-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Xm3nw9s9xenl+Ta2i+FglD2dYJ6rRXl9dGeO/43ZNA6IGaCkQcoxa57PkmJpcX2E oml6Nf09WT0GJib0cumuyA== 0000072423-94-000014.txt : 19940513 0000072423-94-000014.hdr.sgml : 19940513 ACCESSION NUMBER: 0000072423-94-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940402 FILED AS OF DATE: 19940512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTEK INC CENTRAL INDEX KEY: 0000072423 STANDARD INDUSTRIAL CLASSIFICATION: 3444 IRS NUMBER: 050314991 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06112 FILM NUMBER: 94527512 BUSINESS ADDRESS: STREET 1: 50 KENNEDY PLZ CITY: PROVIDENCE STATE: RI ZIP: 02903 BUSINESS PHONE: 4017511600 MAIL ADDRESS: STREET 1: 50 KENNEDY PLAZA CITY: PROVIDENCE STATE: RI ZIP: 02903 10-Q 1 NORTEK 1ST QUARTER 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 2, 1994 ----------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- ----------- Commission File No. 1-6112 ----------------------------------------- NORTEK, INC. ----------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 05-0314991 - ----------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 50 Kennedy Plaza, Providence, RI 02903-2360 - ----------------------------------------------------------- (Address of principal executive offices) (Zip Code) (401) 751-1600 - ----------------------------------------------------------- (Registrant's telephone number, including area code) N/A - ----------------------------------------------------------- (Former name, former address and former fiscal year if changed since last year) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---------- ----------- The number of shares of Common Stock outstanding as of May 6, 1994 was 11,987,742. The number of shares of Special Common Stock outstanding as of May 6, 1994 was 554,205. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Dollar Amounts in Thousands) April 2, Dec. 31, 1994 1993 ---- ---- (Unaudited) ASSETS Current Assets: Unrestricted-- Cash and investments at cost which approximates market $ 79,995 $ 34,006 Short-term investments held for redemption of debentures --- 22,600 Marketable securities 29,438 25,892 Restricted-- Cash and investments at cost which approximates market 6,687 6,687 Accounts receivable, less allowances of $4,549 and $4,198 96,699 84,843 Inventories: Raw materials 29,047 27,603 Work in process 10,071 9,227 Finished goods 50,344 45,183 ------- ------- 89,462 82,013 ------- ------- Current assets of business sold --- 23,736 Insurance claims receivable 14,500 14,500 Prepaid expenses and other current assets 7,211 7,541 U. S. Federal prepaid income taxes 18,500 17,000 ------- ------- Total Current Assets 342,492 318,818 ------- ------- Property and Equipment, at cost: Land 5,869 5,833 Buildings and improvements 52,766 52,309 Machinery and equipment 111,744 108,983 ------- ------- 170,379 167,125 Less--Accumulated depreciation 79,968 76,546 ------- ------- Total Property and Equipment, net 90,411 90,579 ------- ------- Other Assets: Goodwill, less accumulated amortiza- tion of $19,681 and $19,180 74,572 75,599 Non-current assets of business sold --- 11,987 Deferred debt expense 9,376 563 Other 11,306 11,663 ------- ------- 95,254 99,812 ------- ------- $528,157 $509,209 ======= ======= The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Continued) (Dollar Amounts in Thousands) April 2, Dec. 31, 1994 1993 ---- ---- (Unaudited) LIABILITIES AND STOCKHOLDERS' INVESTMENT - ---------------------------------------- Current Liabilities: Notes payable, current maturities of long-term debt and other short- term obligations $ 8,737 $ 14,957 11 1/2% Senior Subordinated Debentures, net --- 22,582 Accounts payable 57,299 46,923 Accrued expenses and taxes, net 86,766 91,422 Current liabilities of business sold --- 11,769 Insurance claims advances 13,239 13,239 ------- ------- Total Current Liabilities 166,041 200,892 ------- ------- Other Liabilities: Deferred income taxes 21,300 18,000 Other 7,497 8,100 ------- ------- 28,797 26,100 ------- ------- Notes, Mortgage Notes and Debentures Payable 230,379 169,664 ------- ------- Mortgage Notes Payable of business sold --- 8,546 ------- ------- Stockholders' Investment: Preference stock, $1 par value; authorized 7,000,000 shares, none issued --- --- Common Stock, $1 par value; authorized 40,000,000 shares, 15,778,130 shares and 15,758,974 shares issued 15,778 15,759 Special Common Stock, $1 par value; authorized 5,000,000 shares, 830,419 and 849,575 shares issued 830 849 Additional paid-in capital 134,627 134,627 Accumulated deficit (15,534) (17,034) Cumulative translation, pension and other adjustments (4,710) (2,143) Less - treasury common stock at cost, 3,795,028 shares (26,371) (26,371) - treasury special common stock at cost, 271,574 shares (1,680) (1,680) ------- ------- Total Stockholders' Investment 102,940 104,007 ------- ------- $528,157 $509,209 ======= ======= The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In Thousands Except Per Share Amounts) For The Three Months Ended ------------------ April 2, April 3, 1994 1993 ---- ---- (Unaudited) Net Sales $169,020 $178,707 ------- ------- Costs and Expenses: Cost of products sold 119,302 129,162 Selling, general and administrative expense 41,444 45,332 ------- ------- 160,746 174,494 ------- ------- Operating earnings 8,274 4,213 Interest expense (7,875) (7,015) Interest income 1,201 1,002 Net gain on marketable securities --- 1,000 ------- ------- Earnings (loss) before provision for income taxes 1,600 (800) Provision for income taxes 900 600 ------- ------- Earnings (loss) before extraordinary gain 700 (1,400) Extraordinary gain from debt retirements 400 --- ------- ------- Earnings (loss) before the cumulative effect of accounting changes 1,100 (1,400) Cumulative effect of accounting changes 400 (2,100) ------- ------- Net Earnings (Loss) $ 1,500 $ (3,500) ======= ======= Net Earnings (Loss) Per Share: Earnings (Loss) Before Extraordinary Gain-- Primary $ .06 $ (.11) ------- ------- Fully diluted $ .06 $ (.11) ------- ------- Extraordinary Gain-- Primary $ .03 $ --- ------- ------- Fully diluted $ .03 $ --- ------- ------- Cumulative Effect of Accounting Changes-- Primary $ .03 $ (.17) ------- ------- Fully diluted $ .03 $ (.17) ------- ------- Net Earnings (Loss)-- Primary $ .12 $ (.28) ====== ======= Fully diluted $ .12 $ (.28) ====== ======= Weighted Average Number of Shares: Primary 12,685 12,657 ====== ====== Fully diluted 13,400 13,387 ====== ====== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Amounts in Thousands) For the Three Months Ended ------------------ April 2, April 3, 1994 1993 ---- ---- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 1,500 $(3,500) ------ ------ Adjustments to reconcile net earnings (loss) to cash: Depreciation and amortization 5,052 5,565 Gain on marketable securities --- (1,000) Extraordinary gain from debt retirements (600) --- Cumulative effect of accounting changes (400) 3,100 Deferred federal income tax credit from continuing operations (500) (800) Deferred federal income tax provision on extraordinary items 1,350 --- Changes in certain assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable, net (11,856) (9,947) Prepaids and other current assets (1,091) (109) Inventories (7,449) (11,065) Accounts payable 6,976 6,493 Accrued expenses and taxes (3,036) 3,380 Long-term assets, liabilities and other, net (4,134) 682 ------ ------ Total adjustments to net earnings (loss) (15,688) (3,701) ------ ------- Net Cash Used in Operating Activities (14,188) (7,201) ------ ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (3,763) (2,643) Purchase of investments and marketable securities (5,032) (34,345) Proceeds from sale of investments and marketable securities --- 37,917 Proceeds (payments) relating to businesses sold or discontinued, net 20,280 (2,970) Other, net (943) (285) ------ ------ Net Cash Provided by (Used in) Investing Activities 10,542 (2,326) ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Sale of Notes 209,195 --- Purchase and redemption of debentures and notes payable (176,611) (778) Payment of borrowings (5,458) (3,361) Other, net (91) (748) ------ ------ Net Cash Provided by (Used in) Financing Activities 27,035 (4,887) ------ ------ Net increase (decrease) in unrestricted cash and investments 23,389 (14,414) Unrestricted cash and investments at the beginning of the period 56,606 23,467 ------ ------ Unrestricted cash and investments at the end of the period $79,995 $ 9,053 ====== ====== Interest paid $ 6,997 $ 1,053 ====== ====== Income taxes paid, net $ 2,753 $ 2,446 ====== ====== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Nortek, Inc. and Subsidiaries Condensed Consolidated Statement of Stockholders' Investment For the Three Months Ended April 2, 1994 and April 3, 1993 (Dollar Amounts in Thousands) Cumulative Translation, Addi- Retained Pension Special tional Earnings and Other Common Common Paid-in (Accumulat- Adjust-Treasury Stock Stock Capital ed Deficit) ments Stock ----- ----- ------- ----------- ------ ----- (Unaudited) Balance, December 31, 1992 $15,602 $990 $134,599 $ 3,766 $ --- $(28,051) 10,393 shares of special common stock converted into 10,393 shares of common stock 10 (10) --- --- --- --- Net loss --- --- --- (3,500) --- --- ------ --- ------- ------- ------ ------- Balance, April 3, 1993 $15,612 $980 $134,599 $ 266 $ --- $(28,051) ====== === ======= ====== ====== ======= Balance, December 31, 1993 $15,759 $849 $134,627 $(17,034) $(2,143) $(28,051) 19,156 shares of special common stock converted into 19,156 shares of common stock 19 (19) --- --- --- --- Translation adjustment --- --- --- --- (652) --- Cumulative effect of an accounting change (see Note E) --- --- --- --- (400) --- Unrealized decline in marketable securities --- --- --- --- (1,515) Net earnings --- --- --- 1,500 --- --- ------ --- ------- ------ ------ ------ Balance, April 2, 1994 $15,778 $830 $134,627 $(15,534) $(4,710) $(28,051) ====== === ======= ====== ====== ======= The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APRIL 2, 1994 AND APRIL 3, 1993 (A) The unaudited condensed consolidated financial statements presented ("Unaudited Financial Statements") have been prepared by Nortek, Inc. and subsidiaries (the "Company") without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the interim periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted, although, the Company believes that the disclosures included are adequate to make the information presented not misleading. Certain amounts in the Unaudited Financial Statements for the prior periods have been reclassified to conform to the presentation at April 2, 1994. It is suggested that these Unaudited Financial Statements be read in conjunction with the financial statements and the notes included in the Company's latest Annual Report on Form 10-K. (B) Net sales and loss before provision for income taxes in the first quarter of 1993 includes approximately $24,400,000 in net sales and a $1,000,000 loss before provision for income taxes relating to Dixieline, which was accounted for as a business held for sale beginning on October 2, 1993. Accordingly, Dixieline's operating results were no longer included in the Company's consolidated operating results subsequent to October 2, 1993. (See Note C below.) (C) On January 14, 1994, the Company redeemed $22,600,000 principal amount of its 11 1/2% Senior Subordinated Debentures due May 1994, which were called for redemption in December 1993. In February 1994, the Company sold in a public offering $218,500,000 of its 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes") at a slight discount. A portion of the net proceeds from the sale of the 9 7/8% Notes was used to redeem, on March 24, 1994, approximately $153,000,000 of certain of the Company's outstanding principal amount of indebtedness, called for redemption on February 22, 1994, and to pay accrued interest. Interest expense, net of interest income, in the first quarter of 1994 was approximately $1,300,000 greater than it would have been had the debt redemption occurred on the same day as the financing. On March 31, 1994, the Company sold all the capital stock of its Dixieline Lumber Company subsidiary ("Dixieline") for