**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

 

**Washington, D. C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **x**                                                   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**   |
|---------------------------------------------------------|------------------------------------------------------------------------------------------------|
|                                                    |                                                                                           |   |   |   |
|                                                    |                                                                                           |   |   |   |
| **For the  quarterly period ended: September 30, 2007** |
| **OR**                                                  |
| **o**                                                   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 
| **For the  transition period from**                      |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                              |
| **Commission  file number 1-10233**                                                                                                                               |
|                                                                                                                                                              |
| **MAGNETEK,  INC.**                                                                                                                                               |
| (Exact name of  Registrant as specified in its charter)                                                                                                           |
|                                                                                                                                                              |
| **DELAWARE**                                                                                                                                                      | ** ** | **95-3917584** |
| (State or other  jurisdiction of                                                                                                                                  |   | (I.R.S. Employer |
| incorporation or  organization)                                                                                                                                   |   | Identification Number) |
|                                                                                                                                                              |   |   |   |   |
| **N49 W13650 Campbell Drive**                                                                                                                                     |
| **Menomonee  Falls, Wisconsin 53051**                                                                                                                             |
| (Address of principal  executive offices)                                                                                                                         |
|                                                                                                                                                              |   |   |   |   |
| **(262)  783-3500**                                                                                                                                               |
| (Registrant’s telephone  number, including area code)                                                                                                        |
|                                                                                                                                                              |
|                                                                                                                                                              |
| (Former name, former  address and former fiscal year,                                                                                                             |
| if changed since last  report)                                                                                                                                    |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes  x  No o

 

                Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.  (Check one):

Large accelerated filer o                    Acceleratedfiler x                             Non-acceleratedfiler o

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

 

 

Thenumber of shares outstanding of Registrant’s Common Stock, as of October 31,2007, was 30,248,350 shares.

 

 

 

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2008 MAGNETEK FORM 10-Q

 

TABLE OF CONTENTS FOR THEQUARTERLY REPORT ON FORM 10Q

FOR THE FISCAL QUARTERENDED SEPTEMBER 30, 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 — Financial Statements**

 

MAGNETEK, INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

 (Amounts in thousands, except per share data,unaudited)

 

 
| ** **                                                                  | ** ** | **Three  Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                  | ** ** | **(13  Weeks)**         | ** ** | **(13  Weeks)** | ** ** |
| ** **                                                                  | ** ** | **September  30,**      | ** ** | **October  1,** | ** ** |
| ** **                                                                  | ** ** | **2007**                | ** ** | **2006** | ** ** |
|                                                                        |       |                    |       |   |   |
| Net sales                                                                   |       | $                       | 26,110     |   | $ | 25,955 |   |
| Cost of sales                                                               |       | 18,827                  |       | 18,535 |   |
| Gross profit                                                                |       | 7,283                   |       | 7,420 |   |
|                                                                        |       |                    |       |   |   |
| Operating  expenses:                                                        |       |                    |       |   |   |
| Research and  development                                                   |       | 843                     |       | 1,219 |   |
| Selling, general  and administrative                                        |       | 5,516                   |       | 7,397 |   |
| Income (loss)  from operations                                              |       | 924                     |       | (1,196 | ) |
|                                                                        |       |                    |       |   |   |
| Non operating  expense (income):                                            |       |                    |       |   |   |
| Interest expense                                                            |       | 143                     |       | 1,076 |   |
| Interest income                                                             |       | (356                    | )          | (288 | ) |
| Income (loss)  from continuing operations before provision for income taxes |       | 1,137                   |       | (1,984 | ) |
|                                                                        |       |                    |       |   |   |
| Provision for  income taxes                                                 |       | 304                     |       | 276 |   |
| Income (loss)  from continuing operations                                   |       | 833                     |       | (2,260 | ) |
|                                                                        |       |                    |       |   |   |
| Loss from  discontinued operations, net of tax                              |       | (334                    | )          | (934 | ) |
|                                                                        |       |                    |       |   |   |
| Net income  (loss)                                                          |       | $                       | 499        |   | $ | (3,194 | ) |
|                                                                        |       |                    |       |   |   |
| Earnings (loss)  per common share                                           |       |                    |       |   |   |
|                                                                        |       |                    |       |   |   |
| Basic and  diluted:                                                         |       |                    |       |   |   |
| Earnings (loss)  from continuing operations                                 |       | $                       | 0.03       |   | $ | (0.08 | ) |
|                                                                        |       |                    |       |   |   |
| Loss from  discontinued operations                                          |       | $                       | (0.01      | ) | $ | (0.03 | ) |
|                                                                        |       |                    |       |   |   |
| Net income  (loss)                                                          |       | $                       | 0.02       |   | $ | (0.11 | ) |
|                                                                        |       |                    |       |   |   |
| Weighted average  shares outstanding:                                       |       |                    |       |   |   |   |
| Basic                                                                       |       | 30,144                  |       | 28,966 |   |
| Diluted                                                                     |       | 30,404                  |       | 28,966 |   |
|                                                                             |            |                         |            |  |  |  |  |  |  |  |  |

 

 

See accompanying notes

 

 

3

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MAGNETEK, INC.

CONDENSED CONSOLIDATEDBALANCE SHEETS

 (Amounts in thousands)

 
| ** **                                       | ** ** | **September 30,** | ** ** | **July 1,** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|-------------|------------|
| **ASSETS**                                       | ** ** | **2007**          | ** ** | **2007**    | ** ** |
|                                             |       | **(Unaudited)**   |       |        |       |
| Current assets:                                  |       |              |       |        |       |
| Cash and cash  equivalents                       |       | $                 | 4,262      |        | $          | 5,404 |   |
| Restricted cash                                  |       | 23,722            |       | 22,852      |       |
| Accounts  receivable, net                        |       | 17,004            |       | 18,104      |       |
| Inventories                                      |       | 17,834            |       | 16,201      |       |
| Prepaid expenses  and other current assets       |       | 2,411             |       | 1,900       |       |
| Total current  assets                            |       | 65,233            |       | 64,461      |       |
|                                             |       |              |       |        |       |
| Property, plant  and equipment                   |       | 20,201            |       | 19,772      |       |
| Less:  accumulated depreciation                  |       | 15,813            |       | 15,470      |       |
| Net property,  plant and equipment               |       | 4,388             |       | 4,302       |       |
|                                             |       |              |       |        |       |
| Goodwill                                         |       | 28,241            |       | 28,187      |       |
| Other assets                                     |       | 7,207             |       | 7,788       |       |
| Total Assets                                     |       | $                 | 105,069    |        | $          | 104,738 |   |
|                                             |       |              |       |        |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY       |       |              |       |        |       |
|                                             |       |              |       |        |       |
| Current  liabilities:                            |       |              |       |        |       |
| Accounts payable                                 |       | $                 | 11,584     |        | $          | 12,238 |   |
| Accrued liabilities                              |       | 7,501             |       | 7,639       |       |
| Accrued  arbitration award                       |       | 22,602            |       | 22,602      |       |
| Current portion  of long-term debt               |       | 11                |       | 11          |       |
| Total current  liabilities                       |       | 41,698            |       | 42,490      |       |
|                                             |       |              |       |        |       |
| Long-term debt,  net of current portion          |       | 18                |       | 21          |       |
|                                             |       |              |       |        |       |
| Pension benefit  obligations, net                |       | 15,166            |       | 15,965      |       |
| Other long term  obligations                     |       | 1,688             |       | 1,709       |       |
| Deferred income  taxes                           |       | 3,305             |       | 3,080       |       |
|                                             |       |              |       |        |       |
| Commitments and  contingencies                   |       |              |       |        |       |
|                                             |       |              |       |        |       |
| Stockholders’  equity                       |       |              |       |        |       |
| Common stock                                     |       | 302               |       | 301         |       |
| Paid in capital  in excess of par value          |       | 134,637           |       | 134,449     |       |
| Accumulated  deficit                             |       | (14,324           | )          | (14,823     | )          |
| Accumulated  other comprehensive loss            |       | (77,421           | )          | (78,454     | )          |
| Total  stockholders’ equity                 |       | 43,194            |       | 41,473      |       |
|                                             |       |              |       |        |       |
| Total  Liabilities and Stockholders’ Equity |       | $                 | 105,069    |        | $          | 104,738 |   |
|                                             |       |              |       |        |       |

