<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: December 31, 1999
OR
[ ] TRANSITION 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)
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 February 1,
2000, 23,327,633 shares.
<PAGE>
2000 MAGNETEK FORM 10-Q
TABLE OF CONTENTS FOR THE QUARTERLY REPORT ON 10Q
FOR THE FISCAL QUARTER AND SIX MONTHS ENDED DECEMBER 31, 1999
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 December 31, 1999 and the results of operations and cash flows
for the three-month and six-month periods ended December 31, 1999 and 1998. 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
six-months ended December 31, 1999 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
DECEMBER 31, 1999 and JUNE 30, 1999
(amounts in thousands)
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
----------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,770 $ 6,880
Accounts receivable 116,809 111,105
Inventories 113,337 116,316
Deferred income taxes, prepaid expenses and other 38,601 35,404
----------- ---------
Total current assets 270,517 269,705
----------- ---------
Property, plant and equipment 239,572 238,554
Less-accumulated depreciation and amortization 139,159 133,489
----------- ---------
100,413 105,065
----------- ---------
Net assets of discontinued operations -- 173,779
Goodwill 70,864 37,548
Prepaid pension and other assets 60,259 59,477
=========== =========
Total Assets $ 502,053 $ 645,574
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 70,505 $ 73,266
Accrued liabilities 90,385 87,742
Current portion of long-term debt 4,113 4,141
----------- ---------
Total current liabilities 165,003 165,149
----------- ---------
Long-term debt, net of current portion 69,184 179,093
Other long-term obligations 44,808 54,262
Deferred income taxes 35,739 43,139
Commitments and contingencies
Stockholders' equity
Common stock 233 300
Paid in capital in excess of par value 102,353 160,574
Retained earnings 108,313 66,210
Accumulated other comprehensive loss (23,580) (23,153)
----------- ---------
Total stockholders' equity 187,319 203,931
----------- ---------
Total Liabilities and Stockholders' Equity $ 502,053 $ 645,574
=========== =========
</TABLE>
<PAGE>
MAGNETEK, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE THREE MONTHS ENDED
DECEMBER 31, 1999 and 1998
(amounts in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Net sales $ 173,199 $ 174,105
Cost of sales 137,197 139,297
--------- ---------
Gross profit 36,002 34,808
Selling, general and administrative 28,208 29,323
Loss on disposal of European lighting business 24,422 --
--------- ---------
Income (loss) from operations (16,628) 5,485
Interest expense 854 461
Other expense, net 462 715
--------- ---------
Income (loss) from continuing operations before
provision (benefit) for income taxes (17,944) 4,309
Provision (benefit) for income taxes (22,039) 1,378
--------- ---------
Income from continuing operations 4,095 2,931
Discontinued operations -
Loss from operations (net of taxes) -- (513)
--------- ---------
Net income $ 4,095 $ 2,418
========= =========
EARNINGS PER COMMON SHARE
Basic:
Income from continuing operations 0.17 0.10
Loss from discontinued operations -- (0.02)
========= =========
Net income $ 0.17 $ 0.08
========= =========
Diluted:
Income from continuing operations 0.17 0.09
Loss from discontinued operations -- (0.01)
========= =========
Net income $ 0.17 $ 0.08
========= =========
</TABLE>
See accompanying notes
<PAGE>
MAGNETEK, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE SIX MONTHS ENDED
DECEMBER 31, 1999 and 1998
(amounts in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Net sales $ 355,252 $ 339,788
Cost of sales 284,653 271,809
--------- ---------
Gross profit 70,599 67,979
Selling, general and administrative 56,334 56,509
Loss on disposal of European lighting business 24,422 --
--------- ---------
Income (loss) from operations ( 10,157) 11,470
Interest expense 1,163 1,028
Other expense, net 996 1,294
--------- ---------
Income (loss) from continuing operations before
provision (benefit) for income taxes ( 12,316) 9,148
Provision (benefit) for income taxes ( 19,900) 2,926
--------- ---------
Income from continuing operations 7,584 6,222
Discontinued operations -
Income (loss) from operations (net of taxes) ( 528) 5,213
Gain on Motor sale (net of taxes) 35,047 --
--------- ---------
Net income $ 42,103 $ 11,435
========= =========
EARNINGS PER COMMON SHARE
Basic:
Income from continuing operations $ 0.29 $ 0.20
Income (loss) from discontinued operations (0.02) 0.17
Gain on Motor sale (net of taxes) 1.31 --
========= =========
Net income $ 1.58 $ 0.37
========= =========
Diluted:
Income from continuing operations $ 0.28 $ 0.20
