Pulse Electronics Corporation. (OTCPK:PULS) Q2 2014 Earnings Conference Call August 5, 2014 5:00 PM ET
Jim Butler - Senior Director, Finance
Alan Benjamin - Interim Chief Executive Officer
Michael Bond - Chief Financial Officer
Good afternoon. And welcome to the Pulse Electronics Second 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, Frank. I’m Jim Butler, Senior Director of Finance for Pulse Electronics Corporation. With me today are, Alan Benjamin, our interim Chief Executive Officer; and Michael Bond, our Chief Financial Officer. This afternoon, we will be discussing our results for the second 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 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 found 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 second 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. For a reconciliation to the U.S. GAAP results, see slide 17.
Now I’ll turn the call to Alan.
Thanks, Jim and thank you to everyone who is joining us on the call today. Our earnings release was distributed a short while ago, I’ll provide an overview of our second quarter results and then Mike will discuss our financial performance in more detail.
Let me start with slide three. Our operating resulting in the second quarter for revenue and non-GAAP operating profit were higher both sequentially and year-over-year as we expected based on the strength in industry demand we experienced coming into the quarter.
Sales were $93.6 million and non-GAAP operating profit for the quarter was $2.9 million. Shipments in key network and power product lines were strong following high order rates coming into the quarter, and higher demand in our smartphone programs bolstered revenue in the wireless segment.
Pulse’s overall strategy remains unchanged. We continue to focus on aggressive EBITDA growth through margin improvement, cost and expense reductions, and growth in new channels. This quarter’s increase in EBITDA margin demonstrates our ability to generate good growth in EBITDA with increases in revenue; however, based on industry performance over the last three years we are not relying solely on market growth to drive our EBITDA. We will continue to pursue new avenues of margin improvement and cost and expense reductions in the third quarter with the objective of further improving our EBITDA margin even without appreciable industry growth.
We saw improvements in our wireless segment this quarter. Higher demand for our existing products compared to the first quarter improved capacity utilization, resulting in higher operating margins despite increasing industry price pressure. Additionally, the new antenna manufacturing technology we discussed last quarter gained traction with our customers, and we look forward to this exciting technology adding to the segment’s operating results in future quarters.
Entering the third quarter, we see demand across our business segments continuing at levels roughly in line with that of the second quarter. With that overview, I’ll turn the call over to Mike for a more thorough review of our second quarter financial results.
Thanks, Alan. I’ll begin on slide five, net sales. Net sales were $93.6 million in the second quarter up 6% compared to $88.3 million in the prior-year quarter and up 14.6% from the first quarter. This performance was mainly driven by broadly increased demand across key markets and customers in all segments. Increased order rates for network and power in the first quarter resulted in strong shipments in the second quarter, and demand for wireless products in both the consumer and infrastructure markets increased over the prior year. Sequentially, revenue increased primarily due to improved market demand and normal seasonality.
Now let’s turn to slide six and I’ll review gross profit margin. Cost of goods sold increased 9.4% to $73.8 million in the quarter from $67.5 million in the prior-year quarter. Gross margin was 21.1% in the quarter compared with 23.5% in the prior-year quarter. Gross profit margin fell compared to the prior year mainly due to lower market prices for consumer wireless products and higher production costs, in all segments particularly labor costs in China. We have been successful in offsetting much of the impact of higher labor cost over the past year with favorable results from manufacturing improvement initiatives we have undertaken in all of our plants during that time. Compared to the first quarter gross profit margin declined slightly due to product mix and higher labor cost.
Now let’s move to operating expenses which we cover on slide seven. Operating expenses declined 10.4% from the second quarter of 2013, mainly due to favorable effects of expense reduction actions as part of the initiative we announced earlier in 2013. Sequentially, operating expenses decreased 5% as certain cost reductions were implemented and achieved their full effect. Operating expenses were 18.2% of net sales in the quarter which was the lowest quarterly percentage since 2008.
Let’s move to slide eight. Our non-GAAP operating profit was $2.9 million in the quarter compared with $2.2 million in prior-year quarter due to lower operating expenses more than offsetting lower gross profit. Our non-GAAP operating profit margin was 3.2% compared to 2.5% in the prior-year quarter.
