**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D. C. 20549**

 

**FORM 10-Q**

 

| **(Mark One)**                                                                                                    |
|-------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                        |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                              |   |   |
| **For the quarterly period ended:  March 31, 2004**                                                          |
|                                                                                                              |
| **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**                                                                                |

 

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| **MAGNETEK, INC.**                                     |
|--------------------------------------------------------|
| (Exact name of registrant as specified in its charter) |

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

 

**10900 WilshireBlvd., Suite 850**

**Los Angeles, California 90024**

(Address of principal executive offices)

(Zip Code)

 

**(310) 208-1980**

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year,

if changed since last report)

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

Yes   ý   No   o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act)   Yes   ý   No   o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

The number of sharesoutstanding of Registrant’s Common Stock, as of May 5, 2004 was 28,489,932shares.

 

 

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2004 MAGNETEK FORM 10-Q

 

TABLE OF CONTENTS FOR THE QUARTERLY REPORT ON FORM 10-Q

FOR THE FISCAL QUARTER ENDED MARCH 31, 2004

 

MAGNETEK, INC.

 
| **Part I.**  | **Financial Information**                                                                   |   |
|--------------|---------------------------------------------------------------------------------------------|--------|
|         |                                                                                        |   |
| Item 1.      | Financial  Statements                                                                       |   |
| Item 2.      | Management’s Discussion and Analysis of  Results of Operations and Financial Condition |   |
| Item 3.      | Quantitative  and Qualitative Disclosures about Market Risk                                 |   |
| Item 4.      | Controls  and Procedures                                                                    |   |
|         |                                                                                        |   |
| **Part II.** | **Other  Information**                                                                      |   |
|         |                                                                                        |   |
| Item 1.      | Legal Proceedings                                                                           |   |
| Item 6.      | Exhibits and Reports on Form 8-K                                                            |   |
|         |                                                                                        |   |
| Signatures   |                                                                                        |   |

 

2

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PART I.                  FINANCIAL INFORMATION

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of theinformation and footnotes required by accounting principles for completefinancial statements.

 

In the opinion ofmanagement, the accompanying condensed consolidated financial statementscontain all adjustments necessary to fairly present the financial position asof March 31, 2004 and the results of operations and cash flows for thethree-month and nine-month periods ended March 31, 2004 and 2003. It issuggested that these condensed consolidated financial statements be read inconjunction with the consolidated financial statements and notes included inthe Company’s latest Annual Report on Form 10-K.  Results for the three-months and nine-months ended March 31, 2004are not necessarily indicative of results that may be experienced for the fullfiscal year.

 

This document, includingdocuments incorporated herein by reference, contains “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  The words “believe”, “expect”,“estimate”, “anticipate”, “intend”, “may”, “might”, “will”, “would”, “could”,“project”, and “predict”, or similar words and phrases generally identifyforward-looking statements. Forward-looking statements contained or incorporated by reference inthis document, including those set forth in the section of this documententitled “Management’s Discussion and Analysis of Financial Condition andResults of Operations”, include, but are not limited to, statements regardingprojections of revenues, income or loss, capital expenditures, plans for futureoperations, products or services and financing needs or expectations, as wellas assumptions relating to the foregoing.

 

Forward-lookingstatements are inherently subject to risks and uncertainties which in manycases are beyond the control of the Company and which cannot be predicted orquantified.  As a result, future eventsand actual results could differ materially from those set forth in,contemplated by, or underlying forward-looking statements.  Such risks and uncertainties include but arenot limited to economic conditions in general, sensitivity to industryconditions, competitive factors such as technology and pricing pressures,business conditions in the telecommunications and electronic equipment markets,international sales and operations, dependence on significant customers,increased material costs, risks and costs associated with acquisitions anddivestitures, environmental matters and the risk that the Company’s ultimatecosts of doing business exceed present estimates.  Further information on factors that could affect Magnetek’sfinancial results can be found in the Company’s filings with the Securities andExchange Commission.

 

Forward-lookingstatements contained in this document speak only as of the date of thisdocument or, in the case of any document incorporated by reference, the date ofthat document.  The Company does nothave any obligation to publicly update or revise any forward-looking statementcontained or incorporated by reference in these documents to reflect changedassumptions, the occurrence of unanticipated events or changes to futureoperating results over time.

 

3

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ITEM1

 

MAGNETEK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED

March 31, 2004 and 2003

(amounts in thousands, except per share data)

(unaudited)

 
|                                           |   | **2004** |   | **2003** |   |
|------------------------------------------------|--------|----------|--------|----------|--------|
|                                           |   |     |   |     |   |
| Net sales                                      |   | $        | 64,815 |     | $      | 53,223 |   |
| Cost of sales                                  |   | 49,230   |   | 42,893   |   |
|                                           |   |     |   |     |   |
| Gross profit                                   |   | 15,585   |   | 10,330   |   |
| Research and development                       |   | 3,578    |   | 2,998    |   |
| Selling, general and administrative            |   | 11,330   |   | 10,161   |   |
|                                           |   |     |   |     |   |
| Income (loss) from operations                  |   | 677      |   | (2,829   | )      |
| Interest and other expense                     |   | 524      |   | 3,889    |   |
|                                           |   |     |   |     |   |
| Income (loss) before benefit for income  taxes |   | 153      |   | (6,718   | )      |
| Benefit for income taxes                       |   | —   |   | (1,308   | )      |
| Net income (loss)                              |   | $        | 153    |     | $      | (5,410 | ) |
|                                           |   |     |   |     |   |
| Earnings (loss) per common share               |   |     |   |     |   |
|                                           |   |     |   |     |   |
| Basic and diluted:                             |   |     |   |     |   |
| Net income (loss)                              |   | $        | 0.01   |     | $      | (0.23 | ) |

 

See accompanying notes

 

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MAGNETEK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED

March 31, 2004 and 2003

(amounts in thousands, except per share data)

(unaudited)

 
|                                           |   | **2004** |    | **2003** |   |
|------------------------------------------------|--------|----------|---------|----------|--------|
|                                           |   |     |    |     |   |
| Net sales                                      |   | $        | 173,341 |     | $      | 147,317 |   |
| Cost of sales                                  |   | 134,507  |    | 120,961  |   |
|                                           |   |     |    |     |   |
| Gross profit                                   |   | 38,834   |    | 26,356   |   |
| Research and development                       |   | 9,706    |    | 8,456    |   |
| Selling, general and administrative            |   | 35,055   |    | 29,576   |   |
| Gain from termination of retiree medical  plan |   | —   |    | (27,771  | )      |
| Goodwill and fixed asset impairment            |   | —   |    | 34,019   |   |
|                                           |   |     |    |     |   |
| Loss from operations                           |   | (5,927   | )       | (17,924  | )      |
| Interest and other expense                     |   | 1,607    |    | 4,308    |   |
|                                           |   |     |    |     |   |
| Loss before provision for income taxes         |   | (7,534   | )       | (22,232  | )      |
| Provision for income taxes                     |   | —   |    | 7,620    |   |
| Net loss                                       |   | $        | (7,534  | )        | $      | (29,852 | ) |
|                                           |   |     |    |     |   |
| Loss per common share                          |   |     |    |     |   |
|                                           |   |     |    |     |   |
| Basic and diluted:                             |   |     |    |     |   |
| Net loss                                       |   | $        | (0.28   | )        | $      | (1.26 | ) |

 

See accompanying notes

 

5

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MAGNETEK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2004 and JUNE 30, 2003

