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UNITED STATES

FORM 10-K

x	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 27, 2013

  

  

o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________

  

Commission File No. 1-5375

The aggregate market value of voting stock held by non-affiliates as of June 28, 2013 is $20,852,000 computed by reference to the closing price on the New York Stock Exchange on such date.

 

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Item 1

Business

We operate our business in three segments: our Network product group (“Network”), our Power product group (“Power”) and our Wireless product group (“Wireless”).

Network produces a variety of passive components that manage and regulate electronic signals for use in a variety of devices used in local area and wide area networks.  These products operate by filtering out radio frequency interference, shaping waveforms, splitting signals, suppressing noise, matching impedances and other functions.  These passive products are often referred to as connectors, filters, filtered connectors, transformers, splitters, micro-filters, baluns and chokes.

Network’s components are characterized by labor intensive manufacturing processes that can be highly customized.  Generally, our Network products have relatively short life cycles due to process and cost improvements, which allow us to utilize our design, engineering and production expertise to meet our customers’ evolving needs.  The markets Network serves have been, and are expected to be, characterized by ongoing product design and manufacturing innovation.

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Power primarily manufactures products that adjust and ensure proper current and voltage, limit distortion of voltage, sense and report current and voltage and cause mechanical movement or actuation.  Power’s products include power transformers, chokes, current and voltage sensors, ignition coils, automotive coils, military and aerospace products and other power magnetic products.

While some of Power’s manufacturing is characterized by labor intensive processes, other portions of the business are highly automated and less variable with product life cycles that change as technology improves.   These factors allow us to utilize our design, engineering and production expertise to meet our customer design needs.  The markets Power serves have been, and will continue to be, characterized by ongoing product design and manufacturing innovation.

Wireless manufactures products that primarily capture or transmit wireless communication signals.  Specifically, our Wireless segment produces antennas, antenna modules and antenna mounting components that capture and transmit communication signals in handsets, other terminal and portable devices, automobiles and wireless-to-wireline access points.

Our Wireless products are sold in a very dynamic market, which causes the life of an average Wireless product to be very short.  Wireless utilizes our expertise in the design, engineering and production of antennas and antenna modules to evolve with our customer needs.   We believe that the industries Wireless serves have been, and will continue to be, characterized by ongoing product design and manufacturing innovation.  However, the manufacturing of our Wireless products tends to be more automated than Network and many Power products, requiring capital investment and changes in our production process for future innovation.

Products

The following table contains a list of some of the key products of our segments:

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Each of our segments sells products predominantly through our worldwide direct sales forces. Given the highly technical nature of our customers’ needs, our direct salespeople typically team up with members of our engineering staff to discuss a sale with a customer’s purchasing and engineering personnel.  During the sales process, there is close interaction between our engineers and those in our customers’ organizations.  This interaction extends throughout a product’s life cycle, engendering strong customer relationships.  Also, we believe that our coordinated sales effort provides a high level of market penetration and efficient coverage of our customers on a cost-effective basis.  As of December 27, 2013, we had approximately 52 salespeople in 8 sales offices worldwide.

We sell our products and services to original equipment manufacturers, original design manufacturers and electronic contract equipment manufacturers, which design, build and market end-user products.  We refer to these companies as OEMs, ODMs and CEMs, respectively.  ODMs typically contract with OEMs to design products, whereas CEMs contract with OEMs to manufacture products.  Many OEMs use CEMs primarily or exclusively to build their products.  Independent distributors sell components and materials to both OEMs and CEMs.  While OEMs are often our design partners, most sales are to CEMs, as OEMs have generally outsourced procurement and manufacturing responsibilities to CEMs.  In order to maximize our sales opportunities, our engineering and sales teams maintain close relationships with all outlets, including OEMs, ODMs, CEMs and other independent distributors.  We provide support for our multinational customer base with local customer service and design centers in North America, Europe and Asia.

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Our research, development and engineering efforts are focused on the design and development of innovative products in collaboration with our customers or their ODM partners. We work closely with OEMs and ODMs to identify their design and engineering requirements.  We have design centers throughout the world in proximity to customers to enable better understanding of our end products and readily satisfy our customers’ design and engineering needs.  Our product lifecycle management system tracks the level of design activity per customer.  This enables us to manage and improve our engineers’ processes for designing products, which has created an overall disciplined and orderly design methodology.  We typically own the customized designs used to make our products.

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engineering expertise;

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product quality and reliability;

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global design and manufacturing capabilities;

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breadth of product line;

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price;

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customer service; and

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delivery time.

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We believe we are competitive with respect to each of these factors.  Product quality and reliability, as well as design and manufacturing capabilities, are enhanced through our continuing commitment to invest in and improve our manufacturing and design resources and, also, our close relationships with our customers’ engineers.  In addition, the breadth of our segments’ product offerings provides customers with the ability to satisfy multiple needs through one supplier.  Also, our global presence enables us to deepen our relationships with customers and to better understand and more easily satisfy their needs in local markets.  Our ability to purchase raw materials in large quantities reduces our production expenses, maximizes our capacity, continually lowers our manufacturing costs and enables us to price our products competitively.

The primary raw materials necessary to manufacture all our segments’ products include:

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base metals such as copper;

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ferrite cores;

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plastics and plastic resins; and

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rare earth metals.

Currently, we do not have significant difficulty obtaining any raw materials integral to our manufacturing and do not anticipate that we will face any significant difficulty in the near future.  However, some of these materials are produced by a limited number of suppliers.  The limited amount of suppliers may restrict our ability to obtain these raw materials in sufficient quantities, at reasonable prices or in a timely manner to meet our customers’ demand for our products.  A lack of availability or a delay in obtaining any of the raw materials used in our products could adversely affect our manufacturing costs and profit margins.  In addition, if the price of our raw materials increases significantly over a short period of time due to increased market demand or shortage of supply, customers may be unwilling to bear the increased price for our products and we may be forced to sell our products containing these materials at lower prices causing a reduction in our profit margins.

Our backlog of unfilled orders at December 27, 2013 and December 28, 2012 was approximately $40.8 million and $36.1 million, respectively.   Orders typically fluctuate from quarter to quarter based on customer demand and general business conditions. Unfilled orders may be canceled prior to shipment of goods. It is expected that all or a substantial portion of the backlog will typically be filled within six months.  We do not believe that our backlog is an accurate indicator of near-term business activity because of variability in lead times, capacity, and demand uncertainty on the part of our customers, and, also, the increased use of vendor managed inventory and similar consignment type arrangements, tend to limit the significance of our backlog.

We utilize proprietary technology that is often developed and protected by us or, to a much lesser extent, licensed from others.  Also, we require each of our employees with access to proprietary technology to enter into confidentiality agreements. We also restrict access to our proprietary information to only those employees essential to our products’ creation.

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Existing legal protections afford only limited advantage to us.  For example, others may independently develop similar or competing products or attempt to copy or use aspects of our products that we regard as proprietary.  Furthermore, intellectual property law in certain areas of the world may not fully protect our products or technology from such actions.  While our intellectual property is important to us in the aggregate, we do not believe any individual patent, trademark or license is material to our business or operations.

Environmental

Our manufacturing operations are subject to a variety of local, state, federal and international environmental laws and regulations governing air emissions, wastewater discharges, the storage, use, handling, disposal and remediation of hazardous substances and, also, employee health and safety. It is our policy to meet or exceed the environmental standards set by these laws.  Through planning and continual process improvements, we strive to protect and preserve the environment by preventing pollution and reducing the consumption of natural resources and materials.  However, in the normal course of business, environmental issues may arise.  We may incur increased costs associated with environmental compliance and cleanup projects necessitated by the identification of new environmental issues or new environmental laws and regulations.

We make available free of charge on our website, www.pulseelectronics.com, all materials that we file electronically with the Securities and Exchange Commission (“SEC”), including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports and all Board and Committee charters, as soon as reasonably practicable after we electronically file or furnish such materials to the SEC.

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Item 1a

Risk Factors

You should carefully consider the following risks and any of the other information set forth in this Annual Report on Form 10-K and in the documents incorporated herein by reference, before deciding to invest in shares of our common stock. The risks described below are not the only ones that we face. Additional risks that are not presently known to us or that we currently deem immaterial may also impair our business operations. The following risks, among others, could cause our actual results, performance, achievements or industry results to differ materially from those expressed in our forward-looking statements contained herein and presented elsewhere by management from time to time. If any of the following risks actually occurs, our business prospects, financial condition or results of operations could be materially harmed and the market price of our common stock would likely decline due to the occurrence of any of these risks.

Cyclical changes in the markets we serve could result in a significant decrease in demand for our products, which may reduce our profitability and/or our cash flow.

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may cancel existing orders;

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may introduce fewer new products;

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may discontinue current product lines; and

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may decrease their inventory levels.

A decrease in demand for our products could have a significant adverse effect on our operating results, profitability and cash flows, which may adversely affect our liquidity, our ability to retire debt or our ability to comply with debt covenants.   Accordingly, we may experience volatility in our revenues, profits and cash flows.

Our debt levels could adversely affect our financial position, our liquidity and the perception of our financial condition in the financial markets.

We have a significant amount of indebtedness. As of March 2014, we had aggregate indebtedness, excluding debt discounts, of approximately $134.2 million with interest rates on our Term A and B Loans of 12.0% and 10.0%, respectively. Our high level of debt could have important consequences, including:

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limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;

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requiring a substantial portion of our cash flow to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flow available for working capital, capital expenditures, acquisitions and other general corporate purposes;

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increasing our vulnerability to adverse changes in general economic, industry and competitive conditions;

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limiting our flexibility in planning for and reacting to changes in the industry in which we compete;

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placing us at a disadvantage compared to other, less leveraged competitors or competitors with comparable debt at more favorable interest rates; and

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increasing our costs of borrowing.

The terms of our debt restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

Covenants with our lenders require compliance with specific financial ratios that may make it difficult for us to obtain additional financing on acceptable terms for future acquisitions or other corporate needs.  In the fourth quarter of 2012, we did not meet certain of these financial covenants.  Oaktree Capital Management L.P. and affiliates (collectively, “Oaktree”) agreed to forbear from taking any action, including acceleration of payment of the term loans, if we fail to satisfy these covenants in the fourth quarter of 2012 and in 2013 in a forbearance and commitment letter dated March 11, 2013.  Oaktree agreed to a forbearance with respect to the Secured Leverage Ratio, calculated as the ratio of consolidated secured debt, which includes the Oaktree term loans, and our rolling four quarters’ EBITDA, and the Total Net Debt Leverage Ratio, calculated as the ratio of (a) the sum of consolidated debt, which includes the Oaktree term loans and senior convertible notes, less unrestricted cash (as defined) and (b) our rolling four quarters’ EBITDA.  On February 21, 2014, we entered into an amendment to the credit agreement, which provides some relief from our financial covenants with respect to the Secured Leverage Ratio, Total Net Debt Leverage Ratio and Minimum Liquidity covenants.  Furthermore, for periods after December 27, 2013, the amended credit agreement will relieve us from having to comply with the covenant that previously required us not to permit the Total Net Debt Leverage Ratio to exceed certain specified ratios.