Income (loss) from discontinued operations (0.02) 0.17
Gain on Motor sale (net of taxes) 1.31 --
========= =========
Net income $ 1.57 $ 0.37
========= =========
</TABLE>
<PAGE>
MAGNETEK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED
DECEMBER 31, 1999 and 1998
(amounts in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 7,584 $ 6,222
Adjustments to reconcile income to net cash used in
operating activities:
Depreciation and amortization 12,760 11,030
Changes in operating assets and liabilities
of continuing operations (30,971) (22,802)
--------- ---------
Total adjustments (18,211) (11,772)
--------- ---------
Net cash used in operating activities (10,627) (5,550)
--------- ---------
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 (8,185) (11,525)
Other investments -- (189)
--------- ---------
Net cash provided by (used in) investing activities 198,922 (11,714)
--------- ---------
Cash flow from financing activities:
Borrowings under bank and other long-term obligations -- 29,946
Proceeds from issuance of common stock 1,665 809
Stock repurchases (59,849) (7,361)
Repayment of bank and other long term obligations (109,937) --
Increase in deferred financing costs (467) --
--------- ---------
Net cash provided by (used in) financing activities (168,588) 23,394
--------- ---------
Net cash provided by continuing operations 19,707 6,130
--------- ---------
Cash flow from discontinued operations:
Income (loss) from discontinued operations (528) 5,213
Adjustments to reconcile income to net cash provided by
discontinued operations:
Depreciation and amortization 1,039 7,839
Changes in operating assets and liabilities (24,325) (11,518)
of discontinued operations, including fees and
expenses of disposal
Capital expenditures (1,003) (10,753)
--------- ---------
Net cash used in discontinued operations (24,817) (9,219)
--------- ---------
Net decrease in cash $ (5,110) $ (3,089)
Cash at the beginning of the period 6,880 5,976
--------- ---------
Cash at the end of the period $ 1,770 $ 2,887
========= =========
</TABLE>
<PAGE>
ITEM 1 (continued)
MAGNETEK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $3,757 $9,624
Income taxes $4,828 $1,196
</TABLE>
(see accompanying notes)
<PAGE>
MAGNETEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(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 six-month
periods ended December 31, 1999 contained thirteen and twenty-seven
weeks respectively. The comparable periods in 1998 contained thirteen
weeks and twenty-six 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 December 31, 1999 and June 30, 1999 consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
----------- -------
<S> <C> <C>
Raw materials and stock parts $ 47,043 $ 51,489
Work-in-process 18,347 19,244
Finished goods 47,947 45,583
-------- --------
$113,337 $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
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.
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 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 then the net book values reflected in
the financial statements for the assets sold.
<PAGE>
6. COMPREHENSIVE INCOME
During the second quarter of fiscal 2000 and 1999, total comprehensive
income was $2,195 and $915 respectively. For the first six months of
fiscal 2000 and 1999, comprehensive income was $41,676 and $10,276
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
------------------- --------------------
2Q 2Q 2Q YTD 2Q YTD
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 4,095 $ 2,931 $ 7,584 $ 6,222
Income (loss) from discontinued operations -- (513) (528) 5,213
Gain of sale of Motor business (net of taxes) -- -- 35,047 --
------- ------- ------- -------
Net income 4,095 2,418 42,103 11,435
Weighted average shares for basic earnings per share 24,036 30,793 26,698 30,986
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 0.17 $ 0.10 $ 0.29 $ 0.20
Income (loss) from discontinued operations -- (0.02) (0.02) 0.17
Gain on sale of Motor business (net of taxes) -- -- 1.31 --
------- ------- ------- -------
Basic earnings per share: $ 0.17 $ 0.08 $ 1.58 $ 0.37
======= ======= ======= =======
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 4,095 $ 2,931 $ 7,584 $ 6,222
Income (loss) from discontinued operations -- (513) (528) 5,213
Gain on sale of Motor business (net of taxes) -- -- 35,047 --
------- ------- ------- -------
Net income $ 4,095 $ 2,418 $42,103 $11,435
Weighted average shares for basic earnings per share 24,036 30,793 26,698 30,986
Effect of dilutive stock options 3 156 54 238
------- ------- ------- -------
Weighted average shares for diluted earnings per share 24,039 30,949 26,752 31,224