(amounts in thousands) 

 
|                                            |   | **March 31**    |    | **June 30** |   |
|-------------------------------------------------|--------|-----------------|---------|-------------|--------|
|                                            |   | **(unaudited)** |    |        |   |
|                                            |   |            |    |
| ASSETS                                          |   |            |    |        |   |
|                                            |   |            |    |        |   |
| Current assets:                                 |   |            |    |        |   |
| Cash                                            |   | $               | 1,213   |        | $      | 1,680 |   |
| Accounts receivable, net                        |   | 52,332          |    | 46,745      |   |
| Inventories                                     |   | 48,685          |    | 48,843      |   |
| Prepaid expenses and other                      |   | 8,896           |    | 12,908      |   |
| Total current assets                            |   | 111,126         |    | 110,176     |   |
|                                            |   |            |    |        |   |
| Property, plant and equipment                   |   | 120,663         |    | 111,723     |   |
|                                            |   |            |    |        |   |
| Less-accumulated depreciation and  amortization |   | 88,957          |    | 77,929      |   |
| Property, plant and equipment, net              |   | 31,706          |    | 33,794      |   |
|                                            |   |            |    |        |   |
| Goodwill                                        |   | 63,815          |    | 63,067      |   |
| Prepaid pension and other assets                |   | 73,429          |    | 73,614      |   |
| Total Assets                                    |   | $               | 280,076 |        | $      | 280,651 |   |
|                                            |   |            |    |        |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY       |   |            |    |        |   |
|                                            |   |            |    |        |   |
| Current liabilities:                            |   |            |    |        |   |
| Accounts payable                                |   | $               | 32,025  |        | $      | 35,496 |   |
| Accrued liabilities                             |   | 12,576          |    | 13,452      |   |
| Current portion of long-term debt               |   | 685             |    | 805         |   |
| Total current liabilities                       |   | 45,286          |    | 49,753      |   |
|                                            |   |            |    |        |   |
| Long-term debt, net of current portion          |   | 15,831          |    | 25,897      |   |
|                                            |   |            |    |        |   |
| Other long-term obligations                     |   | 117,122         |    | 118,861     |   |
|                                            |   |            |    |        |   |
| Deferred income taxes                           |   | 4,970           |    | 6,469       |   |
|                                            |   |            |    |        |   |
| Stockholders’ equity:                      |   |            |    |        |   |
| Common stock                                    |   | 285             |    | 237         |   |
| Paid in capital in excess of par value          |   | 127,622         |    | 106,541     |   |
| Retained earnings                               |   | 73,425          |    | 80,959      |   |
| Accumulated other comprehensive loss            |   | (104,465        | )       | (108,066    | )      |
| Total stockholders’ equity                 |   | 96,867          |    | 79,671      |   |
|                                            |   |            |    |        |   |
| Total Liabilities and Stockholders’ Equity |   | $               | 280,076 |        | $      | 280,651 |   |

 

See accompanying notes

 

6

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MAGNETEK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE NINE MONTHS ENDED

March 31, 2004 and 2003

(amounts in thousands)

(unaudited)

 
|                                                                         |   | **2004** |   | **2003** |   |
|------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Cash flows  from operating activities:                                       |   |     |   |     |   |
| Net loss                                                                     |   | $        | (7,534 | )        | $      | (29,852 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |     |   |     |   |
| Depreciation and amortization                                                |   | 7,582    |   | 6,938    |   |
| Gain from termination of retiree medical,  net of tax                        |   | —   |   | (17,218  | )      |
| Goodwill and fixed asset impairment                                          |   | —   |   | 34,019   |   |
| Changes in operating assets and liabilities                                  |   | (6,087   | )      | 1,520    |   |
|                                                                         |   |     |   |     |   |
| Total adjustments                                                            |   | 1,495    |   | 25,259   |   |
| Net cash used in operating activities                                        |   | (6,039   | )      | (4,593   | )      |
|                                                                         |   |     |   |     |   |
| Cash flows from investing activities:                                        |   |     |   |     |   |
| Purchase of and investment in companies,  net of cash acquired               |   | —   |   | (4,523   | )      |
| Proceeds from sale of business                                               |   | 1,062    |   | —   |   |
| Capital expenditures                                                         |   | (3,481   | )      | (4,672   | )      |
| Net cash used in investing activities                                        |   | (2,419   | )      | (9,195   | )      |
|                                                                         |   |     |   |     |   |
| Cash flow from financing activities:                                         |   |     |   |     |   |
| Proceeds from issuance of common stock                                       |   | 18,738   |   | 248      |   |
| Borrowings under (repayment of) bank and  other long term obligations        |   | (10,186  | )      | 10,601   |   |
| Increase in deferred financing costs                                         |   | (561     | )      | (165     | )      |
| Net cash provided by financing activities                                    |   | 7,991    |   | 10,684   |   |
|                                                                         |   |     |   |     |   |
| Net decrease in cash                                                         |   | $        | (467   | )        | $      | (3,104 | ) |
| Cash at the beginning of the period                                          |   | 1,680    |   | 4,816    |   |
|                                                                         |   |     |   |     |   |
| Cash at the end of the period                                                |   | $        | 1,213  |     | $      | 1,712 |   |

 

See accompanying notes

 

7

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MAGNETEK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004

(Amounts in thousands, except per share data)

(unaudited)

 

1.                                       Basisof Presentation

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial reporting. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for fiscal year endfinancial statements.  For furtherinformation, refer to the financial statements and footnotes thereto includedin the Company’s Form 10-K for the year ended June 30, 2003 filed with theSecurities and Exchange Commission.  Inthe Company’s opinion, these unaudited statements contain all adjustments(consisting of normal recurring adjustments) necessary to present fairly thefinancial position of Magnetek, Inc. as of March 31, 2004, and the results ofits operations and its cash flows for the three-month and nine-month periodsthen ended.

 

The Companyuses a fifty-two, fifty-three week fiscal year ending on the Sunday nearest toJune 30.  Fiscal quarters are thethirteen or fourteen week periods ending on the Sunday nearest September 30,December 31, March 31 and June 30.  Forclarity of presentation, all periods are presented as if they ended on the lastday of the calendar period.  Thethree-month and nine-month periods ended March 31, 2004 and 2003 each containedthirteen and thirty-nine weeks respectively.

 

2.             Summary ofSignificant Accounting Policies

 

Principles of Consolidation – The consolidatedfinancial statements include the accounts of Magnetek, Inc. and itssubsidiaries (the “Company”).  Allsignificant intercompany accounts and transactions have been eliminated.

 

Use of Estimates - The preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States requires management to make estimates and assumptionsthat affect the amounts reported in the financial statements and accompanyingnotes. Actual results could differ from those estimates.   Significant areas requiring managementestimates include the following key financial areas:

 

*Accounts Receivable*

 

Accounts receivable represent receivables from customers in theordinary course of business.  TheCompany is subject to losses from uncollectible receivables in excess of itsallowances.  The Company maintainsallowances for doubtful accounts for estimated losses from customers’ inabilityto make required payments.  In order toestimate the appropriate level of this allowance, the Company analyzeshistorical bad debts, customer concentrations, current customer creditworthiness,current economic trends and changes in customer payment patterns.  If the financial conditions of the Company’scustomers were to deteriorate and to impair their ability to make payments,additional allowances may be required in future periods.  The Company’s management believes that allappropriate allowances have been provided.