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Although we anticipate meeting our covenants in the future, our ability to remain in compliance with the covenants may be adversely affected by future events potentially beyond our control.  Violating any of these covenants could result in being declared in default, which may result in our lenders electing to declare our outstanding borrowings immediately due and payable and terminate all commitments to extend further credit.  If the lenders accelerate the repayment of borrowings, we cannot provide assurance that we will have sufficient liquidity to repay our credit facilities or other indebtedness.  In addition, certain domestic and international subsidiaries have pledged the shares of certain subsidiaries, as well as accounts receivable, inventory, machinery and equipment, intellectual property and other assets as collateral.  If we default on our obligations, our lenders may take possession of the collateral and may license, sell or otherwise dispose of those related assets in order to satisfy our obligations. Refer to Note 6, Debt, to our Consolidated Financial Statements for additional discussion of our debt covenants.

Our primary lender and majority stockholder, Oaktree, may have interests that diverge from our interests and the interests of other security holders.

Oaktree is our primary creditor and beneficially owns a majority of our common stock. Oaktree may have interests that diverge from our interests and the interests of other security holders. In addition, so long as Oaktree maintains ownership at specified thresholds, it has the right to nominate a majority of our board of directors and will be entitled to certain information rights and a right to participate in future offerings of our equity securities. Oaktree is in the business of investing in companies and is not restricted by contract from investing in our current or future competitors. Future events may give rise to a divergence of interests between Oaktree and us or our other security holders that would have a material adverse effect on our Company. Oaktree’s ownership and control may also have the effect of delaying or preventing a change of control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer. Oaktree’s ownership and control may also limit our ability to issue stock, incur further debt, or dispose of any material assets of the Company or its subsidiaries.

Oaktree and affiliates can exercise significant control over the Company.

Oaktree beneficially owns a majority equity position in us.  As a result, as long as Oaktree maintains ownership at specified thresholds, it has the right to nominate a majority of our board of directors, and therefore, has the ability to exert actual control over our management policies and affairs, the outcome of matters submitted to our stockholders, including amendments to the our organizational documents, any proposed merger or other business combination, our financing, consolidation or sale of all or substantially all of our assets and other corporate transactions.  In addition, Oaktree is entitled to certain information rights and a right to participate in future offerings of our equity securities. This concentration of ownership may also delay or prevent a change of control, impede a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer. Oaktree’s ownership and control may also limit our ability to issue stock, incur further debt, or dispose of any material assets of the Company or its subsidiaries.

We are a “controlled company” within the meaning of the NYSE Listed Company Manual and, as a result, qualify for exemptions from certain corporate governance standards, which may limit the presence of independent directors on our board of directors or board committees.

Oaktree beneficially owns a majority equity position in the Company. Accordingly, it has the ability to elect our board of directors and thereby control our management and affairs. Therefore, we are a “controlled company” for purposes of Section 303(A) of the NYSE Listed Company Manual.

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Reduced prices for our products may adversely affect our profit margins if we are unable to reduce our cost structure.

The average selling prices for our products tend to decrease over their life cycle.  In addition, foreign currency movements and the desire to retain market share increase the pressure on our customers to seek lower prices from their suppliers.  As a result, our customers are likely to continue to demand lower prices from us.  To maintain our margins and remain profitable, we must continue to meet our customers’ design needs while concurrently reducing costs through efficient raw material procurement, process and product improvements and reducing our operating expense levels.  Our profit margins and cash flows may suffer if we are unable to reduce our overall cost structure relative to decreases in sales prices.

We use commodities such as copper and plastic resins in manufacturing our products.  Prices of these and other raw materials have experienced significant volatility in the past.  Other manufacturing costs, such as direct and indirect labor, energy, freight and packaging costs, also directly impact the costs of our products.  If we are unable to pass these increased costs to our customers or recover the increased costs through production efficiencies, our gross margins may suffer.

An inability to adequately respond to changes in technology, applicable standards or customer needs may decrease our sales.

The life cycles of our products depend heavily upon the life cycles of the end products for which our products are designed.  End products with short life cycles require us to closely manage our production and inventory levels, as adverse changes in end market demand may make our products obsolete.  Specifically, during market slowdowns, this may result in significant charges for inventory write-offs.  Our future operating results may be adversely affected by material levels of inventory reserves for obsolete or excess inventory.

We have completed numerous acquisitions and divestitures in the past and we may continue to seek acquisitions to grow our businesses. We may also divest operations to focus on our core businesses.  We may fail to derive significant benefits from such transactions.  Also, if we fail to achieve sufficient financial performance from an acquisition, certain long-lived assets, such as property, plant and equipment and intangible assets, could become impaired and result in the recognition of an impairment loss.

The success of our acquisitions depends on our ability to:

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successfully execute the integration or consolidation of the acquired operations into our existing businesses;

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develop or modify the financial reporting and information systems of the acquired entity to ensure overall financial integrity and adequacy of internal control procedures;

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identify and take advantage of cost reduction opportunities; and

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further penetrate existing markets with the product capabilities we may acquire.

Integration of acquisitions may take longer than we expect and may never be achieved to the extent originally anticipated. This could result in lower than expected business growth or higher than anticipated costs.  In addition, acquisitions may:

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cause a disruption in our ongoing business;

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distract our managers;

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increase our debt and leverage;

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unduly burden other resources in our company; and

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result in an inability to maintain our historical standards, procedures and controls, which may result in non-compliance with external laws and regulations or contractual requirements.

Alternatively, we may also consider making strategic divestitures, which may also:

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cause a disruption in our ongoing business;

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distract our managers;

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unduly burden other resources in our company; and

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result in an inability to maintain our historical standards, procedures and controls, which may result in non-compliance with external laws and regulations or contractual requirements.

We may record impairment losses in the future.  We assess the impairment of long-lived assets whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable.  Factors we consider important that could trigger an impairment review include significant changes in the use of any asset, changes in trends of historical operating performance, a significant decline in the price of our common stock, changes in projected operating performance and significant negative economic trends.

We may identify and possibly consummate acquisitions in the future to penetrate or expand important markets and to grow our business.  We may not be able to identify suitable acquisition candidates at reasonable prices.  Even if we identify promising acquisition candidates, the timing, price, structure and success of future acquisitions are uncertain.  An inability to consummate or integrate attractive acquisitions may reduce our growth rate and our ability to penetrate new markets.

We remain committed to technological development through investing in research, development and engineering activities focused on designing next-generation products, improving our existing products and improving our manufacturing processes.  If we determine that any of our manufacturing processes would benefit from capital investment, we may allocate resources to fund the expansion of property, plant and equipment used in these processes. An inability to allocate resources to the appropriate investment or an inability to allocate the appropriate amount of resources to an investment may reduce our ability to grow organically.

Our sales are predominantly made on a purchase order basis.  We have a concentration of several primary customers that we rely on for a material amount of these purchase orders.  To the extent we have agreements in place with these customers, most of these agreements are either short-term in nature or provide these customers with the ability to terminate the arrangement.  Such agreements typically do not provide us with any material recourse in the event of non-renewal or early termination.

We will lose business and our revenues may decrease if one or more of these major customers:

 We have changed our capacity as a result of declines in global demand and through divestitures.  We may significantly reduce or expand our workforce and facilities in response to rapid changes in demand for our products due to prevailing global market conditions.  These rapid fluctuations place strains on our resources and systems.  If we do not effectively manage our resources and systems, our business may be adversely affected.

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Our failure to effectively manage these issues may result in:

We use several types of raw materials in the manufacturing of our products, including:

Some of these materials are only produced by a limited number of suppliers.  The limited amount of suppliers may restrict our ability to obtain these raw materials in sufficient quantities, at reasonable prices or in a timely manner to meet customer demand for our products.  A lack of availability or a delay in obtaining any of the raw materials used in our products could adversely affect our manufacturing costs and profit margins.  In addition, if the price of our raw materials increases significantly over a short period of time due to increased market demand or shortage of supply, customers may be unwilling to bear the increased price for our products and we may be forced to sell our products containing these materials at lower prices causing a reduction in our profit margins.

We operate in a highly competitive worldwide industry, with relatively low barriers to competitive entry. We frequently encounter strong competition within individual product lines from various competitors throughout the world, some of which are larger than us and have significantly greater financial resources and technological capabilities.  We compete principally on the basis of:

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engineering expertise;

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product quality and reliability;

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Our inability to successfully compete on any or all of the above or other factors may result in reduced sales.

Despite our quality control and quality assurance efforts, defects may occur in the products we manufacture due to design or manufacturing errors or component failure. Product defects may result in delayed shipments and reduced demand for our products. We may be subject to increased costs due to warranty claims on defective products. We may be required to participate in a recall involving products which are, or are alleged to be, defective. We carry insurance for certain legal matters involving product liability; however, we do not have coverage for all costs related to product defects and the costs of such claims, including costs of defense and settlement, may exceed our available coverage.

We manufacture and sell our products in various regions of the world and export and import these products to and from a large number of countries.  Fluctuations in exchange rates could negatively impact our cost of production and sales which, in turn, could decrease our operating results and cash flow.  In addition, if the functional currency of our manufacturing costs strengthens as compared to the functional currency of our competitors’ manufacturing costs, our products may become more costly than our competitors.

We manufacture and assemble most of our products in locations outside the United States, primarily in the People’s Republic of China (“PRC” or China), and a majority of our revenues are derived from sales to customers outside the United States.  Our future operations and earnings may be adversely affected by the risks related to, or any other problems arising from, operating in international locations and markets.

Risks inherent in doing business internationally may include:

The majority of our manufacturing occurs in the PRC.  Although the PRC has a large and growing economy, its political, legal and labor developments entail uncertainties and risks.  For example, the availability of labor is highly seasonal and is significantly affected by the migration of workers in relation to the annual Lunar New Year holiday as well as economic conditions in the PRC. At certain times in the past we have encountered difficulties in attracting and retaining the level of labor required to meet our customers’ demands.  Also, wages and benefits have been increasing rapidly over the last several years in China.  While China has been receptive to foreign investment, its investment policies may not continue indefinitely into the future and future policy changes may adversely affect our ability to conduct our operations in these countries or the costs of such operations.

We have benefited in prior years from favorable tax incentives and we operate in countries where we realize favorable income tax treatment relative to the U.S. statutory rate.  We have been granted special tax incentives, including tax holidays, in jurisdictions such as the PRC.  This favorable situation could change if these countries were to increase rates or discontinue the special tax incentives, or if we discontinue our manufacturing operations in any of these countries and do not replace them with operations in locations with similar tax incentives or policies.  Accordingly, in the event of changes in laws and regulations affecting our international operations, we may not be able to continue to recognize or take advantage of similar benefits in the future.