Now let’s move to slide nine. Slide nine 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 as a percentage of sales from 2012 to present. Adjusted EBITDA in the second quarter was $4.8 million compared to $4 million in the prior-year quarter and $1.9 million in the first quarter.
After a sharp decline in EBITDA in the first quarter due to low revenues, our EBITDA performance has generally resumed the growth path that it has been on since 2012 and demonstrates our efforts to improve the operational results of the company in the current revenue environment. We continue to focus on improving EBITDA and believe that any future pickup in revenue growth will have a 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 10. Network net sales was $42.2 million in the second quarter compared with $38.5 million in the prior-year quarter due to the broad-based increased industry demand. Operating profit of $2.1 million in the quarter increased from $0.9 million in the prior-year quarter mainly due to favorable production cost arising from higher volumes and efficiency improvements as well as operating expense reductions more than offsetting higher labor cost.
Sequentially, Network operating profit increased 123% due to higher volumes. I’ll review our power segment on slide 11. Power net sales were $28.1 million in the second quarter compared with $29.6 million in the prior year-quarter and $26.5 million in the first quarter. The decline from last year mainly reflects lower automotive product line sales due to supply constraints of an unrelated part at a key customer.
Operating profit increased slightly to $2.2 million in the quarter compared with $1.9 million in the prior-year quarter mainly due to controlled operating expenses offsetting the lower revenue.
Now turn to slide 12, and I’ll review wireless. Wireless net sales was $23.3 million in the second quarter compared with $20.3 million in the prior-year quarter and $20.2 million in the first quarter. The increased volume in the second quarter reflects increased demand for customer and infrastructure antennas on key customer programs. Operating losses sorry operating loss was $1.6 million in the quarter compared with a loss of $1.1 million in the prior-year quarter and a loss of $2.6 million in the first quarter. The increased loss compared to prior year reflects lower market pricing for consumer antennas and unfavorable mix. With that review of our segments now lets turn to slide 13 and I will cover our balance sheet.
The company had $24.8 million of cash and cash equivalents at June 27, 2014 compared with $26.9 million at December 27, 2013. The decrease in cash mainly reflects the payment of cash consideration for the previously announced convertible bond exchange transactions, refinancing transaction fees and expenses, and capital expenditures. Additionally, in the second quarter the company redeemed the remaining senior convertible notes outstanding after the exchange transaction for $1.6 million in cash. As a result, our capital structure has been simplified and stabilized. All of our company’s debt is now comprised of long-term loans which mature in November 2017.
The principal amount of debt including discount was $137.8 million at the end of the second quarter. The principal of the term loans increased by $3.5 million in the second quarter due to the addition of payment in [kind] interest.
With that review of the second quarter financial performance I’ll now turn the call back over to Alan.
Thanks Mike. Please turn to slide 15 and I will summarize four takeaway points from the call. First, our second quarter sales and non-GAAP operating profit increased both sequentially and year-over-year. Second, Pulse’s strategy remains to aggressively grow EBITDA. Our EBITDA in the second quarter was back on its growth path and we expect further improvements in future quarters. Three, we saw improvements in wireless performance and gained traction on our new antenna manufacturing technology with key customers. And four, demand in the third quarter appears to be generally consistent with that of the second quarter. We thank you for your continued support and we look forward to reporting progress on our objectives in future quarters.
We will not be taking questions on our call today, but we remain committed to full transparency to the investment community. Investors or other parties with questions or comments on our announcement today are welcome to contact our director of investor relations Jim Butler, at phone number 858-674-8183 or by email to the company at firstname.lastname@example.org .Operator; we have now completed our presentation.
Thank you. To access the digital replay of the Pulse Electronics Second Quarter 2014 Results Conference Call, you may dial 187-7344-7529 or area code 412-317-0088 beginning one hour after the conclusion of this conference call. You will be prompted to enter a conference number that will be 10050403. You will be prompted to record your name and company when joining. This concludes today’s conference. You may now disconnect. Thank you very much.
[No Q&A session for this event]
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