<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
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)
26 Century Blvd.
Nashville, Tennessee 37214
(Address of principal executive offices) (Zip Code)
(615) 316-5100
(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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, as of May 1,
2000, 23,281,133 shares.
<PAGE>
2000 MAGNETEK FORM 10-Q
TABLE OF CONTENTS FOR THE QUARTERLY REPORT ON 10Q
FOR THE FISCAL QUARTER AND NINE MONTHS ENDED MARCH 31, 2000
MAGNETEK, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits on Form 8-K
<PAGE>
PART I. FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information 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.
In the opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments necessary to fairly present the financial
position as of March 31, 2000 and the results of operations and cash flows for
the three-month and nine-month periods ended March 31, 2000 and 1999. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and notes included in the
Company's latest annual report on Form 10-K. Results for the three-month and
nine-months ended March 31, 2000 are not necessarily indicative of results which
may be experienced for the full fiscal year.
This document contains "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995, that are subject to risks and
uncertainties which, in many cases, are beyond the control of the Company. These
include but are not limited to economic conditions in general, business
conditions in electrical and electronic equipment markets, competitive factors
such as pricing and technology, and the risk that the Company's ultimate costs
of doing business exceed present estimates. Further information on factors which
could affect MagneTek's financial results are described in the Company's filings
with the Securities and Exchange Commission.
<PAGE>
ITEM 1
MAGNETEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 and JUNE 30, 1999
(amounts in thousands)
<TABLE>
<CAPTION>
ASSETS March 31 June 30
- ------ -------- -------
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 1,310 $ 6,880
Accounts receivable 124,219 111,105
Inventories 114,815 116,316
Deferred income taxes, prepaid expenses and other 37,239 35,404
------------------- --------------------
Total current assets 277,583 269,705
------------------- --------------------
Property, plant and equipment 240,436 238,554
Less-accumulated depreciation
and amortization 142,073 133,489
------------------- --------------------
98,363 105,065
------------------- --------------------
Net assets of discontinued operations - 173,779
Goodwill 70,155 37,548
Prepaid pension and other assets 57,588 59,477
------------------- --------------------
Total Assets 503,689 645,574
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
Current liabilities:
Accounts payable $ 81,004 $ 73,266
Accrued liabilities 85,806 87,742
Current portion of long-term debt 3,871 4,141
------------------- --------------------
Total current liabilities 170,681 165,149
------------------- --------------------
Long-term debt, net of current portion 65,518 179,093
Other long-term obligations 42,558 54,262
Deferred income taxes 35,661 43,139
Commitments and contingencies
Stockholders' equity
Common stock 233 300
Paid in capital in excess of par value 101,971 160,574
Retained earnings 111,977 66,210
Accumulated other comprehensive loss ( 24,910) ( 23,153)
------------------- --------------------
Total stockholders' equity $ 189,271 $ 203,931
------------------- --------------------
Total Liabilities and
Stockholders' Equity 503,689 645,574
=================== ====================
</TABLE>
See accompanying notes
<PAGE>
ITEM 1 (Continued)
MAGNETEK, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2000 and 1999
(amounts in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net sales $ 182,729 $ 168,334
Cost of sales 147,580 134,670
---------------- ----------------
Gross profit 35,149 33,664
Selling, general and administrative 27,023 27,913
---------------- ----------------
Income from operations 8,126 5,751
Interest expense 1,693 412
Other expense, net 524 510
---------------- ----------------
Income from continuing operations before
provision for income taxes 5,909 4,829
Provision for income taxes 2,245 1,545
---------------- ----------------
Income from continuing operations 3,664 3,284
Discontinued operations -
Income from operations (net of taxes) - 1,254
---------------- ----------------
Net income $ 3,664 $ 4,538
================ ================
EARNINGS PER COMMON SHARE
- -------------------------
Basic:
Income from continuing operations $ 0.16 $ 0.11
Income from discontinued operations - 0.04
---------------- ----------------
Net income $ 0.16 $ 0.15
================ ================
Diluted:
Income from continuing operations $ 0.16 $ 0.11
Income from discontinued operations - 0.04
---------------- ----------------
Net income $ 0.16 $ 0.15
