MAG - Magnetek

[alpha231616967560]

Magnetek is a well established maker of digital motors and other electric supply components. They are used mostly in vertical lift applications such as elevators and mines, as well as on industrial cranes; places where nobody wants to screw around with an unknown supplier, so they have built a fairly good moat in the industry.

 

They have great margins (30-40%) and get an excellent ROIC. They have performed well during the soft economy, and are refocusing on their core business (they just terminated their new product line for the renewable energy sector due to the volatility there, and are refocused on industrials and elevators, their core competency).

 

they have a legacy pension liability around $90m (2/3 of enterprise value) and a reasonably conservative plan to pay it down over the next three years, which would accrue to equity and, the words of their investor presentation, 'provide private-equity-like returns'. They are also an excellent buyout candidate for a mid cap or other company that has the funds to deal with the pension obligations.

 

More detail in the investor presentation at http://goo.gl/IXZlcp

 

Disclosure: I don't own MAG presently but will likely be establishing a position this week.

 

 

[Cunninghamew]

Has the management team changed? 

 

It looks like whoever has been running this company has been running it into the ground. I.e. who got them into the Renewable Space to begin with? What means they wont take the free cash generated by the vertical lift biz and dump it into another crappy enterprise?  I was scanning their balance sheet and it looks like they departed ways with another segment in 2005-2006.

 

Sorry I am not trying to knock the idea (rather just asking questions). To me the crux of this investment is 3 fold

 

1. Are the economics of the vertical lift stuff that good? your research says yes

2. Is the management team good, so that the excess returns generated by the good biz dont get wiped out?

3. Pulling in the unfunded pension liability you allude to

[alpha231616967560]

Has the management team changed? 

 

It looks like whoever has been running this company has been running it into the ground. I.e. who got them into the Renewable Space to begin with? What means they wont take the free cash generated by the vertical lift biz and dump it into another crappy enterprise?  I was scanning their balance sheet and it looks like they departed ways with another segment in 2005-2006.

 

Sorry I am not trying to knock the idea (rather just asking questions). To me the crux of this investment is 3 fold

 

1. Are the economics of the vertical lift stuff that good? your research says yes

2. Is the management team good, so that the excess returns generated by the good biz dont get wiped out?

3. Pulling in the unfunded pension liability you allude to

 

New CEO in 2008 - Peter McCormick - has been with them since 1993. He and Schwenner (the CFO) have been busy refocusing the company on their core business. What I like about this idea is that the pension liability is hiding what has always been a fairly solid business in vertical lift motors and elevators. The new management moved the company to Wisconsin, and they have done a good job in reducing costs.

 

As to whether the management team is good, I'm not sure how to answer that question directly, but I like what I've heard on the conference call (there was a single analyst in attendance and he was heckling them a bit) about focus on the core business, and the last few years of 10-Ks back up what they say in the investor presentation and on the call. They are making some fairly conservative assumptions about the economy in general and about the profit margin that they need in order to achieve the pension liability conversion to equity.

 

Diworsification is always a risk, but in this case they have a very clear objective (alleviate the pension liability) and a powerful machine (the vertical lift business) and a fairly strong moat (mission critical business that nobody wants to shop for) with strong margins.

 

Of course, if they are not able to deal with the pension liability on schedule or close to it, this could be a bit of a disaster.

 

[alpha231616967560]

Article on Magnatek on Seeking Alpha today: http://seekingalpha.com/article/1470391-unlocking-value-at-magnetek

 

 

 

 

[AchilliesValue]

I really like this idea. They have an excellent business with what seems to be a decent moat that's obscured by the PBO. However they're using a discount rate of 3.5% which is very very low. If interest rates pick up in the next two years and they pay down some of the obligation even with flat revenues this could be a multi-bagger. Another point they have NOLs of $127 million that have been written off but don't begin to expire until 2019.

 

Also worth noting the board turned down a PE bid at $15

[Rabbitisrich]

A low discount rate means a higher PBO, all things equal. The more questionable estimate is the 7.75% projected return on assets.

[AchilliesValue]

A low discount rate means a higher PBO, all things equal. The more questionable estimate is the 7.75% projected return on assets.

