Pulse Electronics Corporation (NYSE:PULS)
Q1 2014 Earnings Conference Call
May 12, 2014 17:00 ET
Jim Butler – Senior Director, Finance
Ralph Faison – Chairman, President & CEO
Mike Bond – CFO
Good afternoon. Welcome to the Pulse Electronics First Quarter 2014 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 Laura. I’m Jim Butler, Senior Director of Finance for Pulse Electronics Corporation. With me today are Ralph Faison, our Chairman, President and Chief Executive Officer and Mike Bond, our Chief Financial Officer; This afternoon we will discuss our results for the first quarter of 2014.
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 on 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 the first 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 first 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 16 of the presentation.
Now I’ll turn the call to Ralph.
Thank you Jim. Thanks to everyone who is joining us on the call today. Our earnings release was distributed just a short while ago, so I’m going to provide a brief overview of our first quarter results and then Mike will discuss in a little more detail. If I can direct you to slide 3, our first quarter revenue and non-GAAP operating profit were in-line with our guidance. Sales were $81.7 million and non-GAAP operating profit for the quarter was $0.1 million.
We saw continued unfavorable industry conditions that challenge revenues in the first quarter facing downward pressure consistent with what we believe analyst and some of our peers have reported. Weak smartphone demand as we expected was also in-line with the customer demand and competitive peer group’s relative performance.
Our improved operating efficiencies allowed us to effectively breakeven on a non-GAAP basis at less than 82 million in revenue. With our belief that revenue will improve in the coming months and quarters our new operating efficiency should drive improved earnings levels.
If I turn a little bit to the bright spot in the quarter, our orders similar to what others have reported within the industry is that generally order seem to be on an uplift. We found the same particularly in network and power orders continued to grow through the first quarter with bookings trending very nicely ahead of revenue which we believe points to a positive outlook for the coming months and quarters.
I would say just a couple of words about EBITDA. If you recall last year in 2013 we improved our full year EBITDA performance by 86% and for 2014 growth in EBITDA is again the company’s primary objective and keeping with this in first quarter we implemented further cost and expense reduction actions that will continue into second quarter as we drive to our primary goal of EBITDA growth.
If I say just a few words about our wireless segment, of course we continue our intense focus on the segments performance and inspite of the more challenging industry conditions we have seen a significant reduction in industry growth of smartphones resulting in an excess capacity throughout the industry on the current key technologies which puts more competitive pressure on pricing and therefore effects margins. So we’re working with our key customers to convert to our new antenna manufacturing technology which was introduced for our kind of mainstream usage in mid-part of 2013. We introduced this technology with a key customer in the second half of last year and it's now commercially proven with volume manufacturing having been achieved.
So we’re moving now to further deploy this new technology and believe that with the successful partnership with customers will drive improved operating performance for Pulse, while simultaneously providing lower cost significantly enhanced delivery speed and greater design flexibility to our customers.
So with that quick overview, I will turn the call over to Mike for a more thorough review of our first quarter financial results.
Thanks Ralph. I will begin on slide 5, with net sales. Net sales were 81.7 million in the first quarter down 3.7% compared to 84.8 million in the prior year quarter and down 7% from a fourth quarter. This performance was mainly driven by ongoing industry weakness in the network and power segments and lower demand for wireless smartphone and wireless infrastructure products. Sequentially revenue fell due primarily to wireless demand weakness, normal first quarter seasonality and the effects of Chinese New Year.
Now I will turn to slide 6 and review gross profit margin. Cost of goods sold decreased 0.8% to 64.1 million in the quarter from 64.6 million in the prior year quarter. Gross margin was 21.5% in the quarter compared with 23.8% in the prior year quarter. Gross profit margin fell compared to the prior year mainly due to higher production cost that were largely attributable to wage increases in China.
Compared to the fourth quarter gross profit margin was essentially flat as unfavorable cost absorption due to lower volumes was offset by favorable product mix.
Let’s move to operating expenses on slide 7, operating expenses declined 6.5% from the first quarter of 2013 mainly due to a favorable effects of expense reduction actions as part of the initiative we announced earlier in 2013. Sequentially operating expenses increased 3.6% mainly due to a favorable adjustment to compensation expense in the prior quarter. Operating expenses were 21.9% of net sales in the quarter.
