-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SJ+EHzDUs6N31mW4aCCCRKplyg30SZhOgxeZsu5TCRfbVTSdr4cNdcH26XFinLO3 qdVwqAeyRAIHj/XFidg4eg== 0000072423-99-000023.txt : 19991117 0000072423-99-000023.hdr.sgml : 19991117 ACCESSION NUMBER: 0000072423-99-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991002 FILED AS OF DATE: 19991116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTEK INC CENTRAL INDEX KEY: 0000072423 STANDARD INDUSTRIAL CLASSIFICATION: AIR COND & WARM AIR HEATING EQUIP & COMM & INDL REFRIG EQUIP [3585] IRS NUMBER: 050314991 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06112 FILM NUMBER: 99758306 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 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 October 2, 1999 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 November 5, 1999 was 11,039,190. The number of shares of Special Common Stock outstanding as of November 5, 1999 was 552,900. NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Dollar amounts in thousands) OCTOBER 2, DEC. 31, 1999 1998 ---------- -------- (Unaudited) ASSETS CURRENT ASSETS: Unrestricted: Cash and cash equivalents $ 71,998 $ 87,876 Marketable securities available for sale 24,985 121,757 Restricted: Cash and cash equivalents 2,631 --- Investments and marketable securities at cost, which approximates market 20,397 13,818 Accounts receivable, less allowances of $12,350 and $10,657 290,726 205,359 Inventories: Raw materials 95,469 69,247 Work in process 18,077 13,010 Finished goods 95,038 80,450 ---------- ---------- 208,584 162,707 ---------- ---------- Prepaid expenses 12,581 10,938 Other current assets 12,490 15,513 Prepaid income taxes 68,145 54,163 ---------- ---------- TOTAL CURRENT ASSETS 712,537 672,131 ---------- ---------- PROPERTY AND EQUIPMENT, AT COST: Land 16,373 12,628 Buildings and improvements 116,296 102,455 Machinery and equipment 342,901 294,551 ---------- ---------- 475,570 409,634 Less accumulated depreciation 153,908 130,010 ---------- ---------- TOTAL PROPERTY AND EQUIPMENT, NET 321,662 279,624 ---------- ---------- OTHER ASSETS: Goodwill, less accumulated amortization of $52,867 and $41,204 599,315 598,823 Intangible assets, net 106,429 73,441 Deferred debt expense 22,935 24,845 Other 45,619 41,129 ---------- ---------- 774,298 738,238 ---------- ---------- $1,808,497 $1,689,993 ========== ========== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Dollar amounts in thousands) (Continued) OCTOBER 2, DEC. 31, 1999 1998 ---------- -------- (Unaudited) LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Notes payable and other short-term obligations $ 10,298 $ 10,962 Current maturities of long-term debt 5,725 6,776 Accounts payable 163,502 120,101 Accrued expenses and taxes, net 201,129 197,085 --------- ---------- TOTAL CURRENT LIABILITIES 380,654 334,924 --------- ---------- OTHER LIABILITIES: Deferred income taxes 53,915 26,040 Other 91,656 104,306 --------- ---------- 145,571 130,346 --------- ---------- NOTES, MORTGAGE NOTES AND OBLIGATIONS PAYABLE, LESS CURRENT MATURITIES 1,021,392 1,007,113 --------- ---------- STOCKHOLDERS' INVESTMENT: Preference stock, $1 par value; authorized 7,000,000 shares, none issued --- --- Common stock, $1 par value; authorized 40,000,000 shares; 18,734,777 and 18,427,595 shares issued 18,735 18,428 Special common stock, $1 par value; authorized 5,000,000 shares; 843,451 and 854,935 shares issued 843 855 Additional paid-in capital 208,859 201,626 Retained earnings 137,866 93,966 Accumulated other comprehensive loss (12,606) (11,596) Less --treasury common stock at cost, 7,520,817 and 7,290,335 shares (90,750) (83,711) --treasury special common stock at cost, 290,021 and 286,009 Shares (2,067) (1,958) ---------- ---------- TOTAL STOCKHOLDERS' INVESTMENT 260,880 217,610 ---------- ---------- $1,808,497 $1,689,993 ========== ========== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In thousands except per share amounts) For The Three Months Ended October 2, October 3, 1999 1998 ---------- --------- (Unaudited) Net sales $553,493 $458,193 Costs and expenses: Cost of products sold 396,014 331,192 Selling, general and administrative expense 93,323 78,723 Amortization of goodwill and intangible assets 5,074 3,991 -------- -------- 494,411 413,906 -------- -------- Operating earnings 59,082 44,287 Interest expense (24,225) (22,928) Investment income 1,643 3,141 -------- -------- Earnings from continuing operations before provision for income taxes 36,500 24,500 Provision