 

*Inventories*

 

The Company’s inventoriesare stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method, includingmaterial, labor and factory overhead. Inventory on hand may exceed future demand either because the product isobsolete, or the amount on hand is more than can be used to meet futureneeds.  The Company identifiespotentially obsolete and excess inventory by evaluating overall inventorylevels.  In assessing the ultimaterealization of inventories, the Company is required to make judgments as tofuture demand requirements and

 

8

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compare those with thecurrent or committed inventory levels. If future demand requirements are less favorable than those projected bymanagement, additional inventory write-downs may be required.

 

*Reserves for Litigation and Environmental Issues*

 

The Company periodically records the estimated impacts of variousconditions, situations or circumstances involving uncertain outcomes.  The accounting for such events is prescribedunder Statement of Financial Accounting Standard (SFAS) No. 5, “Accounting forContingencies.”  SFAS No. 5 defines acontingency as “an existing condition, situation, or set of circumstancesinvolving uncertainty as to possible gain or loss to an enterprise that willultimately be resolved when one or more future events occur or fail to occur.”

 

SFAS No. 5 does notpermit the accrual of gain contingencies under any circumstances.  For loss contingencies, the loss must beaccrued if (1) information is available that indicates it is probable that theloss has been incurred, given the likelihood of uncertain events; and (2) that theamount of the loss can be reasonably estimated.

 

The accrual of a contingency involves considerable judgment on the partof management.  The Company uses itsinternal expertise, and outside experts, as necessary, to help estimate theprobability that a loss has been incurred and the amount (or range) of theloss.

 

*Income Taxes*

 

The Company uses the liability method to account for income taxes.  The preparation of consolidated financialstatements involves estimating the Company’s current tax exposure together withassessing temporary differences resulting from differing treatment of items fortax and accounting purposes.  Thesedifferences result in deferred tax assets and liabilities, which are includedin the consolidated balance sheets.  Anassessment of the recoverability of the deferred tax assets is made, and avaluation allowance is established based upon this assessment.

 

Federal income taxes are not provided currently on undistributedearnings of foreign subsidiaries since the Company presently intends toreinvest any earnings overseas indefinitely.

 

*Pension Benefits*

 

The valuation of theCompany’s pension plan requires the use of assumptions and estimates to developactuarial valuations of expenses, assets and liabilities.  These assumptions include discount rates,investment returns and mortality rates. Changes in assumptions and future investments returns could potentiallyhave a material impact on the Company’s expenses and related fundingrequirements.

 

Revenue Recognition – The Company’s policy isto record and recognize sales only upon shipment.  Amounts billed to customers for shipping costs are reflected innet sales; shipping costs are reflected in cost of sales.

 

Property, Plant and Equipment – Additions andimprovement are capitalized at cost, whereas expenditures for maintenance andrepair are charged to expense as incurred. Depreciation is provided over the estimated useful lives of therespective assets (ranging from three to forty years) principally using thestraight-line method.

 

Goodwill - The Company adopted SFAS No. 142,“Goodwill and Other Intangible Assets”, effective July 1, 2001.  Under SFAS No. 142, goodwill and otherintangible assets deemed to have indefinite lives are no longer amortized butare subject to annual impairment tests, or interim impairment tests if certainindicators arise.  Management reviewsthe valuation of goodwill at least annually, using discounted future cash flowanalyses of each of the Company’s reporting units.

 

Deferred Financing Costs – Costs incurred to obtain financing aredeferred and included in other assets in the condensed consolidated balancesheets.  Deferred financing costs areamortized over the term of the financing facility.

 

9

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Warranties – The Company offers warranties for certainproducts that it manufactures, with the warranty term generally ranging fromone to two years.  Warranty reserves areestablished for costs expected to be incurred after the sale and delivery ofproducts under warranty, based mainly on known product failures and historicalexperience.  Actual repair costsincurred for products under warranty are charged against the establishedreserve balance as incurred.

 

Earnings per Share – In accordance with SFAS No. 128,“Earnings per Share”, basic earnings per share are computed using the weightedaverage number of common shares outstanding during the period.  Diluted earnings per share incorporate theincremental shares issuable upon the assumed exercise of stock options as ifall exercises had occurred at the beginning of the fiscal period.

 

Stock-Based Compensation – The Company haselected to continue to use the intrinsic-value method of accounting asprescribed by Accounting Principles Board (APB) No. 25 “Accounting for StockIssued to Employees” in accounting for stock based awards to employees.  Under APB 25, the Company recognizes nocompensation expense with respect to such awards when the exercise price isequal to or greater than the market price at the date of grant.  Accordingly, no stock-based employeecompensation cost is reflected in reported results of operations for allperiods presented.

 

The Companyadopted the interim disclosure provisions of SFAS No. 148, “Accounting forStock-Based Compensation – Transition and Disclosure – an Amendment of FASBStatement no. 123”, effective January 1, 2003.

 

The followingtable illustrates the effect on net loss and loss per share if the Company hadapplied the fair value recognition provisions of SFAS No. 123 “Accounting forStock-Based Compensation” to stock-based employee compensation:

 
|                                                                                                                                          |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                                          |   | **2004**                           |   | **2003**                          |   | **2004** |   | **2003** |   |
| Net income (loss)                                                                                                                             |   | $                                  | 153    |                              | $      | (5,410 | ) | $ | (7,534 | ) | $ | (29,852 | ) |
|                                                                                                                                          |   |                               |   |                              |   |   |   |   |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (799                               | )      | (493                              | )      | (2,219 | ) | (1,965 | ) |
| Pro forma net loss                                                                                                                            |   | $                                  | (646   | )                                 | $      | (5,903 | ) | $ | (9,753 | ) | $ | (31,817 | ) |
|                                                                                                                                          |   |                               |   |                              |   |   |   |   |   |
| Earnings (loss) per share as reported:                                                                                                        |   |                               |   |                              |   |   |   |   |   |
| Basic and diluted                                                                                                                             |   | $                                  | 0.01   |                              | $      | (0.23 | ) | $ | (0.28 | ) | $ | (1.26 | ) |
|                                                                                                                                          |   |                               |   |                              |   |   |   |   |   |
| Pro forma loss per share:                                                                                                                     |   |                               |   |                              |   |   |   |   |   |
| Basic and diluted                                                                                                                             |   | $                                  | (0.02  | )                                 | $      | (0.25 | ) | $ | (0.37 | ) | $ | (1.35 | ) |

 

Derivative Financial Instruments – The Companyuses derivative financial instruments to reduce financial market risks. Theseinstruments are used to hedge foreign currency and interest rate marketexposures. The Company does not use derivative financial instruments forspeculative or trading purposes.  TheCompany accounts for derivative instruments in accordance with SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities”, and SFAS No.149, “Amendment of Statement 133 on Derivatives and Hedging”, issued in April2003.  These statements require that anentity recognize all derivatives as either assets or liabilities in thestatement of financial position, measured at fair value, and that hedgeaccounting be applied when certain conditions are met.

 

10

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Foreign Currency Translation - The Company’sforeign entities’ accounts are measured using local currency as the functionalcurrency.  Assets and liabilities aretranslated at the exchange rate in effect at period-end.  Revenues and expenses are translated at therates of exchange prevailing during the fiscal period.  Unrealized translation gains and lossesarising from differences in exchange rates from period to period are includedas a component of accumulated other comprehensive loss in stockholders’ equity.

 

RecentAccounting Pronouncements – In January 2003, the FASB issued Interpretation No. 46(FIN 46), “Consolidation of Variable Interest Entities (VIE)”, which wasamended in December 2003.  FIN 46as amended requires that if a company holds a controlling financial interest ina VIE, the assets, liabilities and results of the VIE’s activities should beconsolidated in the entity’s financial statements. The Company does not expectFIN 46 to have a material impact on its results of operations or financialposition.