approximately $18,800,000 in cash and $6,000,000 in preferred stock of the purchaser. In the third quarter of 1993, the Company provided a valuation reserve of approximately $20,300,000 ($1.19 per share, net of tax) to reduce the Company's net investment in Dixieline to estimated net realizable value. No additional loss in 1994 was necessary in connection with the sale. The following table presents the approximate unaudited pro forma operating results of the Company for the three months ended April 2, 1994 and April 3, 1993, and the year ended December 31, 1993, as adjusted for the pro forma effect of the sale of NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APRIL 2, 1994 AND APRIL 3, 1993 (Continued) Dixieline, the debt financing and the debt redemptions: Three Months Ended Year Ended April 2, April 3, December 1994 1993 31,1993 ---- ---- ------- (Amounts in Thousands Except Per Share Amounts) Net Sales $169,020 $154,346 $660,908 Earnings (Loss) from Continuing Operations $ 1,600 $ (600) $ 3,500 Fully Diluted Earnings (Loss) Per Share $ .13 $ (.04) $ .28 In computing the pro forma earnings (loss) from continuing operations, interest expense on the indebtedness redeemed during the period that such indebtedness was outstanding was excluded from operating results at an average interest rate of approximately 13.5% (including amortization of debt discounts and deferred debt expense) for all periods presented, net of the tax effect. Interest expense was included on the Notes at a rate of approximately 9 7/8%, plus amortization of deferred debt expense and debt discount, for all periods presented, net of the tax effect. The net after-tax loss recorded in the third quarter of 1993 from the valuation reserve recorded to reduce the Company's net investment in Dixieline to net realizable value was also excluded. Investment income was assumed earned on the remaining cash proceeds from the debt financing at a rate of 3.5%. No investment income was assumed earned on the proceeds from the sale of Dixieline. (D) During the first quarter of 1994, the Company purchased, at a discount, in the open market approximately $4,000,000 principal amount of its 7 1/2% convertible sinking fund debentures due 2006. This transaction resulted in an extraordinary gain of approximately $400,000, net of income taxes of $200,000 ($.03 per share) in the first quarter of 1994. During the first quarter of 1993, the Company purchased, at a discount, in the open market approximately $874,000 principal amount of its various debentures, which did not result in a net gain. (E) On January 1, 1994, the Company adopted the accounting requirements of Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities", and recorded as income the accumulated unrealized marketable security reserve recorded at December 31, NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APRIL 2, 1994 AND APRIL 3, 1993 (Continued) 1993 of approximately $400,000 ($.03 per share) as the cumulative effect of an accounting change. Under the new accounting method, the Company will record unrealized gains or losses on such investment securities as adjustments to stockholders' investment. Previously, such gains or losses were recorded in the Company's statement of operations. At April 2, 1994, the reduction in the Company's stockholders' investment under the new accounting method for gross unrealized losses was approximately $1,915,000. Prior periods have not been restated. The Company's marketable securities at April 2, 1994 consist of U. S. Government Treasury Notes due as follows: Fair Principal Market Due Amount Cost Value (Amounts in Thousands) 1-5 years $16,000 $16,003 $15,327 5-10 years 15,000 15,350 14,111 ------ ------ ------ $31,000 $31,353 $29,438 ======= ======= ======= In the first quarter of 1994, there were no realized gains or losses on marketable securities. At April 2, 1994, there were no gross unrealized gains on the Company's marketable securities. (F) On January 1, 1993, the Company adopted the accounting requirements of SFAS No. 106, "Employers' Accounting for Post- Retirement Benefits Other Than Pensions" and recorded, as a charge to operations, the accumulated post-retirement benefit obligation ("APBO") of approximately $3,100,000 (before income tax credit of approximately $1,000,000 ($.17 per share, net of tax) as the cumulative effect of an accounting change. Previously, such health care and related benefits, for qualified active and retired beneficiaries, were charged to operating results in the period that such benefits were paid. (G) At April 2, 1994, the Company remains contingently liable for obligations (approximately $7,100,000) under Industrial Revenue Bond agreements ("IRB's"), plus unpaid interest, relating to facilities of a previously owned subsidiary. This former subsidiary defaulted on certain principal and interest payments related to these IRB's during 1992 and, in March 1993 filed for protection under Federal bankruptcy laws. In March 1994, the Company paid approximately $1,594,000 to the Trustee of these IRB's for interest payments through that date. The Company continues to vigorously pursue all available remedies to minimize any liability that may ultimately result from the outcome of this matter. The Company believes that any liability that may ultimately result from the resolution of this matter, in excess of amounts provided, will not have a material adverse effect on financial position or results of operations of the Company. NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APRIL 2, 1994 AND APRIL 3, 1993 (Continued) (H) In the first quarter of 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes" as a change in accounting method. Under SFAS No. 109, deferred income tax assets or liabilities are computed based on the difference (temporary differences) between the financial statement and income tax bases of assets and liabilities, using the current marginal income tax rates in effect for the period in which the differences are expected to reverse. Deferred income tax provisions or credits are based on the changes in the asset and liability between