FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________________
Commission file number 1-10233
--------------------
MAGNETEK, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3917584
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
26 Century Blvd.
Nashville, Tennessee 37214
(Address of principal executive offices)
(Zip Code)
(615) 316-5100
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, as of
May 4, 1999: 31,592,706 shares.
PART I. FINANCIAL INFORMATION
In the opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments necessary to fairly present the financial
position as of March 31, 1999 and the results of operations and cash flows for
the three-month and nine-month periods ended March 31, 1999 and 1998. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and notes included in the
Company's latest annual report on Form 10-K. Results for the three-months and
nine-months ended March 31, 1999 are not necessarily indicative of results which
may be experienced for the full fiscal year.
ITEM 1
MAGNETEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 and JUNE 30, 1998
(amounts in thousands)
ASSETS March 31 June 30
----------- ---------
(unaudited)
Current assets:
Cash $ 2,180 $ 5,976
Accounts receivable 203,697 197,284
Inventories 210,262 196,830
Prepaid expenses and other 20,715 17,464
-------- --------
Total current assets 436,854 417,554
-------- --------
Property, plant and equipment 476,215 440,127
Less-accumulated depreciation
and amortization 269,107 243,657
-------- --------
207,108 196,470
-------- --------
Goodwill 52,421 53,576
Deferred financing costs,
intangible and other assets 66,254 63,138
-------- --------
Total Assets $762,637 $730,738
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $112,545 $113,377
Accrued liabilities 90,175 107,539
Current portion of long-term debt 2,564 5,527
-------- --------
Total current liabilities 205,284 226,443
-------- --------
Long-term debt, net of current portion 296,084 239,577
Other long-term obligations 62,392 66,213
Deferred income taxes 9,050 11,784
Commitments and contingencies
Stockholders' equity
Common stock 310 313
Paid in capital in excess of par value 169,996 176,464
Retained earnings 43,710 27,737
Accumulated other comprehensive loss (24,189) (17,793)
-------- --------
Total stockholders' equity 189,827 186,721
-------- --------
Total Liabilities and
Stockholders' Equity $762,637 $730,738
-------- --------
-------- --------
ITEM 1 (Continued)
MAGNETEK, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 1999 and 1998
(amounts in thousands except per share data)
(unaudited)
1999 1998
-------- --------
Net sales $284,804 $303,215
Cost of sales 234,653 245,340
-------- --------
Gross profit 50,151 57,875
Selling, general and administrative 38,385 37,577
-------- --------
Income from operations 11,766 20,298
Interest expense 4,509 3,901
Other expense, net 583 551
-------- --------
Income before provision for
income taxes 6,674 15,846
Income taxes 2,136 5,705
-------- --------
Net income $4,538 $10,141
-------- --------
-------- --------
EARNINGS PER COMMON SHARE
Basic:
Net income $0.15 $0.33
-------- --------
-------- --------
Diluted:
Net income $0.15 $0.32
-------- --------
-------- --------
See accompanying notes
ITEM 1 (Continued)
MAGNETEK, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE NINE MONTHS ENDED
MARCH 31, 1999 and 1998
(amounts in thousands except per share data)
(unaudited)
1999 1998
-------- --------
Net sales $854,176 $888,209
Cost of sales 699,886 714,613
-------- --------
Gross profit 154,290 173,596
Selling, general and administrative 114,447 117,519
-------- --------
Income from operations 39,843 56,077
Interest expense 14,213 12,515
Other expense, net 2,139 1,991
-------- --------
Income before provision
for income taxes 23,491 41,571
Income taxes 7,518 14,966
-------- --------
Net income $15,973 $26,605
-------- --------
-------- --------
EARNINGS PER COMMON SHARE
Basic:
Net income $0.52 $0.88
-------- --------
-------- --------
Diluted:
Net income $0.51 $0.85
-------- --------
-------- --------
See accompanying notes
ITEM 1 (continued)
MAGNETEK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(amounts in thousands)
(unaudited)
1999 1998
-------- --------
Cash flows from operating activities:
Net income $15,973 $26,605
Adjustments to reconcile income to net cash
used in operating activities:
Depreciation and amortization 28,902 29,422
Changes in operating assets and liabilities (57,703) (32,971)
-------- --------
Total adjustments (28,801) ( 3,549)
-------- --------
Net cash provided by (used in) operating activities: (12,828) 23,056
