PULSE ELECTRONICS CORP - 10-Q - : Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Introduction 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 the "Risk Factors" section of this report on page 27. Except to the extent required by law, we assume no obligation to update or revise any forward-looking statements.

Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires us to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 1, Summary of significant accounting policies, to the Consolidated Financial Statements in our Annual Report on Form 10-K for the period ended December 30, 2011 describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements.

Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the period ended December 30, 2011 describes the following critical accounting policies, which are significantly impacted by judgments, assumptions and estimates used in the preparation of our Consolidated Financial Statements: · Inventory valuation; · Divestiture accounting; · Intangible assets; · Income taxes; · Defined benefit plans; · Contingency accruals; and · Severance, impairment and other associated costs.

Actual results could differ from our estimates as described in the significant and critical accounting policies in our Annual Report on Form 10-K for the period ended December 30, 2011.

Overview 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.

General. We define net sales as gross sales less returns and allowances. We sometimes refer to net sales as revenue.

Historically our gross margin has been affected by product mix and capacity utilization. The markets served by each of our segments are characterized by relatively short product life cycles, which causes significant 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.

17-------------------------------------------------------------------------------- Table of Contents We believe our focus on technology and other strategic investments, both internal and external, provides us opportunities for future growth in net sales and operating profit in all our segments. However, unfavorable economic and market conditions, as well as customer preferences, may result in a reduction in demand for our products, thus negatively impacting our financial performance. Also, we may divest portions of our business, close certain locations, or complete other cost reduction programs to enable our management to focus on our core businesses and to improve our overall long-term financial performance.

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 expand our capacity of advanced three-dimensional antenna equipment, which is used to produce our Wireless products. We have also committed capital to automate certain manual manufacturing processes and to implement an enterprise resource planning ("ERP") system to enhance visibility, reduce cost, and enhance customer service. In the future, similar investments in property, plant and equipment or research, development and engineering may be funded through internally generated cash flows or through other external resources.

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, asset impairments 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 to lower-cost locations, specifically 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 and changes in operating strategies.

Divestitures. We have historically completed divestitures to streamline our operations, to focus on our core businesses, to reduce our external debt and to strengthen our financial position.

Management Focus. Our executives focus on a number of metrics to evaluate our consolidated financial condition and operating performance. For example, we use consolidated revenue growth, gross margin, operating margin and return on research, development and engineering as performance measures. Operating leverage, or incremental operating profit as a percentage of incremental sales, is also reviewed, which reflects the benefit of absorbing fixed overhead and operating expenses. In evaluating consolidated working capital, liquidity and cash flow, our executives also use performance measures such as days sales outstanding, days payables outstanding, inventory turnover, debt-to-EBITDA leverage, cash conversion efficiency and free cash flow. We define free cash flow as cash flow from operations less capital spending. Additionally, as the continued success of our business is largely dependent on meeting and exceeding our customers' expectations, non-financial performance measures relating to product development, product quality and on-time delivery assists in monitoring customer satisfaction on an on-going basis.

Income Taxes. We have generally not provided for U.S. and foreign withholding taxes on our non-U.S. subsidiaries' undistributed earnings. We expect to reinvest this cash and earnings outside of the United States, because we anticipate that a significant portion of our opportunities for future growth will be abroad. In addition, we expect to use a significant portion of the cash to service debt outside the United States. In 2010, we concluded that there was $8.5 million of earnings that would not be permanently reinvested, and provided a deferred tax liability for this amount. This amount has not yet been repatriated. Thus, with the exception of earnings in the amount of $8.5 million as of September 28, 2012, our non-U.S. subsidiaries' undistributed earnings are intended to be reinvested outside of the U.S. indefinitely. 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, versus the amount of our income earned in lower tax jurisdictions, such as Hong Kong and China. 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, the deductibility or non-deductibility of severance and impairment costs and other similar costs, as well as by changes in our valuation allowance against our net deferred tax assets. Changes in operations, tax legislation, estimates, judgments and forecasts may also affect our tax rate from period to period.