 

Yes my point is the PBO is calculated very conservatively and likely overstates the funding shortfall.  Apologies just reread what I wrote and it wasn't clear. And I agree the return on plant assets is far too high but it only impacts the GAAP pension expense not the actual liability.

[Rabbitisrich]

No, it was my misreading.

[dcollon]

This is an interesting company guys.  Thanks for sharing the idea.

 

 

[GrizzlyRock]

You guys piqued my interest in Magnatek so I did some digging. Here are my thoughts - still very scattered at this point but perhaps interesting nonetheless. I'll sketch out the good, bad, and then present some notes from a discussion with mgmt.

 

Good

- Niche market leader in material handling (mostly overhead crane) ($81 mm in 2012 sales). Competitive advantage is largest player in space with a focus on wireless products which have been growing spectacularly

- Large player in elevator power control. Sounds like they supply a lot of products to the smaller OEMs and are used by the larger OEMs in certain places (not relied on by the large elevator OEMS).  This segment is $22.6 mm in 2012 sales.

- As a reformed former leveraged finance banker to PE LBOs, I can assure you this biz is right up the alley of a middle market PE guy. Niche market, leverageable, with reasonable growth opportunities. Literally would have 15+ bidders if they ran a process. Yet, they certainly would not receive top dollar now the the PBO hanging over their head

 

Bad

- Mining exposure is largely to met coal (bleh...) although they are trying to diversify theor exposure to types of mining equipment. $7.1 mm in 2012 revenue.

- Renewable energy segment of $3.6 mm in revenue. Why didn't they just light the $$ on fire?  Would have been more exciting... Yet, I don't think they are going to pursue this space which is good. they looked hard at solar and wisely passed

- Gin rummy historical acquisitions and divestitures. This biz has $1.5 billion of sales 20 years ago and that's how they got stuck with this PBO.

- Pension liability, although uncertain in total cost, is large yet coming down. I haven't done the math but my gut is they are being overly cautious with their presentation here.

 

Magnetek Notes 6/7/13

- Sell to crane oems

- A lot of time Power control is mandated to be Magnatek's ("spec-ed in") in many projects regalrdless of which OEM is hired.

- material handing sales grew 12% las year with most growth in radio controlled units

- largest customer is joy global (Mining)

- coal lower in US so looking to develop mining products to lessen reliance to coal

-Pension Issues

- Every 100 basis points increase in discount rates would be a $20 mm decrease in liabilities (Note- seems high?)

- using 3.5% at YE currently up to 3.85%

- Thus liability down 7 mm

 

- competitors are in material handling: radio control cadtron, drives Rockwell and standard drive companies

- elevator market are largest OEMs but partner with them in certain instances

- independent elevators control (Emerson) and variety

- joy global guys all drives form Magnetek (70% of mining biz)

 

- focus on growth is radio segments

- inverters for fuel cells and wind inverter - clipper wind acquired by United Technologies and now divested

- wind market down 80%

- looked at solar market but no industry expertise

- management owns 3% of shares

- 3.2 mm shares outstanding

[LC]

Anecdotal industry tailwind: after a conversation with my girlfriend's father, I learned the DOJ ans state governments are clamping down on disability access in buildings withouT elevator lifts. The ADA originally stated that buildings with less than 4 stories did not need to be retrofitted with elevator access. Now apparently the govt (at least in wash dc) is requiring any building with a second story > 3000 sq ft to have a lift installed.

[ericd1]

My research suggests Joy is not doing very well in the current weak coal market. Might want to consider this company when Cat and Joy show improvement. Replacement parts business will keep them going until then. I think you would have to be patient on this one. That said. I like the idea and will add it to my watch list - thanks!

[AchilliesValue]

My research suggests Joy is not doing very well in the current weak coal market. Might want to consider this company when Cat and Joy show improvement. Replacement parts business will keep them going until then. I think you would have to be patient on this one. That said. I like the idea and will add it to my watch list - thanks!

 

Mining is only 6% of revenue so I wouldn't let that industries' tailwinds sway your decision.

