Overview

Magnetek, Inc. ("Magnetek," "the Company," "we," or "us" ) is a global provider of digital power control systems that are used to control motion and power primarily in material handling, elevator and energy delivery applications. Our systems consist primarily of programmable motion control and power conditioning systems used in the following applications: overhead cranes and hoists; elevators; coal mining equipment; and renewable energy applications, including wind turbines and photovoltaic power systems. We believe that with our technical and productive resources, application expertise, broad product offerings and sales channel capabilities, we are well positioned to respond to increasing demand in our served markets. Our operations are located in North America, predominantly in Menomonee Falls, Wisconsin, our Company headquarters.

Our product offerings for material handling applications include drive systems, radio remote controls, and braking, collision-avoidance, and electrification subsystems, sold primarily to original equipment manufacturers ("OEMs") of overhead cranes and hoists. We have a significant market share in North America in alternating current ("AC") control

systems and believe we have growth opportunities in wireless radio controls, direct current ("DC") control systems for retrofit applications and in automating existing manual material handling processes.

Our product offerings for elevator applications are comprised of highly integrated subsystems and drives used to control motion primarily in high-rise, high speed elevator applications. Our products are sold mainly to elevator OEMs and we have a significant share of the available market for DC drives and subsystems used in high-rise elevators used primarily in retrofit projects. We believe we have opportunities for growth in available elevator markets by introducing new energy-saving product offerings for AC applications, expanding the breadth of our product offerings to include competitive low-end products for lower performance AC applications, and using our new product offerings to expand geographically.

Our product offerings for energy delivery applications include power inverters for renewable energy applications, including wind turbines and photovoltaic installations, which deliver AC power to the utility grid from generators inside wind turbines or from solar panels, or deliver power for consumption at the source. Both the wind and solar markets have grown rapidly in North America over the past several years as both wind and solar power have become increasingly competitive from a cost standpoint with more traditional methods of power generation. However, the ongoing credit crisis has had a worldwide impact on solar and wind projects as these markets are heavily dependent on availability of financing over extended periods of time. Although the slowdown in renewable energy projects negatively impacted demand for our products during fiscal 2009, we continue to believe our product offerings have us well positioned to take advantage of growth in renewable energy markets after credit conditions improve and capital is readily available to fund projects.

Continuing Operations

We focus on a variety of key indicators to monitor our business performance. These indicators include order rates, sales growth, gross profit margin, operating profit margin, net income, earnings per share, and working capital and cash flow measures. These indicators are compared to our operating plans as well as to our prior year actual results, and are used to measure our success relative to our company objectives. Our company objectives are to grow sales at least 10% on a year-over year basis, to achieve 30% gross margins and 10% operating profit margins, and to generate sufficient cash flow to fund our operations and meet our obligations.

The U.S. industrial slowdown and decline in capital spending began to negatively impact our business during the third quarter of fiscal 2009 and continued throughout the first quarter of fiscal 2010. Sales of our material handling product offerings, which comprised nearly 70% of our sales in fiscal 2009, are influenced by cyclical forces in the industrial marketplace, and over the past nine months, we have experienced softening demand in certain of our served markets, mainly in the automotive and primary metals industries. During the first quarter of fiscal 2010, our sales decreased 32% year-over-year to $17.8 million from the first quarter of fiscal 2009 sales of $26.4 million, as sales of material handling products decreased 40% year-over-year.

In response to lower levels of sales and incoming orders, we have reduced our workforce by nearly 60 positions, approximately 16% of our workforce, and implemented a wage and salary freeze that is expected to remain in place throughout fiscal 2010. More recently, we have taken actions to temporarily suspend the Company's 401(k) plan matching contributions and also have changed the method of payment of the Company's incentive compensation plan for fiscal 2010 from cash payments to payment in Company common stock in an effort to preserve cash.

First quarter fiscal 2010 gross margin was 31.5% of sales compared to prior year first quarter gross margin of 35.8%, due mainly to lower sales volume partially offset by savings from cost reduction actions implemented throughout the economic slowdown. We reported an operating loss of $1.3 million for the first quarter of fiscal 2010 compared to a prior year first quarter operating profit of $2.1 million, due mainly to lower sales volume and higher pension expense, which increased by more than $1.2 million in the first quarter of fiscal 2010 over prior year first quarter levels. Also during the first quarter fiscal 2010, our cash balances decreased by more than $2 million after contributing more than $4 million to our defined benefit pension plan.