 

 

See accompanying notes

 

 

4

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MAGNETEK, INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOW

 (Amounts in thousands, unaudited)

 
| ** **                                                                                                                       | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                       | ** ** | **(13 Weeks)**         | ** ** | **(13 Weeks)** | ** ** |
|                                                                                                                             |       | **September  30,**     | ** ** | **October  1,** |   |
|                                                                                                                             |       | **2007**               | ** ** | **2006** |   |
| Cash flows from  continuing operating activities:                                                                                |       |                   |       |   |   |
| Income (loss)  from continuing operations                                                                                        |       | $                      | 833        |   | $ | (2,260 | ) |
| Adjustments to  reconcile income (loss) from continuing operations to net cash provided by  (used in) operating activities: |       |                   |       |   |   |
| Depreciation and  amortization                                                                                                   |       | 416                    |       | 542 |   |
| Stock based  compensation expense                                                                                                |       | 96                     |       | 126 |   |
| Pension expense                                                                                                                  |       | 47                     |       | 770 |   |
| Changes in  operating assets and liabilities                                                                                     |       | (748                   | )          | (1,143 | ) |
|                                                                                                                             |       |                   |       |   |   |
| Total  adjustments                                                                                                               |       | (189                   | )          | 295 |   |
| Net cash provided  by (used in) continuing operating activities                                                                  |       | 644                    |       | (1,965 | ) |
|                                                                                                                             |       |                   |       |   |   |
| Cash flows from  investing activities:                                                                                           |       |                   |       |   |   |
| Deposit into  escrow account                                                                                                     |       | (870                   | )          | — |   |
| Capital  expenditures                                                                                                            |       | (385                   | )          | (43 | ) |
| Net cash used in  investing activities                                                                                           |       | (1,255                 | )          | (43 | ) |
|                                                                                                                             |       |                   |       |   |   |
| Cash flow from  financing activities:                                                                                            |       |                   |       |   |   |
| Proceeds from  issuance of common stock                                                                                          |       | 199                    |       | 90 |   |
| Borrowings under  line-of-credit agreements                                                                                      |       | —                 |       | 924 |   |
| Principal  payments under capital lease obligations                                                                              |       | (3                     | )          | (3 | ) |
| Increase in  deferred financing costs                                                                                            |       | —                 |       | (26 | ) |
| Net cash  provided by financing activities                                                                                       |       | 196                    |       | 985 |   |
|                                                                                                                             |       |                   |       |   |   |
| Cash flows from  discontinued operations:                                                                                        |       |                   |       |   |   |
| Provided by  (used in) operating activities                                                                                      |       | (727                   | )          | 9,149 |   |
| Used in  investing activities                                                                                                    |       | —                 |       | (794 | ) |
| Used in  financing activities                                                                                                    |       | —                 |       | (6,932 | ) |
| Cash provided by  (used in) discontinued operations                                                                              |       | (727                   | )          | 1,423 |   |
|                                                                                                                             |       |                   |       |   |   |
| Net increase  (decrease) in cash                                                                                                 |       | (1,142                 | )          | 400 |   |
| Cash at the  beginning of the period                                                                                             |       | 5,404                  |       | 96 |   |
|                                                                                                                             |       |                   |       |   |   |
| Cash at the end  of the period                                                                                                   |       | $                      | 4,262      |   | $ | 496 |   |
|                                                                                                                             |       |                   |       |   |   |

 

 

See accompanyingnotes

 

 

5

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MAGNETEK, INC.

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

(Amounts in thousandsunless otherwise noted, except per share data, unaudited)

 

**1.****                                     ****Summary of SignificantAccounting Policies**

 

                Profile

Magnetek, Inc. (the “Company” or “Magnetek”) is a global provider ofdigital power control systems that are used to control motion and powerprimarily in material handling, elevator, telecommunications (“telecom”) andenergy delivery applications.  TheCompany’s products consist primarily of programmable motion control and powerconditioning systems used on the following applications: overhead cranes andhoists; elevators; wireless telecom; coal mining equipment; and fuel cells andwind turbines.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidatedfinancial statements include the accounts of Magnetek, Inc. and itssubsidiaries.  All significantintercompany accounts and transactions have been eliminated.

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial reporting and with the instructions to Form10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  For further information,refer to the financial statements and footnotes thereto included in the Company’sForm 10-K for the year ended July 1, 2007 filed with the Securities andExchange Commission.  In the Company’sopinion, these unaudited statements contain all adjustments, consisting ofnormal recurring adjustments, necessary to present fairly the financialposition of the Company as of September 30, 2007, and the results of itsoperations and cash flows for the three-month periods ended September 30, 2007and October 1, 2006. Results for the three-months ended September 30, 2007 arenot necessarily indicative of results that may be experienced for the fullfiscal year.

 

The Company uses a fifty-two, fifty-three week fiscalyear ending on the Sunday nearest to June 30. Fiscal quarters are the 13 or 14 week periods ending on the Sundaynearest September 30, December 31, March 31 and June 30.  The three-month periods ended September 30,2007 and October 1, 2006 each contained 13 weeks.

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 AccountingPronouncements —In July 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. The Companyadopted FIN 48 on July 2, 2007.  Theadoption of this pronouncement did not have a material effect on the Company’sfinancial position, results of operations, or liquidity.

 

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”)No. 158, *Employers’ Accounting for Defined Benefit Pensionand Other Post Retirement Plans*, which requires the Company torecognize the overfunded or underfunded status of a defined benefitpostretirement plan as an asset or liability in the balance sheet and torecognize changes in that funded status in the year in which the changes occurthrough comprehensive income. Additionally, SFAS No. 158 requires the Company to measure the fundedstatus of a plan as of the date of its fiscal year-end.  The requirement to recognize the fundedstatus of a defined benefit postretirement plan and the related disclosurerequirements were effective for the Company’s fiscal year ended July 1,2007.  The Company currently measures thefunded status of its defined benefit postretirement plan as of its fiscalyear-end.  The adoption of thispronouncement did not have a material effect on the Company’s financialposition, results of operations, or liquidity.

 

 

6

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Reclassifications— Certain prior 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.