================ ================
</TABLE>
See accompanying notes
<PAGE>
ITEM 1 (Continued)
MAGNETEK, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE NINE MONTHS ENDED
MARCH 31, 2000 and 1999
(amounts in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net sales $ 537,981 $ 508,122
Cost of sales 432,233 406,479
---------------- ----------------
Gross profit 105,748 101,643
Selling, general and administrative 83,357 84,422
Loss on disposal of European lighting business 24,422 -
---------------- ----------------
Income (loss) from operations ( 2,031) 17,221
Interest expense 2,856 1,440
Other expense, net 1,520 1,804
---------------- ----------------
Income (loss) from continuing operations before
provision (benefit) for income taxes ( 6,407) 13,977
Provision (benefit) for income taxes ( 17,655) 4,471
---------------- ----------------
Income from continuing operations 11,248 9,506
Discontinued operations -
Income (loss) from operations (net of taxes) ( 528) 6,467
Gain on Motor sale (net of taxes) 35,047 -
---------------- ----------------
Net income $ 45,767 $ 15,973
================ ================
EARNINGS PER COMMON SHARE
- --------------------------
Basic:
Income from continuing operations $ 0.44 $ 0.31
Income (loss) from discontinued operations (0.02) 0.21
Gain on Motor sale (net of taxes) 1.37 -
---------------- ----------------
Net income $ 1.79 $ 0.52
================ ================
Diluted:
Income from continuing operations $ 0.44 $ 0.30
Income (loss) from discontinued operations (0.02) 0.21
Gain on Motor sale (net of taxes) 1.37 -
---------------- ----------------
Net income $ 1.79 $ 0.51
================ ================
</TABLE>
<PAGE>
MAGNETEK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
------------------ ----------------
Cash flows from operating activities:
<S> <C> <C>
Net income from continuing operations $ 11,248 $ 9,506
Adjustments to reconcile income to net cash used in
operating activities:
Depreciation and amortization 18,299 16,852
Changes in operating assets and liabilities
of continuing operations (31,181) (44,375)
------------------ ----------------
Total adjustments (12,882) (27,532)
------------------ ----------------
Net cash used in operating activities (1,634) (18,017)
------------------ ----------------
Cash flows from investing activities:
Proceeds from sale of Motor business and other assets 255,352 -
Purchase of and investment in companies, net of cash acquired (48,245) -
Capital expenditures (12,503) (17,287)
Other investments - (603)
------------------ ----------------
Net cash provided by (used in) investing activities 194,604 ( 17,890)
------------------ ----------------
Cash flow from financing activities:
Borrowings under bank and other long-term obligations - 53,394
Proceeds from issuance of common stock 1,732 857
Stock repurchases (60,298) (7,361)
Repayment of bank and other long term obligations (113,845) -
Increase in deferred financing costs (467) -
------------------ ----------------
Net cash provided by (used in) financing activities (172,878) 46,890
------------------ ----------------
Net cash provided by continuing operations 20,092 10,983
------------------ ----------------
Cash flow from discontinued operations:
Income (loss) from discontinued operations (528) 6,467
Adjustments to reconcile income to net cash used by discontinued operations:
Depreciation and amortization 1,039 12,050
Changes in operating assets and liabilities
of discontinued operations, including fees and
expenses of disposal (25,170) (19,197)
Capital expenditures (1,003) (14,099)
------------------ ----------------
------------------ ----------------
Net cash used in discontinued operations (25,662) (14,799)
------------------ ----------------
Net decrease in cash $ (5,570) $ (3,796)
Cash at the beginning of the period 6,880 5,976
------------------ ----------------
Cash at the end of the period $ 1,310 $ 2,180
------------------ ----------------
</TABLE>
<PAGE>
ITEM 1 (continued)
MAGNETEK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,560 $ 14,263
Income taxes $ 5,587 $ 5,380
</TABLE>
(See accompany notes)
<PAGE>
MAGNETEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(All dollar amounts are in thousands)
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL PERIOD - The Company uses a fifty-two, fifty-three week fiscal year.
Fiscal periods end on the Sunday nearest the end of the month. For clarity
of presentation, all periods are presented as if they ended on the last day
of the calendar period. The three-month and nine-month periods ended March
31, 2000 contained thirteen and forty weeks respectively. The comparable
periods in 1999 contained thirteen weeks and thirty-nine weeks.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of MagneTek, Inc. and its subsidiaries (the Company). All
significant inter-company accounts and transactions have been eliminated.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from
these estimates.