periods. The effect of adopting this new accounting method in the first quarter of 1993 was not significant to the provision for income taxes as compared to the prior accounting method. The tax effect of temporary differences which gave rise to significant portions of deferred income tax assets and liabilities as of April 2, 1994 is as follows: (Amounts in Thousands) ---- U.S. Federal Prepaid (Deferred) Income Tax Assets Arising From: Accounts receivable $ 1,571 Inventory (710) Insurance reserves 5,578 Other reserves, liabilities and assets, net 12,050 Other, net 11 ------ $18,500 ====== Deferred (Prepaid) Income Tax Liabilities Arising From: Property & equipment, net $11,652 Prepaid pension assets 1,636 Insurance reserves (816) Other reserves, liabilities and assets, net 946 Capital loss carryforward (6,217) Valuation allowances 14,099 $21,300 ====== NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APRIL 2, 1994 AND APRIL 3, 1993 (Continued) At April 2, 1994, the Company has a capital loss carryforward of approximately $17,000,000 which expires in the year 1997. The Company has provided a valuation allowance equal to the tax effect of capital loss carryforwards and certain other deferred income tax assets, since realization of these deferred income tax assets cannot be reasonably assured. At April 2, 1994, the Company has approximately $7,500,000 of net U. S. Federal prepaid income tax assets which are expected to be realized through future operating earnings. The table below reconciles the provision for income taxes from continuing operations at the federal statutory income tax rate to the actual provision for income taxes : Three Months Ended ------------------ April 2, April 3, 1994 1993 ---- ---- (Amounts in Thousands) Provision (credit) for income taxes at the federal statutory rate $ 560 $(272) Net change from statutory rate: State taxes, net of federal tax effect 163 330 Non-deductible amortization for tax purposes 184 180 Other non-deductible items 74 160 Change in valuation reserve (77) 61 Tax effect on foreign income 86 128 Other, net (90) 13 ---- ---- Provision for income taxes from continuing operations $ 900 $ 600 ==== ==== The Company recorded a $1,000,000 income tax credit (principally deferred) in the first quarter of 1993 relating to the cumulative effect of an accounting change for certain post-retirement benefits. This actual income tax credit was approximately equal to the tax credit at the U. S. Federal statutory rate. (I) Loss per share calculations presented for the first quarter of 1993 do not include the effect of common stock equivalents or convertible debentures (and the reduction in related interest expense) because the assumed exercise of stock options and conversion of debentures is anti-dilutive. Earnings per share calculations presented for the first quarter of 1994 do not include the effect of convertible debentures (and the reduction in related interest expense) because the assumed conversion of debentures is anti-dilutive. (J) At April 2, 1994, the payment of cash dividends or stock payments was prohibited under the most restrictive of the Company's indenture and loan agreements. (K) The following table summarizes the unaudited activity of businesses sold or discontinued included in the accompanying NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APRIL 2, 1994 AND APRIL 3, 1993 (Continued) unaudited condensed consolidated statement of cash flows: Three Months Ended ------------------ April 2, April 3, 1994 1993 ---- ---- (Amounts in Thousands) Fair value of assets sold $34,439 $ --- Liabilities assumed by the purchaser (16,143) --- Cash received (paid) relating to businesses sold or discontinued 1,984 (2,970) ------ ------ Net cash proceeds (payments) relating to businesses sold or discontinued $20,280 $(2,970) ====== ====== Significant unaudited non-cash financing and investing activities excluded from the accompanying unaudited condensed consolidated statement of cash flows include transactions of approximately $1,515,000 of unrealized loss on investment in marketable securities in 1994 and approximately $1,883,000 resulting from the effect of a change in accounting method for income taxes relating to property, net, in 1993. Depreciation and amortization included in the Company's unaudited condensed consolidated statement of cash flows for the three months ended April 2, 1994 and April 3, 1993, includes approximately $600,000 and approximately $500,000 of amortization of deferred debt expense and debt discount, respectively, which is recorded as interest expense in the accompanying unaudited condensed consolidated statement of operations. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 2, 1994 AND THE FIRST QUARTER ENDED APRIL 3, 1993 The Company is a diversified manufacturer of residential and commercial building products, operating within three principal product groups: the Residential Building Products Group; the Air Conditioning and Heating Products Group; and the Plumbing Products Group. Through these product groups, the Company manufactures and sells, primarily in the United States and Canada, a wide variety of products for the residential and commercial construction, manufactured housing, and the do-it-yourself and professional remodeling and renovation markets. In March 1994, the Company sold its Retail Home Center Operations ("Dixieline") to increase the Company's focus on its other building products businesses. For purposes of this Management's Discussion and Analysis of Financial Condition and Results of Operations, the results of operations attributable to Dixieline have been excluded from all data that are reported as being from ongoing operations, including net sales, cost of products sold, selling, general and administrative expense and segment earnings. Total consolidated operating results of the Company, however, include the operating results of Dixieline in the first quarter of 1993. (See Note C of the Notes to Unaudited Condensed Consolidated Financial Statements.) Results of Operations The tables below and on the next page set forth, for the periods presented, (a) certain