for income taxes 15,900 11,200 -------- -------- Earnings from continuing operations before extraordinary loss 20,600 13,300 Earnings from discontinued operations --- 600 Extraordinary loss from debt retirements --- (100) -------- -------- Net earnings $ 20,600 $ 13,800 ======== ======== Net Earnings (Loss) Per Share: Earnings from continuing operations before extraordinary loss: Basic $1.74 $1.13 Diluted $1.70 $1.11 Earnings from discontinued operations: Basic --- $ .05 Diluted --- $ .05 Extraordinary loss from debt retirements: Basic --- $(.01) ----- ----- Diluted --- $(.01) ----- ----- Net Earnings: Basic $1.74 $1.17 ===== ===== Diluted $1.70 $1.15 ===== ===== Weighted Average Number of Shares: Basic 11,808 11,721 ====== ====== Diluted 12,104 11,951 ====== ====== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In thousands except per share amounts) For The Nine Months Ended October 2, October 3, 1999 1998 ---------- --------- (Unaudited) Net sales $1,504,281 $1,300,308 Costs and Expense: Cost of products sold 1,077,901 959,018 Selling, general and administrative expense 266,548 234,222 Amortization of goodwill and intangible assets 14,913 9,934 --------- --------- 1,359,362 1,203,174 --------- --------- Operating earnings 144,919 97,134 Interest expense (72,564) (62,126) Investment income 6,145 7,492 --------- --------- Earnings from continuing operations before provision for income taxes 78,500 42,500 Provision for income taxes 34,600 19,400 --------- --------- Earnings from continuing operations before extraordinary loss 43,900 23,100 Earnings from discontinued operations --- 600 Extraordinary loss from debt retirements --- (100) --------- --------- Net Earning $ 43,900 $ 23,600 ========= ========= Net Earnings (Loss) Per Share: Earnings from continuing operations before extraordinary loss: Basic $3.72 $2.17 Diluted $3.65 $2.13 Earnings from discontinued operations: Basic --- $ .05 Diluted --- $ .05 Extraordinary loss from debt retirements: Basic --- $(.01) --- ----- Diluted --- $(.01) --- ----- Net Earnings: Basic $3.72 $2.21 ===== ===== Diluted $3.65 $2.17 ===== ===== Weighted Average Number of Shares: Basic 11,802 10,660 ====== ====== Diluted 12,027 10,858 ====== ====== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Amounts in thousands) For The Nine Months Ended October 2, October 3, 1999 1998 ---------- ---------- (Unaudited) Cash flows from operating activities: Earnings from continuing operations $43,900 $ 23,100 Earnings from discontinued operations --- 600 Extraordinary loss from debt retirements --- (100) ------- --------- Net earnings 43,900 23,600 ------- --------- Adjustments to reconcile net earnings to cash: Depreciation and amortization expense 40,133 31,043 Non-cash interest expense 2,828 2,497 Loss on sale of a discontinued operation before income taxes --- 2,500 Loss on debt retirements before income taxes --- 150 Deferred federal income tax provision 18,000 7,300 Deferred federal income tax credit from discontinued operations --- (2,300) Changes in certain assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable, net (54,968) (36,315) Prepaid and other current assets 2,276 (4,492) Inventories (23,480) (12,269) Net assets of discontinued operations --- (6,659) Accounts payable 35,385 24,346 Accrued expenses and taxes (13,092) (9,536) Long-term assets, liabilities and other, net (453) (3,150) -------- --------- Total adjustments to net earnings 6,629 (6,885) -------- --------- Net cash provided by operating activities 50,529 16,715 -------- --------- Cash flows from investing activities: Capital expenditures (34,400) (24,185) Net cash paid for businesses acquired (113,018) (242,500) Purchase of investments and marketable securities (79,295) (100,512) Proceeds from the sale of investments and marketable securities 176,339 36,123 Net proceeds from businesses sold or discontinued --- 68,947 Change in restricted cash and investments (3,968) --- Other, net (6,863) (7,088) -------- --------- Net cash used in investing activities $ (61,205) $(269,215) --------- --------- The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (amounts in thousands) (continued) For The Nine Months Ended October 2, October 3, 1999 1998 ---------- ---------- (Unaudited) CASH FLOWS FROM FINANCING ACTIVITIES: Sale of notes, net $ --- $203,492 Purchase of notes --- (10,511) Net increase (decrease) in borrowings 1,395 (26,141) Net proceeds from the sale of Nortek Common Stock --- 64,190 Purchase of Nortek Common and Special Common Stock (6,982) (6,760) Other, net 385 1,589 ------ ------- Net cash (used in)provided by financing activities (5,202) 225,859 ------- ------- Net decrease in unrestricted cash and cash equivalents (15,878) (26,641) Unrestricted cash and cash equivalents at the beginning of the period 87,876 125,842 ------- ------- Unrestricted cash and cash equivalents at the end of the period $71,998 $ 99,201 ======= ======== Interest paid $90,380 $ 76,880 ======= ======== Income taxes paid, net $ 8,993 $ 2,617 ======= ======== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT FOR THE THREE MONTHS ENDED OCTOBER 3, 1998 (Dollar amounts in thousands)