2. INVENTORIES
Inventories at March 31, 2000 and June 30, 1999 consist of the following:
<TABLE>
<CAPTION>
March 31 June 30
--------- ---------
<S> <C> <C>
Raw materials and stock parts $ 45,984 $ 51,489
Work-in-process 18,287 19,244
Finished goods 50,544 45,583
--------- ---------
$ 114,815 $ 116,316
========= =========
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
The Company is a party to a number of product liability lawsuits, many of
which involve fires allegedly caused by defective ballasts. All of these
cases are being defended by the Company, and management believes that its
insurers will bear all liability, except for applicable deductibles, and
that none of these proceedings individually or in the aggregate will have a
material effect on the Company.
In April 1998, Ole K. Nilssen filed a lawsuit in the U.S. District Court
for the Northern District of Illinois alleging the Company is infringing
seven of his patents pertaining to electronic ballast technology. The
plaintiff seeks an unspecified amount of damages and an injunction to
preclude the Company from making, using or selling those products allegedly
infringing his patents. The Company denies that it has infringed, or is
infringing, any of the plaintiff's patents, and has asserted several
affirmative defenses. The Company also filed a counterclaim seeking
judicial declaration that it is not
<PAGE>
infringing (and has not infringed) the patents asserted by the plaintiff,
and that such asserted patents are invalid. The Company intends to defend
this matter vigorously. Due to the preliminary state of the litigation, it
is difficult to predict the outcome of the foregoing legal proceeding.
However, management of the Company does not believe that the financial
impact of such litigation will be material.
The Company has from time to time discovered contamination by hazardous
substances at certain of its facilities. In response to such a discovery,
the Company conducts remediation activities to bring the facility into
compliance with applicable laws and regulations. The Company's remediation
activities for fiscal 1999 did not entail material expenditures, and its
remediation activities for fiscal 2000 are not expected to entail material
expenditures. Future discoveries of contaminated areas could entail
material expenditures, depending upon the extent and nature of the
contamination.
Prior to its purchase by the Company in 1986, Century Electric, Inc.
("Century Electric") acquired a business from Gould Inc. ("Gould") in May
1983 which included a leasehold interest in a fractional horsepower
electric motor manufacturing facility located in McMinnville, Tennessee. In
connection with this acquisition, Gould agreed to indemnify Century
Electric from and against liabilities and expenses arising out of the
handling and cleanup of certain waste materials, including but not limited
to cleaning up any PCBs at the McMinnville facility (the "1983 Indemnity").
Investigation has revealed the presence of PCBs and other substances,
including solvents, in portions of the soil and in the groundwater
underlying the facility and in certain offsite soil, sediment and biota
samples. Century Electric has kept the Tennessee Department of Environment
and Conservation, Division of Superfund, apprised of test results from the
investigation. The McMinnville plant has been listed as a Tennessee
Inactive Hazardous Substance Site, a report on that site has been presented
to the Tennessee legislature, and community officials and plant employees
have been notified of the presence of contaminants as above described. In
1995, Gould completed an interim remedial measure of excavating and
disposing onsite soil containing PCBs. Gould also conducted preliminary
investigation and cleanup of certain onsite and offsite contamination. The
cost of any further investigation and cleanup of onsite and offsite
contamination cannot presently be determined. The Company recently sold its
leasehold interest in the McMinnville plant and believes that the costs for
further onsite and offsite cleanup (including ancillary costs) are covered
by the 1983 Indemnity. While the Company believes that Gould will continue
to perform substantially under its indemnity obligations, Gould's
substantial failure to perform such obligations could have a material
adverse effect on the Company.
The Company has 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 offsite locations. Due, in part, to the existence of
indemnification from the former owners of certain acquired businesses for
cleanup costs at certain of these sites, the Company's estimated share in
liability (if any) at the offsite facilities is not expected to be
material. It is possible that the Company will be named as a potentially
responsible party in the future with respect to other sites.
In selling certain business operations, the Company from time to time has
agreed, subject to various conditions and limitations, to
<PAGE>
indemnify buyers with respect to environmental liabilities associated with
the acquired operations. The Company's indemnification obligations pursuant
to such agreements did not entail material expenditures for fiscal 1999,
and its indemnification obligations for fiscal 2000 are not expected to
entail material expenditures. Future expenditures pursuant to such
agreements could be material, depending upon the nature of any future
asserted claims subject to indemnification.