18-------------------------------------------------------------------------------- Table of Contents Results of Operations Three months ended September 28, 2012 compared to the three months ended September 30, 2011 The table below presents our results of operations and the change in those results from period to period in percentage and dollars (in thousands): Three Months Ended September September 28, 30, Change Change Results as % of net sales 2012 2011 $ % 2012 2011 Net sales $ 88,233 $ 96,014 $ (7,781 ) (8.1 )% 100.0 % 100.0 % Cost of sales 71,281 73,913 (2,632 ) (3.6 ) (80.8 ) (77.0 ) Gross profit 16,952 22,101 (5,149 ) (23.3 ) 19.2 23.0 Selling, general and administrative expenses 18,049 19,798 (1,749 ) (8.8 ) (20.5 ) (20.6 ) Severance, impairment and other associated costs 3,851 2,968 883 29.8 (4.4 ) (3.1 ) Debt restructuring and related costs 814 -- 814 100.0 (0.9 ) -- Operating loss (5,762 ) (665 ) (5,097 ) 766.4 (6.5 ) (0.7 ) Interest expense, net (3,754 ) (1,917 ) (1,837 ) 95.8 (4.3 ) (2.0 ) Other (expense) income, net 948 (1,088 ) 2,036 (187.1 ) 1.1 (1.1 ) Loss from continuing operations before income taxes (8,568 ) (3,670 ) (4,898 ) 133.5 (9.7 ) (3.8 ) Income tax (expense) benefit (356 ) 2,682 (3,038 ) (113.3 ) (0.4 ) 2.8 Net loss from continuing operations (8,924 ) (988 ) (7,936 ) 803.2 (10.1 ) (1.0 ) Net loss from discontinued operations -- (270 ) (270 ) 100.0 -- (0.3 ) Net loss $ (8,924 ) $ (1,258 ) $ (7,666 ) 609.4 % (10.1 )% (1.3 )% Net sales. Our consolidated net sales decreased by 8.1% in the three months ended September 28, 2012 compared to the prior year period primarily due to ongoing industry weaknesses which constrained demand for Network and Power products, partially offset by higher sales in Wireless as sales to new customers continue to increase.

Net sales for our three segments for the three months ended September 28, 2012 and September 30, 2011 were as follows (in thousands): September 28, 2012 September 30, 2011 Network $ 39,902 $ 43,832 Power 28,932 36,580 Wireless 19,399 15,602 Net sales $ 88,233 $ 96,014 Gross profit. Our consolidated gross margin was 19.2% for the three months ended September 28, 2012 as compared to 23.0% for the three months ended September 30, 2011. The lower gross profit margin compared to the prior year reflects ramp up costs for new programs and inefficiencies associated with the growth in Wireless, and higher labor costs, lower pricing, and volumes for Network and Power products. In particular, incremental production expenses associated with our Wireless operations in Korea contributed to $0.8 million lower gross margin during the three months ended September 28, 2012. As of September 28, 2012, we have shut down our manufacturing operations in Korea and transferred production to other manufacturing facilities. Therefore, we do not anticipate such incremental costs in future periods.

19-------------------------------------------------------------------------------- Table of Contents Selling, general and administrative expenses. Total selling, general and administrative expenses decreased 8.8% in the three months ended September 28, 2012 compared to the prior year quarter. The decrease in spending was due to aggressive expense reduction actions, a $1.0 million favorable impact of reaching an agreement on intellectual property licensing, and sustained scrutiny over all discretionary spending. The decrease was partially offset by a $0.4 million of additional expense to increase our pension liability based on an actuarially determined estimate of our pension expense for 2012, compared to income of $0.5 million in the prior year quarter.

Research, development and engineering expenses ("RD&E") are included in selling, general and administrative expenses. For the three months ended September 28, 2012 and September 30, 2011, respectively, RD&E was as follows (in thousands): 2012 2011 RD&E $ 6,127 $ 6,021 Percentage of sales 6.9 % 6.3 % Our RD&E spending as a percentage of sales in the quarter ended September 28, 2012 is consistent with the quarter ended September 28, 2011. RD&E spending includes legal expenses incurred in connection with the patent lawsuit filed by Halo Electronics. During the three months ended September 28, 2012 and September 30, 2011, we incurred approximately $0.2 million and $0.1 million of legal expenses, respectively, related to this matter. Refer to further discussion in Note 8, Commitments and contingencies.

