Magnetek: Q3 Results
MENOMONEE FALLS, Wis. - Magnetek, Inc. reported the results of its third quarter of fiscal year 2014, ended September 28, 2014.
Third Quarter Results
In the third quarter of fiscal 2014, Magnetek recorded revenue of $29.6 million, a $3.6 million increase over prior year third quarter sales of $26.0 million. The year-over-year increase was mainly due to higher sales into material handling markets, which increased $2.3 million to $21.9 million, and higher sales into elevator markets, which increased $1.0 million to $6.2 million. Operating income 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, third quarter earnings per share from continuing operations increased to $.88 per share compared to prior year earnings from continuing operations of $.39 per share.
“The improvements we saw in end market conditions in our second quarter continued into the third quarter, and manufacturing activity in the U.S. continued to accelerate. The combination of higher sales volume, cost control, and strong execution resulted in exceptional profitability at both the gross profit and operating profit lines,” said Peter McCormick, Magnetek’s president and chief executive officer.
Gross profit amounted to $10.9 million (36.9% of sales) in the third quarter of 2014 versus $9.2 million (35.3% of sales) in the same period a year ago. The increase in gross profit and gross margin as a percentage of sales was primarily due to higher sales volumes in the current year, as well as selective pricing and cost actions implemented over the past several quarters.
Total operating expenses, consisting of research and development, pension expense, and selling, general and administrative costs, were $7.6 million in the third quarter of 2014, comparable to $7.6 million in the third quarter of fiscal 2013. Compared to the prior year, pension expense of $0.9 million was lower than prior year third quarter pension expense of $1.6 million. However, the lower pension expense was largely offset by increased incentive compensation provisions in the quarter.
Income from continuing operations after provision for income taxes in the third quarter of fiscal 2014 was $3.2 million, or $.88 per diluted share, compared to after-tax income from continuing operations of $1.3 million, or $.39 per diluted share, in the same period last year.
Including the results of discontinued operations, the Company recorded net income of $.88 per diluted share in the third quarter of 2014 versus net income of $.34 per diluted share in the third quarter of fiscal 2013.
Unrestricted cash balances decreased by $3.7 million during the third quarter of fiscal 2014 to $12.2 million at September 28, 2014, reflecting cash contributions of $7.1 million to the Company’s defined benefit pension plan during the third quarter.
Operations and Outlook
Total current year third quarter bookings were $29.6 million, resulting in a book-to-bill ratio for the quarter of 100%, and total Company order backlog was $14.8 million at September 28, 2014.
“Our business continues to have strong momentum as measured by quotations, orders, and sales metrics. While recent economic and political developments have led to increased volatility in financial markets and a sense of growing global economic uncertainties, we haven’t seen any unfavorable impact in our business related to these issues to date. We remain optimistic that economic and manufacturing activity in the U.S. will continue at healthy levels through the remainder of 2014, and as a result, we expect a strong finish to the year,” said Mr. McCormick. “Over the past several quarters, we’ve taken a number of actions to improve the operating leverage in our business and we’ve seen the favorable impact of those actions in our results for the past two quarters. Looking ahead to the fourth quarter, while our sales may decline modestly from the recently completed third quarter, we fully expect that we should again post a healthy year-over-year increase in sales; and operating profit margins, adjusted for pension settlement charges, should again exceed our stated target of 10%,” continued Mr. McCormick (see Pension Update below for a discussion of pension settlement charges).
“Our strategy for some time now has been focused on increasing the value of the Company by growing our sales organically, generating healthy levels of profit and cash flow, and meaningfully reducing our pension obligation. We’ve been successful with these initiatives over time, as demonstrated by the anticipated 5% year-over-year growth in our sales, and we expect continued success beyond 2014. It’s difficult at this point to predict future sales volume beyond the fourth quarter, however, assuming sales levels in 2015 are at a minimum consistent with the current year run rate of about $108 million, we should see further earnings growth next year based on expected lower pension expense and lower tax provisions. We should also be in a position where we’ll have more options in allocating our resources, as our mandatory cash contributions to the pension plan should decline materially after this year,” concluded Mr. McCormick.
As previously disclosed, Magnetek has an underfunded defined benefit pension plan that was frozen in 2003. Based mainly on the number of participants and the persistent low interest rate environment, the Company’s annual pension expense and required minimum contributions to the pension plan have been substantial over the past several years.