**2.**             **Discontinued Operations**

 

Certain expenses incurred related to businesses theCompany no longer owns are classified as discontinued operations, including thehistorical results of the power electronics business, which was divested inOctober 2006.  The results ofdiscontinued operations are as follows:

 
| ** **                                         | ** ** | ** **             | ** ** | ** **      | ** ** |
|----------------------------------------------------|------------|------------------------|------------|-----------------|------------|
| ** **                                         | ** ** | **Three Months Ended** | ** ** |
|                                               |       | **September  30,**     | ** ** | **October  1,** |       |
|                                               |       | **2007**               | ** ** | **2006**        |       |
| Net sales                                          |       | $                      | —     |            | $          | 43,489 |   |
| Loss from  discontinued operations before interest |       |                   |       |            |       |
| and income taxes                                   |       | $                      | (330       | )               | $          | (335 | ) |
| Interest  expense, net                             |       | 4                      |       | 274             |       |
| Provision for  income taxes                        |       | —                 |       | 325             |       |
| Loss from  discontinued operations                 |       | $                      | (334       | )               | $          | (934 | ) |
|                                               |       |                   |       |            |       |
|                                                    |            |                        |            |                 |            |  |  |  |

 

 

Loss from discontinued operations in the table aboveincludes expenses of $330 and $30 for the three-month periods ended September30, 2007 and October 1, 2006 respectively, for legal fees and other costsrelated to businesses the Company no longer owns (see Note 4 of Notes toCondensed Consolidated Financial Statements).

In October, 2006, theCompany completed the sale of its power electronics business to Power-One, Inc.(“Power-One”).  The transaction includedpayment by Power-One to the Company of $65.7 million in cash, net of postclosing adjustments, and the assumption by Power-One of approximately $16.0million of the Company’s debt, representing the total debt balances outstandingof the Company’s subsidiary Magnetek, S.p.A. The Company used approximately $29.0 million of the proceeds to repayall of its remaining outstanding debt and in December 2006 made a contribution of$30.0 million to its defined benefit pension plan.

The agreement provides for indemnification by theCompany for breaches of representations and warranties and other customarymatters that the Company believes are typical for this type of transaction, includingindemnification for certain tax, legal, environmental and warranty issues.  The condensed consolidated balance sheet asof September 30, 2007 includes certain accrued liabilities which represent theCompany’s best estimate of remaining 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 toindemnification.  Any future adjustmentto currently recorded contingencies related to indemnification claims orpayments based upon changes in circumstances would also be recorded as a gainor loss on the sale of the business in discontinued operations.

 

**3.             Inventories**

 

Inventories at September 30, 2007 and July 1, 2007consist of the following:

 

                
| ** **                     | ** ** | **September 30,** | ** ** | **July 1,** | ** ** |
|--------------------------------|------------|-------------------|------------|-------------|------------|
| ** **                     | ** ** | **2007**          | ** ** | **2007**    | ** ** |
| Raw materials  and stock parts |       | $                 | 11,951     |        | $          | 11,046 |   |
| Work-in-process                |       | 1,709             |       | 1,544       |       |
| Finished goods                 |       | 4,174             |       | 3,611       |       |
|                           |       | $                 | 17,834     |        | $          | 16,201 |   |
|                           |       |              |       |        |       |

 

 

**4.****                                     ****Commitments andContingencies**

 

**Litigation—ProductLiability**

 

The Company has settled or otherwise resolved all ofthe product liability lawsuits associated with its discontinued businessoperations except for any potential future product claims which may arise inconnection with the recent sale of the 

 

 

7

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Company’s power electronics business (see Note 2 ofNotes to Condensed Consolidated Financial Statements). The Company is also anamed party in one product liability lawsuit related to the TelemotiveIndustrial Controls business acquired in December 2002 through thepurchase of the stock of MXT Holdings, Inc.   The claimpre-dated the acquisition and was tendered to the insurance companies thatprovided coverage for MXT Holdings, Inc., against such claims and the defenseand indemnification has been accepted by the carriers, subject to a reservationof rights.  Management believes that the insurers will bear all liability,if any, with respect to such case and that the proceedings will not have amaterial adverse effect on the Company’s results of operations or financialposition.

 

In August 2006, Pamela L. Carney, Administrator of theEstate of Michael J. Carney, filed a lawsuit in the Court of Common Pleas ofWestmoreland County, Pennsylvania, against the Company and other defendants,alleging that a product manufactured by the Telemotive Industrial Controlsbusiness acquired by the Company in December 2002 contributed to an accidentthat resulted in the death of Michael J. Carney in August 2004.  The claim has been tendered to the Company’sinsurance carrier and legal counsel has been retained to represent theCompany.  Plaintiff’s claim for damagesis unknown at this time, but management believes that its insurers will bearall liability in excess of deductible amounts for the claim, if any.

 

The Company has been named, along with multiple otherdefendants, in asbestos-related lawsuits associated with businessoperations previously acquired by the Company, but which are no longer owned.During the Company’s ownership, none of the businesses produced or soldasbestos-containing products. With respect to these claims, the Companyis either contractually indemnified against liability for asbestos-relatedclaims or believes that it has no liability for such claims. The Companyaggressively seeks dismissal from these proceedings, and has also tendered thedefense of these cases to the insurers of the previously acquiredbusinesses.  The Company has also filedlate claims in the Federal-Mogul bankruptcy proceedings to recover attorney’sfees paid for the defense of these claims. The Company and Federal-Mogul entered into a settlement agreement underwhich the Company is entitled to receive amounts from a settlement trustestablished under Federal-Mogul’s reorganization plan and funded by insuranceproceeds.  The Company is entitled toreceive 15% of the first $20 million and 10% of the next $25 million ofinsurance proceeds, up to a maximum of $5.5 million, in exchange forwithdrawing its bankruptcy claims and objections to the reorganization plan andexecution of certain releases.  The settlement is subject to finalapproval of the plan by the Bankruptcy Court. There is no guarantee that any amounts will be collected on anyinsurance policies, and Federal-Mogul and the trust have control over thecollection process.  Several insurancecarriers filed a declaratory judgment action relating to insurance coverage forsuch previously acquired businesses, seeking a determination that no coverageis available under the policies. Federal-Mogul, the Company and other defendants filed responsivepleadings and motions to dismiss the case, and the court recently granted themotions to dismiss the declaratory judgment action.  Management does not believe the asbestosproceedings, individually or in the aggregate, will have a material adverseeffect on its financial position or results of operations.

 

**Litigation—PatentInfringement**

 

In April 1998, Ole K. Nilssen filed a lawsuit inthe U.S. District Court for the Northern District of Illinois alleginginfringement by the Company of seven of his patents pertaining to electronicballast technology, and seeking unspecified damages and injunctive relief topreclude the Company from making, using or selling products allegedlyinfringing his patents. The Company denied that its products infringed anyvalid patent and filed a response asserting affirmative defenses, as well as acounterclaim for a judicial declaration that its products do not infringe thepatents asserted by Mr. Nilssen and also that the asserted patents areinvalid. In June 2001, the Company sold its lighting business to UniversalLighting Technologies, 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 would likelyresult in payment of the award to Nilssen.

