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, mining and renewable energy applications. Our digital power control systems serve the needs of selected niches of traditional and emerging markets that are becoming increasingly dependent on "smart" power. We are North America's largest independent supplier of digital drives, radio controls, software and accessories for industrial cranes and hoists, and we are also the largest independent supplier of digital DC motion control systems for elevators. Customers include most of the industrial crane and hoist companies in North America and the world's leading elevator builders. In addition, we have a growing range of products for energy delivery applications, including motion control systems for mining equipment and power inverters for renewable energy applications. We are focused on providing our customers cost-effective power solutions that will improve efficiency, reduce costs, and save energy. Other trends in our served markets we believe we can capitalize on include the adoption of wireless control solutions, modernization and upgrade of installed equipment, and an increasing desire in our markets for added features, enhanced performance, and safer workplace environments. We believe that with our focus on innovation and our application expertise, combined with strong brand name recognition, broad product offerings and sales channel capabilities, we are well positioned to grow our business by gaining share in both our served markets as well as in new markets. Our operations are located in North America, predominantly in Menomonee Falls, Wisconsin, our Company headquarters.

Our product offerings for material handling applications include innovative power control systems, radio remote controls, and braking, collision-avoidance, and electrification subsystems, sold primarily to OEMs of overhead cranes and hoists. While we sell primarily to OEMs of overhead cranes and hoists, we spend a great deal of effort understanding the needs of end users to gain specification. We can combine our products with engineered services to provide complete customer-specific systems solutions. A primary driver of our growth in this market is our ability to improve our customers' operations and provide them with quantifiable, and in many cases, significant returns on invested capital.

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. We believe we have opportunities for growth in available elevator markets by introducing new energy-saving product offerings for both AC and DC applications, expanding the breadth of our product offerings for lower performance AC applications, and using our new product offerings to expand geographically.

Our product offerings for energy delivery applications include AC and DC drives for mining applications, as well as power inverters for renewable energy applications. We believe that energy needs will continue to grow significantly for the foreseeable future, and with our product offerings, we are positioned to capitalize on that growth. We have a wide variety of product offerings which are engineered to efficiently use available power, or which convert energy to usable power in an energy efficient manner. We have been a leading supplier of AC and DC digital motion control systems to underground coal mining equipment manufacturers for over 25 years. More recently we've developed and introduced power inverters which convert DC power from renewable energy sources to utility-grade AC power. We believe the best revenue growth opportunities in renewable energy markets are currently in the utility-scale solar market, which is expected to continue to grow in North America as solar power becomes increasingly competitive from a cost standpoint with more traditional methods of power generation.

We intend to continue to build on our competitive strengths in established material handling, elevator, and mining markets, while also continuing to market our product portfolio aimed at penetrating growing and emerging markets for digital power-based systems. We further intend to continue to pursue internal growth opportunities in our core product lines, seeking to increase our market share, enter new markets, and expand our current business model geographically.

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 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 growth initiatives, our operations and our obligations.

Throughout calendar year 2011, we experienced improving conditions and increasing demand in most of our major served markets, mainly in traditional industrial markets. Accordingly, both our sales and operating results improved steadily throughout 2011, and that trend has continued into fiscal 2012. While our 2012 second quarter sales decreased 7% to $29.0 million from $31.1 million in the comparable period last year, the majority of the decline was due to lower sales of wind power inverters. Sales of products with material handling applications, our largest served market, continued to grow in the second quarter of fiscal 2012, and increased more than 7% over the comparable period last year to nearly $19 million.

Second quarter 2012 gross profit decreased to $10.2 million, or 35.0% of sales, compared to $10.4 million, or 33.5% of sales in the comparable period last year. The increase in our gross profit as a percentage of sales was due mainly to a shift in our sales mix, with higher sales volumes into traditional served industrial markets where margins are typically higher, and lower sales of lower margin products with renewable energy applications. We reported pre-tax income from operations of $2.5 million, or approximately 8.8% of sales, in the second quarter of 2012, compared to prior year pre-tax income from operations of $1.6 million, or 5.3% of sales. Diluted earnings per share from continuing operations increased 46% to $0.70 per share in the second quarter of 2012, compared to $0.48 per share in the same period of 2011. In addition, our cash balances increased more than $1 million during the second quarter of 2012, even after contributing $3.9 million to our defined benefit pension plan.

Our incoming order rate was solid during the second quarter of fiscal 2012, but as expected, was negatively impacted by declining orders for wind power inverters. Demand levels remain healthy in our traditional served industrial markets, mainly for products with material handling applications. Manufacturing continues to be an area of strength in the U.S. economy, and we expect manufacturing activity and demand in most of our served industrial markets to continue to grow moderately during 2012.

