Description

Valued without a PULS

The following excerpt from Ayn Rand’s novel “The Fountainhead” is an apt description of PULS’s Board of Directors failure to consummate a deal with BELFA or seek strategic alternatives earlier. The proverbial “gun to the head” is now center stage, which results in a binary situation for PULS’s shareholders.

"I won't try tell you how much I'd like to do it," Roark said to him at the end of the first interview.  "But there's no chance of my getting it.  I can get along with people--when they are alone.  I can do nothing with them in groups.  No board has ever hired me--and I don't think one ever will."

Kent Lansing smiled.  "Have you ever known a Board to do anything?"

"What do you mean?"

"Just that: have you ever known a board to do anything at all?"

"Well, they seem to exist and function."

"Do they?  You know there was a time when everyone thought it self-evident the earth was flat.  It would be entertaining to speculate upon the nature and causes of humanity's illusions.  I'll write a book about it one day.  It won't be popular.  I'll have a chapter on boards of directors.  You see, they don't exist."

"I'd like to believe you, but what's the gag?"

"No, you wouldn't like believe me.  The causes of illusions are not pretty to discover.  They're either vicious or tragic.  This one is both.  Mainly vicious.  And it's not a gag.  But we won't go into that now.  All I mean is that a board of directors is one or two  ambitious men--and a lot of ballast.  I mean that groups of men are vacuums.  Great big empty nothings.  They say we can't visualize a total nothing.  Hell, sit at any board meeting.  The point is only who chooses to fill that nothing.  It's a tough battle.  The toughest.  It's simple enough to fight any enemy, so long as he's there to be fought.  But when he isn't...Don't look at me like that, as if I were crazy.  You ought to know.  You've fought a vacuum all your life.”

This chapter of the PULS saga began or ended (depending on your viewpoint) when PULS’s Board of Directors declined to pursue a merger or takeover with BelFuse (BELFA) and hired Richard Faison as Chairman/President/CEO to pursue a turnaround. Hopefully, this chapter of the PULS saga is now ending and that belief is supported by Faison’s prepared remarks regarding strategic alternatives from the August 7, 2012 earnings conference call: “We have recently seen increased strategic interest in PULS from a variety of parties. And as we have always said we’ll do, the Company is exploring all financing and strategic options to ensure we realize its highest possible value for shareholders, including necessary develering and debt repayment. While that presents some challenging decisions to the Company, I believe that the significant value of PULS’s technology and market leadership potential remains strong.”

A series of events, missteps and self-inflicted wounds created this opportunity. To understand the current value proposition of PULS, it requires a review of the background and timeline.

Background & Timeline:

• In 2006, a representative from BEL and PULS began discussing a framework for a possible business combination.
• January 2011: PULS named Ralph Faison as President and CEO and to the Board of Directors; prior to PULS Faison was President/CEO and Board member of Andrew Corporation which was acquired by CommScope in December of 2007. “Under his leadership Andrew’s revenue increased from $865MM in fiscal 2002 to nearly $2.2B in fiscal 2007. Prior to joining Andrew Corp. he was President and CEO of Celiant Corp., a manufacturer of power amps and wireless RF systems, which was acquired by Andrew Corporation in June 2002.” CTV was subsequently acquired/went private with Carlyle.
• February 28, 2011: BEL publicly offered to purchase PULS for $6.00 per share. PULS closed at $5.41 the Friday before the offer.
• “The PULS Board summarily rejected BEL’s proposal prior to making any attempt to engage with BEL to discuss a suitable valuation or transaction” according BEL’s statement.
• On March 21, 2011: BEL issued the following statement elaborating on the aforementioned: “For the past several years, BELFA has made several exhaustive but unproductive attempts to engage privately and constructively with the PULS Board about a business combination that makes the most sense for PULS shareholders. Each time, BELFA was asked to postpone merger discussions to some future date. And each time, BELFA honored these requests; patiently waiting while PULS churned through four CEOs, shareholder value plummeted by more than $750MM and shareholders suffered.”
• Please note that on March 21, 2011 PULS was trading at $6.02 a share and now trades at ~$1.40.
• Highlights from the May 3, 2011 proxy filed by BEL:

ü  “Both companies have agreed in the past that increasing raw materials, labor and operating costs make a BEL/PULS combination very compelling for all shareholders.” WHICH in my opinion is part of the thesis for PULS currently being of “some value” to a strategic.