 

In February 2003, Nilssen filed a second lawsuitin the U.S. District Court for the Northern District of Illinois alleginginfringement by ULT of twenty-nine of his patents pertaining to electronicballast technology, and seeking unspecified damages and injunctive relief topreclude ULT from making, using or selling products allegedly infringing hispatents. ULT made a claim for indemnification, which the Company accepted,subject to the limitations set forth in the sale agreement.  The case is now pending in the MiddleDistrict of Tennessee.  Nilssenvoluntarily dismissed all but four of the patents from the lawsuit.  TheCompany denies that the products for which it has an indemnification obligationto ULT

 

 

8

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 infringe anyvalid patent and responded on behalf of ULT asserting affirmative defenses, aswell as a counterclaim for a judicial declaration that the patents areunenforceable and invalid and that the products do not infringe Nilssen’spatents.   The case against ULT has been stayed pending Nilssen’sappeal of an unfavorable decision against him in another case that couldinfluence the outcome of his lawsuits against ULT.  The decision in such other case was affirmedby the appellate court on October 10, 2007. ULT requested a re-examination of the patents at issue by the Patent andTrademark Office (PTO) and the PTO recently rejected claims in all of thepatents at issue in the lawsuit against ULT. The Company will continue to aggressively defend the claims against ULTthat are subject to defense and indemnification; however, an unfavorabledecision could have a material adverse effect on the Company’s financialposition, cash flows and results of operations.

 

**EnvironmentalMatters - General**

 

From time to time, Magnetek has taken action to bringcertain facilities associated with previously owned businesses intocompliance with applicable environmental laws and regulations. Upon thesubsequent sale of certain businesses, the Company agreed to indemnify thebuyers against environmental claims associated with the divested operations,subject to certain conditions and limitations. Remediation activities,including those related to the Company’s indemnification obligations, did notinvolve material expenditures during the first quarter of fiscal years 2008 or2007.

 

The Company has also been identified by the UnitedStates Environmental Protection Agency and certain state agencies as apotentially responsible party for cleanup costs associated with alleged pastwaste disposal practices at several previously owned facilities and offsitelocations. Its remediation activities as a potentially responsible party werenot material in the first quarter of fiscal years 2008 or 2007.  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 other potentiallyresponsible parties, the availability of indemnification rights against thirdparties and the identification of additional contaminated sites, the Company’sestimated share of liability, if any, for environmental remediation, includingits indemnification obligations, is not expected to be material.

 

*CenturyElectric (McMinnville, Tennessee)*

 

Prior to the Company’s purchase of CenturyElectric, Inc. (“Century Electric”) in 1986, Century Electric acquired abusiness from Gould Inc. (“Gould”) in May 1983 that included aleasehold interest in a fractional horsepower electric motor manufacturingfacility located in McMinnville, Tennessee. Gould agreed to indemnify CenturyElectric from and against liabilities and expenses arising out of the handlingand cleanup of certain waste materials, including but not limited to cleaningup any polychlorinated biphenyls (“PCBs”) at the McMinnville facility (the “1983Indemnity”). The presence of PCBs and other substances, including solvents, inthe soil and in the groundwater underlying the facility and in certain offsitesoil, sediment and biota samples has been identified. The McMinnville plant islisted as a Tennessee Inactive Hazardous Waste Substance Site and plantemployees were notified of the presence of contaminants at the facility. Gouldhas completed an interim remedial excavation and disposal of onsite soilcontaining PCBs and a preliminary investigation and cleanup of certain onsiteand offsite contamination. The Company believes the cost of furtherinvestigation and remediation (including ancillary costs) is covered by the1983 Indemnity. The Company sold its leasehold interest in the McMinnvilleplant in August 1999 and while the Company believes that Gould willcontinue to perform substantially under its indemnity obligations, Gould’ssubstantial failure to perform such obligations could have a material adverseeffect on the Company’s financial position, cash flows and results ofoperations.

 

*Environmental- Effect of Fruit of the Loom Bankruptcy (Bridgeport, Connecticut)*

 

In 1986, the Company acquired the stock of UniversalManufacturing Company (“Universal”) from a predecessor of Fruit of the Loom (“FOL”),and the predecessor agreed to indemnify the Company against certainenvironmental liabilities arising from pre-acquisition activities at a facilityin Bridgeport, 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 the bankruptcyfiling. In November 2001, the Company and FOL entered into an agreementinvolving the allocation of certain potential tax 

 

 

9

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benefits and Magnetek withdrew its claims in thebankruptcy proceeding. FOL’s obligation to the state of Connecticut was notdischarged in the reorganization proceeding. 

 

In October 2006, the owner of the Bridgeport facilityfiled a lawsuit in Superior Court, J.D. of Fairfield, Connecticut alleging thatthe Company is obligated to remediate environmental contamination at thefacility.  The Company filed a Motion toStay and Remand the matter to the Connecticut Department of EnvironmentalProtection (“DEP”) on the basis that DEP has primary jurisdiction to determinethe need and responsibility for any further remediation.  Following the court’s denial of such motion,the Company filed its answer, affirmative defenses and counterclaims.  The Bridgeport facility owner amended itscomplaint, alleging breach of lease obligations and violation of Connecticutenvironmental statutory requirements, which allegations were denied in theCompany’s amended answer.  The case is indiscovery.  DEP recently requestedparties, including the Company, to submit reports summarizing the investigationsand remediation performed to date at the site and the proposed additionalinvestigations and remediation necessary to complete those actions at thesite.  DEP requested additionalinformation from the Company relating to site investigations and remediation.DEP also conducted an on-site inspection at the Bridgeport facility.  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.

 

**5.             ComprehensiveIncome (Loss)**

 

For the three month periods ended September 30, 2007and October 1, 2006, comprehensive income (loss) consisted of the following:

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **September 30,**      | ** ** | **October 1,** | ** ** |
| ** **                                 | ** ** | **2007**               | ** ** | **2006** | ** ** |
| Net income  (loss)                         |       | $                      | 499        |   | $ | (3,194 | ) |
| Change in  unrecognized pension liability  |       | 845                    |       | — |   |
| Change in  currency translation adjustment |       | 188                    |       | (16 | ) |
| Comprehensive  income (loss)               |       | $                      | 1,532      |   | $ | (3,210 | ) |
|                                       |       |                   |       |   |   |

 

 

                                                                             

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

 

Thefollowing table sets forth the computation of basic and diluted earnings (loss)per share for the three-months ended September 30, 2007 and October 1, 2006:

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|
| ** **                                              | ** ** | **September 30,**      | ** ** | **October 1,** | ** ** |
| ** **                                              | ** ** | **2007**               | ** ** | **2006** | ** ** |
| Numerator:                                              |       |                   |       |   |   |
| Income (loss)  from continuing operations               |       | $                      | 833        |   | $ | (2,260 | ) |
| Loss from  discontinued operations                      |       | (334                   | )          | (934 | ) |
| Net income  (loss)                                      |       | $                      | 499        |   | $ | (3,194 | ) |
|                                                    |       |                   |       |   |   |
| Denominator:                                            |       |                   |       |   |   |
| Weighted average  shares for basic earnings per share   |       | 30,144                 |       | 28,966 |   |
| Add dilutive  effective of stock based compensation     |       | 260                    |       | — |   |
| Weighted average  shares for diluted earnings per share |       | 30,404                 |       | 28,966 |   |
|                                                    |       |                   |       |   |   |
| Basic &  Diluted:                                   |       |                   |       |   |   |
| Income (loss)  per share from continuing operations     |       | $                      | 0.03       |   | $ | (0.08 | ) |
| Loss per share  from discontinued operations            |       | $                      | (0.01      | ) | $ | (0.03 | ) |
| Net income  (loss) per share                            |       | $                      | 0.02       |   | $ | (0.11 | ) |
|                                                    |       |                   |       |   |   |

 

 

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Outstanding options to purchase 3.9 million and 6.9million shares of common stock for the three months ended September 30, 2007and October 1, 2006, respectively have not been included in the Company’scomputation of weighted average shares for diluted earnings per share becausethe effect would have been anti-dilutive.

