Pulse Electronics Corporation (OTCPK:PULS) Q4 2013 Earnings Conference Call March 11, 2014 5:00 PM ET
Jim Butler - Senior Director, Finance
Ralph Faison - Chairman, President & CEO
Mike Bond - CFO
Good afternoon and welcome to the Pulse Electronics Fourth Quarter 2013 Results Conference Call. (Operator Instructions). I would now like to the conference call over to Mr. Jim Butler, Senior Director of Finance. Sir, please go ahead.
Thank you Jamie. This is Jim Butler, I’m Senior Director of Finance for Pulse Electronics Corporation. With me today are Ralph Faison, our Chairman, President and Chief Executive Officer; Mike Bond, our Chief Financial Officer; This afternoon we will discuss our results for the fourth quarter of 2013 and provide our outlook for the first 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-K for 2013 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 fourth 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. For reconciliation the U.S. GAAP results see slide 21.
Now I’ll turn the call to Ralph.
Thank you Jim. Thank you everyone for joining the call today. As Jim mentioned our earnings release was distributed just a few moments ago and I’m going to provide an overview of fourth quarter and 2013 in total, then Mike will discuss our financial performance in a bit more detail and then I will come back and talk about the outlook for our first quarter 2014.
So if I could direct you to slide 3, our fourth quarter revenue and non-GAAP operating profit were within our guidance. Sales were $87.8 million and our operating profit came in at $2.2 million. In addition, EBITDA of 4.2 million was a $1 million higher than our Q4, 2012 and that’s despite a lower total revenue performance in 2013.
So from an industry’s perspective we continue to see muted demand for our network and power segments. Though we remain focused on operational efficiencies and innovations that will help grow our customer share within the tepid industry conditions.
Within our wireless segment softening smartphone demand continues to put pressure there so we’re driving new antenna technology that will create significantly faster design cycles and significantly less expensive methods for 3D antenna manufacturer which we believe will help drive increased opportunities for both share and margin improvements. Also within wireless within the infrastructure products we are heavily focused on distributed antenna systems to support LTE small cell deployments.
So our results for the quarter topped off a year which we made considerable strides and improve business performance which I will discuss and if you will turn to slide 4, so despite the overall revenue levels being lower, we improved our gross profit margin to 23% that was from 19.9% in 2012. We reduced our operating expenses especially on a run-rate basis at the end of the year. We also increased our non-GAAP operating profit from $1.4 million in 2012 to $9.6 million in 2013. So for the full year EBITDA increased 86% to $17 million.
So if I can turn your attention to slide 5, I will spend a little bit of time on our corporate objectives for 2014. Now most importantly with the completion of our recently announced convertible bond exchange transactions are continuing to grow EBITDA is the key objective for Pulse in 2014.
To help facilitate that manufacturing cost reductions will continue to focus there driving more process efficiencies from our consolidated foot print by continuing to -- to proven our product line and our cost reduction efforts from a highly focused R&D cost reduction for each product group.
We also remain focused on our operating expense savings, now apologies for a moment. Our R&D and sales and marketing are virtually at target where we like them to be but of course we will adjust them commensurate with customer opportunities and overall market demand as time goes on. So our intense focus on expense reductions will be on G&A. Now that our ERP system is virtually complete we expect to reap the efficiencies and expense savings throughout 2014 as we become more streamline with a new system and the processes designed around that system.
So all of these actions will be taken regardless of the business climate and as we demonstrated in 2013 we must continue to drive efficiencies and earnings improvement inspite of a needed department environment.
So EBITDA being our critical focus, EBITDA growth is critical funding our growth initiatives primarily in areas of technology advancements, more manufacturing efficiencies and for our customers rapidly lead time and delivery performance improvement.
Our strength in balance sheet now with a debt consolidation effort is behind us, allow us to focus more on these operational initiatives throughout the company and drive improved EBITDA. So with that overview I will turn the call over to Mike for a more thorough review of our fourth quarter financial results. Mike?
Thanks Ralph. I’ll cover the financial slides and I will begin on slide 7 with net sales. Net sales were 87.8 million in the fourth quarter down 2.9% compared to 90.4 million in the prior year quarter and down 7.5% from the third quarter. This performance was mainly driven by lower demand in the network and power segments and weakness in the wireless infrastructure antenna sales.
Sequentially revenue fell due to lower demand for network and power products across the industry late in the third quarter that carried over into the fourth quarter as well as typical seasonality in wireless smartphone demand weakness.