-------- --------
Cash flows from investing activities:
Proceeds from sale of businesses and assets -- 294
Capital expenditures (37,405) (41,753)
Other investments ( 603) 4,865
-------- --------
Net cash used in investing activities (38,008) (36,594)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 857 5,314
Repurchase of common stock ( 7,361) --
Borrowings under bank
and other long-term obligations 53,544 5,073
Increase in deferred financing costs -- ( 102)
-------- --------
Net cash provided by financing activities: 47,040 10,285
-------- --------
Net decrease in cash ( 3,796) (3,253)
Cash at the beginning of period 5,976 6,138
-------- --------
Cash at the end of period $2,180 $2,885
-------- --------
-------- --------
(continued on next page)
ITEM 1 (continued)
MAGNETEK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(amounts in thousands)
(unaudited)
1999 1998
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $14,263 $12,152
Income taxes $ 5,380 $ 1,226
(see accompanying notes)
ITEM 1 (continued)
MAGNETEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(All dollar amounts are in thousands)
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL PERIOD - The Company uses a fifty-two, fifty-three week fiscal
year. Fiscal periods end on the Sunday nearest the end of the month. For
clarity of presentation, all periods are presented as if they ended on
the last day of the calendar period. The three-month and nine-month
periods ended March 31, 1999 and 1998 each contained thirteen weeks and
thirty nine weeks respectively.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of MagneTek, Inc. and its subsidiaries (the
Company). All significant inter-company accounts and transactions have
been eliminated.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and the accompanying notes. Actual results could
differ from these estimates.
EARNINGS PER SHARE - In 1997, the Financial Accounting Standards Board
issued statement of Financial Accounting Standards No. 128, Earnings per
share. Statement 128 replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for all
periods have been presented, and where necessary, restated to conform to
the Statement 128 requirements.
2. INVENTORIES
Inventories at March 31, 1999 and June 30, 1998 consist of the following:
March 31 June 30
-------- -------
Raw materials and stock parts $70,896 $64,714
Work-in-process 40,030 38,620
Finished goods 99,336 93,496
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$210,262 $196,830
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-------- --------
3. COMMITMENTS AND CONTINGENCIES
In April 1998, Ole K. Nilssen filed a lawsuit in the U.S. District Court
for the Northern District of Illinois alleging the Company is infringing
on seven of his patents pertaining to electronic ballast technology. The
plaintiff seeks an unspecified amount of damages and an injunction to
preclude the Company from making, using or selling those products
allegedly infringing his patents. The Company denies that it has
infringed, or is infringing, any of the plaintiff's patents, and has
asserted several affirmative defenses. The Company also filed a
counterclaim seeking judicial declaration that it is not infringing (and
has not infringed) on the patents asserted by the plaintiff, and that
such asserted patents are invalid. The Company intends to defend this
matter vigorously. Due to the early state of the litigation, it is
difficult to predict the outcome of the foregoing legal proceeding.
However, management of the Company does not believe that the financial
impact of such litigation will be material to operating results or the
financial position of the Company.
4. OTHER COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 130 "Reporting Comprehensive Income," as of the first quarter
of fiscal 1999. SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components, however it has no
impact on the Company's net income or stockholders' equity. SFAS 130
requires foreign currency translation adjustments, which, prior to
adoption were reported separately in stockholders equity, to be included
in other comprehensive income. Prior year financial statements have been
restated to conform to the requirements of SFAS 130.
During the third quarter of fiscal 1999, total comprehensive losses were
$87 versus comprehensive income of $8,462 in the third quarter of fiscal
1998. For the first nine months of fiscal 1999 and 1998, comprehensive
income was $9,577 and $24,309 respectively.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share.