Through a combination of contributions to pension assets and positive year-to-date asset returns, the Company’s pension plan assets have increased from $161 million at the beginning of 2014 to $180 million as of the end of September 2014. During the same time, the Company’s estimated pension obligation has remained roughly the same at approximately $210 million, as the negative impact of declining interest rates and imputed interest has been largely offset by benefit payments and changes in interest rate crediting assumptions. As a result, Company management estimates that the Company’s net pension liability has decreased by $18 million in the first nine months of 2014, from $48 million at the beginning of the year to approximately $30 million as of September 28, 2014.
From a funding standpoint, the Company made cash contributions totaling approximately $11 million and also contributed Company common stock valued at more than $7 million to its pension plan during the first nine months of fiscal 2014. Subsequent to the end of the third quarter, in October 2014, the Company made an additional cash contribution of $4 million to its pension plan, which represented the final mandatory contribution for 2014. Based on current actuarial assumptions, future contributions beyond fiscal 2014 to achieve fully funded status are currently estimated at $29 million, a reduction of $14 million from the aggregate funding amounts of $43 million estimated at the beginning of fiscal 2014. Of this total, minimum required contributions are currently estimated at $4 million for fiscal 2015, and then declining to between $2 and $3 million annually for fiscal years 2016 through 2018. The timing of the Company’s required contributions has shifted several years into the future based on the passage by Congress in August 2014 of the Highway and Transportation Funding Act, which included extended pension funding relief.
The Company is currently in the process of offering a lump sum payout of pension benefits (a “lump sum window”) to eligible deferred vested participants. A total of approximately 3,000 participants were offered the lump sum window opportunity. The program, which will be funding neutral, is expected to be completed in December 2014. Preliminary results indicate that approximately 2,100 participants have elected the lump sum option, with a total expected payout of about $43 million. This amount will be paid out of pension assets and the Company’s pension liability will be reduced by a similar amount. The lump sum window will reduce the size, volatility, and mortality risk of the pension plan, result in lower future administrative costs, and ultimately reduce the cost of potential future annuitization of the pension plan. Upon completion of the lump sum window, the Company expects to record a one-time, non-cash settlement charge as a component of pension expense in the fourth quarter of fiscal 2014. The settlement charge represents accelerated amortization of actuarial pension losses which are currently recorded on the Company’s balance sheet in accumulated other comprehensive loss as a reduction in stockholders’ equity. These losses would otherwise be amortized to the income statement over time as a component of pension expense. The settlement charge is expected to be in the range of $30 to $35 million and will impact the Company’s fourth quarter operating results, but will have no impact on the Company’s cash flow or financial position and is expected to reduce future pension expense.
Given the lower pension obligation, the impact of the settlement charge, and current actuarial assumptions, the Company currently expects a reduction in its pension expense for fiscal year 2015 of approximately $1.3 million to $1.7 million from the current year estimated expense of $3.7 million, which in turn, represents approximately $.35 to $.45 on a per share basis.
In addition, given the lower expected pension funding amounts, the Company could begin to generate taxable income in fiscal 2015 and beyond, and could then begin to utilize its substantial net operating loss carry-forward tax benefits.
“Our pension situation has presented us with some interesting challenges over time, consuming the majority of our cash flow for a number of years now. The situation this year has been very dynamic, marked by increasing volatility in financial markets, declining interest rates, heavy contributions to the pension plan, both in the form of cash and stock, and of course the lump sum window,” said Marty Schwenner, Magnetek’s chief financial officer. “Overall we’re very pleased that we were able to achieve a fairly sizable reduction in our pension liability to date despite the negative impact of falling interest rates throughout the year. It’s also very encouraging that both pension expense and pension funding amounts for the next several years appear to be converging at much lower amounts; and we feel the success of the lump sum window has also changed our pension dynamics such that we’re better positioned for the future. While we’ll be recording a settlement charge as part of the lump sum window, it’s important to note that it’s a non-cash charge and actually has a favorable impact on pension expense going forward,” continued Mr. Schwenner. “We’re now focused on finalizing the lump sum window and its impacts, prior to re-measuring our pension at year-end with updated asset and liability balances. In early 2015, we’ll be in a position where we’ll have firmer estimates of future pension expense, funding amounts, and potential annuitization costs, and we intend to provide an update at that time. Provided equity markets and interest rates remain relatively stable for the remainder of the year, we should be looking at some very favorable developments for our future earnings and cash flows,” concluded Mr. Schwenner.
Marty Schwenner, 262-703-4282