Welcome to the Magnetek Fourth Quarter and Fiscal Year 2013 Earnings Call. My name is Sylvia, and I will be your operator for today. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Lynn Bostrom, Director of Communications. Lynn, you may begin.
Good morning. Thank you for joining us today. I trust everyone has received Magnetek's fourth quarter and fiscal year 2013 results. This information is available under Financial News in the Investor Relations section of our website at magnetek.com. As the operator said, this conference call is being recorded today, March 12, 2014, and is being webcast live on Magnetek's website.
Throughout the call, we'll refer to slides, which are available on our website as well. Listeners are encouraged to follow along with the slides. The webcast will be available for replay on our website following the call for at least three months or as long as the content remains timely.
As stated on Slide 2, statements made during this conference call are intended to come within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and may be forward-looking and subject to risks. Factors that could cause actual events to differ materially from these statements are discussed in the company's press releases and periodic filings with the SEC, including our Form 10-K.
Magnetek's President and Chief Executive Officer, Peter McCormick; and our Vice President and Chief Financial Officer, Marty Schwenner, will be speaking on the call today. Mr. McCormick will provide the opening remarks.
Thanks, Lynn, and good morning. While market uncertainties and declines in two of our three major served markets continued to prove challenging in 2013, we managed our business well and were able to generate consistent levels of profitability and cash flow.
Conditions in the overhead material handling industry, our largest served market, deteriorated significantly in 2013 versus 2012 levels, with fewer new cranes being ordered and fewer large scale projects being implemented. Our served mining market remained depressed throughout 2013 and our decision to focus on our core businesses and no longer pursue the volatile renewable energy market also impacted year-over-year sales.
Although this marketplace reality did result in a 10% sales decline in 2013 from 2012, we continue to focus on organic growth, taking advantage of opportunities in higher growth areas such as wireless control. Combined with a series of pricing repositioning and cost actions, we were able to remain firmly profitable despite the softness. We achieved gross margins exceeding 34% and made significant progress towards reducing the sizeable pension obligation.
Many of you know our pension has consumed the majority of our cash flow for a number of years. And in fact, we have contributed an average of nearly $1 million per month toward the pension for the last six-and-a-half years. These contributions over time combined with favorable asset returns during 2013 and the higher year-end discount rate should result in a positive impact on our earnings and cash flow going forward. Marty will provide more details on the pension shortly during the financial report.
Before we get into the details of our financial results, I'd like to spend a few minutes focusing on some of the highlights of our business during the period. As we have said before, we see wireless control technology as a significant growth opportunity for us. In addition to controlling overhead cranes and hoists wirelessly, radio remote control is being adopted as a safe, more efficient method of controlling motion in more and more industries such as fluid power, oil and gas, agriculture and construction to name a few.
During 2013, we introduced new wireless control products that meet demand for feature-rich products with advanced communications and diagnostics. We also established partnerships in Asia and Europe to expand the geographic reach of our wireless controls.
We've talked in the past about the demand for energy efficiency and savings as an important growth driver for us. During 2013, we introduced the line of AC regenerative crane control systems. These are systems that take surplus energy from the cranes and return it to the AC power source, reducing total energy consumption and improving energy efficiency. These products are particularly applicable in harsh environments such as steel mills where older technology resistors don't stand up well. We expect to see demand for these products grow over time as customers learn about the return on investment in energy savings they can realize.
Speaking of energy regeneration, many of you are familiar with our Quattro Energy Regenerating Elevator Drive. We recently reached a milestone for this product line. Over 2,000 Quattro drives have been installed in elevators throughout the world. And these green elevator drives are saving building owners' money everyday.
And finally, a point of pride, Magnetek was recognized in 2013 as a premier supplier of one of our longstanding customers, Joy Global. One of only 39 recipients out of 5,000 Joy Global suppliers, Magnetek was recognized for best in industry quality, delivery and value. We appreciate that recognition as it speaks to what we're trying to achieve for each of our customers everyday.
So while 2013 was certainly not without its challenges, given the continuing softness in several of our major markets, we successfully adjusted our business to remain firmly profitable, while making significant progress towards reducing our pension obligation. This should provide us with increased alternatives for our business going forward.
And now, I'll turn it over to Marty to discuss the details of our fourth quarter and fiscal year 2013.
