Pulse Electronics Corporation (NYSE:PULS), a leading provider of electronic components, today reported results for its third quarter ended September 27, 2013.
Third Quarter Highlights
- Net sales were $94.8 million, up 7.5% from $88.2 million in the prior-year quarter, and up 7.5% from $88.3 million in the second quarter.
- Operating profit (U.S. GAAP) was $0.5 million compared with a loss of $5.8 million in the prior-year quarter and a profit of $1.6 million in the second quarter.
- Non-GAAP operating profit was $3.6 million, compared with a loss of $0.6 million in the prior-year quarter and a profit of $2.2 million in the second quarter. (See Schedule A for a reconciliation of U.S. GAAP results to non-GAAP measures.)
- Adjusted EBITDA increased for the fourth consecutive quarter to $5.5 million.
- Substantially completed the implementation of new ERP system.
“Our operating performance for both revenue and non-GAAP operating profit were within guidance again this quarter,” said Pulse Chairman and Chief Executive Officer Ralph Faison. “We achieved solid growth in our wireless segment as demand from certain programs at our smartphone customers increased. We also made significant progress in the operating results of this segment. Meanwhile, we had sequential operating profit improvements in our network and power segments despite a muted demand environment. We continued to improve operational efficiencies and control expenses. This quarter we achieved a milestone $5 million in adjusted EBITDA, representing our fourth consecutive increase, and sixth increase in the last seven quarters, demonstrating the continuous progress the Pulse team is making toward our target operating model.
“I am very pleased that, as of the end of October, the majority of our sites are now live on our new ERP system. This implementation has been a core component of our strategic turnaround plan, and our fully-integrated, modern system promises to markedly improve Pulse’s customer service, operational effectiveness, and overall organizational efficiency,” continued Mr. Faison. “I would like to express my appreciation to the many Pulse employees around the world, and particularly those directly engaged on the project, for their tireless work over the many months of the implementation. This was an incredibly complex undertaking, and everyone involved should feel extremely proud of the successful transition they have achieved.”
Third Quarter Operating Performance
Net sales were $94.8 million compared with $88.2 million in the prior-year quarter, due to increased demand for wireless products for smartphone programs in which the company participates, offset by modest declines in the network and power segments. Sequentially, consolidated net sales increased 7.5 percent compared with second quarter net sales of $88.3 million mainly due to recovery of wireless product demand and strength in network from accelerated orders for products subject to the Halo injunction.
Cost of sales increased 2.7 percent to $73.2 million from $71.3 million in the prior-year quarter. The company’s gross profit margin was 22.8 percent compared with 19.2 percent in the prior-year quarter and 23.5 percent in the second quarter. The higher gross profit margin compared to the prior year reflects the favorable effects of higher wireless revenue and resulting efficiencies. It also reflects manufacturing plant consolidations and other cost reduction programs. The sequential decrease in gross margin was mainly due to a higher mix of wireless revenues and the implementation of the second portion of government-mandated wage increases at the company’s manufacturing facilities in China, as expected.
Operating expenses were $18.4 million, essentially flat from the third quarter of 2012, which included a $1.0 million favorable impact of an intellectual property licensing agreement. On a comparable basis excluding the IP item, operating expenses declined 3.5 percent. Operating expenses declined 3.1 percent compared to the second quarter due to ongoing expense controls and lower compensation expense. The company anticipates further expense reductions in future quarters resulting from its previously announced expense reduction initiative.
Operating profit (U.S. GAAP) was $0.5 million compared with a loss of $5.8 million in the prior-year quarter. Third quarter operating profit included $2.7 million for severance, impairment, and associated costs in connection with the expense reduction initiative, cost reductions related to operational process improvements, and impairment of assets from the early phase of a continuing development program. Non-GAAP operating profit was $3.6 million compared with a loss of $0.6 million in the prior-year quarter and a profit of $2.2 million in the second quarter.
The company had $25.6 million of cash and cash equivalents at September 27, 2013 compared with $31.5 million at December 28, 2012. The decrease in cash mainly reflects capital expenditures, refinancing transaction fees and expenses, and working capital needs. In the third quarter the company generated $5.8 million in cash flow from operations and increased its overall cash balance from the second quarter by $2.4 million.
Expense Reduction Initiative
As part of the $2.7 million of severance, impairment, and associated costs noted above, the company recorded $0.5 million in severance expense related to actions taken as part of its previously announced expense reduction initiative and expects to begin to realize savings from those actions in the fourth quarter. The initiative is on track to achieve the expected $6 million annualized savings by the end of the first quarter of 2014.
The company believes it has a number of options regarding the retirement of its $22.3 million of outstanding senior convertible notes prior to maturity, including public and/or private exchange transactions. The company is actively pursuing these options with the goal of achieving the best possible outcome for all stakeholders; however, there can be no assurance that the company will be successful in these efforts.
Fourth Quarter 2013 Outlook
“As we look to the fourth quarter, the industry environment continues to appear muted for our network and power segments, uncertainty surrounding government military spending is ongoing given the temporary resolution to U.S. budget issues, and the velocities of the production ramps for the smartphone programs on which we participate are varying,” said Mr. Faison. “Accordingly, and consistent with typical seasonality in our markets, we expect overall demand to be slightly lower in the fourth quarter. However, with the favorable impact from ongoing cost and expense reductions, we expect non-GAAP operating profit to achieve levels similar to the third quarter despite the slightly lower revenue.”