 

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivatives and Hedging”, which amends andclarifies accounting for derivative instruments, including certain derivativeinstruments embedded in other contracts and for hedging activities underStatement of Financial Accounting Standards No. 133, “Accounting for DerivativeInstruments and Hedging Activities.”** SFAS No. 149 is generally effective for derivative instruments,including derivative instruments embedded in certain contracts, entered into ormodified after June 30, 2003 and for hedging relationships designated afterJune 30, 2003. The adoption of SFAS No. 149 did not have a material impact onthe Company’s results of operations or financial position.

 

In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristic of Both Liabilities andEquity”.  This statement establishesstandards for how an issuer classifies and measures in its statement offinancial position certain financial instruments with characteristics of bothliabilities and equity.  SFAS No. 150requires that an issuer classify a financial instrument that is within thescope of SFAS No. 150 as a liability (or an asset in some circumstances) becausethat financial instrument embodies an obligation of the issuer. SFAS No. 150 iseffective for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodsbeginning after June 15, 2003.  Theadoption of SFAS No. 150 did not have a material impact on the Company’sresults of operations or financial position.

 

Reclassifications – Certain prior year balances were reclassified toconform to the current year presentation.

 

3.                                       Inventories

 

Inventories atMarch 31, 2004 and June 30, 2003 consist of the following:

 
|                          |   | **March 31** |   | **June 30** |   |
|-------------------------------|--------|--------------|--------|-------------|--------|
| Raw materials and stock parts |   | $            | 29,661 |        | $      | 26,994 |   |
| Work-in-process               |   | 13,158       |   | 15,217      |   |
| Finished goods                |   | 5,866        |   | 6,632       |   |
|                          |   | $            | 48,685 |        | $      | 48,843 |   |

 

4.                                       Commitmentsand Contingencies

 

The Company is a party toa number of product liability lawsuits, all of which arise from businessoperations no longer owned by Magnetek. Contractual liability for claimsresulting from indemnification obligations related to sales of the variousbusiness operations has terminated for new claims.  All of the pending product liability cases are being aggressivelydefended by the Company, and management believes that its insurers will bearall liability, if any, that exceeds applicable deductibles, and that none of theseproceedings individually or in the aggregate will have a material effect on theCompany’s results of operations or financial position.

 

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The Company has beennamed, along with numerous other defendants, in asbestos-related lawsuits. TheCompany has never produced asbestos-containing products and is eithercontractually indemnified against liability for asbestos-related claims orbelieves that it has no liability for such claims, all of which arise frombusiness operations the Company acquired but no longer owns. While the outcomeof these cases cannot be predicted with certainty, the Company is aggressivelyseeking to be dismissed from the proceedings and does not believe theproceedings, individually or in the aggregate, will have a material adverseeffect on its results of operations or financial position.

 

In April 1998, OleK. Nilssen filed a lawsuit in the U.S. District Court for the Northern Districtof Illinois alleging infringement by the Company of seven of his patentspertaining to electronic ballast technology, and seeking unspecified damagesand injunctive relief to preclude the Company from making, using or sellingproducts allegedly infringing his patents. The Company denied that its productsinfringed any valid patent and filed a response asserting affirmative defenses,as well as a counterclaim for a judicial declaration that its products do notinfringe the patents asserted by Nilssen and also that the asserted patents areinvalid. In April 2003, the lawsuit and counterclaims were dismissed by theparties with prejudice and both parties agreed to submit limited issues indispute to binding arbitration before an arbitrator with a relevant technicalbackground.  The ballast division wassold in 2001 and the Company agreed to a limited indemnification of the buyerof the division against substantively the same claims raised against theCompany.  In February 2003, Nilssenfiled a suit against the buyer and the buyer is seeking indemnification fromthe Company in connection therewith. Settlement discussions have occurred between the Company and Nilssenfrom time to time, and although the Company will continue to assert what itbelieves are strong defenses at arbitration, an unfavorable decision in thearbitration or the failure to obtain a favorable resolution of Nilssen’s claimsagainst the buyer of the ballast division could have a material adverse effecton the Company’s financial position, cash flows or results of operations.

 

Fromtime to time, the Company discovered the existence of hazardous substances atcertain facilities associated with previously owned businesses and responded asnecessary to bring the facilities into compliance with applicable laws andregulations. Upon sale of the businesses, the Company agreed, in some cases, toindemnify the buyers against environmental claims associated with the divestedoperations, subject to various conditions and limitations. Remediationactivities, including those related to the Company’s indemnificationobligations, did not involve material expenditures during the first nine monthsof fiscal year 2004.

 

The Company has also been identified by the United States EnvironmentalProtection Agency and certain state agencies as a potentially responsible partyfor cleanup costs associated with alleged past waste disposal practices atseveral previously owned facilities and offsite locations. Its remediationactivities as a potentially responsible party were not material in the firstnine months of fiscal year 2004. Although the materiality of future expenditures for environmentalactivities may be affected by the level and type of contamination, the extentand nature of cleanup activities required by governmental authorities, thenature of the Company’s alleged connection to the contaminated sites, thenumber and financial resources of other potentially responsible parties, theavailability of indemnification rights against third parties and theidentification of additional contaminated sites, the Company’s estimated shareof liability, if any, for environmental remediation, including itsindemnification obligations, is not expected to be material.

 

Prior to the Company’s purchase of Century Electric, Inc.(“Century Electric”) in 1986, Century Electric acquired a business fromGould Inc. (“Gould”) in May 1983 that included a leasehold interestin a fractional horsepower electric motor manufacturing facility located inMcMinnville, Tennessee. Gould agreed to indemnify Century Electric from and againstliabilities and expenses arising out of the handling and cleanup of certainwaste materials, including but not limited to cleaning up any polychlorinatedbiphenyls (“PCBs”) at the McMinnville facility (the “1983 Indemnity”).  The presence of PCBs and other substances,including solvents, in the soil and in the groundwater underlying the facilityand in certain offsite soil, sediment and biota samples has been identified.The McMinnville plant is listed as a Tennessee Inactive Hazardous WasteSubstance Site and plant employees were notified of the presence ofcontaminants at the facility. Gould has completed an interim remedialexcavation and disposal of onsite soil containing PCBs and a preliminaryinvestigation and cleanup of certain onsite and offsite contamination. TheCompany believes the cost of further investigation and remediation (includingancillary costs) are covered by the 1983 Indemnity. The

 

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Company sold its leasehold interest in the McMinnville plant in August1999 and while the Company believes that Gould will continue to performsubstantially under its indemnity obligations, Gould’s substantial failure toperform such obligations could have a material adverse effect on the Company’sfinancial position, cash flows or results of operations.

 

The Company acquired the stock of Universal Manufacturing Company(“Universal”) from a predecessor of Fruit of the Loom (“FOL”), and thepredecessor agreed to indemnify the Company against certain environmental liabilitiesarising from pre-acquisition activities. Environmental liabilities covered bythe indemnification agreement include completion of additional cleanupactivities, if any, at the Bridgeport, Connecticut facility (sold in connectionwith the sale of the transformer business in June 2001) and defense andindemnification against liability related to offsite disposal locations whereMagnetek may have a share of potential response costs. In 1999 FOL filed apetition for Reorganization under Chapter 11 of the Bankruptcy Code and theCompany filed a proof of claim in the proceeding for obligations related to theenvironmental indemnification agreement. In November 2001, the Company and FOLentered into an agreement involving the allocation of certain potential taxcredits and Magnetek withdrew its claims in the bankruptcy proceeding.  Although the Company believes that FOL hassubstantially completed the obligations required by the indemnificationagreement, its ability to set aside any remaining obligations to the states ofConnecticut and New Jersey through bankruptcy, or the discovery of additionalenvironmental contamination at the Bridgeport facility could have a materialadverse effect on the Company’s financial position or results of operations.