Addi- Accumulated Special tional Other Common Common Paid-in Retained Treasury Comprehensive Comprehensive Stock Stock Capital Earnings Stock Income (loss) Income ------ ------ ------- -------- -------- ------------- ------------- (Unaudited) Balance, July 4, 1998 $18,409 $ 860 $198,886 $68,766 $(84,288) $ (6,903) $ --- Net earnings --- --- --- 13,800 --- --- 13,800 Other comprehensive income: Currency translation --- --- --- --- --- 416 416 adjustment Unrealized increase in the value of marketable securities --- --- --- --- --- 474 474 ------- Comprehensive income $14,690 ======= 2,675 shares of special common stock converted into 2,675 shares of common stock 3 (3) --- --- --- --- 4,947 shares of common stock issued upon exercise of stock options 5 --- (5) --- --- --- 15,620 shares of treasury stock acquired --- --- --- --- (186) --- Other --- --- 1,948 --- --- --- ------- ----- -------- ------- -------- ------- Balance, October 3,1998 $18,417 $ 857 $200,829 $82,566 $(84,474) $(6,013) ======= ===== ======== ======= ======== =======
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT FOR THE THREE MONTHS ENDED OCTOBER 2, 1999 (Dollar amounts in thousands)
Addi- Accumulated Special tional Other Common Common Paid-in Retained Treasury Comprehensive Comprehensive Stock Stock Capital Earnings Stock Income (loss) Income ------ ------ ------- -------- -------- ------------- ------------- (Unaudited) Balance, July 3, 1999 $18,692 $846 $207,857 $117,266 $(89,439) $(13,508) $ --- Net earnings --- --- --- 20,600 --- --- 20,600 Other comprehensive income (loss): Currency translation adjustment --- --- --- --- --- 952 952 Unrealized decrease in the value of market- able securities --- --- --- --- --- (50) (50) ------- Comprehensive income $21,502 ======= 2,309 shares of special common stock converted into 2,309 shares of common stock 3 (3) --- --- --- --- 40,083 shares of common stock issued upon exercise of stock options 40 --- 913 --- --- --- 94,244 shares of treasury stock acquired --- --- --- --- (3,378) --- Other --- --- 89 --- --- --- ------- ---- -------- -------- -------- -------- Balance, October 2, 1999 $18,735 $843 $208,859 $137,866 $(92,817) $(12,606) ======= ==== ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 8 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT FOR THE NINE MONTHS ENDED OCTOBER 3, 1998 (Dollar amounts in thousands)
Addi- Accumulated Special tional Other Common Common Paid-in Retained Treasury Comprehensive Comprehensive Stock Stock Capital Earnings Stock Income (loss) Income ------ ------ ------- -------- -------- ------------- ------------- (Unaudited) Balance, December 31, 1997 $16,051 $ 767 $135,345 $58,966 $(77,714) $(5,327) $ --- Net earnings --- --- --- 23,600 --- --- 23,600 Other comprehensive income (loss): Currency translation adjustment --- --- --- --- --- (1,181) (1,181) Unrealized increase in the value of marketable securities --- --- --- --- --- 595 595 Minimum pension liability Net of $65 tax benefit --- --- --- --- --- (100) (100) ------- Comprehensive income $22,914 ======= Sale of 2,182,500 shares of common stock 2,182 --- 62,207 --- --- --- 10,831 shares of special common stock converted into 10,831 shares of common stock 11 (11) --- --- --- --- 172,875 shares of common stock and 100,991 shares of special common stock issued upon exercise of stock options 173 101 3,277 --- --- --- 221,043 shares of Treasury stock acquired --- --- --- --- (6,760) --- ------- ------ -------- ------- -------- ------- Balance, October 3, 1998 $18,417 $ 857 $200,829 $82,566 $(84,474) $(6,013) ======= ====== ======== ======= ======== =======
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 9 NORTEK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT FOR THE NINE MONTHS ENDED OCTOBER 2, 1999 (Dollar amounts in thousands)
