UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
|
(Mark
One)
|
|
[
X ]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended: December 27, 2009
OR
|
[ ]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
Commission
file number 1-10233
MAGNETEK,
INC.
(Exact
name of Registrant as specified in its charter)
|
DELAWARE
|
95-3917584
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
Number)
|
N49
W13650 Campbell Drive
Menomonee
Falls, Wisconsin 53051
(Address
of principal executive offices)
(262)
783-3500
(Registrant’s
telephone number, including area code)
__________________________________________________
(Former
name, former address and former fiscal year,
if
changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X
] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
[ ] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “accelerated filer,” “large accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
|
Large
accelerated filer [ ]
|
Accelerated
filer [ X ]
|
Non-accelerated
filer [ ]
|
Smaller
Reporting Company
[ ]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No [X]
The
number of shares outstanding of Registrant’s Common Stock, as of February 1,
2010, was 31,083,488 shares.
FISCAL
YEAR 2010 MAGNETEK FORM 10-Q
FOR THE
FISCAL QUARTER ENDED DECEMBER 27, 2009
MAGNETEK,
INC.
Part
I. Financial
Information
Part
II. Other
Information
PART I. FINANCIAL
INFORMATION
MAGNETEK,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts
in thousands, except per share data, unaudited)
|
|
|
Three
Months Ended
|
|
|
|
|
(13
Weeks)
|
|
|
(13
Weeks)
|
|
|
|
|
December
27,
|
|
|
December
27,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
19,232 |
|
|
$ |
26,761 |
|
|
Cost
of sales
|
|
|
13,354 |
|
|
|
17,359 |
|
|
Gross
profit
|
|
|
5,878 |
|
|
|
9,402 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
995 |
|
|
|
900 |
|
|
Pension
expense
|
|
|
2,051 |
|
|
|
847 |
|
|
Selling,
general and administrative
|
|
|
3,588 |
|
|
|
5,707 |
|
|
Income
(loss) from operations
|
|
|
(756 |
) |
|
|
1,948 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income:
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
(6 |
) |
|
|
(43 |
) |
|
Income
(loss) from continuing operations before income taxes
|
|
|
(750 |
) |
|
|
1,991 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
130 |
|
|
|
732 |
|
|
Income
(loss) from continuing operations
|
|
|
(880 |
) |
|
|
1,259 |
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations, net of tax
|
|
|
(345 |
) |
|
|
680 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(1,225 |
) |
|
$ |
1,939 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
Basic
and diluted:
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from continuing operations
|
|
$ |
(0.03 |
) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
$ |
(0.01 |
) |
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(0.04 |
) |
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,010 |
|
|
|
30,671 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
31,010 |
|
|
|
30,845 |
|
See
accompanying notes
MAGNETEK,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts
in thousands, except per share data, unaudited)
|
|
|
Six
Months Ended
|
|
|
|
|
(26
Weeks)
|
|
|
(26
Weeks)
|
|
|
|
|
December
27,
|
|
|
December
27,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
37,066 |
|
|
$ |
53,112 |
|
|
Cost
of sales
|
|
|
25,566 |
|
|
|
34,265 |
|
|
Gross
profit
|
|
|
11,500 |
|
|
|
18,847 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
1,896 |
|
|
|
1,770 |
|
|
Pension
expense
|
|
|
4,103 |
|
|
|
1,693 |
|
|
Selling,
general and administrative
|
|
|
7,547 |
|
|
|
11,405 |
|
|
Income
(loss) from operations
|
|
|
(2,046 |
) |
|
|
3,979 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income:
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
(16 |
) |
|
|
(110 |
) |
|
Income
(loss) from continuing operations before income taxes
|
|
|
(2,030 |
) |
|
|
4,089 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
361 |
|
|
|
1,094 |
|
|
Income
(loss) from continuing operations
|
|
|
(2,391 |
) |
|
|
2,995 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of tax
|
|
|
(629 |
) |
|
|
(175 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(3,020 |
) |
|
$ |
2,820 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
Basic
and diluted:
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from continuing operations
|
|
$ |
(0.08 |
) |
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(0.10 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,985 |
|
|
|
30,654 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
30,985 |
|
|
|
30,905 |
|
MAGNETEK,
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Amounts
in thousands)
|
|
|
December
27,
|
|
|
June
28,
|
|
|
ASSETS
|
|
2009
|
|
|
2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
16,483 |
|
|
$ |
18,097 |
|
|
Restricted
cash
|
|
|
262 |
|
|
|
262 |
|
|
Accounts
receivable, net
|
|
|
10,836 |
|
|
|
11,598 |
|
|
Inventories
|
|
|
11,086 |
|
|
|
12,617 |
|
|
Prepaid
expenses and other current assets
|
|
|
924 |
|
|
|
1,242 |
|
|
Total
current assets
|
|
|
39,591 |
|
|
|
43,816 |
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
20,711 |
|
|
|
19,948 |
|
|
Less:
accumulated depreciation
|
|
|
16,867 |
|
|
|
16,299 |
|
|
Net
property, plant and equipment
|
|
|
3,844 |
|
|
|
3,649 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
30,432 |
|
|
|
30,359 |
|
|
Other
assets
|
|
|
5,808 |
|
|
|
6,256 |
|
|
Total
Assets
|
|
$ |
79,675 |
|
|
$ |
84,080 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’
DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
7,728 |
|
|
$ |
5,716 |
|
|
Accrued
liabilities
|
|
|
4,735 |
|
|
|
6,313 |
|
|
Current
portion of long-term debt
|
|
|
6 |
|
|
|
11 |
|
|
Total
current liabilities
|
|
|
12,469 |
|
|
|
12,040 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion
|
|
|
2 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
Pension
benefit obligations, net
|
|
|
70,988 |
|
|
|
76,849 |
|
|
Other
long term obligations
|
|
|
1,562 |
|
|
|
1,615 |
|
|
Deferred
income taxes
|
|
|
5,322 |
|
|
|
4,863 |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficit
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
310 |
|
|
|
309 |
|
|
Paid
in capital in excess of par value
|
|
|
138,544 |
|
|
|
138,094 |
|
|
Accumulated
deficit
|
|
|
(4,541 |
) |
|
|
(1,521 |
) |
|
Accumulated
other comprehensive loss
|
|
|
(144,981 |
) |
|
|
(148,173 |
) |
|
Total
stockholders' deficit
|
|
|
(10,668 |
) |
|
|
(11,291 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Deficit
|
|
$ |
79,675 |
|
|
$ |
84,080 |
|
See
accompanying notes
MAGNETEK,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts
in thousands, unaudited)
|
|
|
Six
Months Ended
|
|
|
|
|
(26
Weeks)
|
|
|
(26
Weeks)
|
|
|
|
|
December
27,
|
|
|
December
28,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash
flows from continuing operating activities:
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
(2,391 |
) |
|
$ |
2,995 |
|
|
Adjustments
to reconcile income (loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
to
net cash provided by (used in)operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
541 |
|
|
|
513 |
|
|
Stock
based compensation expense
|
|
|
314 |
|
|
|
742 |
|
|
Pension
expense
|
|
|
4,103 |
|
|
|
1,693 |
|
|
Deferred
income tax provision
|
|
|
459 |
|
|
|
450 |
|
|
Changes
in operating assets and liabilities
|
|
|
3,519 |
|
|
|
(1,001 |
) |
|
Cash
contribution to pension fund
|
|
|
(6,859 |
) |
|
|
(4,392 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
adjustments
|
|
|
2,077 |
|
|
|
(1,995 |
) |
|
Net
cash provided by (used in) continuing operating activities
|
|
|
(314 |
) |
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
form sale of business, net of transaction costs
|
|
|
- |
|
|
|
1,250 |
|
|
Deposit
into escrow account
|
|
|
- |
|
|
|
(5 |
) |
|
Capital
expenditures
|
|
|
(693 |
) |
|
|
(396 |
) |
|
Net
cash provided by (used in) investing activities
|
|
|
(693 |
) |
|
|
849 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
138 |
|
|
|
164 |
|
|
Borrowings
under capital lease obligations
|
|
|
- |
|
|
|
8 |
|
|
Principal
payments under capital lease obligations
|
|
|
(7 |
) |
|
|
(7 |
) |
|
Net
cash provided by financing activities
|
|
|
131 |
|
|
|
165 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from discontinued operations:
|
|
|
|
|
|
|
|
|
|
Used
in operating activities
|
|
|
(738 |
) |
|
|
(316 |
) |
|
Cash
used in discontinued operations
|
|
|
(738 |
) |
|
|
(316 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
(1,614 |
) |
|
|
1,698 |
|
|
Cash
at the beginning of the period
|
|
|
18,097 |
|
|
|
15,210 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at the end of the period
|
|
$ |
16,483 |
|
|
$ |
16,908 |
|
See
accompanying notes
MAGNETEK,
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
27, 2009
(Amounts
in thousands unless otherwise noted, except per share data,
unaudited)
|
1.