FISCAL YEAR FISCAL YEAR
----------------- -----------------
3Q 3Q YTD YTD
1999 1998 1999 1998
---- ---- ---- ----
(in thousands, except per share amounts)
BASIC
Weighted average shares outstanding 30,778 31,101 30,900 30,162
EARNINGS:
Net income $ 4,538 $10,141 $15,973 $26,605
------- ------- ------- -------
Per Share Earnings: $ 0.15 $ 0.33 $ 0.52 $ 0.88
------- ------- ------- -------
------- ------- ------- -------
DILUTED:
Weighted average shares outstanding 30,778 31,101 30,900 30,162
Dilutive stock options based upon the
treasury stock method using the average
market price 108 799 214 1,093
Effect of convertible debt to equity -- -- -- 761
------- ------- ------- -------
Total diluted shares outstanding 30,886 31,900 31,114 32,016
EARNINGS:
Net Income 4,538 10,141 15,973 26,605
Add: Interest savings on convertible debt after tax -- -- -- 466
------- ------- ------- -------
Net income $ 4,538 $10,141 $15,973 $27,071
PER SHARE EARNINGS: $ 0.15 $ 0.32 $ 0.51 $ 0.85
------- ------- ------- -------
------- ------- ------- -------
6. REPOSITIONING COSTS
In fiscal 1996, as a result of significant declines in sales and profit
margins in both electronic and magnetic ballasts, the Company initiated
a review and analysis of actions to reduce costs and improve future
flexibility and profitability, focused to a large extent in its Lighting
products business. Subsequent to review and approval by the Company's
Board of Directors, certain reserves were established and charges
recorded in the year ended June 30, 1996. These charges were associated
with a variety of repositioning actions and included severance,
termination benefits and asset write-downs related to facility closures.
Reserves were also established for estimated increases in warranty
(primarily related to the electronic ballast product line) and other
costs.
As of the end of the third quarter of fiscal 1999, the majority of the
activity associated with these reserves has been completed, with the
exception of those related to warranty claims. The magnitude of warranty
claims incurred since June of 1996 (approximately one-half of the
warranty period), have been significantly less than originally
projected. In addition, the Company has successfully recovered almost
three million dollars from a single vendor in a structured settlement of
a claim made for defective components used in certain of the ballasts.
Approximate net cash outlays related to these reserves for the third
quarter of fiscal 1999 were $2,000. Through the first nine months of
fiscal 1999, approximately $2,200 of cash outlays were incurred and
include approximately $2,000 of warranty related recoveries from a
single vendor in a structured legal settlement.
7. SUBSEQUENT EVENTS
Effective April 26, 1999, the Company sold the assets subject to certain
liabilities of its generator business to Emerson Electric Company for
$115 million. Proceeds from the generator sale were used to reduce
outstanding debt levels. The Company estimates the gain on sale, before
income taxes, to approximate $75 million to $80 million.
ITEM 2
MANAGEMENT DISCUSSION
RESULTS OF OPERATIONS:
THREE MONTHS ENDED MARCH 31, 1999 VS. 1998
NET SALES AND GROSS PROFIT.
MagneTek's net sales for the third quarter of fiscal 1999 were $284.8
million, a 6.1% decrease from the third quarter of fiscal 1998 at $303.2
million. Sales in the Motors and Controls segment declined 4.5% due to
lower sales of generators, direct current, residential fractional
horsepower motors, integral motors, and standard drives products.
Revenues in commercial fractional horsepower motor products increased.
Sales in the Lighting Products segment fell 7.8% primarily due to
domestic sales declines in both magnetic and electronic fluorescent
ballasts. Sales of compact fluorescent and high intensity discharge
ballasts increased from the year earlier quarter. Power Supplies segment
sales fell 7.1%. Excluding sales from the acquisition of Omega Power
Systems, sales declined 12.8%. The reduced sales levels for the Power
Supplies segment were due to lower overall demand from key European
customers.
The Company's gross profit decreased to $50.2 million (17.6% of net
sales) in the third quarter of fiscal 1999 from $57.9 million (19.1% of
net sales) in the third quarter of fiscal 1998. Reduced gross profit
performance occurred primarily in the Motors and Controls segment.
