Pulse Electronics Corporation (NYSE:PULS)
Q2 2013 Earnings Conference Call
August 06, 2013, 05:00 PM, ET
Ralph E. Faison - Chairman, President and CEO
Drew A. Moyer - SVP, CFO
Jim Butler - Senior Director, Finance
Good afternoon everyone and welcome to the Pulse Electronics Second Quarter of 2013 Results Conference Call. All participants will be in a listen-only mode. (Operator Instructions). Please note today's event is being recorded.
At this time I would like to turn the conference call over to Mr. Jim Butler, Senior Director of Finance. Please go ahead.
Thank you, Jamie. Again this is Jim Butler, Senior Director of Finance for Pulse Electronics Corporation. We apologize for the brief delay on starting the call today for some technical problems.
With me today are Ralph Faison, our Chairman, President and Chief Executive Officer; Drew Moyer, our Chief Financial Officer; and Alan Benjamin, our Chief Operating Officer. This afternoon we will discuss our results for the second quarter of 2013, and provide our outlook for the third quarter.
Before we begin our presentation let me take care of four administrative items. First, we will use a slide presentation to accompany our prepared remarks. A PDF of the slides has been posted to our website. Second, this call is being webcast and a replay will be available on our website for two weeks.
Third, we will make statements considered forward-looking within the meaning of Federal Securities Laws. These statements are based on our current knowledge and expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. For a discussion of such risks and uncertainties see the disclosures, including the Risk Factor section in our most recent 10-K, as well as in certain of our other SEC filings. We also encourage you to review our 10-Q for this quarter when filed. The company undertakes no obligation to revise or update any forward-looking statement.
Fourth, management's comments and the accompanying slide presentation should be read in conjunction with the second quarter earnings press release we issued this afternoon. The press release contains our financial results according to U.S. generally accepted accounting principles.
In this call all references to operating profit or loss and diluted earnings or loss per share are on a non-GAAP basis. These non-GAAP measures exclude severance, impairment and associated costs, legal reserves, non-cash stock-based compensation expense and costs associated with an unsolicited takeover attempt in applicable periods. For reconciliation to U.S. GAAP results and a rationale for our usage of non-GAAP measures, see slides 19 and 20 in our presentation.
Now I’ll turn the call to Ralph.
Ralph E. Faison
Thank you, Jim and a big thank you to everyone who is joining us on the call today. Our earnings release was distributed just a short while ago and I am going to provide a quick overview of the second quarter. Drew will then join and discuss our financial performance in a little more detail. Then I will come back and give a review of our outlook for the third quarter of 2013.
So if I can direct you to slide three our second quarter revenue was within our guidance and our non-GAAP operating profit was above our guidance. Sales were $88.3 million and non-GAAP operating profit for the quarter was $2.2 million. This quarter's results were a continuation of our trend of improving operational performance despite a lower demand environment.
We have been largely successful in stabilizing gross margin, even though labor costs continue to rise and with good control over operating expenses our non-GAAP operating profit margin maintained its upward trajectory.
We are also pleased that our on-going improvements in operating efficiency and commitment to improve customer service and satisfaction have allowed us to reduce our lead times for a majority of our products to four to five weeks, that is half that of the typical industry lead times.
In the past few quarters we've made a number of statements regarding an intellectual property lawsuit with Halo Electronics Incorporated in which we are defendants that affects a few parts in our network segment but which could individually be important to some of our customers.
Earlier in the second quarter of the US District Court in its final judgment in the case granted Halo's motion for a permanent injunction against the product subject to the jury verdict and subsequently granted a stay of the injunction through October 15, 2013.
This stay allows us to continue to support customers while we transition to our new and improved replacement parts which are rapidly introduced -- which we are rapidly introducing and we’ll continue to ship after the expiration of the stay. We're making good progress and many of these parts are available now ensuring all customers have the opportunity for uninterrupted supply of high quality products.