Our declining incoming order rate for wind inverters is indicative of the challenging conditions that have persisted in renewable energy markets for some time, and we expect conditions in the wind market to remain soft for the foreseeable future. Renewable energy markets, like many emerging industries, are characterized by rapid changes in technology, market conditions, and available product solutions. Factors influencing end market conditions include the cost of competing traditional energy sources and the availability of government subsidies. Market conditions for inverter manufacturers have deteriorated considerably over the past year. A growing number of competitors combined

with high levels of investment in research and development have led to a great deal of pricing pressure and significant reductions in profitability. We also believe that scale is becoming increasingly important in order to compete effectively. Over the past year, we've shifted our focus from wind to utility-scale solar, as we believe the North American solar market offers us better growth opportunities in renewable energy. We continue to directly market our one megawatt solar inverter to engineering, procurement and construction OEMs for utility-scale projects. However, receipt of any orders for solar inverters in the second half of 2012 will likely not result in revenue until 2013 due to lengthy solar project lead times.

Entering the third quarter, we have a healthy backlog of $17 million, comprised almost entirely of orders for our traditional served markets. Accordingly, we're currently expecting a fairly steep decline in renewable energy sales in the third quarter. In response to the expected lower third quarter sales volume, we've recently taken actions to reduce our cost structure. We also believe we can offset part of the expected decline in revenue from renewable energy with higher sales of products for material handling applications. Finally, sales of our industrial products have higher gross margins than our renewable energy product offerings, and as a result, our sales mix in the third quarter should be more favorable than the past several quarters. In summary, while we're projecting sequentially lower sales and profitability in the third quarter, we expect to generate healthy levels of profit and cash flow, prior to pension contributions, in the third quarter.

Current forecasts indicate the U.S. economic recovery is slowing, and macro-economic conditions remain dynamic and fragile. As a result, it remains challenging to predict the duration or the magnitude of the current economic recovery, whether in the U.S. overall or in the specific end markets we serve. For the remainder of 2012, we intend to focus our development and marketing efforts on organic sales growth opportunities across all product lines. In addition, we are executing actions to prudently expand our reach into new end markets and geographical areas, and are also taking actions to reduce our cost structure and reallocate resources in those parts of our business which are not growing.

Discontinued Operations

Certain expenses related to previously divested businesses have 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 include 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 that we entered into when we divested those businesses.

Going forward, our results of discontinued operations 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 telecom power systems ("TPS") business, which was divested in September 2008, 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 Transition Report on Form 10-K for the six-month transition period ended January 1, 2012.

Results of Operations - Three Months Ended July 1, 2012, and July 3, 2011

Net Sales and Gross Profit

Net sales for the three months ended July 1, 2012, were $29.0 million, a
decrease of 7% from the three months ended July 3, 2011, sales of $31.1
million. The decrease in sales was primarily due to lower sales of wind power
inverters into renewable energy markets, partially offset by higher sales
volumes into traditional served material handling and mining markets. Net sales
by major market were as follows, in millions:

                                 Three Months Ended
                          July 1, 2012        July 3, 2011
Material handling       $   18.9     65 %   $   17.6     57 %
Elevator motion control      5.3     18 %        5.6     18 %
Energy systems               4.8     17 %        7.9     25 %
Total net sales         $   29.0    100 %   $   31.1    100 %

Gross profit for the three months ended July 1, 2012, was $10.2 million, or 35.0% of sales, versus $10.4 million, or 33.5% of sales, for the three months ended July 3, 2011. The increase in gross profit as a percentage of sales for the three months ended July 1, 2012, as compared to the three months ended July 3, 2011, was mainly due to a favorable shift in the Company's sales mix, with increased sales of higher margin material handling products.

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

Research and development ("R&D") expense was $1.0 million, or 3.3% of sales, for the three months ended July 1, 2012, a decrease of $0.2 million compared to R&D expense of $1.2 million, or 3.8% of sales, for the three months ended July 3, 2011, due mainly to completion of the Company's solar inverter product in early 2012.

Pension expense was $1.7 million and $1.6 million for the three months ended July 1, 2012 and July 3, 2011, respectively (see Note 7 of Notes to Condensed Consolidated Financial Statements). The increase in pension expense was mainly due to increased amortization of actuarial losses resulting from declining interest rates experienced during 2011.

Selling, general and administrative ("SG&A") expense was $5.0 million (17.2% of sales) for the three months ended July 1, 2012, versus $6.0 million (19.3% of sales) for the three months ended July 3, 2011. Selling expenses in the three months ended July 1, 2012, increased to $3.0 million from $2.7 million in the three months ended July 3, 2011, mainly due to higher commissions and higher discretionary spending. General and administrative ("G&A") expense decreased to $2.0 million for the three months ended July 1, 2012, from $3.3 million for the three months ended July 3, 2011, mainly due to lower incentive compensation provisions.

