[November 07, 2012]

Pulse Electronics Corporation Reports Third Quarter Results

Pulse Electronics Corporation (NYSE:PULS), a leading provider of electronic components, today reported results for its third quarter ended September 28, 2012.

Third Quarter Highlights

• Net sales were $88.2 million, down 8.1 percent from $96.0 million in the prior-year quarter, and down 12.1 percent from $100.4 million in the second quarter.
• Operating loss (U.S. GAAP) was $5.8 million compared with a loss of $0.7 million in the prior-year quarter and a loss of $0.1 million in the second quarter.
• Non-GAAP operating loss was $0.6 million, compared with a profit of $2.6 million in the prior-year quarter and a profit of $0.8 million in the second quarter. (See Schedule A for a reconciliation of U.S. GAAP results to non-GAAP measures.)

Additionally, the company and certain affiliates of investment funds managed by Oaktree Capital Management, L.P., an affiliate of Oaktree Capital Group, LLC (NYSE: OAK), a leading global investment management firm with approximately $81 billion under management, have entered into definitive agreements to recapitalize Pulse with a debt and equity investment of approximately $102.7 million in Pulse. At closing, Pulse intends to use the proceeds to repay $55 million outstanding under its senior credit agreement with its existing lenders and use $20 million for working capital and general business purposes. In addition, Oaktree has agreed to exchange $27.7 million of the company's $50 million in outstanding 7% senior convertible notes due 2014. The new capital structure supports the company's long term strategy and the execution of its business plans. The loan has a five-year term and will allow Pulse to further strengthen its technology leadership in the electronics components industry, continue the turnaround of its wireless business, and significantly reduce the amount of cash required for debt service. Pulse expects these transactions to close on or around November 19, 2012.

Completion of these transactions is urgent due to liquidity constraints the company currently faces. This difficult liquidity situation resulted from high levels of debt and impending maturity in February 2013, unsustainable levels of cash interest expense to service the debt, and reduced operating cash flow due to a decrease in demand for the company's products resulting from the unfavorable economic and industry environment. At current rates of cash use, the company estimates that it would be unable to meet its current obligations prior to the end of 2012. The company expects that the Oaktree transactions will substantially resolve its liquidity constraints and enable it to continue its pursuit of growth.

CEO Comments

"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, "which indicates that our business is performing as expected, given the challenging economic and industry environment. Our network business made sequential improvements in operating profit despite restrained demand, even excluding one time beneficial items. Our wireless business performed as expected due to customer program ramp delays at two large customers that we announced in August. These delays led to a temporary decline in revenues in the segment. We believe the wireless segment, depending on customer ramps, remains on track to attain near breakeven performance on annualized revenue of approximately $100 million by the end of this year.

"Oaktree's investment demonstrates a strong belief in the fundamental market and operational strength of the company," continued Mr. Faison. "In connection with Pulse's thorough review of capital alternatives, the company received interest from a number of well-recognized investment firms. Oaktree's investment uniquely satisfied our objectives of providing immediate improvement to our liquidity, addressing the maturity of our existing credit agreement, and reducing our cash debt service costs while providing the best outcome to stakeholders under the circumstances."

"We are pleased to have the opportunity to partner with Pulse and provide additional capital to drive strong financial and operating performance and position the company for long-term success," said Ken Liang, a Managing Director at Oaktree Capital Management. "We look forward to working with Pulse's management team to further its business strategy in the years ahead."

Third Quarter Operating Performance

Net sales were $88.2 million compared with $96.0 million in the prior-year quarter, reflecting ongoing economic and industry weakness which constrained demand for network and power products, partially offset by higher wireless sales to new antenna customers. Sequentially, net sales decreased 12.1 percent compared with second quarter net sales of $100.4 million mainly due to delayed customer product ramps in wireless that extended into the third quarter.

Cost of sales decreased 3.6 percent to $71.3 million from $73.9 million in the prior-year quarter. The company's gross profit margin was 19.2 percent compared with 23.0 percent in the prior-year quarter and 19.1 percent in the second quarter. The lower gross profit margin compared to the prior year reflects ramp up costs for new programs and inefficiencies associated with the growth in wireless, and higher labor costs, lower pricing, and volumes for network and power products. The sequential improvement in gross margin was due mainly to the favorable effects of manufacturing plant consolidations and lower cost parts suppliers in network and power.

Operating expenses decreased 8.8 percent to $18.0 million from $19.8 million in the third quarter of 2011, and on a comparable basis excluding one-time items operating expenses declined 5.9 percent. The decrease in spending was due to aggressive expense reduction actions, the $1.0 million favorable impact of reaching an agreement on intellectual property licensing, and sustained scrutiny over all discretionary spending.

Operating loss (U.S. GAAP) was $5.8 million compared with a loss of $0.7 million in the prior-year quarter. Non-GAAP operating loss was $0.6 million compared with a profit of $2.6 million in the prior-year quarter and a profit of $0.8 million in the second quarter. Third quarter operating loss (U.S. GAAP) included $3.9 million for severance, impairment and associated costs and $0.8 million for debt restructuring and related costs.

The company had $22.3 million of cash and cash equivalents at September 28, 2012 compared with $17.6 million at December 30, 2011. The company has been diligent in maximizing the efficiency of working capital to maintain adequate levels of cash in the uncertain economic and market environment. The company generated $1.8 million in cash from operations during the quarter and restrained capital expenditures to $0.7 million. During the third quarter the company had no changes to its outstanding debt.