4. DISCONTINUED OPERATIONS/REPOSITIONING
On August 2, 1999, the Company sold its Motor business to A.O. Smith for
$253 million. The results of the Motor business have been reflected as
discontinued operations in the accompanying consolidated financial
statements. A portion of the Company's interest expense has been allocated
to discontinued operations based upon the debt attributable to those
operations. Taxes have been allocated using the same overall rate incurred
by the Company in the first quarter of fiscal year 2000. The Company
recorded an after-tax gain of $35 million in the first quarter of fiscal
year 2000 upon the sale of its Motor business.
During the year ended June 30, 1996, the Company established certain
reserves associated with a variety of repositioning actions. With the
exception of warranty associated with defective capacitors, these actions
were completed in fiscal 1999. In the third quarter of fiscal year 2000,
the remaining warranty liability was reviewed and reduced by $.7 million.
The Company will continue to review and evaluate this liability throughout
the remaining term of the warranty period ending December 2001.
5. ACQUISITIONS/DIVESTITURES
On July 23, 1999, the Company purchased the assets of Electric Motor
Systems, Inc., Electromotive Systems, Inc., and EMS/Rosa Automation
Engineering, Inc., (the EMS Group) for a cash purchase price of
approximately $38 million. The EMS Group manufactures and purchases for
resale, adjustable speed drives. On December 16, 1999, the Company
purchased the shares of Mondel ULC, a Nova Scotia unlimited liability
company for approximately $10 million. Mondel ULC manufactures a variety of
industrial brakes for the crane and hoist market. The acquisitions were
accounted for under the purchase method of accounting and, accordingly, the
respective purchase prices have been preliminarily allocated to the net
assets acquired based on their estimated fair market values. Operating
results of the EMS Group and Mondel ULC are included in the Company's
consolidated results effective as of the acquisition dates. Pro forma
results of the operations, as if the acquisitions had occurred at the
beginning of the period presented, would not differ materially from
historical results as reported.
On December 23, 1999, the Company sold its European magnetic lighting
business to a group including former and current management. Net assets of
the Company's German operations and certain inventory and fixed assets
located in Milan, Italy were included in the transaction. Net proceeds,
including the assumption of debt by the buyers, approximated $2.5 million.
In addition, the buyers agreed to indemnify MagneTek for substantially all
past, present and future obligations in connection with the business'
operations in Germany. In connection with the sale, the Company announced
the closure of its Milan factory. Accordingly, the Company recorded
severance and other charges reflecting the estimated costs of the closure.
The loss on the sale of the business together with the estimated costs for
the
<PAGE>
closure of the Milan facility approximated $24.4 million and is included in
the accompanying Condensed Consolidated Income Statement as "Loss on
disposal of European lighting business". In connection with the loss, the
Company recorded an income tax benefit in the amount of $24.5 million. The
tax benefit was greater than the statutory rate as a result of the tax
basis being substantially greater than the net book values reflected in the
financial statements for the assets sold.
6. COMPREHENSIVE INCOME
During the third quarter of fiscal 2000 and 1999, total comprehensive
income was $2,334 and $189 respectively. For the first nine months of
fiscal 2000 and 1999, comprehensive income was $44,010 and $10,465
respectively.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share.