Please turn to slide 8 and I will review gross profit margin. Cost of goods sold decreased 2.9% to 68.7 million in the quarter from 70.7 million in the prior year quarter. Gross margin was 21.7% in the quarter compared with 21.8% in the prior year quarter. Gross profit margin was essentially flat compared to the prior year as higher production cost especially wages in China were offset by favorable mix and other operational efficiencies. Compared to the third quarter gross profit margin decreased somewhat due mainly to unfavorable cost absorption associated with lower volumes.
Now let’s move to operating expenses which are covered in slide 9. Operating expenses declined 8.6% from the fourth quarter of 2012 mainly due to favorable effects of expense reduction action as part of the initiative we announced earlier this year. Sequentially, operating expenses decreased 6.1% due to expense reductions as well as lower compensation expense. As a percentage of net sales operating expenses were 19.7% in the quarter.
Let’s move to slide 10, our non-GAAP operating profit was 2.2 million in the quarter compared to 1.3 million from the prior year quarter reflecting our continuing trend of improving financial performance. The improvement mainly reflects reduced operating expenses which offset the unfavorable effects of lower revenue plus improved results in the power segment. Our non-GAAP operating profit margin was 2.5% compared to 1.4% in the prior year quarter.
Slide 11, shows our quarterly adjusted EBITDA and our EBITDA margin as a percent of sales from 2012 to the present. We continue to see the results of our strategic initiatives in the trend of EBITDA over the past two years. Fourth quarter EBITDA was 1 million or 32% higher than the prior year quarter and EBITDA as a percent of revenue increased over the same period from 3.5% to 4.7%.
As Ralph mentioned maintaining the trends in EBITDA growth is the Company’s key objective for 2014 and will require continuous focus on cost and operating expense reductions.
With that review of our consolidated results, let me provide a review of the performance of our three segments starting with network on slide 12. Network net sales were 36.8 million in the fourth quarter compared with 37.7 million in the prior year quarter as muted industry demand continued. Additionally product subject to Halo injunction which went into effect during the fourth quarter had lower revenue. We continue to make good progress in qualifying replacement products with our customers and believe that the unfavorable effects of the injunction will have a smaller impact on network revenue in future quarters.
Operating profit of 0.9 million in the quarter declined from $1.1 million in the prior year quarter mainly due to the unfavorable mix impact of the Halo injunction partly offset in a positive way by the operating expense reductions. Sequentially the network operating profit decline was also mainly due to unfavorable product mix and ongoing expense reduction programs. Our power segment is on slide 13, power net sales were 26.3 million in the fourth quarter compared to 27.4 million in the prior year quarter and 28.1 million in the third quarter.
The decline from last year reflects the ongoing challenges across the industry including lower government and military spending. Operating profit increased significantly however to 2.4 million in the quarter compared to 0.9 million in the prior year quarter and 2.2 million in the third quarter due mainly to a favorable mix of automotive coil products and controlled operating expenses.
Please turn to slide 14, and I will review wireless. Wireless net sales were 24.7 million in the fourth quarter compared to 25.3 million in the prior year quarter and 27.3 million in the third quarter. The lower volume in the fourth quarter reflects slightly lower demand for infrastructure antennas. Operating loss was 1.4 million in the quarter compared with a loss of 1.2 million in the prior year quarter and a loss of 0.7 million in the third quarter.
The increased loss reflects unfavorable mix and reduced overhead absorption due to lower volumes.
With that review of our segments please turn to slide 13 and I will cover our balance sheet. We had 26.9 million of cash and cash equivalents at the end of the fiscal year compared with 31.5 million at the end of 2012. The decrease in cash mainly reflects capital expenditures, refinancing transaction fees and working capital needs. In the fourth quarter we generated approximately 2.7 million in cash flow from operations and increased our overall cash balance from the third quarter by 1.3 million.
More information on our cash flow during the quarter will be contained in the 10-K which we will file this week. The total principle of the Oaktree term loans increased to approximately 114.2 million due to the addition of payment-in-kind interest.
The 22.3 million of senior convertible notes are reflected as current debt this quarter because their maturity date is December 2014. Most of these know notes are retired in the exchange transactions we just completed in February which I will describe on slide 16.