We believe that future increased profitability is largely dependent upon increased sales revenue, continued improvement in gross margins, and a recovery in the valuation of our pension plan assets, which would favorably impact our periodic pension expense. Our past sales growth has been, and we believe future sales growth will continue to be, dependent on strong demand for material handling products, our customers' ability to obtain financing and willingness to invest in the current economic environment, and successful introduction and increasing acceptance of new products.

While we believe economic conditions will remain challenging throughout much of fiscal 2010, we did see several encouraging signs in the first quarter of fiscal 2010 that lead us to believe our sales and order rates may have reached the low point of the cyclical downturn. Bookings for material handling products have continued to increase throughout fiscal 2010 after reaching a low point in the June quarter. Our incoming order rate was 105% of sales in the first quarter of fiscal 2010, and subsequent to the end of the quarter, we received a follow-on production order for wind power inverters valued at $11.0 million, scheduled for delivery between December 2009 and November 2010. In addition, our backlog is up nearly $2 million to nearly $11.0 million as of September 27, 2009.

Gross margins in our continuing operations have historically been near or above 30% and we are targeting this level of gross margin going forward. Fiscal 2010 first quarter gross margins were 32%, despite lower sales volume, due to the previously mentioned workforce reductions and material cost reductions resulting mainly from product redesign efforts. Further improvement in gross margins is mainly dependent upon favorable economic conditions, continued acceptance of recently introduced product offerings by the marketplace, and ongoing successful cost reduction actions related to recently introduced product offerings.

We intend to focus our development and marketing efforts on internal sales growth opportunities across all product lines, with an emphasis on development and enhancement of energy efficient power control products and systems. While we have continued to focus on controlling our operating expenses, our pension expense is expected to increase to $8.2 million in fiscal 2010 from $3.4 million in fiscal 2009, mainly due to negative returns on plan assets experienced during fiscal 2009. The combination of economic headwinds, lower sales volume and higher pension expense resulted in operating losses in the first quarter of fiscal 2010, and will make it unlikely that we will achieve our goal of 10% operating profit margins for all of fiscal 2010.

Our current outlook projects improving quarterly trends for the remainder of the fiscal year; however, given the nearly unprecedented economic circumstances we've faced over the past year, it is very difficult to predict the magnitude of a potential economic recovery, whether in the U.S. or in the specific end markets we serve.

Discontinued Operations

In the fourth quarter of fiscal 2008, we classified the assets and liabilities of our telecom power systems ("TPS") business as held for sale, and the results of operations of the TPS business as discontinued operations. Our TPS product offerings were focused on providing back-up power for wireless applications. We concluded we could better achieve our sales growth objectives by redirecting certain resources deployed in the TPS business to our product offerings in the material handling, elevator and energy delivery markets. We completed the divestiture of the TPS business during the first quarter of fiscal 2009 (see Note 2 of Notes to Condensed Consolidated Financial Statements).

In addition to the operating results of the divested TPS business, certain expenses related to previously divested businesses have also been classified as discontinued operations in the accompanying condensed consolidated financial statements and footnotes for all periods presented (see Note 2 of Notes to Condensed Consolidated Financial Statements). Expenses related to previously divested businesses have historically included certain expenses for environmental matters, asbestos claims and product liability claims (see Note 4 of Notes to Condensed Consolidated Financial Statements). All of these issues relate to businesses we no longer own and most relate to indemnification agreements we provided when we divested those businesses.

Our results of discontinued operations in future periods may include additional costs incurred related to businesses no longer owned, and may include additional costs above those currently estimated and accrued related to the divestiture of our TPS business and our power electronics business, which was divested in October 2006.

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our Annual Report on Form 10-K for the fiscal year ended June 28, 2009.

Results of Operations - Three Months Ended September 27, 2009 and September 28, 2008

Net Sales and Gross Profit

Net sales for the three months ended September 27, 2009, were $17.8 million, a decrease of 32.3% from the three months ended September 28, 2008, sales of $26.4 million. The decrease in sales was primarily due to lower sales volumes in our material handling product line as a result of the decline in capital spending in North America in recent months. Net sales by product line were as follows, in millions:

                                                  Three Months Ended
                                    September 27, 2009          September 28, 2008
        Material handling         $     10.9           61 %   $     18.4           70 %
        Elevator motion control          5.0           28 %          5.4           20 %
        Energy systems                   1.9           11 %          2.6           10 %
        Total net sales           $     17.8          100 %   $     26.4          100 %

Gross profit for the three months ended September 27, 2009, was $5.6 million, or 31.5% of sales, versus $9.4 million, or 35.8% of sales, for the three months ended September 28, 2008. The decrease in gross profit as a percentage of sales for the three months ended September 27, 2009, as compared to the three months ended September 28, 2008, was due to lower sales volume of higher margin material handling products, partially offset by savings from cost reductions implemented in response to the lower sales volume.