ü  “In an attempt to urge the PULS Board to examine ALL options available for maximizing shareholder value, BEL nominated two well-respected individuals for election to the PULS Board at PULS’s 2011 annual meeting of shareholders. After BEL made its offer and submitted its director nominations, PULS expanded the Board from 6 to 8 members and nominated three new director candidates.”

ü  An email from James Papada, former PULS Chairman to Dan Bernstein, CEO of BEL dated May 24, 2006: “One thing rings with absolute clarity in my mind: the combination of BEL and our ECS (division of PULS at the time) would be just not company altering but, more importantly, industry altering. For those shareholders who chose to stay with the company, it could be a very, very lucrative deal over the next decade and one which neither of us can provide all by ourselves, at least not in the midterm, and probably not ever. The economics of this deal are just so compelling and we owe it to our respective shareholders to do what we can to explore it carefully and, if possible, make it happen.”

• Fast forward to May 8 2012 earnings conference call: “Last quarter if you recall, we talked about the fact that we have identified assets that we would hold for sale, that would be a combination of non-strategic product lines as well as real estate. And we would be seeking a new modest lower interest rate, more permanent credit facility and we estimated that the valuation range of those activities would be in excess of $55MM. What I am pleased to say in terms of progress we made this quarter, at this time a combination of closed transactions, LOI’s on asset sales and then a commitment letter for new financing in their total, combined value exceeds our $55MM target.” A bit premature, which was blamed on internal issues of the potential asset acquirer.
• June 27, 2012 PULS issues an update on asset sales: “The company also reported that the potential asset sales initiated as part of its strategy to delever its balance sheet remain on track. The company also reported that it is in advanced stages of negotiations on a definitive agreement with a lender for financing. The company has extended the timeframe for potentially closing the financing to coincide with the expected timing of the asset sales and the related retirement of its existing senior credit facility. All such transactions remain subject to the uncertainty inherent in such matters, as well as market and other conditions. “While I am disappointed we were unable to complete the transactions by June 28 and claw back all of the warrants vesting to our existing bank group,” said Pulse Chairman and Chief Executive Officer Ralph Faison, “I remain confident that we will complete asset sales, refinancing, and other actions sufficient to completely repay the existing $55 million credit facility and also provide additional liquidity. We are highly motivated to complete these transactions as expeditiously as we and our counterparts possibly can.”

ü  August 7, 2012 earnings conference call: “We have recently seen increased strategic interest in PULS from a variety of parties. And as we have always said we’ll do, the Company is exploring all financing and strategic options to ensure we realize its highest possible value for shareholders, including necessary develering and debt repayment. While that presents some challenging decisions to the Company, I believe that the significant value of PULS’s technology and market leadership potential remains strong.”

Investment Summary: as a percentage of revenue

I believe the best way to value PULS is via a percentage of revenue, which seems to be only the stable metric in this constantly “evolving” story. In the event of asset sales, modeling EPS would be more perplexing. Using a best case of 75% of $400MM of sales minus net debt of $100MM arrive a price target of $4.69, which is well below the BEL bid of $6 a mere year and a half ago. The value proposition PULS offers a strategic is the following:

• PULS offers sophisticated yet commoditized products in an industry constantly under pricing pressure, therefore economies of scale and capacity utilization are required on a continuous basis. A strategic would receive both almost immediately from PULS’s capabilities and assets.
• Do not discount the recent purchases of activists, Becker Drapkin and insiders.
• BEL displayed a public interest in PULS 1.5 years ago at a significantly higher valuation.
• AME, AVX, APH, MOLX and TEL are all large and capable acquirers
• $150MM EV valuation provides investor with “call option” return possibilities
• $3.50 to $4.00 would be fair value in my opinion

Highlights and Catalysts:

• March 19, 2012: Board member, Steven Crane bought 20,000 shares at $2.63; Crane is the CFO of MLNK
• May 23 to May 24 Chairman/President/CEO Ralph Faison bought 70,764 shares from $1.88 to $1.94
• May 18 to May 22 Chairman/President/CEO Ralph Faison bought 129,236 shares from $1.79 to $1.86
• On June 7, 2012 Becker Drapkin filed a 13D indicating ownership of 2.1MM shares or ~5% of the shares outstanding. According to “The Activist Spotlight” in Barron’s June 9, 2012 “Becker Drapkin is a relatively new and very successful activist investor. 80.5% average return on Becker Drapkin’s previous seven 13D filings (versus an average of 14.6% for the S&P 500).
• PULS has optimized their manufacturing footprint, down to 4 plants in China, which is a reduction from 10 plants ~18 months ago.
• Credit facility needs to be refinanced by the end of February 2013.