consolidated operating results, (b) the percentage change of certain such results as compared to the prior comparable period, (c) the percentage which certain of such results bears to net sales and (d) the change of certain of such percentages (to net sales) as compared to the prior comparable period. The results of operations for the first quarter ended April 2, 1994 are not necessarily indicative of the results of operations to be expected for the full year. First Quarter Ended Change in April 2, April 3, First Quarter 1994 1994 1993 $ % ---- ---- ----- ------ (Dollar amounts in millions) Net sales $169.0 $178.7 $(9.7) (5.4) Cost of products sold 119.3 129.2 9.9 7.7 Selling, administrative and other, net 41.4 45.3 3.9 8.6 Operating earnings 8.3 4.2 4.1 97.6 Interest expense (7.9) (7.0) (.9) (12.9) Interest income 1.2 1.0 .2 20.0 Net gain on marketable securities --- 1.0 (1.0) (100.0) Earnings (Loss) before provision for income taxes 1.6 (.8) 2.4 300.0 Provision for income taxes .9 .6 (.3) (50.0) Earnings (loss) before extraordinary gain .7 (1.4) 2.1 150.0 Extraordinary gain from debt retirements .4 --- .4 --- Earnings (loss) before the cumulative effect of accounting changes 1.1 (1.4) 2.5 --- Cumulative effect of accounting changes .4 (2.1) 2.5 --- ---- ---- ---- ---- Net earnings (loss) $ 1.5 $(3.5) $ 5.0 --- ==== ==== ==== ==== NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 2, 1994 AND THE FIRST QUARTER ENDED APRIL 3, 1993 (Continued) Change in Percentage of Net Sales Percentage First Quarter Ended for the First April 2, April 3, Quarter 1994 1994 1993 as compared to 1993 ---- ---- ------------------- Net sales 100.0% 100.0% --- Cost of products sold 70.6 72.3 1.7 Selling, administrative and other, net 24.5 25.3 .8 Operating earnings 4.9 2.4 2.5 Interest expense (4.6) (3.9) (.7) Interest income .7 .5 .2 Net gain on marketable securities --- .5 (.5) Earnings (Loss) before provision for income taxes 1.0 (.5) 1.5 Provision for income taxes .5 .3 (.2) Earnings (loss) before extraordinary gain .5 (.8) 1.3 Extraordinary gain from debt retirements .2 --- .2 Earnings (Loss) before the cumulative effect of accounting changes .7 (.8) 1.5 Cumulative effect of accounting changes .2 (1.2) 1.4 ---- ---- ---- Net earnings (loss) .9 (2.0) 2.9 ==== ==== ==== The following table presents the net sales for the Company's principal product groups for the first quarter ended April 2, 1994 as compared to the first quarter ended April 3, 1993 and the amount and the percentage change of such results as compared to the prior comparable period. The results of operations for the first quarter are not necessarily indicative of the results of operations to be expected for the full year. First Quarter Ended ------------------- April 2, April 3, Increase (Decrease) 1994 1993 $ % ---- ---- ----- ----- (000's omitted) Net Sales: Residential Building Products $ 64,000 $ 65,205 $(1,205) (1.8) Air Conditioning and Heating Products 73,474 56,735 16,739 29.5 Plumbing Products 31,546 32,406 (860) (2.7) ------- ------- ------ ----- Net Sales from Ongoing Operations 169,020 154,346 14,674 9.5 Business Sold --- 24,361 (24,361) 100.0 ------- ------- ------- ----- Total $169,020 $178,707 $ (9,687) (5.4) ======= ======= ======= ===== NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 2, 1994 AND THE FIRST QUARTER ENDED APRIL 3, 1993 (Continued) Operating Results Net sales from ongoing operations increased approximately $14,674,000, or approximately 9.5%, in the first quarter of 1994 as compared to the first quarter of 1993. Total net sales decreased approximately $9,687,000, or approximately 5.4%, in 1994 as compared to 1993 as a result of the effect of Dixieline, partially offset by the following factors. Net sales from ongoing operations increased principally as a result of increased sales volume of residential air conditioning and heating ("HVAC") products, increased shipments of new and replacement HVAC products to manufactured housing customers and increased sales levels of commercial and industrial HVAC products by the Air Conditioning and Heating Products Group. To a lesser extent, these increases were partially offset by slightly lower sales levels in the Residential Building Products Group and decreased sales levels of bathroom fixtures as a result of the curtailment of certain product lines in the fourth quarter of 1993 by the Plumbing Products Group. The decline in the Plumbing Products Group was partially offset by increased sales volume of vitreous china products. Cost of products sold from ongoing operations as a percentage of net sales from ongoing operations decreased from approximately 71.6% in the first quarter of 1993 to approximately 70.6% in the first quarter of 1994. Total cost of products sold as a percentage of total net sales decreased from approximately 72.3% in 1993 to approximately 70.6% in 1994 as a result of the factors described below and the effect of Dixieline, which operated at higher cost levels than the Company's other product groups. The decrease in cost of products sold from ongoing operations as a percentage of net sales from ongoing operations was primarily attributable to a reduction in cost in the Plumbing Products Group and increased sales of residential and commercial HVAC products in the Air Conditioning and Heating Products Group, without a proportionate increase in costs. The improvement in cost levels is due, in part, to the Company's ongoing cost control efforts. To a lesser extent, these decreases in the percentage were partially offset by slightly lower sales levels without a proportionate decrease in costs in the Residential Building Products Group. Selling, general and administrative expense from ongoing operations, as a percentage of net sales from ongoing operations decreased from approximately 25.1% in 1993 to approximately 24.5% in 1994. Total selling, general and administrative expense, as a percentage of total net sales decreased from approximately 25.3% in 1993 to approximately 24.5% in 1994 as a result of the factors described below and the effect of Dixieline which operated at higher expense levels than the Company's