that sector?

Thomas Edman -- President and Chief Executive Officer

Yes. So 2019, full year numbers. We were about 18% of our Aerospace & Defense business was commercial aerospace. The balance was defense. Now obviously, with commercial aerospace demand worsening, we through 2020, that will come substantially down in terms of commercial aerospace as a percentage of those revenues. But to begin with, they already were relatively small as a percentage.

What we have seen is that the defense side of the business more than makes up for that, that's why we're still seeing very strong ongoing growth, about 8% in the second quarter. And as we look forward, why we're still continuing to be optimistic here in terms of of that overall aerospace and defense business. And that's really fed by, again, by our radar position and then the program breadth that we have on the defense side. So hopefully, that gives you a feel for the split.

Matt Sheerin -- Stifel -- Analyst

Sure enough. Thanks a lot.

Operator

Our next question in queue comes from Steven Fox, Advisors. Please go ahead.

Steven Fox -- Advisors -- Analyst

Thanks, good afternoon. If you hi. I guess, just back up to the Q2 results on a continuing operations basis. Relative to your original guidance, there was some significant top line upside. And you sort of cited some of the markets that look like contributed to it. But maybe you can just sort of call out within each segment. What was most surprising to you relative to guidance? And then associated with that, maybe I got this wrong, but it looks like the drop-down from the top line upside was greater than you normally would target. I'm wondering if you would agree with that? And if so, what drove that?

Thomas Edman -- President and Chief Executive Officer

Sure. I'll give a general comment on the second part, Todd, you can jump in there as well. On the top line performance, we I think we were very, very pleased. Obviously, we were able to perform ahead of forecast in a number of our end markets. If you look at the medical industrial instrumentation area, that was one area where we outperformed versus our guidance driven by really a combination of two things: medical demand and then instrumentation demand being strong. Network and communication, we also did better than we had expected there. Mainly the networking sorry, the telecom side driving that.

The 5G growth being stronger than we had been forecasting. And then computing also had tremendous upside against our forecast, mainly data center demand, semiconductor remains strong, but data center demand stronger than we had forecast. And if you tie all that back to COVID and what was going on with our customers, I think most of it, that really does make sense that we would see that kind of of growth in the quarter, with that growth sort of normalizing as we go back and as we move into the third quarter. So how that contributed, particularly, we saw some tremendous utilization improvements in several of our facilities in Asia.

They performed very well operationally. And then also on the North America side, we from an operations standpoint, we had been deliberately careful given absent T rate concerns with COVID about our ability to push production out, and the teams did an amazing job in North America as well. So I'll stop there. Todd, any further comments?

Todd Schull -- Executive Vice President and Chief Financial Officer

Well, I think you hit the nail on the head relative to Q2 performance relative to the guidance or expectations that we had set going into the quarter. As Tom mentioned in his comments, is particularly in the medical area where we were asked to really stretch ourselves by customers on a rather urgent basis and we rally to do that as a group. As you look into Q3, and what's happening, you're seeing a calming down in some of those markets. So where medical and industrial instrumentation was very strong in Q2 with very little notice, if you will. It's tapering off here the initial surge and ventilators are slowing down here. Is there going to the kind of getting back to a more normal pattern.

We're also seeing and I think you've seen this with some of the other commentary out in the street. Data centers are pausing a little bit in Q3. We've seen that from some of the chip companies who have made some comments to that effect. And Tom mentioned in his comments that 5G is pausing a little bit in Q3. A lot of the 5G growth in the first half of the year was driven in Asia, particularly China. And with what's going on there politically and otherwise, they're definitely pausing a little bit in Q3, and we're seeing some of that filter down into our business expectations for the quarter. Operationally, as Tom pointed out, we executed pretty well.

And a lot of the in Q2, a lot of the upside in profit was really driven by the revenue and execution. And as we look at Q3, yes, we're declining quarter-to-quarter, but a lot of that is really top line. In fact, all of it is just top line driven. So when you look at the impact. And even with essentially $100 million or $110 million, if you take the midpoint of guidance drop sequentially in revenue. The incremental margin drop is much smaller than that. And so we're doing a pretty good job in managing the costs, both up and down as we try to respond to the revenue levels that we're experiencing.

Steven Fox -- Advisors -- Analyst

Great, that's very helpful. Thank you.

Todd Schull -- Executive Vice President and Chief Financial Officer

Thanks, Steve.