Severance, impairment and other associated costs. During the three months ended September 28, 2012, we incurred approximately $3.9 million of costs, primarily related to severance and other costs associated with our initiative to reorganize the capacity of our manufacturing plants in China and $0.7 million for write-downs of fixed assets that are no longer in use. During the three months ended September 30, 2011, we incurred a charge of $2.2 million for a number of cost reduction actions approved by management and $0.8 million for write-downs of fixed assets that are no longer in use.

Debt restructuring and related costs. During the three months ended September 28, 2012, we incurred $0.8 million of costs related to financing and strategic alternatives we are pursuing to increase liquidity and repay the borrowings under our credit facility by its maturity date in February 2013. The majority of these costs represent fees of our financial and legal advisors, as well as commitment fees on a new credit facility that may not be consummated. No similar costs related to this matter were incurred for the three months ended September 30, 2011.

Interest. Net interest expense increased by $1.8 million primarily due to higher interest on our senior credit facility. Under the March 2012 amendment, the interest rate increased to a variable rate of LIBOR plus 10.0%. Our interest expense also increased during the three months ended September 28, 2012 due to $0.3 million of fees incurred because the outstanding borrowings under the credit facility were not repaid as of September 28, 2012 and a $0.8 million increase in debt fee amortization, which includes approximately $0.5 million related to the warrants issued in connection with the amendment.

Other. Net other (expense) income for the three months ended September 28, 2012 is primarily attributable to our foreign currency exchange activity related to changes in the varying currencies of our intercompany lending program. During the three months ended September 28, 2012, we incurred $0.9 million in foreign currency gains as compared to a $1.6 million loss for the three months ended September 30, 2011, primarily due to the effects of the overall strengthening of the euro to the U.S. dollar and related remeasurement of intercompany advances and loans into their respective functional currencies.

Income taxes. The income tax (expense) benefit for the three months ended September 28, 2012 and September 30, 2011 was as follows (in thousands): September 28, September 30, 2012 2011 Income tax (expense) benefit $ (356 ) $ 2,682 Effective tax rate (4.2 )% 73.1 % The Company's effective tax rate is a blended rate for different jurisdictions in which the Company operates. We continue to provide a full valuation allowance against losses in the majority of jurisdictions in which we operate. The Company will continue to evaluate the realizability of its net deferred tax assets on an ongoing basis to identify whether any significant changes in circumstances or assumptions have occurred that could materially affect the realizability of deferred tax assets and expects to release the valuation allowance when it has sufficient positive evidence, including, but not limited to, cumulative earnings in successive recent periods, to overcome the negative evidence which currently exists. The change in the effective tax rate in the third quarter of 2012 versus the third quarter of 2011 was primarily due to losses in individual jurisdictions, which cannot provide a benefit against taxable income in the same jurisdiction. Additionally, there were changes in estimates related to permanent items in non-U.S. jurisdictions identified as a result of the filing of some of the Company's non-U.S. tax returns.

20-------------------------------------------------------------------------------- Table of Contents Nine months ended September 28, 2012 compared to the nine months ended September 30, 2011 The table below presents our results of operations and the change in those results from period to period in percentage and dollars (in thousands): Nine Months Ended September September 28, 30, Change Change Results as % of net sales 2012 2011 $ % 2012 2011 Net sales $ 282,751 $ 278,811 $ 3,940 1.4 % 100.0 % 100.0 % Cost of sales 228,198 215,913 12,285 5.7 (80.7 ) (77.4 ) Gross profit 54,553 62,898 (8,345 ) (13.3 ) 19.3 22.6 Selling, general and administrative expenses 55,834 62,594 (6,760 ) (10.8 ) (19.7 ) (22.5 ) Severance, impairment and other associated costs 5,901 13,591 (7,690 ) (56.6 ) (2.1 ) (4.9 ) Debt restructuring and related costs 814 -- 814 100.0 (0.3 ) -- Cost related to unsolicited takeover attempt -- 1,916 (1,916 ) (100.0 ) -- (0.7 ) Operating loss (7,996 ) (15,203 ) 7,207 (47.4 ) (2.8 ) (5.5 ) Interest expense, net (10,099 ) (4,368 ) (5,731 ) 131.2 (3.6 ) (1.6 ) Other income, net 877 621 256 41.2 0.3 0.2 Loss from continuing operations before income taxes (17,218 ) (18,950 ) 1,732 (9.1 ) (6.1 ) (6.8 ) Income tax (expense) benefit (2,504 ) 8,512 (11,016 ) (129.4 ) (0.9 ) 3.1 Net loss from continuing operations (19,722 ) (10,438 ) (9,284 ) 88.9 (7.0 ) (3.7 ) Net earnings from discontinued operations -- 342 (342 ) (100.0 ) -- 0.1 Net loss $ (19,722 ) $ (10,096 ) $ (9,626 ) 95.3 % (7.0 )% (3.6 )% Net sales. Our consolidated net sales increased by 1.4% in the nine months ended September 28, 2012 as compared to the prior year period primarily as a result of higher sales in Wireless as sales to new customers continue to increase, partially offset by ongoing industry weaknesses, which constrained demand for Network and Power products.