other product groups. The decrease in selling, general and administrative expense from ongoing operations as a percentage of net sales from ongoing operations in the first quarter of 1994 was principally due to lower non-segment expense and increased net sales from ongoing operations. The effect of increased net sales of the Air Conditioning and Heating Products Group, without a proportionate NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 2, 1994 AND THE FIRST QUARTER ENDED APRIL 3, 1993 (Continued) increase in expense was also a factor. This group operates at lower expense levels than the total expense level of ongoing operations. These decreases in the percentage were partially offset by the effect of lower sales in Residential Building Products and Plumbing Products without proportionate decreases in expense. Segment earnings from ongoing operations were approximately $12,100,000 for the first quarter of 1994 as compared to approximately $9,900,000 for the first quarter of 1993. Total segment earnings were approximately $12,100,000 for 1994, as compared to approximately $9,000,000 for 1993 as a result of the effect of Dixieline and the following factors. The increase in segment earnings from ongoing operations principally was due to the increased sales level and lower cost and expense levels in the Air Conditioning and Heating Products Group, and decreased costs in the Plumbing Products Group. The increase in segment earnings was partially offset by the effect of slightly lower sales volume in the Residential Building Products Group without a proportionate decrease in costs and expenses. Foreign segment earnings, consisting primarily of the results of operations of the Company's Canadian subsidiary which manufactures built-in ventilating products, declined to approximately 7.4% of segment earnings from ongoing operations in the first quarter of 1994 from approximately 11.3% of such earnings in 1993. This decline was primarily due to an approximately 26.8% increase in domestic segment earnings from ongoing operations in 1994, as well as an approximate 20.1% decrease in foreign segment earnings in 1994. The decrease in foreign segment earnings was primarily the result of the continued weakness in the residential construction market in Canada. Operating earnings in the first quarter of 1994 increased approximately $4,100,000, or approximately 97.6%, as compared to 1993, primarily as a result of the factors discussed above and the effect of Dixieline's operating results. Dixieline's operating loss included in the Company's consolidated operating results was approximatley $900,000 in the first quarter of 1993. Dixieline's operating results in 1994 are no longer included in the Company's consolidated operating results. See above. Interest expense in the first quarter of 1994 increased approximately $900,000, or approximately 12.9%, as compared to the first quarter of 1993. In February 1994, the Company sold in a public offering $218,500,000 of its 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes") and used a portion of the proceeds to redeem, on March 24, 1994 approximately $153,000,000 of certain of the Company's outstanding indebtedness. Interest expense (net of interest income) was approximately $1,300,000 greater than it would have been had the debt redemption occurred on the same day as the financing. This increase was partially offset by the effect of the redemption of certain other outstanding indebtedness in January 1994. (See Note C of the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere herein.) NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 2, 1994 AND THE FIRST QUARTER ENDED APRIL 3, 1993 (Continued) Interest income in the first quarter of 1994 increased approximately $200,000, or approximately 20.0%, as compared to the first quarter of 1993, principally due to higher average invested balances of short- term investments, marketable securities and other investments (in part, due to cash from the sale of the 9 7/8% Notes), principally offset by slightly lower yields earned on investment and marketable securities. The net gain on marketable securities was approximately $1,000,000 for 1993, a portion of which were unrealized gains recorded in the Company's Statement of Operations in 1993. Due to the adoption in 1994 by the Company of Statement of Financial Accounting Standards ("SFAS") No. 115, such unrealized gains and losses are now recorded as adjustments to stockholders' investment. (See Note E of Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere herein.) The provision for income taxes was approximately $900,000 for 1994, as compared to approximately $600,000 for 1993. The income tax rates principally differed from the United States federal statutory rate of 35% in 1994 and 34% in 1993, as a result of the effect of foreign income tax on foreign source income, a limited amount of state income tax benefits recorded, and nondeductible amortization expense (for tax purposes) in both periods. (See Note H of the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere herein.) The Company recorded an extraordinary gain of approximately $400,000 in the first quarter of 1994. The gain resulted from the purchase in the open market of the Company's 7 1/2% Convertible debentures in March 1994. (See Note D of the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere herein.) The cumulative effect of accounting changes resulted in earnings of approximately $400,000 in the first quarter of 1994 and a loss of approximately $2,100,000 in the first quarter of 1993 from the adoption of SFAS No. 115 and No. 106, respectively. (See Notes E and F of the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere herein.) NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 2, 1994 AND THE FIRST QUARTER ENDED APRIL 3, 1993 (Continued) Liquidity and Capital Resources The Company's primary sources of liquidity in 1994 have been funds provided by the sale of Notes (See Note C of the Notes to the Unaudited Condensed Consolidated Financial Statements) and proceeds from a business sold and, in both periods, subsidiary