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 0.17 $ 0.09 $ 0.28 $ 0.20
Income (loss) from discontinued operations -- (0.01) (0.02) 0.17
Gain on sale of Motor buisiness (net of taxes) -- -- 1.31 --
------- ------- ------- -------
Diluted earnings per share: $ 0.17 $ 0.08 $ 1.57 $ 0.37
======= ======= ======= =======
</TABLE>
<PAGE>
8. SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three Months Three Months
Ending December 31, 1999 Ending December 30, 1998
--------------------------------------------- -----------------------------------------------
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 $100,571 $40,095 $32,533 $173,199 $106,311 $44,664 $23,130 $174,105
Operating profit 4,360 2,118 1,316 7,794 4,467 240 778 5,485
</TABLE>
<TABLE>
<CAPTION>
Six Months Six Months
Ending December 31, 1999 Ending December 30, 1998
--------------------------------------------- -----------------------------------------------
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 $204,594 $83,015 $67,643 $355,252 $210,939 $84,570 $44,279 $339,788
Operating profit 6,939 3,808 3,518 14,265 8,997 414 2,059 11,470
</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 Six Months Ended
12/31/99 12/31/98 12/31/99 12/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total operating profit for reportable
segments $ 7,794 $ 5,485 $ 14,265 $ 11,470
Loss on disposal of European lighting
business (24,422) -- (24,422) --
Interest Expense 854 461 1,163 1,028
Other expense 462 715 996 1,294
-------- -------- -------- --------
Income from continuing operations before
provision (benefit) for income taxes $(17,944) $ 4,309 $(12,316) $ 9,148
======== ======== ======== ========
</TABLE>
ITEM 2
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
THREE MONTHS ENDED DECEMBER 31, 1999 VS. 1998
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
businesses are reported as discontinued operations in the
<PAGE>
accompanying Consolidated Financial Statements. Proceeds from the
divestitures were used to repay all borrowings under the Company's
domestic bank lines of credit, to continue the stock repurchase program
previously authorized by the Board, and to acquire substantially all of
the assets of EMS group (see Note 5). This acquisition significantly
increases MagneTek's share of the North American A/C (alternating
current) electronic drives market.
MagneTek now operates in three business segments: Lighting Power
Products (LP), Power Electronic Products (PE), and Drives & Systems
(DS). LP makes power devices called "ballasts" that energize and
operate fluorescent and other types of lamps, as well as certain
ballast components. PE produces electronic converters, rectifiers and
battery chargers, generally known as "power supplies," primarily for
data processing and communications equipment, as well as component
transformers. Previously part of the Motors & Controls segment, DS
supplies electronic "drives" for regulating motor speed, as well as
related hardware and software.
MagnTek's net sales for the second quarter of fiscal 2000 were $173.2
million, relatively unchanged compared to the second quarter of fiscal
1999 at $174.1 million. Sales in the Drives & Systems segment increased
40.6% from prior year due to the acquisition of the EMS Group which
occurred in July of 1999. Excluding the effect of the acquisition,
sales declined 9.7% due to slower sales of standard drive products.
Sales in the Lighting Power Products segment declined 5.4% from the
year earlier period. Domestic sales of Lighting Power Products
increased 3% but were more than offset by lower sales in the European
lighting businesses. The Company sold its European lighting business in
December of 1999 (see Note 5). Sales in the Power Electronic Products
segment declined 10.2% due to lower sales of domestic power supplies
and currency translation.
The Company's gross profit increased to $36.0 million (20.8% of net
sales) in the second quarter of fiscal 2000 from $34.8 million (20.0%
of net sales) in the second quarter of fiscal 1999. Gross profits
declined in Lighting Power Products due to competitive price pressures
but was more than offset by improved performance in both Drives and
Systems and Power Electronics Products.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expense was $28.2 million
(16.3% of net sales) in the second quarter of fiscal 2000 compared to
$29.3 million (16.8% of net sales) in the second quarter of fiscal
1999. The reduction in SG&A spending reflects cost reduction actions
initiated in the fourth quarter of fiscal 1999 which were responsible
for the improved performance. These actions resulted in reduced manning
levels and lower costs in administrative support functions.
