Magnetek’s Pending Exit From Power Electronics Business Reflected in Fiscal 2006 Results
Magnetek, Inc. announced its intent to divest its Power Electronics Group (PEG), which manufactures embedded power supplies, in order to raise cash and focus exclusively on its digital Power Control Systems business. On September 28, 2006, the company signed a definitive agreement to sell PEG to Power-One, Inc. for $71.7 million in cash and Power-One's assumption of approximately $16.7 million in debt. The transaction is expected to close by the end of October 2006, subject to the satisfaction of customary closing conditions.
Revenues from the company's continuing operations totaled $83.1 million for the fiscal year ended July 2, 2006, up 9% from $76.0 million in fiscal 2005. The company's losses from continuing operations were $7.1 million or $.25 per share in fiscal 2006 versus $5.5 million or $.19 per share in fiscal 2005. These losses were attributable primarily to pension expenses of $3.7 million in fiscal 2006 and $1.4 million in fiscal 2005, net interest expense of $2.7 million associated with funds held in escrow during 2006 for potential payment of a patent arbitration award, and costs associated with manufacturing relocations in fiscal 2005.
Including $37.8 million in non-cash charges attributed to PEG, the company's loss from discontinued operations was $39.8 million or $1.37 per share in fiscal 2006. In fiscal 2005, discontinued operations lost $21.3 million or $.75 per share, including a charge of $22.0 million related to a patent arbitration award, which Magnetek is currently contesting in court. Borrowed funds held in escrow to pay this award, if necessary, account for most of the increase in long-term debt on the fiscal 2006 year-end Balance Sheet. In total, the company recorded a loss of $46.8 million or $1.62 per share in fiscal 2006, of which $37.8 million was non-cash in nature, versus $26.9 million or $.94 per share in fiscal 2005, of which $22.0 million was non-cash in nature. Pension expenses and net interest on debt amounted to $6.4 million in fiscal 2006 versus $1.8 in fiscal 2005.
Magnetek will use some of the proceeds from the divestiture of PEG to pay down debt. Should the Court in the patent arbitration case referenced above find in Magnetek's favor, $22.0 million in debt will be eliminated, and proceeds from the divestiture will be used to pay off the balance of the company's debt. While the patent in question was recently declared unenforceable in another case before a different judge in the same court, the judge in Magnetek's case has not indicated when his decision may be forthcoming. There can be no certainty that the court's prior declaration will be repeated in the present case.
By divesting PEG, Magnetek is making the transition from, predominantly, a custom components manufacturer to a systems integrator, thus changing its role from one of meeting individual customers' specifications to one of addressing market-defined, market-wide needs. Over the past three years, the company's Power Control Systems business has grown at a compound annual rate of 10%, and its gross profit margins have consistently amounted to more than 30% of sales. The divestiture of PEG will also enable Magnetek to reduce selling, general and administrative expense (SG&A) and interest expense substantially, resulting in positive operating profit and cash flow. The company expects that its net operating loss carry-forwards (NOLs) will allow most of the profits and cash to drop to the bottom line.