operations, unrestricted investments and marketable securities. The Company's Canadian subsidiary, Broan Limited, has a $20,100,000 Canadian (approximately $14,500,000 U. S. at exchange rates prevailing at April 2, 1994) secured line of credit, of which approximately $14,800,000 Canadian (approximately $10,700,000 U. S. at exchange rates prevailing at April 2, 1994), in the aggregate, is available to the Company (the "Line of Credit"). The Line of Credit prohibits dividends or other distributions to the Company from Broan Limited in excess of $14,800,000 Canadian (approximately $10,700,000 U. S. at exchange rates prevailing at April 2, 1994). Borrowings under the Line of Credit are available for working capital and other general corporate purposes. The Line of Credit contains covenants requiring Broan Limited to maintain (i) a ratio of earnings before interest and taxes to interest of at least 2 to 1, (ii) a working capital ratio of at least 1.5 to 1 and (iii) a debt to equity ratio of no higher than 3 to 1; the Line of Credit also limits the annual amount of capital expenditures which Broan Limited may make to $500,000 Canadian (approximately $360,000 U. S. at exchange rates prevailing at April 2, 1994). Broan Limited pays a commitment fee of .25% per annum on the unutilized portion of the Line of Credit payable monthly on a pro rata basis, and the Line of Credit is subject to an annual review by the lender in April of each year. As of May 10, 1994, there were $1,600,000 U. S. in outstanding borrowings under the Line of Credit, all of the proceeds of such borrowings were advanced to the Company, and $3,700,000 U. S. of additional available borrowings could be advanced to the Company. Unrestricted cash and investments were $109,433,000 at April 2, 1994. On January 14, 1994, the Company redeemed $22,600,000 principal amount of its 11-1/2% Senior Subordinated Debentures due May 1994, which were called for redemption in December 1993. In February 1994, the Company sold in a public offering $218,500,000 of its 9-7/8% Senior Subordinated Notes due 2004 ("9-7/8% Notes") at a slight discount. A portion of the net proceeds from the sale of the 9-7/8% Notes were used to redeem, on March 24, 1994, approximately $153,000,000 of certain of the Company's outstanding principal amount of indebtedness and pay accrued interest. (See Note C of Notes to the Unaudited Condensed Consolidated Financial Statements.) The Company believes that cash flow from subsidiary operations, unrestricted cash and marketable securities and borrowings under the Line of Credit or under new credit facilities or arrangements which may be entered into will provide sufficient liquidity to meet the NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 2, 1994 AND THE FIRST QUARTER ENDED APRIL 3, 1993 (Continued) Company's working capital, capital expenditure, debt service and other ongoing business needs through the next 12 months. The Company's investment in marketable securities at April 2, 1994 consisted primarily of investments in United States Treasury securities. (See Note E of Notes to Unaudited Condensed Consolidated Financial Statements.) At April 2, 1994, approximately $6,687,000 of the Company's cash and investments were pledged as collateral with an insurance company and were classified as restricted in current assets in the Company's accompanying consolidated balance sheet. At April 2, 1994, the Company remains contingently liable under approximately $7,100,000 of obligations under Industrial Revenue Bond ("IRB's") agreements, plus unpaid interest, relating to facilities of a previously owned subsidiary. This former subsidiary defaulted on certain principal and interest payments related to these IRB's during 1992 and, in February 1993, filed for protection under federal bankruptcy laws. In March 1994, the Company paid approximately $1,594,000 to the Trustee of these IRB's for interest payments through that date. The Company continues to vigorously pursue all available remedies to minimize any liability that may ultimately result from the outcome of this matter. The Company believes that the resolution of this matter, after giving consideration to amounts previously provided, will not have a material adverse effect on the financial position or results of operations of the Company. (See Note G of Notes to Unaudited Condensed Consolidated Financial Statements.) In March 1994, the Company sold Dixieline for approximately $18,800,000 in cash and $6,000,000 of preferred stock of the purchaser. (See Note C of Notes to Unaudited Condensed Consolidated Financial Statements.) The Company's working capital and current ratio increased from approximately $117,926,000 and approximately 1.6:1, respectively, at December 31, 1993 to $176,451,000 and approximately 2.1:1, respectively, at April 2, 1994, principally as a result of the remaining cash proceeds from the debt financing in February 1994 and as described below. (See Note C of Notes to Unaudited Condensed Consolidated Financial Statements.) Accounts receivable increased approximately $11,856,000, or approximately 14.0%, between December 31, 1993 and April 2, 1994, while net sales from ongoing operations increased approximately .4% in the first quarter of 1994 as compared to the fourth quarter of 1993. This increase is principally as a result of increased net sales of new and replacement products from residential and manufactured housing customers by the Air Conditioning and Heating Products Group. The rate of change in accounts receivable in certain periods may be different than the rate of change in sales in such periods principally due to the timing of net sales. Significant net sales near the end of any period generally result in significant amounts of accounts receivable on the date of the balance sheet at the end of such period. NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 2, 1994 AND THE FIRST QUARTER ENDED APRIL 3, 1993 (Continued) In recent periods, the Company has not experienced any significant changes in credit terms, collection efforts, credit utilization or delinquency. Inventories increased approximately $7,449,000 