Addi- Accumulated Special tional Other Common Common Paid-in Retained Treasury Comprehensive Comprehensive Stock Stock Capital Earnings Stock Income (loss) Income ------ ------ ------- -------- -------- ------------- ------------- (Unaudited) Balance, December 31, 1998 $18,428 $855 $201,626 $93,966 $(85,669) $(11,596) $ --- Net earnings --- --- --- 43,900 --- --- 43,900 Other comprehensive income (loss): Currency translation adjustment --- --- --- --- --- (1,197) (1,197) Unrealized increase in the value of market- able securities --- --- --- --- --- 187 187 ------- Comprehensive income $42,890 ======= 11,484 shares of special common stock converted into 11,484 shares of common stock 12 (12) --- --- --- --- 60,698 shares of common stock issued upon exercise of stock options 60 --- 1,064 --- --- --- 234,494 shares of treasury stock acquired --- --- --- --- (7,148) --- 235,000 shares of common stock issued as partial consideration for an acquisition 235 --- 6,080 --- --- --- Other --- --- 89 --- --- --- ------- --- -------- -------- -------- -------- BALANCE, OCTOBER 2, 1999 $18,735 $843 $208,859 $137,866 $(92,817) $(12,606) ======= ==== ======== ======== ======== ======== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
10 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 2, 1999 AND OCTOBER 3, 1998 (A) The unaudited condensed consolidated financial statements (the "Unaudited Financial Statements") presented have been prepared by Nortek, Inc. and include the accounts of Nortek, Inc., and all of its significant wholly owned subsidiaries (the "Company") after elimination of intercompany accounts and transactions, 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. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted, the Company believes that the disclosures included are adequate to make the information presented not misleading. Certain amounts in the Unaudited Financial Statements for prior periods have been reclassified to conform to the October 2, 1999 presentation. 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 as filed with the Securities and Exchange Commission. (B) During the second quarter of 1998, the Company sold, in a public offering, 2,182,500 shares of its common stock for net proceeds of approximately $64,190,000 (the "Common Stock Offering"). (C) Acquisitions are accounted for as purchases and, accordingly, have been included in the Company's consolidated results of operations since the acquisition date. Purchase price allocations are subject to refinement until all pertinent information regarding the acquisitions is obtained. (D) On July 31, 1998, the Company, through a wholly owned subsidiary, purchased all of the issued and outstanding capital stock of NuTone Inc. ("NuTone"), a wholly owned subsidiary of Williams plc ("Williams") for an aggregate purchase price of $242,500,000 in cash plus approximately $5,500,000 in expenses and fees. The purchase price was funded through the use of the net proceeds from the sale of $210,000,000 principal amount of 8 7/8% Senior Notes due August 1, 2008 (the "8 7/8% Notes") at a slight discount, which occurred on July 31, 1998, together with approximately $44,800,000 of the cash proceeds received from the Common Stock Offering. (E) The following presents the approximate unaudited Pro Forma net sales, depreciation and amortization expense (other than amortization of deferred debt expense and debt discount), operating earnings, earnings from continuing operations and diluted earnings per share from continuing operations of the Company for the three months and nine months ended 11 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 2, 1999 AND OCTOBER 3, 1998 (Continued) October 3, 1998 and the year ended December 31, 1998 and gives pro forma effect to the Common Stock Offering, the sale of the 8 7/8% Notes and the acquisition of NuTone on July 31, 1998, and reflects the estimated cost reductions directly attributable to the NuTone acquisition as described below as if such transactions had occurred on January 1, 1998. The Pro Forma results for the periods presented below include the actual results of NuTone since July 31, 1998 in accordance with the purchase method of accounting for an acquisition. Pro Forma operating results do not give pro forma effect to dispositions of businesses that occurred in 1998, the acquisition of Napco, Inc. which occurred on October 9, 1998 or acquisitions which occurred in 1999. (See Notes I, J, K and L).
