**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

**FORM 10-Q**

**(MarkOne)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the quarterly periodended:  April 1, 2007**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

** **

**For thetransition period from**

**Commission file number 1-10233**

**MAGNETEK, INC.**

(Exact name ofRegistrant as specified in its charter)

| **DELAWARE**                     |   | **95-3917584**          |
|----------------------------------|--------|-------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer        |
| incorporation or  organization)  |   | Identification  Number) |

** **

**N49W13650 Campbell DriveMenomonee 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)

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  x  No  o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.  (Checkone):

Large acceleratedfiler o                    Acceleratedfiler x                    Non-acceleratedfiler o

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

Yes o  No x

The number of shares outstanding ofRegistrant’s Common Stock, as of April 30, 2007, was 29,853,064 shares.

 

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2007 MAGNETEK FORM10-Q

TABLE OF CONTENTSFOR THE QUARTERLY REPORT ON FORM 10QFOR THE FISCAL QUARTER ENDED APRIL 1, 2007

MAGNETEK, INC.

#####  

| **Part I.**  | ** ** | **Financial Information**                                                                   |
|--------------|------------|---------------------------------------------------------------------------------------------|
|         |       |                                                                                        |
| Item 1.      |       | Financial Statements                                                                        |
| Item 2.      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| Item 3.      |       | Quantitative  and Qualitative Disclosures about Market Risk                                 |
| Item 4.      |       | Controls and  Procedures                                                                    |
|         |       |                                                                                        |
| **Part II.** | ** ** | **Other Information**                                                                       |
|         |       |                                                                                        |
| Item  1.     |       | Legal  Proceedings                                                                          |
| Item  1A.    |       | Risk  Factors                                                                               |
| Item 2.      |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |
| Item 3.      |       | Defaults upon  Senior Securities                                                            |
| Item 4.      |       | Submission of  Matters to a Vote of Security Holders                                        |
| Item  5.     |       | Other  Information                                                                          |
| Item  6.     |       | Exhibits                                                                                    |
|         |
| Signatures   |

 

** **

2

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**PART I.  FINANCIAL INFORMATION**

**Item 1 — FinancialStatements**

**MAGNETEK, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Amounts in thousands, except per share data, unaudited)**

 
| ** **                                                                  | ** ** | **Three Months Ended**               | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                  | ** ** | **(13 Weeks)  April 1,  2007 ** | ** ** | **(13 Weeks)  April 2,  2006 ** | ** ** |
|                                                                        |       |                                           |       |   |   |
| Net sales                                                                   |       | $                                              | 23,311     |   | $ | 26,582 |   |
| Cost of sales                                                               |       | 16,406                                         |       | 19,271 |   |
| Gross profit                                                                |       | 6,905                                          |       | 7,311 |   |
|                                                                        |       |                                           |       |   |   |
| Operating expenses:                                                         |       |                                           |       |   |   |
| Research and  development                                                   |       | 912                                            |       | 1,263 |   |
| Selling, general  and administrative                                        |       | 5,628                                          |       | 7,279 |   |
| Income (loss) from  operations                                              |       | 365                                            |       | (1,231 | ) |
|                                                                        |       |                                           |       |   |   |
| Non operating expense  (income):                                            |       |                                           |       |   |   |
| Interest expense                                                            |       | 142                                            |       | 950 |   |
| Interest income                                                             |       | (389                                           | )          | (273 | ) |
| Other expense                                                               |       | 70                                             |       | — |   |
| Income (loss) from  continuing operations before provision for income taxes |       | 542                                            |       | (1,908 | ) |
|                                                                        |       |                                           |       |   |   |
| Provision for income  taxes                                                 |       | 307                                            |       | 490 |   |
| Income (loss) from  continuing operations                                   |       | 235                                            |       | (2,398 | ) |
|                                                                        |       |                                           |       |   |   |
| Loss from discontinued  operations, net of tax                              |       | (654                                           | )          | (2,032 | ) |
|                                                                        |       |                                           |       |   |   |
| Net loss                                                                    |       | $                                              | (419       | ) | $ | (4,430 | ) |
|                                                                        |       |                                           |       |   |   |
| Earnings (loss) per  common share                                           |       |                                           |       |   |   |
|                                                                        |       |                                           |       |   |   |
| Basic and diluted:                                                          |       |                                           |       |   |   |
| Earnings (loss) from  continuing operations                                 |       | $                                              | 0.01       |   | $ | (0.08 | ) |
|                                                                        |       |                                           |       |   |   |
| Loss from discontinued  operations                                          |       | $                                              | (0.02      | ) | $ | (0.07 | ) |
|                                                                        |       |                                           |       |   |   |
| Net loss                                                                    |       | $                                              | (0.01      | ) | $ | (0.15 | ) |
|                                                                        |       |                                           |       |   |   |
| Weighted average shares  outstanding:                                       |       |                                           |       |   |   |
| Basic                                                                       |       | 29,616                                         |       | 28,911 |   |
| Diluted                                                                     |       | 30,269                                         |       | 28,911 |   |

 

See accompanying notes

** **

3

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**MAGNETEK, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Amounts in thousands, except per share data, unaudited)**

 
| ** **                                                         | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                         | ** ** | **(39 Weeks)**             | ** ** | **(39 Weeks)** | ** ** |
| ** **                                                         | ** ** | **April 1,**               | ** ** | **April 2,** | ** ** |
| ** **                                                         | ** ** | **2007**                        | ** ** | **2006** | ** ** |
|                                                               |       |                            |       |   |   |
| Net sales                                                          |       | $                               | 76,844     |   | $ | 76,258 |   |
| Cost of sales                                                      |       | 55,460                          |       | 53,734 |   |
| Gross profit                                                       |       | 21,384                          |       | 22,524 |   |
|                                                               |       |                            |       |   |   |
| Operating expenses:                                                |       |                            |       |   |   |
| Research and  development                                          |       | 3,719                           |       | 3,742 |   |
| Selling, general  and administrative                               |       | 22,214                          |       | 21,019 |   |
| Loss from operations                                               |       | (4,549                          | )          | (2,237 | ) |
|                                                               |       |                            |       |   |   |
| Non operating expense  (income):                                   |       |                            |       |   |   |
| Interest expense                                                   |       | 2,275                           |       | 2,211 |   |
| Interest income                                                    |       | (1,582                          | )          | (405 | ) |
| Other expense                                                      |       | 395                             |       | — |   |
| Loss from continuing  operations before provision for income taxes |       | (5,637                          | )          | (4,043 | ) |
|                                                               |       |                            |       |   |   |
| Provision for income  taxes                                        |       | 956                             |       | 1,169 |   |
| Loss from continuing  operations                                   |       | (6,593                          | )          | (5,212 | ) |
|                                                               |       |                            |       |   |   |
| Loss from discontinued  operations, net of tax                     |       | (3,235                          | )          | (1,997 | ) |
|                                                               |       |                            |       |   |   |
| Net loss                                                           |       | $                               | (9,828     | ) | $ | (7,209 | ) |
|                                                               |       |                            |       |   |   |
| Loss per common share                                              |       |                            |       |   |   |
|                                                               |       |                            |       |   |   |
| Basic and diluted:                                                 |       |                            |       |   |   |
| Loss from continuing  operations                                   |       | $                               | (0.22      | ) | $ | (0.18 | ) |
|                                                               |       |                            |       |   |   |
| Loss from discontinued  operations                                 |       | $                               | (0.11      | ) | $ | (0.07 | ) |
|                                                               |       |                            |       |   |   |
| Net loss                                                           |       | $                               | (0.33      | ) | $ | (0.25 | ) |
|                                                               |       |                            |       |   |   |
| Weighted average shares  outstanding:                              |       |                            |       |   |   |
| Basic                                                              |       | 29,497                          |       | 28,905 |   |
| Diluted                                                            |       | 29,497                          |       | 28,905 |   |

 

 

See accompanying notes.

** **

4

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MAGNETEK, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(Amounts in thousands)

 
| ** **                                      | ** ** | **April 1,** | ** ** | **July 2,** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                      | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| ** **                                      | ** ** | **(Unaudited)**   | ** ** | ** **       | ** ** |
| ASSETS                                          |       |              |       |             |       |
|                                            |       |              |       |             |       |
| Current assets:                                 |       |              |       |             |       |
| Cash and cash  equivalents                      |       | $                 | 4,681      |             | $          | 96 |   |
| Restricted cash                                 |       | 22,602            |       | 22,602           |       |
| Accounts  receivable, net                       |       | 15,408            |       | 14,765           |       |
| Inventories                                     |       | 14,653            |       | 13,134           |       |
| Prepaid expenses  and other current assets      |       | 589               |       | 693              |       |
| Assets held for  sale                           |       | —            |       | 140,549          |       |
| Total current assets                            |       | 57,933            |       | 191,839          |       |
|                                            |       |              |       |             |       |
| Property, plant and  equipment                  |       | 19,464            |       | 18,580           |       |
| Less-accumulated  depreciation                  |       | 15,580            |       | 14,369           |       |
| Net property, plant and  equipment              |       | 3,884             |       | 4,211            |       |
|                                            |       |              |       |             |       |
| Goodwill                                        |       | 28,122            |       | 28,150           |       |
| Other assets                                    |       | 7,659             |       | 8,826            |       |
| Total Assets                                    |       | $                 | 97,598     |             | $          | 233,026 |   |
|                                            |       |              |       |             |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY      |       |              |       |             |       |
|                                            |       |              |       |             |       |
| Current liabilities:                            |       |              |       |             |       |
| Accounts payable                                |       | $                 | 9,466      |             | $          | 7,862 |   |
| Accrued  liabilities                            |       | 8,799             |       | 8,663            |       |
| Accrued  arbitration award                      |       | 22,602            |       | 22,602           |       |
| Liabilities held  for sale                      |       | —            |       | 75,933           |       |
| Current portion  of long-term debt              |       | —            |       | 27,412           |       |
| Total current  liabilities                      |       | 40,867            |       | 142,472          |       |
|                                            |       |              |       |             |       |
| Long-term debt, net of  current portion         |       | 33                |       | 43               |       |
|                                            |       |              |       |             |       |
| Pension benefit  obligations, net               |       | 25,972            |       | 45,494           |       |
|                                            |       |              |       |             |       |
| Deferred income taxes                           |       | 2,784             |       | 2,109            |       |
|                                            |       |              |       |             |       |
| Commitments and  contingencies                  |       |              |       |             |       |
|                                            |       |              |       |             |       |
| Stockholders’ equity                       |       |              |       |             |       |
| Common stock                                    |       | 294               |       | 287              |       |
| Paid in capital  in excess of par value         |       | 133,139           |       | 129,473          |       |
| Accumulated  deficit                            |       | (16,659           | )          | (6,831           | )          |
| Accumulated  other comprehensive loss           |       | (88,832           | )          | (80,021          | )          |
| Total stockholders’  equity                |       | 27,942            |       | 42,908           |       |
|                                            |       |              |       |             |       |
| Total Liabilities and Stockholders’ Equity |       | $                 | 97,598     |             | $          | 233,026 |   |

 