 

**7.****                                     ****Warranties**

TheCompany offers warranties for certain products that it manufactures, with thewarranty term generally ranging from one to two years.  Warranty reserves are established for costsexpected to be incurred after the sale and delivery of products under warranty,based mainly on known product failures and historical experience.  Actual repair costs incurred for productsunder warranty are charged against the established reserve balance asincurred.  Changes in the warrantyreserve for the three-month periods ended September 30, 2007 and October 1,2006 were as follows:

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **September 30,**      | ** ** | **October 1,** | ** ** |
| ** **                                            | ** ** | **2007**               | ** ** | **2006** | ** ** |
| Balance,  beginning of fiscal year                    |       | $                      | 305        |   | $ | 310 |   |
| Additions  charged to earnings for product warranties |       | 233                    |       | 105 |   |
| Use of reserve  for warranty obligations              |       | (168                   | )          | (126 | ) |
| Balance, end of  period                               |       | $                      | 370        |   | $ | 289 |   |
|                                                  |       |                   |       |   |   |

 

 

Warrantyreserves are included in accrued liabilities in the accompanying condensedconsolidated balance sheets.

 

**8.****                                     ****Pension Expense**

 

For the three-month periods ended September 30, 2007and October 1, 2006, pension expense related to the Company’s defined benefitpension plan consisted of the following:

 
| ** **                       | ** ** | **Three Months Ended** | ** ** |
|----------------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **September 30,**      | ** ** | **October 1,** | ** ** |
| ** **                       | ** ** | **2007**               | ** ** | **2006** | ** ** |
| Interest Cost                    |       | $                      | 2,607      |   | $ | 2,462 |   |
| Expected return  on plan assets  |       | (3,405                 | )          | (2,678 | ) |
| Recognized net  actuarial losses |       | 845                    |       | 986 |   |
|                             |       |                   |       |   |   |
| Total net  pension expense       |       | $                      | 47         |   | $ | 770 |   |
|                             |       |                   |       |   |   |

 

 

Pensionexpense is included in selling, general and administrative expense in theaccompanying condensed consolidated statements of operations.  Under current funding regulations, actuarialprojections indicate the Company will be required to make a contribution to thedefined benefit pension plan of approximately $2.7 million in April 2008.

 

 

**9.****                                     ****Income Taxes**

Dueto historical taxable losses, the Company provides valuation reserves againstits U.S. deferred tax assets.  A portionof the Company’s deferred tax liability relates to tax-deductible amortizationof goodwill that is no longer amortized for financial reporting purposes. Thesedeferred tax liabilities are considered to have an indefinite life and aretherefore ineligible to be considered as a source of future taxable income inassessing the realization of deferred tax assets.

TheCompany’s provision for income taxes for each of the three-month periods endedSeptember 30, 2007 and October 1, 2006 includes $225 of deferred income taxexpense related to the increase in the Company’s deferred tax liability relatedto tax-deductible amortization of goodwill.  The remaining tax provision is comprised of income taxes of the Company’sforeign subsidiary in Canada.

**10.****                              ****Bank Borrowing Arrangements**

On September 30, 2005, the Company entered into anagreement with Ableco Finance LLC (“Ableco”) providing for an $18 million termloan and an agreement with Wells Fargo Foothill, Inc. (“WFF”) providing for a$13 million revolving credit facility. 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 not 

 

 

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successful (see Note 4 of Notes to CondensedConsolidated Financial Statements). The deposit is reported as restricted cashin the accompanying condensed consolidated balance sheets as of September 30,2007 and July 1, 2007.

 

As discussed in Note 2 of the Notes to CondensedConsolidated Financial Statements, in October 2006, the Company completed thedivestiture of its power electronics business. The Company used a portion of the proceeds from the divestiture to repayall borrowings outstanding under the Ableco term loan, which was terminated inOctober 2006, and the WFF revolving credit facility, which remained inplace.  As of September 30, 2007, theCompany was in compliance with all covenants of the amended revolving creditagreement and there were no borrowings outstanding under the WFF revolvingcredit facility.  On November 6, 2007,based upon mutual agreement between the Company and WFF, the revolving creditagreement was terminated without penalty prior to its expiration date ofDecember 31, 2007 (see Note 11 of Notes to Condensed Consolidated FinancialStatements).

 

**11.****                              ****Subsequent Events**

Subsequent to the end ofthe fiscal 2008 first quarter, the Company terminated its amended revolvingcredit agreement with WFF and entered into an agreement with Associated Bank,N.A. providing for a $10 million revolving credit facility (the “Associatedfacility”) with an effective date of November 6, 2007.  Borrowings under the Associated facility bearinterest at the London Interbank Offering Rate (“LIBOR”) plus 1.5%, withborrowing levels determined by a borrowing base formula as defined in theagreement, based on the level of eligible accounts receivable.  The Associated facility also supports theissuance of letters of credit, places certain restrictions on the Company’sability to pay dividends or make acquisitions, and includes covenants whichrequire minimum operating profit levels and limit annual capitalexpenditures.  Under the terms of theAssociated facility, the Company is required to maintain $22.0 million in anescrow account to fund the Nilssen arbitration award in the event that itsappeal of the award is not successful (see Note 4 of Notes to CondensedConsolidated Financial Statements). Borrowings under the Associated facility are secured by the Company’saccounts receivable and inventory.  TheAssociated facility expires in November 2009 unless extended by the partiesprior to that time.

 

 

**Item2 — Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

**Overview**

 

Magnetek, Inc. (“Magnetek”or “the Company”) is a global provider of digital power control systems thatare used to control motion and power primarily in material handling, elevator,telecommunications (“telecom”) and energy delivery applications.  Our systems consist primarily of programmablemotion control and power conditioning systems used in the followingapplications:  overhead cranes andhoists; elevators; wireless telecom; coal mining equipment; and fuel cells andwind turbines.  We believe that with ourtechnical and productive resources we are well positioned to respond toincreasing demand in our served markets. Our operations are located in North America, predominantly in MenomoneeFalls, Wisconsin, our Company headquarters.

 

Our material handling offeringsinclude drives, radio remote controls, and braking, collision-avoidance, andelectrification subsystems, sold primarily to original equipment manufacturers(“OEMs”) of overhead cranes and hoists. We have a significant market share in North America in alternatingcurrent (“AC”) drives and believe we have sales growth opportunities in directcurrent (“DC”) drives for retrofit applications and in wireless remotecontrols.

 

Our elevator productofferings are comprised of highly integrated subsystems and drives used tocontrol motion primarily in high-rise, high speed elevator applications.  Our products are sold mainly to elevator OEMsand we have a significant share of the available market for DC drives andsubsystems used in high-rise elevators for both new and retrofit projects.  We believe we have opportunities for salesgrowth in available elevator markets by introducing new energy-saving productofferings for both DC and AC applications, expanding the breadth of our productoffering to include competitive low-end products for lower performanceapplications, and using our new product offerings to expand geographically,primarily into Asia.