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We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.

A significant portion of our cash is held offshore by international subsidiaries and may be denominated in currencies other than the U.S. dollar.  While we intend to use a significant amount of the cash held overseas to fund our international operations and growth, if we encounter a significant need for liquidity domestically or at a particular location that we cannot fulfill through borrowings, equity offerings, or other internal or external sources, we may experience unfavorable tax and earnings consequences due to necessary cash transfers.  For example, these adverse consequences would occur if the transfer of cash into the United States is taxed with no available foreign tax credit to offset the U.S. tax liability, resulting in lower net earnings.  Also, we may be prohibited or significantly delayed when transferring cash from a country such as the PRC, as there are foreign exchange ceilings imposed by local governments and often lengthy approval processes, which foreign governments require for international cash transfers.  We have not experienced any significant liquidity restrictions in any of the countries in which we operate and we do not presently foresee any.

Losing the services of our executive officers or other highly qualified and experienced employees could adversely affect our businesses.

Our success depends upon the contributions of our executive officers and senior management, many of whom have numerous years of experience and would be extremely difficult to replace.  We must also attract and maintain experienced and highly skilled engineering, sales and marketing, finance and manufacturing personnel.  Competition for qualified personnel is often intense, and we may not be successful in hiring and retaining these people. If we lose the services of these key employees or cannot attract and retain other qualified personnel, our businesses could be adversely affected.

 

We face risks arising from the restructuring of our operations.

 

In the past, we have undertaken initiatives to restructure our business operations with the intention of improving utilization and realizing cost savings in the future. These initiatives have included changing the number and location of our production facilities, largely to align our capacity and infrastructure with current and anticipated customer demand. This alignment includes transferring programs from higher cost geographies to lower cost geographies. The process of restructuring entails, among other activities, moving production between facilities, closing facilities, reducing the level of staff, realigning our business processes and reorganizing our management.

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We continuously evaluate our operations and cost structure relative to general economic conditions, market demands, tax rates, cost competitiveness and our geographic footprint as it relates to our customers’ production requirements. As a result of this ongoing evaluation, we could initiate future restructuring plans. Restructurings present significant potential risks of events occurring that could adversely affect us, including a decrease in employee morale, delays encountered in finalizing the scope of, and implementing, the restructurings (including extensive consultations concerning potential workforce reductions, particularly in locations outside of the U.S.), the failure to achieve targeted cost savings and the failure to meet operational targets and customer requirements due to the loss of employees and any work stoppages that might occur. These risks are further complicated by our extensive international operations, which subject us to different legal and regulatory requirements that govern the extent and speed of our ability to reduce our manufacturing capacity and workforce. In addition, the current global economic conditions may change how governments regulate restructuring as the recent global recession has impacted local economies. Finally, we may have to obtain agreements from our affected customers for the relocation of our facilities in certain instances. Obtaining these agreements, along with the volatility in our customers’ demand, can further delay restructuring activities.

We maintain extensive manufacturing operations in the PRC and elsewhere, similar to many of our customers and suppliers.  A sustained interruption of our manufacturing operations or those of our customers or suppliers, resulting from complications caused by a public health epidemic or a natural disaster could have a material adverse effect on our business and our results of operations.

The unavailability of insurance against certain business and product liability risks may adversely affect our future operating results.

As part of our comprehensive risk management program, we purchase insurance coverage against certain business and product liability risks.  However, not all risks are insurable and those that are insured may differ in the amount covered due to the type of risk, end market and customer location.  If any of our insurance carriers discontinues an insurance policy, significantly reduces available coverage or increases our deductibles and we cannot find another insurance carrier to provide comparable coverage at similar costs or we are not fully insured for a particular risk in a particular place, then we may be subject to increased costs of uninsured or under-insured losses, which may adversely affect our operating results.

Also, our components, modules and other products are used in a broad array of representative end products.  If our insurance program does not adequately cover liabilities arising from the direct use of our products or liabilities that arise from use of our customers’ products, we may be subject to increased costs of uninsured losses, which may adversely affect our operating results.

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air emissions;

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wastewater discharges;

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the storage, use, handling, disposal and remediation of hazardous substances, wastes and chemicals; and

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employee health and safety.

If violations of environmental laws occur, we could be held liable for damages, penalties, fines and remedial actions for contamination discovered at our present or former facilities.  Our operations and results could be adversely affected by any material obligations arising from existing laws or new regulations that may be enacted in the future.  We may also be held liable for past disposal of hazardous substances generated by our business or businesses we acquire.

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

 

We collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, and damage our reputation, and cause a loss of confidence in our products, which could adversely affect our business, revenues and competitive position.

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Our stock price has been and may continue to be volatile.

We believe that the following factors, among others, may have had and may continue to have a significant negative impact on the market price and volatility of our common stock:

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the notice of non-compliance with listing standards we received from the New York Stock Exchange that we previously announced;

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the amount, terms, and timing of our debt obligations;

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developments regarding our ability to raise additional capital;

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soft market demand conditions in certain primary markets;

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economic and other external factors;

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actual or anticipated period-to-period fluctuations in our financial results;

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variations in our operating performance and the performance of our competitors;

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publication of research reports by securities analysts about us or our competitors or our industry;

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strategic decisions by us or our competitors, such as acquisitions, divestures, spin-offs, joint ventures, strategic investments or changes in business strategy;

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the passage of legislation or other regulatory developments affecting us or our industry;

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speculation in the press or investment community;

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changes in accounting principles;

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terrorist acts, acts of war or periods of widespread civil unrest; and

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natural disasters and other calamities.

Disruptions or volatility in global financial markets could limit our sources of liquidity, or the liquidity of our customers, dealers and suppliers.

 

Global economic conditions may cause volatility and disruptions in the capital and credit markets. Since the global economic downturn in 2008, liquidity, credit and credit capacity for certain issuers, including certain of our customers, dealers and suppliers has been restricted. Changes in global economic conditions, including material cost increases and decreases in economic activity in the markets that we serve, and the success of plans to manage cost increases, inventory and other important elements of our business may significantly impact our ability to generate funds from operations. Market volatility, changes in counterparty credit risk, the impact of government intervention in financial markets and general economic conditions may also adversely impact our ability to access capital and credit markets to fund operating needs. An inability to access capital and credit markets may have an adverse effect on our business, results of operations, financial condition and competitive position.

In addition, the global demand for our products generally depends on customers’ ability to pay for our products, which, in turn, depends on their access to funds. Subject to global economic conditions, customers may experience increased difficulty in generating funds from operations. Further, following capital and credit market volatility and uncertainty, many financial institutions have revised their lending standards, thereby decreasing access to capital. If capital and credit market volatility occurs, customers’ liquidity may decline which, in turn, would reduce their ability to purchase our products.

Further issuances of our common stock will be dilutive.

The market price of our common stock could decline due to the issuance or sale of a large number of shares in the market, including the issuance of shares underlying our remaining convertible notes and warrants to purchase common stock issued in March 2012.

To the extent we issue or sell additional shares of common stock to third parties, we may be required to issue additional shares of common stock to Oaktree under a top-up option in the Investment Agreement. The top-up option provides that Oaktree will have the option to purchase a number of additional shares of common stock to retain its ownership percentage in the Company. As of February 21, 2014, its ownership percentage is 69.8% of our outstanding common stock (which reflects Oaktree's beneficial ownership of 65,855 warrants to purchase our common stock).

 

Potential share issuances may have a dilutive effect on our common stock and could also make it more difficult or impossible for us to sell equity securities in the future at a time and price that we deem appropriate to raise funds through future offerings of common stock.

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Our intellectual property rights may not be adequately protected or third parties may claim we have violated their intellectual property rights.

If we do not meet the New York Stock Exchange continued listing requirements, our common stock may be delisted.

On September 27, 2012, the New York Stock Exchange (the “NYSE” or the “Exchange”) notified us that we had fallen below the NYSE’s continued listing standard for average market capitalization because we failed to maintain an average market capitalization over a consecutive 30-day trading period of at least $50.0 million and that we must achieve such an average market capitalization over a consecutive 30-day trading period on or before March 27, 2014, or be subject to delisting.  The market capitalization requirements provide that the NYSE will promptly initiate suspension and delisting procedures with respect to our common stock if our global market capitalization for 30 consecutive trading days is less than $15.0 million, in which case we would not be eligible to utilize the cure procedures provided by the NYSE in other circumstances. On November 12, 2012, we submitted a plan for remediation of the deficiency related to the market capitalization and stockholders’ equity requirements to the NYSE, which they accepted on January 3, 2013.  We are required to provide the Exchange staff with updates in connection with the initiatives of the plan of compliance at least quarterly or upon the Exchange’s request and the Exchange staff will review us periodically for compliance with the plan during the extension periods.  Failure to make progress consistent with the plan of compliance or to regain compliance with the continued listing standards by the end of the applicable extension periods could result in our common stock being delisted from the Exchange. There can be no assurance that we will be able to make progress consistent with its plan to regain compliance with the Exchange’s continued listing standards in a timely manner, or at all.

We face the risk that the average market capitalization may not rise to a level necessary to satisfy the NYSE requirements. Furthermore, even if we regain compliance with the continuing listing standards of the NYSE, we cannot provide assurance that we will continue to list on the NYSE or any other exchange as a public company.

A delisting of our common stock and/or a termination of our public reporting obligations is likely to reduce the liquidity and value of our common stock and may inhibit or preclude our ability to raise additional financing and may also materially and adversely impact our credit terms with our vendors.

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We may incur additional tax expense or become subject to additional tax exposure.

We are subject to income taxes in the United States and numerous foreign jurisdictions, and our domestic and international tax liabilities are dependent upon the distribution of income among these different jurisdictions. Our provision for income taxes and cash tax liability in the future could be adversely affected by numerous factors, including income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities and changes in tax laws and regulations. We are also subject to the continuous examination of our income tax returns by the U.S. Internal Revenue Service and other tax authorities. The results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures may have an adverse effect on the Company’s provision for income taxes and cash tax liability.

Item 1b

Unresolved Staff Comments

None.

Item 2

Properties

In addition to these manufacturing locations, we have 146,000 square feet of space used for engineering, sales and administrative support functions at various locations in the U.S. and globally. We lease approximately 227,000 square feet of space for dormitories, canteens and other employee-related facilities in the PRC.

Item 3

Legal Proceedings

Item 4

Mine Safety Disclosures

Not applicable.

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Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Equity Compensation Plan Information

The disclosure required by this item is incorporated by reference in our definitive proxy statement to be used in connection with our 2014 Annual Shareholders Meeting.

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Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis of our financial condition and results of operations as well as other sections of this report contain certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties.   Actual results may differ materially from those anticipated in these forward-looking statements for many reasons, including the risks we face described in Item 1a, Risk Factors.  Except to the extent required by law, we assume no obligation to update or revise any forward-looking statements.