 

5.                                       ComprehensiveLoss

 

For the fiscalquarters and nine months to date ended March 31, 2004 and 2003, comprehensiveloss consisted of the following:

 
|                            |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|---------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                            |   | **2004**                           |   | **2003**                          |   | **2004** |   | **2003** |   |
| Net income (loss)               |   | $                                  | 153    |                              | $      | (5,410 | ) | $ | (7,534 | ) | $ | (29,852 | ) |
| Currency translation adjustment |   | (1,786                             | )      | 1,754                             |   | 3,601 |   | 3,503 |   |
| Comprehensive loss              |   | $                                  | (1,633 | )                                 | $      | (3,656 | ) | $ | (3,933 | ) | $ | (26,349 | ) |

 

6.                                       Earnings(Loss) Per Share

 

The followingtable sets forth the computation of basic and diluted earnings (loss) pershare.

 
|                                                                |   | **Three  Months  Ended March 31** |   | **Nine  Months Ended  Ended March 31** |   |
|---------------------------------------------------------------------|--------|-----------------------------------|--------|----------------------------------------|--------|
|                                                                |   | **2004**                          |   | **2003**                               |   | **2004** |   | **2003** |   |
| **Numerator:**                                                      |   |                              |   |                                   |   |   |   |   |   |
| Net income (loss)                                                   |   | $                                 | 153    |                                   | $      | (5,410 | ) | $ | (7,534 | ) | $ | (29,852 | ) |
| **Denominator:**                                                    |   |                              |   |                                   |   |   |   |   |   |
| Weighted average shares used to compute  basic earnings per share   |   | 28,469                            |   | 23,652                                 |   | 26,629 |   | 23,633 |   |
| Add dilutive effect of stock options  outstanding                   |   | 486                               |   | —                                 |   | — |   | — |   |
| Weighted average shares used to compute  diluted earnings per share |   | 28,955                            |   | 23,652                                 |   | 26,629 |   | 23,633 |   |
|                                                                |   |                              |   |                                   |   |   |   |   |   |
| **Net income (loss) per share:**                                    |   |                              |   |                                   |   |   |   |   |   |
| Basic                                                               |   | $                                 | 0.01   |                                   | $      | (0.23 | ) | $ | (0.28 | ) | $ | (1.26 | ) |
| Diluted                                                             |   | $                                 | 0.01   |                                   | $      | (0.23 | ) | $ | (0.28 | ) | $ | (1.26 | ) |

 

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The dilutiveeffect of stock options outstanding at March 31, 2004 and 2003 was not includedin the calculation of dilutive loss per share for the three-month period endedMarch 31, 2003, and the nine-month periods ended March 31, 2004 and 2003.  The Company had a net loss for each of theseperiods, and as a result, inclusion of the dilutive effect of stock optionswould have had an anti-dilutive impact.

 

7.                                       Goodwill

 

The changes in thecarrying value of goodwill by reporting unit are as follows:

 
|                                              |   | **Telecom  Power** |   | **Power  Electronics** |   | **Industrial  Controls** |   | **Total** |   |
|---------------------------------------------------|--------|--------------------|--------|------------------------|--------|--------------------------|--------|-----------|--------|
|                                              |   |               |   |                   |   |                     |   |      |   |
| **Balance at June 30, 2003**                      |   | $                  | — |                   | $      | 35,058                   |   | $         | 28,009 |   | $ | 63,067 |   |
|                                              |   |               |   |                   |   |                     |   |      |   |
| Purchase price adjustments and  reclassifications |   | —             |   | —                 |   | 29                       |   | 29        |   |
|                                              |   |               |   |                   |   |                     |   |      |   |
| Currency translation                              |   | —             |   | 697                    |   | 22                       |   | 719       |   |
|                                              |   |               |   |                   |   |                     |   |      |   |
| **Balance at March 31, 2004**                     |   | $                  | — |                   | $      | 35,755                   |   | $         | 28,060 |   | $ | 63,815 |   |

 

8.                                       Warranties

 

The Company offerswarranties for certain products that it manufactures, with the warranty termgenerally ranging from one to two years. Warranty reserves are established for costs expected to be incurredafter the sale and delivery of products under warranty, based mainly on knownproduct failures and historical experience. Actual repair costs incurred for products under warranty are chargedagainst the established reserve balance as incurred.  Changes in the warranty reserve for the nine months ended March31, 2004 were as follows:

 
|                                                  |   | **Warranty  Reserve** |   |
|-------------------------------------------------------|--------|-----------------------|--------|
| Balance, June 30, 2003                                |   | $                     | 503    |   |
| Additions charged to earnings for product  warranties |   | 8                     |   |
| Use of reserve for warranty obligations               |   | (29                   | )      |
| Decrease to pre-existing warranties                   |   | (77                   | )      |
| Balance, March 31, 2004                               |   | $                     | 405    |   |

 

Warranty reserves areincluded in accrued liabilities in the condensed consolidated balance sheets.

 

9.                                       Restructuring Costs

 

The Company beganrestructuring activities during the second quarter of fiscal 2004, whichinclude a workforce reduction of approximately 200 positions in Europe and therelocation of those positions to lower cost facilities in Eastern Europe andChina.  The total cost of all restructuringactivities is estimated at $1.6 million, related to employee severance andlease termination costs.  The Companyexpects to complete these restructuring activities by the end of calendar 2004.  Costs incurred to date are $0.4 million and$1.0 million respectively for the three-month and nine-month periods endedMarch 31, 2004, and are included in selling, general and administrative expensein the accompanying condensed consolidated statements of operations.

 

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10.                                 Pension Expense

 

For the three- andnine-month periods ended March 31, 2004 and 2003, pension expense related tothe Company’s defined benefit pension plan consisted of the following:

 
|                               |   | **Three  Months  Ended March 31** |   | **Nine  Months Ended  Ended March 31** |   |
|------------------------------------|--------|-----------------------------------|--------|----------------------------------------|--------|
|                               |   | **2004**                          |   | **2003**                               |   | **2004** |   | **2003** |   |
| Service cost                       |   | $                                 | — |                                   | $      | 167 |   | $ | — |   | $ | 502 |   |
| Interest cost                      |   | 2,563                             |   | 2,719                                  |   | 7,688 |   | 8,158 |   |
| Expected return on plan assets     |   | (2,649                            | )      | (3,125                                 | )      | (7,947 | ) | (9,375 | ) |
| Amortization of prior service cost |   | —                            |   | 13                                     |   | — |   | 38 |   |
| Recognized net actuarial losses    |   | 885                               |   | 559                                    |   | 2,654 |   | 1,676 |   |
|                               |   |                              |   |                                   |   |   |   |   |   |
| Total net pension expense          |   | $                                 | 799    |                                   | $      | 333 |   | $ | 2,395 |   | $ | 999 |   |

 

The Company contributed535,000 shares of its common stock, valued at approximately $2.4 million, tothe plan during the first quarter of fiscal 2004.  No additional contributions are anticipated for the remainder offiscal 2004.

 

ITEM 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OFOPERATIONS AND FINANCIAL CONDITION

 

Overview

 

We are a global providerof digital power-electronic products, including electronic converters,inverters, rectifiers and systems. These products are used primarily in industrial, telecommunications,data processing, consumer, imaging, alternative energy, power generation andother applications requiring precise, efficient, reliable power.  We believe that with our technical andproductive resources, we are well positioned to respond to increasing demandfor such power.  We operate in a singlebusiness segment, Digital Power Products, which includes two broad productcategories, Power Control Systems and Power Control Products.