|
Summary of Significant
Accounting Policies
|
Profile
Magnetek,
Inc. (the “Company” or “Magnetek”) is a global provider of digital power control
systems that are used to control motion and power primarily in material
handling, elevator and energy delivery applications. The Company’s
products consist primarily of programmable motion control and power conditioning
systems used on the following applications: overhead cranes and hoists;
elevators; coal mining equipment; and renewable energy.
Basis of
Presentation
The
accompanying unaudited condensed consolidated financial statements include the
accounts of Magnetek, Inc. and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial reporting and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. For further
information, refer to the financial statements and footnotes thereto included in
the Company’s Annual Report on Form 10-K for the year ended June 28, 2009 filed
with the Securities and Exchange Commission (the “SEC”). In the
Company's opinion, these unaudited statements contain all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial position of the Company as of December 27, 2009, and the results of
its operations and cash flows for the three- and six-month periods ended
December 27, 2009 and December 28, 2008. Results for the three- and six-months
ended December 27, 2009 are not necessarily indicative of results that may be
experienced for the full fiscal year.
The
Company uses a fifty-two, fifty-three week fiscal year ending on the Sunday
nearest to June 30. Fiscal quarters are the 13 or 14 week periods
ending on the Sunday nearest September 30, December 31, March 31 and June
30. The three- and six-month periods ended December 27, 2009 and
December 28, 2008 each contained 13 and 26 weeks respectively.
Use of Estimates -
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Recent Accounting
Pronouncements
In
August 2008, the SEC announced that it will issue for comment a proposed
roadmap regarding the potential use of International Financial Reporting
Standards (“IFRS”) for the preparation of financial statements by U.S.
registrants. IFRS are standards and interpretations adopted by the International
Accounting Standards Board. Under the proposed roadmap, the Company would be
required to prepare financial statements in accordance with IFRS in fiscal 2014,
including comparative information also prepared under IFRS for fiscal 2013 and
fiscal 2012. The Company is currently assessing the potential impact of IFRS on
its financial statements and will continue to follow the proposed roadmap for
future developments.
In
December 2007, the FASB issued Accounting Standards Codification (“ASC”)
Topic 805, Business
Combinations. ASC Topic 805 is effective for business
combinations closed in fiscal years beginning after December 15, 2008. This
standard significantly changes the accounting for business acquisitions both
during the period of the acquisition and in subsequent periods. Among the more
significant changes in the accounting for acquisitions are the
following:
|
·
|
Acquired
in-process research and development (“IPR&D”) is accounted for as an
asset, with the cost recognized as the research and development is
realized or abandoned. IPR&D was previously expensed at the time of
the acquisition.
|
|
·
|
Contingent
consideration is recorded at fair value as an element of purchase price
with subsequent adjustments recognized in operations. Contingent
consideration was previously accounted for as a subsequent adjustment of
purchase price.
|
|
·
|
Transaction
costs are expensed. These costs were previously treated as costs of the
acquisition.
|
In
December 2007, the FASB issued ASC Topic 810, Noncontrolling Interests in
Consolidated Financial Statements. ASC Topic 810 establishes
accounting and reporting standards for the noncontrolling interest (minority
interest) in a subsidiary and for the deconsolidation of a subsidiary. ASC Topic
810 is effective for financial statements issued for fiscal years beginning
after December 15, 2008. The Company adopted ASC Topic 810 effective June
29, 2009. As the Company currently has no minority interests, the
adoption of ASC Topic 810 did not have a material impact on its consolidated
financial statements.
In May
2009, the FASB issued ASC Topic 855, Subsequent Events, which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. This Statement requires an entity to recognize in
the financial statements the effects of all subsequent events that provide
additional evidence about conditions that existed at the date of the balance
sheet. For nonrecognized subsequent events that must be disclosed to keep the
financial statements from being misleading, an entity will be required to
disclose the nature of the event, as well as an estimate of its financial
effect, or a statement that such an estimate cannot be made. In addition, ASC
Topic 855 requires entities to disclose the date through which subsequent events
were evaluated. ASC Topic 855 is effective for interim or annual
financial periods ending after June 15, 2009. The Company adopted the
provisions of ASC Topic 855 for its fiscal year ended June 28, 2009 and applied
the requirements of ASC Topic 855 on a prospective basis. The Company
has evaluated subsequent events and transactions for potential recognition or
disclosure in the financial statements through February 4, 2010, the date the
financial statements were available to be issued, and has concluded that no
recognized or nonrecognized subsequent events have occurred since its fiscal
second quarter ended on December 27, 2009.
2. Discontinued
Operations
In April
2008, the Company committed to a plan to divest its telecom power systems
(“TPS”) business, which manufactured backup power systems for wireless
applications. As a result, the Company reclassified the assets to be
disposed of, primarily inventory, as held for sale at June 29, 2008, and
classified the operating results of the business as discontinued
operations. In September 2008, the Company completed the sale of the
assets of the TPS business to Myers Power Products, Inc.
(“Myers”). The purchase price of $1.25 million was paid by Myers to
the Company in October, 2008. The Company recorded a loss of $0.4
million related to the divestiture, included in results of discontinued
operations for the six months ended December 28, 2008, comprised mainly of
future lease costs and the write-off of certain TPS fixed assets.
In
addition, certain expenses incurred related to businesses the Company no longer
owns are classified as discontinued operations. The results of
discontinued operations are as follows:
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
December
27,
|
|
|
December
28,
|
|
|
December
27,
|
|
|
December
28,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net
sales - TPS business
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations - TPS
|
|
|
(1 |
) |
|
|
(5 |
) |
|
|
(28 |
) |
|
|
(94 |
) |
|
Income
from Federal Mogul settlement
|
|
|
- |
|
|
|
480 |
|
|
|
- |
|
|
|
480 |
|
|
Income
(loss) on disposal of TPS business
|
|
|
- |
|
|
|
153 |
|
|
|
- |
|
|
|
(368 |
) |
|
Income
(expense) related to divested businesses
|
|
|
(344 |
) |
|
|
52 |
|
|
|
(601 |
) |
|
|
(193 |
) |
|
Loss
from discontinued operations
|
|
$ |
(345 |
) |
|
$ |
680 |
|
|
$ |
(629 |
) |
|
$ |
(175 |
) |
The
condensed consolidated balance sheet as of December 27, 2009 includes certain
accrued liabilities which represent the Company’s best estimate of remaining
contingent liabilities related to indemnification provisions included in sale
agreements of divested businesses. While management has used its best
judgment in assessing the potential liability for these items, given the
uncertainty regarding future events, it is difficult to estimate the possible
timing or magnitude of any payments that may be required for liabilities subject
to indemnification. Any future adjustment to currently recorded
contingencies related to indemnification claims or payments based upon changes
in circumstances would be recorded as a gain or loss in discontinued
operations.