Also we received notice from the New York Stock Exchange that we have regained compliance with the exchange's continued listing standard for share prices. Our common stock has closed above $1 for at least 30 trading days. We continue to follow all the New York Stock Exchange requirements to regain compliance with the market capitalization listing standard as well.
So if I can ask you to turn to slide four, I’ll discuss our new expense reduction program. With our ERP implementation progressing towards completion and driving the expected efficiencies, we've initiated program of further expense reductions which we expect to reduce operating expenses by $6 million on an annualized basis by the end of the first quarter of 2014.
These reductions are a natural step in getting to our target of 15% operating expense model and they also makes sense to implement now because of the prolonged nature of lower demand in our industry. While we believe that the underlying fundamentals of our industry will eventually drive significant future growth and help improve our expense structure more rapidly achieving the expense level appropriate for the existing revenues will help assure continued earnings and cash growth regardless of sales trends.
We've not yet determined the extent of the severance and restructuring charges we will incur as part of this program but we do believe there’ll be less than one-third the annual savings rate and will thus generate rapid payback to the company’s operating results.
So with that short overview I’ll turn the call over to Drew and he’ll take you through a little more thorough review of our second quarter financial results.
Drew A. Moyer
Thanks Ralph. I’ll begin on slide six with net sales. Net sales were $88.3 million in the second quarter down 12.1% compared to the $100.4 million in the prior year quarter and up 4.1% from the first quarter. This performance was within the outlook range we provided earlier, as Ralph mentioned. And we believe it is in-line with broader industry trends as well as lower demand for certain customer’s smartphone programs. Sequentially net sales increased mainly due to seasonal recovery from the typically weak first quarter offset by on-going industry softness of certain smartphone program demand.
Please turn to slide seven and I’ll review gross profit margin. Cost of goods sold decreased 16.8% to $67.5 million in the quarter from $81.2 million in the prior year quarter. Gross margin was 23.5% in the quarter compared with 19.1% in the prior year quarter. This significant improvement in gross margin reflects the favorable effects of manufacturing plant consolidations and other cost reduction programs we have taken over the past two years and their resulting operational efficiencies.
Additionally improvements in wireless operations have significantly reduced inefficiencies and new product ramp cost compared to the prior year. Compared to the first quarter gross profit margin decreased slightly mainly due to the implementation of a portion of government mandated wage increases at the company’s manufacturing facilities in China. The remaining minimum wage increases became effective in the third quarter.
Now let's move to operating expenses which are covered on slide eight. Operating expenses were essentially flat at 19 million in the quarter compared to $18.7 million in the prior year quarter and $19.2 million in the first quarter. Our operating expenses remained under control due to sustained scrutiny overall discretionary spending. As a percentage of net sales operating expenses were 21.5% in the quarter.
Let's move to slide nine. Our non-GAAP operating profit was $2.2 million in the quarter compared with $0.9 million in the prior year quarter reflecting our continuing trend of improving financial performance. The improvement mainly reflects our improved wireless operations and overall operating efficiencies in the other segments.
Our non-GAAP operating profit margins was 2.5% compared to 0.9% in the prior year quarter and 1.9% in the first quarter.
Slide 10 provides additional historical context to the progress we are making on Pulse’s overall business results. In this chart we present quarterly adjusted EBITDA and our EBITDA margin has a percentage of sales from 2012 to the present. Our efforts to improve the overall performance of the wireless business, improved manufacturing performance through plant consolidations and reduce operating expenses have clearly led to a significant improvement in the company’s breakeven point and its ability to generate stronger financial results in the current revenue environment.
Over the past six quarters we have generated higher EBITDA on less revenue. As we continue to focus on expense reductions through 2013 we believe then any pickup in revenue growth will have an even more favorable impact on operating profit and EBITDA performance.
With that review of our consolidated results let me provide a review of the performance of our three segments starting with Network on slide 11. Network net sales were $38.5 million in the second quarter compared with $41.7 million in the prior year quarter as lower industry demand continued.