Net sales for our three segments for the nine months ended September 28, 2012 and September 30, 2011 were as follows (in thousands): September 28, 2012 September 30, 2011 Network $ 120,355 $ 129,767 Power 92,743 107,147 Wireless 69,653 41,897 Net sales $ 282,751 $ 278,811 Gross profit. Our consolidated gross margin for the nine months ended September 28, 2012 was 19.3% as compared to 22.6% for the nine months ended September 30, 2011. The lower gross profit compared to the prior year reflects higher labor costs, lower pricing and volumes for Network and Power products, the unfavorable mix effect of the growth of lower-margin Wireless products, and ramp up costs and inefficiencies associated with the growth in our Wireless business. In particular, incremental production expenses associated with our Wireless operations in Korea contributed to $1.5 million lower gross margin during the nine months ended September 28, 2012. As of September 28, 2012, we have shut down our manufacturing operations in Korea and transferred production to other manufacturing facilities. Therefore, we do not anticipate such incremental costs in future periods.

21-------------------------------------------------------------------------------- Table of Contents Selling, general and administrative expenses. Total selling, general and administrative expenses decreased 10.8% in the nine months ended September 28, 2012 compared to the prior year period. The decrease in spending was due to aggressive expense reduction actions, a $1.0 million favorable impact of reaching an agreement on intellectual property licensing, and sustained scrutiny over all discretionary spending.

Research, development and engineering expenses ("RD&E") are included in selling, general and administrative expenses. For the nine months ended September 28, 2012 and September 30, 2011, respectively, RD&E was as follows (in thousands): 2012 2011 RD&E $ 18,402 $ 20,525 Percentage of sales 6.5 % 7.4 % Our RD&E spending as a percentage of sales in the period ended September 28, 2012 decreased primarily due to reduction in force actions taken in the prior year, as well as lower legal expenses incurred in connection with the patent lawsuit filed by Halo Electronics. During the nine months ended September 28, 2012 and September 30, 2011, we incurred approximately $0.6 million and $0.8 million of legal expenses, respectively, related to this matter. Refer to further discussion in Note 8, Commitments and contingencies.

Severance, impairment and other associated costs. During the first nine months of 2012, the $5.9 million of charges included $3.7 million for severance, lease termination and other costs associated with our restructuring program initiated in the fourth quarter of 2010 to reduce and reorganize the capacity of our manufacturing plants in China as we shifted manufacturing to lower cost facilities. Additionally, there was a total of $5.0 million of charges, including; $1.1 million related to global workforce reductions, primarily in Europe; $0.2 million related to severance, and $0.7 million for the write-down of fixed assets no longer in use as a result of the shutdown of our Korea manufacturing operations and relocation of this manufacturing to facilities in China; and $0.2 million of additional costs associated with our withdrawal from Wireless' audio components business, which we initiated and substantially completed in 2011. During the nine months ended September 30, 2011, we incurred $12.8 million of charges for a number of cost reduction actions approved by management and $0.8 million of write-downs of fixed assets that are no longer in use. The amount of $12.8 million in charges related to cost reduction actions includes severance and related payments of $12.6 million and a $0.2 million write-down of a manufacturing facility to its fair value.