See accompanying notes

5

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MAGNETEK, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW(Amounts in thousands, unaudited)

 
| ** **                                                                                                         | ** ** | **(39 Weeks)** | ** ** | **(39 Weeks)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                                                                                         | ** ** | **April 1,**   | ** ** | **April 2,**   | ** ** |
| ** **                                                                                                         | ** ** | **2007**            | ** ** | **2006**            | ** ** |
| Cash flows from  continuing operating activities:                                                                  |       |                |       |                |       |
| Loss from continuing  operations                                                                                   |       | $                   | (6,593     | )                   | $          | (5,212 | ) |
| Adjustments to  reconcile loss from continuing operations to net cash provided by (used in)  operating activities: |       |                |       |                |       |
| Depreciation and  amortization                                                                                     |       | 1,513               |       | 1,535               |       |
| Write-off of  deferred financing                                                                                   |       | 670                 |       | —              |       |
| Stock based  compensation expense                                                                                  |       | 1,456               |       | 361                 |       |
| Changes in  operating assets and liabilities                                                                       |       | 3,683               |       | 4,740               |       |
| Cash  contribution to pension fund                                                                                 |       | (30,000             | )          | —              |       |
|                                                                                                               |       |                |       |                |       |
| Total adjustments                                                                                                  |       | (22,678             | )          | 6,636               |       |
| Net cash provided by  (used in) continuing operating activities                                                    |       | (29,271             | )          | 1,424               |       |
|                                                                                                               |       |                |       |                |       |
| Cash flows from  investing activities:                                                                             |       |                |       |                |       |
| Proceeds from  sale of business, net of transaction costs                                                          |       | 63,546              |       | —              |       |
| Deposit into  escrow account                                                                                       |       | —              |       | (22,602             | )          |
| Capital  expenditures                                                                                              |       | (926                | )          | (519                | )          |
| Net cash provided by  (used in) investing activities                                                               |       | 62,620              |       | (23,121             | )          |
|                                                                                                               |       |                |       |                |       |
| Cash flow from  financing activities:                                                                              |       |                |       |                |       |
| Proceeds from  issuance of common stock                                                                            |       | 2,100               |       | 236                 |       |
| Borrowings under  long term notes                                                                                  |       | —              |       | 18,000              |       |
| Repayment of  long term notes                                                                                      |       | (18,000             | )          | —              |       |
| Borrowings  (repayments) under line-of-credit agreements                                                           |       | (9,412              | )          | 5,337               |       |
| Principal  payments under capital lease obligations                                                                |       | (10                 | )          | (9                  | )          |
| Increase in  deferred financing costs                                                                              |       | (207                | )          | (1,667              | )          |
| Net cash provided by  (used in) financing activities                                                               |       | (25,529             | )          | 21,897              |       |
|                                                                                                               |       |                |       |                |       |
| Cash flows from  discontinued operations:                                                                          |       |                |       |                |       |
| Provided by  operating activities                                                                                  |       | 2,857               |       | 3,296               |       |
| Used in  investing activities                                                                                      |       | (930                | )          | (3,656              | )          |
| Used in  financing activities                                                                                      |       | (5,162              | )          | (31                 | )          |
| Cash used in  discontinued operations                                                                              |       | (3,235              | )          | (391                | )          |
|                                                                                                               |       |                |       |                |       |
| Net increase (decrease)  in cash                                                                                   |       | 4,585               |       | (191                | )          |
| Cash at the beginning  of the period                                                                               |       | 96                  |       | 595                 |       |
|                                                                                                               |       |                |       |                |       |
| Cash at the end of the period                                                                                      |       | $                   | 4,681      |                | $          | 404 |   |

 

See accompanying notes

** **

6

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MAGNETEK, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSAPRIL 1, 2007(Amounts in thousands unless otherwise noted, except per share data, unaudited)

**1.****                                      Summaryof Significant Accounting Policies**

Basis ofPresentation

The accompanying unaudited condensed consolidated financial statementsinclude the accounts of Magnetek, Inc. and its subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated.

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial reporting and with the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  For further information, refer to thefinancial statements and footnotes thereto included in the Company’s Form 10-Kfor the year ended July 2, 2006 filed with the Securities and ExchangeCommission.  In the Company’s opinion,these unaudited statements contain all adjustments, consisting of normalrecurring adjustments, necessary to present fairly the financial position ofthe Company as of April 1, 2007, and the results of its operations for thethree- and nine-month periods ended April 1, 2007 and April 2, 2006 and itscash flows for the nine-months ended April 1, 2007 and April 2, 2006.   Results for the three- and nine-months endedApril 1, 2007 are not necessarily indicative of results that may be experiencedfor the full fiscal year.

The Company uses a fifty-two, fifty-three week fiscal year ending onthe Sunday nearest to June 30.  Fiscalquarters are the 13 or 14 week periods ending on the Sunday nearest September30, December 31, March 31 and June 30. The three- and nine-month periods ended April 1, 2007 and April 2, 2006each contained 13 and 39 weeks respectively.

Use of Estimates—The preparation of financial statements in accordancewith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Actual results could differfrom those estimates.

Recent Accounting Pronouncements—InJuly 2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 48 (“FIN 48”) *Accounting for Uncertaintyin Income Taxes - an interpretation of FASB Statement No. 109* whichprescribes a recognition threshold and measurement process for recording in thefinancial statements uncertain tax positions taken or expected to be taken in atax return.  Additionally, FIN 48provides guidance on derecognition, classification, accounting in interimperiods, and disclosure requirements for uncertain tax positions. FIN 48 iseffective for fiscal years beginning after December 15, 2006 (July 2, 2007 forthe Company).  The adoption of thispronouncement is not expected to have a material effect on the Company’sfinancial position, results of operations, or liquidity.

In September 2006, the FASB issued underStatement of Financial Accounting Standard (“SFAS”) No. 158, *Employers’ Accounting for Defined Benefit Pension and Other PostRetirement Plans*, which requires the Company to recognize theoverfunded or underfunded status of a defined benefit postretirement plan as anasset or liability in the balance sheet and to recognize changes in that fundedstatus in the year in which the changes occur through comprehensiveincome.  Additionally, SFAS No. 158requires the Company to measure the funded status of a plan as of the date ofits fiscal year-end.  The requirement torecognize the funded status of a defined benefit postretirement plan and therelated disclosure requirements are effective for the Company’s fiscal yearended July 1, 2007, while the requirement to measure the funded status as offiscal year-end is not effective for the Company until fiscal 2009.  The Company is currently evaluating theimpact that the adoption of SFAS No. 158 will have on its consolidatedfinancial position, results of operations and cash flows.

Reclassifications—Certainprior year balances were reclassified to conform to the current yearpresentation, including the reclassification of the telecom power businessassets, liabilities, and results of operations from discontinued operations tocontinuing operations.

7

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**2.**             **DiscontinuedOperations**

The Company’s power electronics business as well as certain expensesincurred related to businesses the Company no longer owns are classified asdiscontinued operations.  The results ofdiscontinued operations are as follows:

 

|                                                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **April 1,**                | ** ** | **April 2,**               | ** ** | **April 1,** | ** ** | **April 2,** | ** ** |
| ** **                                                                   | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                         |       |                             |       |                            |       |   |   |   |   |
| Income (loss)  from discontinued operations before interest and income taxes |       | $                                | (234       | )                               | $          | (1,311 | ) | $ | (1,863 | ) | $ | 343 |   |
| Loss on sale of  power electronics business                                  |       | (420                             | )          | —                          |       | (420 | ) | — |   |
| Interest  expense, net                                                       |       | —                           |       | 361                             |       | 521 |   | 959 |   |
| Provision for  income taxes                                                  |       | —                           |       | 360                             |       | 431 |   | 1,381 |   |
| Loss from discontinued  operations                                           |       | $                                | (654       | )                               | $          | (2,032 | ) | $ | (3,235 | ) | $ | (1,997 | ) |

 

Loss from discontinued operations in the table above includes expensesof $234 and $544 for the three- and nine-month periods ended April 1, 2007respectively, and $354 and $1,673 for the three- and nine-month periods endedApril 2, 2006, for legal fees and costs related to the Nilssen patentinfringement claim (see Note 5 of Notes to Condensed Consolidated FinancialStatements), environmental issues and asbestos claims related to businessesthat the Company no longer owns.

During the fourth quarterof fiscal year 2006, the Company committed to a plan to divest its powerelectronics business.  As a result, in June 2006,the Company classified the assets and liabilities of the power electronicsbusiness as held for sale and the results of this business as discontinuedoperations.  The Company’s powerelectronics business was comprised mainly of the Company’s wholly-ownedsubsidiaries Magnetek S.p.A. (Italy), Magnetek Kft. (Hungary) and MagnetekElectronics Co., Ltd. (China), and a North American division located inChatsworth, California.  The Companyentered into an agreement to sell the business to Power-One, Inc. (see Note 13of Notes to Condensed Consolidated Financial Statements), and the transactionwas completed in October, 2006.

During the third quarter of fiscal 2007 the Companyand Power-One agreed upon the final purchase price adjustment related to thesale of the power electronics business. As a result, the Company made a payment of $2.3 million to Power One,based upon changes in the tangible net worth of the business and certainindemnified liabilities.  The finalsettlement resulted in a loss on the sale of the power electronics business,net of amounts previously recorded, of $420.

The results of the Company’s power electronics business were asfollows:

 

|                                                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **April 1,**                | ** ** | **April 2,**               | ** ** | **April 1,** | ** ** | **April 2,** | ** ** |
| ** **                                                                   | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                         |       |                             |       |                            |       |   |   |   |   |
| Net sales                                                                    |       | $                                | —     |                            | $          | 37,551 |   | $ | 53,545 |   | $ | 111,511 |   |
|                                                                         |       |                             |       |                            |       |   |   |   |   |
| Income (loss)  from discontinued operations before interest and income taxes |       | $                                | —     |                            | $          | (957 | ) | $ | (1,319 | ) | $ | 2,016 |   |
| Interest  expense, net                                                       |       | —                           |       | 361                             |       | 521 |   | 959 |   |
| Provision for income  taxes                                                  |       | —                           |       | 360                             |       | 431 |   | 1,381 |   |
| Loss from discontinued  operations—power electronics business           |       | $                                | —     |                            | $          | (1,678 | ) | $ | (2,271 | ) | $ | (324 | ) |

 

8

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Assets and liabilitiesof the Company’s power electronics business classified as held for sale as ofJuly 2, 2006, were as follows:

|                                                                                                          | ** ** | **July 2,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| **Assets and Liabilities of Discontinued Power Electronics Business** | ** ** | **2006**         | ** ** |
|                                                                                                     |       |             |       |
| Cash and  equivalents                                                                                    |       | $                | 1,491      |   |
| Accounts  receivable                                                                                     |       | 51,431           |       |
| Inventories                                                                                              |       | 45,438           |       |
| Net property,  plant and equipment                                                                       |       | 27,320           |       |
| Other assets                                                                                             |       | 18,485           |       |
| Assets of  discontinued power electronics business                                                       |       | $                | 144,165    |   |
| Eliminations                                                                                             |       | (3,616           | )          |
| Total assets                                                                                             |       | $                | 140,549    |   |
|                                                                                                     |       |             |       |
| Accounts payable                                                                                         |       | $                | 34,985     |   |
| Other current  liabilities                                                                               |       | 5,926            |       |
| Other long term  liabilities                                                                             |       | 10,728           |       |
| Long term debt                                                                                           |       | 24,294           |       |
| Liabilities of  discontinued power electronics business                                                  |       | $                | 75,933     |   |

 

During fiscal 2005, theCompany committed to a plan to divest its telecom power business, and as aresult, classified the telecom power business assets and liabilities as held forsale and the results of the business as discontinued operations.  The Company did not complete the divestitureof its telecom power business despite actively marketing the business topotential interested parties at a reasonable price.  In October 2006, the Company decided toretain the business, and accordingly, the operating results of its telecompower business have been classified as continuing operations in theaccompanying condensed consolidated statements of operations and its assets andliabilities have been reclassified from held for sale to held and used in theaccompanying consolidated balance sheets for all periods presented.

