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Magnetek: Q2 Results

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MENOMONEE FALLS, Wis. - Magnetek, Inc. reported the results of its second quarter of fiscal year 2014, ended June 29, 2014.

In the second quarter of fiscal 2014, Magnetek recorded revenue of $27.0 million, comparable with sales levels achieved in the second quarter of fiscal 2013. However, both income from operations and earnings per share were up significantly year-over-year, due to improvements in gross margins, effective cost control, and lower pension expense. As a result, second quarter earnings per share from continuing operations increased to $.74 per share compared to prior year earnings from continuing operations of $.36 per share.

“End market conditions improved throughout much of our second quarter, and while our sales level was steady with last year, on a sequential basis our sales were up 12% from our first quarter. Compared to the first quarter, sales for material handling applications, our largest served market, were up nearly 10%, while sales into elevator markets were up 15%. In addition, our second quarter gross margin increased to 36% of sales, and our operating profit margin exceeded our stated target of 10%. In summary, we challenged the organization to improve our operating performance, and our people responded very well, as we not only saw healthy growth in our business, but also controlled our costs and managed our assets quite well,” said Peter McCormick, Magnetek’s president and chief executive officer.

Gross profit amounted to $9.7 million (36.0% of sales) in the second quarter of 2014 versus $9.3 million (34.6% of sales) in the same period a year ago. The increase in gross profit and gross margin was primarily due to improved sales mix, as well as selective pricing and cost actions.

Total operating expenses, consisting of research and development, pension expense, and selling, general and administrative costs, were $7.0 million in the second quarter of 2014, compared to $7.9 million in the second quarter of fiscal 2013. Compared to the prior year, the decrease in operating expenses was mainly due to lower pension expense, lower payroll-related costs, and a favorable adjustment to stock compensation expense, partially offset by increased incentive compensation provisions.

Income from continuing operations after provision for income taxes in the second quarter of fiscal 2014 was $2.5 million, or $.74 per diluted share, compared to after-tax income from continuing operations of $1.2 million, or $.36 per diluted share, in the same period last year.

Including the results of discontinued operations, the Company recorded net income of $.68 per diluted share in the second quarter of 2014 versus net income of $.35 per diluted share in the second quarter of fiscal 2013.

Unrestricted cash balances increased by $0.5 million during the second quarter of fiscal 2014 to $15.9 million at June 29, 2014, reflecting a $4.1 million cash contribution to the Company’s defined benefit pension plan during the second quarter.

Operations and Outlook

Total second quarter 2014 bookings were $27.4 million, resulting in a book-to-bill ratio for the quarter of 102%, and total Company order backlog was $14.8 million at June 29, 2014.

“Business conditions in most of our end markets improved during the quarter, as the momentum we experienced late in the first quarter continued into the second quarter. We’re optimistic that economic activity will continue to show modest improvement through the remainder of 2014. Over the past several quarters, we’ve continued to take actions to better align our cost structure with current sales volumes, improving the operating leverage in our business, and we saw the impact of those actions in our second quarter results. If we’re able to maintain current incoming order rates throughout the third quarter, we should be able to post quarterly operating results in the second half of the year similar to the results of the second quarter,” said Mr. McCormick. “From a longer-term perspective, our strategy has been focused around increasing the value of the Company by growing organically, consistently generating healthy levels of cash, as well as reducing our pension obligation; and we’ve done well with these initiatives over time. For example, over the past 7 years, we’ve generated $88 million of adjusted EBITDA, and have contributed nearly $79 million to our pension plan. We’re finally seeing the benefit of years of significant contributions to our pension plan in the form of a lower pension obligation and reduced pension expense, which has enhanced the value of the Company. The substantial progress we’ve made in improving the health of our pension plan should also significantly reduce future funding amounts beyond 2014, provided interest rates and asset valuations remain relatively stable going forward. Reduced pension funding amounts would in turn provide us with greater resources to reinvest in opportunities aimed at growing our business and increasing profitability. In summary, mid- to longer-term, we continue to believe that we have great opportunities to increase the value of the Company through a combination of steady growth in sales and profits, consistently strong cash flow generation, and further reductions in our pension obligation,” concluded Mr. McCormick.

Pension Update

As previously disclosed, Magnetek has an underfunded defined benefit pension plan that was frozen in 2003. Based mainly on the number of participants and decreasing interest rates over the past several years, the Company’s annual pension expense and required minimum contributions to the pension plan have been significant.

The Company measures its pension annually, on the last day of its fiscal year, and adjusts the reported pension obligation per the balance sheet accordingly. In its Annual Report on Form 10-K for the fiscal year ended December 29, 2013, the Company reported that its pension obligation, as measured on that date, was approximately $48 million, estimated using a discount rate of 4.45%.

During the first six months of 2014, interest rates used to measure pension liabilities decreased approximately 50 basis points. The increase in the Company’s pension obligation resulting from higher interest rates is estimated at approximately $10 million. During the same period, the Company’s pension assets increased by approximately $7 million, from $161 million at the end of December 2013 to $168 million at June 29, 2014. As a result, the Company’s management estimates that the impact of lower interest rates, partially offset by better than expected returns on plan assets during the first half of 2014, have increased the Company’s pension obligation by approximately $3 million, to a total of $51 million as of June 29, 2014.

The Company contributed approximately $4 million to its pension plan during the first six months of 2014, and estimates that minimum required pension contributions will total approximately $11 million for the remainder of fiscal 2014. Beyond the current year, fiscal 2015 and 2016 minimum required contributions are currently estimated at $7 million for each year. The actual timing and amount of future pension plan contributions are dependent upon many factors, including returns on invested assets, the level of certain market interest rates, the discount rate used to determine pension obligations, voluntary contributions the Company may elect to make to the plan, and other potential regulatory actions.

Magnetek, Inc. (MAG) manufactures digital power and motion control systems used in material handling, people moving and energy delivery. The Company is headquartered in Menomonee Falls, Wis. in the greater Milwaukee area and operates manufacturing plants in Pittsburgh, Pa. and Bridgeville, Pa. as well as Menomonee Falls.

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