Decreased sales in generators, direct current motors and standard drives
were determining factors as well as continued costs associated with the
transition of selected motor product lines to lower cost facilities.
Pricing in many areas of the motor business remains competitive. While
sales volume for the Lighting Products segment declined 7.8%, gross
profits did not proportionately reflect the revenue loss. Earlier plant
consolidation and transfer of production to Mexico have improved cost
control and flexibility. Gross profits for the Power Supplies segment
declined due to reduced sales for the segment. Additionally, domestic
results reflected manufacturing inefficiencies associated with excess
capacity. Consolidation efforts are currently in process to transfer
capability to a single site for U.S. power supplies production
requirements.
OPERATING EXPENSES.
Selling, general and administrative (SG&A) expense was $38.4 million
(13.5% of net sales) in the third quarter of fiscal 1999 compared to
$37.6 million (12.4% of net sales) in the third quarter of fiscal 1998.
The majority of the increase is attributable to costs associated with
Omega Power Systems which was acquired in June, 1998. Due to the fact
that downward changes in sales volume (e.g. generators) occurred to a
significant degree at accounts with neglible support costs, selling
expenses were less variable than normal.
INTEREST AND OTHER EXPENSE.
Interest expense was $4.5 million in the third quarter of fiscal 1999
compared to $3.9 million in the third quarter of fiscal 1998. The
increase in interest expense reflects increased borrowing associated
with the purchase of Omega Power Systems in June of 1998 and increased
levels of working capital for the overall Company.
NET INCOME.
The Company recorded an after-tax profit of $4.5 million in the third
quarter of fiscal 1999 compared to an after-tax profit of $10.1 million
in the third quarter of fiscal 1998. The tax provision in the third
quarter of fiscal 1999 was $2.1 million (32% effective tax rate) versus
$5.7 million (36% effective tax rate) in the third quarter of fiscal
1998. The lower provision for taxes reflects the Company's projected
lower deferred tax asset valuation requirement and a reduction in
certain foreign tax rates. The Company expects the lower overall rate to
continue for the remainder of the year.
ITEM 2
MANAGEMENT DISCUSSION
RESULTS OF OPERATIONS:
NINE MONTHS ENDED MARCH 31, 1999 VS. 1998
NET SALES AND GROSS PROFIT.
Net sales for MagneTek in the first nine months of fiscal 1999 were
$854.2 million a 3.8% decline from the $888.2 million of sales in the
first nine months of fiscal 1998. Sales in the Lighting Products segment
declined 5.9% due to lower sales in magnetic and electronic fluorescent
ballasts. The lower sales were focused in domestic markets as revenues
in Europe were comparable to prior year results. Power Supply segment
sales increased 2.2%. Excluding sales contributed by the acquisition of
Omega Power Systems, revenues declined 5% for the Power Supplies
segment. Motors and Controls segment sales fell 4% from the year earlier
nine-month period. With the single exception of commercial fractional
horsepower products, all other motor product lines declined from prior
year. Revenues were lower in generators by 15.3% due primarily to
softening foreign demand. Standard drives product revenues slipped 10.6%
from the previous nine-month period.
Gross profits were $154.3 million (18.1% of net sales) in the first nine
months of fiscal 1999 compared to $173.6 million (19.5% of net sales) in
the first nine months of fiscal 1998. Gross profit levels are
unfavorable to prior year in each of the Company's three segments. The
Lighting Products segment gross profit decline was partially offset by
earlier repositioning actions and has mitigated the competitive pricing
environment and reduced sales levels. Motors and Controls gross profits
were adversely impacted by significantly lower sales of generators.
While aggregate motor product sales were higher than the year earlier
period, pricing levels remain competitive. The Power Supplies segment
experienced lower gross profits in both domestic and foreign markets.
Domestic power supplies are transitioning to a single manufacturing
location and have yet to realize cost advantages from consolidation.
OPERATING EXPENSES.