Income from Operations

Income from operations for the three months ended July 1, 2012, was $2.5 million compared to income from operations of $1.6 million for the three months ended July 3, 2011. The increase in income from operations for the three months ended July 1, 2012, as compared to the three months ended July 3, 2011, was mainly due to lower R&D and G&A expenses in the three months ended July 1, 2012, partially offset by lower gross profit due to lower sales volume and increased selling expenses.

Interest Income

Interest income was negligible for the three months ended July 1, 2012 and July 3, 2011.

Provision for Income Taxes

We recorded a provision for income taxes of $0.3 million and $0.1 million for the three months ended July 1, 2012, and July 3, 2011, respectively. 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.

We recorded income from continuing operations of $2.3 million for the three months ended July 1, 2012, or $0.70 per diluted share, compared to income from continuing operations of $1.5 million for the three months ended July 3, 2011, or $0.48 per diluted share.

Income (Loss) from Discontinued Operations

We recorded income from discontinued operations for the three months ended July 1, 2012, of $0.9 million, or $.29 per share on a diluted basis, compared to a loss from discontinued operations of $0.4 million, or a $0.11 loss per share on a diluted basis, for the three months ended July 3, 2011. Income from discontinued operations in the three months ended July 1, 2012, includes a gain of $1.1 million from non-cash adjustments of liabilities related to previously owned businesses, partially offset by certain legal and other expenses related to previously owned businesses (see Notes 2 and 4 of Notes to Condensed Consolidated Financial Statements). The loss from discontinued operations in the three months ended July 3, 2011, is comprised entirely of expenses related to previously divested businesses.

Net Income

Our net income was $3.2 million in the three months ended July 1, 2012, or $.99 per diluted share, compared to net income of $1.2 million in the three months ended July 3, 2011, or $0.37 per share on a diluted basis.

Results of Operations - Six Months Ended July 1, 2012, and July 3, 2011

Net Sales and Gross Profit

Net sales for the six months ended July 1, 2012, were $57.7 million, a decrease
of 2% from the six months ended July 3, 2011, sales of $58.9 million. The
decrease in sales was primarily due to lower sales of wind power inverters into
renewable energy markets and lower sales of products with elevator applications,
partially offset by higher sales volumes into traditional served material
handling and mining markets. Net sales by major market were as follows, in
millions:

                                  Six Months Ended
                          July 1, 2012        July 3, 2011
Material handling       $   37.2     65 %   $   31.5     54 %
Elevator motion control     10.5     18 %       11.9     20 %
Energy systems              10.0     17 %       15.5     26 %
Total net sales         $   57.7    100 %   $   58.9    100 %

Gross profit for the six months ended July 1, 2012, was $20.8 million, or 36.0% of sales, versus $19.1 million, or 32.5% of sales, for the six months ended July 3, 2011. The increase in gross profit as a percentage of sales for the six months ended July 1, 2012, as compared to the six months ended July 3, 2011, was mainly due to a favorable shift in the Company's sales mix, with increased sales of higher margin material handling and mining products, and fewer sales of lower margin wind power inverters.

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

R&D expense was $1.9 million, or 3.4% of sales, for the six months ended July 1, 2012, a decrease of $0.4 million compared to R&D expense of $2.3 million, or 3.9% of sales, for the six months ended July 3, 2011, due mainly to completion of the Company's solar inverter product in early 2012.

Pension expense was $3.4 million and $3.2 million for the six months ended July 1, 2012 and July 3, 2011, respectively (see Note 7 of Notes to Condensed Consolidated Financial Statements). The increase in pension expense was mainly due to increased amortization of actuarial losses resulting from declining interest rates experienced during 2011.

SG&A expense was $10.5 million (18.2% of sales) for the six months ended July 1, 2012, comparable to SG&A expense of $10.5 million (17.9% of sales) for the six months ended July 3, 2011. Selling expenses in the six months ended July 1, 2012, increased to $5.9 million from $4.9 million in the six months ended July 3, 2011, mainly due to higher commissions from increased sales of material handling products, higher payroll costs, and higher discretionary spending. G&A expense decreased to $4.6 million for the six months ended July 1, 2012, from $5.6 million for the six months ended July 3, 2011, mainly due to lower incentive compensation provisions.

Income from Operations

Income from operations for the six months ended July 1, 2012, was $5.0 million compared to income from operations of $3.1 million for the six months ended July 3, 2011. The increase in income from operations for the six months ended July 1, 2012, as compared to the six months ended July 3, 2011, was mainly due to higher gross profit on increased sales of material handling and mining products, and lower R&D and G&A expenses in the six months ended July 1, 2012, partially offset by increased selling expenses.

Interest Income

Interest income was negligible for the six months ended July 1, 2012 and July 3, 2011.