Operator

Our next question in queue comes from Mike Crawford, B. Riley. Please go ahead.

Mike Crawford -- B. Riley -- Analyst

Thank you. On aerospace and defense front, I imagine the large platform programs keep you pretty well insulated from the budget cycle and the selection year where work on AESA and F-35, F-16, that stays pretty much the same. But are there some new programs that you're looking to either get on or to ramp up that will require the new government 2021 budget before you can get started? And if so, could you talk about any of those opportunities?

Thomas Edman -- President and Chief Executive Officer

That's an interesting question, Mike. What we have seen and you can see that in our overall program backlog moving up over 640 now. We there has been tremendous momentum in the with the programs that we're involved in. And a major part of our focus through the years has been to be not just in a broad set of programs to be but to have depth in the right programs. Those programs are, particularly where we have depth of involvement, usually involve our RF capability and therefore are usually tied to radar. Systems and radar requirements. At this point, while it's always good to have a solid budget backdrop, that's not essential with these programs because they're viewed as core programs.

And so whether it's the fighter jet programs that we mentioned, whether it's upgrades, with some of the naval ships that are out there, whether it's the LTAMDS type missile programs, the need to move Disa radar is a core requirement of all the armed services. And so with that backdrop, I'm not we're not viewing any particular program as being dependent on budget requirements in terms of driving our overall growth. As I think we've got a nice, solid set of core programs that will be funded going forward that will really be provide that strong backdrop to drive our growth at this point.

Mike Crawford -- B. Riley -- Analyst

Okay. I'll just ask one other question, object. So in automotive vertical, I'm not sure if I heard exactly what conventional PCBs was as a percent of automotive sales in 2Q? And then if there's been any change on where you think that mix might change for 2H 2020 or 2021 or beyond?

Thomas Edman -- President and Chief Executive Officer

Yes. Yes. So we provide that number on an annual basis because I think it's sort of misleading to provide it on a quarterly basis. It moves around quite a bit. But as you know, we were over 20% and in terms of content from the nonconventional printed circuit board at the end of last year. What we're seeing right now is this year should lead to more than likely another increase in that percentage with electrification continuing to occur.

So I expect that to happen as we move through the course of the year. So that, again, we report that number really in the first quarter of next year. You should we should see a pretty solid increase in that percentage. As again, as we see growth on the sensor and on the infotainment side of the business. Balanced again in the face of what is really going to be a challenging year. So if you have a portion of the market that is that continues to grow, albeit slowly in the face of overall unit volumes dropping. That's you're going to see that percentage increase. So that's what I would expect to see as we move toward the second half.

Mike Crawford -- B. Riley -- Analyst

Okay, great, thank you very much.

Thomas Edman -- President and Chief Executive Officer

Thank you.

Operator

Next question comes from Jim Ricchiuti with Needham & Company. Please go ahead.

Mike Cikos -- Needham & Company -- Analyst

Our team, you have Mike Cikos here instead of Jim Ricchiuti. Couple of quick questions for you. The first being on the E-MS business. I just wanted to make sure I heard you correctly in the prepared remarks, but was there a comment that some of this business may have seen a temporary benefit as customers were trying to place orders ahead of your wind down, did I hear that correctly? And if so, did you quantify what that benefit was?

Thomas Edman -- President and Chief Executive Officer

So you'll find so you'll find in the tables in the press release, you'll find some really nice data on the split. So both nonmobility and then also E-MS. So you'll be able to do the math, if you will. But just to give you a feel, the we did talk about EMS being up from last year because of the last time buys and that, that's just a short-term situation and overall.

But so that's and I should let me at that. It's actually up sequentially. So but that you can sort of remove that noise, if you will, by referring to those tables. And then you can really see where the printed circuit board business, the ongoing business will be here as we go through as we look at the year-to-date at any rate for TTM.

Mike Cikos -- Needham & Company -- Analyst

Okay. And I'll have to circle up on those tables. And just another question. I know, again, it's a little difficult to forecast because we're expecting to swine down through the back half of 2020, but is there I guess, can you help us understand what you're baking into your Q3 sales guidance for this for the E-MS division?