Three Months Nine Months Year Ended Ended Ended October 3, October 3, December 31, 1998 1998 1998 ---------- ---------- ------------ (In thousands except per share amounts) (Unaudited) Pro Forma: Net sales $473,600 $1,411,000 $1,849,000 Depreciation and amortization expense 11,900 36,200 47,400 Operating earnings 45,800 106,600 142,500 Earnings from continuing operations 12,900 21,400 31,400 Diluted earnings per share from continuing operations $1.08 $1.80 $2.63
At the date of the NuTone acquisition, the Company achieved cost reductions directly attributable to the acquisition from the elimination of fees and charges paid by NuTone to Williams and related entities. The unaudited Pro Forma operating earnings have been increased by approximately $354,000 for the nine months ended October 3, 1998 and the year ended December 31, 1998 and decreased by approximately $30,000 for the three months ended October 3, 1998 to reflect the elimination of such fees. Subsequent to the NuTone acquisition, the Company expects to realize approximately $15,000,000 in unaudited estimated annual cost reductions ("NuTone Cost Reductions") that can be achieved as a 12 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 2, 1999 AND OCTOBER 3, 1998 (Continued) result of integrating NuTone into the Company's operations. Pro Forma earnings have not been increased for the NuTone Cost Reductions for the periods presented, except for NuTone Cost Reductions actually achieved since the date of acquisition. The NuTone Cost Reductions are estimates and actual savings achieved could differ materially. In computing the Pro Forma earnings, earnings have been reduced by the net interest income on the aggregate cash portion of the purchase price of the NuTone acquisition at the historical rate earned by the Company and interest expense on indebtedness incurred in connection with the acquisition of NuTone. Earnings have also been reduced by amortization of goodwill and intangible assets and reflect net adjustments to depreciation expense as a result of an increase in the estimated fair market value of property and equipment and changes in depreciable lives. Interest expense was included on the 8 7/8% Notes at the applicable coupon rate plus amortization of deferred debt expense and debt discount, net of tax effect. The Pro Forma information presented does not purport to be indicative of the results which would have been reported if these transactions had occurred on January 1, 1998, or which may be reported in the future. (F) The Company's Board of Directors has authorized a number of programs to purchase shares of the Company's Common and Special Common Stock. The most recent of these programs was announced on May 20, 1999, and allows the Company to purchase up to 500,000 shares of the Company's Common and Special Common Stock in open market or negotiated transactions, subject to market conditions, cash availability and provisions of the Company's outstanding debt instruments. As of November 5, 1999, the Company has purchased approximately 280,600 shares of its Common and Special Common Stock under this program for approximately $8,600,000 and accounted for such share purchases as Treasury Stock. At November 5, 1999, approximately $87,000,000 was available for the payment of cash dividends, stock purchases or other restricted payments as defined under the terms of the Company's most restrictive Indenture. (G) Basic earnings per share amounts have been computed using the weighted average number of common and common equivalent shares outstanding during each period. Special Common Stock is treated as the equivalent of Common Stock in determining 13 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 2, 1999 AND OCTOBER 3, 1998 (Continued) earnings per share results. Diluted earnings per share amounts have been computed using the weighted average number of common and common equivalent shares and the dilutive potential common and special common shares outstanding during each period. A reconciliation between basic and diluted earnings per share from continuing operations is as follows:
Three Nine Months ended Months ended Oct. 2, Oct. 3, Oct. 2, Oct. 3, 1999 1998 1999 1998 ------- ------- ------- ------- (In thousands except per share amounts) Earnings from continuing operations $20,600 $13,300 $43,900 $23,100 Basic EPS: Basic common shares 11,808 11,721 11,802 10,660 ====== ====== ====== ====== Basic EPS $1.74 $1.13 $3.72 $2.17 ===== ===== ===== ===== Diluted EPS: Basic common shares 11,808 11,721 11,802 10,660 Plus: Impact of stock options 296 230 225 198 ------ ------ ------ ------ Diluted common shares 12,104 11,951 12,027 10,858 ====== ====== ====== ====== Diluted EPS $1.70 $1.11 $3.65 $2.13 ===== ===== ===== =====