Provision for Income Taxes

We recorded a provision for income taxes of $0.5 million and $0.3 million for the six months ended July 1, 2012, and July 3, 2011, respectively, which includes non-cash deferred income tax provisions of $0.5 million and $0.4 million, respectively, related to changes in deferred tax liabilities from goodwill amortization for tax purposes.

Income from Continuing Operations

We recorded income from continuing operations of $4.4 million for the six months ended July 1, 2012, or $1.37 per diluted share, compared to income from continuing operations of $2.8 million for the six months ended July 3, 2011, or $.87 per diluted share.

Income (Loss) from Discontinued Operations

We recorded income from discontinued operations for the six months ended July 1, 2012, of $5.7 million, or $1.74 per share on a diluted basis, compared to a loss from discontinued operations of $0.6 million, or a $0.20 loss per share on a diluted basis, for the six months ended July 3, 2011. Income from discontinued operations in the six months ended July 1, 2012, includes a gain of $5.0 million from a settlement agreement resulting in resolution of a legal matter (see Notes 2 and 4 of Notes to Condensed Consolidated Financial Statements). Income from discontinued operations in the six months ended July 1, 2012, also includes a gain of $1.1 million from non-cash adjustments of liabilities related to previously owned businesses, partially offset by certain legal and other expenses related to previously owned businesses. The loss from discontinued operations in the six months ended July 3, 2011, is comprised entirely of expenses related to previously divested businesses.

Net Income
Our net income was $10.1 million in the six months ended July 1, 2012, or $3.11 per diluted share, compared to net income of $2.2 million in the six months ended July 3, 2011, or $.67 per share on a diluted basis.

Liquidity and Capital Resources

Our unrestricted cash and cash equivalent balance increased approximately $6.4 million during the first six months of fiscal 2012, from $20.6 million at January 1, 2012, to $27.0 million at July 1, 2012. Restricted cash balances remained unchanged during the first six months of fiscal 2012 at $0.3 million. The primary source of cash during the first six months of fiscal 2012 was income from continuing operations of $4.4 million, which included non-cash charges aggregating $4.7 million for depreciation, amortization, pension, stock compensation, and deferred income tax provisions. In addition, our income from discontinued operations of $5.7 million included a payment of $5.0 million from a settlement agreement entered into during the first six months of fiscal 2012 to resolve a long-standing legal issue (see Note 4 of Notes to Condensed Consolidated Financial Statements).

The primary uses of cash in the first six months of fiscal 2012 included a $3.9 million contribution to our pension plan and a $3.0 million net increase in operating assets and liabilities. Accounts receivable increased by $1.8 million during the first six months of fiscal 2012, mainly due to an increase in days sales outstanding, which increased from 51.4 days at January 1, 2012, to 57.9 days at July 1, 2012. Accounts payable and other accrued liabilities decreased by $2.4 million during the first six months of fiscal 2012, due to lower accounts payable balances as well as payment of incentive compensation amounts accrued as of January 1, 2012. In addition, $1.1 million of the reduction in accounts payable and other accrued liabilities resulted from non-cash adjustments to liabilities related to previously owned businesses. In addition, we consumed cash of $0.4 million for disbursements related to previously divested businesses and $0.6 million for capital expenditures.

While we may make further investments to increase capacity and improve efficiency, we do not anticipate that capital expenditures in fiscal 2012 will exceed $1.5 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 million revolving credit facility (the "revolving facility"). Borrowings under the revolving facility bore 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 revolving 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 revolving facility were collateralized by our accounts receivable and inventory. We have subsequently entered into four amendments to the revolving facility, the primary purpose of which was to extend the maturity dates of the revolving facility and to broaden the security interest of Associated Bank to include all assets of the Company.

In December 2011, we entered into the most recent fourth amendment to the revolving facility with Associated Bank, the purpose of which was to (i) extend the maturity date of the revolving facility to June 15, 2013; (ii) increase the commitment amount of Associated Bank to $12.5 million; (iii) establish minimum adjusted earnings before interest, taxes, depreciation and amortization requirements for the three-month periods ending December 31, 2011, through March 31, 2013; and (iv) establish maximum cash amounts that we can contribute to our defined benefit pension plan during the term of the agreement. There were no amounts outstanding on the amended revolving facility as of July 1, 2012. We are currently in compliance with all covenants of the revolving facility, as amended.

Primarily as a result of the decline in interest rates over the past decade, the accumulated benefit obligation of our defined benefit pension plan currently exceeds plan assets. We contributed $30 million to our pension plan in December 2006 following the divestiture of our power electronics business, and subsequently have made contributions to the plan aggregating $42 million from April 2008 through July 1, 2012, funded by cash generated from operations and existing cash on hand.

In response to the level of our projected pension funding obligations relative . . .