During a recent period of market unease prior to the end of the year, I took advantage of a down day and opened a new position in ModusLink Global Solutions (MLNK).
I want to share my full analysis with you and why I like the company.
ModusLink Global Solutions is a provider of supply-chain management solutions, with big name clients like Hewlett-Packard (HPQ). The company offers a number of logistic services, with a majority of its business coming from technology original equipment manufacturers, (OEMs) as the company is a Microsoft (MSFT) Authorized Replicator. This makes MLNK a valuable partner to tech OEMs, which sell products with Microsoft software pre-installed.
MLNK has five main services. Let’s take a closer look at them now:
- Material Planning and Factory Supply sources inbound material and maintains high quality standards based on its local supplier relationships. MLNK performs kitting and assembly of packaging materials and accessories while managing logistics and delivery schedules into multiple manufacturing sites.
- Value-Added Warehousing and Distribution provides its customers full order management, retail connectivity and integrated transportation management services. The company’s capabilities add speed and reliability to its clients’ efforts to get their products to market, which are supported by a global technology infrastructure.
- Product Returns Management simplifies the returns process for retailers and manufacturers including receipt of goods, managing the returns authorization process and the ultimate disposition of the returned product.
- Product Repair and Recoveryhelps clients maximize the value of returned and excess inventory through product remanufacturing and value recovery services.
- E-Commerce offers clients e-commerce solutions, including financial management and payment processing, which are driven by a transaction engine that can power a client’s online store.
MLNK is very international in nature, with sales from the Americas accounting for 35% of 2013 revenues, Asia accounting for 28% of 2013 revenues, Europe accounting for 31%, and the rest of the world accounting for the remaining 6%.
Modus’ sales are also somewhat concentrated, as the top customers represented 69% of revenues in 2013 and Hewlett Packard accounted for 29%. While this adds a little risk to the investment, MLNK’s recent efforts to reduce its cost structure, which I will discuss more in just a moment, should allow the company to better manage any periods of revenue shortfalls.
I believe MLNK is a turnaround play. Due to competition and pricing pressures, revenues for the company declined from $1 billion in the July 2009 fiscal year to $754 million in the July 2013 fiscal year. In early 2013 there were two important events that have aided in building confidence among investors.
First, management appointed John Boucher, an executive with 30 years of experience in supply chain management experience, as CEO back in January. A month later, the company received an endorsement from publicly traded diversified manufacturer, Steel Partners Holdings LP (SPLP).
Steel Partners acquired four million shares of MLNK at $4 a share, along with warrants to acquire two million more shares at $5 a share. Combined with an affiliated company of SPLP, precious metals and engineering company Handy & Harman (HNH), an entity known as “The Steel Group” owns 14.9% of MLNK’s share and could own as much as 32% of the shares.
Thanks to new business won in 2013, revenues in that fiscal year did increase from $713 million in fiscal 2012. This increase was due to in large part to restructuring costs, other unusual one-time items, and non-cash write-downs. Based on adjusted Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), the company had been profitable. Adjusted EBITDA was $18 million, $5.2 million and $15.2 million in fiscal 2013, 2012 and 2011, respectively.
These results are all restated after an SEC inquiry required the company to change the way it accounts for volume discounts to its customers. The restatement, which covered fiscal 2007 through 2012, forced a restatement of revenues of $32.9 million, or just 0.6% of the aggregate total during the period under review. Net income during the period was reduced by $18 million, which added to the previous aggregate loss of $231 million. While the SEC has not yet closed its investigation, auditors have signed off on the revised financial statements, and I do not expect there to be further material adjustments to MLNK’s financial statements.
The company’s first-quarter earnings release showed that the cost cutting and restructuring efforts were beginning to positively impact results. Revenues declined 2.9% to $191.4 million, reflecting in part the sale of the company’s Tech for Less subsidiary in January 2013.
However, an improved revenue mix helped drive an increase in gross margins to 11.5% from 9.5%, while improved operating efficiencies resulted in a 25% decline in selling, general and administrative (SG&A) expenses to $18.1 million. Excluding extraordinary items, adjusted EBITDA increased to $8.5 million from $2.1 million. MLNK earned a profit of 1 cent a share, compared to a loss of 24 cents a share in the previous period.
MLNK also boasts a strong balance sheet, with total cash of $67 million (roughly $1.30 a share) and no long-term debt. Total current assets net of all long-term liabilities is $110 million, or $2.15 a share. If management can maintain their recent profitability and further advance this liquidity, the stock price should be supported and allow the company to possibly enhance shareholder value through a dividend or a buyback plan.
MLNK has soared since mid-December, however, I believe it has catalysts in place to push the shares higher. The company’s cost structure has been reduced significantly, and revenues are stabilizing. Restructuring expenses was just $979,000 last quarter, and management believes they can have the current restructuring liability of $2 million paid off by fiscal 2015. Also, I believe the new management and ownership structure will help keep this turnaround story moving.