Management’s discussion and analysis of financial condition and results of operations (MD&A) is provided as a supplement to the accompanying Consolidated Financial Statements and footnotes to help provide an understanding of our financial condition, the changes in our financial condition and our results of operations.  This item should be read in connection with our Consolidated Financial Statements.  See Item 15, Exhibits and Financial Statement Schedules.

We are a global producer of precision-engineered electronic components and modules.  Based on our estimates of the total annual revenues in our primary markets and our share of those markets relative to our competitors, we believe we are a leading global producer of electronic components and modules in the primary markets we serve.  We operate our business in three segments:

•

our Network product group, which we refer to as Network;

•

our Power product group, which we refer to as Power; and

•

our Wireless product group, which we refer to as Wireless.

Network produces a variety of passive components that manage and regulate electronic signals for use in various devices used in local area and wide area networks, such as connectors, filters, filtered connectors, transformers, splitters, micro-filters, baluns and chokes.  Power primarily manufactures products that adjust and ensure proper current and voltage, limit distortion of voltage, sense and report current and voltage and cause mechanical movement or actuation, which includes power transformers, chokes, current and voltage sensors, ignition coils, automotive coils and military and aerospace products.  Wireless manufactures products related to the capture or transmission of wireless communication signals, such as antennas, antenna modules and antenna mounting components.

Historically, our gross margin has been significantly affected by product mix and capacity utilization.  The markets served by each of our segments are characterized by varying product life cycles, which in some cases cause significant product turnover each year and, subsequently, frequent variations in the prices of products sold.  Due to the constantly changing quantity of parts each segment offers and the frequent changes in our average selling prices, we cannot isolate the impact of changes in unit volume and unit prices on our net sales or gross margin in any given period.  In addition, our operations are subject to changes in foreign exchange rates, especially the U.S. dollar as compared to the euro and Chinese renminbi, which affect our U.S. dollar reported results of operations.

Technology and Strategic Investments.  Our products evolve along with changes in technology, changes in the availability and price of raw materials and changes in design preferences of the end users of our products. Also, regulatory requirements can occasionally impact the design and functionality of our products. We address these dynamic conditions, as well as our customers’ desires, by continually investing in the development of each of our segments’ products and by maintaining a diverse product portfolio, which contains both mature and emerging technologies.  We remain committed to technological development through investing in research, development and engineering activities focused on designing next generation products, improving our existing products and improving our manufacturing processes.  If we determine that any of our segments’ manufacturing processes would benefit from capital investment, we may allocate resources to fund the expansion of property, plant and equipment used in these processes.  For example, we have committed capital to drive higher levels of automation throughout our manufacturing operations. We also committed capital to the implementation of our new enterprise resource planning (“ERP”) system to enhance visibility, reduce cost, and enhance customer service. As of the end of fiscal year 2013, the majority of our sites are now live on our new ERP system.

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Cost Reduction Programs. We continue to simplify our operations to optimally match our capacity to the current and anticipated revenues and unit demand of each of our operating segments.  Specific actions to simplify our operations will dictate the future expenses associated with our cost reduction programs. Actions taken over the past several years, such as divestitures, plant closures, plant relocations, and reduction in personnel, have resulted in the elimination of a variety of future costs. The majority of these costs, not related to the impairment of long-lived assets, represent the annual salaries and benefits of terminated employees, including both those related to manufacturing and those that provided selling, general and administrative services. Also, we have experienced depreciation savings from disposed equipment and reductions in rental expense from the termination of lease agreements.  Historically, we have also reduced labor and overhead costs as a result of relocating factories with higher wage rates, such as those in southern China, to lower-cost areas in the central regions of China. The savings created by these cost reduction programs impact cost of goods sold and selling, general and administrative expenses, but the timing of such savings may not be apparent due to other performance factors such as unanticipated changes in demand, changes in unit selling prices, operational challenges, changes in operating strategies, and rising labor costs.  Wage rates in China, which are mandated by the government, have been steadily increasing. There were minimum wage increases implemented in a portion of our manufacturing locations in the second quarter of 2013, with wage increases in our remaining locations taking effect in the third quarter of 2013. Such wage rate increases have and will continue to have an unfavorable impact on our overall profit margin in the future.

 

Income Taxes. Our effective income tax rate is affected by the proportion of our income earned in higher tax jurisdictions, such as those in Europe and the United States, and income earned in lower tax jurisdictions, such as Singapore, China and Hong Kong.  This mix of income can vary significantly from one period to another.  Additionally, our effective income tax rate will be impacted from period to period by significant transactions and the deductibility or non-deductibility of severance and impairment costs and other similar costs as well as by changes in our net deferred tax assets valuation allowance.  Changes in operations, tax legislation, estimates, judgments and forecasts may also affect our tax rate from period to period.

Critical Accounting Policies

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Revenue Recognition

Historically, we have engaged in divestitures to streamline our operations, to focus on our core businesses, to reduce our debt and to strengthen our financial position.  When the operations and cash flows of the divestiture have been or will be eliminated from our ongoing operations and, also, when we do not expect to have any significant continuing involvement with such operations, we may report the business that has either been disposed of, or is classified as held for sale, as a discontinued operation.  If we plan to dispose of the business by sale, we are required to report the divested business or assets at the lower of its carrying amount or at its estimated fair value less costs to sell in the period it is classified as held for sale.  These assessments require judgments and estimates which include determining when it is appropriate to classify the business as held for sale, if the business meets the specifications of a discontinued operation, determining the fair value of the business and determining the level and type of involvement, if any, we will have with the disposed business in the future.   Furthermore, when removing the divested business or assets from our Consolidated Balance Sheets, and, if necessary, restating results in prior periods, we are required to make assumptions, judgments and estimates regarding, among other things, the assets, liabilities and activities of the business and their relation to our continuing businesses.

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Changes in our assumptions concerning projected financial results or any of the other underlying assumptions could have a significant impact on the fair value of the trade names or the amount of the impairment charge. Additionally, significant changes in any of these estimates or assumptions in the future may result in a future impairment. Changes in key assumptions would have affected the impairment charge recorded in 2013 as follows (in millions, except percentages):

In the fourth quarter of 2012, we reassessed our previous assertion with regard to permanently invested foreign earnings.  As a result of our assessment of our potential cash needs in the U.S. in conjunction with certain distributions in 2012, we determined that $40.0 million of previously unremitted foreign earnings would not be permanently reinvested and therefore we recorded a deferred tax liability in 2012 for the net tax-effect of these earnings. Aside from this change, we have generally not provided for U.S. and foreign withholding taxes on our non-U.S. subsidiaries’ undistributed earnings, which are considered permanently reinvested. We expect our foreign earnings will be used to service our non-U.S. debt and maintain our foreign operations, and thus are permanently reinvested outside of the U.S. The majority of our cash requirements are generated by our non-U.S. subsidiaries, as our manufacturing and operations are primarily outside of the U.S., and we anticipate that a significant portion of our opportunities for future growth will be outside the U.S.  In addition, we expect to use a significant portion of the cash to service debt outside of the U.S.  We continue to maintain our permanent reinvestment assertion with regard to the remaining undistributed earnings outside of the U.S. As of December 27, 2013, the amount of cash associated with permanently reinvested foreign earnings was approximately $14.3 million. We have not, nor do we anticipate the need to repatriate these funds to the U.S.  However, if funds are repatriated, we would need to accrue and pay taxes on such amounts.

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Defined Benefit Plans

Severance, Impairment and Other Associated Costs

New Accounting Pronouncements

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Year ended December 27, 2013 compared to the year ended December 28, 2012

Net sales.  Net sales for the year ended December 27, 2013 decreased by $17.5 million, or 4.7%, to $355.7 million compared with $373.2 million in the prior-year period, reflecting ongoing economic and industry weakness which constrained demand for Network and Power products.

Gross profit. Gross profit for the year ended December 27, 2013 increased by $7.4 million to $81.7 million compared to $74.3 million in the prior-year period.  Gross profit as a percentage of net sales increased to 23.0% for the year ended December 27, 2013 as compared to 19.9% for the prior-year period. The higher gross profit margin compared to the prior year reflects the favorable effects of manufacturing plant consolidations and other cost reduction programs and resulting operational efficiencies which more than offset the labor cost increases in China. In addition, we incurred ramp up costs and inefficiencies in the prior year associated with the growth in our Wireless segment.

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Selling, general and administrative expenses. Selling, general and administrative expenses decreased by $0.8 million, or 1.1%, to $73.9 million in the year ended December 27, 2013 compared with $74.7 million in the prior year, which included a $1.0 million favorable impact of reaching an agreement on intellectual property licensing.  The decrease compared to prior year was primarily due to aggressive expense reduction actions and sustained scrutiny over all discretionary spending.

Interest.   Net interest expense increased by $7.1 million to $24.5 million compared with $17.4 million in the prior year.  The increase was primarily due to higher borrowing rates and debt levels compared to the prior-year period. Also, interest expense increased due to higher debt fee and discount amortization from our Oaktree term loans.

Other.  During fiscal 2013, we incurred $2.4 million of other expense, net, which consisted of a $2.9 million loss for the change in fair value on the warrant liability we issued to Oaktree in connection with the Oaktree recapitalization, partially offset by a $0.7 million gain on the sale of assets related to two manufacturing plants in China and a trade name, as well as foreign currency losses related to changes in the various currencies of our intercompany lending program of $0.3 million.  During fiscal 2012, other expense, net primarily consisted of a $4.2 million unrealized gain for the change in fair value on the warrant liability issued to Oaktree and a $0.7 million gain on the sale of assets related to the sale of equipment and a manufacturing plant in China.

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Income taxes.  The effective tax rate for the year ended December 27, 2013 was a tax expense of 19.4% compared to 28.2% for the year ended December 28, 2012. The 2013 effective tax rate was primarily impacted by assessments and permanent non-deductible expenses in foreign jurisdictions.  The 2012 effective tax rate was primarily impacted by a tax reserve that was recorded in connection with an audit in a foreign jurisdiction, as well as U.S. and foreign withholding taxes incurred. The 2012 tax rate was not impacted by the change we made in fiscal 2012 to our assertion of previously permanently reinvested foreign earnings and the establishment of a deferred tax liability, due to the offsetting reversal of available valuation allowance in the U.S.

Discontinued operations. During fiscal 2012, our results from discontinued operations included $0.3 million of costs relating to certain legal matters related to our former Medtech operations.

Our primary capital requirements are to fund working capital needs and operating expenses, meet required interest and principal payments, and fund capital expenditures. In the past, our capital resources have primarily consisted of cash flows from operations and borrowings under previous credit facilities. Since 2008, our revenues and earnings have decreased significantly due to a variety of factors, including recessionary economic conditions, weaknesses in our specific markets, and the negative effects of leverage and debt service costs, including interest expense.  As a result, we faced liquidity and capital resource challenges, and have also suffered a decline in the market capitalization of our common stock.

