Description

Artesyn Technologies, Inc. is a small-cap communications equipment company defending itself from a hostile bid while re-establishing its earnings growth pattern and trading at roughly 1.0x revenues. While expensive at first glance on a current P/E basis, ATSN is growing revenues 15-20% in 2004 and expects similar growth in 2005 while benefiting from an improved cost structure after recently moving its manufacturing offshore. For a company with an equity market capitalization below $500 million, ATSN also has a significant cash balance ($100 million) and sizeable NOL’s ($135 million) to partially shield future earnings.

Valuation also appears anchored by a recent unfriendly low-ball takeover proposal from competitor Bel Fuse (BELFB) in stock that was originally worth $10 per share and currently equates to $9.20 per share (at 0.265 BELFB). Management has a poison pill in place and expects to deliver strong earnings growth to ultimately fend off its unwanted suitor. While BELFB could always lose interest and walk away, they did acquire over 5% of ATSN’s stock in the public market in anticipation of making their offer in September and have indicated that they are willing to pay a higher price subject to due diligence. If ATSN were to stumble and look to sell, other industry players like Emerson might be a better strategic fit and willing to pay a higher price due to higher synergies and superior balance sheet.

With a top-notch customer list (including major corporations like Dell, HP and Cisco), significant historical investment in R&D generating new products for a recovering communications industry, recently streamlined cost structure, and a hostile offer hanging over its head, ATSN has several key ingredients for achieving significant upside from current levels.

Business description
Artesyn Technologies, Inc. is engaged in the design, manufacture and sale of power conversion equipment and board level computing solutions incorporated into embedded communications systems. The Company's business is organized into two operating segments, Power Conversion and Communications Products. The Power Conversion group designs, manufactures and sells alternating current/direct current (AC/DC) and DC/DC power conversion equipment. The Communications Products group designs, manufactures and sells central processing unit boards and wide area network input/output boards bundled with software protocols embedded in communications infrastructure systems. The Company's products are sold to original equipment manufacturers within four core market sectors in the communications industry: server and storage, wireless infrastructure, networking and telecommunications.

Financials
As shown below, revenue growth has been re-established while gross margins are returning to historically high levels.
FINANCIALS 1998 1999 2000 2001 2002 2003 2004 (LTM)
Revenues $532.4 $594.2 $690.1 $494.0 $350.8 $356.9 $408.4
Gross profit 137.1 153.7 181.0 56.3 29.6 69.3 $100.9
R& D 33.4 36.4 44.9 41.5 34.3 34.3 $39.7
SG&A 52.3 50.2 62.8 54.1 36.6 38.9 $43.2
Depreciation $16.9 20.1 27.2 34.4 27.0 22.9 $22.0
Operating profit $51.4 $67.1 $73.3 ($39.3) ($41.4) ($4.0) $17.9

Gross margin 25.8% 25.9% 26.2% 11.4% 8.4% 19.4% 24.7%
Operating margin 9.7% 11.3% 10.6% -7.9% -11.8% -1.1% 4.4%

ATSN has re-established profitability in its main power conversion segment and is enjoying rapid growth and superior profitability in its communications products group.

SEGMENT DETAIL 2003 1Q/04 2Q/04 3Q/04
Power conversion
Revenue 314.4 83.4 88.0 86.7
Operating profit (15.8) 4.0 2.6 1.5
Margin -5.0% 4.8% 2.9% 1.7%

Communications products
Revenue 42.5 13.1 17.5 20.3
Operating profit 6.2 2.3 5.5 6.8
Margin 14.6% 17.5% 31.5% 33.5%

For valuation purposes, the total share count includes full dilution from in-the-money options and the outstanding $90 million of convertible debt.

CAPITALIZATION
Basic Options Convert
ATSN $11.07 $11.07 $11.07
Shares 39.199 41.147 52.307
Equity value $434 $455 $579
Net debt ($8) ($8) ($98)
Enterprise value $426 $447 $481


Financials
EV/Revenues ('04) 1.1 $420
EV/Revenues ('05) 1.0 $480
EV/EBITDA ('04) 10.7 $45
EV/EBITDA ('05) 8.0 $60
P/E ('04) 35.7 $0.31
P/E ('05) 22.6 $0.49
P/E ('06) 16.3 $0.68

Catalyst

*Takeover potential: competitor Bel-Fuse bought 5% of ATSN, made an informal offer and continues to request merger discussions
*Possible proxy context in the spring to remove the poison pill
*Earnings growth from improved end-market demand, new products and streamlined cost structure
*Guidance update from management in January