Thomas Edman -- President and Chief Executive Officer

Why don't I do this? If let me just walk through approximately. If you look at the printed circuit board business, and you look at where we're going to be year-on-year with the end markets, that can probably give you a feel for it. And so if you think about the guidance and if you look year-on-year, aerospace and defense, we should, in printed circuit board, we should be up about 4%. Of course, there's very little E-MS content there. Automotive, where there's obviously more E-MS content.

For PCBs only, we should be down about 31% year-on-year. If you look at computing, we'll be roughly flat year-on-year. MII, where there is some E-MS content, we should be up roughly nine percentage points with PCB and then if you look at net working comp, down roughly 9%, eight 8.7% or so there. So that should give you a feel for where we are on the PCB side. Todd, any more guidance you'd like to provide on the tables.

Todd Schull -- Executive Vice President and Chief Financial Officer

Yes. I can help them out a little bit. You don't have the benefit of the table that is an exhibit to the press release. But when you look at that, you'll see that the two plants that we're talking about that are being closed, only contributed about $21 million of revenue in the second quarter. And as you look at Q3 and Q4, although the numbers can fluctuate a little bit, it's going to be in that neighborhood, plus or minus $5 million. So it's relatively immaterial. And it's not going to have a huge swing one way or the other, as we can see it right now.

Mike Cikos -- Needham & Company -- Analyst

That's helpful. Very helpful. And then one final, if I may. Just coming to the the COVID-19 pandemic and how you guys have been handling this, again, with the results on the outside of the execution from you guys. Wanted to get a sense, have costs that you guys are currently incurring to help with the contact tracing or protecting your personnel. Are those fully reflected in Q2 results? And should we assume a continuation of that in Q3? Or is there a potential step down as things somewhat normalized, and most of those upfront costs are hopefully behind you at this point?

Thomas Edman -- President and Chief Executive Officer

Go ahead, Todd.

Todd Schull -- Executive Vice President and Chief Financial Officer

Yes, I'll take a shot at it. So yes, we incur costs. And they're a little here and a little there, things like deep cleaning and more frequent cleaning masks equipment for temperature checking. Obviously, the time spent doing contact tracing, and we follow-up with all of our employees on a daily basis. So there's a lot of, I'll call it, hidden cost a little here and a little there and are difficult to capture. There are some things that are a little more direct, like I said, the masks or something like that. And then there's a whole issue of productivity. So those costs are expensed as incurred, and they are reflected in our Q1 and Q2 numbers as we've incurred those costs.

And we as best as we can, we've tried to include our expected costs associated with that in our Q3 guidance. It's COVID is not going away. I think if you look at the stats, it's being rather difficult, obviously, when you look around the nation, particularly in the U.S., and it's even starting to rear its head again in Hong Kong. So we're very concerned, and we're being very vigilant with our people and our sites to make sure that we're taking care of our people. And we're very fortunate that those that are getting sick or not getting sick at work. We're trying to protect our people at work. But there will continue to be costs associated with that. We are going to continue to do our protocols to protect our people as best as we can within the work environment. But those costs are reflected already in our forecast.

Mike Cikos -- Needham & Company -- Analyst

Thank you for the color, guys.

Todd Schull -- Executive Vice President and Chief Financial Officer

Sure.

Operator

We'll take our next question in queue comes from Paul Coster with JPMorgan. Please go ahead.

Paul Chung -- JPMorgan -- Analyst

Hey, guys. It's Paul Chung on for Coster. So just on your long-term kind of operating margin targets for 12% to 14%. Now that you have you sold the mobile business and you're exiting parts of E-MS. Can you give us a sense for the time line to hitting that long term range? And then can you also comment on the kind of seasonality of your operating margins now? Is it fair to kind of assume a lot less volatility between the quarters moving forward, particularly in 1Q and 2Q?

Todd Schull -- Executive Vice President and Chief Financial Officer

Tom, you want to try to run that? Take a try at that?

Thomas Edman -- President and Chief Executive Officer

Absolutely.

Todd Schull -- Executive Vice President and Chief Financial Officer

So let me take the second question first, and that is seasonality. So we used to have very, very major seasonality impacts when we were when we had a large element of the consumer business. With the sale of our mobility business unit that gets us out of a big piece of that. Now there'll still be some subtle differences. We still have Chinese New year in the first quarter, and that impacts our ability to produce and our customers' ability to produce. And so there always tends to be a little bit of an impact there. And oftentimes, in Q3, particularly in North America, you have vacation season. This year is a bit weird because of COVID. But generally speaking, we see a little pattern there.