In response to these liquidity and capital resource challenges, in November 2012, we entered into agreements with Oaktree to recapitalize our company.  In February 2014, we announced that we had reached agreements with the holders of approximately $20.7 million of our $22.3 million of outstanding senior convertible notes due in December 2014 to exchange their notes for $14.9 million of new Term B Loans, 1.1 million shares of common stock, and $2.1 million of cash. The exchange transactions will reduce our outstanding debt and the amount of cash required for debt service and will extend the maturity of the exchanged debt beyond 2014, allowing us to further focus on our long term strategy and the execution of our business plans.

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Cash Flow from Operating Activities

Net cash used in financing activities during the year ended December 27, 2013 was $2.7 million, consisting of cash used in the payment of debt issuance costs of $2.2 million, as well an increase in restricted cash of $0.5 million related to amounts held in escrow in connection with certain post-closing obligations under the Oaktree credit agreement.

Net cash provided by financing activities during the year ended December 28, 2012 was $23.8 million. The primary source of cash from financing activities was $86.0 million of proceeds from long-term borrowings.  The primary use of cash for financing activities included a $55.0 million repayment of our senior credit facility, $6.0 million of debt issuance costs relating to our senior credit facility amendment in March 2012 and refinancing with Oaktree, and a $1.3 million dividend paid to minority shareholders of our majority-owned non-U.S. subsidiary.

Financing Transactions

On November 20, 2012, we entered into a credit agreement with certain affiliates of investment funds managed by Oaktree Capital Management, L.P. (such affiliates of such investment funds collectively, “Oaktree”) pursuant to which Oaktree extended a new $75.0 million senior secured Term A Loan and exchanged $28.5 million of principal and unpaid interest of our outstanding senior convertible notes for a new $28.5 million secured Term B Loan.  We used approximately $55.0 million of the proceeds to retire our senior credit facility and are using the remaining $20.0 million for working capital, transaction fees, general business purposes, and cash on hand.

On March 11, 2013, we entered into a forbearance and commitment letter with Oaktree (the “Letter Agreement”). Oaktree agreed, subject to certain specified conditions to forbear from taking any action, including acceleration of payment of the term loans, if we fail to satisfy the secured leverage ratio, the total net debt leverage ratio, and the minimum liquidity covenants included in the credit agreement for the fourth quarter of 2012 and for each quarter in 2013. In addition, the credit agreement includes events of default, including receipt of a judgment or order for payment in excess of the threshold amount as defined in the credit agreement. With respect to the Halo Electronics case and the Turkish legal matter, subject to certain specified conditions, Oaktree agreed to forbear from taking any action including acceleration of payment of the term loans in the event of judgments or orders of payments that arise through January 1, 2014.  Refer to further discussion of these legal matters in Note 10, Commitments and contingencies, to the accompanying Consolidated Financial Statements.

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On February 21, 2014, we entered into agreements with the holders of approximately $20.7 million of the $22.3 million of our senior convertible notes to exchange their notes for new Term B Loans, shares of our common stock, and cash (collectively “the Exchange Transaction”).  In aggregate, the Exchange Transaction resulted in the issuance of $14.9 million of new Term B Loans, 1.1 million shares of our common stock, and $2.1 million of cash in exchange for approximately $20.7 million of the outstanding senior convertible notes.  The Term B Loans are identical to the Term B Loan issued to Oaktree in November 2012.

Term Loans

As of December 27, 2013, we have $114.2 million of outstanding principal on our term loans ($90.0 million, net of discount). On November 20, 2012, we entered into a credit agreement with Oaktree pursuant to which Oaktree extended a new $75.0 million senior secured Term A Loan and exchanged $28.5 million of principal and unpaid interest of our outstanding senior convertible notes for a new $28.5 million secured Term B Loan.  We used approximately $55.0 million of the proceeds to retire our senior credit facility and are using the remaining $20.0 million for working capital, transaction fees, general business purposes, and cash on hand.

On February 21, 2014, we issued an additional $14.9 million of Term B Loans to certain holders of our senior convertible notes in connection with the Exchange Transaction.  Refer to discussion of the Exchange Transaction below.

The interest rate on the Term A Loan is 12.0% per annum, and the interest rate on the Term B Loan is 10.0% per annum.  Interest on each term loan may, at our election, be paid in cash or paid in kind ("PIK") (in the form of additional principal) until November 2015.  We plan to pay the interest due on these term loans in the form of additional principal through November 2015.  Interest is due on the last business day of the calendar quarter.

During the year ended December 27, 2013, the principal balance on the term loans increased by $10.7 million due to PIK interest elections made during the year.  Additionally, under the credit agreement, we are required to pay non-U.S. withholding tax with respect to the accrued interest on behalf of Oaktree.  During fiscal year 2013, we remitted approximately $1.9 million of foreign withholding taxes on interest accrued on the term loans.

These term loans mature on November 20, 2017 and are secured by a first priority lien on the collateral, which includes the shares and assets of certain domestic and international subsidiaries.  The term loans are non-amortizing and may be prepaid without any penalty.  While the Term B Loan is not junior in relative lien priority to the Term A Loan, the Term B Loan may not be repaid until the Term A Loan is paid in full.

Outstanding term loans are subject to financial covenants computed on a quarterly basis as of the most recent quarter end.  In accordance with the Letter Agreement, Oaktree agreed to forbear from taking any action, including acceleration of payment of the term loans, if we failed to satisfy the secured leverage ratio, the total net debt leverage ratio, and the minimum liquidity covenants included in the credit agreement for each quarter in 2013.

Under the credit agreement, as amended in February 2014, the secured leverage ratio requirements, as defined in the agreement, are set forth in the table below:

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In addition, our capital expenditures are limited to $10.0 million in fiscal 2013, $12.0 million in fiscal 2014, and $14.0 million in fiscal 2015 and in each fiscal year thereafter.

 

We are also subject to financial covenants with respect to the $23.0 million loan commitment in the Letter Agreement.  The effectiveness of the loan commitment is subject to compliance with certain covenants including the following financial covenants for each quarter in 2013: the secured leverage ratio is not to exceed 13.00 to 1.00 and the total net debt leverage ratio is not to exceed 14.00 to 1.00.  As of December 27, 2013, we were in compliance with these financial covenants.  The loan commitment expires on March 31, 2014.

Upon closing of the Oaktree term loans in November 2012, we issued to Oaktree 3.7 million shares of our common stock and a warrant to issue 19.9% of the common stock of a wholly-owned subsidiary of the Company.  The warrant was issued pending shareholder approval of an amendment to the Company's Articles of Incorporation that would authorize the issuance of Series A non-voting preferred stock. Upon approval of the amendment at a special shareholder meeting on January 21, 2013, the warrant was terminated and 1,000 shares of Series A non-voting preferred stock of the Company were issued to Oaktree.

In accordance with the Investment Agreement, the Series A preferred stock was automatically convertible into such number of shares of our common stock that would result in Oaktree having received 67.9% of our total common stock (on a pro forma fully diluted basis as of November 20, 2012, and without giving effect to shares of common stock and warrants previously owned by Oaktree).  In conjunction with the Exchange Transaction, we amended the Investment Agreement in February 2014 such that the Series A preferred stock was convertible into shares of common stock at such time that we acquired and cancel at least 90% of the $22.3 million of our outstanding senior convertible notes. In accordance with the Investment Agreement, as amended, the Series A preferred stock was converted into 8.2 million shares of our common stock upon completion of the Exchange Transaction on February 21, 2014.  Refer to further discussion in Note 7, Preferred stock, to the accompanying Consolidated Financial Statements.

 

Convertible Note Exchange Transaction

At December 27, 2013, we had $22.3 million of outstanding principal on our senior convertible notes that will mature on December 15, 2014. The notes bear a coupon rate of 7.0% per annum.

On February 21, 2014, we entered into agreements with the holders of approximately $20.7 million of the $22.3 million of our senior convertible notes to exchange their notes for new Term B Loans, shares of our common stock, and cash.  In aggregate, the Exchange Transaction resulted in the issuance of $14.9 million of new Term B Loans, 1.1 million shares of our common stock, and $2.1 million of cash in exchange for approximately $20.7 million of the outstanding senior convertible notes.  The Term B Loans are identical to the Term B Loan issued to Oaktree in November 2012.

Following the Exchange Transaction, we have $1.6 million of outstanding principal on our senior convertible notes.  Pursuant to the Series A preferred stock conversion and the resulting issuance of 8.2 million shares of common stock to Oaktree, a “change in control” under the terms of the senior convertible notes was deemed to have occurred since Oaktree beneficially owns a majority of the outstanding shares of our common stock. Such change in control triggered our obligation to repurchase all remaining outstanding senior convertible notes.  We expect to provide notice on March 13, 2014 to all holders of outstanding senior convertible notes that a change in control occurred.  We will be required to pay the $1.6 million of outstanding amounts due on either May 1, 2014, or December 15, 2014, the maturity date, depending upon elections made by the note holders.

Senior Credit Facility

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On September 27, 2012, the New York Stock Exchange (the “NYSE” or the “Exchange”) notified us that we had fallen below the NYSE’s continued listing standard for average market capitalization because we failed to maintain an average market capitalization over a consecutive 30-day trading period of at least $50.0 million and that we must achieve such an average market capitalization over a consecutive 30-day trading period on or before March 27, 2014.  On November 12, 2012, we submitted a plan for remediation of the deficiency related to the market capitalization and stockholders’ equity requirements to the NYSE, which they accepted on January 3, 2013. The plan included our consideration of other options regarding the eventual retirement of the senior convertible notes, either before or at maturity.  We are required to provide the Exchange staff with updates in connection with the initiatives of the plan of compliance at least quarterly or upon the Exchange’s request and the Exchange staff will review us periodically for compliance with the plan during the extension periods.  Failure to make progress consistent with the compliance plan or to regain compliance with the continued listing standards by March 27, 2014 could result in our common stock being delisted from the Exchange.

On October 10, 2012, the NYSE notified us that we failed to meet an additional listing standard because the average closing share price of our common stock was below the NYSE’s minimum standard of $1.00 per share during a consecutive 30 trading-day period.  On May 22, 2013, we implemented a 1-for-10 reverse stock split of our common stock following shareholder approval at the annual meeting. As a result of the split, every ten shares of issued and outstanding common stock was converted into one issued and outstanding share of common stock and reduced our total common shares outstanding on the effective date from 79.5 million shares to 7.9 million shares. On July 3, 2013, the NYSE notified the Company that our stock price was above the NYSE’s minimum requirement of $1.00 based on a 30-trading day average.  Accordingly, the Company is now in compliance with the $1.00 continued listing criterion.

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Contractual Obligations

(1)Excludes other obligations under employment contracts that are generally only payable upon a change of control.