**3.****                                   Stock-BasedCompensation**

Effective July 4, 2005, the Company adopted SFAS No. 123 (R), *Share-Based Payment*, which requires all share-based paymentsto employees, including grants of employee stock options, to be recognized inthe Company’s financial statements based upon their fair values.  The Company selected the modified prospectivemethod of adoption in which compensation cost is recognized beginning with theeffective date.  In accordance with themodified prospective method of adoption, the Company’s results of operationsfor prior periods were not restated.

Compensation expense related to director stock option grants in thethree- and nine-month periods ended April 1, 2007 was $10 and $85respectively.  As of April 1, 2007, therewas $28 of total unrecognized compensation cost related to director grants, tobe expensed ratably over a weighted-average remaining period of 1.25 years.

In August 2005, the Company granted 500,000 shares of restricted stock(the “August 2005 stock grant”) with a fair value of $2.77 per share to certainofficers and key employees.  Therestricted shares fully vest on January 1, 2009.  The divestiture of the Company’s powerelectronics business in October 2006 resulted in the forfeiture of 90,000shares of the August 2005 stock grant from employees of the business.  The divestiture also resulted in thetermination of several corporate officers and the accelerated vesting of175,000 shares of the August 2005 stock grant that were granted to theseofficers.  Compensation expense relatedto the August 2005 stock grant in the three- and nine-month periods ended April1, 2007 was $48 and $335 respectively. As of April 1, 2007, there was $339 of total unrecognized compensationcost related to the grant, to be expensed ratably over a weighted-averageremaining period of 1.75 years.

In July 2006, the Company granted a bonus equal to 200,000 shares ofcommon stock to its former CEO who elected to defer the shares pursuant to theterms of the Director and Officer Compensation and Deferral Investment Plan (“DDIP”)pending approval of an amendment to the DDIP by the Company’sshareholders.  Such amendment was approved at the annual meeting of theshareholders on October 25, 2006.  The Company recorded compensationexpense of $952 related to the bonus in the nine-month period ended April 1,2007.

In January, 2007, the Company issued an aggregate of 100,000 stockoptions at exercise prices of $5.31 and $5.83, equal to the market prices ofthe Company’s common stock at the respective grant dates.  The shares vest ratably over a four yearperiod.  Compensation expense related tothe January 2007 option grants in the three- and nine-month periods ended April

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1, 2007 was $16.  As of April 1,2007, there was $328 of total unrecognized compensation cost related to thegrants, to be expensed ratably over a weighted-average remaining period of 3.75years.

Also in January 2007, the Company granted an aggregate of 90,000 sharesof restricted stock to certain officers which vest on January 1, 2010 and alsoentered into an agreement with the Company’s CEO whereby the CEO will receivecash bonuses payable quarterly in an amount equal to the fair market value of6,250 shares of common stock (for a total of 12 payments with a total valueequal to 75,000 shares).  The Company’sCEO has elected to defer the bonus payments pursuant to the terms of theDDIP.  Payments under the DDIP are madein shares of common stock and the amounts deferred are paid in Januaryfollowing the year in which the termination of service as a key executiveoccurs.  The shares awarded under both ofthese arrangements had a fair value of $4.98 per share at the grant date.  Compensation expense of $68 was included inthe condensed consolidated statements of operations for the three- andnine-month periods ended April 1, 2007, and as of April 1, 2007, there was $754of total unrecognized compensation remaining, to be expensed ratably over aweighted-average remaining period of 2.75 years.

Compensation expense related to all stock-based awards for the three-and nine-month periods ended April 1, 2007 was as follows:

|                                                    | ** ** | **April 1, 2007** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **Three months**       | ** ** | **Nine months** | ** ** |
| ** **                                         | ** ** | **ended**                   | ** ** | **ended** | ** ** |
| August 2005  restricted stock grant                |       | $                           | 48         |   | $ | 335 |   |
| Bonus to the  Company’s former CEO            |       | —                      |       | 952 |   |
| January 2007  stock option grant                   |       | 16                          |       | 16 |   |
| January 2007  restricted stock grant and CEO bonus |       | 68                          |       | 68 |   |
| Director stock  options                            |       | 10                          |       | 85 |   |
|                                               |       | $                           | 142        |   | $ | 1,456 |   |

 

**4.             Inventories**

Inventories at April 1, 2007 and July 2, 2006 consist of the following:

 

|                                | ** ** | **April 1,** | ** ** | **July 2,** | ** ** |
|--------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                     | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| Raw materials  and stock parts |       | $                 | 10,500     |             | $          | 10,210 |   |
| Work-in-process                |       | 1,972             |       | 1,637            |       |
| Finished goods                 |       | 2,181             |       | 1,287            |       |
|                           |       | $                 | 14,653     |             | $          | 13,134 |   |

 

**5.****                                      Commitmentsand Contingencies**

*Litigation—Product Liability*

The Company has settled or otherwise resolved all of the productliability lawsuits associated with its discontinued business operations. Thelast remaining limited obligation to defend and indemnify the purchaser of adiscontinued business operation against new product liability claims expired inDecember 2003 and the Company believes that any new claims would eitherqualify as an assumed liability, as defined in the various purchase agreements,or would be barred by an applicable statute of limitations.   The Company is also a named party in two product liability lawsuitsrelated to the Telemotive Industrial Controls business acquired inDecember 2002 through the purchase of the stock of MXT Holdings, Inc.  Both claims were tendered to the insurance companies that providedcoverage for MXT Holdings, Inc., against such claims and the defense and indemnificationhas been accepted by the carriers, subject to a reservation of rights. Management believes that the insurers will bear all liability, if any, withrespect to both cases and that the proceedings, individually or in theaggregate, will not have a material adverse effect on the Company’s results ofoperations or financial position.

In August 2006, Pamela L. Carney, Administrator of the Estate ofMichael J. Carney, filed a lawsuit in the Court of Common Pleas of WestmorelandCounty, Pennsylvania, against the Company and other defendants, alleging that aproduct manufactured by the Telemotive Industrial Controls business acquired bythe Company in December 2002 contributed to an accident that resulted in thedeath of Michael J. Carney in August 2004. The claim has been tendered to the Company’s

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insurance carrier and legal counsel has been retained to represent theCompany.  Plaintiff’s claim for damagesis unknown at this time, but management believes that the Company’s insurerwill bear all liability for the claim, if any.

The Company has been named, along with multiple other defendants, inasbestos-related lawsuits associated with business operations previouslyacquired by the Company, but which are no longer owned. During the Company’sownership, none of the businesses produced or sold asbestos-containingproducts. With respect to these claims, the Company is either contractuallyindemnified against liability for asbestos-related claims or believesthat it has no liability for such claims. The Company aggressively seeksdismissal from these proceedings, and has also tendered the defense of thesecases to the insurers of the previously acquired businesses and is awaitingtheir response.  The Company has alsofiled a late claim in the amount of $2.5 million in the Federal-Mogulbankruptcy proceedings to recover attorney’s fee paid for the defense of theseclaims, which the Company believes is an obligation of Federal Mogul althoughthe claim is subject to challenge.  Management does not believe theasbestos proceedings, individually or in the aggregate, will have a materialadverse effect on its financial position or results of operations.

*Litigation—Patent Infringement*

In April 1998, Ole K. Nilssen (“Nilssen”) filed a lawsuit in theU.S. District Court for the Northern District of Illinois alleging infringementby the Company of seven of his patents pertaining to electronic ballasttechnology, and seeking unspecified damages and injunctive relief to precludethe Company from making, using or selling products allegedly infringing hispatents. The Company denied that its products infringed any valid patent andfiled a response asserting affirmative defenses, as well as a counterclaim fora judicial declaration that its products do not infringe the patents assertedby Mr. Nilssen and also that the asserted patents are invalid. InJune 2001, the Company sold its lighting business to Universal LightingTechnologies, Inc. (“ULT”), and agreed to provide a limitedindemnification against certain claims of infringement that Nilssen mightallege against ULT. In April 2003, Nilssen’s lawsuit and the counterclaimswere dismissed with prejudice and both parties agreed to submit limited issuesin dispute to binding arbitration before an arbitrator with a relevanttechnical background. The arbitration occurred in November, 2004 and a decisionawarding Nilssen $23.4 million was issued on May 3, 2005, to be paid within tendays of the award. Nilssen’s counsel filed a motion to enter the award in U.S.District Court for the Northern District of Illinois, and Magnetek filed acounter-motion to vacate the award for a number of reasons, including that theaward was fraudulently obtained.  Magnetek’s request for oral argument wasgranted and the hearing took place on October 19, 2005.  A decision has not been announced.  An unfavorable decision by the Court wouldlikely result in payment of the award to Nilssen.

In February 2003, Nilssen filed a second lawsuit in the U.S.District Court for the Northern District of Illinois alleging infringement byULT of twenty-nine of his patents pertaining to electronic ballast technology,and seeking unspecified damages and injunctive relief to preclude ULT frommaking, using or selling products allegedly infringing his patents. ULT made aclaim for indemnification, which the Company accepted, subject to thelimitations set forth in the sale agreement. The case is now pending in the Central District of Tennessee.  Nilssen voluntarily dismissed all but four ofthe patents from the lawsuit.  The Company denies that the products forwhich it has an indemnification obligation to ULT infringe any valid patent andresponded on behalf of ULT asserting affirmative defenses, as well as acounterclaim for a judicial declaration that the patents are unenforceable andinvalid and that the products do not infringe Nilssen’spatents.   ULT requested a re-examination of the patents atissue by the Patent and Trademark Office and the request was granted.  Meanwhile, the case against ULT has beenstayed pending Nilssen’s appeal of an unfavorable decision against him inanother case that could influence the outcome of his lawsuits against ULT.  The Company will continue to aggressivelydefend the claims against ULT that are subject to defense and indemnification;however, an unfavorable decision could have a material adverse effect on theCompany’s financial position, cash flows and results of operations.

*Environmental Matters*—*General*

From time to time, Magnetek has taken action to bring certainfacilities associated with previously owned businesses into compliance withapplicable environmental laws and regulations. Upon the subsequent sale ofcertain businesses, the Company agreed to indemnify the buyers againstenvironmental claims associated with the divested operations, subject to certainconditions and limitations. Remediation activities, including those related tothe Company’s indemnification obligations, did not involve materialexpenditures during the three and nine months ended April 1, 2007 and April 2,2006.

The Company has also been identified by the United States EnvironmentalProtection Agency and certain state agencies as a potentially responsible partyfor cleanup costs associated with alleged past waste disposal practices atseveral previously owned facilities and offsite locations.  Although the materiality of futureexpenditures for environmental activities may be affected by the level and typeof contamination, the extent and nature of cleanup activities required bygovernmental authorities, the nature of the Company’s alleged connection to thecontaminated sites, the number and financial resources of

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other potentially responsible parties, the availability ofindemnification rights against third parties and the identification ofadditional contaminated sites, the Company’s estimated share of liability, ifany, for environmental remediation, including its indemnification obligations,is not expected to be material.