On February 21, we announced that we had reached agreements with holders of 20.7 million or 93% of the outstanding notes to exchange their notes for various combinations of consideration. In aggregate the notes were exchanged for 14.9 million in new Term Loan B, 1.1 million new shares of common stock and 2.1 million in cash. This was an important accomplishment for Pulse as the exchange transactions reduced our total debt by about 5 million extended it's maturity to 2017 and reduced our cash interest expense through November 2015.
Additionally the amended credit agreement governing the remaining secured term loans modified certain financial covenants including the secured debt leverage ratio, we believe will provide the company sufficient latitude in coming years to pursue it's growth objectives. As for the exchange transactions Oaktree agreed to convert it's preferred stock. Issued as part of the original financing in November 2012 into common stock at the ratio prescribed in the investment agreement.
This conversion and the exchange transactions provided final clarity on the capital structure under which Pulse will operate for the foreseeable future. The dilution of our existing shareholders resulting from the exchange is less than we originally illustrated and they will retain a significantly greater share of total equity than the maximum dilution that was contemplated at the original refinancing in 2012.
Specifically in our fourth quarter 2012 release we indicated that existing shareholders portion of total equity could be reduced to as low as 17.1% if all bond holders exchanged under the originally contemplated scenario while the actual portion after the exchange transactions is 25.4%. Finally also connected with the exchange transactions the company agreed to appoint three Oaktree designees to the Board of Directors and to increase the membership of the Board from 7 to 9 directors.
In future elections of directors Oaktree will have the right to designate a majority of the Board nominees as long as they hold a majority of the outstanding stock. With that review of our fourth quarter financial performance I will now turn the call back over to Ralph.
Thank you Mike. If I can turn your attention to slide 18, we will talk about first quarter guidance. First let me make a few contextual remarks. We’re seeing similar trends that have been indicated by both industry analysts and peer companies particularly regarding the network and power segment. Order rates have strengthened in the latter part of fourth quarter and they have remained modestly higher than last year through the start of our first quarter particularly post Chinese New Year as compared to year ago quarter. So bookings are moderately stronger but they do come in a bit late in Q1 so our shipment intervals let me caution will likely put pressure on revenue in the quarter. Obviously that if we tracked or talked about book to bill that would forecast a decent book to bill for the quarter.
In addition we got our normal season softness, first quarter is the toughest quarter in the industry and certainly historically for us and of course most of that is driven by the Q1 Chinese what I call Chinese New Year effect about two weeks for the industry takes a bit of a vacation from manufacturing in orders. And then lastly the ongoing smartphone demand weakness that we have all seen from industry’s perspective.
So therefore that all sums up, that first quarter will be somewhat lower than fourth quarter from a revenue perspective and so at this time we expect first quarter 2014 consolidated net sales to range from about 78 million to 84 million and then non-GAAP operating profits commensurate with that to range from a loss of about 1 million to a gain of about 1 million.
So let me turn to another topic, you will notice in the press release the topic of suspending future quarterly guidance. So as we mentioned in the press release we feel it's no longer prudent to provide specific top line and bottom line guidance for any future quarterly earnings report, this particularly considering the limited visibility and the short term industry trends which is further exacerbated by our own improved lead times. Of course we’re pleased that increases in customer satisfaction but it does shorten the order to delivery cycle and therefore further reduces by behavior the forecast visibility.
This will allow us though to focus more on the important aspects of a full year 2014 objectives and continued improvement of business performance that we demonstrated in 2013. This allows us to place less emphasis on more short term quarterly basis and we believe these longer term goals are in the best interest of all shareholders.
So lastly I will ask you to turn to slide 19 and I will summarize with three points from this call. First, our fourth quarter sales and non-GAAP operating profit were in-line with our guidance. Secondly, we achieved significant improvement in business performance in 2013 which we covered and that was despite lower revenue. And lastly, our continued growth in EBITDA is the key objective for 2014. So I want to thank you for your support and watching this and listening to our call today. We will not be taking questions and answers on the call today but we remain committed to full transparency and open to any questions from any investor at any point in time by contacting website, Jim Butler, at any point in time for direct discussions.
So thank you very much. Jamie we can close the call now.
And to access the digital replay of the Pulse Electronics Fourth Quarter 2013 results conference call, you may dial 187-7344-7529 or 141-2317-0088 beginning one hour after the conclusion of this conference until March 26, 2014 at 5 PM Eastern Time. You will be prompted then our conference number which will be 10041737. You will be prompted to record your name and company when joining. Today’s conference is now concluded. We thank you for attending today’s presentation. You may now disconnect your telephone lines.
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