Thanks, Pete, and good morning. I'd like to briefly cover our fourth quarter and 2013 results and then provide an update on our pension focusing on our potential to further enhance value going forward. Our fourth quarter performance was impacted by softness in material handling markets late in the year, as well as a few unusually high expense items that we don't expect will recur.
Turning to Slide 3 titled Q4 Results of Continuing Operations, sales into material handling markets of $18.6 million were down more than $4 million from the prior-year fourth quarter and were also down sequentially, which is a bit unusual for us as the fourth quarter has historically been seasonally stronger than the third quarter in material handling.
Crane industry statistics confirm that the markets reached a near-term peak in 2012 and new crane orders dropped between 20% to 30% in 2013. Projections indicate the market will likely remain soft through the first half of 2014 before recovering later in the year. Power ordering sales trends over the past couple of years have tracked closely to the industry trends or monitoring, with the exception of our wireless radio products, which have continued to see strong growth rate.
Gross margin achievement in the fourth quarter was better than 34%, a satisfactory level given the lower sales volume. Our operating expenses were down about $600,000 year-over-year due to lower pension expense and lower spending on R&D, variable selling expenses and incentive compensation provisions.
Unusual expenses during the quarter totaled about $400,000 related to severance, professional fees and a true-up of our pension expense for the year. Despite these costs, our income from operations totaled nearly $1 million. Diluted earnings per share amounted to $0.22. And our adjusted EBITDA for the quarter was nearly $3 million.
Turning to the next slide, our total year sales were down 10% to $103 million as market conditions in material handling declined from 2012 and mining market conditions remained extremely weak throughout 2013. In addition, our withdrawal from renewable energy resulted in a $3 million year-over-year sales decline. Total year gross margin as a percent of sales was 34.2%, down from 34.9% in 2012, but our gross profit dropped $4.5 million, representing about 40% of the sales decline. Partially offsetting the reduction in gross profit was lower spending in R&D and SG&A and lower pension expense resulting in a decrease in total operating expenses of $1.3 million from last year.
The decline in our income, earnings per share and adjusted EBITDA year-over-year is indicative of the degree of operating leverage we have in our business. While we did take action in response to the lower sales volume, we believe end market conditions will improve later in 2014 and we remain committed to our longer-term strategy to grow our business through product innovation combined with our application expertise. To that end, given the recent lack of growth, we're trying to find the optimal balance between short-term profit and cash flow and longer-term growth opportunities for our business.
Moving to the balance sheet, which is Slide 5, for those of you following along with the slide deck, our liquidity remained strong just by ongoing pension contributions as we closed the year with $15 million in cash. While our cash balance has declined almost $14 million during 2013, we made cash contributions of nearly $25 million to our pension plan during the year.
The other number that stands out in the balance sheet is our pension obligation, which decreased from $102 million at December 2012 to $48 million at December 2013, an improvement of nearly $54 million. The balance sheet liability represents the difference between the pension benefit obligation or PBO and our pension assets. We measure the PBO at year-end using a discount rate of 4.45%, an increase of about 95 basis points over last year's rate, which reduced the obligation by about $18 million.
On the pension asset side, again we contributed $25 million to the plan during 2013 and our return on assets was about $19 million. In summary then, during 2013, our PBO decreased from $230 million to $209 million, while our assets increased from $128 million to $151 million. So we made significant progress reducing the net pension liability during 2013. This has been our stated strategy for some time now to increase the equity value of the company by reducing liabilities, primarily our pension.
Given the improvement we've seen in the pension situation, we feel it's an appropriate time to look at some actions to reduce the risk and volatility of our pension. For example, at the end of 2013, we rebalanced our assets, increasing our investments in fixed income and multi-asset funds and reducing our investments in alternative funds and to a lesser degree equities. After the allocation, we still have more than half of our assets in equities as we're still seeking returns on the assets. However at the same time, we feel we also need to be mindful of capital preservation and reduce our risk of sizeable losses in the portfolio.
We're also analyzing costs and benefits related to offering lump sum settlement to certain planned participants. Lump sum settlements could shrink the size of our plan and lower administrative costs, while also reducing the volatility and mortality risk of the plan and lowering the cost of future annuitization. Any actions taken regarding these strategies would need to be funding neutral and would be consistent with our primary objective of ultimately transferring the entire plan to a third-party insurer through annuitization.