(H) In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is effective for fiscal years beginning after June 15, 2000. A company may also implement the Statement as of 14 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 2, 1999 AND OCTOBER 3, 1998 (Continued) the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS 133 cannot be applied retroactively. SFAS 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). The Company is in the process of quantifying the impacts of adopting SFAS 133 on its financial statements and has not determined the timing of or method of adoption. (I) On March 8, 1999, the Company acquired Webco, Inc. ("Webco"), a designer and manufacturer of custom air handling equipment for industrial, institutional and commercial customers. For the fiscal year ended October 31, 1998, Webco had net sales of approximately $13,900,000. (J) On April 23, 1999, the Company completed the acquisition of three businesses from Caradon plc of the United Kingdom: Peachtree Doors and Windows, Thermal-Gard and CWD Windows and Doors (the "Caradon Acquired Companies"). Peachtree Doors and Windows, based in Norcross, Georgia, is a national supplier of premium residential windows, entry doors and patio doors that target custom and high-end home markets. Thermal-Gard, based in Punxsutawney, Pennsylvania, manufactures premium replacement windows, patio doors and sunrooms. CWD Windows and Doors, headquartered in Calgary, Alberta, is a leading provider of complete window and door systems for new homes in Western Canada. For the year ended December 31, 1998, the Caradon Acquired Companies had combined net sales of approximately $169,700,000. (K) On May 28, 1999, the Company acquired Multiplex Technologies, Inc. ("Multiplex"), a leading manufacturer and designer of high-performance, multi-room video distribution equipment for home automation/home entertainment. Multiplex had net sales of approximately $10,000,000 for the year ended December 31, 1998. (L) On September 9, 1999 the Company acquired Kroy Building Products, Inc., ("Kroy") a leading manufacturer of vinyl fencing, railing profiles and vinyl decking systems for residential and light commercial applications. Kroy is located in York, Nebraska and had net sales of approximately $26,000,000 during the twelve months ended June 30, 1999. 15 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 2, 1999 AND OCTOBER 3, 1998 (Continued) (M) Effective in 1998, the Company adopted SFAS 131, "Disclosures About Segments of an Enterprise and Related Information". This statement introduced a new model for segment reporting, called the "management approach." The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance. The presentation for the three months and nine months ended October 2, 1999 and October 3, 1998 is consistent with the presentation in the Company's 1998 Form 10-K. There have been no changes in the Company's segment reporting in 1999. The Company has three reportable segments: the Residential Building Products Segment; the Air Conditioning and Heating Products Segment; and the Windows, Doors and Siding Segment. Other includes corporate related items, results of insignificant operations, intersegment eliminations and certain income and expense items not allocated to reportable segments. The operating results labeled Businesses sold consist of entities sold during 1998 that were previously included in the Company's former Specialty Products and Distribution Group as well as other businesses sold during 1998. The Company evaluates segment performance based on operating earnings before allocations of corporate overhead costs. The income statement impact of all purchase accounting adjustments, including goodwill and intangible assets amortization, is included in the operating earnings of the applicable segment. Intersegment net sales and eliminations were not material for any of the periods presented. The tables that follow exclude the results of operations for the plumbing products business, which was sold in 1998 and had been accounted for as a discontinued operation. 16 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 2, 1999 AND OCTOBER 3, 1998 (Continued) Summarized financial information for the Company's reportable segments is presented in the tables that follow for the three months and nine months ended October 2, 1999 and October 3, 1998.