3. Inventories
Inventories
consist of the following:
|
|
|
December
27,
|
|
|
June
28,
|
|
|
|
|
2009
|
|
|
2009
|
|
|
Raw
materials and stock parts
|
|
$ |
7,694 |
|
|
$ |
9,479 |
|
|
Work-in-process
|
|
|
1,227 |
|
|
|
909 |
|
|
Finished
goods
|
|
|
2,165 |
|
|
|
2,229 |
|
|
|
|
$ |
11,086 |
|
|
$ |
12,617 |
|
|
4.
|
Commitments and
Contingencies
|
Litigation—Product
Liability
The
Company is involved in a product liability lawsuit related to the Telemotive
Industrial Controls business acquired in December 2002 through the purchase of
the stock of MXT Holdings, Inc. (“MXT”). The lawsuit was initially filed by
Robert Redman in Cook County, Illinois in 1998 against MXT and other defendants,
but now is pending only against MXT and Electromotive Systems, Inc., a
non-affiliated third party. The claim pre-dated the acquisition and was tendered
to the insurance companies that provided coverage for MXT Holdings, Inc.,
against such claims, and the defense and indemnification has been accepted by
the carriers, subject to a reservation of rights. The lawsuit seeks damages for
personal injuries allegedly incurred by Mr. Redman due to an allegedly
defective radio control product manufactured by MXT. The lawsuit is in the
discovery phase. Management believes that the insurers will bear all
liability, if any, with respect to the case and that the proceeding will not
have a material adverse effect on the Company’s results of operations or
financial position.
In August
2006, Pamela L. Carney, Administrator of the Estate of Michael J. Carney, filed
a lawsuit in the Court of Common Pleas of Westmoreland County, Pennsylvania,
against the Company and other defendants, alleging that a product manufactured
by the Telemotive Industrial Controls business acquired by the Company in
December 2002 contributed to an accident that resulted in the death of Michael
J. Carney in August 2004. The claim has been tendered to the Company’s insurance
carrier and legal counsel has been retained to represent the Company.
Plaintiff’s claim for damages is unknown at this time, but management believes
that its insurer will bear all liability in excess of deductible amounts for the
claim, if any. The case is in the discovery phase and no trial date has been
set.
The
Company has been named, along with multiple other defendants, in
asbestos-related lawsuits associated with business operations previously
acquired by the Company, but which are no longer owned. During the Company’s
ownership, none of the businesses produced or sold asbestos-containing products.
With respect to these claims, the Company is either contractually indemnified
against liability for asbestos-related claims or believes that it has no
liability for such claims. The Company aggressively seeks dismissal from these
proceedings, and has also tendered the defense of these cases to the insurers
for the companies from which Magnetek acquired the businesses. Management does
not believe the asbestos proceedings, individually or in the aggregate, will
have a material adverse effect on its financial position or results of
operations.
Litigation—Patent
Infringement and Related Proceedings
In
August, 2008, the Company filed a complaint in the Circuit Court of Cook County,
Illinois, County Department, Law Division, against Kirkland &
Ellis, LLP (“K&E”) (Magnetek, Inc. vs.
Kirkland & Ellis, LLP, Civil Action
No. 2008-L-008970). The lawsuit involves a claim for breach of
professional responsibility arising out of K&E’s representation of Magnetek
in the patent infringement action, Ole K. Nilssen v Magnetek,
Inc. The Company alleges that, as a result of K&E’s negligent breach
of professional duty in failing to discover or investigate the existence of
prior art and prior misconduct which would have made Nilssen’s patent claim
unenforceable or invalidated his patent, the Company suffered an arbitration
award and judgment in the amount of $23.4 million, which judgment was
ultimately settled by the payment to Nilssen of $18.8 million. The Company
is seeking damages in the amount of $18.8 million, reimbursement of
reasonable costs and attorneys fees incurred in the proceeding to vacate the
arbitration award and settlement thereof, and costs incurred in connection with
this lawsuit. K&E filed its answer in October 2008 and, in December 2009,
filed a motion to dismiss for lack of subject matter jurisdiction and
alternative motion to file amended affirmative defenses. The Company’s brief in
opposition was filed in January 2010. The case is in the discovery phase and no
trial date has been set.
Litigation—Other
In
November 2007, a lawsuit was filed by Antonio Canova in Italy, in the Court of
Arezzo, Labor Law Section, against the Company and Power-One Italy, S.p.A.
Mr. Canova is a former Executive Vice President of the Company and was
Deputy Chairman and Managing Director of the Company’s former Italian
subsidiary, Magnetek S.p.A. Mr. Canova asserted claims for damages in
the amount of 3.5 million Euros (approximately $5.1 million USD)
allegedly incurred in connection with the termination of his employment at the
time of the sale of the Company’s power electronics business to
Power-One, Inc. in October
2006. The claims against the Company relate to a change of control agreement and
restricted stock grant. The Company’s reply brief was filed in March 2008, and
the Company believes the claim is without merit and intends to vigorously defend
against it. A hearing was held on October 15, 2009, at which time testimony from
the witnesses for the parties was presented in Court, and on December 15, 2009,
the parties filed briefs confirming the facts in support of their positions. The
Court has scheduled the final hearing in the lawsuit for May 25,
2010.
|
|
As
previously reported by the Company, the Company and Power-One, Inc. were
involved in a lawsuit in the Circuit Court, Waukesha County, Wisconsin
relating to the terms of a distribution and supply agreement between the
parties. The parties reached a settlement of the matters involved in the
lawsuit and mutually agreed to terminate their supply and distribution
agreement, and the lawsuit was dismissed on November 13,
2009.
|
Environmental
Matters—General
From time
to time, Magnetek has taken action to bring certain facilities associated with
previously owned businesses into compliance with applicable environmental laws
and regulations. Upon the subsequent sale of certain businesses, the Company
agreed to indemnify the buyers against environmental claims associated with the
divested operations, subject to certain conditions and limitations. Remediation
activities, including those related to the Company’s indemnification
obligations, did not involve material expenditures during the first six months
of fiscal years 2010 or 2009.
The
Company has also been identified by the United States Environmental Protection
Agency and certain state agencies as a potentially responsible party for cleanup
costs associated with alleged past waste disposal practices at several
previously owned or leased facilities and offsite locations. Its remediation
activities as a potentially responsible party were not material in the first six
months of fiscal years 2010 or 2009. Although the materiality of future
expenditures for environmental activities may be affected by the level and type
of contamination, the extent and nature of cleanup activities required by
governmental authorities, the nature of the Company’s alleged connection to the
contaminated sites, the number and financial resources of other potentially
responsible parties, the availability of indemnification rights against third
parties and the identification of additional contaminated sites, the Company’s
estimated share of liability, if any, for environmental remediation, including
its indemnification obligations, is not expected to be material.
Bridgeport,
Connecticut Facility
In 1986,
the Company acquired the stock of Universal Manufacturing Company (“Universal”)
from a predecessor of Fruit of the Loom (“FOL”), and the predecessor agreed to
indemnify the Company against certain environmental liabilities arising from
pre-acquisition activities at a facility in Bridgeport, Connecticut.
Environmental liabilities covered by the indemnification agreement included
completion of additional cleanup activities, if any, at the Bridgeport facility
and defense and indemnification against liability for potential response costs
related to offsite disposal locations. The Company’s leasehold interest in the
Bridgeport facility was assigned to the buyer in connection with the sale of the
Company’s transformer business in June 2001. FOL, the successor to the
indemnification obligation, filed a petition for Reorganization under
Chapter 11 of the Bankruptcy Code in 1999 and the Company filed a proof of
claim in the proceeding for obligations related to the environmental
indemnification agreement. The Company believes that FOL had substantially
completed the clean-up obligations required by the indemnification agreement
prior to the bankruptcy filing. In November 2001, the Company and FOL entered
into an agreement involving the allocation of certain potential tax benefits and
Magnetek withdrew its claims in the bankruptcy proceeding. FOL’s obligation to
the state of Connecticut was not discharged in the reorganization
proceeding.