*Century Electric (McMinnville,Tennessee)*

Prior to the Company’s purchase of Century Electric, Inc. (“CenturyElectric”) in 1986, Century Electric acquired a business from Gould Inc. (“Gould”)in May 1983 that included a leasehold interest in a fractional horsepowerelectric motor manufacturing facility located in McMinnville, Tennessee. Gouldagreed to indemnify Century Electric from and against liabilities and expensesarising out of the handling and cleanup of certain waste materials, includingbut not limited to cleaning up any polychlorinated biphenyls (“PCBs”) at theMcMinnville facility (the “1983 Indemnity”). The presence of PCBs and othersubstances, including solvents, in the soil and in the groundwater underlyingthe facility and in certain offsite soil, sediment and biota samples has beenidentified. The McMinnville plant is listed as a Tennessee Inactive HazardousWaste Substance Site and plant employees were notified of the presence ofcontaminants at the facility. Gould has completed an interim remedialexcavation and disposal of onsite soil containing PCBs and a preliminaryinvestigation and cleanup of certain onsite and offsite contamination. TheCompany believes the cost of further investigation and remediation (includingancillary costs) is covered by the 1983 Indemnity. The Company sold itsleasehold interest in the McMinnville plant in August 1999 and while theCompany believes that Gould will continue to substantially perform under itsindemnity obligations, Gould’s failure to perform such obligations could have amaterial adverse effect on the Company’s financial position, cash flows andresults of operations.

*Effect of Fruit of the LoomBankruptcy (Bridgeport, Connecticut)*

In 1986, the Company acquired the stock of Universal ManufacturingCompany (“Universal”) from a predecessor of Fruit of the Loom (“FOL”), and thepredecessor agreed to indemnify the Company against certain environmentalliabilities arising from pre-acquisition activities at a facility inBridgeport, Connecticut. Environmental liabilities covered by theindemnification agreement include completion of additional cleanup activities,if any, at the Bridgeport facility and defense and indemnification againstliability for potential response costs related to offsite disposallocations.  The Company’s leaseholdinterest in the Bridgeport facility was assigned to the buyer in connectionwith the sale of the Company’s transformer business in June 2001.   FOL, the successor to the indemnificationobligation, filed a petition for Reorganization under Chapter 11 of theBankruptcy Code in 1999 and the Company filed a proof of claim in the proceedingfor obligations related to the environmental indemnification agreement. TheCompany believes that FOL had substantially completed the clean-up obligationsrequired by the indemnification agreement prior to the bankruptcy filing. InNovember 2001, the Company and FOL entered into an agreement involving theallocation of certain potential tax benefits and Magnetek withdrew its claimsin the bankruptcy proceeding. FOL’s obligation to the state of Connecticut wasnot discharged in the reorganization proceeding.  In October 2006, the owner of the Bridgeportfacility filed a lawsuit in Superior Court, J.D. of Fairfield, Connecticutalleging that the Company is obligated to remediate environmental contaminationat the facility.  The Company has filed aMotion to Stay and Remand the matter to the Connecticut Department ofEnvironmental Protection (“DEP”) on the basis that DEP has primary jurisdictionto determine the need and responsibility for any further remediation.  DEP recently requested parties, including theCompany, to submit reports summarizing the investigations and remediationperformed to date at the site and the proposed additional investigations andremediation necessary to complete those actions at the site.  FOL’s inability to satisfy its remainingobligations related to the Bridgeport facility and any offsite disposallocations, or an unfavorable ruling in the lawsuit with the owner of theBridgeport facility, or the discovery of additional environmental contaminationat the Bridgeport facility could have a material adverse effect on the Company’sfinancial position, cash flows or results of operations.

**6.             Comprehensive Loss**

For the fiscal periods ended April 1, 2007 and April2, 2006, comprehensive loss consisted of the following:

 

|                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **April 1,**                | ** ** | **April 2,**               | ** ** | **April 1,** | ** ** | **April 2,** | ** ** |
| ** **                       | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net loss                         |       | $                                | (419       | )                               | $          | (4,430 | ) | $ | (9,828 | ) | $ | (7,209 | ) |
| Currency  translation adjustment |       | 7                                |       | 1,247                           |       | (170 | ) | 1,404 |   |
| Comprehensive loss               |       | $                                | (412       | )                               | $          | (3,183 | ) | $ | (9,998 | ) | $ | (5,805 | ) |

 

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**7.**             **Earnings (Loss) Per Share**

The following table setsforth the computation of basic and diluted earnings (loss) per share for thethree- and nine-months ended April 1, 2007 and April 2, 2006:

 

|                                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **April 1,**                | ** ** | **April 2,**               | ** ** | **April 1,** | ** ** | **April 2,** | ** ** |
| ** **                                              | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Numerator:                                              |       |                             |       |                            |       |   |   |   |   |
| Income (loss) from continuing operations                |       | $                                | 235        |                            | $          | (2,398 | ) | $ | (6,593 | ) | $ | (5,212 | ) |
| Loss from discontinued operations                       |       | (654                             | )          | (2,032                          | )          | (3,235 | ) | (1,997 | ) |
| Net loss                                                |       | $                                | (419       | )                               | $          | (4,430 | ) | $ | (9,828 | ) | $ | (7,209 | ) |
|                                                    |       |                             |       |                            |       |   |   |   |   |
| Denominator:                                            |       |                             |       |                            |       |   |   |   |   |
| Weighted average shares for basic earnings per share    |       | 29,616                           |       | 28,911                          |       | 29,497 |   | 28,905 |   |
| Add dilutive effective of stock based compensation      |       | 653                              |       | —                          |       | — |   | — |   |
| Weighted average shares for diluted earnings per  share |       | 30,269                           |       | 28,911                          |       | 29,497 |   | 28,905 |   |
|                                                    |       |                             |       |                            |       |   |   |   |   |
| Basic &  Diluted:                                   |       |                             |       |                            |       |   |   |   |   |
| Income (loss)  per share from continuing operations     |       | $                                | 0.01       |                            | $          | (0.08 | ) | $ | (0.22 | ) | $ | (0.18 | ) |
| Loss per share  from discontinued operations            |       | $                                | (0.02      | )                               | $          | (0.07 | ) | $ | (0.11 | ) | $ | (0.07 | ) |
| Net loss per share                                      |       | $                                | (0.01      | )                               | $          | (0.15 | ) | $ | (0.33 | ) | $ | (0.25 | ) |

 

Outstanding options to purchase 4.2 million and 7.2 million shares ofcommon stock for the three months ended April 1, 2007 and April 2, 2006,respectively, were not included in the Company’s computation of weightedaverage shares for diluted earnings per share because the effect would havebeen anti-dilutive.  Similarly,outstanding options to purchase 4.3 million and 7.3 million shares of commonstock for the nine months ended April 1, 2007 and April 2, 2006, respectively,were not included in the Company’s computation of weighted average shares fordiluted earnings per share because the effect would have been anti-dilutive.

**8.             Warranties**

The Company offerswarranties for certain products that it manufactures, with the warranty termgenerally ranging from one to two years. Warranty reserves are established for costs expected to be incurredafter the sale and delivery of products under warranty, based mainly on knownproduct failures and historical experience. Actual repair costs incurred for products under warranty are chargedagainst the established reserve balance as incurred.  Changes in the warranty reserve for the nine-monthperiods ended April 1, 2007 and April 2, 2006 were as follows:

|                                                       | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **April 1,**               | ** ** | **April 2,** | ** ** |
| ** **                                            | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| Balance,  beginning of fiscal year                    |       | $                               | 430        |   | $ | 310 |   |
| Additions  charged to earnings for product warranties |       | 218                             |       | 423 |   |
| Use of reserve  for warranty obligations              |       | (313                            | )          | (397 | ) |
| Balance, end of period                                |       | $                               | 335        |   | $ | 336 |   |

 

Warranty reserves are included in accruedliabilities in the condensed consolidated balance sheets.

**9.**             **Restructuring Costs**

As a result of the divestiture of the Company’s power electronicsbusiness in October, 2006 the Company downsized and relocated its corporateoffice to Menomonee Falls, Wisconsin from Chatsworth, California.  In addition, the Company decided to retainand restructure the telecom power business, including relocating themanufacturing operations from Dallas, Texas to Menomonee Falls.

The condensed consolidated statement of operations for the nine-monthperiod ended April 1, 2007, includes severance costs of $1.9 million related todownsizing the corporate office, of which $0.6 million is included in researchand

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development expense and $1.3 million is included in selling, generaland administrative expense.  All of theseverance amounts were paid by the end of the Company’s third quarter of fiscal2007.

Costs incurred related to the restructuring and relocation of thetelecom power business, including inventory charges and duplicate facility andlabor costs, of $0.3 million and $1.2 million are included in cost of sales inthe condensed consolidated statements of operations for the three- andnine-month periods ended April 1, 2007, respectively.

The Company completed these restructuring activities during the thirdquarter of fiscal 2007.

**10.**          **Pension Expense**

For the three- and nine-month periods ended April 1, 2007 and April 2,2006, pension expense related to the Company’s defined benefit pension planconsisted of the following:

 

|                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **April 1,**                | ** ** | **April 2,**               | ** ** | **April 1,** | ** ** | **April 2,** | ** ** |
| ** **                       | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest Cost                    |       | $                                | 2,549      |                            | $          | 2,440 |   | $ | 7,761 |   | $ | 7,320 |   |
| Expected return  on plan assets  |       | (3,321                           | )          | (2,552                          | )          | (8,626 | ) | (7,656 | ) |
| Recognized net  actuarial losses |       | 930                              |       | 1,062                           |       | 2,686 |   | 3,186 |   |
|                             |       |                             |       |                            |       |   |   |   |   |
| Total net pension  expense       |       | $                                | 158        |                            | $          | 950 |   | $ | 1,821 |   | $ | 2,850 |   |

 

Pension expense is included in selling,general and administrative expense in the accompanying condensed consolidatedstatements of operations.

As a result of the divestiture of thepower electronics business (as discussed in Note 13 of Notes to CondensedConsolidated Financial Statements), the Company used a portion of the proceedsto make a contribution in December 2006 of $30.0 million to its defined benefitpension plan.  This contribution was notcontemplated in the Company’s original fiscal year 2007 estimate of periodicnet benefit cost.  As a result of thesignificant contribution relative to the plan assets, the related impact onpension expense, and the divestiture of the power electronics business, theCompany performed a remeasurement of its pension assets, liabilities andexpense as of December 31, 2006.  Theremeasurement resulted in an increase of $8.6 million to the Company’s pensionbenefit obligation and minimum pension liability and a reduction in pensionexpense due to a reduction in the discount rate from 6.38% to 5.88%.

**11.****                              ****Income Taxes**

Due to historicaltaxable losses, the Company provides valuation reserves against its U.S.deferred tax assets that result in a zero net deferred tax position (net deferredassets equal to deferred tax liabilities). A portion of the Company’s deferred tax liability relates totax-deductible amortization of goodwill that is no longer amortized forfinancial reporting purposes. These deferred tax liabilities are considered tohave an indefinite life and are therefore ineligible to be considered as asource of future taxable income in assessing the realization of deferred taxassets.

The Company’s provisionfor income taxes for the three- and nine-months ended April 1, 2007 includes$225 and $675, respectively, of deferred income tax expense related to theincrease in the Company’s deferred tax liability related to tax-deductibleamortization of goodwill.   The remainingtax provision is comprised of income taxes of the Company’s foreign subsidiaryin Canada.

**12.****                              ****Bank Borrowing Arrangements**

On September 30, 2005, the Company entered intoan agreement with Ableco Finance LLC (“Ableco”) providing for an $18 millionterm loan and an agreement with Wells Fargo Foothill, Inc. (“WFF”) providingfor a $13 million revolving credit facility. Borrowings under the term loan bore interest at the lender’s referencerate plus 5%, or, at the Company’s option, the London Interbank Offering Rate (“LIBOR”)plus 7.5%.  Such rates could be increasedby up to one percentage point depending upon the level of U.S. funded debt toEBITDA as defined in the agreement.  Theterm loan required quarterly principal payments of $1 million beginning inSeptember, 2006.  Borrowings under therevolving credit facility bear interest at the bank’s prime lending rate plus2.5% or, at the Company’s option, LIBOR plus 4%.  Borrowing levels under the revolving creditfacility are determined by a borrowing base formula as defined in theagreement, based on the level of eligible domestic accounts receivable andinventory.  The revolving credit facilityalso supports the issuance of letters of

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credit. Borrowings under the term loan were secured, and under the revolvingcredit facility are secured, by a lien over substantially all of the Company’sdomestic assets.