Debt restructuring and related costs. During the nine months ended September 28, 2012, we incurred $0.8 million of costs related to financing and strategic alternatives we are pursuing to increase liquidity and repay the borrowings under our credit facility by its maturity date in February 2013. The majority of these costs represent fees of our financial and legal advisors, as well as commitment fees on a new credit facility that may not be consummated. No similar costs related to this matter were incurred for the nine months ended September 30, 2011.

Costs related to unsolicited takeover attempt. During the nine months ended September 30, 2011, we incurred $1.9 million of legal and professional fees and other costs related to an unsolicited takeover attempt and proxy contest. The majority of these costs represent fees of our financial and legal advisors. No similar costs related to this matter were incurred for the nine months ended September 28, 2012.

Interest. Net interest expense increased by $5.7 million primarily due to higher interest on our senior credit facility. Under the March 2012 amendment, the interest rate increased to a variable rate of LIBOR plus 10.0%. Our interest expense also increased during the nine months ended September 28, 2012 due to $0.6 million of additional fees incurred since the outstanding borrowings under the credit facility were not repaid as of September 28, 2012 and $2.2 million in increased expense for debt fee amortization, which includes approximately $1.2 million related to the warrants issued in connection with the amendment.

Other. Net other income for the nine months ended September 28, 2012 was primarily attributable to a $0.4 million gain recognized on the sale of equipment related to our encapsulated transformer product line, as well as the foreign currency gains related to changes in the varying currencies of our intercompany lending program of $0.2 million. During the nine months ended September 30, 2011, we incurred net foreign currency loss of approximately $1.2 million. Also, included in net other income for the nine months ended September 30, 2011 was a reversal of a contingency accrual that was originally recorded in purchase accounting for a legacy acquisition.

Income taxes. The income tax (expense) benefit for the nine months ended September 28, 2012 and September 30, 2011 was as follows (in thousands): September 28, September 30, 2012 2011 Income tax (expense) benefit $ (2,504 ) $ 8,512 Effective tax rate (14.5 )% 44.9 % 22-------------------------------------------------------------------------------- Table of Contents The Company's effective tax rate is a blended rate for different jurisdictions in which the Company operates. We continue to provide a full valuation allowance against losses in the majority of jurisdictions in which we operate. The Company will continue to evaluate the realizability of its net deferred tax assets on an ongoing basis to identify whether any significant changes in circumstances or assumptions have occurred that could materially affect the realizability of deferred tax assets. We expect to release the valuation allowance when we have sufficient positive evidence, including, but not limited to, cumulative earnings in successive periods, to overcome such negative evidence that currently exists. The change in the effective tax rate in the first nine months of 2012 versus the first nine months of 2011 was primarily due to losses in individual jurisdictions which we are unable to realize as a tax benefit.

Discontinued operations. During the nine months ended September 30, 2011, we recorded an adjustment of approximately $0.6 million, net of tax, for post-closing working capital and financial indebtedness adjustments for the sale of our former electrical contact operations in Europe and Asia.

Liquidity and Capital Resources Net cash used in operating activities was $4.5 million for the nine months ended September 28, 2012 as compared to $5.5 million for the nine months ended September 30, 2011. The negative operating cash flows were primarily attributable to operating losses, as well as cash outlays for severance costs related to cost-reduction efforts, prior period tax audit settlements and higher debt service costs from the amended credit facility and other items.

Capital expenditures were $7.0 million during the nine months ended September 28, 2012 and $8.8 million for the nine months ended September 30, 2011. We make capital expenditures to invest in new programs, which we believe are essential to our future growth, primarily related to our Wireless segment, as well as initiatives to drive higher levels of automation throughout our manufacturing operations, and to the implementation of our ERP system.

Net cash provided by investing activities during the nine months ended September 28, 2012 included $6.5 million of cash deposits received in connection with the sale of three manufacturing plants, net of related transaction costs paid. These transactions are subject to closing conditions and are expected to be finalized in the fourth quarter of 2012.

We have $50.0 million in convertible senior notes, which will mature on December 15, 2014. The notes bear a coupon rate of 7.0% per annum that is payable semiannually in arrears on June 15 and December 15 of each year. We paid approximately $1.7 million on June 15, 2012 and expect to pay additional interest on these notes in December 2012.