As stated earlier, we closed the year with $15 million in cash, roughly equal to our pension contributions for the current 2014 fiscal year. Our total future pension contributions are currently estimated at $43 million, down from the prior-year estimate of $92 million. Contributions in 2015 and 2016 are currently estimated at about $7 million annually, certainly manageable even given our current level of cash flow.
Looking forward then, we remain committed to our near-term strategy of managing our business well despite difficult and uneven conditions and further reducing our pension through contributions. If we can generate even modest positive returns on our pension assets, we could be at a position to annuitize our pension plan within the next year or two even without further interest rate increases.
We feel very strongly that this is the best course of action for the company and our shareholders as we could potentially shift to a more growth-oriented strategy and our shareholders could then enjoy a greater share of our future success.
At this point, I'll turn it back over to Pete for some closing remarks.
Thanks, Marty. It is challenging for us to forecast our business, given the current uneven economic situation. However, we do expect that barring any severe downturn in our major served markets, we can continue to focus on sales and profitability by pursuing internal growth opportunities in our core product lines, expanding into new applications for our products and growing our business geographically.
Throughout 2014, we intend to focus our research and development effort on developing cost-effective power solutions that will improve efficiency, reduce cost and save energy in our core crane and hoist, elevator and mining applications. And while we are building on our competitive strength in these established markets, we'll also continue to include prudent expansion into new end markets and new geographic areas.
As I mentioned earlier, we believe we can capitalize on the adoption of wireless control solutions in a variety of end markets and we intend to broaden our wireless control product portfolio to serve those industries. We'll also intend to continue international expansion of our radio controls through our alliances in Asia and Europe.
In the elevator industry, we believe we have opportunities for growth with our line of energy-saving AC and DC products and our expanding AC drive offerings, as well as growth opportunities through penetration of international markets with our new product lines. The growing focus on energy saving allows us to use our expertise in this area to bring energy regeneration to a greater number of products to both material handling and elevator applications. The desire for sophisticated diagnostics and communication features and enhanced performance and safety provide opportunities for us to modernize and upgrade equipment in our served industries.
Finally, in our mining business, we've made investments in product development that will allow us to expand in the Asia as well as reduce our dependence on the coal industry that should help us grow this business long term. Magnetek has earned strong brand name recognition in the marketplace. Our focus on innovation combined with our application expertise, broad product offerings and sales channel capabilities positions us to grow our business going forward.
While we work toward this, we also plan to continue to tightly control our operating expenses aimed at optimizing operating leverage and growing our income and cash flow. Our objectives are to achieve at least 5% year-over-year sales growth, 35% gross margins and 10% operating profit margins, while generating sufficient cash flow to fund our growth initiatives, our operations and our obligations.
In closing, we'd like to thank you for your continued support as we move toward a period, where I believe our opportunities can far outweigh our obligations and we can look forward to focusing primarily on growing our business and enhancing our value to you, our shareholders.
Thank you for your attention and now we would be happy to take your questions.
(Operator Instructions) And we have Justyn Putnam from Talanta Investment.
Justyn Putnam - Talanta Investment
So that 5% sales goal that you have, is that in place for 2014 too?
Well, 2014 over 2013, I'd say that that's our long-term what we're trying to achieve and [inaudible] things that we're working on to get there. But I'd say as long as the markets continue to be soft, it'd be hard to obtain.
I don't know that you can necessarily take 2013 and add the 5% to come up with a projection at 2014 revenue. I think what we're trying to get a good handle on is certainly our end market conditions are down and the statistics that we're monitoring indicates that the first half likely remain soft and then things are projected to recover in the second half. So it's probably a little bit too early to tell what will happen in the second half of the year at this point.
Justyn Putnam - Talanta Investment
Okay. But based on what you're seeing now, you said you've gotten some higher quotations for larger projects so far this year and you're expecting the second half of 2014 to improve. So based on what you know now, I mean is the first half of the year deteriorating or is it just maintaining [inaudible] slow level?
The first half of the year in material handling is projected to decline slightly over the first half of last year. We monitor the statistics from the Crane Manufacturers Association of America. And if we pull out the radio portion of our business from the base material handling, our base material handling order rates match up very well with the crane industry statistics. And they are projecting kind of a continued softness through the first half, but then moving to an accelerating growth mode in the second half. And we are seeing some quotations of some larger projects, but those are not yet turned into orders.
And at this moment, we have no further questions. I will now turn the call over to Lynn Bostrom.
Thank you for joining us today. We look forward to your participation on our next quarterly call.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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