In November 2005, under terms of the financing agreements with WFF andAbleco, the Company deposited $22.6 million into an escrow account to fund theNilssen arbitration award in the event that its appeal of the award is notsuccessful (see Note 5 of Notes to Condensed Consolidated FinancialStatements). The deposit is reported as restricted cash in the accompanyingcondensed consolidated balance sheets as of April 1, 2007 and July 2, 2006.

As discussed in Notes 2 and 13 of the Notes to Condensed ConsolidatedFinancial Statements, in October, 2006, the Company completed the divestitureof its power electronics business.  TheCompany used a portion of the proceeds from the divestiture to repay allborrowings outstanding under its term loan and revolving credit facility.    In accordance with provisions of theagreement with Ableco, the agreement was terminated prior to the December 2007expiration date in exchange for a $325 prepayment penalty by the Company.  The prepayment penalty is included in otherexpense in the consolidated statements of operations for the nine-month periodended April 1, 2007.  In addition, thewrite-off of deferred financing costs of $670 related to the term loan isincluded in interest expense for the nine-month period ended April 1,2007.  The revolving credit facilityremains in place and the Company is currently in default under certaincovenants of the revolving credit agreement. The Company is in the process of obtaining a waiver.  There were no borrowings outstanding underthe revolving credit facility as of April 1, 2007.

**13.**                               **Divestitureof Power Electronics Business**

On October 23, 2006, the Company completed thesale of its power electronics business to Power-One, Inc. (“Power-One”).  The transaction, which satisfied allapplicable regulatory approvals and other customary closing conditions,included payment by Power-One to the Company of $68.0 million in cash and theassumption by Power-One of approximately $16.0 million of the Company’s debt,representing the total debt balances outstanding of the Company’s subsidiaryMagnetek, S.p.A.  The Company usedapproximately $29.0 million of the proceeds to repay all of its remainingoutstanding debt and in December 2006 made a contribution of $30.0 million toits defined benefit pension plan.  TheCompany intends to use the remainder of the proceeds from the sale of thebusiness primarily to fund ongoing operations.

Pursuant to the purchase and sale agreement by andbetween the Company and Power-One, Power-One purchased the business through theacquisition of all of the outstanding shares of Magnetek, S.p.A., a subsidiaryof the Company, and of the assets and liabilities of the U.S. division of thebusiness.  The terms of the agreementwere negotiated at arms-length.  Theagreement provided for a final purchase price adjustment to be negotiatedprimarily based on changes in tangible net assets of the business fromSeptember 28, 2006 to the October 23, 2006 closing date.  In February 2007, the Company and Power-Onecompleted negotiations of the final purchase price adjustment.  As a result, the Company paid a finalsettlement to Power-One of $2.3 million and recorded a loss on the sale of thepower electronics business of $0.4 million (net of amounts previously accrued),included in loss from discontinued operations in the accompanying condensedconsolidated statements of operations for the three- and nine-month periodsended April 1, 2007.

The agreement also provides indemnification for breaches ofrepresentations and warranties and other customary matters that the Companybelieves are typical for this type of transaction, including indemnificationsfor certain tax, legal, environmental and warranty issues.

The condensed consolidated balance sheet as of April 1, 2007 includes$1.9 million in accrued liabilities, representing the Company’s best estimateof remaining closing costs and contingent liabilities related to theindemnification provisions of the purchase and sale agreement.  While management has used its best judgmentin assessing the potential liability for these items, given the uncertaintyregarding future events, it is difficult to estimate the possible timing ormagnitude of any payments that may be required for liabilities subject to indemnification.  Any future adjustment to currently recordedclosing costs estimates or contingencies related to indemnifications based uponchanges in circumstances would also be recorded as a gain or loss on the saleof the business in discontinued operations.

**14.**                               **SubsequentEvents**

On May 1, 2007, the Company entered into an agreement to settlelitigation with Samsung-Electro-Mechanics Co., Ltd. (SEMCO), a Koreancorporation, whereby SEMCO agreed to pay the Company the total sum of $2.12million in four semi-annual installments between June 1, 2007 and December 1,2008 to resolve a dispute in a development agreement.  The Company will record the net present valueof the payments, estimated at $2.04 million, in other income from continuingoperations in its fourth quarter of fiscal 2007, which ends on July 1, 2007.

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**Item 2 — Management’s Discussion and Analysis ofOperations and Financial Condition**

**Overview**

Magnetek is global provider of digital powercontrol systems and we operate solely in this product category.  Our systems are used primarily in materialhandling, motion control, telecommunications (telecom) and energyapplications.  We believe that with ourtechnical and productive resources we are well positioned to respond toincreasing demand in our served markets. Our power control systems consist primarily of programmable motioncontrol and power conditioning systems used in the following applications:  cranes and hoists; elevators; wirelesstelecom; mining; fuel cell and wind markets. Our operations are located in North America, predominantly in MenomoneeFalls, Wisconsin, the location of our Company headquarters.

During fiscal year 2005, we reclassified theassets and liabilities of our telecom power business as held for sale, and theresults of operations of this business as discontinued operations.  In fiscal year 2006, we entered into variousstages of negotiations with several interested parties, however, we were notable to reach an agreement to sell the business.  In October 2006, we decided to retain thebusiness and initiated restructuring actions in order to improve its operatingresults.  The accompanying financialstatements reflect the reclassification of the assets and liabilities of ourtelecom power business as held and used, and the results of this business,including related restructuring costs, as continuing operations for all periodspresented.

During the fourth quarter of fiscal 2006, wecompleted a review of various cash raising alternatives to enable us to addresspending pension and debt repayment obligations, as well as provide funds forfuture growth initiatives, and we decided to divest our power electronicsbusiness.  This business was engaged inthe manufacture of embedded power electronic products, used primarily intelecom, data processing and storage, semiconductor equipment, medicalinstrumentation and home appliances.  Thebusiness had manufacturing and administrative facilities in Italy, China,Hungary and Chatsworth, California.  During the fourth quarterof fiscal year 2006, we reclassified the assets and liabilities of the powerelectronics business as held for sale, and the results of operations of thisbusiness as discontinued operations (see Note 2 of Notes to CondensedConsolidated Financial Statements).

In October 2006, we sold the power electronics business to Power-One, Inc.for $65.7 million in cash and the assumption by Power-One of approximately $16million of Magnetek’s debt, after post closing adjustments (see Note 13 ofNotes to Condensed Consolidated Financial Statements).  We used a portion of the proceeds from thedivestiture of the business to repay all of our outstanding bank debt,approximately $29 million, and also made a $30 million contribution to our definedbenefit pension plan in December 2006. We intend to use the remainder of the proceeds from the sale primarilyto fund ongoing operations.

The divestiture of our power electronicsbusiness has resulted in a smaller company in terms of sales with revenueexpected to exceed $100 million in our current fiscal year.  However, our gross margins in our continuingpower control systems business have historically been approximately 30%.  We completed the consolidation of ourmanufacturing operations and administrative facilities during the third quarterof fiscal 2007, relocating both our telecom manufacturing from Dallas, Texas,and our corporate office functions from Chatsworth, California, to MenomoneeFalls.  The resulting cost savings,together with a reduction in pension expense from the recent contribution toour pension plan and lower interest expense from reduced borrowings, enabledour continuing operations to generate net income for the third quarter offiscal 2007.

**ContinuingOperations**

Demand in certain of ourkey markets, mainly material handling, was seasonably soft during the thirdquarter of fiscal 2007 and our sales decreased to $23.3 million, down 12% fromthird quarter fiscal 2006 sales of $26.6 million.  Gross profit in the third quarter of fiscal2007 was lower than the same period in fiscal 2006, due mainly to lower salesvolume and restructuring costs from the relocation of our telecom manufacturingoperations.  Our research and development(“R&D”) expense decreased in the third quarter of fiscal 2007 compared tothe third quarter of fiscal 2006, due mainly to corporate staff reductions andthe substantial completion of key development efforts.  We intend to continue to invest in R&Dgoing forward, mainly in new product offerings for alternative energyapplications and radio controls for material handling, however the rate ofgrowth in R&D spending has slowed in fiscal 2007.  Third quarter fiscal 2007 selling, generaland administrative (“SG&A”) expense decreased by $1.7 million compared tothe third quarter of fiscal 2006, due mainly to lower pension expense andpayroll savings resulting from our corporate downsizing (see Note 9 of Notes toCondensed Consolidated Financial Statements).  As a result, our continuing operations reported income from operationsof nearly $0.4 million.

Our total long-term debtremained at zero during the third quarter of fiscal 2007.  In the second quarter of fiscal 2007, we useda portion of the proceeds from the divestiture of our power electronicsbusiness to repay all of our outstanding domestic bank debt, and our Europeandebt was assumed by Power-One upon the purchase of the business.  We contributed $30 million to our definedbenefit pension plan in December 2006, and under current funding regulations,no contributions are expected until April 2008. Future required contributions will depend on future interest ratelevels, values in equity and

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fixed income markets,and the level and timing of interim contributions we may make to the plan, andcould still be significant.  Pensionexpense recorded for financial reporting purposes is also dependent upon thesefactors, but is expected to be substantially lower in future periods ascompared to recent historical recorded expense due primarily to the impact ofthe recent contribution on pension expense calculated under accounting rules.

We intend to focus our development and marketing capabilities oninternal sales growth opportunities across all product lines, with a near-termemphasis on power products for wind and elevator markets.  We also intend to focus on improving ourmanufacturing flow and related efficiency in our relocated telecom operationsto improve margins.  We completed theconsolidation of our administrative functions during the third quarter of fiscal2007, and will continue to review further administrative cost reductionactions.  Looking forward, gross marginsin our fourth quarter of fiscal 2007 will likely be impacted by start up costsand manufacturing variances related to ramp up of production capacity for windinverter products.  In addition, webelieve that future sustained profitability is dependent upon increasing salesrevenue, improvement in gross margins, successful introduction and acceptanceof new product offerings and continued cost control initiatives.

##### **DiscontinuedOperations**

The results of our power electronics business, as well as certainexpenses related to previously divested businesses, have been classified asdiscontinued operations in the accompanying condensed consolidated financialstatements and footnotes for all periods presented.   The assets and liabilities of our powerelectronics business are classified as held for sale in the accompanyingcondensed consolidated balance sheet as of July 1, 2006.

Our third quarter fiscal 2007 loss from discontinued operations was$0.7 million, due mainly to a loss on the sale of our power electronicsbusiness of $0.4 million from finalization of the closing balance sheet of thebusiness (see Note 13 of Notes to Condensed Consolidated Financial Statements).  Costs associated with other previously ownedbusinesses were $0.3 million for the three months ended April 1, 2007. These costs have historically included charges for an arbitration award in apatent infringement claim and related legal fees, as well as certain expensesfor product liability claims, environmental issues, and asbestos claims (seeNote 5 of Notes to Consolidated Financial Statements).   All of theseissues relate to businesses we no longer own and most relate to indemnificationagreements we provided when we divested those businesses.

Going forward, our discontinued operations will include additionalcosts we may incur related to businesses no longer owned and may includeadditional costs above those currently estimated and accrued related to thedivestiture of our power electronics business.

