Pulse Electronics Corporation (NYSE:PULS) Q1 2013 Earnings Conference Call May 7, 2013 5:00 PM ET
Ralph E. Faison - Chairman, President and CEO
Drew A. Moyer - SVP, CFO
Alan H. Benjamin - SVP, Chief Operating Officer
Jim Butler - Senior Director, Finance
Good afternoon and welcome to the Pulse Electronics First Quarter of 2013 Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to Mr. Jim Butler, Senior Director of Finance. Please go ahead.
Thank you, Laura. I am Jim Butler, Senior Director of Finance for Pulse Electronics Corporation. 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 first quarter of 2013, and provide our outlook for the second 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 Factors 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 in 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. These non-GAAP measures exclude severance, impairment and associated costs, legal reserves, non-cash stock-based compensation expense and cost associated with an unsolicited takeover attempt in applicable periods. For a reconciliation to U.S. GAAP results and a rationale for our usage of non-GAAP measures, see slides 18 and 19 in our presentation.
Now I’ll turn the call to Ralph.
Ralph E. Faison
Thanks, Jim and thank you everyone who is joining us on our call today. As Jim mentioned, our earnings release was distributed short while ago. I will provide a short overview of our first quarter. Then Drew will discuss our financial performance in more detail, and I will come back and review our outlook for the second quarter of 2013.
So if I could direct you to slide 3, our first quarter revenue was within our guidance and non-GAAP operating profit was above our guidance. Sales were $84.8 million and non-GAAP operating profit for the quarter was $1.6 million. So the investing environment remains challenging and we continue to face uncertain demand in each of our segments. Nevertheless, this quarters results continue to demonstrate our ongoing progress in improving the operational performance of the Company.
As a result of two years of major restructuring and reengineering, we began to realize noticeable gross profit margin improvement last quarter and that continued into this quarter as gross profit margins increased nicely. Therefore we substantially lowered our breakeven point and further stabilization in improvement gross margin are key objectives for Pulse throughout the rest of 2013.
We stand poised to continue to deliver improved operating profit when markets recover to a more normal demand level. We are pleased to also report an operating profit according to U.S. GAAP standards for the first time since the fourth quarter of 2010.
So as promised with that short overview, I will turn the call over to Drew for more thorough review of our first quarter financial results and an update on the Oaktree investment.
Drew A. Moyer
Okay. Thanks, Ralph. I'll begin on slide 5, with net sales. Net sales as Ralph mentioned, were $84.8 million in the first quarter, down 9.9% compared to $94.1 million in the prior-year quarter and down 6.2% from the fourth quarter. This revenue was within the outlook range we provided earlier and believe it is in line with the industry challenges and uncertain economic environment reflected in the recent announcements of the financial performance of our customers and peers. A reduced strength of demand in smartphone products was the significant contributor to our lower sequential revenue.
Please turn to slide 6, and I will review gross profit margin. Cost of sales sold decreased 14.7% to $64.6 million in the quarter from $75.7 million in the prior-year quarter. Gross margin was 23.8% in the quarter compared with 19.5% 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’ve taken over the past two years and the resulting operational efficiencies. Compared to the fourth quarter, gross profit margin increased mainly due to improved product mix in wireless and the continuing favorable affects of our cost reduction programs.
Now let’s move to operating expenses which are covered on slide 7. Operating expenses were essentially flat at $19.2 million in the quarter compared to $19.0 million in the prior-year quarter and $18.9 million in the fourth quarter. Our operating expenses remain under control due to sustained scrutiny over all discretionary spending in light of the sales environment. As a percentage of net sales, operating expenses were 22.6% in the quarter.
Let’s move now to slide 8. Our non-GAAP operating profit was $1.6 million in the quarter compared with a loss of $0.2 million in the prior-year quarter. The improvement reflects the substantial reduction in our breakeven point achieved by our cost and expenses reduction programs which are key components of our turnaround plan. To illustrate this, first quarter non-GAAP operating profit was the highest since the third quarter of 2011 when revenue was over $96 million. Gross profit margin was the highest since the fourth quarter of 2010 which was also a period with much higher revenue than this quarter. Since our major restructuring activities are now behind us. We had minimal severance, impairment and other associated costs this quarter. This helped us to achieve our first operating profit under U.S. GAAP since the fourth quarter of 2010.