In
October 2006, Sergy Company, LLC (“Sergy”), the owner of the Bridgeport
facility, filed a lawsuit in Superior Court, J.D. of Fairfield, Connecticut
alleging that the Company is obligated to remediate environmental contamination
at the facility. The case was transferred to the Complex Litigation Docket, J.D.
of Waterbury at Waterbury, Connecticut. Sergy filed an amended complaint
alleging a breach of lease obligations and violation of Connecticut
environmental statutory requirements, which allegations were denied in the
Company’s amended answer, affirmative defenses and counterclaims. The case is in
the discovery and motions phase. Sergy amended its complaint to
include additional claims against the Company under the Connecticut Transfer
Act. The Company’s request to add additional potentially responsible parties as
defendants was granted by the Court, and the Company filed declaratory judgment
complaints against the FOL successor and Merrit Gavin, trustee of the Sergy
Trust, a former owner of the Bridgeport facility, seeking a declaration that the
obligations that Sergy seeks to enforce against the Company are the obligations
of these other parties. In July 2009, the
Court
granted Gavin’s motion to dismiss him from the lawsuit, and the Company filed an
appeal of such ruling. In October 2009, FOL filed its third motion to dismiss
and the Company filed its responsive brief. The lawsuit is in the discovery
phase, and the trial is scheduled to begin in January, 2011. The
Company intends to continue vigorously defending the claims brought against it
in the lawsuit.
In
January 2007, the Connecticut Department of Environmental Protection (“DEP”)
requested parties, including the Company, to submit reports summarizing the
investigations and remediation performed to date at the site and the proposed
additional investigations and remediation necessary to complete those actions at
the site. DEP requested additional information
from the Company relating to site investigations and remediation. The Company
retained an environmental consultant to review and prepare reports on historical
operations and environmental activities at the Bridgeport facility. In November
2009, the Company submitted its report and proposed work plan to the DEP. The
Company has recorded a liability of $0.3 million related to the Bridgeport
facility, representing the Company’s best estimate of future legal fees, site
investigation costs and remediation costs, the majority of which is expected to
be incurred during fiscal 2010. The liability is included in accrued liabilities
in the condensed consolidated balance sheet as of June 28, 2009 and
December 27, 2009.
In April
2008, the Commissioner of Environmental Protection (“CTCEP”) filed an action in
Superior Court, Judicial District of Hartford-New Britain at Hartford seeking
injunctive relief against Sergy and the Company, which action was commenced
after Sergy cut off power to the Bridgeport facility, thereby disabling a
groundwater pump and treatment system previously installed by FOL and currently
operated by the Company on a voluntary basis. Although a stipulation was entered
into by the Company and Sergy relating to the start up and operation of the
groundwater pump and treatment system, the CTCEP filed a request to amend the
complaint to assert additional claims and to seek further remedies, including
injunctive relief and civil penalties, for alleged failure to investigate and
remediate pollution under the Connecticut Transfer Act. In September,
2008 the Hartford Court ordered the case transferred to the Waterbury Court,
where the above referenced action filed by Sergy against the Company is
currently pending. In July 2009, the Court denied the Company’s
motion to join Gavin and FOL in the CTCEP lawsuit and also denied the motion to
consolidate the Sergy and CTCEP actions. The lawsuit is currently in the
discovery phase.
FOL’s
inability to satisfy its remaining obligations related to the Bridgeport
facility and any offsite disposal locations, or an unfavorable ruling in the
lawsuits with the owner of the Bridgeport facility or the CTCEP, or the
discovery of additional environmental contamination at the Bridgeport facility
could have a material adverse effect on the Company’s financial position, cash
flows or results of operations.
5. Comprehensive
Income
For the
three- and six-month periods ended December 27, 2009, and December 28, 2008,
comprehensive income consisted of the following:
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
December
27,
|
|
|
December
28,
|
|
|
December
27,
|
|
|
December
28,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net
income (loss)
|
|
$ |
(1,225 |
) |
|
$ |
1,939 |
|
|
$ |
(3,020 |
) |
|
$ |
2,820 |
|
|
Change
in unrecognized pension liability
|
|
|
1,553 |
|
|
|
1,080 |
|
|
|
3,105 |
|
|
|
2,160 |
|
|
Change
in currency translation adjustments
|
|
|
46 |
|
|
|
(597 |
) |
|
|
87 |
|
|
|
(642 |
) |
|
Comprehensive
income
|
|
$ |
374 |
|
|
$ |
2,422 |
|
|
$ |
172 |
|
|
$ |
4,338 |
|
6. Earnings
(Loss) Per Share
The
following table sets forth the computation of basic and diluted earnings (loss)
per share for the three- and six-months ended December 27, 2009, and December
28, 2008:
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
December
27,
|
|
|
December
28,
|
|
|
December
27,
|
|
|
December
28,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
(880 |
) |
|
$ |
1,259 |
|
|
$ |
(2,391 |
) |
|
$ |
2,995 |
|
|
Income
(loss) from discontinued operations
|
|
|
(345 |
) |
|
|
680 |
|
|
|
(629 |
) |
|
|
(175 |
) |
|
Net
income (loss)
|
|
$ |
(1,225 |
) |
|
$ |
1,939 |
|
|
$ |
(3,020 |
) |
|
$ |
2,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares - basic earnings per share
|
|
|
31,010 |
|
|
|
30,671 |
|
|
|
30,985 |
|
|
|
30,654 |
|
|
Add
dilutive effective of stock based compensation
|
|
|
- |
|
|
|
174 |
|
|
|
- |
|
|
|
251 |
|
|
Weighted
average shares - diluted earnings per share
|
|
|
31,010 |
|
|
|
30,845 |
|
|
|
30,985 |
|
|
|
30,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share from continuing operations
|
|
$ |
(0.03 |
) |
|
$ |
0.04 |
|
|
$ |
(0.08 |
) |
|
$ |
0.10 |
|
|
Income
(loss) per share from discontinued operations
|
|
$ |
(0.01 |
) |
|
$ |
0.02 |
|
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
Net
income (loss) per share
|
|
$ |
(0.04 |
) |
|
$ |
0.06 |
|
|
$ |
(0.10 |
) |
|
$ |
0.09 |
|
Outstanding
options to purchase 2.3 million and 2.4 million shares of common stock for the
three months ended December 27, 2009, and December 28, 2008, have not been
included in the Company’s computation of weighted average shares for diluted
earnings per share because the effect would have been
anti-dilutive. Outstanding options to purchase 2.3 million shares of
common stock for the six months ended December 27, 2009, and December 28, 2008,
respectively, have not been included in the Company’s computation of weighted
average shares for diluted earnings per share because the effect would have been
anti-dilutive.
7. Warranties
The
Company offers warranties for certain products that it manufactures, with the
warranty term generally ranging from one to two years. Warranty
reserves are established for costs expected to be incurred after the sale and
delivery of products under warranty, based mainly on known product failures and
historical experience. Actual repair costs incurred for products
under warranty are charged against the established reserve balance as
incurred. Changes in the warranty reserve for the six-month periods
ended December 27, 2009, and December 28, 2008, are as follows:
|
|
|
Six
Months Ended
|
|
|
|
|
December
27,
|
|
|
December
28,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance,
beginning of fiscal year
|
|
$ |
281 |
|
|
$ |
493 |
|
|
Changes
in product warranties charged to earnings
|
|
|
209 |
|
|
|
(48 |
) |
|
Use
of reserve for warranty obligations
|
|
|
(228 |
) |
|
|
(97 |
) |
|
Balance,
end of period
|
|
$ |
262 |
|
|
$ |
348 |
|
Warranty
reserves are included in accrued liabilities in the accompanying condensed
consolidated balance sheets.
8.
Pension
Expense
Pension
expense related to the Company’s defined benefit pension plan for the three- and
six-month periods ended December 27, 2009, and December 28, 2008,
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
December
27,
|
|
|
December
28,
|
|
|
December
27,
|
|
|
December
28,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Interest
cost
|
|
$ |
2,705 |
|
|
$ |
2,799 |
|
|
$ |
5,410 |
|
|
$ |
5,598 |
|
|
Expected
return on plan assets
|
|
|
(2,207 |
) |
|
|
(3,032 |
) |
|
|
(4,412 |
) |
|
|
(6,065 |
) |
|
Recognized
net actuarial losses
|
|
|
1,553 |
|
|
|
1,080 |
|
|
|
3,105 |
|
|
|
2,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net pension expense
|
|
$ |
2,051 |
|
|
$ |
847 |
|
|
$ |
4,103 |
|
|
$ |
1,693 |
|
Under
current funding regulations, actuarial projections indicate that the Company
will be required to make contributions to the defined benefit pension plan of
approximately $5.3 million during the remainder of fiscal year
2010.