As part of the amendment to the credit facility completed in March 2012, the company issued warrants to purchase approximately 2.6 million shares of common stock, which represent 6.1% of all outstanding shares, to its existing bank group. Unless the outstanding borrowings under the credit facility are repaid by certain dates, the vesting of the warrants occurs in three stages over the course of the remainder of this calendar year. The company did not retire the facility in full by the second vesting date of September 28, 2012, and approximately 0.4 million warrants, which convert into the equivalent of 0.9% of the outstanding shares of common stock, vested on that date. The cumulative vested warrants total approximately 1.2 million shares, or the equivalent of 2.8% of the outstanding shares.

Oaktree Investment

The company expects that the investment of new capital by Oaktree will provide it with sufficient liquidity to meet its anticipated funding needs. The Oaktree investment totals approximately $102.7 million and is comprised of two phases. The company expects the initial phase to close on or about November 19, 2012, and it consists of:

• a $75 million senior secured Term Loan A with funds to be used for retirement of $55 million of outstanding debt under Pulse's existing senior secured credit facility and $20 million in new cash to be used for working capital and general business purposes;
• a $27.7 million secured Term Loan B issued and exchanged for $27.7 million of Pulse's outstanding 7% senior convertible notes due December 2014 now held by Oaktree;
• the issuance by Pulse to Oaktree of an amount of shares of Pulse common stock which, along with any other common stock Oaktree already owns, will represent approximately 49% of the outstanding common stock of Pulse; and
• the issuance by Pulse to Oaktree of a warrant to purchase shares of a subsidiary that will terminate upon issuance of shares of a new class of Pulse non-voting preferred stock as described below.

The interest rate on the $75 million secured Term Loan A will be 12% per annum, and the interest rate on the $27.7 million Term Loan B will be 10% per annum. Interest on each of the secured term loans is payable-in-kind (PIK) for the first three years of the loans. Both term loans mature five years after closing of the term loan credit facility agreement and are secured by a perfected first lien on the collateral that currently secures Pulse's outstanding senior secured credit facility and Pulse's available unencumbered assets. The loans are non-amortizing and prepayable without penalty. While the Term Loan B is not junior in priority to the Term Loan A, the Term Loan B may not be repaid until the Term Loan A has been repaid in full.

As part of the initial phase of the recapitalization, Oaktree will be issued shares of a new class of non-voting preferred stock as soon as Pulse shareholders approve an amendment to Pulse's articles of incorporation to authorize the issuance of non-voting preferred stock at a special shareholder meeting. If Pulse shareholders do not approve the amendment, Oaktree will be entitled to exercise warrants to purchase 19.9% of the common stock of Pulse's wholly-owned Delaware subsidiary, Technitrol Delaware, Inc. However, if the non-voting preferred stock is authorized and issued to Oaktree, the subsidiary warrant will be terminated. Following the issuance of the Pulse preferred stock, from time to time after completion of the second phase of the recapitalization, in the event Oaktree's percentage ownership of outstanding shares of common stock falls below 49%, the company will issue to Oaktree shares of Pulse common stock that it is ultimately entitled to in the recapitalization in order to maintain Oaktree's ownership of then outstanding Pulse common stock at 49% until such time as it has received all such shares of common stock. The new Pulse preferred stock will automatically convert into additional shares of Pulse common stock upon discharge of the company's 7% senior convertible notes and Oaktree would then hold approximately 64.38% of the equity of Pulse (on a fully diluted basis immediately following closing, and without giving effect to shares of common stock and warrants it owns prior to this transaction). The terms of its investment provide Oaktree the right to designate three individuals to the company's slate of director nominees at any shareholder meeting.

The company expects the second phase of the recapitalization to occur during 2013. In this phase, Pulse intends to offer each holder of its outstanding senior convertible notes, other than Oaktree, the option to receive new debt under secured Term Loan B in exchange for its senior convertible notes at up to 80% of their par amount, as well as shares of Pulse common stock. To the extent the holders of 90% of the senior convertible notes, including those exchanged by Oaktree in the first phase, exchange their notes under this optional exchange, then the $27.7 million portion of Oaktree's Term Loan B will be reduced by 20%.

The information contained in this press release is for informational purposes only and is not an offer to buy or the solicitation of an offer to sell any security. The second phase exchange offer will only be made by means of appropriate offer documents and related materials.

The issuance of new shares of Pulse common stock in these transactions would normally require approval of Pulse shareholders according to the shareholder approval policy of the New York Stock Exchange. The audit committee of the Pulse board of directors determined that the delay necessary to obtain shareholder approval prior to securing the term loan would seriously jeopardize the financial viability of Pulse due to its current liquidity constraints. Therefore, the audit committee pursued an exception provided in the NYSE's shareholder approval policy and applied to the NYSE to waive the shareholder approval that would otherwise be required. The NYSE has accepted Pulse's application for the exception. In reliance on the exception, Pulse and Oaktree expect to consummate the first phase of the recapitalization on or around November 19, 2012, which is at least 10 days after Pulse mails a letter to all shareholders notifying them of its intention to issue the shares of its common stock without seeking their approval, in accordance with NYSE rules. The following table is intended to illustrate the relative equity interest of the Company's existing equity holders and Oaktree immediately after Closing taking into account only issued and outstanding shares of common stock and common stock underlying vested warrants owned by Oaktree.

Ownership of Common Stock on an Issued and Outstanding Basis Immediately Following Closing

Non Oaktree Common Stock Outstanding prior to the Closing

39.1

49.00%