 

(2)

The Term A and Term B loans permit us to pay interest in kind through November 2015, in lieu of cash payment, such that amounts due for interest are added to the outstanding balance of the facility.  This table assumes that interest on these loans will be paid in kind through November 2015.

Off-Balance Sheet Arrangements

Item 8

Financial Statements and Supplementary Data

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9a

Controls and Procedures

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A company’s internal control over financial reporting is a process designed to provide reasonable, not absolute, assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Item 9b

Other Information

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Item 10

Directors, Executive Officers and Corporate Governance

Item 11

Executive Compensation

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The disclosure required by this item is incorporated by reference in our definitive proxy statement to be used in connection with our 2014 Annual Shareholders Meeting.

Item 13

Certain Relationships, Related Transactions and Director Independence

The disclosure required by this item is incorporated by reference in our definitive proxy statement to be used in connection with our 2014 Annual Shareholders Meeting.

Item 14

Principal Accounting Fees and Services

The disclosure required by this item is incorporated by reference in our definitive proxy statement to be used in connection with our 2014 Annual Shareholders Meeting.

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Item 15

Exhibits and Financial Statement Schedules

Information required by this item is contained in the “Exhibit Index” found on page 74 through 77 of this report.

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Report of Independent Registered Public Accounting Firm

/s/ GRANT THORNTON LLP

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Report of Independent Registered Public Accounting Firm

We have audited the accompanying consolidated balance sheet of Pulse Electronics Corporation and subsidiaries (the Company) as of December 28, 2012, and the related consolidated statements of operations, comprehensive loss, cash flows, and changes in shareholders’ deficit for the year then ended. These consolidated financial statements the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pulse Electronics Corporation and subsidiaries as of December 28, 2012 and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

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Pulse Electronics Corporation and Subsidiaries

Consolidated Balance Sheets

 

See accompanying Notes to Consolidated Financial Statements.

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Pulse Electronics Corporation and Subsidiaries

Pulse Electronics Corporation and Subsidiaries

See accompanying Notes to Consolidated Financial Statements.

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Pulse Electronics Corporation and Subsidiaries

See accompanying Notes to Consolidated Financial Statements.

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Pulse Electronics Corporation and Subsidiaries

In May 2013, the Company effected a 1-for-10 reverse stock split. All share and per share amounts have been retroactively restated to reflect the reverse split.

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		2013				2012
Finished goods		$	21,573			$	18,563
Work in progress			3,570				4,276
Raw materials and supplies			11,583				8,595
		$	36,726			$	31,434

		2013				2012
Land		$	745			$	745
Buildings and improvements			8,374				8,047
Machinery and equipment			77,522				75,562
Software			8,069				2,753
Construction in progress			1,900				7,007
Property, plant and equipment, gross			96,610				94,114
Accumulated depreciation			(68,655	)			(64,708	)
		$	27,955			$	29,406

		2013				2012
Income taxes payable		$	6,493			$	6,631
Accrued compensation			10,003				8,893
Accrued restructuring costs			493				733
Deposit on pending divestitures (Note 16)			--				6,100
Legal reserve			5,302				5,716
Other accrued expenses			14,044				16,124
		$	36,335			$	44,197

		2013				2012
Intangible assets subject to amortization  (definite lives):
Customer relationships		$	3,300			$	3,300
Technology			2,000				2,000
Total			5,300				5,300
Accumulated amortization:
Customer relationships			(3,300	)			(2,833	)
Technology			(2,000	)			(2,000	)
Total			(5,300	)			(4,833	)
Net intangible assets subject to amortization			--				467
Intangible assets not subject to amortization (indefinite lives):
Tradename			2,040				2,600
		$	2,040			$	3,067

		2013				2012
Oaktree term loans		$	114,237			$	103,514
Senior convertible notes			22,315				22,315
Less: Oaktree term loans discount			(24,207	)			(29,076	)
			112,345				96,753
Less: current portion of long-term debt			(22,315	)			--
		$	90,030			$	96,753

		Term A				Term B				Total
Amount borrowed		$	75,000			$	28,514			$	103,514
Discount associated with warrant and common stock			(21,449	)			(8,154	)			(29,603	)
Carrying value, November 20, 2012			53,551				20,360				73,911
Accretion of discount			377				150				527
Carrying value, December 28, 2012			53,928				20,510				74,438
Accretion of discount			3,497				1,373				4,870
PIK Interest			8,155				2,567				10,722
Carrying value, December 27, 2013		$	65,580			$	24,450			$	90,030

Test Period End Date(s)	Secured Leverage Ratio
March 31, 2014 through December 31, 2014	11.00 to 1.00
March 31, 2015 through December 31, 2015	9.50 to 1.00
March 31, 2016 through December 31, 2016	8.00 to 1.00
March 31, 2017 through December 31, 2017	5.00 to 1.00

Year Ending
2014		$	22,315
2015			--
2016			--
2017			114,237
2018			--
Thereafter			--
		$	136,552

		2013				2012
Domestic		$	(14,832	)		$	(138,770	)
Non-U.S.			(7,808	)			113,999
Total		$	(22,640	)		$	(24,771	)

Current:		2013				2012
Federal		$	462			$	602
State and local			55				102
Non-U.S.			2,952				8,234
			3,469				8,938
Deferred:
Federal			140				124
State and local			(55	)			--
Non-U.S.			829				(2,083	)
			914				(1,959	)
Net tax expense		$	4,383			$	6,979

		2013				2012
U.S. statutory federal income tax rate			35	%			35	%
Decrease (increase) resulting from:
State and local income taxes, net of federal tax effect			--				(1	)
Non-deductible expenses and other			(21	)			(62	)
Withholding taxes			(5	)			(9	)
Tax credits			5				62
Tax effect of valuation allowance			(8	)			(214	)
Foreign rate differential			(25	)			161
Effective tax rate			(19	) %			(28	) %

		2013				2012
Unrecognized tax benefits at the beginning of the year		$	7,880			$	17,300
Additions to tax positions related to current year			1,202				1,415
Reductions to tax positions related to prior years			(1,058	)			(7,090	)
Lapses in statutes of limitation			(4,502	)			(3,745	)
Unrecognized tax benefits at the end of the year		$	3,522			$	7,880

Assets:		2013				2012
Inventories		$	936			$	1,132
Plant and equipment			5,145				6,155
Vacation pay and other compensation			234				218
Pension expense			1,100				928
Stock awards			1,194				68
Accrued liabilities			1,896				1,522
Net operating losses – federal, state and foreign			19,739				22,216
Tax credits			7,368				10,780
Acquired intangibles			2,851				4,120
Other			5,844				8,246
Total deferred tax assets			46,307				55,385
Valuation allowance			(38,191	)			(44,697	)
Net deferred tax assets		$	8,116			$	10,688
Liabilities:
Foreign earnings not permanently invested		$	9,243			$	9,535
Restructuring			1,551				1,551
Acquired intangibles			583				529
Other			3,653				3,282
Total deferred tax liabilities			15,030				14,897
Net deferred tax liabilities		$	(6,914	)		$	(4,209	)
Short-term deferred tax assets		$	1,305			$	1,056
Short-term deferred tax liabilities			(990	)			(92	)
Long-term deferred tax assets			4,557				2,443
Long-term deferred tax liabilities			(11,786	)			(7,616	)
Net deferred tax liabilities		$	(6,914	)		$	(4,209	)

		2013				2012
Service cost		$	19			$	--
Interest cost			1,616				1,685
Expected return on plan assets			(1,692	)			(1,615	)
Amortization of transition obligation			--				5
Amortization of prior service costs			--				1
Recognized actuarial gains			14				--
Curtailment gains			(16	)			(18	)
Net periodic pension cost (income)		$	(59	)		$	58

		2013				2012
Change in benefit obligation:
Projected benefit obligation at beginning of year		$	40,636			$	38,195
Service cost			19				--
Interest cost			1,616				1,685
Actuarial (gains) losses			(3,280	)			2,969
Benefits paid			(2,056	)			(2,152	)
Plan curtailments			(16	)			(61	)
Projected benefit obligation at end of year		$	36,919			$	40,636
Change in fair value of plan assets:
Fair value of plan assets at beginning of year		$	35,117			$	33,569
Actual return on plan assets			(1,644	)			3,592
Employer contributions			123				108
Benefits paid			(2,056	)			(2,152	)
Fair value of plan assets at end of year		$	31,540			$	35,117
Amounts recognized on the Consolidated Balance Sheets:
Non-current assets		$	263			$	235
Non-current liabilities			(5,642	)			(5,754	)
Net amount recorded		$	(5,379	)		$	(5,519	)

		2013				2012
Actuarial losses		$	(4,065	)		$	(4,027	)
Plan curtailment			(84	)			(84	)
Amortization of prior service costs			(20	)			(20	)
Amortization of transition obligations			(7	)			(7	)
Accumulated other comprehensive income		$	(4,176	)		$	(4,138	)

		2013				2012
Projected benefit obligation		$	36,682			$	40,477
Accumulated benefit obligation		$	36,760			$	40,384
Plan assets		$	31,118			$	34,723

Asset category:		2013				2012
Equity securities			11	%			11	%
Fixed income securities			87	%			89	%
Other			2	%			0	%
Total			100	%			100	%

		2013				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Plan assets per asset category (1):
Cash and cash equivalents		$	0.1			$	0.1			$	--			$	--
Fixed income securities:
Corporate bonds (2)			27.5				27.5				--				--
Short-term debt securities (3)			0.5				0.5				--				--
Equity securities:
Domestic small-cap value (4)			1.0				1.0				--				--
Domestic mid-cap value (5)			1.9				1.9				--				--
International diversified value (6)			0.5				0.5				--				--
Fair value of plan assets		$	31.5			$	31.5			$	--			$	--

		2012				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Plan assets per asset category (1):
Cash and cash equivalents		$	0.1			$	0.1			$	--			$	--
Fixed income securities:
Corporate bonds (2)			30.8				30.8				--				--
Short-term debt securities (3)			0.5				0.5				--				--
Equity securities:
Domestic small-cap value (4)			1.1				1.1				--				--
Domestic mid-cap value (5)			2.1				2.1				--				--
International diversified value (6)			0.5				0.5				--				--
Fair value of plan assets		$	35.1			$	35.1			$	--			$	--

		2013				2012
Discount rate			4.9	%			4.1	%
Annual compensation increases			N/	A			N/	A
Expected long-term rates of return on plan assets			5.0	%			5.0	%

Year Ending
2014		$	2,140
2015			2,115
2016			2,189
2017			2,206
2018			2,235
Thereafter			26,034
		$	36,919

Year Ending
2014		$	4,083
2015			2,625
2016			1,572
2017			846
2018			536
Thereafter			797
		$	10,459