Due to
historical taxable losses, the Company provides valuation reserves against its
U.S. deferred tax assets. A portion of the Company’s deferred tax
liability relates to tax-deductible amortization of goodwill that is no longer
amortized for financial reporting purposes. These deferred tax liabilities are
considered to have an indefinite life and are therefore ineligible to be
considered as a source of future taxable income in assessing the realization of
deferred tax assets.
The
Company’s provision for income taxes for each of the three-month periods ended
December 27, 2009 and December 28, 2008 includes $234 and $225 of deferred
income tax expense related to the increase in the Company’s deferred tax
liability related to tax-deductible amortization of goodwill. The
provision for income taxes for the six-month periods ended December 27, 2009 and
December 28, 2008 includes $459 and $450 of deferred income tax expense related
to the increase in the Company’s deferred tax liability related to
tax-deductible amortization of goodwill. The remaining tax provision
is comprised of income taxes of the Company’s foreign subsidiary in
Canada.
|
10.
|
Bank Borrowing
Arrangements
|
In
November 2007, the Company entered into an agreement with Associated Bank, N.A.
(“Associated Bank”) providing for a $10 million revolving credit facility (the
“revolving facility”). Borrowings under the revolving facility bore
interest at the London Interbank Offering Rate (“LIBOR”) plus 1.5%, with
borrowing levels determined by a borrowing base formula as defined in the
agreement, which includes the level of eligible accounts receivable. The
revolving facility also supports the issuance of letters of credit, places
certain restrictions on the Company’s ability to pay dividends or make
acquisitions, and includes covenants that require minimum operating profit
levels and limit annual capital expenditures. Borrowings under the
revolving facility are collateralized by the Company’s accounts receivable and
inventory. In December 2008, the Company and Associated Bank entered into
a first amendment to the revolving facility, the primary purpose of which was to
extend the maturity date of the revolving facility to November
2010. There were no amounts outstanding on the amended revolving
facility as of December 27, 2009.
Due
mainly to the increase in pension expense during fiscal 2010, the Company was in
violation of the operating profit covenant included in the amended revolving
facility for the quarter ended December 27, 2009. The Company obtained a waiver
of the covenant default and is in the process of entering into a second
amendment to the revolving facility with Associated Bank. However, until
execution of such second amendment, the Company cannot utilize the revolving
facility.
Overview
Magnetek,
Inc. (“Magnetek,” “the Company,” “we,” or “us” ) is a global provider of digital
power control systems that are used to control motion and power primarily in
material handling, elevator and energy delivery applications. Our
systems consist primarily of programmable motion control and power conditioning
systems used in the following applications:
overhead
cranes and hoists; elevators; coal mining equipment; and renewable energy
applications, including wind turbines and photovoltaic power
systems. We believe that with our technical and productive resources,
application expertise, broad product
offerings and sales channel capabilities, we are well positioned to respond to
increasing demand in our served markets. Our operations are located
in North America, predominantly in Menomonee Falls, Wisconsin, our Company
headquarters.
Our
product offerings for material handling applications include drive systems,
radio remote controls, and braking, collision-avoidance, and electrification
subsystems, sold primarily to original equipment manufacturers (“OEMs”) of
overhead
cranes and hoists. We have a significant market share in North
America in alternating current (“AC”) control systems and believe we have growth
opportunities in wireless radio controls, direct current (“DC”) control systems
for retrofit applications and in automating existing manual material handling
processes.
Our
product offerings for elevator applications are comprised of highly integrated
subsystems and drives used to control motion primarily in high-rise, high speed
elevator applications. Our products are sold mainly to elevator OEMs
and we have a significant share of the available market for DC drives and
subsystems used in high-rise elevators used primarily in retrofit
projects. We believe we have opportunities for growth in available
elevator markets by introducing new energy-saving product offerings for AC
applications, expanding the breadth of our product offerings to include
competitive low-end products for lower performance AC applications, and using
our new product offerings to expand geographically.
Our
product offerings for energy delivery applications include power inverters for
renewable energy applications, including wind turbines and photovoltaic
installations, which deliver AC power to the utility grid from generators inside
wind turbines or from solar panels, or deliver power for consumption at the
source. Both the wind and solar markets have grown rapidly in North
America over the past several years as both wind and solar power have become
increasingly competitive from a cost standpoint with more traditional methods of
power generation. However, the ongoing credit crisis
and uncertainty of continued governmental incentives and regulations has had an
impact on solar and wind projects as these markets are heavily dependent on
availability of financing and government incentives over extended periods of
time. Although the slowdown in renewable energy projects negatively
impacted demand for our products during fiscal 2009, we believe our
product offerings have us well positioned to take advantage of growth in
renewable energy markets as credit conditions continue to improve and capital is
readily available to fund projects.
Continuing
Operations
We focus
on a variety of key indicators to monitor our business performance. These
indicators include order rates, sales growth, gross profit margin, operating
profit margin, net income, earnings per share, and working capital and cash flow
measures. These indicators are compared to our operating plans
as well as to our prior year actual results, and are used to measure our success
relative to our company objectives. Our company objectives are to grow
sales at least 10% on a year-over year basis, to achieve 30% gross margins and
10% operating profit margins, and to generate sufficient cash flow to fund our
operations and meet our obligations.
The U.S.
industrial slowdown and decline in capital spending began to negatively impact
our business during the third quarter of fiscal 2009 and continued to impact us
through the second quarter of fiscal 2010. Sales of our material
handling product offerings, which comprised nearly 70% of our sales in fiscal
2009, are influenced by cyclical forces in the industrial marketplace, and over
the past 12 months, we have experienced softening demand in certain of our
served markets, mainly in the automotive and primary metals
industries. We have recently seen indicators of improvements in
certain of our served markets, mainly in renewable energy and material
handling. Our bookings in the June 2009 quarter were $15.9 million,
$18.8 million in the September 2009 quarter and $28.1 million in the December
2009 quarter. Bookings for the December 2009 quarter include an order
for wind power inverters value at $11 million with deliveries scheduled between
now and November 2010. Our backlog value as of December 27, 2009 of
$20.4 million includes the $11 million wind inverter order. Our
second quarter sales of $19.2 million increased 8% sequentially over our first
quarter sales, but were down year-over-year by 28%, as sales of material
handling products decreased 36% year-over-year.
In
response to lower levels of sales and incoming orders, we have reduced our
workforce by nearly 60 positions, approximately 16% of our workforce, and
implemented a wage and salary freeze that is expected to remain in place
throughout fiscal 2010. More recently, we have taken actions to
temporarily suspend the Company’s 401(k) plan matching contributions and also
have changed the method of payment of the Company’s incentive compensation plan
for fiscal 2010 from cash payments to payment in Company common stock in an
effort to preserve cash. We continue to look for further actions to
improve our processes and improve production efficiency as well as reduce
our fixed cost structure.
Second
quarter fiscal 2010 gross margin was 30.6% of sales compared to prior year
second quarter gross margin of 35.1%, due mainly to lower sales volume partially
offset by savings from cost reduction actions implemented throughout the
economic slowdown. We reported an operating loss of $0.8 million for
the second quarter of fiscal 2010 compared to a
prior
year second quarter operating profit of $1.9 million, due mainly to lower sales
volume and higher pension expense, which increased by more than $1.2 million in
the second quarter of fiscal 2010 over prior year second quarter
levels. Also during the second quarter fiscal 2010, our cash balances
increased by $0.7 million even after contributing more than $2.6 million to our
defined benefit pension plan.
We
believe that future increased profitability is largely dependent upon increased
sales revenue, continued improvement in gross margins, and a recovery in the
valuation of our pension plan assets, which would favorably impact our periodic
pension expense. Our past sales growth has been, and we believe
future sales growth will continue to be, dependent on strong demand for material
handling products, our customers’ ability to obtain financing and willingness to
invest in the current
economic environment, successful introduction and increasing acceptance of new
products, and a continuing recovery in renewable energy markets.