Three Nine Months Ended Months Ended October 2, October 3, October 2, October 3, 1999 1998 1999 1998 --------- --------- --------- --------- (Amounts in thousands) Net sales: - ---------- Residential building products $162,402 $130,743 $ 477,770 $ 331,901 Air conditioning and heating products 144,152 121,975 417,898 356,645 Windows, doors and siding 226,346 150,306 549,317 390,677 Other 20,593 19,481 59,296 52,564 -------- --------- ---------- ---------- 553,493 422,505 1,504,281 1,131,787 Businesses sold --- 35,688 --- 168,521 -------- --------- ---------- ---------- Consolidated net sales $553,493 $ 458,193 $1,504,281 $1,300,308 ======== ========= ========== ==========
Operating earnings (loss): - -------------------------- Residential building products $27,297 $16,275 $69,878 $36,989 Air conditioning and heating products 19,342 16,345 50,597 43,564 Windows, doors and siding 17,711 14,519 38,862 22,474 Other, net (5,268) (3,602) (14,418) (11,319) -------- -------- ------- --------- 59,082 43,537 144,919 91,708 Businesses sold --- 750 --- 5,426 -------- -------- ------- --------- Consolidated operating earnings 59,082 44,287 144,919 97,134 Unallocated: Interest expense (24,225) (22,928) (72,564) (62,126) Investment income 1,643 3,141 6,145 7,492 -------- -------- -------- --------- Earnings before provision for income taxes $ 36,500 $ 24,500 $ 78,500 $ 42,500 ======== ======== ======== =========
17 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 2, 1999 AND OCTOBER 3, 1998 (Continued)
Three Nine Months Ended Months Ended October 2, October 3, October 2, October 3, 1999 1998 1999 1998 --------- --------- --------- --------- (Amounts in thousands) Depreciation and amortization: - ------------------------------ Residential building products $4,651 $4,169 $14,711 $ 9,556 Air conditioning and heating products 2,734 2,217 7,946 6,711 Windows, doors and siding 5,644 4,175 16,202 12,331 Other 292 326 1,274 1,008 ------ ------ ------- -------- 13,321 10,887 40,133 29,606 Businesses sold --- 280 --- 1,437 ------ -------- ------- -------- Consolidated depreciation and amortization $13,321 $ 11,167 $40,133 $ 31,043 ======= ========= ======= ========
(N) The Company's plans for eliminating certain activities of acquisitions acquired through the first quarter of 1999 have been finalized. The Company expects to finalize its plans with respect to the remaining 1999 acquisitions within one year of the respective acquisition dates and, accordingly, additional liabilities may be recorded as adjustments to the purchase price allocation for certain of the acquired businesses. For the nine months ended October 2, 1999, the Company recorded a liability of approximately $3,400,000 related to employee termination costs, an approximate $3,200,000 benefit from the curtailment of a pension plan relating to severed employees, and approximately $2,000,000 related primarily to the exit of certain facilities and operations of the acquired companies. The change in these liabilities and adjustments, since the end of the second quarter of 1999, resulted in a net decrease in goodwill of approximately $1,200,000 in the third quarter. The Company expects to record an additional estimated $1,000,000 to $2,000,000 of liabilities and adjustments, for acquisition plans not yet finalized relating principally to additional employee terminations and other exit costs arising from the elimination of certain products and the consolidation of certain functions and operations at the acquired businesses. 18 NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 2, 1999 AND OCTOBER 3, 1998 (Continued) Charges to the liabilities for employee terminations include payroll, payroll taxes and insurance benefits related to severance packages and were approximately $700,000 and $3,300,000 for the three months and nine months ended October 2, 1999, respectively. Charges to the liabilities for other exit costs relate principally to other costs of exiting or closing facilities and legal and consulting fees that were incurred due to the implementation of the Company's exit strategies. Charges to the liabilities for other exit costs were approximately $530,000 and $930,000 for the three months and nine months ended October 2, 1999, respectively. 