Research and Development, Pension Expense, and Selling, General and Administrative

Research and development ("R&D") expense was $0.9 million, or 5.1% of sales, for the three months ended September 27, 2009, comparable to R&D expense of $0.9 million, or 3.3% of sales, for the three months ended September 28, 2008.

Pension expense was $2.1 million and $0.8 million for the three months ended September 27, 2009 and September 28, 2008, respectively (see Note 8 of Notes to Condensed Consolidated Financial Statements). The increase in pension expense was mainly due to negative returns on plan assets experienced during fiscal 2009.

Selling, general and administrative ("SG&A") expense was $4.0 million (22.2% of sales) for the three months ended September 27, 2009, versus $5.7 million (21.6% of sales) for the three months ended September 28, 2008. Selling expenses in the three months ended September 27, 2009, decreased to $2.0 million from $2.6 million in the three months ended September 28, 2008, due to lower volume-related commissions and lower payroll-related expenses. General and administrative ("G&A") expense decreased to $2.0 million for the three months ended September 27, 2009, from $3.1 million for the three months ended September 28, 2008, mainly due to lower payroll-related costs and lower incentive compensation provisions.

Income (Loss) from Operations

Our loss from operations for the three months ended September 27, 2009, was $1.3 million compared to income from operations of $2.0 million for the three months ended September 28, 2008. The decline in income from operations for the three months ended September 27, 2009, as compared to the three months ended September 28, 2008, was mainly due to lower sales volumes in the three months ended September 27, 2009.

Interest Income

Interest income was negligible for the three months ended September 27, 2009 and September 28, 2008.

Provision for Income Taxes

We recorded income tax provisions of $0.2 million for the three months ended September 27, 2009, and $0.4 million for the three months ended September 28, 2008. The income tax provision in both periods includes non-cash deferred income tax provisions of $0.2 million related to changes in deferred tax liabilities from goodwill amortization for tax purposes.

Income (Loss) from Continuing Operations

We recorded a loss from continuing operations of $1.5 million for the three months ended September 27, 2009, or a $0.05 loss per share on both a basic and diluted basis, compared to income from continuing operations of $1.7 million for the three months ended September 28, 2008, or $0.06 earnings per share on both a basic and diluted basis.

Loss from Discontinued Operations

We recorded a loss from discontinued operations for the three months ended September 27, 2009, of $0.3 million, or a $0.01 loss per share on both a basic and diluted basis, compared to a loss from discontinued operations of $0.9 million, or a $0.03 loss per share on both a basic and diluted basis, for the three months ended September 28, 2008. Loss from discontinued operations in the three months ended September 27, 2009, includes expenses of $0.3 million related to previously divested businesses. Loss from discontinued operations in the three months ended September 28, 2008 was comprised of a loss on the disposal of our TPS business of $0.5 million, expenses related to previously divested businesses of $0.3 million and losses in our TPS business prior to its divestiture of $0.1 million.

Net Income (Loss)

Our net loss was $1.8 million in the three months ended September 27, 2009, or $0.06 per share, basic and diluted, compared to net income of $0.9 million in the three months ended September 28, 2008, or $0.03 per share on a diluted basis.

Liquidity and Capital Resources

Our cash and cash equivalent balance, including restricted cash, decreased $2.4 million during the three months ended September 27, 2009, from $18.4 million at June 29, 2009, to $16.0 million at September 27, 2009. Our primary sources of cash during the three months ended September 27, 2009, were from operations assisted by reduced working capital requirements of $0.8 million and a participation payment related to an annuity contract of $0.5 million, and our primary use of cash was for contributions of $4.2 million to our defined benefit pension plan. During the three months ended September 27, 2009, our net inventories decreased by $0.6 million, mainly related to lower sales activity to date in fiscal 2010. While we may make further investments to increase capacity for and improve efficiency in the production of wind inverters, we do not anticipate that capital expenditures in fiscal 2010 will exceed $2.0 million. The expected amount of capital expenditures could change depending upon changes in revenue levels, our financial condition and the general economy.