However, operating profit of $0.9 million in the quarter improved slightly from the 0.8 million in the prior year quarter despite the lower revenue. The segment's financial performance was driven by improved gross margins including plant consolidation and migration to lower cost Western China despite the unfavorable pressure from rising minimum wage rates in China. Sequentially network operating profit declined slightly due to the partial implementation of the wage rate increases.
Power is on slide 12. Power net sales were $29.6 million in the second quarter compared with $32.1 million in the prior year quarter and sequential up slightly from $27.6 million in the first quarter. The decline from last year reflects the on-going challenges across the industry including lower government and military spending and lower pricing for certain products.
Operating profit for the power segment was $1.9 million in the quarter compared with $2.0 million in the prior year quarter and $1.2 million in the first quarter.
Turn to slide 13 now and I’ll review Wireless. Wireless net sales were $20.3 million in the second quarter compared with $26.6 million in the prior year quarter and $21.4 million in the first quarter. The lower volume in the second quarter reflects reduced strength in certain customers smartphone programs. Operating loss was $1.1 million in the quarter compared with a loss of $2.4 million in the prior year quarter and a loss of $1.5 million in the first quarter. The reduced loss even on lower revenue reflects continued progress in improving our wireless operations.
With that review of the segments turn now please to slide 14 and I’ll cover the balance sheet. We had $23.2 million of cash and cash equivalents at June 28, 2013 compared with $31.5 million at December 28, 2012. The decrease in cash mainly reflects refinancing transaction fees and capital expenditures. Capital spending in the quarter was approximately $4.1 million compared to $1.6 million in the first quarter mainly due to the timing of certain projects. We maintain the same scrutiny over capital expenditures as we do for operating expenses and we expect capital spending to taper down through the rest of 2013.
More information on our cash flow during the quarter will be contained in our 10-Q filed this week. The total principal of the Oaktree term loans increased to approximately $110.9 million due to the addition of the payment-in-kind interest. We are still in discussions with Oaktree regarding the possible terms of a convertible bond exchange offer as part of our investment agreement with Oaktree, but we have not yet reached an agreement to move forward with an offer. We believe we have a number of other options regarding the retirements of the convertible bonds either before or after maturity.
With that overview of second quarter financial performance I’ll now turn the call back over to Ralph.
Ralph E. Faison
Okay. Thank you Drew. So if I can ask you to turn to slide 16 you’ll see our outlook for the third quarter 2013. As we look at the third quarter we continue to see modest but encouraging improvements in our key markets.
Our network and power businesses should see typical seasonal uplift which will be a significant improvement from the third quarter demand in the past two years while our wireless business should see increased smartphone project demand as well. Combined with the breakeven point reductions we have achieved recently and strict limits on expenses in anticipation of our expense reduction program we expect also to see higher revenues that will also drive higher operating profits.
So at this time we expect third quarter 2013 consolidated net sales to range from $91 million to $97 million and non-GAAP operating profit to range from $2 million to $4 million.
So finally if I can ask you to turn to slide 17, and I’ll summarize three takeaway points from the call. First, our second quarter sales were in line with our guidance. Second, our non-GAAP operating profit was better than our guidance due to mostly stable gross margins and control of operating expenses.
And third we have initiated an operating expense reduction program and expect it to cut approximately $6 million in annualized operating expenses to more rapidly move towards our target 15% operating expense model.
So I want to thank you for your continued support. And we look forward to reporting progress on our objectives in future quarters. As we've done in the past few quarters we’ll not be taking questions on the call today, but we ask that you contact -- any investors or any parties with questions contact Drew Moyer at 858-674-8268 or by email to the company at Investor Relations at pulseelectronics.com.
So Jamie we've now completed our presentation.
To access the digital replay of the Pulse Electronics second quarter of 2013 results conference call, you may dial 1877-344-7529 or 412-317-0088 beginning one hour after the conclusion of this conference until August 28, 2013 at 5 PM. You will be prompted to enter a conference number which will be 10031904. Again that is 10031904. You will be prompted to record your name and company when joining. Today's conference has now concluded. We do thank you for attending today’s presentation. You may now disconnect your telephone lines.
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