On September 28, 2012, we had approximately $55.0 million of borrowings outstanding under our credit facility. Our credit facility provides for borrowings not to exceed $55.0 million, including letters of credit in an aggregate amount not to exceed the U.S. dollar equivalent of $3.0 million. The maturity date of the facility is February 28, 2013. Therefore, the $55.0 million of outstanding borrowings under the credit facility at September 28, 2012 has been classified as a current liability in our Condensed Consolidated Balance Sheets.

Our credit facility was amended on March 9, 2012 and the revised terms reduced the borrowings permitted under the credit facility from $60.8 million to $55.0 million, increased the interest rate on the outstanding borrowings to a combination of the variable base rate plus a credit margin spread of 10.0% on LIBOR, reduced our permitted capital expenditures and reduced the available cash we are required to maintain to $1.0 million. In addition, under the amended facility, net proceeds that we receive from any dispositions of assets or equity interests in our subsidiaries, issuance of equity and incurrence of additional indebtedness (as permitted) must be used to repay our outstanding borrowings under the credit facility. Outstanding borrowings that are repaid or prepaid may not be reborrowed. The amendment also eliminated the requirement that we comply with the following financial covenants for the remainder of the facility term: (i) total debt (excluding our convertible senior notes) as compared to our rolling four-quarter EBITDA; (ii) fixed charges as compared to our rolling four-quarter EBITDA; and (iii) a minimum rolling six-month EBITDA.

In connection with the amendment to the credit facility completed in March 2012, the Company issued to its existing bank group warrants to purchase approximately 2.6 million shares of common stock of the Company at an exercise price of $0.01 per share. The warrants vest over time if the Company does not repay the credit facility in full by certain dates. We did not repay the outstanding borrowings under the facility by the first and second warrant vesting dates of June 28, 2012 and September 28, 2012, respectively. Consequently, warrants to purchase approximately 1.2 million shares of common stock became vested. On December 31, 2012, warrants to purchase approximately 1.4 million additional shares of common stock will vest unless the Company has repaid the outstanding borrowings under the credit facility by such date.

23-------------------------------------------------------------------------------- Table of Contents We recorded the fair value of the warrants of $2.0 million as debt issuance costs, which have been capitalized and are being amortized using the effective interest method. The value of the warrants was determined on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 0.46%, volatility of 80.0%, a three-year term, and no dividend yield. The valuation took into account the probability that the warrants will vest at June 28, 2012, September 28, 2012 and December 31, 2012. These vesting probabilities were based on management's estimates regarding the probability of success and timing related to the possible sale of certain non-strategic assets and additional financing opportunities that would enable us to repay the outstanding borrowings under the credit facility by these dates. We paid total fees and expenses of approximately $1.3 million in connection with the amendment, which have been capitalized as debt issuance costs and are being amortized using the effective interest rate method through the maturity date of the debt. In addition, we recorded a charge of approximately $0.3 million to write off previously capitalized fees and costs that related to the credit facility and its amendments. We incurred additional fees of 0.5% of outstanding borrowings on June 28, 2012 and September 28, 2012, or $0.6 million, and may incur additional fees on December 31, 2012, if outstanding borrowings under the credit facility remain outstanding at this date.

Transaction with Oaktree Capital Management, L.P.

On November 7, 2012, we entered into definitive agreements with Oaktree Capital Management, L.P. ("Oaktree"), pursuant to which Oaktree will invest approximately $102.7 million in the Company. The transaction will occur in two phases; the initial phase of the transaction will consist of the following: (a) a $75.0 million senior secured Term Loan A with funds to be used for retirement of $55.0 million of outstanding debt under the Company's existing credit facility and $20.0 million to be used for working capital and general business purposes; and (b) a $27.7 million secured Term Loan B issued and exchanged for $27.7 million of the Company's outstanding 7.0% convertible senior notes due December 2014 held by Oaktree. We will issue to Oaktree an amount of shares of common stock at closing, which along with any other common stock Oaktree already owns, will represent approximately 49.0% of the outstanding common stock of the Company. We will issue to Oaktree shares of a new class of non-voting preferred stock as described below.