or approximately 9.1%, between December 31, 1993 and April 2, 1994. Accounts payable increased approximately $10,376,000 or approximately 22.1% between December 31, 1993 and April 2, 1994. Unrestricted cash and investments increased approximately $23,389,000 (net of $22,600,000 which was used to retire certain indebtedness on January 14, 1994 - see Note C of Notes to Unaudited Condensed Consolidated Financial Statements) from December 31, 1993 to April 2, 1994, principally as a result of cash provided (used) by the following: Condensed Consolidated Cash Flows ------------ Operating Activities-- Cash flow from operations, net $ 6,402,000 Increase in accounts receivable, net (11,856,000) Increase in inventories (7,449,000) Increase in trade accounts payable 6,976,000 Change in accrued expenses, taxes, prepaids, other assets, liabilities, and other, net (8,261,000) Investing Activities-- Net cash proceeds relating to businesses sold 20,280,000 Purchase of marketable securities (5,032,000) Capital expenditures (3,763,000) Financing Activities-- Increases in borrowings, net of payments, including purchase of debentures 27,126,000 All other, net (1,034,000) ---------- $23,389,000 ========== The Company's debt-to-equity ratio increased from approximately 2.1:1 at December 31, 1993 to 2.3:1 at April 2, 1994, primarily as a result of a net increase in borrowings of approximately $23,400,000. (See Note C of Notes to Unaudited Condensed Consolidated Financial Statements.) At April 2, 1994, the payment of cash dividends or stock payments was prohibited under the most restrictive of the Company's indentures and loan agreements. The Company's St. Louis, Missouri plant, which is part of the Company's Air Conditioning and Heating Products Group and manufactures products for the residential site-built and manufactured housing markets, experienced damage as a result of the flooding of the Mississippi River in July 1993. The plant was closed for several NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED APRIL 2, 1994 AND THE FIRST QUARTER ENDED APRIL 3, 1993 (Continued) weeks, but returned to full operation in late August 1993. At April 2, 1994, the Company accrued for estimated losses of approximately $14,500,000 related to the flooding, recorded a receivable of approximately $14,500,000 for casualty, property damage and business interruption insurance claims due from its insurance carrier and recorded as a liability approximately $13,200,000 of cash advances received relating to such claims. The Company believes that it has adequate insurance coverage and does not expect this event to have a material adverse effect on the Company's financial condition or results of operations. At April 2, 1994, the Company has approximately $7,500,000 of net U. S. Federal prepaid income tax assets which are expected to be realized through future operating earnings. (See Note H of Notes to the Unaudited Condensed Consolidated Financial Statements.) The Company believes that its growth will be generated largely by internal growth in each of its product groups, augmented by strategic acquisitions. The Company regularly reviews potential acquisitions which would increase or expand the market penetration of, or otherwise complement, its current product lines, although there are no pending agreements or negotiations for any material acquisitions and the Company has made no material acquisitions since early 1988. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 11.1 Calculation of shares used in determining earnings per share (filed herewith). (b) The following reports on Form 8-K were filed by the Registrant during the period: February 11, 1994. Item 5. Other Events, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. February 14, 1994. Item 5. Other Events, Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. April 13, 1994. Item 2. Acquisition or Disposition of Assets, Item 7. Financial Statements, Pro Forma Financial information and Exhibits. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORTEK, INC. (Registrant) /s/Almon C. Hall --------------------------------- Almon C. Hall, Vice President and Controller and Chief Accounting Officer May 12, 1994 - ------------------------- (Date) EX-11 2 EXHIBIT 11.1 EXHIBIT 11.1 NORTEK, INC. AND SUBSIDIARIES CALCULATION OF SHARES USED IN DETERMINING EARNINGS PER SHARE For the Three Months Ended -------------------------- April 2, April 3, 1994 1993 ---- ---- Calculation of the number of shares to be used in computing primary earnings per share: Weighted average common and special common shares issued during the period 16,608,549 16,052,149 Less average common and special common shares held in the Treasury (4,066,602) (3,526,602) ---------- ---------- Weighted average number of common and special common shares outstanding during the period 12,541,947 12,525,547 Dilutive effect of stock options considered common stock equivalents computed under the treasury stock method using the average price during the period 142,965 131,207 ---------- ---------- Weighted average number of common and common equivalent shares outstanding during the period 12,684,912 12,656,754 ========== ========== Calculation of the number of shares to be used in computing fully diluted earnings per share: Weighted average number of common and special common shares outstanding during the period 12,541,947 12,525,547 Dilutive effect of stock options considered common stock equivalents computed under the treasury stock method using the greater of the price at the end of the period or the average price during the period 142,965 135,205 Dilutive effect of assuming conversion of the Company's 7.5% Convertible Debentures 714,612 725,953 ---------- ---------- 13,399,524 13,386,705 ========== ========== Note: Earnings (loss) per share calculations do not include the effect of common stock equivalents in 1993 or convertible debentures in both periods (and the reduction in related expense), because the assumed exercise of stock options and conversion of debentures is anti- dilutive for the net earnings (loss) per share amounts. -----END PRIVACY-ENHANCED MESSAGE-----