##### **CriticalAccounting Policies**

The following discussion and analysis of our financial condition andresults of operations is based upon our condensed consolidated financialstatements.  In preparing financialstatements in conformity with accounting principles generally accepted in theUnited States, we must make estimates and assumptions that affect the reportedamount of assets and liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities at the date of our financialstatements.  Such estimates are basedupon historical experience and other assumptions believed to be reasonablegiven known circumstances.  Actual resultscould differ from those estimates.  On anongoing basis, we evaluate and update our estimates, including those related toaccounting for inventories, goodwill, pension benefits and reserves forlitigation and environmental issues.  Weconsider the following policies critical to understanding our financialposition and results of operations.

*Accounts Receivable*

Accounts receivable represent amounts due fromcustomers in the ordinary course of business. We are subject to losses from uncollectible receivables in excess of ourallowances.  We maintain allowances fordoubtful accounts for estimated losses from customers’ inability to makerequired payments.  In order to estimatethe appropriate level of this allowance, we analyze historical bad debts,customer concentrations, current customer creditworthiness, current economictrends and changes in customer payment patterns.  Our total allowance includes a specificallowance based on identification of customers where we feel full payment is indoubt, as well as a general allowance calculated based on our historical losseson accounts receivable as a percentage of historical sales.  We believe that our methodology has beeneffective in accurately quantifying our allowance for doubtful accounts and donot anticipate changing our methodology in the future.  However, if the financial conditions of anyof our customers were to deteriorate and impair their ability to make payments,additional allowances may be required in future periods.  We believe that all appropriate allowanceshave been provided.

** **

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*Inventories*

Our inventories arestated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method, includingmaterial, labor and factory overhead.  Weidentify potentially obsolete and excess inventory by evaluating overallinventory levels in relation to expected future requirements and marketconditions, and provisions for excess and obsolete inventory and inventoryvaluation are recorded accordingly. Items with no usage for the past twelve months and no expected future usageare considered obsolete, and are disposed of or fully reserved.  Reserves for excess inventory are determinedbased upon historical and anticipated usage as compared to quantities on hand.  Excess inventory is defined as inventoryitems with on-hand quantities in excess of one year’s usage and specifiedpercentages are applied to the excess inventory value in determining thereserve.  Our assumptions have notchanged significantly in the past, and we believe they are not likely to changein the foreseeable future.  We feel thatour assumptions regarding inventory valuation have been accurate in the past.

*Long-Lived Assets and Goodwill*

We periodically evaluatethe recoverability of our long-lived assets, including property, plant andequipment.  Impairment charges arerecorded in operating results when the undiscounted future expected cash flowsderived from an asset are less than the carrying value of the asset.  We are required to perform annual impairmenttests of our goodwill, and may be required to test more frequently in certaincircumstances.  We have elected toperform our annual impairment test in the fourth quarter of our fiscalyear.  Our power controls systems businessis our only reporting unit under SFAS No. 142.

In assessing potentialimpairment, we make significant estimates and assumptions regarding thediscounted future cash flows of our reporting units to determine the fair valueof those reporting units.    Suchestimates include, but are not limited to, projected future operating results,working capital ratios, cash flow, terminal values, market discount rates andtax rates.  We review the accuracy of ourprojections by comparing them to our actual results annually, and havedetermined that, historically, our cash flow estimates used in determining thefair value of our reporting units have been reasonably accurate.  We use the results of this analysis as wellas projected operating results to modify our estimates annually.  However, if circumstances cause theseestimates to change in the future, or if actual circumstances varysignificantly from these assumptions, this could result in additional goodwillimpairment charges.  We cannot predictthe occurrence of future events that may adversely affect our reported goodwillbalance.

*Pension Benefits*

Wesponsor a defined benefit plan that covers a number of current and formeremployees in the U.S.  The valuation ofour pension plan requires the use of assumptions and estimates that attempt toanticipate future events to develop actuarial valuations of expenses, assetsand liabilities.  These assumptionsinclude discount rates, expected rates of return on plan assets and mortalityrates.  We consider market conditions,including changes in investment returns and interest rates, in making theseassumptions.  Our plan assets arecomprised mainly of common stock and bond funds.  The expected rate of return on plan assets isa long-term assumption and is generally not changed on an annual basis.  The discount rate reflects the market forhigh-quality fixed income debt instruments and is subject to change eachyear.  Changes in assumptions typicallyresult in actuarial gains or losses that are amortized in accordance with themethods specified in FAS Statement No. 87. Significant differences between our assumptions and actual futureinvestment return or discount rates could have a material impact on ourfinancial position or results of operations and related funding requirements.

Following the divestiture of our powerelectronics business, we contributed $30 million to our defined benefit pensionfund in December 2006.  The contributionwas not contemplated in our original fiscal 2007 estimate of periodic netbenefit cost.  As a result of thesignificant contribution and the related impact on pension expense, as well asthe divestiture of our power electronics business, we performed a remeasurementof pension assets, liabilities and periodic net benefit cost as of December 31,2006.  Our pension benefit obligation andminimum pension liability were increased by $8.6 million, due mainly to areduction in our discount rate assumption to 5.9% from a rate of 6.4% in theoriginal estimate for fiscal 2007 prepared in June 2006.  As a result our pension expense was reducedto $0.2 million per quarter for the remainder of fiscal 2007 beginning in ourthird fiscal quarter.

*Reservesfor Contingencies*

We periodically recordthe estimated impacts of various conditions, situations or circumstancesinvolving uncertain outcomes.  Theaccounting for such events is prescribed under SFAS No. 5, *Accountingfor Contingencies*.  SFAS No. 5defines a contingency as an existing condition, situation, or set ofcircumstances involving uncertainty as to possible gain or loss to anenterprise that will ultimately be resolved when one or more future eventsoccur or fail to occur.

SFASNo. 5 does not permit the accrual of gain contingencies under anycircumstances.  For loss contingencies,the loss must be accrued if (1) information is available that indicates it isprobable that the loss has been incurred, given the likelihood of uncertainevents; and (2) that the amount of the loss can be reasonably estimated.

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Theaccrual of a contingency involves considerable judgment on our part.  We use our internal expertise, and outsideexperts as necessary, to help estimate the probability that a loss has beenincurred and the amount or range of the loss.

*Income Taxes*

We operate in several taxing jurisdictions and aresubject to a variety of income and related taxes.  Judgment is required in determining ourprovision for income taxes and related tax assets and liabilities.  We believe we have reasonably estimated ourtax positions for all jurisdictions for all open tax periods.  It is possible that, upon closure of our taxperiods, our final tax liabilities could differ from our estimates.

Werecord deferred income tax assets in tax jurisdictions where we generate lossesfor income tax purposes.  We also recordvaluation allowances against these deferred tax assets in accordance with SFASNo. 109, *Accounting for Income Taxes*, when, inour judgment, the deferred income tax assets will likely not be realized in theforeseeable future.

**Results of Operations - Three Months Ended April1, 2007 and April 2, 2006**

NetSales and Gross Profit

Net sales for the three months endedApril 1, 2007 were $23.3 million, a decrease of 12.3% from the three monthsended April 2, 2006 sales of $26.6 million. The decrease was mainly due to lower sales in the telecom power marketof $3.2 million and lower sales in energy systems markets of $0.7 million,partially offset by higher sales in the material handling markets of $0.9million.  Net sales by market were asfollows, in millions:

 

|                          | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **April 1, 2007**      | ** ** | **April 2, 2006** | ** ** |
| Material  handling       |       | $                                | 13.7       |   | 59 | % | $ | 12.8 |   | 48 | % |
| Elevator motion  control |       | 4.2                              |       | 18 | % | 4.5 |   | 17 | % |
| Telecom power  systems   |       | 3.7                              |       | 16 | % | 6.9 |   | 26 | % |
| Energy systems           |       | 1.7                              |       | 7 | % | 2.4 |   | 9 | % |
|                     |       |                             |       |   |   |   |   |   |   |
| Total net sales          |       | $                                | 23.3       |   | 100 | % | $ | 26.6 |   | 100 | % |

 

Gross profit for the three months endedApril 1, 2007 was $6.9 million, or 29.6% of sales, versus $7.3 million, or27.5% of sales, in the three months ended April 2, 2006.  The increase in gross profit as a percentageof sales in the three months ended April 1, 2007 as compared to the threemonths ended April 2, 2006 was due to favorable sales mix, with proportionatelyhigher sales of higher margin sales in material handling markets.

Researchand Development, Selling, General and Administrative

R&D expense was $0.9 million, or 3.9%of sales, in the three months ended April 1, 2007, compared to the R&Dexpense of $1.3 million, or 4.8% of sales, for the three months ended April 2,2006.  R&D expense in the threemonths ended April 1, 2007 reflects lower payroll costs due to a staffreduction in our corporate R&D function.

SG&A expense was $5.6 million (24.1% of sales) in the three monthsended April 1, 2007 versus $7.3 million (27.4% of sales) in the three monthsended April 2, 2006.  Selling expenses inthe three months ended April 1, 2007 were $2.6 million, comparable to $2.6million in the three months ended April 2, 2006.  General and administrative (“G&A”)expense was $3.0 million in the three months ended April 1, 2007 compared to$4.7 million in the three months ended April 2, 2006, due to lower pensionexpense of $0.8 million, lower payroll-related costs due to corporate staffreductions of $0.6 million, and lower professional fees and travel expenses.

Income (Loss) from Operations

Income from operations for the threemonths ended April 1, 2007 was $0.4 million compared to a loss from operationsof $1.2 million for the three months ended April 2, 2006.  The improvement in income from operations inthe three months ended April 1, 2007 as compared to the three months endedApril 2, 2006 was mainly due to cost savings of $1.5 million from restructuringactivities and lower R&D spending of $0.3 million, partially offset bylower gross margins of $0.4 million from lower sales volume.

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InterestIncome and Expense and Other Expense 

Interest income was $0.4 million andinterest expense was $0.1 million in the three months ended April 1, 2007.  Interest income was $0.3 million and interestexpense was $1.0 million in the three months ended April 2, 2006.  The increase in interest income in the threemonths ended April 1, 2007 was due to higher cash and cash equivalent balancesheld in short-term investments.

The decrease in interest expense in thethree-month period ended April 1, 2007 was mainly due to the repayment of allof our debt following the divestiture of the power electronics business.  Interest expense for the three months endedApril 1, 2007 was comprised entirely of deferred financing amortization.  Interest expense in the three months endedApril 2, 2006 reflects interest on outstanding borrowings and deferredfinancing amortization.

Other expense in the three months endedApril 1, 2007 was comprised of a loss of $0.1 million on the sale of our metalfabrication assets and inventory to a third party.  Other expense for the nine months ended April1, 2007 also included a prepayment penalty of $0.3 million related to the earlyrepayment of our $18.0 million term loan in October 2006.

Provision for IncomeTaxes

We recorded a tax provision of $0.3million in the three months ended April 1, 2007.  Despite the pretax loss of $1.9 million inthe three months ended April 2, 2006, we recorded a tax provision of $0.5million.  The provision in both periodswas mainly due to non-cash deferred tax provisions related to changes indeferred tax liabilities from goodwill amortization and to a lesser extent,provisions for income taxes on our pretax income in Canada (see Note 11 ofNotes to Condensed Consolidated Financial Statements).

Income (Loss) fromContinuing Operations

We recorded income from continuingoperations of $0.2 million in the three months ended April 1, 2007, or $0.01earnings per share on both a basic and diluted basis, compared to a loss fromcontinuing operations of $2.4 million in the three months ended April 2, 2006,or a $0.08 loss per share on both a basic and diluted basis.