But I don't think the seasonality well, I know the seasonality won't be as pronounced as it was in the past. And I'm not even sure how significant it will be, but you will see some subtle differences with Q1 and Q3 probably being the most impacted. In regards to your first question on targets, I think we made the comment in my notes that if you take out the businesses that we either have exited or are or the two plants that we're closing, our operating margin would have been about 9.9% this past quarter. And so that's an indication of the improvement in the financial model that we're driving toward. So our goal of getting to 12% to 14% doesn't seem so far away now. We do need top line help. We have plants, particularly in Asia, that are not as utilized as they need to be in terms of their financial contribution.

And so we need some top line growth to get there. But assuming the economy rights itself here from the COVID buyers, and that's a big if. I'm not I don't have a great crystal ball there looking at 2021 or 2022. But assuming those are more normal years. And we have our organic revenue growth that we would expect in that four to the mid-single digits kind of number. It's a two year stretch there. We need to get a few hundred million dollars of top line $200 million to, let's say, $300 million to get us into that solid into that margin range. And those are levels we've been at before in different end markets. We just need the end markets to kind of get their strength back. We saw some of that in Q2, but we're seeing some of it slide a bit back in Q3. We need to kind of get some of that consistent growth, which comes from a healthy economy, and that's the big wildcard right now.

Paul Chung -- JPMorgan -- Analyst

Got you. And then just a follow-up on that $200 million to $300 million, is acquisitions kind of in the cards? Or you now focused on the existing business now. It has been two years since you bought Anaren and you seem to kind of add to your portfolio around two to three year gap. So are we in for another one?

Thomas Edman -- President and Chief Executive Officer

Thanks, Paul. Yes, sure, I'll double on that one. The so the $200 million to $300 million that Todd was referring to really is about our organic efforts to grow the business. And we believe we can get there as we return to more normal times. And as we look at the real macro factors driving our growth rates in our end markets. So that's organic. But as we you're certainly right from a balance sheet perspective, we're in very strong shape now. Really pleased to see that. The company, though, is pursues M&A as part of our overall strategic growth. And we've identified a few areas of focus. One is to continue to look at our footprint, make sure that we've got the right footprint from a support a customer support perspective.

The other and bigger thrust of our M&A efforts will be to continue to deepen our engagement on our RF side of the business, both from an aerospace and defense standpoint and also commercially. So we will continue to move forward with that strategy. When those opportunities materialize, it's always difficult to estimate. But it's a process that we run that we run as a regular part of our core one of our core processes. So we continue to work that. And in the meantime, as we've informed our investors consistently, our first priority was to pay down the debt. We've done that. We are really pleased with the shape of our balance sheet, and we'll continue to work our strategies for growth. So I hope that gives you an answer, Paul.

Paul Chung -- JPMorgan -- Analyst

Yeah. Perfect, thank you.

Thomas Edman -- President and Chief Executive Officer

Thank you.

Operator

There are no more questions in the queue at this time. I will now turn it over to Tom Edman for closing remarks.

Thomas Edman -- President and Chief Executive Officer

Great. Thank you very much, and thank you all for joining us. I'd just like to close by summarizing some of the points that I made earlier. First, we delivered revenues and earnings above the guided range despite COVID-19 related challenges and labor productivity, which really is a demonstration of our focus on operational excellence. Second, our end market diversification has allowed us to and so has allowed our continuing operations to grow despite weakness in a couple of subsegments.

Third, we received proceeds from the sale of the mobility unit divestiture and repaid our term loan. So in closing, I'd like to thank our employees, our customers, our of course, you, our investors, for their and your continued support as we navigate challenges around our businesses associated with COVID-19. We will continue our long-term strategic focus on diversification, differentiation and discipline.

And so with that, I'll close the call. Thank you again for joining us and ask that you all stay safe. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Sameer Desai -- TTM Technologies, Inc.-Senior Director, Corporate Development and Investor Relations

Thomas Edman -- President and Chief Executive Officer

Todd Schull -- Executive Vice President and Chief Financial Officer

William Stein -- SunTrust -- Analyst

Matt Sheerin -- Stifel -- Analyst

Steven Fox -- Advisors -- Analyst

Mike Crawford -- B. Riley -- Analyst

Mike Cikos -- Needham & Company -- Analyst

Paul Chung -- JPMorgan -- Analyst

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