The interest rate on the $75.0 million secured Term Loan A will be 12.0% per annum, and the interest rate on the $27.7 million Term Loan B will be 10.0% per annum. Interest on each of the secured term loans is payable-in-kind for the first three years of the loans. Both term loans mature five years after closing of the term loan credit facility agreement and are secured by a perfected first lien on the collateral that currently secures the Company's outstanding credit facility and available unencumbered assets. The loans are non-amortizing and prepayable without penalty. While the Term Loan B is not junior in priority to the Term Loan A, the Term Loan B may not be repaid until the Term Loan A has been repaid in full.

As part of the initial phase, Oaktree will be issued shares of a new class of non-voting preferred stock as soon as the Company's shareholders approve an amendment to our articles of incorporation to allow for issuance of such non-voting preferred stock. If the Company's shareholders do not approve the amendment, Oaktree will be entitled to exercise a warrant to purchase 19.9% of the common stock of the Company's wholly-owned Delaware subsidiary, Technitrol Delaware, Inc. If the non-voting preferred is issued to Oaktree, the subsidiary warrant will be terminated. We intend to seek shareholder approval for the necessary amendment at a special shareholder meeting. Should all of the convertible senior notes be retired, the new preferred stock will automatically convert into additional shares of common stock such that Oaktree would hold 64.38% of the equity of Pulse (on a fully diluted basis immediately following closing, and without giving effect to shares of common stock and warrants it owned prior to this transaction).

We expect the second phase to occur during 2013. In this phase, we will offer each holder of its outstanding convertible senior notes, other than Oaktree, the option to exchange its convertible senior notes at up to 80.0% of their par amount, as well as and shares of Pulse common stock. If the holders of 90.0% of the convertible senior notes, including those exchanged by Oaktree in the first phase, exchange their convertible senior notes under this optional exchange, then the $27.7 million portion of Oaktree's Term Loan B will be reduced by 20.0%.

The issuance of new shares of Pulse common stock in these transactions would normally require approval of the Company's shareholders according to the shareholder approval policy of the New York Stock Exchange ("NYSE"). The audit committee of the Company's board of directors determined that the delay necessary to obtain shareholder approval prior to securing the term loan would seriously jeopardize the financial viability of the Company. Because of that determination, the audit committee pursued an exception provided in the NYSE's shareholder approval policy and expressly applied to the NYSE to waive, the shareholder approval that would otherwise have been required under that policy. The NYSE has accepted the Company's application of the exception. In reliance on the exception, the Company and Oaktree expect to consummate the first phase of the recapitalization on or around November 19, 2012, which is at least 10 days after the Company mails to all of its shareholders a letter to all shareholders notifying them of its intention to issue the shares of its common stock without seeking their approval, in accordance with NYSE rules.

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

During the fourth quarter of 2012, we expect to incur costs in connection with these transactions, including approximately $1.6 million in contractual fees to be paid to our advisors.

24-------------------------------------------------------------------------------- Table of Contents The description of the terms of the recapitalization transactions contained in this Form 10-Q is a summary. The recapitalization plan is subject to numerous conditions, including certain customary conditions typical for transactions of this nature. No assurances can be made that these closing conditions will be satisfied or that any transaction will be consummated. The Company expects to file the full agreements as exhibits to the Company's Current Report on Form 8-K with the Securities and Exchange Commission.

NYSE Delisting Notice On September 27, 2012, the NYSE notified the Company it had fallen below the Exchange's continued listing standard for average market capitalization and stockholders' equity. Rule 802.01B of the NYSE Listed Company Manual requires companies whose total stockholders' equity is less than $50.0 million to maintain an average global market capitalization over a consecutive 30-day trading period of not less than $50.0 million. Under applicable NYSE rules, the Company has 45 days from the receipt of the notice to submit a plan advising the NYSE of definitive actions the Company has taken, or proposes to take, that would bring it into compliance with the market capitalization listing standards within 18 months of receipt of the letter. The Company intends to submit such a plan and has notified the NYSE that it will seek to cure the deficiency within the prescribed timeframe. If the Exchange accepts the plan, the shares of common stock will continue to be listed on the NYSE during the 18 month cure period, subject to the compliance with other NYSE continued listing standards and continued periodic review by the NYSE of the Company's progress with respect to its plan. If the plan is not submitted on a timely basis, is not accepted or is accepted but the Company does not make progress consistent with the plan during the plan period, the Exchange could initiate delisting proceedings. A delisting of our common stock is likely to reduce the liquidity 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.