 

Our power control systemsconsist primarily of programmable motion control and power conditioning systemsand include: alternating current (AC) and direct current (DC) variable-frequencymotor drives, fuel cell power inverters and telecom power plants.  Our power systems also include complete DCpower systems for telecom and networking applications.

 

Our embedded powercontrol products, which are sold to original equipment manufacturers forinstallation in their products, include: AC-to-DC switching power supplies,AC-to-DC rectifiers and battery chargers, DC to-DC power converters, DC-to-ACpower inverters and peripheral component interconnects.  These products are used primarily intelecommunications (telecom), data processing and storage, digital imaging,semiconductor processing and testing equipment, medical instrumentation andhome appliances.

 

CriticalAccounting Policies

 

The followingdiscussion and analysis of our financial condition and results of operations isbased upon our condensed consolidated financial statements.  In preparing financial statements inconformity with accounting principles generally accepted in the United States,we must make estimates and assumptions that affect the reported amount ofassets and liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities at the date of our financial statements.  Such estimates are based upon

 

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historicalexperience and other assumptions believed to be reasonable given knowncircumstances.  Actual results coulddiffer from those estimates.  On anongoing basis, we evaluate and update our estimates, including those related toaccounting for inventories, goodwill, pension benefits, reserves for litigationand environmental issues and income taxes. We consider the following policies critical to understanding ourfinancial position and results of operations.

 

*Inventories*

 

Our inventories are stated at the lower of cost ormarket.  Cost is determined by thefirst-in, first-out (FIFO) method, including material, labor and factoryoverhead.  We identify potentiallyobsolete and excess inventory by evaluating overall inventory levels inrelation to expected future requirements and market conditions, and provisionsfor excess and obsolete inventory and inventory valuation are recordedaccordingly.  In assessing the ultimaterealization of inventories, we are required to make judgments as to futuredemand requirements and compare those with the current or committed inventorylevels.  If future demand requirementsare less favorable than those we project, additional inventory write-downs maybe required.

 

*Long-Lived Assets and Goodwill*

 

We periodically evaluatethe recoverability of our long-lived assets, including property, plant andequipment.  Impairment charges arerecorded in operating results when the undiscounted future expected cash flowsderived from an asset are less than the carrying value of the asset.

 

We also periodicallyevaluate the carrying value of goodwill for impairment.  We have identified our Telecom Power, PowerElectronics and Industrial Controls groups as reporting units under SFAS No.142.  In assessing potential impairment,we make significant estimates and assumptions regarding the discounted futurecash flows of our identified reporting units to determine the fair value ofthose reporting units.    Such estimatesinclude, but are not limited to, projected future operating results, workingcapital ratios, cash flow, market discount rates and tax rates.  If these estimates change in the future, orif actual circumstances vary significantly from these assumptions, this could resultin additional goodwill impairment charges.

 

*Pension Benefits*

 

The valuation of our pension plan requires the use ofassumptions and estimates to develop actuarial valuations of expenses, assetsand liabilities.  These assumptionsinclude discount rates, investment returns and mortality rates.  Changes in assumptions, or significantdifferences between actual future discount rates, investments returns andmortality rates from those assumptions, could potentially have a materialimpact on our expenses and related funding requirements.

 

*Reservesfor Litigation and Environmental Issues*

 

We periodically recordthe estimated impacts of various conditions, situations or circumstancesinvolving uncertain outcomes.  Theaccounting for such events is prescribed under SFAS No. 5, “Accounting forContingencies.”  SFAS No. 5 defines acontingency as “an existing condition, situation, or set of circumstancesinvolving uncertainty as to possible gain or loss to an enterprise that willultimately be resolved when one or more future events occur or fail to occur.”

 

SFAS No. 5 does not permit the accrual of gaincontingencies under any circumstances. For loss contingencies, the loss must be accrued if (1) information isavailable that indicates it is probable that the loss has been incurred, giventhe likelihood of uncertain events; and (2) that the amount of the loss can bereasonably estimated.

 

The accrual of a contingency involves considerable judgment on ourpart.  We use our internal expertise,and outside experts as necessary, to help estimate the probability that a losshas been incurred and the amount (or range) of the loss.

 

*Income Taxes*

 

We record deferred income tax assets in tax jurisdictions where wegenerate losses for income tax purposes. We also record valuation allowances against these deferred tax assets inaccordance with SFAS No. 109,

 

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“Accounting for Income Taxes”, when, in our judgment, the deferredincome tax assets will likely not be realized in the foreseeable future.

 

Results of Operations forThree Months Ended March 31, 2004 and 2003

 

Net Sales and GrossProfit

 

Net sales for the thirdquarter of fiscal 2004 were $64.8 million, an increase of 21.8% from the thirdquarter of fiscal 2003 sales of $53.2 million. The increase is due to higher sales of embedded power supplies andcurrency translation impact from the stronger Euro, partially offset by lowertelecom service revenue.  We divestedour telecom service business midway through the first quarter of fiscal2004.  We continued to focus on gainingshare in systems markets and on new product introductions in industrial,consumer and alternative energy markets, as well as developing our distributionchannel.  Our bookings in the thirdquarter of fiscal 2004 were $73.2 million, an increase of 27.3% over thirdquarter fiscal 2003 bookings of $57.5 million. We expect our fourth quarter net sales to increase over the thirdquarter due to increased demand for our embedded power supplies, increased netsales through our distribution channel, and new product introductions.  We did however begin to experience longerlead times for certain purchased components that could limit the rate ofincrease in sales in the fourth quarter.

 

Our third quarter fiscal2004 gross profit was $15.6 million versus $10.3 million in the third quarterof fiscal 2003.  As a percentage of netsales, gross profit increased to 24.0% in the third quarter of fiscal 2004 from19.4% in the same period in fiscal 2003. The improvement in gross profit is due to the increase in power supplyunit volumes, selected price increases, cost advantages from our manufacturingfacility in China, and the sale of our telecom service business, whichnegatively impacted third quarter fiscal 2003 gross profit.  These benefits were partially offset by thestrength in the Euro relative to the U.S. dollar which compressed gross profitson sales from our European subsidiary denominated in U.S. dollars in fiscal2004 as compared to fiscal 2003.

 

Research and Development,Selling, General and Administrative

 

We continued to increasethe amount invested in research and development (R&D).  R&D expense was $3.6 million, or 5.5% ofsales, in the third quarter of fiscal 2004 compared to $3.0 million, or 5.6% ofsales, in the third quarter of fiscal 2003. We increased spending in newproduct development aimed at emerging alternative energy markets, and alsocontinued to invest in new power-electronic platforms and applications andexpand the breadth of existing product lines in established markets.

 

Selling,general and administrative (SG&A) expense was $11.3 million (17.5% ofsales) in the third quarter of fiscal 2004 versus $10.2 million (19.1% ofsales) in the third quarter of fiscal 2003. Our third quarter fiscal 2004 selling expenses were $4.2 million versus$4.4 million in the third quarter of fiscal 2003.  The decrease was due to the divestiture of our telecom servicebusiness in July 2003 and cost reduction actions in our remaining telecomsystems business, partially offset by volume-related selling expenses andcurrency translation.  General andadministrative (G&A) expense increased to $7.1 million in the third quarterof fiscal 2004 from $5.8 million in the third quarter of fiscal 2003, due torestructuring expenses related to a plant closure and relocation of $0.4million (see Note 9 of Notes to Condensed Consolidated Financial Statements),higher pension and other employee-related expenses, increased professional feesand currency translation.