In the second quarter of fiscal 2000 the Company recorded charges of
$24.4 million associated with the sale of its European lighting
business (see Note 5). Charges included the net asset values 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 $.9 million in the second quarter of fiscal 2000
compared to $.5 million in the second quarter of fiscal 1999. Interest
expense for the second quarter of fiscal 2000 primarily reflects
incremental debt associated with the acquisition of the EMS
<PAGE>
Group in July of 1999. Other expenses of $.5 million in the second
quarter of fiscal 2000 was comparable to the $.7 million incurred in
the year earlier period.
NET INCOME
The Company recorded an after-tax profit from continuing operations of
$4.1 million in the second quarter of fiscal 2000 compared to an
after-tax profit of $2.9 million for continuing operations in the
second quarter of fiscal 1999. Net income for the second quarter of
fiscal year 2000 was $4.1 million compared to $2.4 million in the year
earlier period. Net income in the second quarter of fiscal 1999
included losses of $.5 million associated with discontinued operations.
Results for continuing operations in the second quarter of fiscal 2000
include a $24.5 million tax benefit primarily due to the increased tax
over book basis associated with the Company's German operation (see
Note 5). The tax provision for the second quarter of fiscal 2000,
excluding the loss on disposal of the European lighting business and
related tax benefits, was $2.5 million (38% effective tax rate) versus
$1.4 million (32% effective tax rate) in the second 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:
SIX MONTHS ENDED DECEMBER 31, 1999 VS. 1998:
NET SALES AND GROSS PROFIT:
Net sales for MagneTek for the first six months of fiscal 2000 were
$355.3 million, a 4.6% increase from the $339.8 million in the first
six months of fiscal 1999. Sales in the Drives and Systems segment
increased 52.8% from the comparable year earlier period. Excluding the
acquisition of the EMS Group made in July of 1999, revenues for the
Drives and Systems increased 2.2%. Sales of Lighting Power Products
declined 3.0% from the previous year levels. While domestic revenues
for Lighting Power Products increased 2.7% from the first six months of
fiscal 1999, lower sales of European ballasts and the sale of the
German operation in December more than erased the domestic increase.
Sales of Power Electronic Products were unfavorable by 1.8% when
compared to the previous period. The reduced volume is attributable to
lower sales in the trade magnetics product line. RV converters and
power supplies sales were in the aggregate, slightly increased from
prior year.
Gross profits were $70.6 million (19.9% of net sales) in the first six
months of fiscal 2000 compared to $68.0 million (20.0% of net sales) in
the first six months of fiscal 1999. Increased gross profit levels
primarily reflect the higher sales volume. The decline in the gross
margin percentage reflects lower gross margin in Lighting Power
Products due to continued competitive price pressures in both domestic
and foreign markets. Gross margins increased versus the prior year six
month period in both the Drives and Systems and Power Electronic
Products segments due to the favorable mix of products sold.
<PAGE>
OPERATING EXPENSE
Selling, general and administrative (SG&A) expense was $56.3 million
(15.9% of net sales) in the first six months of fiscal 2000 versus
$56.5 million (16.6% of net sales) in the first six month of fiscal
1999. Cost levels increased due to the acquisition of the EMS Group in
July 1999 but were offset due to reduced salary and related costs by
manning level reductions initiated at the end of fiscal 1999.
In the second quarter of fiscal 2000 the Company recorded charges of
$24.4 million associated with the sale of its European lighting
business (see Note 5). Charges included the net asset values 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 $1.2 million in the first six months of fiscal
2000 compared to $1.0 million in the first six months of fiscal 1999.
Interest rates are generally higher on the Company's floating rate debt
than in the year earlier period.
NET INCOME:
The Company recorded an after-tax profit of $7.6 million in the first
six months of fiscal 2000 compared to an after tax profit of $6.2
million in the first six months of fiscal 1999.
Results for the first six 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 six months of fiscal 2000 excluding the benefit associated
with German operations was $4.6 million (38% effective tax rate)
compared to $2.9 million (32% effective tax rate) in the first six
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 December 31, 1999, the Company had approximately $135
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 to no more than $60 million through December 31, 1999, and
$90 million throughout the term of the Agreement. During the six months
ended December 31, 1999, the Company repurchased 6.8 million shares in
open market transactions for approximately $59.6 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
<PAGE>
with these adjustments, as well as legal, consulting and other expenses
of the transactions, approximated $19 million in the current fiscal
year and should essentially be 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 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
None
<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: February 10, 2000 /s/ David P. Reiland
-------------------------------
David P. Reiland
Executive Vice President
and Chief Financial Officer
(Duly authorized officer of the
registrant and principal
financial officer)
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