Loss from DiscontinuedOperations

Our loss from discontinued operations for the three months ended April1, 2007 was $0.7 million, or a $0.02 loss per share on both a basic and dilutedbasis, compared to a loss from discontinued operations of $2.0 million, or a $0.07loss per share on both a basic and diluted basis, for the three months endedApril 2, 2006.  Loss from discontinuedoperations in the three months ended April 1, 2007 was comprised mainly of aloss on the sale of our power electronics business of $0.4 million and expensesrelated to previously divested businesses of $0.3 million.  Loss from discontinued operations of $2.0million in the three months ended April 2, 2006 was comprised of net lossesfrom our discontinued power electronics business of $1.7 million, as well asexpenses related to previously divested businesses of $0.3 million, mainlylegal fees and other costs associated with the patent infringement claim.

NetLoss

Our net loss was $0.4 million in thethree months ended April 1, 2007, or a $0.01 loss per share, basic and diluted,compared to a net loss of $4.4 million in the three months ended April 2, 2006,or a $0.15 loss per share on both a basic and diluted basis.

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**Results of Operations - Nine Months Ended April 1,2007 and April 2, 2006**

NetSales and Gross Profit

Net sales for the nine months ended April1, 2007 were $76.8 million, an increase of 0.8% from the nine months endedApril 2, 2006 sales of $76.3 million. The increase was mainly due to higher sales to material handling marketsof $2.8 million offset by lower sales in telecom power markets of $2.7million.   Net sales by market were asfollows, in millions:

 

|                          | ** ** | **Nine Months Ended** | ** ** |
|--------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **April 1, 2007**     | ** ** | **April 2, 2006** | ** ** |
| Material  handling       |       | $                               | 45.1       |   | 59 | % | $ | 42.3 |   | 55 | % |
| Elevator motion  control |       | 14.2                            |       | 18 | % | 12.8 |   | 17 | % |
| Telecom power  systems   |       | 12.0                            |       | 16 | % | 14.7 |   | 20 | % |
| Energy systems           |       | 5.5                             |       | 7 | % | 6.5 |   | 9 | % |
|                     |       |                            |       |   |   |   |   |   |   |
| Total net sales          |       | $                               | 76.8       |   | 100 | % | $ | 76.3 |   | 100 | % |

 

Gross profit for the nine months endedApril 1, 2007 was $21.4 million, or 27.8% of sales, versus $22.5 million, or29.5% of sales, in the nine months ended April 2, 2006.  The reduction in gross profit as a percentageof sales in the nine months ended April 1, 2007 as compared to the nine monthsended April 2, 2006 was mainly due to restructuring costs of $1.2 millionrelated to the relocation of our telecom manufacturing operations.

Researchand Development, Selling, General and Administrative

R&D expense was $3.7 million, or 4.8%of sales, in the nine months ended April 1, 2007, comparable to the R&Dexpense of $3.7 million, or 4.9% of sales, for the nine months ended April 2,2006.  R&D expense in the nine monthsended April 1, 2007 includes $0.6 million in severance related to restructuringof our corporate office functions.  Wecontinue to invest in product development for new markets and applications suchas alternative energy products for wind applications and expect our R&Dexpense to approximate $1.0 million per quarter for the remainder of the 2007fiscal year and 2008 fiscal year.

SG&A expense was $22.2 million (28.9% of sales) in the nine monthsended April 1, 2007 versus $21.0 million (27.6% of sales) in the nine monthsended April 2, 2006.  Selling expenses inthe nine months ended April 1, 2007 were $8.0 million, an increase of $0.4million compared to $7.6 million in the nine months ended April 2, 2006.  G&A expense was $14.2 million in the ninemonths ended April 1, 2007 compared to $13.5 million in the nine months endedApril 2, 2006, due to higher stock-based compensation expense of $1.1 million(see Note 3 of Notes to Condensed Consolidated Financial Statements) and $1.3million in severance costs in the nine months ended April 1, 2007 (see Note 9of Notes to Condensed Consolidated Financial Statements), partially offset bysavings in the third fiscal quarter resulting from restructuring actions andlower pension expense.

Loss from Operations

Our loss from operations for the ninemonths ended April 1, 2007 was $4.5 million compared to a loss from operationsof $2.2 million for the nine months ended April 2, 2006.  The increase in loss from operations in thenine months ended April 1, 2007 as compared to the nine months ended April 2,2006 was mainly due to restructuring and relocation costs included in our lossfrom operations for the nine months ended April 1, 2007, partially offset bysavings resulting from those actions in the third fiscal quarter.

InterestIncome and Expense and Other Expense 

Interest income was $1.6 million andinterest expense was $2.3 million in the nine months ended April 1, 2007.  Interest income was $0.4 million and interestexpense was $2.2 million in the nine months ended April 2, 2006.  The increase in interest income in the ninemonths ended April 1, 2007 was due to higher cash and cash equivalent balancesduring the second and third quarters of fiscal 2007 and $0.3 million ininterest income related to a previous tax settlement.

The increase in interest expense in thenine-month period ended April 1, 2007 was mainly due to the write-off ofdeferred financing assets of $0.7 million from the early retirement ofdebt.  Interest expense in the ninemonths ended April 2, 2006 reflects interest on outstanding borrowings anddeferred financing amortization.

The term loan was repaid in October 2006,and as a result, our other expense of $0.4 million in the nine months endedApril 1, 2007 is comprised of a prepayment penalty of $0.3 million related tothe early repayment of that debt and a loss of $0.1 million on the sale of ourmetal fabrication assets and inventory to a third party.

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Provision for IncomeTaxes

Despite the pretax loss of $5.6 millionin the nine months ended April 1, 2007 and the pretax loss of $4.0 million inthe nine months ended April 2, 2006, we recorded tax provisions in thoseperiods of $1.0 million and $1.2 million respectively, due to non-cash deferredtax provisions related to changes in deferred tax liabilities from goodwillamortization and to a lesser extent, provisions for income taxes on our pretaxincome in Canada (see Note 11 of Notes to Condensed Consolidated FinancialStatements).

Loss from ContinuingOperations

We recorded a loss from continuingoperations of $6.6 million in the nine months ended April 1, 2007, or a $0.22loss per share on both a basic and diluted basis, compared to a loss fromcontinuing operations of $5.2 million in the nine months ended April 2, 2006,or a $0.18 loss per share on both a basic and diluted basis.

Loss from DiscontinuedOperations

Our loss from discontinued operations for the nine months ended April1, 2007 was $3.2 million, or a $0.11 loss per share on both a basic and dilutedbasis, compared to a loss from discontinued operations of $2.0 million, or a$0.07 loss per share on both a basic and diluted basis, for the nine monthsended April 2, 2006.  Loss fromdiscontinued operations in the nine months ended April 1, 2007 was comprisedmainly of losses in our discontinued power electronics business of $2.3 million,expenses related to previously divested businesses of $0.5 million, and theloss we recorded on the sale of the power electronics business of $0.4million.  Loss from discontinuedoperations in the nine months ended April 2, 2006 was comprised of net lossesfrom our discontinued power electronics business of $0.3 million and expensesrelated to previously divested businesses of $1.7 million, mainly legal feesand other costs associated with the patent infringement claim.

NetLoss

Our net loss was $9.8 million in the ninemonths ended April 1, 2007, or a $0.33 loss per share, basic and diluted,compared to a net loss of $7.2 million in the nine months ended April 2, 2006,or a $0.25 loss per share on both a basic and diluted basis.

**Liquidity and Capital Resources**

Our cash and cash equivalent balance, excluding restricted cash,increased $4.6 million during the nine months ended April 1, 2007, from $0.1million at July 2, 2006 to $4.7 million at April 1, 2007.  During the nine months ended April 1, 2007, ouraccounts receivable balances increased $0.6 million and inventories increased$1.5 million, while accounts payable increased $1.6 million.  We also paid approximately $1.3 million inseverance costs during fiscal 2007 related to our corporate downsizing.  Our capital expenditures in the nine monthsended April 1, 2007 were $0.9 million and we are in the process of addingcapacity for the production of wind inverters. We do not anticipate capital expenditures in fiscal 2007 will exceed$2.0 million.  The expected amount ofcapital expenditures could change depending upon changes in revenue levels, ourfinancial condition and the general economy.

As discussed in Notes 2 and 13 of the Notes to Condensed ConsolidatedFinancial Statements, in October, 2006, we sold our power electronics businessto Power-One for $65.7 million in cash (net of post closing adjustments of $2.3million) and the assumption of approximately $16.0 million in outstanding debtin Europe.  We used approximately $29.0million of the proceeds from the divestiture to repay all borrowingsoutstanding under our term loan with Ableco and revolving credit facility withWFF in October 2006.  Pursuant to theterms of the loan agreement with Ableco, the agreement was terminated prior tothe December 2007 expiration date in exchange for our payment to Ableco of $0.3million.  The revolving credit facilityremains in place with availability of $12.1 million at April 1, 2007.  We are currently in default under certaincovenants of the revolving credit agreement, and we are in the process ofobtaining a waiver.  There were noborrowings outstanding under the revolving credit facility as of April 1, 2007.

Primarily as a result of the decline in interest rates over the pastseveral years, the accumulated benefit obligation of our defined benefitpension plan currently exceeds plan assets. We used a portion of the proceeds from the divestiture of our powerelectronics business to contribute $30.0 million to our pension plan inDecember 2006 and under current funding regulations, actuarial projectionsindicate no contributions to the plan would be required before April 2008.  Future required contributions will depend onfuture interest rate levels, values in equity and fixed income markets, and thelevel and timing of interim contributions we may make to the plan, and couldstill be significant.

We are subject to certain potentialenvironmental and legal liabilities associated primarily with past divestitures(see Note 5 of Notes to Condensed Consolidated Financial Statements).   In the fourth quarter of fiscal 2005, adecision was rendered in a patent infringement action brought against us by OleK. Nilssen.  In settlement of pendinglitigation, we agreed to submit the matter to binding arbitration, and in May2005, the arbitrator awarded damages to Mr. Nilssen of $23.4 million, to bepaid within ten days of the award. Nilssen’s counsel filed a motion to enter the award in U.S. DistrictCourt for the

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Northern District of Illinois, and wefiled a counter-motion to vacate the award on grounds that it was fraudulentlyobtained.  Our request for oral argument was granted and the hearing washeld on October 19, 2005.  The judge isexpected to render his decision by mail after further consideration.  An unfavorable decision by the Court couldresult in payment of the award of $22.6 million, net of previously paidamounts, to Nilssen, which would have a material adverse effect on our cashflows during the period in which payment would be made.  We have adequate resources to support paymentof the award if such a payment is necessary, as we currently have $22.6 millionof restricted cash in an interest-earning escrow account.

Based upon current plans and business conditions, we believe thatcurrent cash balances, borrowing capacity under our revolving credit facilityand internally generated cash flows will be sufficient to fund anticipatedoperational needs, capital expenditures and other commitments over the next 12months.

**Caution Regarding Forward-LookingStatements and Risk Factors**

This document, including documents incorporated herein by reference,contains “forward-looking statements” within the meaning of the PrivateSecurities 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-lookingstatements.  Forward-looking statements are inherently subject to risksand uncertainties which in many cases are beyond our control and which cannotbe predicted or quantified.  As a result, future events and actual resultscould differ materially from those set forth in, contemplated by, or underlyingforward-looking statements.  Forward-looking statements contained in thisdocument speak only as of the date of this document or, in the case of anydocument incorporated by reference from another document, the date of thatdocument.  We do not have any obligation to publicly update or revise anyforward-looking statement contained or incorporated by reference in thesedocuments to reflect changed assumptions, the occurrence of unanticipatedevents or changes to future operating results over time.