 

Our telecom product offeringsare focused on providing back-up power for wireless applications.  During fiscal year 2007, we initiatedrestructuring actions and completed the relocation of the telecom manufacturingoperations from Dallas, Texas to Menomonee Falls, Wisconsin.  We are now focused on increasing sales byexpanding our customer base and gaining market share in microwave backhaul andmobile power applications, as well as improving operating results throughmaterial cost reductions and improvements in manufacturing efficiency.

 

 

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Our energy delivery productofferings include power inverters for fuel cells and wind turbines, whichdeliver AC power from these energy sources to the utility power grid.  We believe we have sales growth opportunitiesin the wind market, which is growing rapidly in North America as wind powerbecomes increasingly competitive from a cost standpoint with more traditionalmethods of power generation.  We believeour product offerings have us well positioned to take advantage of growth inthe wind market and expect sales of inverters for wind applications to be ourfastest revenue growth product over the next several years.  We also provide drives for underground coalmining equipment.

 

During fiscal year 2007, wecompleted the divestiture of our power electronics business, repaid all of ouroutstanding debt, and made a significant contribution to our defined benefitpension plan.  We also restructured ourmanagement team, reduced our corporate overhead by over $6 million annually andrelocated our corporate headquarters as well as our telecom operations toWisconsin.  In addition, our continuingoperations returned to profitability during the second half of fiscal 2007.

 

While we are a smallercompany following the divestiture of our power electronics business, we are aleader in several of our served markets, our operations are centralized inNorth America, and we believe we have several opportunities for sales growth infiscal 2008.  Our sales were $103.8million in fiscal 2007, and we expect double-digit revenue growth in fiscal2008; however, our sales growth is dependent on successful introduction of newproducts for elevator and wind markets. In addition, we may experience a cyclical slowdown in the materialhandling market, which comprised more than half of our sales in fiscal2007.  Gross margins in our continuingoperations have historically been in the range of upper 20%’s to 30% and we aretargeting this level of gross margin going forward, however, gross margin infiscal 2008 may be negatively impacted by start up expenses related toproduction of new products.  In addition,we intend to focus on controlling operating expenses and, through utilizationof our net operating loss carryforwards for tax purposes, we believe themajority of our reported operating profit can be realized as net income.

 

**                                               ****Continuing Operations**

 

Demand in our served markets was mixedduring the first quarter of fiscal 2008, and our sales decreased from $26.9million in our fourth quarter of fiscal 2007 to $26.1 million in the firstquarter of fiscal 2008.  Demand formaterial handling products remained strong and sales of material handlingproducts increased during the first quarter of fiscal 2008.  However, this was offset by lower sales oftelecom, elevator and mining products. Sales in the first quarter of fiscal year 2007 were $26.0 million.

Gross profit in the first quarter offiscal 2008 was lower than the same period in fiscal 2007, due mainly to lowersales of mining products and a less favorable sales mix in our elevator productline, with higher sales of low-end, lower margin products.  In addition, gross profit was negativelyimpacted by start-up costs for production of wind inverters without anymeaningful sales revenue in the first quarter of fiscal 2008.  Our research and development (“R&D”)expense decreased in the first quarter of fiscal 2008 compared to the firstquarter of fiscal 2007, due mainly to corporate staff reductions and thesubstantial completion of key development efforts.  We intend to continue to invest in R&Dgoing forward, mainly in new product offerings for alternative energyapplications, as well as design modifications to reduce costs and enhancecompetitiveness of our products.  Firstquarter fiscal 2008 selling, general and administrative (“SG&A”) expensedecreased by $1.9 million compared to the first quarter of fiscal 2007, duemainly to lower pension expense, payroll savings resulting from our corporatedownsizing, and lower professional fees.  As a result, our continuing operations reported income from operationsof more than $0.9 million.

We intend to focus our development and marketingcapabilities on internal sales growth opportunities across all product lines,with a near-term emphasis on power products for alternative energy and elevatormarkets.  We also intend to focus onimproving gross margins in our telecom products through a combination of priceincreases, cost reductions and efficiency improvements.  Looking forward, gross margins in fiscal 2008will likely continue to be impacted by start up costs and manufacturingvariances related to ramp up of production capacity for wind inverterproducts.  In addition, we believe thatfuture sustained profitability is dependent upon increased sales revenue andimprovement in gross margins. Improvement in gross margins is mainly dependent upon a continuingeconomic expansion, successful introduction of new product offerings atacceptable margins, and improvement in operating performance in our telecombusiness.

 

##### **Discontinued Operations**

 

Certain expenses related to previously divestedbusinesses, including the results of the power electronics business divested infiscal 2007, have been classified as discontinued operations in theaccompanying condensed consolidated financial statements and footnotes for allperiods presented.  These costs havehistorically included charges for an arbitration award in a patent infringementclaim and related legal fees, as well as certain expenses for product liabilityclaims, environmental issues, and asbestos claims (see Note 4 of Notes to ConsolidatedFinancial Statements).   All of these issues relate to businesses weno longer own and most relate to indemnification agreements we provided when wedivested those businesses.  Our firstquarter fiscal 2008 loss from discontinued operations was $0.3 million.

 

 

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Going forward, our discontinued operations willinclude additional costs we may incur related to businesses no longer owned andmay include additional costs above those currently estimated and accruedrelated to the divestiture of our power electronics business.

 

**CriticalAccounting Policies and Estimates**

 

There have been no material changes to our criticalaccounting policies and estimates from the information provided in Item 7,“Management’s Discussion and Analysis of Financial Condition and Results ofOperations”, included in our Annual Report on Form 10-K for the fiscal yearended July 1, 2007.

 

**Resultsof Operations - Three Months Ended September 30, 2007 and October 1, 2006**

 

NetSales and Gross Profit

 

Netsales for the three months ended September 30, 2007 were $26.1 million, anincrease of 0.6% from the three months ended October 1, 2006 sales of $26.0million.  The increase in sales was dueto higher sales volumes in our material handling product line (primarily craneautomation product offerings)offset by lower sales in our elevator product line due to unfavorable productmix, and decreased sales volumes in our telecom power and energy systemsproduct lines.  Net sales by product linewere as follows, in millions:

 
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|
| ** **               | ** ** | **Sept 30, 2007**      | ** ** | **Oct 1, 2006** | ** ** |
| Material  handling       |       | $                      | 17.2       |   | 66 | % | $ | 15.6 |   | 60 | % |
| Elevator motion  control |       | 4.5                    |       | 17 | % | 4.9 |   | 19 | % |
| Telecom power  systems   |       | 3.3                    |       | 13 | % | 3.5 |   | 14 | % |
| Energy systems           |       | 1.1                    |       | 4 | % | 2.0 |   | 7 | % |
|                     |       |                   |       |   |   |   |   |   |   |
| Total net sales          |       | $                      | 26.1       |   | 100 | % | $ | 26.0 |   | 100 | % |
|                     |       |                   |       |   |   |   |   |   |   |
|                          |            |                        |            |  |  |  |  |  |  |  |  |  |

 

 

Grossprofit for the three months ended September 30, 2007 was $7.3 million, or 27.9%of sales, versus $7.4 million, or 28.6% of sales, in the three months endedOctober 1, 2006.  The decrease in grossprofit as a percentage of sales in the three months ended September 30, 2007 ascompared to the three months ended October 1, 2006 was due to unfavorable salesmix within our elevator products, $0.2 million, lower sales volume of miningproducts, $0.3 million, and start-up costs for production of wind inverters of$0.2 million, partially offset by higher margins in our material handlingproduct line of $0.6 million and modest improvements in gross margins fortelecom products, due to lower costs and increased efficiencies in the Company’snew power systems manufacturing facility in Menomonee Falls, Wisconsin.