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
------------------------ -------------------------
3Q 3Q 3Q YTD 3Q YTD
2000 1999 2000 1999
------- ------- --------- -------
BASIC EARNINGS PER SHARE:
- -------------------------
<S> <C> <C> <C> <C>
Income from continuing operations $ 3,664 $ 3,284 $ 11,248 $ 9,506
Income (loss) from discontinued operations - 1,254 (528) 6,467
Gain of sale of Motor business (net of taxes) - - 35,047 -
------- ------- --------- -------
Net income $ 3,664 $ 4,538 $ 45,767 $ 15,973
Weighted average shares for basic earnings per share 23,134 30,778 25,510 30,900
BASIC EARNINGS PER SHARE:
- -------------------------
Income from continuing operations $ 0.16 $ 0.11 $ 0.44 $ 0.31
Income (loss) from discontinued operations - 0.04 (0.02) 0.21
Gain on sale of Motor business (net of taxes) - - 1.37 -
------- ------- --------- -------
BASIC EARNINGS PER SHARE: $ 0.16 $ 0.15 $ 1.79 $ 0.52
========================= ======= ======= ========= =======
DILUTED EARNINGS PER SHARE:
- ---------------------------
Income from continuing operations $ 3,664 $ 3,284 $ 11,248 $ 9,506
Income (loss) from discontinued operations - 1,254 (528) 6,467
Gain on sale of Motor business (net of taxes) - - 35,047 -
------- ------- --------- -------
Net income $ 3,664 $ 4,538 $ 45,767 $ 15,973
Weighted average shares for basic earnings per share 23,134 30,778 25,510 30,900
Effect of dilutive stock options 9 108 44 214
------- ------- --------- -------
Weighted average shares for diluted earnings per share 23,143 30,886 25,554 31,114
DILUTED EARNINGS PER SHARE:
- ---------------------------
Income from continuing operations $ 0.16 $ 0.11 $ 0.44 $ 0.30
Income (loss) from discontinued operations - 0.04 (0.02) 0.21
Gain on sale of Motor buisiness (net of taxes) - - 1.37 -
------- ------- --------- -------
Diluted earnings per share: $ 0.16 $ 0.15 $ 1.79 $ 0.51
=========================== ======= ======= ========= =======
</TABLE>
<PAGE>
8. SEGMENT INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDING MARCH 31, 2000 ENDING MARCH 31, 1999
----------------------------------------------- ------------------------------------------------
Lighting Power Drives & Lighting Power Drives &
Power Electronic Systems Power Electronic Systems
Products Products Products Total Products Products Products Total
---------- ---------- -------- ----- ---------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $97,437 $47,541 $37,751 $182,729 $106,332 $41,111 $20,891 $168,334
Operating profit 3,769 2,295 2,062 8,126 5,059 561 131 5,751
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDING MARCH 31, 2000 ENDING MARCH 31, 1999
----------------------------------------------- ------------------------------------------------
Lighting Power Drives & Lighting Power Drives &
Power Electronic Systems Power Electronic Systems
Products Products Products Total Products Products Products Total
---------- ---------- -------- ----- ---------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $302,031 $130,556 $105,394 $537,981 $317,271 $125,681 $65,170 $508,122
Operating profit 10,708 6,103 5,580 22,391 14,056 975 2,190 17,221
</TABLE>
A reconciliation of combined operating profits for Lighting Power Products,
Power Electronic Products and Drives & Systems Products to consolidated income
from continuing operations before taxes is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
3/31/00 3/31/99 3/31/00 3/31/99
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total operating profit for reportable $ 8,126 $ 5,751 $ 22,391 $ 17,221
segments
Loss on disposal of European lighting - - (24,422) -
business
Interest Expense 1,693 412 2,856 1,440
Other expense 524 510 1,520 1,804
--------- --------- --------- ---------
Income from continuing operations before
provision (benefit) for income taxes $ 5,909 $ 4,829 $ (6,407) $ 13,977
========= ========= ========= =========
</TABLE>
ITEM 2
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
THREE MONTHS ENDED MARCH 31, 2000 VS. 1999
NET SALES AND GROSS PROFIT
During fiscal 1999, after a period of declining revenues and pressure on
operating profits, MagneTek undertook a review of strategic alternatives
for improving shareholder value. Based on this review, which was conducted
by both internal and outside analysts, the Company concluded that its
electronic product lines offer the best opportunity for growth,
profitability and value enhancement. Moreover, the Motor and Generator
businesses were being impacted by industry consolidation, exposing the
Company to unknown costs to remain competitive. Therefore, the Company
elected to divest these businesses and use the proceeds to reduce debt,
repurchase Company stock and strengthen electronic product lines.
The Generator business was sold to Emerson Electric Co. in April 1999 for
$115 million. In August, just after fiscal year end, the Motor business was
sold to A.O. Smith Corporation for $253 million. These
<PAGE>
businesses are reported as discontinued operations in the accompanying
Consolidated Financial Statements. In December, 1999, the Company sold its
European magnetic lighting business (See Note 5).
As a continuation of the move toward consolidating its business around a
core technology of power electronics, the Company is currently
investigating strategic alternatives to reduce its participation in the
North American lighting ballast business and to build upon its strengths in
the global power supply business.
MagneTek's net sales for the third quarter of fiscal 2000 were $182.7
million, an 8.6% increase compared to the third quarter of fiscal 1999 at
$168.3 million. Sales in the Drives & Systems segment increased 80.7% from
the prior year due to the acquisitions of the EMS Group in July, 1999 and
of Mondel ULC in December, 1999. Excluding the acquisitions, sales in the
Drives & Systems segment increased 11.2% due to increased standard drives
sales. Sales in the Lighting Power Products segment declined 8.4% due to
the divesture of the Company's European magnetic lighting business.