Gross
margins in our continuing operations have historically been near or above 30%
and we are targeting this level of gross margin going forward. Fiscal
2010 second quarter gross margins were near 31%, despite lower sales volume, due
to the previously mentioned workforce reductions and material cost reductions
resulting mainly from product redesign efforts. Further improvement
in gross margins is mainly dependent upon favorable economic conditions,
continued acceptance of recently introduced product offerings by the
marketplace, and ongoing successful cost reduction actions related to recently
introduced product offerings.
We intend
to focus our development and marketing efforts on internal sales growth
opportunities across all product lines, with an emphasis on development and
enhancement of energy efficient power control products and
systems. While we have continued to focus on controlling our
operating expenses, our pension expense is expected to increase to $8.2 million
in fiscal 2010 from $3.4 million in fiscal 2009, mainly due to negative returns
on plan assets experienced during fiscal 2009. The combination of economic
headwinds, lower sales volume and higher pension expense resulted in operating
losses in the second quarter and first half of fiscal 2010, and will make it
highly unlikely that we will achieve our goal of 10% operating profit margins
for all of fiscal 2010.
Our
current outlook projects improving quarterly trends for the remainder of the
fiscal year; however, given the nearly unprecedented economic circumstances
we’ve faced over the past year, it is very difficult to predict the magnitude of
a potential economic recovery, whether in the U.S. or in the specific end
markets we serve.
Discontinued
Operations
In the
fourth quarter of fiscal 2008, we classified the assets and liabilities of our
telecom power systems (“TPS”) business as held for sale, and the results of
operations of the TPS business as discontinued operations. Our TPS product
offerings were focused on providing back-up power for wireless
applications. We concluded we could better achieve our sales growth
objectives by redirecting certain resources deployed in the TPS business to our
product offerings in the material handling, elevator and energy delivery
markets. We completed the divestiture of the TPS business during the first
quarter of fiscal 2009 (see Note 2 of Notes to Condensed Consolidated Financial
Statements).
In
addition to the operating results of the divested TPS business, certain expenses
related to previously divested businesses have also been classified as
discontinued operations in the accompanying condensed consolidated financial
statements and footnotes for all periods presented (see Note 2 of Notes to
Condensed Consolidated Financial Statements). Expenses related to
previously divested businesses have historically included certain expenses for
environmental matters, asbestos claims and product liability claims (see Note 4
of Notes to Condensed Consolidated Financial Statements). All of
these issues relate to businesses we no longer own and most relate to
indemnification agreements we provided when we divested those
businesses.
Our
results of discontinued operations in future periods may include additional
costs incurred related to businesses no longer owned, and may include additional
costs above those currently estimated and accrued related to the divestiture of
our TPS business and our power electronics business, which was divested in
October 2006.
Critical Accounting Policies
and Estimates
There
have been no material changes to our critical accounting policies and estimates
from the information provided in Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”, included in our
Annual Report on Form 10-K for the fiscal year ended June 28, 2009.
Results of Operations -
Three Months Ended December 27, 2009 and December 28, 2008
Net Sales and Gross
Profit
Net sales
for the three months ended December 27, 2009, were $19.2 million, a decrease of
28% from the three months ended December 28, 2008, sales of $26.8
million. The decrease in sales was primarily due to lower sales
volumes in our material handling product line as a result of the decline in
capital spending in North America in recent months. Net sales by
product line were as follows, in millions:
|
|
|
Three
Months Ended
|
|
|
|
|
December
27, 2009
|
|
|
December
28, 2008
|
|
|
Material
handling
|
|
$ |
12.6 |
|
|
|
66 |
% |
|
$ |
19.7 |
|
|
|
74 |
% |
|
Elevator
motion control
|
|
|
4.3 |
|
|
|
22 |
% |
|
|
4.9 |
|
|
|
18 |
% |
|
Energy
systems
|
|
|
2.3 |
|
|
|
12 |
% |
|
|
2.2 |
|
|
|
8 |
% |
|
Total
net sales
|
|
$ |
19.2 |
|
|
|
100 |
% |
|
$ |
26.8 |
|
|
|
100 |
% |
Gross
profit for the three months ended December 27, 2009, was $5.9 million, or 30.6%
of sales, versus $9.4 million, or 35.1% of sales, for the three months ended
December 28, 2008. The decrease in gross profit as a percentage of
sales for the three months ended December 27, 2009, as compared to the three
months ended December 28, 2008, was due to lower sales volume of higher margin
material handling products, partially offset by savings from cost reductions
implemented in response to the lower sales volume.
Research and Development,
Pension Expense, and Selling, General and Administrative
Research
and development (“R&D”) expense was $1.0 million, or 5.2% of sales, for the
three months ended December 27, 2009, comparable to R&D expense of $0.9
million, or 3.4% of sales, for the three months ended December 28,
2008.
Pension
expense was $2.1 million and $0.8 million for the three months ended December
27, 2009 and December 28, 2008, respectively (see Note 8 of Notes to Condensed
Consolidated Financial Statements). The increase in pension expense
was mainly due to negative returns on plan assets experienced during fiscal
2009.
Selling,
general and administrative (“SG&A”) expense was $3.6 million (18.6% of
sales) for the three months ended December 27, 2009, versus $5.7 million (21.3%
of sales) for the three months ended December 28, 2008. Selling
expenses in the three months ended December 27, 2009, decreased to $2.1 million
from $2.6 million in the three months ended December 28, 2008, due to lower
volume-related commissions and lower payroll-related
expenses. General and administrative (“G&A”) expense decreased to
$1.5 million for the three months ended December 27, 2009, from $3.1 million for
the three months ended December 28, 2008, mainly due to lower payroll-related
costs and lower incentive compensation
provisions. G&A expense for the three months ended
December 28, 2008 includes a restructuring charge of $0.9 million related to
management reorganization.
Income (Loss) from
Operations
Our loss
from operations for the three months ended December 27, 2009, was $0.8 million
compared to income from operations of $1.9 million for the three months ended
December 28, 2008. The decline in income from operations for the
three months ended December 27, 2009, as compared to the three months ended
December 28, 2008, was mainly due to lower sales volumes in the three months
ended December 27, 2009.
Interest
Income
Interest
income was negligible for the three months ended December 27, 2009 and December
28, 2008.
Provision for Income
Taxes
We
recorded income tax provisions of $0.1 million for the three months ended
December 27, 2009, and $0.7 million for the three months ended December 28,
2008. The income tax provision in both periods includes non-cash
deferred income tax provisions of $0.2 million related to changes in deferred
tax liabilities from goodwill amortization for tax purposes.
Income (Loss) from
Continuing Operations
We
recorded a loss from continuing operations of $0.9 million for the three months
ended December 27, 2009, or a $0.03 loss per share on both a basic and diluted
basis, compared to income from continuing operations of $1.3 million for the
three months ended December 28, 2008, or $0.04 income per share on both basic
and diluted basis.
Income (Loss) from
Discontinued Operations
We
recorded a loss from discontinued operations for the three months ended December
27, 2009, of $0.3 million, or a $0.01 loss per share on both a basic and diluted
basis, compared to income from discontinued operations of $0.7 million, or $0.02
income per share on both a basic and diluted basis, for the three months ended
December 28, 2008. The loss from discontinued operations in the three
months ended December 27, 2009, includes expenses of $0.3 million related to
previously divested businesses. Income from discontinued operations
in the three months ended December 28, 2008 includes a settlement gain of
$0.5 million from an agreement with Federal-Mogul Corporation as well as income
of $0.5 million related to previously divested businesses, partially offset by
expenses related to previously divested businesses of $0.3 million.
Net Income
(Loss)
Our net
loss was $1.2 million in the three months ended December 27, 2009, or a $0.04
loss per share, basic and diluted, compared to net income of $1.9 million in the
three months ended December 28, 2008, or $0.06 per share on a basic and diluted
basis.