With that review of our consolidated results, let me now provide a review of the performance of our three segments starting with network on slide 9. Network sales were $35.8 million in the first quarter compared with $38.8 million in the prior-year quarter as lower industry demand conditions continue. However operating profit improved to $1.3 million in the quarter compared to a loss of $0.9 million in the prior-year quarter and $1.1 million in the fourth quarter. The segments financial performance was driven by improved gross margins reflecting plant consolidations and migration to lower cost labor and part suppliers as well as improving pricing and product mix despite the unfavorable pressure from rising wage rates at our plants in China.
Power is on slide 10. Power net sales were $27.6 million in the first quarter compared with $31.7 million in the prior-year quarter and sequentially up slightly from $27.4 million in the fourth quarter of 2012. The decline from last year reflects the ongoing challenges across the industry and lower pricing for certain products. Operating profit was $1.2 million in the quarter compared with $2.3 million in the prior-year quarter mainly due to the lower revenue. Sequentially, operating profit improved from $0.9 million in the fourth quarter due to certain improvements in pricing and product mix.
Turn to slide 11 and I’ll review Wireless. Wireless net sales were $21.4 million in the first quarter compared with $23.7 million in the prior-year quarter, and $25.3 million in the fourth quarter. The lower volume in the first quarter reflects reduced strength in the smartphone market across a number of customers. Operating loss was $1.5 million in the quarter compared with a loss of $2.1 million in the prior-year quarter. The reduced loss even on lower revenue reflects continued progress in improving our wireless manufacturing efficiencies and product mix. Sequentially, operating loss increased from $1.2 million in the fourth quarter due to the lower revenue.
Slide 12 provides additional historical context to the progress we’re making in the wireless segment. In these charts we present quarterly revenue and the operating loss from 2010 to the present. Sales in wireless reached their trough in the second quarter of 2011 and you can see that sales have steadily recovered as we have diversified the customer base and achieved numerous design wins on new programs with these new customers.
As we have indicated the growth has been somewhat choppy however due to timing of customer ramps and demand shifts in the smartphone market. Similarly, we have made solid progress on reducing the operating loses over this period as volume increases have led to better factory utilization and efficiencies. We have also maintained better control over program ramp cost and we have focused on higher margin products. We believe we're making solid progress in this segment and remain on track to achieving breakeven profitability at the existing revenue growth trend.
With that review of our segments, turn to slide 13 and I’ll cover our balance sheet. We had $25.4 million of cash at March 29, 2013 compared with $31.5 million at December 28, 2012. The decrease in cash mainly reflects refinancing transaction fees and expenses and working capital needs. Both inventory and receivables declined during the period but accounts payable and accrued expenses declined by a greater amount as we made significant payments to key suppliers. Capital spending in the quarter was approximately $1.6 million. More information on our cash flow during the quarter will be contained in the 10-Q filed this week. The total principle of the Oaktree term loans increased to approximately $107.8 million due to the addition of the payment-in-kind interest.
With that review of first quarter financial performance, I’ll now turn the call back over to, Ralph.
Ralph E. Faison
Thank you, Drew. If I can direct you to slide 15, you’ll see our outlook for the second quarter. As we look to the second quarter recent order patterns indicate that we should achieve some seasonal growth and specifically anticipate additional improvement in wireless demand. We believe that somewhat higher volumes and continuation of favorable gross margin trends we saw in the first quarter will help to offset increasing costs at our manufacturing facilities specifically in the area of labor resulting in a non-GAAP operating profit similar to that of first quarter. At this time we expect second quarter 2013 consolidated net sales to range from $85 million to $91 million and non-GAAP operating profit to range from breakeven to a profit of $2 million.
So finally, let me ask you to turn to slide 16, and I’ll summarize three takeaway points from this call. Our first quarter sales were in line with our guidance. Second, non-GAAP operating profit was better than our guidance mainly due to significant improvements in gross margin across all of our business segments. Third and lastly, we have substantially reduced our breakeven point and we stand poised to continue to deliver improved operating profit particularly when markets recovered to more normal demand levels. Well thank you for your continued support. We look forward to reporting progress on our objectives in future quarters. As we did last quarter, we’ll not be taking questions on our call today, but we invite you, we invite our investors or any other parties with questions or comments about our announcement today or any other elements associated with Pulse to contact me or Drew Moyer, our CFO, at 858-674-8268 or by email to the Company at Investor Relations at pulseelectronics.com. So that completes our presentation. Operator, thank you very much.
Thank you. To access the digital replay of the Pulse Electronics first quarter 2013 results conference call, you may dial 1877-344-7529 or 1412-317-0088 beginning one hour after the conclusion of this conference to May 22, 2013 at 5 PM eastern time. You will be prompted to enter a conference number which will be 10027982. You will be prompted to record your name and company when joining. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
[No Q&A for this event]
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