 

## Income (Loss) from Operations

 

Income from operationsimproved to an operating income of $0.7 million for the third quarter of fiscal2004 from an operating loss of $2.8 million for the same period in fiscal 2003,due mainly to the increase in gross profit partially offset by increases inR&D and SG&A expenses.

 

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Interest and OtherExpense

 

Net interest expense was$0.5 million in the third quarter of fiscal 2004 compared to net interestexpense of $0.6 million in the third quarter of fiscal 2003.  Other expense in the third quarter of fiscal2003 includes a $3.3 million charge for settlement of litigation.

 

Net Income (Loss)

 

We recorded an after-taxincome of $0.2 million in the third quarter of fiscal 2004, compared to anafter-tax loss of $5.4 million in the third quarter of fiscal 2003.  Due to the year-to-date pretax loss, we didnot record any tax provision in the third quarter of fiscal 2004, while the taxbenefit in the third quarter of fiscal 2003 was $1.3 million (19% effectiverate).

 

Results of Operations for Nine Months Ended March 31, 2004 and 2003

 

## Net Sales and Gross Profit

 

Our net salesfor the first nine months of fiscal 2004 were $173.3 million, a 17.7% increasefrom sales of $147.3 million for the first nine months of fiscal 2003.  The increase was due to higher sales ofembedded power supplies, currency translation due to the strength of the Euro,the acquisition of MXT Holdings, Inc. in January 2003 (operating under the nameTelemotive), and growth in sales in consumer markets, partially offset by thedivestiture of our telecom service business in the first quarter of fiscal2004.

 

Our fiscal 2004 grossprofit for the first nine months was $38.8 million, or 22.4% of sales, versus$26.4 million, or 17.9% of sales, in the first nine months of fiscal 2003.  The gross profit for the first nine monthsof fiscal 2003 reflects a charge of $4.7 million to write down the value oftelecom-related inventory.  Excluding thischarge, gross profit for the period would have been $31.1 million, or 21.1% ofsales.  The increase in gross profit wasdue to higher power supply unit volumes, selected price increases, and thetransfer of certain product lines to our lower cost manufacturing facility inChina, partially offset by the strength of the Euro relative to the U.S.dollar, which compressed gross profits on sales from our European subsidiarydenominated in U.S. dollars.

 

## Research and Development, Selling, General andAdministrative

 

R&D expense was $9.7million, or 5.6% of sales, in the first nine months of fiscal 2004 compared to$8.5 million, or 5.7% of sales, in the first nine months of fiscal 2003.  For the first nine months of fiscal 2004, weincreased spending in new product development aimed at alternative energymarkets.  In addition, we continued toinvest in new power-electronic platforms and applications and expand thebreadth of existing product lines.

 

SG&Aexpense was $35.1 million, or 20.2% of sales, for the first nine months offiscal 2004 versus $29.6 million, or 20.1% of sales, for the first nine monthsof fiscal 2003.  Fiscal 2004 sellingexpenses were $12.8 million for the first nine months, nearly equivalent to thefirst nine months of fiscal 2003, as increases due to volume-related sellingexpenses, the acquisition of Telemotive and currency translation were offset byheadcount reductions in our telecom systems business and the divestiture of ourtelecom service business.  G&Aexpense was $22.3 million for the first nine months of fiscal 2004 compared to$16.9 million for the first nine months of fiscal 2003.  The increase in G&A expense of $5.4million was due to a $1.7 million charge to write down the value of accountsreceivable related to a customer bankruptcy, restructuring expenses related toplant closure and relocation of $1.0 million (see Note 9 of Notes to CondensedConsolidated Financial Statements), higher pension and other employee-relatedexpenses, and currency translation, partially offset by lower G&A expensein our telecom business, due to the divestiture of our telecom service businessand headcount reductions.

 

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## Gain from Termination of Retiree Medical Plan

 

Fiscal 2003 results forthe first nine months include a nonrecurring pre-tax gain of $27.8 millionrelated to the termination in the first quarter of fiscal 2003 of our retireemedical plan.  The financial impact infuture fiscal quarters subsequent to the first quarter of fiscal 2003 has beena reduction of income from operations of approximately $0.4 million, due toelimination of the amortization credit associated with the related liability.

 

## Goodwill and Fixed Asset Impairment 

 

During thesecond quarter of fiscal 2003, we determined that there were indicators ofimpairment in the carrying value of goodwill, based on the decline in ourmarket capitalization and the continued decline in the telecommunicationsindustry at that time.  We performed aninterim impairment test in accordance with SFAS 142 based on forecasted operatingresults and cash flows, and we recorded a $33.4 million goodwill impairmentcharge.  The charge related exclusivelyto our telecommunications business and effectively reduced the carrying valueof goodwill for that business to zero.

 

We alsoperformed an impairment review of our long-lived assets in accordance with SFAS144.  Based upon utilization and marketvalues of certain fixed assets at that time, notably in our telecommunicationsbusiness, we recorded a $0.6 million impairment charge to reduce the carryingvalue of those assets.

 

## Loss from Operations

 

As a result of the abovefactors, our loss from operations for the nine months ended March 31, 2004 was$5.9 million versus a loss from operations for the nine months ended March 31,2003 of $17.9 million.  The reduction inour loss from operations was due mainly to increased gross profit from highersales in the first nine months of fiscal 2004 and asset impairment charges inthe first nine months of fiscal 2003 that did not recur in fiscal 2004.

 

Interest and OtherExpense

 

Interest and otherexpense was $1.6 million for the first nine months of fiscal 2004, comprised of$1.1 million in interest expense and $0.5 million due to amortization ofdeferred financing charges, compared to interest and other expense of $4.3million for the same period in fiscal 2003. Interest and other expense in fiscal 2003 includes a $3.3 million chargefor settlement of litigation, $0.8 million in interest expense and $0.2 millionin amortization of deferred financing. The increase in interest expense over the prior year is attributable tohigher outstanding debt balances during the first nine months of fiscal 2004,while the increase in amortization of deferred financing was due to theaccelerated write off of balances under our prior bank agreement upon replacementwith a new credit agreement (see “Liquidity and Capital Resources”).

 

Net Loss

 

Net loss for the firstnine months of fiscal 2004 was $7.5 million compared to a net loss of $29.9million for the first nine months of fiscal 2003.  The net loss for the first nine months of fiscal 2003 includedthe impact of both the nonrecurring gain and the impairment charges.  Excluding the impact of the nonrecurringgain, the telecom-related asset write-downs and impairment charges, and thecharge for settlement of litigation, we would have recorded an after-tax lossof $4.8 million for the first nine months of fiscal 2003.  We did not record any tax benefit related toour losses in the first nine months of fiscal 2004 due to the uncertainty inrealizing those benefits.  The taxprovision for the first nine months of fiscal 2003 was $7.6 million.  While we recorded a pretax operating loss of$22.2 million for the first nine months of fiscal 2003, we also recorded a taxprovision during the same period, associated mainly with the $27.8 millionnonrecurring gain recorded in the first quarter of fiscal 2003. There was notax benefit associated with the $33.4 million goodwill impairment chargerecorded in the second quarter of fiscal 2003, as the goodwill was notdeductible for income tax purposes.