On October 10, 2012, we received a written notification from the New York Stock Exchange (the "NYSE" or the "Exchange"), notifying us that we fail to comply with NYSE Listed Company Manual Rule 802.01C (the "Rule") because our common stock traded below the minimum average closing share price of $1.00 during the last 30 consecutive business days. The notification has no immediate effect on the listing of our common stock. Under the applicable rules of the NYSE, the Company must notify the NYSE within 10 business days of receipt of the non-compliance notice that it intends to cure the deficiency. The Company has notified the NYSE within this time period that it intends to cure the deficiency. The Company has six months from its receipt of the non-compliance notice to cure the deficiency and regain compliance. Compliance can be achieved by having a closing price of at least $1.00 per share on the last trading day of any calendar month during the six-month cure period and an average closing share price of at least $1.00 over the 30 trading-day period ending on the last trading day of that month. Notwithstanding the foregoing, if the Company determines to remedy the non-compliance by taking action that will require shareholder approval, such as a reverse stock split, the NYSE will continue to list the common stock pending shareholder approval by no later than its next annual meeting, and the implementation of such action promptly thereafter. The deficiency would be cured if the price promptly exceeds $1.00 per share, and the price remains above the level for at least the following 30 trading days. A delisting of our common stock is likely to reduce the liquidity 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.

Certain Other Matters Relating to Liquidity We are a party to various legal proceedings, claims and assessments that arise in the ordinary course of business, and may continue to incur significant costs in defending or settling legal matters. The total amount and timing of the expected future payments related to these matters cannot be estimated due to the uncertainty of the duration of the legal proceedings and the ultimate scope of other claims. However, an unfavorable outcome in a single matter or in multiple legal matters during the same reporting period could have a material adverse effect on our consolidated financial position, results from operations and cash flows. Refer to Note 8, Commitments and contingencies, on page 11 of this Form 10-Q for a discussion of certain legal proceedings.

Our domestic defined benefit retirement plan is subject to the pursuit of an alleged claim by the Pension Benefit Guarantee Corporation ("PBGC"). Communications from the PBGC have indicated that the sale of Electrical's North America operations may have resulted in a partial plan termination, which may require us to accelerate our funding of up to approximately $6.3 million to this defined plan but would not be expected to directly result in any additional expenses to the Company. In February 2012, legislation was introduced that may limit the applicability of ERISA Section 4062(e) to substantial, permanent cessations of operations and not to transactions like the sale of Electrical to a third party in which operations are moved to another facility at a different location. We are continuing discussions with the PBGC on this matter. We do not anticipate making any material cash payments to our domestic defined benefit retirement plan in 2012.

The Company's majority-owned subsidiary in Taiwan declared a dividend of approximately $7.0 million, payable in November 2012. Distributions to minority shareholders, withholding and other taxes will reduce the net proceeds of the dividend to the Company to approximately $4.8 million. Cash of this subsidiary is included in the Company's Condensed Consolidated Balance Sheet.

25-------------------------------------------------------------------------------- Table of Contents During the nine months ended September 28, 2012, we experienced no material changes to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 30, 2011.

Our retained earnings are free from legal or contractual restrictions as of September 28, 2012, with the exception of approximately $26.0 million of subsidiary retained earnings primarily in China that are restricted in accordance with Section 58 of the PRC Foreign Investment Enterprises Law. The $26.0 million includes approximately $2.5 million of retained earnings of a majority-owned subsidiary. The amount restricted in accordance with the PRC Foreign Investment Enterprise Law is applicable to all foreign investment enterprises doing business in China. The restriction applies to 10% of our net earnings in China, limited to 50% of the total capital invested.

We do not maintain any off-balance-sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect on our financial condition or results of operations.

New and Recently Adopted Accounting Pronouncements Please see Note 1, General, to the Notes to Unaudited Condensed Consolidated Financial Statements beginning on page 8 for a description of new and recently adopted accounting pronouncements.

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