		Defined Benefit Plan Adjustments				Currency Translation Adjustments				Unrealized Holding Losses on Securities				Total
Balance at December 30, 2011		$	(3,211	)		$	25,176			$	12			$	21,977
Current year changes			(922	)			(352	)			--				(1,274	)
Balance at December 28, 2012			(4,133	)			24,824				12				20,703
Current year changes			(43	)			402				(5	)			354
Balance at December 27, 2013		$	(4,176	)		$	25,226			$	7			$	21,057

		2013				2012
Restricted stock and units		$	898			$	957
Stock options			1,016				932
Total after-tax stock-based compensation expense		$	1,914			$	1,889
Total stock-based compensation included in:
Selling, general and administrative expenses		$	1,914			$	1,889

		2013								2012
		Shares				Weighted Average Stock Grant Price (Per Share)				Shares				Weighted Average Stock Grant Price (Per Share)
Opening nonvested restricted stock and units			104			$	26.92				58			$	39.70
Granted			284				3.80				59				11.17
Vested			(55	)			17.15				(10	)			13.57
Forfeited/canceled			(33	)			7.82				(3	)			10.63
Ending nonvested restricted stock and units			300			$	8.91				104			$	26.92

		2013												2012
		Shares				Weighted Average Option Exercise Price (Per Share)				Aggregate Intrinsic Value				Shares				Weighted Average Option Exercise Price (Per Share)				Aggregate Intrinsic Value
Opening stock options outstanding			127			$	45.10								125			$	46.40
Granted			253				3.82								4				7.30
Exercised			--				--								--				--
Forfeited/canceled			(37	)			12.69								(2	)			48.32
Ending stock options outstanding			343				18.13				--				127				45.10				--
Ending stock options exercisable			54			$	45.44				--				24			$	43.70				--

		2013				2012
Dividend yield			0.0	%			0.0	%
Volatility			97.6	%			81.8	%
Risk-free interest rate			0.8	%			0.8	%
Expected life (years)			4.8				4.8

		2013				2012
Net loss from continuing operations		$	(27,023	)		$	(31,750	)
Net loss from discontinued operations			--				(345	)
Less: Net earnings (loss) attributable to non-controlling interest			111				(109	)
Net loss attributable to Pulse Electronics Corporation		$	(27,134	)		$	(31,986	)
Basic loss  per share:
Shares			7,994				4,667
Continuing operations		$	(3.39	)		$	(6.78	)
Discontinued operations			--				(0.07	)
Per share amount		$	(3.39	)		$	(6.85	)
Diluted loss  per share:
Shares			7,994				4,667
Continuing operations		$	(3.39	)		$	(6.78	)
Discontinued operations			--				(0.07	)
Per share amount		$	(3.39	)		$	(6.85	)

Balance accrued at December 30, 2011		$	4.2
Net expense			5.9
Cash payments			(8.2	)
Non-cash charges			(1.2	)
Balance accrued at December 28, 2012			0.7
Net expense			3.3
Cash payments			(1.6	)
Non-cash charges			(1.9	)
Balance accrued at December 27, 2013		$	0.5

	Fair Value Measurements at December 27, 2013
	Total				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
Long-lived assets held for sale		$	1.9			$	--			$	--			$	1.9
Total		$	1.9			$	--			$	--			$	1.9

		Fair Value Measurements at December 28, 2012
		Total				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
Long-lived assets held for sale		$	7.5			$	--			$	--			$	7.5
Total Assets		$	7.5			$	--			$	--			$	7.5
Liabilities:
Warrant Liability		$	12.2			$	--			$	--			$	12.2
Total Liabilities		$	12.2			$	--			$	--			$	12.2

		Warrant liability				Assets held for sale
Fair value at December 30, 2011		$	--			$	8.2
Issuance of warrant liability			16.4				--
Change in fair value (included in other expense, net)			(4.2	)			--
Long-lived assets sold			--				(0.7	)
Fair value at December 28, 2012			12.2				7.5
Change in fair value (included in other expense, net)			2.9				--
Settlement of warrant liability			(15.1	)			--
Long-lived assets sold			--				(5.7	)
Foreign currency impact			--				0.1
Fair value at December 27, 2013		$	--			$	1.9

		2013				2012
Supplemental cash flow disclosures of non-cash investing and financing activities:
Capital expenditures included in accounts payable		$	391			$	1,548
Debt issuance costs included in accounts payable			1,508				1,247
Common stock and warrant issued in connection with Oaktree recapitalization			--				29,603
Warrant issued in connection with senior credit facility amendment			--				2,013
Cash payments made during the year:
Income taxes			3,257				10,039
Interest		$	3,436			$	6,973

		Quarter Ended
2013:		March 29				June 28				Sept. 27				Dec. 27
Net sales		$	84,806			$	88,258			$	94,840			$	87,772
Gross profit			20,181				20,750				21,646				19,090
Net loss from continuing operations			(7,130	)			(5,221	)			(7,588	)			(7,084	)
Net loss (earnings) attributable to non-controlling interest			14				(9	)			(44	)			(72	)
Net loss  attributable to Pulse Electronics Corporation		$	(7,116	)		$	(5,230	)		$	(7,632	)		$	(7,156	)
Basic loss per share		$	(0.89	)		$	(0.65	)		$	(0.95	)		$	(0.89	)
Diluted loss per share		$	(0.89	)		$	(0.65	)		$	(0.95	)		$	(0.89	)

		Quarter Ended
2012:		March 30				June 29				Sept. 28				Dec. 28
Net sales		$	94,135			$	100,383			$	88,233			$	90,418
Gross profit			18,398				19,204				16,952				19,717
Net loss from continuing operations			(4,303	)			(6,494	)			(8,924	)			(12,029	)
Net loss from discontinued operations			--				--				--				(345	)
Net loss (earnings) attributable to non-controlling interest			197				97				(35	)			(150	)
Net loss attributable to Pulse Electronics Corporation		$	(4,106	)		$	(6,397	)		$	(8,959	)		$	(12,524	)
Basic loss earnings per share		$	(0.99	)		$	(1.53	)		$	(2.11	)		$	(2.05	)
Diluted loss earnings per share		$	(0.99	)		$	(1.53	)		$	(2.11	)		$	(2.05	)

		2013				2012
Net sales:
Network		$	150,570			$	158,089
Power			111,544				120,145
Wireless			93,562				94,935
Total net sales		$	355,676			$	373,169
Operating income (loss) from continuing operations before severance, impairment and other associated costs, debt restructuring and related costs, legal reserve and costs related to unsolicited takeover attempt:
Network		$	4,839			$	3,519
Power			7,607				5,941
Wireless			(4,673	)			(9,901	)
Operating income (loss) excluding severance, impairment and other associated costs, debt restructuring and related costs, legal reserve and costs related to unsolicited takeover attempt			7,773				(441	)
Severance, impairment and other associated costs			3,342				5,932
Debt restructuring and related costs			--				1,198
Legal reserve			147				5,523
Costs related to unsolicited takeover attempt			--				(545	)
Operating income (loss)			4,284				(12,549	)
Interest expense, net			(24,492	)			(17,435	)
Other income (expense) , net			(2,432	)			5,213
Loss from continuing operations before income taxes		$	(22,640	)		$	(24,771	)

		2013				2012
Depreciation and amortization:
Network		$	2,102			$	1,814
Power			1,286				2,119
Wireless			4,005				3,891
Total		$	7,393			$	7,824

		2013				2012
Sales to customers in:
China		$	182,033			$	190,845
United States			46,528				46,395
Asia, other than China			52,683				56,969
Europe			66,520				67,575
Other			7,912				11,385
Total		$	355,676			$	373,169

		2013				2012
Net property, plant and equipment located in:
China		$	14,723			$	16,127
United States			11,614				12,034
Korea			1,045				575
Europe			538				631
Other			35				39
Total		$	27,955			$	29,406

	Exhibit Index
3.1	Amended and Restated Articles of Incorporation of Pulse Electronics Corporation, filed with the Pennsylvania Department of State on January 22, 2013 (incorporated by reference to Exhibit 3.1 to our Form 8-K dated January 21, 2013).
3.1(2)	Amendment to Amended and Restated Articles of Incorporation of Pulse Electronics Corporation, dated February 21, 2014 (incorporated by reference to Exhibit 3.1(2) to our Form 8-K dated February 21, 2014).
3.2	Statement with Respect to Shares, filed with the Pennsylvania Department of State on January 22, 2013 (incorporated by reference to Exhibit 3.1 to our Form 8-K dated January 21, 2013).
3.3	By-Laws, amended and restated as of October 28, 2011 (incorporated by reference to Exhibit 3.3 to our Form 8-K dated October 28, 2011).
3.3(1)	Amended and Restated Articles of Incorporation of Pulse Electronics Corporation (incorporated by reference to Exhibit 3.3 to our Form 8-K dated May 17, 2013).
4.6	Indenture between Technitrol, Inc. and Wells Fargo Bank, National Association, dated as of December 22, 2009 (incorporated by reference to Exhibit 4.1 to our Form 8-K dated December 22, 2009).
4.7	Form of 7.00% Convertible Senior Note due 2014 (incorporated by reference to Exhibit 4.2 to our Form 8-K dated December 22, 2009).
10.2	Restricted Stock Plan II, amended and restated as of November 8, 2010 (incorporated by reference to Exhibit 10.2 to our Form 10-K for the year ended December 30, 2011).
10.3	2001 Stock Option Plan, amended and restated as of November 8, 2010 (incorporated by reference to Exhibit 10.3 to our Form 10-K for the year ended December 30, 2011).
10.3(1)	Form of Stock Option Agreement (incorporated by reference to 10.3 (1) to our Form 10-K for the year ended December 28, 2012).
10.4	Technitrol, Inc. Board of Directors Stock Plan, as amended (incorporated by reference to Exhibit 10.4 to our Form 8-K dated May 15, 2008).
10.5(5)	Amendment No. 3 dated as of March 9, 2012 among Pulse Electronics Corporation (formerly known as Technitrol, Inc.) and certain subsidiaries, JP Morgan Chase Bank, N.A. as administrative agent, swing line lender, and a letter of credit issuer, and other lenders party thereto (incorporated by reference to 10.5 (5) to our Form 10-K for the year ended December 30, 2011).
10.6	Warrant Agreement dated as of March 9, 2012 among Pulse Electronics Corporation (formerly known as Technitrol, Inc.) and certain subsidiaries, JP Morgan Chase Bank, N.A. as administrative agent, swing line lender, and a letter of credit issuer, and other lenders party to Amendment No. 3 to the Credit Agreement dated as of March 9, 2012 (incorporated by reference to Exhibit 10.11 to our Form 10-K for the year ended December 30, 2011).
10.6(1)	Warrant Shares Registration Rights Agreement dated as of March 9, 2012 among Pulse Electronics Corporation (formerly known as Technitrol, Inc.) and certain subsidiaries, JP Morgan Chase Bank, N.A. as administrative agent, swing line lender, and a letter of credit issuer, and other lenders party to Amendment No. 3 to the credit agreement dated as of March 9, 2012 (incorporated by reference to 10.6 (1) to our Form 10-K for the year ended December 30, 2011).
10.8(1)	Technitrol, Inc. Grantor Trust Agreement dated July 5, 2006 between Technitrol, Inc. and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.8(1) to our Form 8-K dated July 11, 2006).
10.8(2)	Technitrol, Inc. Supplemental Retirement Plan amended and restated effective December 31, 2004 (incorporated by reference to Exhibit 10.8(2) to our Form 8-K dated December 31, 2008).
10.8(3)	Agreement for Settlement of Benefits dated September 24, 2009 (incorporated by reference to Exhibit 10.8(3) to our Form 8-K dated September 24, 2009).