 

Also I believe the only renewable energy revenues you'll see going forward will be from service & maintenance as management decided to exit the business which accounts for the decline in sales during Q1. I believe they're going to stick to the core businesses at least until the pension issue is resolved.

[alpha231616967560]

MAG earnings tomorrow. The market seems to be anticipating some negative news. This will be a good data point to weigh the negative impact of the recent woes in the coal mining industry on MAG.

[dcollon]

Earnings:

http://investorinfo.magnetek.com/phoenix.zhtml?c=107102&p=irol-newsArticle&ID=1847102&highlight=

 

Conference Call:

http://investorinfo.magnetek.com/phoenix.zhtml?p=irol-eventDetails&c=107102&eventID=4986008

 

[alpha231616967560]

- Net sales of $27.0 million decreased 7% over the prior year second quarter, mainly due to lower sales into mining markets and withdrawal from renewable energy markets. On a sequential basis, Q2 net sales increased nearly 8% over current year Q1 sales.

 

- Q2 sales into material handling and elevator markets increased 7% and 11% respectively over the same period last year.

 

- Q2 adjusted EBITDA (see attached reconciliation) totaled $3.4 million, or 12.8% of sales, compared to $4.6 million, or 16.0% of sales, for the same period last year. On a sequential basis, Q2 adjusted EBITDA increased 29% over current year Q1 adjusted EBITDA.

 

- Cash balances totaled $24.9 million as of June 30, 2013.

 

So the core business is basically on track, with some growth in Material Handling (their biggest market by a significant margin). It sounds like the plan to reduce the pension obligation through business as usual is intact so far.

 

[dcollon]

Magnetek, Inc. to Announce Its Fiscal 2013 Third Quarter Results on November 6th

 

On November 6, 2013, before commencement of trading on the NASDAQ, Magnetek, Inc. (“Magnetek” or “the Company”) (NASDAQ: MAG) will announce the results of its fiscal 2013 third quarter, which ended on September 29, 2013. A conference call with Magnetek management will follow at 11:00 a.m. Eastern Time.

 

The conference call will be webcast on the Investor Relations page of Magnetek’s website at www.magnetek.com. Management’s presentation will be supplemented by slides appearing on the Company’s website. Listeners are encouraged to view these materials in conjunction with the call. Replays of the call will be available on the website for a limited time.

 

[alpha231616967560]

Earnings out: http://investorinfo.magnetek.com/phoenix.zhtml?c=107102&p=irol-newsArticle&ID=1872958&highlight=

 

Looks like they are executing on the pension pay-down.

[dcollon]

I thought this was interesting from AT&T tonight.  Obviously, MAG continues to benefit from higher discount rates.

 

AT&T Inc. T -0.69%  expects to record a fourth-quarter pretax $7.6 billion gain related to actuarial gains and losses on the telecommunications company's pension and postemployment benefit plans.

 

Additionally, AT&T said it would take an additional $500 million charge related to the retirement of about 4,200 management workers who opted to take a lump sum pension payment for retiring by the end of 2013. The company, which has almost 250,000 workers, made the offer to management workers in the fall.

 

In a regulatory filing Wednesday, the company said as of Dec. 31, it increased its assumed discount rate to 5%, resulting in an actuarial gain of about $7.9 billion.

[AchilliesValue]

Yeah assuming the core business is performing fine MAG should start popping up on people's screens once the 10-K is updated. But, I'd expect them to use a lower rate than AT&T.  I'm going from memory but if I'm remembering correctly they used ~3.25% last year which I remembered being quite conservative relative to other companies.

[alpha231616967560]

Disappointing result. Earnings down ~10% YOY due primarily to Material Handling decline and projected to be soft in Q1 and Q2 of 2014.

 

Pension reduction is still on track, so I don't see anything that changes the original thesis in this earnings report.

 

They're focused on the core business and the pension and riding out the short term fluctuations. 

 

Here is a link to the earnings call http://investorinfo.magnetek.com/phoenix.zhtml?p=irol-eventDetails&c=107102&eventID=5102364

 

[alpha231616967560]

Respectable quarter: http://investorinfo.magnetek.com/phoenix.zhtml?c=107102&p=irol-newsArticle&ID=1928006&highlight=

 

Management has increased margins and reduced costs while continuing to reduce legacy pension liability. They are responding to the business environment as well as possible. Hopefully this is the bottom of the business cycle.