 

Researchand Development, Selling, General and Administrative

 

R&Dexpense was $0.8 million, or 3.2% of sales, in the three months ended September30, 2007, compared to the R&D expense of $1.2 million, or 4.7% of sales,for the three months ended October 1, 2006. R&D expense in the three months ended September 30, 2007 reflectslower payroll costs, mainly due to the elimination of our corporate R&Dfunction.

 

SG&A expense was $5.5 million (21.1% of sales) inthe three months ended September 30, 2007 versus $7.4 million (28.5% of sales)in the three months ended October 1, 2006. Selling expenses in the three months ended September 30, 2007 were $2.8million, comparable to $2.7 million in the three months ended October 1,2006.  General and administrative (“G&A”)expense was $2.7 million in the three months ended September 30, 2007 comparedto $4.7 million in the three months ended October 1, 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) fromOperations

 

Incomefrom operations for the three months ended September 30, 2007 was $0.9 millioncompared to a loss from operations of $1.2 million for the three months endedOctober 1, 2006.  The improvement inincome from operations for the three months ended September 30, 2007 as comparedto the three months ended October 1, 2006 was mainly due to cost savings fromrestructuring activities and lower pension expense, partially offset by lowergross profit.

 

 

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InterestIncome and Expense

 

Interestincome was $0.4 million and interest expense was $0.1 million in the threemonths ended September 30, 2007. Interest income was $0.3 million and interest expense was $1.1 millionin the three months ended October 1, 2006. The increase in interest income in the three months ended September 30,2007 was due to higher cash balances held in short-term investments.

 

Thedecrease in interest expense in the three-month period ended September 30, 2007was due to the repayment of all of our debt following the divestiture of thepower electronics business.  Interestexpense for the three months ended September 30, 2007 was comprised entirely ofdeferred financing amortization. Interest expense in the three months ended October 1, 2006 reflects bothinterest expense on outstanding borrowings and deferred financing amortization.

 

Provisionfor Income Taxes

 

Werecorded an income tax provision of $0.3 million in the three months endedSeptember 30, 2007.  Despite the pretaxloss of $2.0 million in the three months ended October 1, 2006, we recorded atax provision of $0.3 million for that period. The provision in both periods was mainly due to non-cash deferred taxprovisions 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 9 of Notes to Condensed Consolidated FinancialStatements).

 

Income(Loss) from Continuing Operations

 

Werecorded income from continuing operations of $0.8 million in the three monthsended September 30, 2007, or $0.03 earnings per share on both a basic anddiluted basis, compared to a loss from continuing operations of $2.3 million inthe three months ended October 1, 2006, or a $0.08 loss per share on both abasic and diluted basis.

 

Lossfrom Discontinued Operations

 

Our loss from discontinued operations for the threemonths ended September 30, 2007 was $0.3 million, or a $0.01 loss per share onboth a basic and diluted basis, compared to a loss from discontinued operationsof $0.9 million, or a $0.03 loss per share on both a basic and diluted basis,for the three months ended October 1, 2006. Loss from discontinued operations in the three months ended September30, 2007 was comprised mainly of expenses related to previously divestedbusinesses of $0.3 million.  Loss fromdiscontinued operations of $0.9 million in the three months ended October 1,2006 was comprised mainly of net losses from our discontinued power electronicsbusiness of $0.9 million.

 

NetIncome

 

Ournet income was $0.5 million in the three months ended September 30, 2007, or$0.02 earnings per share, basic and diluted, compared to a net loss of $3.2million in the three months ended October 1, 2006, or a $0.11 loss per share onboth a basic and diluted basis.

 

**Liquidityand Capital Resources**

 

Our cash and cash equivalent balance, includingrestricted cash, decreased $0.3 million during the three months ended September30, 2007, from $28.3 million at July 1, 2007 to $28.0 million at September 30,2007.  During the three months endedSeptember 30, 2007, our accounts receivable balances decreased $1.1 million,however, inventories increased $1.6 million, mainly related to increasedpurchases of inventory for wind inverters, and accounts payable decreased $0.6million.  Our capital expenditures in thethree months ended September 30, 2007 were $0.4 million and we may make furtherinvestments to increase capacity for and improve efficiency in the productionof wind inverters.  We do not anticipatecapital expenditures in fiscal 2008 will exceed $2.5 million.  The expected amount of capital expenditurescould change depending upon changes in revenue levels, our financial conditionand the general economy.

 

As of September 30,2007, we were in compliance with all covenants of the amended revolving creditagreement with Wells Fargo Foothill, Inc. (“WFF”) and there were no borrowingsoutstanding.  On November 6, 2007, basedupon mutual agreement between us and WFF, the amended revolving creditagreement was terminated without penalty prior to its expiration date ofDecember 31, 2007.  Subsequent to the endof the fiscal 2008 first quarter, we entered into an agreement with AssociatedBank, N.A. providing for a $10 million revolving credit facility (the “Associatedfacility”) with an effective date of November 6, 2007.  Borrowings under the Associated facility bearinterest at the London Interbank Offering Rate (“LIBOR”) plus 1.5%, withborrowing levels determined by a borrowing base formula as defined in theagreement, based on the level of eligible accounts receivable.  The Associated facility also supports theissuance of letters of credit, places certain restrictions on our ability topay dividends or make acquisitions, and includes covenants which

 

 

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require minimumoperating profit levels and limit annual capital expenditures.  Borrowings under the Associated facility aresecured by our accounts receivable and inventory.  Under the terms of the Associated facility,we are required to retain $22.0 million in an escrow account to fund theNilssen arbitration award in the event that our appeal of the award is notsuccessful (see below and Note 4 of Notes to Condensed Consolidated FinancialStatements).  The Associated facilityexpires in November 2009, unless renewed by the parties prior to that time.

 

Primarily as a result of the decline in interest ratesover the past several years, the accumulated benefit obligation of our definedbenefit pension plan currently exceeds plan assets.  We used a portion of the proceeds from thedivestiture of our power electronics business to contribute $30.0 million toour pension plan in December 2006.  Undercurrent funding regulations, actuarial projections indicate we will be requiredto make a contribution to the plan of approximately $2.7 million in April2008.  Required contributions in fiscal2009 and beyond will depend on future interest rate levels, values in equityand fixed income markets, and the level and timing of interim contributions wemay make to the plan, and could still be significant.

 

Weare subject to certain potential environmental and legal liabilities associatedprimarily with past divestitures (see Note 4 of Notes to Condensed ConsolidatedFinancial Statements).   In the fourthquarter of fiscal 2005, a decision was rendered in a patent infringement actionbrought against us by Ole K. Nilssen.  Insettlement of pending litigation, we agreed to submit the matter to bindingarbitration, and in May 2005, the arbitrator awarded damages to Mr. Nilssen of$23.4 million, to be paid within ten days of the award.  Nilssen’s counsel filed a motion to enter theaward in U.S. District Court for the 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, webelieve that current cash balances, borrowing capacity under our Associatedfacility and internally generated cash flows will be sufficient to fundanticipated operational needs, capital expenditures and other commitments overthe next 12 months.