Results of Operations - Six
Months Ended December 27, 2009 and December 28, 2008
Net Sales and Gross
Profit
Net sales
for the six months ended December 27, 2009, were $37.1 million, a decrease of
30% from the six months ended December 28, 2008, sales of $53.1
million. The decrease in sales was primarily due to lower sales
volumes in our material handling product line as a result of the decline in
capital spending in North America in recent months. Net sales by
product line were as follows, in millions:
|
|
|
Six
Months Ended
|
|
|
|
|
December
27, 2009
|
|
|
December
28, 2008
|
|
|
Material
handling
|
|
$ |
23.5 |
|
|
|
63 |
% |
|
$ |
38.0 |
|
|
|
72 |
% |
|
Elevator
motion control
|
|
|
9.3 |
|
|
|
25 |
% |
|
|
10.3 |
|
|
|
19 |
% |
|
Energy
systems
|
|
|
4.3 |
|
|
|
12 |
% |
|
|
4.8 |
|
|
|
9 |
% |
|
Total
net sales
|
|
$ |
37.1 |
|
|
|
100 |
% |
|
$ |
53.1 |
|
|
|
100 |
% |
Gross
profit for the six months ended December 27, 2009, was $11.5 million, or 31.0%
of sales, versus $18.8 million, or 35.5% of sales, for the six months ended
December 28, 2008. The decrease in gross profit as a percentage of
sales for the six months ended December 27, 2009, as compared to the six months
ended December 28, 2008, was due to lower sales volume of higher margin material
handling products, partially offset by savings from cost reductions implemented
in response to the lower sales volume.
Research and Development,
Pension Expense, and Selling, General and Administrative
Research
and development (“R&D”) expense was $1.9 million, or 5.1% of sales, for the
six months ended December 27, 2009, comparable to R&D expense of $1.8
million, or 3.3% of sales, for the six months ended December 28,
2008.
Pension
expense was $4.1 million and $1.7 million for the six months ended December 27,
2009 and December 28, 2008, respectively (see Note 8 of Notes to Condensed
Consolidated Financial Statements). The increase in pension expense
was mainly due to negative returns on plan assets experienced during fiscal
2009.
Selling,
general and administrative (“SG&A”) expense was $7.5 million (20.4% of
sales) for the six months ended December 27, 2009, versus $11.4 million (21.5%
of sales) for the six months ended December 28, 2008. Selling
expenses in the six months ended December 27, 2009, decreased to $4.1 million
from $5.2 million in the six months ended December 28, 2008, due to lower
volume-related commissions and lower payroll-related
expenses. General and administrative (“G&A”) expense decreased to
$3.4 million for the six months ended December 27, 2009, from $6.2 million for
the six months ended December 28, 2008, mainly due to lower payroll-related
costs and lower incentive compensation provisions. G&A expense
for the six months ended December 28, 2008 includes a restructuring charge of
$0.9 million related to management reorganization.
Income (Loss) from
Operations
Our loss
from operations for the six months ended December 27, 2009, was $2.0 million
compared to income from operations of $4.0 million for the six months ended
December 28, 2008. The decline in income from operations for the
six
months
ended December 27, 2009, as compared to the six months ended December 28, 2008,
was mainly due to lower sales volumes in the six months ended December 27, 2009,
offset by lower payroll related costs.
Interest
Income
Interest
income was negligible for the six months ended December 27, 2009 and December
28, 2008.
Provision for Income
Taxes
We
recorded income tax provisions of $0.4 million for the six months ended December
27, 2009, and $1.1 million for the six months ended December 28,
2008. The income tax provision in both periods includes non-cash
deferred income tax provisions of $0.5 million related to changes in deferred
tax liabilities from goodwill amortization for tax purposes.
Income (Loss) from
Continuing Operations
We
recorded a loss from continuing operations of $2.4 million for the six months
ended December 27, 2009, or a $0.08 loss per share on both a basic and diluted
basis, compared to income from continuing operations of $3.0 million for the six
months ended December 28, 2008, or $0.10 income per share on both a basic and
diluted basis.
Loss from Discontinued
Operations
We
recorded a loss from discontinued operations for the six months ended December
27, 2009, of $0.6 million, or a $0.02 loss per share on both a basic and diluted
basis, compared to a loss from discontinued operations of $0.2 million, or $0.01
loss per share on both a basic and diluted basis, for the six months ended
December 28, 2008. The loss from discontinued operations in the six
months ended December 27, 2009, is comprised entirely of expenses related to
previously divested businesses. Our loss from discontinued
operations for the six months ended December 28, 2008, includes a loss on
the September 2008 disposal of our TPS business of $0.4 million, expenses
related to previously divested businesses of $0.2 million, and losses in our TPS
business of $0.1 million, partially offset by a settlement gain of $0.5 million
from a previous agreement with Federal-Mogul Corporation.
Net Income
(Loss)
Our net
loss was $3.0 million in the six months ended December 27, 2009, or a $0.10 loss
per share, basic and diluted, compared to net income of $2.8 million in the six
months ended December 28, 2008, or $0.09 per share on a basic and diluted
basis.
Liquidity and Capital
Resources
Our cash
and cash equivalent balance, including restricted cash, decreased $1.7 million
during the six months ended December 27, 2009, from $18.4 million at June 29,
2009, to $16.7 million at December 27, 2009. Our primary sources of
cash during the six months ended December 27, 2009, were from operations
assisted by reduced working capital requirements of $3.0 million and a
participation payment related to an annuity contract of $0.5 million, and our
primary use of cash was for contributions of $6.9 million to our defined benefit
pension plan. During the six months ended December 27, 2009, our net
inventories decreased by $1.5 million and our accounts receivable balances
decreased by $0.8 million. While we may make further investments to
increase capacity for and to improve efficiency in the production of wind
inverters, we do not anticipate that capital expenditures in fiscal 2010 will
exceed $1.5 million. The expected amount of capital expenditures
could change depending upon changes in revenue levels, our financial condition
and the general economy.
In
November 2007 we entered into an agreement with Associated Bank, N.A.
(“Associated Bank”) providing for a $10 million revolving credit facility (the
“revolving facility”). Borrowings under the revolving facility
bear interest at the London Interbank Offering Rate (“LIBOR”) plus 1.5%, with
borrowing levels determined by a borrowing base formula as defined in the
agreement, based on the level of eligible accounts
receivable. The revolving facility also supports the issuance of
letters of credit, places certain restrictions on our ability to pay dividends
or make acquisitions, and includes covenants which require minimum operating
profit levels and limit annual capital expenditures. Borrowings under
the revolving facility are collateralized by our accounts receivable and
inventory. In December 2008, we entered into an amendment to
the revolving facility with Associated Bank, the primary purpose of which
was to extend the maturity date of the revolving facility to November 1,
2010. There were no amounts outstanding under the revolving
facility as of December 27, 2009. Due mainly to the increase in
pension expense during fiscal 2010, the Company was in violation of the
operating profit covenant included in the amended revolving facility for the
quarter ended December 27, 2009. The Company obtained a waiver of the covenant
default and is in the process of entering into a second amendment to
the
revolving
facility with Associated Bank. However, until execution of such second
amendment, the Company cannot utilize the revolving facility.
Primarily
as a result of the decline in interest rates over the past several years and
more recent declines in values in equity markets, the accumulated benefit
obligation of our defined benefit pension plan currently exceeds plan
assets. We have made contributions to the plan aggregating $19.1
million from April 2008 through December 2009, funded by cash generated from
operations and existing cash on hand. Under funding regulations,
current actuarial projections indicate that we will be required to make
contributions to the plan aggregating approximately $12.1 million in fiscal
2010, of which $6.9 million has already been contributed as of December 27,
2009, the end of our fiscal 2010 second quarter. Pension plan assets
increased by $14.0 million during the first six months of fiscal 2010 to $116.2
million, with a resulting reduction in our aggregate pension funding obligation
of $23.3 million from the funding obligation reported as of June 28,
2009. Required contributions beyond fiscal 2010 could still be
significant, and will depend on future interest rate levels, values in equity
and fixed income markets, and the level and timing of additional interim
contributions we may make to the plan.
Based
upon current plans and business conditions, we believe that current cash
balances, borrowing capacity under the Associated facility and internally
generated cash flows will be sufficient to fund anticipated operational needs,
capital expenditures, required pension plan contributions and other commitments
over the next 12 months.