Domestic Lighting Power Products revenues increased 7.7% due primarily to
increased sales of electronic and HID (high intensity discharge) products.
Sales in the Power Electronic Products segment increased 15.6% with
increasing revenues recorded in both foreign and domestic operations.
The Company's gross profit increased to $35.1 million (19.2% of net sales)
in the third quarter of fiscal 2000 from $33.7 million (20.0% of net sales)
in the third quarter of fiscal 1999. Gross profits increased due to the
overall increase in sales volume. As a percentage of sales, gross profits
declined due primarily to lower gross margins in Lighting Power Products as
a result of continuing pressure on selling prices, lower distribution
sales, and higher material and freight costs. The Company has announced
price increases ranging from 4% to 7% for products in this segment.
OPERATING EXPENSES
Selling, general and administrative (SG&A) expense was $27.0 million (14.8%
of net sales) in the third quarter of fiscal 2000 compared to $27.9 million
(16.6% of net sales) in the third quarter of fiscal 1999. The reduction in
SG&A spending reflects cost reduction actions initiated in the fourth
quarter of fiscal 1999 which resulted in reduced manning levels and lower
costs in administrative support functions.
INTEREST AND OTHER EXPENSE
Interest expense was $1.7 million in the third quarter of fiscal 2000
compared to $.4 million in the third quarter of fiscal 1999. The increase
in interest expense reflects incremental debt associated with the
acquisition of the EMS Group in July of 1999 and Mondel ULC in December of
1999. Additional purchases of the Company's common stock which occurred
primarily in the first six months of fiscal 2000 has also increased overall
debt levels. Other expense of $.5 million in the third quarter of fiscal
2000 was unchanged from the year earlier period.
NET INCOME
The Company recorded an after-tax profit from continuing operations of $3.7
million in the third quarter of fiscal 2000 compared to an after-tax profit
of $3.3 million in the third quarter of fiscal 1999. Net income for the
third quarter of fiscal year 2000 was $3.7 million
<PAGE>
compared to $4.5 million in the year earlier period. Net income in the
third quarter of fiscal 1999 include after-tax profits of $1.2 million
associated with discontinued operations.
The tax provision for the third quarter of fiscal year 2000 was $2.2
million (38% effective rate) versus $1.5 million (32% effective rate) in
the third quarter of fiscal 1999. The Company expects that the 38% tax rate
will continue for the balance of the current fiscal year.
RESULTS OF OPERATIONS:
NINE MONTHS ENDED MARCH 31, 2000 VS. 1999:
NET SALES AND GROSS PROFIT:
Net Sales for MagneTek for the first nine months of fiscal 2000 were $538.0
million, a 5.9% increase from the $508.1 million in the first nine months
of fiscal 1999. Sales in the Drives and Systems segment increased 61.7%
from the comparable year earlier period. Exclusive of the acquisitions of
the EMS Group made in July of 1999 and Mondel ULC made in December of 1999,
revenues for Drives and Systems increased 5% due to higher sales of
standard drives. Sales in the Lighting Power Products segment declined 4.8%
from the previous year levels. Domestic revenues for Lighting Power
Products increased 4.4% but were more than offset by the impact of the sale
of the European magnetic lighting business in December, 1999. Sales of
Power Electronic Products increased 3.9% from the first nine months of
fiscal 1999 due to stronger sales of European power supplies.
Gross profits were $105.7 million (19.7% of net sales) in the first nine
months of fiscal 2000 compared to $101.6 million (20.0% of net sales) in
the first nine months of fiscal 1999. Increased levels of gross profit
reflect the higher sales volume over the year earlier period. The gross
margin percentage decline is attributable to lower gross margin in Lighting
Power Products due to a decline in distribution related sales and
competitive pricing. Gross margin results for both the Drives and Systems
and Power Electronic Products segments improved from prior year due to the
continued improvement in the mix of products sold.
OPERATING EXPENSES
Selling, general and administrative (SG&A) expense was $83.4 million (15.5%
of net sales) in the first nine months of fiscal 2000 versus $84.4 million
(16.6% of net sales) in the first nine months of fiscal 1999. Lower costs
were a function of manning level reductions initiated at the end of fiscal
1999. The full effect of the actions taken were largely offset by the
increased SG&A costs associated with the acquisition of the EMS Group and
Mondel ULC.