In November 2007 we entered into an agreement with Associated Bank, N.A. ("Associated Bank") providing for a $10.0 million revolving credit facility (the "Associated facility"). Borrowings under the Associated facility bear interest at the London Interbank Offering Rate ("LIBOR") plus 1.5%, with borrowing levels determined by a borrowing base formula as defined in the agreement, based on the level of eligible accounts receivable. The Associated facility also supports the issuance of letters of credit, places certain restrictions on our ability to pay dividends or make acquisitions, and includes covenants which require minimum operating profit levels and limit annual capital expenditures. Borrowings under the Associated facility are collateralized by our accounts receivable and inventory. In December 2008, we entered into an amendment to the Associated facility with Associated Bank, the primary purpose of which was to extend the maturity date of the Associated facility to November 1, 2010. There were no amounts outstanding under the Associated facility and the Company was in compliance with all covenants as of the last measurement date of June 28, 2009.

Primarily as a result of the decline in interest rates over the past several years and more recent declines in values in equity markets, the accumulated benefit obligation of our defined benefit pension plan currently exceeds plan assets. We have made contributions to the plan aggregating $16.4 million from April 2008 through September 2009, funded by cash generated from operations and existing cash on hand. Under funding regulations, current actuarial projections indicate that we will be required to make contributions to the plan aggregating approximately $12.5 million in fiscal 2010, of which $4.2 million has already been contributed as of September 27, 2009, the end of our fiscal 2010 first quarter. Pension plan assets increased by $10.2 million during the first quarter of fiscal 2010 to $112.4 million, with a resulting reduction in our aggregate pension funding obligation of $17.7 million from the funding obligation reported as of June 28, 2009. Required contributions beyond fiscal 2010 could still be significant, and will depend on future interest rate levels, values in equity and fixed income markets, and the level and timing of additional interim contributions we may make to the plan.

Based upon current plans and business conditions, we believe that current cash balances, borrowing capacity under the Associated facility and internally generated cash flows will be sufficient to fund anticipated operational needs, capital expenditures, required pension plan contributions and other commitments over the next 12 months.

Caution Regarding Forward-Looking Statements and Risk Factors

This document, including documents incorporated herein by reference, contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe," "expect," "estimate," "anticipate," "intend," "may," "might," "will," "would," "could," "project," and "predict," or similar words and phrases generally identify forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties which in many cases are beyond our control and which cannot be predicted or quantified. As a result, future events and actual results could differ materially from those set forth in, contemplated by, or underlying forward-looking statements. Forward-looking statements contained in this document speak only as of the date of this document or, in the case of any document incorporated by reference from another document, the date of that document. We do not have any obligation to publicly update or revise any forward-looking statement contained or incorporated by reference in these documents to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

Our future results of operations and the other forward-looking statements contained in this filing, including this section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations," involve a number of risks and uncertainties. In particular, the statements regarding future economic conditions, our goals and strategies, new product introductions, penetration of new markets, projections of sales revenues and sales growth, manufacturing costs and

operating costs, pricing of our products and raw materials required to manufacture our products, gross margin expectations, relocation and outsourcing of production capacity, capital spending, research and development expenses, the outcome of pending legal proceedings and environmental matters, payment of certain claims by insurance carriers, tax rates, sufficiency of funds to meet our needs including contributions to our defined benefit pension plan, and our plans for future operations, as well as our assumptions relating to the foregoing, are all subject to risks and uncertainties.

A number of factors could cause our actual results to differ materially from our expectations. We are subject to all of the business risks facing public companies, including business cycles and trends in the general economy, financial market conditions, changes in interest rates, demand variations and volatility, potential loss of key personnel, supply chain disruptions, government legislation and regulation, and natural causes. Additional risks and uncertainties include but are not limited to industry conditions, competitive factors such as technology and pricing pressures, business conditions in our served markets, dependence on significant customers, increased material costs, risks and costs associated with acquisitions and divestitures, environmental matters and the risk that our ultimate costs of doing business exceed present estimates. This list of risk factors is not all-inclusive, as other factors and unanticipated events could adversely affect our financial position or results of operations. Further information on factors that could affect our financial results can be found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended June 29, 2008, under the heading "Risk Factors" as well as below in Part II, Item 1A under the heading "Risk Factors".