Selling, general and administrative (SG&A) expense was $114.4 million
(13.4% of net sales) in the first nine months of fiscal 1999 compared to
$117.5 million (13.2% of net sales) in the first nine months of fiscal
1998. Overall spending levels related to selling costs were comparable
in the first nine months of fiscal 1999 to the year earlier period.
General and administrative spending was responsible for the improved
performance and was favorably impacted by lower costs associated with
pension expense, variable compensation programs and discretionary
spending (e.g. travel, consulting). The Company continues to incur
expenses for information systems enhancements and upgrades.
INTEREST AND OTHER EXPENSE
Interest expense was $14.2 million in the first nine months of fiscal
1999 compared to $12.5 million in the first nine months of fiscal 1998.
Other expense of $2.1 million in the first nine months of fiscal 1999 is
essentially unchanged from 1998. Higher interest expense for the initial
nine months of fiscal 1999 reflects increased borrowings associated with
the Omega Power Systems acquisition and higher investments in working
capital than in fiscal 1998.
NET INCOME
The Company recorded an after-tax profit of $16.0 million in the first
nine months of fiscal 1999 compared to an after-tax profit of $26.6
million in the first nine months of fiscal 1998. The tax provision in
the first nine months of fiscal 1999 was $7.5 million (32% effective tax
rate) versus $15.0 million (36% effective tax rate) in the first nine
months of fiscal 1998. The Company anticipates this lower overall rate
to continue throughout fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a Bank Loan Agreement which provides for borrowings of up to
$350 million under a revolving loan facility through June, 2002. Borrowings
under the facility bear interest at the bank's prime lending rate or, at the
London Interbank Offered rate plus five eighths of one percent. As of March
31, 1999 the Company had approximately $55 million of available borrowings
under the Bank Loan Agreement. At present, the Bank Loan Agreement provides
both short-term working capital availability and longer-term financing needs
for the Company. The Company's Board of Directors has approved the repurchase
of up the five million shares of its common stock. Through the first nine
months of fiscal 1999, the Company repurchased 633,200 shares for
approximately $7.4 million through open market transactions.
Effective April 26, 1999, the Company sold the assets subject to certain
liabilities of its generator business to Emerson Electric Company for $115
million. Proceeds from the generator sale were used to reduce outstanding
debt levels. The Company estimates the gain on sale, before income taxes, to
approximate $75 million to $80 million.
IMPACT OF YEAR 2000
As previously reported in the 1998 Annual Report, the Company initiated in
fiscal 1997 a comprehensive systems review, which resulted in the purchase of
an Oracle "Enterprise Resource Planning" software package. While the primary
purpose of the software was to improve business processes, it also enables
the Company to resolve Year 2000 issues. Through the first nine months of
fiscal 1999, the Company has completed approximately 75% of its system
conversion. The Company currently expects to complete conversion of all
software to eliminate Year 2000 problems by early in the second half of
calendar 1999. Total costs of the project are anticipated at approximately
$18 million of which approximately $14 million has been cumulatively spent
through March of 1999. Management believes that the likelihood of a material
adverse impact due to problems with internal systems is remote.
The Company has also initiated an evaluation of other potential areas which
could be impacted by the Year 2000 issue. The Company has, and continues to
contact critical suppliers to determine that the products and services they
provide are Year 2000 compliant. These external vendor products and systems
are expected to function properly in the Year 2000. Notwithstanding those
efforts, there can be no assurance that another company's failure to ensure
Year 2000 capability would not have an adverse effect on the Company.
The Company will conduct periodic reviews to monitor implementation plans
associated with the Year 2000 problem. In the event these reviews would
indicate the Company's implementation dates are at risk, contingency plans
will be established.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Item 1, Note 3.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Form 8-K filed May 10, 1999 reporting:
(i) the sale of the Registrants generator business to
Emerson Electric Co; and (ii) the resignation of the
Registrants President and Chief Executive Officer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAGNETEK, INC.
(Registrant)
Date: May 4, 1999 /s/ DAVID P. REILAND
---------------------------------
David P. Reiland
Executive Vice President
and Chief Financial Officer
(Duly authorized officer of the
registrant and principal
financial officer)