In the second quarter of fiscal 2000 the Company recorded charges of $24.4
million associated with the sale of its European magnetic lighting business
(see Note 5). Charges included the net asset value of the Company's German
lighting business, as well as inventory and fixed assets at the Milan,
Italy facility. In addition, severance and other costs were recorded for
the closure of the Milan facility.
INTEREST AND OTHER EXPENSE
Interest expense was $2.9 million in the first nine months of fiscal 2000
compared to $1.4 million in the first nine months of fiscal 1999. The
combination of generally higher interest rates on the
<PAGE>
Company's variable rate debt and funding requirements for the EMS Group and
Mondel ULC acquisitions as well as common stock repurchases are the primary
factors.
NET INCOME
The Company recorded an after-tax profit from continuing operations of
$11.2 million for the first nine months of fiscal 2000 compared to $9.5
million in the first nine months of fiscal 1999. Net income for the first
nine months of fiscal 2000 was $45.8 million and includes a $35.0 million
(net of tax) gain on the sale of the Motors business. This compares to net
income of $16.0 million recorded in the first nine months of fiscal 1999
which included $6.5 million (net of tax) associated with discontinued
operations.
Results for the first nine months of fiscal 2000 include a $24.5 million
tax benefit due primarily to the increased tax over book basis associated
with the Company's German operations. The tax provision for the first nine
months of fiscal 2000 excluding the benefit associated with the German
operations was $6.8 million (38% effective rate) compared to $4.5 million
(32% effective rate) in the first nine months of fiscal 1999. The Company
expects the 38% effective tax rate to continue for the balance of the
current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Effective September 27, 1999, the Company amended its Bank Loan Agreement
to adjust covenants for the reclassification of the motor and generator
businesses as discontinued operations and the impact of certain charges
recorded in the fourth quarter of fiscal 1999. Currently, borrowings under
the Bank Loan Agreement bear interest at the bank's prime lending rate or,
at the Company's option, the London Interbank Offered Rate plus one and
one-half percent. These rates may be reduced or increased based on the
level of certain debt-to-cash flow ratios. The Bank Loan Agreement provides
funds for both short-term working capital requirements and long-term
financing needs for the Company. As of March 31, 2000, the Company had
approximately $136 million of available borrowings under the Bank Loan
Agreement. Under terms of the amendment, the Bank Loan Agreement also
limits the amount of certain distributions the Company can make including
share repurchases. During the nine months ended March 31, 2000, the Company
repurchased 6.9 million shares in open market transactions for
approximately $60.3 million. During the second quarter of fiscal 2000, the
Company completed negotiations with Emerson Electric and A.O. Smith as to
final purchase price adjustments for the earlier sale of the Generator and
Motor businesses. Cash outflows associated with these adjustments, as well
as legal, consulting and other expenses of the transactions, approximated
$20 million in the current fiscal year and are essentially complete.
During the first six months of fiscal 2000, the Company purchased the EMS
Group and Mondel ULC for approximately $38 million and $10 million
respectively and sold its Motor business for $253 million (see Notes 4 and
5).
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risks in the areas of commodity prices,
foreign exchange and interest rates. To mitigate the effect of such risks,
the Company selectively utilizes specific financial instruments. Company
policy clearly prohibits the use of such financial instruments for trading
or speculative purposes. There
<PAGE>
have been no material changes in the reported market risks since that
reported in the Company's Annual Report on form 10-K dated June 30, 1999.
IMPACT OF YEAR 2000
As previously reported in the 1999 Annual Report, the Company initiated in
fiscal 1997 a comprehensive systems review, which resulted in the purchase
of an Oracle "Enterprise Resource Planning" software package. While the
primary purpose of the software was to improve business processes, it also
enabled the Company to resolve Year 2000 issues.
The Company has experienced to date no problems with computer systems
subsequent to January 1, 2000. Management does not currently anticipate a
future material adverse impact with internal systems caused by Year 2000
issues.
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Item 1, Note 3.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed a Form 8-K dated February 9, 2000 reporting the
amendment and restatement of its Stockholder Rights Plan.
<PAGE>
SIGNATURES
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.
MAGNETEK, INC.
(Registrant)
Date: May __, 2000 -----------------------------------------
David P. Reiland
Executive Vice President
and Chief Financial Officer
(Duly authorized officer of the
registrant and principal
financial officer)
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