 

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Liquidity and CapitalResources

 

Our cash balancedecreased $0.5 million to $1.2 million at March 31, 2004 from $1.7 million atJune 30, 2003.  Our primary sources ofcash for the first nine months of fiscal 2004 were proceeds of $18.7 millionfrom the sale of our common stock and proceeds of $1.1 million from the sale ofour telecom service business.  Ourprimary uses of cash for the first nine months of fiscal 2004 were for repaymentof bank obligations of $10.2 million, cash used in operations of $6.0 million,costs incurred in refinancing our bank debt of $0.6 million and capitalexpenditures of $3.5 million.  Weanticipate that our capital expenditures for the fiscal year 2004 will be lessthan $6.0 million.

 

As of March 31, 2004,long-term borrowings including current portion were $16.5 million compared to$26.7 million as of June 30, 2003.  InAugust 2003, we replaced our revolving credit facility with an asset based creditagreement (“Credit Agreement”) for our North American operations.  The aggregate lending commitment under theCredit Agreement is $19.0 million with available borrowings determined by aborrowing base as defined in the agreement, supported by eligible domesticaccounts receivable and inventory. Borrowings under the Credit Agreement bear interest at the bank’s primelending rate plus one percent or, at our option, the London Interbank OfferingRate (LIBOR) plus three and one-quarter percent.  Borrowings under the Credit Agreement are secured bysubstantially all of the Company’s North American assets.  This facility also supports the issuance ofletters of credit.  As of March 31,2004, we had $13.1 million of available borrowing capacity, with $2.8 million ofborrowings outstanding, under the facility.

 

Additionally, ourEuropean subsidiary maintains revolving borrowing arrangements with localbanks, primarily to support working capital needs.  Available borrowings under these arrangements aggregate approximatelyEuro 20.0 million depending in part upon levels of accounts receivable, andbear interest at various rates ranging from 2% to 8%.  During the first quarter of fiscal 2004, our European subsidiaryentered into a ten-year agreement with a European bank to provide borrowingssecured by the subsidiary’s land and building. Borrowings under this agreement bear interest at EURIBOR plus one andone-half percent.  The initial commitmentto lend under this agreement is Euro 7.0 million, with the commitment reducedratably on a quarterly basis beginning March 31, 2004 and ending September 30,2013.  Amounts outstanding at March 31,2004 under all of our European bank lending agreements were $7.2 million.

 

As a result of thedecline in interest rates and stock market equity values over the past twoyears, the accumulated benefit obligation of our defined benefit pension planexceeds plan assets as of March 31, 2004. The amount and timing of future contributions to the plan are dependentupon values in equity and fixed income markets, and to a lesser extent, thelevel of interest rates.  While nocontributions were mandated, we did elect to contribute 535,000 shares of ourcommon stock, valued at approximately $2.4 million, to the plan during thefirst quarter of fiscal 2004.

 

On October 8,2003, we entered into agreements with a small number of investors for them topurchase 4.2 million shares of our common stock at a discount of 8% from the$5.10 closing price on that date.  OnOctober 17, 2003 we issued the shares, receiving aggregate proceeds, net offees and expenses, of approximately $18.5 million.  The proceeds were used to repay debt.  We have registered the shares for resale.

 

Based upon current plansand business conditions, management believes that borrowing capacity under ourrevolving loan facilities and internally generated cash flows will besufficient to fund anticipated working capital needs, capital expenditures, andother near-term commitments during the next twelve months.

 

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ITEM 3

 

## QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKETRISK

 

We are exposed to market risks in the areas of foreignexchange and interest rates.  Tomitigate the effect of such risks, we selectively use specific financialinstruments. Hedging transactions can be entered into under Company policiesand procedures and are monitored monthly. Our policy clearly prohibits the useof such financial instruments for trading or speculative purposes.  There have been no material changes in thereported market risks since that reported in our Annual Report on Form 10-Kdated June 30, 2003.

 

Interest Rates

 

The fair value of our debt was $16.5 million at March 31, 2004.  The fair value of our debt is equal to theborrowings outstanding from domestic and foreign banks and small amounts owedunder capital lease and note arrangements. Prospectively, we do not considerthere to be material risk due to changes in the interest rate structure ofborrowing rates applicable to such debt. For our debt outstanding at March 31,2004, a hypothetical 10% adverse change in interest rates would not have had amaterial impact on our pre-tax earnings and cash flow due to relatively lowvariable interest rates.

 

Foreign Currency Exchange Rates

 

We may selectively enter into foreign exchange contracts to hedgecertain exposures in Europe.  A portionof our products are manufactured in Europe and sold in the U.S.  Many of these sales to U.S. customers aredenominated in U.S. dollars.  As aresult, our financial results could be significantly impacted by changes inexchange rates, particularly the exchange rate between the U.S. dollar and theEuro.  Our exposure on sales by ourEuropean subsidiaries consists of (1) the exposure related to a weakening U.S.dollar for U.S. dollar denominated sales, as most of our European subsidiaries’costs are in Euro; in the event of a weakening U.S. dollar, locally recordedsales in the functional currency (the Euro) are decreased, (2) the exposurerelated to a weakening U.S. dollar when payment of U.S. dollar receivables arereceived from customers, resulting in less local currency than was originallyrecorded at the date of sale, and (3) the exposure that upon translation of thesubsidiaries’ periodic financial statements, a weakening local currency wouldresult in lower reported sales in U.S. dollars than if the local currency hadbeen stable relative to the U.S. dollar. In the latter case, operating expenses would also be translated at thelower amount and accordingly, the effect on net income would be mitigated.  We had no foreign currency contractsoutstanding at March 31, 2004.

 

ITEM4

 

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Wehave evaluated, under the supervision and with the participation of management,including our Chief Executive Officer and Chief Financial Officer, theeffectiveness of the design and operation of our disclosure controls andprocedures (as that term is defined under Rule 13a-15(e) and Rule 15d-15(e) ofthe Securities Exchange Act of 1934) and our internal control over financialreporting (as that term is defined under Rule 13a-15(f) and Rule 15d-15(f)under the Securities Exchange Act of 1934). The controls and procedures are designed to ensure that material informationrelating to us, including our subsidiaries, is made known to us.  Procedures related to internal control overfinancial reporting are designed to provide reasonable assurances regarding thereliability of our reporting and preparation of financial statements inaccordance with generally accepted accounting principles.  Based upon this evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that, as of ourthird quarter ended March 31, 2004, our disclosure controls and proceduresare effective in timely alerting them to material information relating to usand required to be included in our periodic SEC filings.

 

Changes in Internal Controls

 

Therewas no change in our internal control over financial reporting thatoccurred during our third quarter ended March 31, 2004 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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PART II                                                    OTHERINFORMATION

 

ITEM 1.                                                     LegalProceedings

 

See Part I, Item 1, Note4.

 

ITEM 6.                                                     Exhibits and Reports on Form 8-K

 

(a)                                  Index to Exhibits

 
| 31.1   |   | Certification of the Chief Executive Officer  pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934                                         |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                    |
| 31.2   |   | Certification of the Chief Financial Officer  pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934                                         |
|   |   |                                                                                                                                                    |
| 32.1   |   | Certification of the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                                    |
| 32.2   |   | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

(b)                                 Reports on Form 8-K

 

Form 8-K filed January30, 2004, Press release announcing fiscal 2004 second quarter results.

 

 

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: May 14, 2004 |   | /s/ DAVID P. REILAND                                                          |   |
|               |   |                                                                          |
|               |   | David P. Reiland                                                              |
|               |   | Executive Vice President  and Chief Financial Officer                         |
|               |   | (Duly authorized officer of the  registrant and principal  financial officer) |
|                    |        |                                                                               |  |  |

 

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