10.11	Form of Indemnity Agreement (incorporated by reference to Exhibit 10.11 to our Form 10-K for the year ended December 30, 2011).
10.12	Technitrol, Inc. Supplemental Savings Plan (incorporated by reference to Exhibit 10.15 to our Form 10-Q for the nine months ended September 26, 2003).
10.13	Technitrol, Inc. 401(k) Retirement Savings Plan, as amended (incorporated by reference to post-effective Amendment No. 1, to our Registration Statement on Form S-8 filed on October 31, 2003, File Number 033-35334).
10.13(1)	Amendment No. 1 to Technitrol, Inc. 401(k) Retirement Savings Plan, dated December 31, 2006 (incorporated by reference to Exhibit 10.13(1) to our Form 10-K for the year ended December 29, 2006).
10.14	Pulse Engineering, Inc. 401(k) Plan as amended (incorporated by reference to post-effective Amendment No. 1, to our Registration Statement on Form S-8 filed on October 31, 2003, File Number 033-94073).
10.14(1)	Amendment No. 1 to Pulse Engineering, Inc. 401(k) Plan, dated December 31, 2006 (incorporated by reference to Exhibit 10.14(1) to our Form 10-K for the year ended December 29, 2006).
10.16	Annual and Long-Term Incentive Plan dated January 3, 2011 (incorporated by reference to our Form 8-K dated January 4, 2011).
10.28	Employment Agreement between Pulse Electronics Corporation and Ralph Faison dated January 4, 2011 (incorporated by reference to Exhibit 10.28 to our Form 8-K dated January 4, 2011).
10.28(1)	Amendment to Employment Agreement between Pulse Electronics Corporation and Ralph E. Faison (incorporated by reference to Exhibit 10.29 to our Form 8-K dated September 16, 2011).
10.28(2)	Amendment to Employment Agreement between Pulse Electronics Corporation and Ralph E. Faison (incorporated by reference to Exhibit 10.31 to our Form 8-K dated November 17, 2011).
10.29(2)	Employment Letter Agreement dated July 30, 2012 for Alan H. Benjamin (incorporated by reference to Exhibit 10.29.1 to our Form 8-K dated August 3, 2012).
10.30	Schedule of Board of Director and Committee Fees (incorporated by reference to Exhibit 10.30 to our Form 10-K for the year ended December 28, 2012).
10.30(1)	Pulse Electronics Directors Compensation Policy (incorporated by reference to Exhibit 10.30(1) to our Form 10-K for the year ended December 28, 2012)
10.30(2)	Director Restricted Stock Agreements (incorporated by reference to Exhibit 10.30(2) to our Form 10-K for the year ended December 28, 2012)
10.30(3)	Director Restricted Stock Agreements (filed herewith)
10.31(1)	Amended Exhibit A to Pulse Electronics Corporation Executive Severance Policy (incorporated by reference to Exhibit 10.32 to our Form 8-K dated October 11, 2013).
10.32	Pulse Electronics Corporation Severance Policy (incorporated by reference to Exhibit 10.32 to our Form 8-K dated April 12, 2012 and Exhibit 10.32.1 to our Form 8-K dated August 3, 2012).
10.34	Employment Letter Agreement dated April 6, 2012 for John R.D. Dickson (incorporated by reference to Exhibit 10.34 to our Form 8-K dated April 12, 2012).
10.35	Pulse Electronics Corporation 2012 Omnibus Incentive Compensation Plan (incorporated by reference to Exhibit 10.35 to our Form 8-K dated May 18, 2012).
10.35(1)	Amendment to the Pulse Electronics Corporation 2012 Omnibus Incentive Compensation Plan (incorporated by reference to Exhibit 10.35(1) to our Form 8-k dated May 17, 2013).

10.36

Fourth Amended and Restated credit agreement, by and among Pulse Electronics Corporation, Pulse Electronics (Singapore) Pte Ltd., J.P. Morgan Chase Bank, N.A., and the Lenders thereto, dated November 7, 2012 (incorporated by reference to Exhibit 10.36 to our Form 8-K dated November 7, 2012).

10.36(1)	Letter Agreement relating to certain amendments and the grant of a security interest, by and among Pulse Electronics Corporation, certain subsidiaries of Pulse Electronics Corporation and Oaktree, dated November 19, 2012 (incorporated by reference to Exhibit 10.36(1) to our Form 10-K for the year ended December 28, 2012).
10.36(2)	Second Amendment Letter Agreement relating to certain amendments, by and among Pulse Electronics Corporation, certain subsidiaries of Pulse Electronics Corporation and Oaktree, dated March 13, 2013 (incorporated by reference to Exhibit 10.36(2) to our Form 10-K for the year ended December 28, 2012).
10.36(3)	Amendment No. 3, dated as of February February 21 2014, to Credit Agreement, dated as of February 28, 2008, among Pulse Electronics Corporation, Pulse Electronics (Singapore) Pte Ltd, the lenders party thereto and Cantor Fitzgerald Securities, as Administrative Agent (incorporated by reference to Exhibit 10.36(3) to our Form 8-K dated February 21, 2014).
10.37	Investment Agreement, by and among Pulse Electronics Corporation, certain subsidiaries of Pulse Electronics Corporation and Oaktree, dated November 7, 2012 (incorporated by reference to Exhibit 10.37 to our Form 8-K dated November 7, 2012).
10.37(1)	Amendment No. 1 to Investment Agreement, by and among Pulse Electronics Corporation, certain subsidiaries of Pulse Electronics Corporation and Oaktree, dated March 11, 2013 (incorporated by reference to Exhibit 10.37(1) to our Form 10-K for the year ended December 28, 2012).
10.37(2)	Amendment No. 2 to Investment Agreement, by and among Pulse Electronics Corporation, certain subsidiaries of Pulse Electronics Corporation and Oaktree, dated April 15, 2013 (incorporated by reference to Exhibit 10.37(2) to our Form 10-Q for the three months ended March 28, 2013).
10.37(3)	Amendment No. 3, dated February 21, 2014, to the Investment Agreement, dated as of November 7, 2012 as amended on March 11, 2013, and as further amended on April 15, 2013, among Pulse Electronics Corporation, Technitrol Delaware, Inc., Pulse Electronics (Singapore) Pte. Ltd., OCM PE Holdings, L.P. and certain of its affiliated funds (incorporated by reference to Exhibit 10.36(3) to our Form 8-K dated February 21, 2014).
10.40	Forbearance and Commitment Letter, by and among Pulse Electronics Corporation, certain subsidiaries of Pulse Electronics Corporation and Oaktree, dated March 11, 2013 (incorporated by reference to Exhibit 10.40 to our Form 10-K for the year ended December 28, 2012).
10.41	Employment Letter Agreement dated October 11, 2013 for Michael C. Bond (incorporated by reference to Exhibit 10.41 to our Form 8-K dated October 11, 2013).
10.41(1)	Note Exchange Agreement, dated February 21, 2014, between Angelo Gordon & Co., L.P., Pulse Electronics Corporation and Pulse Electronics (Singapore) Pte. Ltd. (incorporated by reference to Exhibit 10.41 to our Form 8-K dated February 21, 2014).
10.42	Note Exchange Agreement, dated February 21, 2014, between Cannell Capital LLC, Pulse Electronics Corporation and Pulse Electronics (Singapore) Pte. Ltd. (incorporated by reference to Exhibit 10.42 to our Form 8-K dated February 21, 2014).
10.43	Note Exchange Agreement, dated February 21, 2014, between Harber Capital, LLC, Pulse Electronics Corporation and Pulse Electronics (Singapore) Pte. Ltd. (incorporated by reference to Exhibit 10.43 to our Form 8-K dated February 21, 2014).
10.44	Note Exchange Agreement, dated February 21, 2014, between Oppenheimer & Co. Inc., Pulse Electronics Corporation and Pulse Electronics (Singapore) Pte. Ltd. (incorporated by reference to Exhibit 10.44 to our Form 8-K dated February 21, 2014).
10.45	Note Exchange Agreement, dated February 21, 2014, between Wolverine Flagship Fund Trading Limited, Pulse Electronics Corporation and Pulse Electronics (Singapore) Pte. Ltd. (incorporated by reference to Exhibit 10.44 to our Form 8-K dated February 21, 2014).

21	Subsidiaries of the Registrant.
23.1	Consent of Independent Registered Public Accounting Firm - Grant Thornton LLP.
23.2	Consent of Independent Registered Public Accounting Firm - KPMG LLP.
31.1	Certification of Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.1	The following financial statements from the Pulse Electronics Corporation Annual Report on Form 10-K for the year ended December 27, 2013, formatted in Extensive Business Reporting Language (“XBRL”): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Changes in Shareholders’ Deficit and (vi) the Notes to the Consolidated Financial Statements.

By	/s/Ralph E. Faison
	Ralph E. Faison
	President and Chief Executive Officer
Date	March 12, 2014

By	/s/John E. Burrows, Jr.		By	/s/Justin C. Choi
	John E. Burrows, Jr.			Justin C. Choi
	Director			Director
Date	March 12, 2014		Date	March 12, 2014
By	/s/John E. Major
	John E. Major		By	/s/Ralph E. Faison
	Director			Ralph E. Faison
				President and Chief Executive Officer
Date	March 12, 2014			(Principal Executive Officer)
By	/s/ Steven G. Crane		Date	March 12, 2014
	Steven G. Crane
	Director
			By	/s/Michael C. Bond
Date	March 12, 2014			Michael C. Bond
				Senior Vice President
By	/s/ Kenneth Liang			and Chief Financial Officer
	Kenneth Liang			(Principal Financial Officer)
	Director
			Date	March 12, 2014
Date	March 12, 2014
			By	/s/Dana M. Kinsch
By	/s/ Kaj Vazales			Dana M. Kinsch
	Kaj Vazales			Corporate Controller
	Director			and Chief Accounting Officer
				(Principal Accounting Officer)
Date	March 12, 2014
			Date	March 12, 2014
By	/s/ Michael Alan Kreger
	Michael Alan Kreger
	Director
Date	March 12, 2014
By	/s/Gary E. Sutton
	Gary E. Sutton
	Director
Date	March 12, 2014