 

“Market conditions were quite soft early in 2014, but our business activity picked up strongly later in the quarter, and we booked about 45% of our first quarter orders during the month of March. Material handling markets are seasonally slower in the March quarter, so we would expect sales in the second quarter to increase modestly from the $18 million level of the first quarter. While sales into elevator markets were just over $5 million in the first quarter, bookings were nearly $6 million, so we should also see an uptick in elevator sales in the second quarter. Conditions in mining markets remain extremely challenging, and we expect mining to remain difficult throughout 2014,” said Mr. McCormick. “We’re cautiously optimistic that the first quarter was the low point for us in terms of sales levels, and that the momentum we experienced late in the first quarter can continue into the second quarter and the remainder of the year,” continued Mr. McCormick.

 

“Our stated strategy for some time now has been to enhance the value of the Company by focusing on organic growth opportunities, consistently generating cash, and reducing our pension obligation. Over the past several years, we’ve been very successful with cash generation, and have deployed that cash through investments in our business and contributions 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,” continued Mr. McCormick. “What we haven’t seen in our business in recent quarters is robust organic growth, which we believe has largely been a function of end market conditions characterized by a continuing reluctance to invest. We’re continuing efforts to enter new markets and geographies, but some of these growth initiatives have a longer-term horizon. We’ve responded by taking actions to align our cost structure with our sales volume to better assure achievement of consistent profitability and cash flow. In summary, we believe our strategy to enhance value remains sound, and our profitability and cash flow are healthy even at current volumes. We began to see signs of improvement in market conditions near the end of the first quarter, and we believe we are well-positioned to achieve our growth objectives over time as end market conditions continue to improve going forward,” concluded Mr. McCormick.

[dcollon]

Magnetek Contributes Shares of Common Stock to Its Pension Plan

Monday, September 08, 2014

 

Magnetek, Inc. (“Magnetek” or “the Company,” NASDAQ: MAG) today announced that, on September 5, 2014, it made a voluntary excess contribution of 250,000 shares of Magnetek common stock to its defined benefit pension plan (the “plan”). The contribution, which represents less than 5 percent of total pension plan assets, consists of newly issued Magnetek shares and is fully tax-deductible.

 

The shares were contributed to the plan in a private placement. An independent fiduciary, Evercore Trust Company, N.A., has been engaged to make all investment decisions with respect to the contributed shares.

 

The voluntary contribution reduces the plan’s underfunded balance, improving the health of the plan while increasing the Company’s financial flexibility. Immediately following the contribution, the Company has approximately 3.5 million shares of common stock issued and outstanding.

 

The net effect of the contribution on earnings per share is expected to be approximately 7 percent dilutive in fiscal year 2014; however, the contribution is expected to have minimal effect on earnings per share in fiscal year 2015, as the impact of the increased shares outstanding is expected to be almost entirely offset by reduced pension expense. Based on actuarial assumptions, this excess 2014 contribution is expected to reduce required pension contributions over the next five years by approximately $10 million.

 

As of December 29, 2013, the plan was underfunded by approximately $48 million. According to current estimates of plan assets including the impact of the voluntary contribution of stock and projected pension obligations, the underfunding has decreased to approximately $40 million.

[abitofvalue]

Isn't the contribution of shares at these prices an indication that management thinks shares are a little overvalued here?  Why would management essentially issue shares here at "the bottom of the cycle" to make a contribution that isn't necessary?

 

This issuance is particularly confusing given management has already indicated that they are in the midst of a voluntary lump sum window and the low interest rate environment is inflating the under-funding issue.  Why not wait a few months to see how things settle down? 

 

Management has even talked about shareholders will benefit from the pension under-funding being resolved, but issuing shares to the pension fund will not benefit current shareholders!!

[dcollon]

Another impressive quarter

 

http://investorinfo.magnetek.com/phoenix.zhtml?c=107102&p=irol-newsArticle&ID=1987644