Our future results of operations and the other forward-looking statementscontained in this filing, including this section titled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”,involve a number of risks and uncertainties.  In particular, thestatements regarding future economic conditions, our goals and strategies, newproduct introductions, penetration of new markets, projections of salesrevenues, manufacturing costs and operating costs, pricing of our products andraw materials required to manufacture our products, gross margin expectations,relocation and outsourcing of production capacity, capital spending, researchand development expenses, the outcome of pending legal proceedings andenvironmental matters, tax rates, sufficiency of funds to meet our needsincluding contributions to our defined benefit pension plan, and our plans forfuture operations, as well as our assumptions relating to the foregoing, areall subject to risks and uncertainties.

A number of factors could cause ouractual results to differ materially from our expectations.  We are subjectto all of the business risks facing public companies, including business cyclesand trends in the general economy, financial market conditions, changes ininterest rates, demand variations and volatility, potential loss of key personnel,supply chain disruptions, government legislation and regulation, and naturalcauses.  Additional risks and uncertainties include but are not limited toindustry conditions, competitive factors such as technology and pricingpressures, business conditions in our served markets, dependence on significantcustomers, increased material costs, risks and costs associated withacquisitions and divestitures, environmental matters and the risk that ourultimate costs of doing business exceed present estimates.  This list of risk factors is notall-inclusive, as other factors and unanticipated events could adversely affectour financial position or results of operations.  Further information on factors that couldaffect our financial results can be found in our Form 10-K filing with theSecurities and Exchange Commission for the year ended July 2, 2006, under theheading “Risk Factors Affecting the Company’s Outlook”, as well as below inPart II, Item 1A under the heading  “RiskFactors”.

**Item 3 —Quantitative and Qualitative Disclosures about Market Risk**

Weare exposed to market risks in the areas of foreign exchange and interestrates.  To mitigate the effect of suchrisks, from time to time we selectively use specific financial instruments.Hedging transactions can be entered into under Company policies and proceduresand are monitored monthly. Company policy prohibits the use of such financialinstruments for trading or speculative purposes. There have been changes in themarket risks that we reported in our Annual Report on Form 10-K dated July 2,2006 as a result of the divestiture of our power electronics business.  Our exposure to interest rate risk decreasedsignificantly, as we have no debt outstanding as of April 1, 2007, and ourexposure to foreign currency exchange rates decreased significantly, as thedivestiture included the majority of our international operations.  Our continuing operations did not have anyoutstanding hedge instruments or contracts at April 1, 2007, and July 2, 2006.

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***Interest Rates***

The fair value of our debt was effectively zero atApril 1, 2007.  Our debt balance of $33was comprised entirely of capital lease obligations.  As a result, at April 1, 2007, a hypothetical10% adverse change in interest rates would have a negligible impact on ourannual interest expense.

***Foreign Currency Exchange Rates***

We generally do notenter into foreign exchange contracts to protect against reductions in valueand volatility of future cash flows caused by changes in exchange rates, but wemay selectively enter into foreign exchange contracts to hedge certainexposures.  Gains and losses on thesenon-U.S.-currency investments would generally be offset by corresponding lossesand gains on the related hedging instruments, resulting in negligible net exposure.

We had no foreigncurrency contracts outstanding at April 1, 2007 and July 2, 2006.

**Item4 — Controls and Procedures**

In connection with this Form 10-Q, under the direction of our ChiefExecutive Officer and Chief Financial Officer, we evaluated our disclosurecontrols and procedures, as defined in Rules 13a-15(e) and 15d-15(e)of the Securities Exchange Act of 1934, and internal control over financialreporting and concluded that (i) our disclosure controls and procedures wereeffective as of April 1, 2007, and (ii) no change in internal control overfinancial reporting occurred during the quarter ended April 1, 2007, thathas materially affected, or is reasonably likely to materially affect, suchinternal control over financial reporting.

Attached as exhibits to this Form 10-Q are certifications of theCompany’s Chief Executive Officer and Chief Financial Officer, which arerequired in accordance with Rule 13a-14 of the Securities Exchange Act of1934.  This “Controls and Procedures”section includes information concerning the controls and evaluation thereofreferred to in the attached certifications, and it should be read inconjunction with the attached certifications for a more complete understandingof the topics presented.

**PART II - OTHER INFORMATION**

**Item 1 — Legal Proceedings**

In April 1998, Ole K. Nilssen (“Nilssen”) filed a lawsuit in theU.S. District Court for the Northern District of Illinois alleging infringementby the Company of seven of his patents pertaining to electronic ballast technology,and seeking unspecified damages and injunctive relief to preclude the Companyfrom making, using or selling products allegedly infringing his patents. TheCompany denied that its products infringed any valid patent and filed aresponse asserting affirmative defenses, as well as a counterclaim for ajudicial declaration that its products do not infringe the patents asserted byMr. Nilssen and also that the asserted patents are invalid. InJune 2001, the Company sold its lighting business to Universal LightingTechnologies, Inc. (“ULT”), and agreed to provide a limitedindemnification against certain claims of infringement that Nilssen mightallege against ULT. In April 2003, Nilssen’s lawsuit and the counterclaimswere dismissed with prejudice and both parties agreed to submit limited issuesin dispute to binding arbitration before an arbitrator with a relevanttechnical background. The arbitration occurred in November, 2004 and a decisionawarding Nilssen $23.4 million was issued on May 3, 2005, to be paid within tendays of the award. Nilssen’s counsel filed a motion to enter the award in U.S.District Court for the Northern District of Illinois, and Magnetek filed acounter-motion to vacate the award for a number of reasons, including that theaward was fraudulently obtained.  Magnetek’s request for oral argument wasgranted and the hearing took place on October 19, 2005.  A decision has not been announced.  An unfavorable decision by the Court wouldlikely result in payment of the award to Nilssen.

In February 2003, Nilssen filed a second lawsuit in the U.S.District Court for the Northern District of Illinois alleging infringement byULT of twenty-nine of his patents pertaining to electronic ballast technology,and seeking unspecified damages and injunctive relief to preclude ULT frommaking, using or selling products allegedly infringing his patents. ULT made aclaim for indemnification, which the Company accepted, subject to thelimitations set forth in the sale agreement. The case is now pending in the Central District of Tennessee.  Nilssen voluntarily dismissed all but four ofthe patents from the lawsuit.  The Company denies that the products forwhich it has an indemnification obligation to ULT infringe any valid patent andresponded on behalf of ULT asserting affirmative defenses, as well as acounterclaim for a judicial declaration that the patents are unenforceable andinvalid and that the products do not infringe Nilssen’spatents.   ULT requested a re-examination of the patents atissue by the Patent and Trademark Office and the request was granted.  Meanwhile, the case against ULT has beenstayed pending Nilssen’s appeal of an unfavorable decision against him inanother case that could influence the outcome of his lawsuits against ULT.  The Company will continue to aggressivelydefend the claims against

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ULT that are subject to defense and indemnification; however, anunfavorable decision could have a material adverse effect on the Company’sfinancial position, cash flows and results of operations.

*Effect of Fruit of the LoomBankruptcy (Bridgeport, Connecticut)*

In 1986, the Company acquired the stock of Universal ManufacturingCompany (“Universal”) from a predecessor of Fruit of the Loom (“FOL”), and thepredecessor agreed to indemnify the Company against certain environmentalliabilities arising from pre-acquisition activities at a facility inBridgeport, Connecticut. Environmental liabilities covered by theindemnification agreement include completion of additional cleanup activities,if any, at the Bridgeport facility and defense and indemnification againstliability for potential response costs related to offsite disposal locations.The Company’s leasehold interest in the Bridgeport facility was assigned to thebuyer in connection with the sale of the Company’s transformer business in June2001.  FOL, the successor to theindemnification obligation, filed a petition for Reorganization under Chapter11 of the Bankruptcy Code in 1999 and the Company filed a proof of claim in theproceeding for obligations related to the environmental indemnificationagreement. The Company believes that FOL had substantially completed theclean-up obligations required by the indemnification agreement prior to thebankruptcy filing. In November 2001, the Company and FOL entered into anagreement involving the allocation of certain potential tax benefits andMagnetek withdrew its claims in the bankruptcy proceeding. FOL’s obligation tothe state of Connecticut was not discharged in the reorganizationproceeding.  In October 2006, the ownerof the Bridgeport facility filed a lawsuit in Superior Court, J.D. ofFairfield, Connecticut alleging that the Company is obligated to remediateenvironmental contamination at the facility. The Company has filed a Motion to Stay and Remand the matter to theConnecticut Department of Environmental Protection (“DEP”) on the basis thatDEP has primary jurisdiction to determine the need and responsibility for anyfurther remediation.  DEP recentlyrequested parties, including the Company, to submit reports summarizing theinvestigations and remediation performed to date at the site and the proposedadditional investigations and remediation necessary to complete those actionsat the site.  FOL’s inability to satisfyits remaining obligations related to the Bridgeport facility and any offsitedisposal locations, or an unfavorable ruling in the lawsuit with the owner ofthe Bridgeport facility, or the discovery of additional environmentalcontamination at the Bridgeport facility could have a material adverse effecton the Company’s financial position, cash flows or results of operations.

On May 1, 2007, the Company enteredinto an agreement to settle litigation with Samsung-Electro-Mechanics Co., Ltd.(SEMCO), a Korean corporation, whereby SEMCO agreed to pay the Company thetotal sum of $2.12 million in four semi-annual installments between June 1,2007 and December 1, 2008 to resolve a dispute in a development agreement.  The Company will record the net present valueof the payments, estimated at $2.04 million, in other income from continuingoperations in its fourth quarter of fiscal 2007, which ends on July 1, 2007.

**Item 1A — Risk Factors**

There have been material changes to the risk factorsdisclosed in our Annual Report on Form 10-K for the year ended July 2, 2006resulting from the divestiture of our power electronics business during fiscal2007.  The risk factor related to theimpact on our liquidity in the event we were not able to sell the powerelectronics business is no longer relevant, as we completed the sale of thebusiness in October 2006.  In addition,our exposure to risks associated with international operations is alsosignificantly lower subsequent to the divestiture of the power electronicsbusiness, as most of our operations are now based in the United States.  There have been no material changes to theother risk factors disclosed in our Annual Report on Form 10-K for the yearended July 2, 2006.

**Item 2 —Unregistered Sales of Equity Securities and Use of Proceeds**

Therewere no unregistered sales of equity securities and there were no repurchasesof equity securities during our third fiscal quarter ended April 1, 2007.

**Item3 — Defaults upon Senior Securities**

None.

**Item 4 — Submission of Matters toa Vote of  Security Holders**

None.

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**Item5 — Other Information**

None.

**Item6 — Exhibits**

(a)                                  Indexto Exhibits

31.1               Certificationof the Chief Executive Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934. *

31.2               Certificationof the Chief Financial Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934. *

32.1               Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002. *

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*                    Filedwith this Report on Form 10-Q.

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SIGNATURES

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                    |   | MAGNETEK, INC. (Registrant)                                                  |
|--------------------|--------|------------------------------------------------------------------------------|
|               |   |                                                                         |
| Date: May 11, 2007 |   | /s/ David P. Reiland                                                         |
|               |   | David P. Reiland  President and Chief Executive Officer                      |
|               |   | (Duly authorized  officer of the Registrant and principal executive officer) |
| Date: May 11, 2007 |   | /s/ Marty J. Schwenner                                                       |
|               |   | Marty J. Schwenner  Vice-President and Chief Financial Officer               |
|               |   | (Duly authorized  officer of the Registrant and principal financial officer) |

 

 

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