Key Statistics:

Serial Restructuring:

 PULS embarked on their restructuring process in June of 2009 and still continues today, but there may be light at the end of the tunnel.

• June 2009: PULS sold Medtech (components business) for $200MM to Altor Equity Partners AB.
• January 2010: PULS sold the North American operations of AMI Doduco to Metalor Technologies SA for an undisclosed price.
• September 2010: PULS sold AMI Doduco’s European operations to Tinicum Capital Partners II LP for $33MM. January 2011: PULS named Ralph Faison as President and CEO and to the Board of Directors; prior to PULS Faison was President/CEO and Board member of Andrew Corporation which was acquired by CommScope in December of 2007. “Under his leadership Andrew’s revenue increased from $865MM in fiscal 2002 to nearly $2.2B in fiscal 2007. Prior to joining Andrew Corp. he was President and CEO of Celiant Corp., a manufacturer of power amps and wireless RF systems, which was acquired by Andrew Corporation in June 2002.”

Business Description & 10K Notes:

PULS is a global producer of precision-engineered electronic components and modules and according to internal estimates is the largest producer in the markets they serve. These components and modules are used to manage, transmit and regulate electronic signals and power in all types of electronic products, making them critical to the functioning of customers’ end products.

PULS operates in three segments: Network product group, Power product group and Wireless product group

Network Group: produces a variety of passive components that manage and regulate electronic signals for use in a variety of devices in local area and wide area networks. These products operate by filtering out RF 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. Typically, network products have short life cycles due to process and cost improvements, which allow PULS to utilize their design, engineering and production expertise to meet customers’ evolving needs.  The market for network servers have been and will continue to be, characterized by ongoing product design and manufacturing innovation that will drive growth.
• Network Group revenues: FY11 $169.8MM or 46%, FY10 $219.2MM or 50.7%, FY09 $152.7MM or 38.3%

Power Group: 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 magnetic products.

• PULS’s power products tend to have short lifecycles. A portion of Power’s manufacturing is characterized by labor intensive processes and other portions are highly automated and less variable with product life cycles that change as technology improves.  Power’s market has been and will continue to be characterized by ongoing product design and manufacturing innovation and growth.
• Power Group revenues:FY11 $135.2MM or 36.6%, FY10 $127MM or 29.4%, FY09 $95.1MM or 23.8%

Wireless Group: manufactures products that primarily capture or transmit wireless communication signals. The 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.

• PULS’s wireless products are sold in a “very dynamic market,” which causes the life of an average Wireless product to be short. Wireless utilizes PULS’s expertise in the design, engineering and production of antennas and antenna modules to evolve with customer needs. The industries served by the Wireless Group will continue to be characterized by ongoing product design and manufacturing innovation. The manufacturing  of the Wireless products tend to be more automated than Network and Power products, requiring capital investment and changes in the production process for future innovation.
• Wireless Group revenues: FY11 $64.3MM or 17.4%, FY10 $86.3MM or 19.9%, FY09 $151MM or 37.9%

DISCLAIMER: I currently own shares of PULS and I may buy or sell shares without any further notification.  Please do your own due diligence before making any investment decisions!

Catalyst

• March 19, 2012: Board member, Steven Crane bought 20,000 shares at $2.63; Crane is the CFO of MLNK
• May 23 to May 24 Chairman/President/CEO Ralph Faison bought 70,764 shares from $1.88 to $1.94
• May 18 to May 22 Chairman/President/CEO Ralph Faison bought 129,236 shares from $1.79 to $1.86
• On June 7, 2012 Becker Drapkin filed a 13D indicating ownership of 2.1MM shares or ~5% of the shares outstanding. According to “The Activist Spotlight” in Barron’s June 9, 2012 “Becker Drapkin is a relatively new and very successful activist investor. 80.5% average return on Becker Drapkin’s previous seven 13D filings (versus an average of 14.6% for the S&P 500).
• PULS has optimized their manufacturing footprint, down to 4 plants in China, which is a reduction from 10 plants ~18 months ago.
• Credit facility needs to be refinanced by the end of February 2013.