 

**CautionRegarding Forward-Looking Statements and Risk Factors**

 

This document, including documents incorporated hereinby reference, contains “forward-looking statements” within the meaning of thePrivate Securities Litigation Reform Act of 1995.  The words “believe”, “expect”,“estimate”, “anticipate”, “intend”, “may”, “might”, “will”, “would”, “could”, “project”,and “predict”, or similar words and phrases generally identify forward-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 these documentsto reflect changed assumptions, the occurrence of unanticipated events orchanges to future operating results over time.

 

Our future results of operations and the otherforward-looking statements contained in this filing, including thissection titled “Management’s Discussion and Analysis of FinancialCondition and Results of Operations”, involve a number of risks anduncertainties.  In particular, the statements regarding future economicconditions, our goals and strategies, new product introductions, penetration ofnew markets, projections of sales revenues and sales growth, manufacturingcosts and operating costs, pricing of our products and raw materials requiredto manufacture our products, gross margin expectations, relocation andoutsourcing of production capacity, capital spending, research and developmentexpenses, the outcome of pending legal proceedings and environmental matters,payment of certain claims by insurance carriers, tax rates, sufficiency offunds to meet our needs including contributions to our defined benefit pensionplan, and our plans for future operations, as well as our assumptions relatingto the foregoing, are all subject to risks and uncertainties.

 

Anumber of factors could cause our actual results to differ materially from ourexpectations.  We are subject to all of the business risks facing publiccompanies, including business cycles and trends in the general economy,financial market conditions, changes in interest rates, demand variations andvolatility, potential loss of key personnel, supply chain disruptions,government legislation and regulation, and natural causes.  Additionalrisks and uncertainties include but are 

 

 

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notlimited to industry conditions, competitive factors such as technology andpricing pressures, business conditions in our served markets, dependence onsignificant customers, increased material costs, risks and costs associatedwith acquisitions 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 1, 2007, under theheading “Risk Factors Affecting the Company’s Outlook”, as well as below inPart II, Item 1A under the heading  “RiskFactors”.

 

**Item 3 — Quantitative andQualitative Disclosuresabout Market Risk**

 

There have been nomaterial changes to the quantitative and qualitative disclosures about ourmarket risk disclosed in our Annual Report on Form 10-K for the year ended July1, 2007.  We did not have any outstandinghedge instruments or foreign currency contracts outstanding at September 30,2007 or October 1, 2006.

 

**Item 4 — Controls and Procedures**

 

In connection with this Form 10-Q, under the directionof our Chief Executive Officer and Chief Financial Officer, we evaluated ourdisclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, and internal control overfinancial reporting and concluded that (i) our disclosure controls andprocedures were effective as of September 30, 2007, and (ii) no change ininternal control over financial reporting occurred during the quarterended September 30, 2007, that has materially affected, or is reasonablylikely to materially affect, such internal control over financial reporting.

 

Attached as exhibits to this Form 10-Q arecertifications of the Company’s Chief Executive Officer and Chief FinancialOfficer, which are required in accordance with Rule 13a-14 of the SecuritiesExchange Act of 1934.  This “Controls andProcedures” section includes information concerning the controls and evaluationthereof referred 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**

 

Information about our legal proceedings is containedin Part II, Item 3, Legal Proceedings, Part I, Environmental Matters, and Note11 in the Notes to Consolidated Financial Statements in our Annual Report onForm 10-K for the fiscal year ended July 1, 2007, which is incorporated hereinby reference, and in Note 4 of the Notes to Condensed Consolidated FinancialStatements contained in this Quarterly Report on Form 10-Q.   We believe that there have been no material developmentswith respect to these matters during the quarter ended September 30, 2007.

 

**Item 1A —Risk Factors**

 

There have been nomaterial changes to the risk factors disclosed in our Annual Report on Form10-K for the year ended July 1, 2007.

 

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

 

There were no unregistered sales of equity securities andthere were no repurchases of equity securities during our first fiscal quarterended September 30, 2007.

 

**Item 3 —Defaults upon Senior Securities**

 

None.

 

 

 

**Item 4 — Submission of Matters to a Vote of Security Holders**

 
| (a)    | The Annual Meeting of  Stockholders of the Company was held on November 2, 2007. |
|--------|----------------------------------------------------------------------------------|
|   |                                                                             |
| (b)    | The following named  persons were elected as directors at such meeting:          |
|   | Dewain  K. Cross                                                                 |
|   | Yon  Y. Jorden                                                                   |
|   | Mitchell  I. Quain                                                               |
|   | David  P. Reiland                                                                |

 

 

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| (c) | The votes cast for and  withheld with respect to each nominee for director were as follows: |
|-----|---------------------------------------------------------------------------------------------|

 
| **Nominee**        | ** ** | **For**    | ** ** | **Withheld** |
|--------------------|------------|------------|------------|--------------|
|               |       |       |       |         |
| Dewain K. Cross    |       | 28,057,033 |       | 247,658      |
| Yon Y. Jorden      |       | 28,068,177 |       | 236,514      |
| Mitchell I.  Quain |       | 28,071,977 |       | 232,714      |
| David P. Reiland   |       | 28,063,977 |       | 240,714      |

 

 

 
| (d) | The appointment of  Ernst & Young LLP as the Company’s independent registered public  accounting firm for fiscal 2008 was ratified. The votes cast for and against  the appointment, and the votes that abstained were as follows: |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

                                
| **For**    | ** ** | **Against** | ** ** | **Abstain** |
|------------|------------|-------------|------------|-------------|
| 28,154,506 |       | 132,634     |       | 17,551      |

 

 

**Item 5 —Other Information**

 

None.

 

**Item 6 -Exhibits**

 

(a)                                  Index to Exhibits

 

10.1                           Third Amendment to Credit Agreement andWaiver dated as of September 19, 2007 among Magnetek, Inc., certain of itssubsidiaries, the lenders party thereto and Wells Fargo Foothill, Inc. **

 

10.2                           Industrial Building Lease dated as ofNovember 20, 2006 and Amendment of Industrial Building Lease dated as of April5, 2007 among Magnetek, Inc., and W. C. Bradley Co. ***

 

31.1                           Certification of the Chief ExecutiveOfficer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. *

 

31.2                           Certification of the Chief FinancialOfficer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. *

 

32.1                           Certification pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002. *

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  *                                   Filedwith this Report on Form 10-Q.

 

 **                               Previouslyfiled under Form 8-K of the Company on September 20, 2007 and incorporatedherein by this reference.

 

***                           Previouslyfiled under Form 8-K of the Company on August 23, 2007 and incorporated hereinby this reference.

 

 

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SIGNATURES

 

      Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                    |   |                    | MAGNETEK, INC.                              |
|-------------------------|--------|-------------------------|---------------------------------------------|
|                    |   |                    | (Registrant)                                |
|                    |   |                    |                                        |
|                    |   |                    |                                        |
| Date: November  8, 2007 |   | /s/ David P.  Reiland   |
|                    |   |                    | David P. Reiland                            |
|                    |   |                    | President and  Chief Executive Officer      |
|                    |   |                    | (Duly authorized  officer of the Registrant |
|                    |   |                    | and  principal executive officer)           |
|                    |   |                    |                                        |
| Date: November  8, 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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