Now I will move to slide 8, our non-GAAP operating profit. Our non-GAAP operating profit was $0.1 million in the quarter compared to 1.6 million in the prior year quarter. This was due to lower gross profit resulting from lower revenue and higher labor cost, partially offset by lower operating expenses. Our non-GAAP operating profit margin was 0.1% compared to 1.9% in the prior year quarter.
With that review of our consolidated results, let provide a review of the performance of our three segments starting with network on slide 9. Network net sales was 34.9 million in the first quarter compared with 35.8 million in the prior year quarter as muted industry demand continued. Additionally, product subject to the Halo injunction that went into effect during the fourth quarter of 2013 had lower revenue, although that impact is mitigating as we continue to qualify replacement products with our customers. Operating profit of 0.9 million in the quarter declined from 1.3 million in the prior year quarter mainly (technical difficulty) by operating expense reductions.
Sequentially the network operating profit was flat as favorable product mix offset lower revenue. Power is on slide 10, power net sales were 26.5 million in the first quarter compared with 27.6 million in the prior year quarter and 26.3 million in the fourth quarter. Decline from last year reflects the ongoing demand challenges across the industry although the worst of low government demand for military and aerospace products appears to be over.
Operating profit increased slightly to 1.3 million in the quarter compared with 1.2 million in the prior year quarter mainly due to favorable mix of automotive coil products and controlled operating expenses.
Now turn to slide 11 and I will review wireless. Wireless net sales were 20.2 million in the first quarter compared to 21.4 million in the prior year quarter and 24.7 million in the fourth quarter. The lower volume in the first quarter reflects lower demand for consumer and infrastructure antennas. The operating loss was 2.7 million in the quarter compared with a loss of 1.5 million in the prior year quarter and a loss of 1.4 million in the fourth quarter.
The increased loss reflects lower pricing for consumer antennas, unfavorable mix and reduced overhead absorption due to lower volumes.
With that review of our segments please turn to slide 12 and I will cover our balance sheet. We had 20.6 million of cash and cash equivalents at the end of the quarter compared with 26.9 million at the end of the fourth quarter. The 6.3 million decrease in cash is mainly a reflection of four items. First, 2.1 million cash consideration for the convertible bond exchange transactions we completed in the first quarter. Second, 1.3 million of fees and expenses we paid associated with refinancing transactions. Third, 1.9 million increase in working capital mainly due to an 11% reduction in accounts payable partially offset by a 7% reduction in accounts receivable associated with lower business levels in the first quarter and lastly 1 million of capital expenditures.
More information on our cash flow during the quarter can be contained or will be contained in the 10Q which we will file this week. Long term debt increased from 90 million at the end of the fourth quarter to 111.3 million at the end of the first quarter. The increase was mainly due to the convertible bond exchange transactions we announced previously that were completed in the first quarter. In those transactions we exchanged 20.7 million of outstanding senior convertible notes due in 2014 for aggregate consideration of 14.9 million in New Term B loan, 1.1 million new shares of common stock and 2.1 million in cash.
The connection with the transactions we also paid an amendment fee to Oaktree of 1.8 million which was added to the principal the outstanding term loans. The principal of the term loans also increased by 3.3 million due to the addition of payment-in-kind interests.
The total principal amount of all debt at the end of the quarter including discount was 135.8 million. With that review of the first quarter financial performance, I will now turn the call back over to you, Ralph.
Thank you Mike. At this point I just want to cover just a bit of wrap up from the presentation. Number one, our first quarter sales and non-GAAP operating profit were in-line with our guidance. Two, we continue to experience strong orders through the quarter which we expect will result in sequential revenue growth in coming months and three we’re executing on our new antenna manufacturing technology for the wireless segment which we have developed and believe will drive improved operating results in the future. So I want to thank you for your continued support and look forward to reporting our progress and our objectives in future quarters and I would ask that for any questions you may have, please call us directly at 858-674-8183 or email us at firstname.lastname@example.org.
We look forward to hearing from you and thank you very much.
Laura I will turn the call back over to you.
Thank you. To access the digital replay of the Pulse Electronics First Quarter 2014 results Conference Call, you may dial 187-7344-7529 or 141-2317-0088 beginning one hour after the conclusion of this conference until May 27, 2014 at 5 PM Eastern Time. You will be prompted to enter a conference number which will be 10045490. You will then be prompted to record your name and company when joining. This conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
[No Q&A session for this event]
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