Caution Regarding
Forward-Looking Statements and Risk Factors
This
document, including documents incorporated herein by reference, contains
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. The words “believe,” “expect,” “estimate,”
“anticipate,” “intend,” “may,” “might,” “will,” “would,” “could,” “project,” and
“predict,” or similar words and phrases generally identify forward-looking
statements. Forward-looking statements are inherently subject to risks and
uncertainties which in many cases are beyond our control and which cannot be
predicted or quantified. As a result, future events and actual results
could differ materially from those set forth in, contemplated by, or underlying
forward-looking statements. Forward-looking statements contained in this
document speak only as of the date of this document or, in the case of any
document incorporated by reference from another document, the date of that
document. We do not have any obligation to publicly update or revise any
forward-looking statement contained or incorporated by reference in these
documents to reflect changed assumptions, the occurrence of unanticipated events
or changes to future operating results over time.
Our
future results of operations and the other forward-looking statements contained
in this filing, including this section titled “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” involve a number of
risks and uncertainties. In particular, the statements regarding future
economic conditions, our goals and strategies, new product introductions,
penetration of new markets, projections of sales revenues and sales growth,
manufacturing costs and operating costs, pricing of our products and raw
materials required to manufacture our products, gross margin expectations,
relocation and outsourcing of production capacity, capital spending, research
and development expenses, the outcome of pending legal proceedings and
environmental matters, payment of certain claims by insurance carriers, tax
rates, sufficiency of funds to meet our needs including contributions to our
defined benefit pension plan, and our plans for future operations, as well as
our assumptions relating to the foregoing, are all subject to risks and
uncertainties.
A number
of factors could cause our actual results to differ materially from our
expectations. We are subject to all of the business risks facing public
companies, including business cycles and trends in the general economy,
financial market conditions, changes in interest rates, demand variations and
volatility, potential loss of key personnel, supply chain disruptions,
government legislation and regulation, and natural causes. Additional
risks and uncertainties include but are not limited to industry conditions,
competitive factors such as technology and pricing pressures, business
conditions in our served markets, dependence on significant customers, increased
material costs, risks and costs associated with acquisitions and divestitures,
environmental matters and the risk that our ultimate costs of doing business
exceed present estimates. This list of risk factors is not
all-inclusive, as other factors and unanticipated events could adversely affect
our financial position or results of operations. Further information
on factors that could affect our financial results can be found in our Annual
Report on Form 10-K filed with the Securities and Exchange Commission for the
fiscal year ended June 29, 2008, under the heading “Risk Factors” as well as
below in Part II, Item 1A under the heading “Risk
Factors”.
There
have been no material changes to the quantitative and qualitative disclosures
about our market risk disclosed in our Annual Report on Form 10-K for the fiscal
year ended June 28, 2009. We did not have any outstanding hedge
instruments or foreign currency contracts outstanding at December 27, 2009 or
December 28, 2008.
In
connection with this Quarterly Report on Form 10-Q, under the direction of our
Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
of the
Securities
Exchange Act of 1934, and internal control over financial reporting and
concluded that (i) our disclosure controls and procedures were effective as
of December 27, 2009; and (ii) no change in internal control over financial
reporting occurred during the quarter ended December 27, 2009, that has
materially affected, or is reasonably likely to materially affect, such internal
control over financial reporting.
Attached
as exhibits to this Quarterly Report on Form 10-Q are certifications of the
Company’s Chief Executive Officer and Chief Financial Officer, which are
required in accordance with Rule 13a-14 of the Securities Exchange Act of
1934. This “Controls and Procedures” section includes information
concerning the controls and evaluation thereof referred to in the attached
certifications, and it should be read in conjunction with the attached
certifications for a more complete understanding of the topics
presented.
PART II - OTHER
INFORMATION
Information
about our legal proceedings is contained in Part I, Item 3, Legal
Proceedings, and Note 11 in the Notes to Consolidated Financial Statements in
our Annual Report on Form 10-K for the fiscal year ended June 28,
2009, which is incorporated
herein by reference, and in Note 4 of the Notes to Condensed Consolidated
Financial Statements contained in our Quarterly Reports on Form 10-Q.
Except as noted below, we believe that there have been no material developments
with respect to these matters during the fiscal quarter ended December 27,
2009.
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As
previously reported by the Company, the Company and Power-One, Inc. were
involved in a lawsuit in the Circuit Court, Waukesha County, Wisconsin
relating to the terms of a distribution and supply agreement between the
parties. The parties reached a settlement of the matters
involved in the lawsuit and mutually agreed to terminate their supply and
distribution agreement, and the lawsuit was dismissed on November 13,
2009.
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There
have been no material changes to the risk factors disclosed in our Annual Report
on Form 10-K for the fiscal year ended June 28, 2009.
There
were no unregistered sales of equity securities and there were no repurchases of
equity securities during our fiscal quarter ended December 27,
2009.
None.
The
Annual Meeting of Stockholders of the Company was held on November 4,
2009.
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(a)
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The
following named persons were elected as directors at such
meeting:
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David
A. Bloss, Sr.
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Yon
Y. Jorden
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|
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Mitchell
I. Quain
|
|
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David
P. Reiland
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|
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(b)
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The
votes cast for and withheld with respect to each nominee for director were
as follows:
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Nominee
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For
|
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Withheld
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David
A. Bloss, Sr.
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21,221,088
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3,966,187
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Yon
Y. Jorden
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21,731,946
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3,455,329
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Mitchell
I. Quain
|
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21,742,847
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3,444,428
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David
P. Reiland
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21,649,495
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3,537,780
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(c)
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The
appointment of Ernst & Young LLP as the Company’s independent
registered public accounting firm for fiscal 2010 was
ratified. The votes cast for and against the appointment, and
the votes that abstained were as follows:
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For
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Against
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Abstain
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21,818,438
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3,354,574
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14,263
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(d)
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The
Company’s Second Amended and Restated 2004 Stock Incentive Plan was
approved, which (among other things) decreases the maximum aggregate
shares of Company common stock the may be subject to future awards,
implements a fungible share pool structure and eliminates the cap of
500,000 shares of common stock that can be awarded as a non-option award
in the form of incentive bonuses, incentive stock and incentive stock
units. The votes cast were as
follows:
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Broker
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For
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Against
|
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Abstain
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Non-votes
|
|
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15,078,299
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3,694,578
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1,306,946
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5,107,452
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Change in Directors’
Compensation
On
November 5, 2009, Magnetek, Inc.’s Board of Directors, upon recommendation
of the Nominating and Corporate Governance Committee, approved an increase in
the amount of the annual Committee chairmanship fees for the Compensation
Committee, Nominating and Corporate governance Committee and Retirement
Committee from $4,000 to $10,000, effective for all Committee meetings after
November 5, 2009. The annual Committee chairmanship fees are deferred and
payable in phantom shares of common stock of the Company, pursuant to the
Amended and Restated Director and Officer Compensation and Deferral
Plan.
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(a)
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Index
to Exhibits
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|
|
|
10.1
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Second
Amended and Restated 2004 Stock Incentive Plan of Magnetek, Inc. November
5, 2009. **
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10.2
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Fiscal
Year 2010 Management Incentive Stock Compensation Plan. *
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10.3
|
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Form
of Restricted Stock Award Agreement Pursuant to Second Amended and
Restated 2004 Stock Incentive Plan. *
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10.4
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Form
of Non-Qualified Stock Option Agreement Pursuant to Second Amended and
Restated 2004 Stock Incentive Plan. *
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31.1
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Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934. *
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31.2
|
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934. *
|
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32.1
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. *
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|
|
|
|
|
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*
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Filed
with this Report on Form 10-Q.
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**
|
|
Previously
filed with the Company’s Proxy Statement dated September 16, 2009 for the
2009 Annual Meeting of the Shareholders and incorporated herein by this
reference.
|
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
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|
MAGNETEK,
INC.
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|
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(Registrant)
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|
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Date:
February
5, 2010
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/s/
PETER M. MCCORMICK
|
|
|
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Peter
M. McCormick
|
|
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President
and Chief Executive Officer
|
|
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(Duly
authorized officer of the Registrant
|
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and
principal executive officer)
|
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Date:
February
5, 2010
|
/s/
MARTY J. SCHWENNER
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Marty
J. Schwenner
|
|
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Vice
President and Chief Financial Officer
|
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(Duly
authorized officer of the Registrant
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|
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and
principal financial officer)
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