19 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 Effective in 1998, the Company adopted SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information" and, accordingly, the information for all periods presented has been reclassified to conform to the presentation for October 2, 1999. The Company is a diversified manufacturer of residential and commercial building products, operating within three principal segments: the Residential Building Products Segment, the Air Conditioning and Heating Products Segment, and the Windows, Doors and Siding Segment. Other includes corporate related items; results of insignificant operations and certain income and expense items not allocable to reportable segments. The results of operations and other data relating to Businesses sold have been presented separately. Through these principal segments, the Company manufactures and sells, primarily in the United States, Canada and Europe, a wide variety of products for the residential and commercial construction, manufactured housing and the do-it-yourself ("DIY") and professional remodeling and renovation markets. The Residential Building Products Segment manufactures and distributes built-in products primarily for the residential new construction, do-it-yourself and professional remodeling and renovation markets including kitchen range hoods, bath fans and combination units (fan, heater and light combinations). The Air Conditioning and Heating Products Segment manufactures and sells heating, ventilating, and air conditioning ("HVAC") systems for custom-designed commercial applications and for manufactured and site-built residential housing. The Windows, Doors and Siding Segment manufactures and distributes vinyl and wood windows, entry doors, patio doors, vinyl siding, aluminum trim coil, soffit, skirting, shutters and vinyl fences and decks for use in the residential construction, DIY and professional renovation markets. The Company acquired NuTone on July 31, 1998, Napco on October 9, 1998, Webco on March 8, 1999, Peachtree Windows and Doors, Thermal-Gard and CWD Windows and Doors (the "Caradon Acquired Companies") on April 23, 1999, Multiplex on May 28, 1999 and Kroy on September 9, 1999. (See Notes D, I, J, K and L). These acquisitions have been accounted for under the purchase method of accounting. Accordingly, the results of NuTone, Napco, Webco, the Caradon Acquired Companies, Multiplex and Kroy are included in the Company's consolidated results since the date of their acquisition. 20 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) The tables that follow exclude the results of operations for the plumbing products business, which was sold on July 10, 1998 and had been accounted for as a discontinued operation. During 1998, the Company made several dispositions of non-strategic assets acquired in the 1997 acquisition of Ply Gem Industries, Inc. ("Ply Gem"). On May 8, 1998, the Company sold Studley Products, Inc. ("Studley"). Studley was treated as an operation held for sale since the acquisition of Ply Gem and accordingly Studley's operating results are not included in the Company's consolidated financial results. Four additional Ply Gem subsidiaries were sold during 1998: on May 22, 1998, the Company sold Sagebrush Sales Inc.; on July 2, 1998, the Company sold Goldenberg Group Inc.; on July 31, 1998 the Company sold the Ply Gem Manufacturing division of Ply Gem; and on December 10, 1998, the Company sold Allied Plywood Corporation. Additionally, on December 30, 1998 the Company sold its M&S Systems LP and Moore-O-Matic, Inc. subsidiaries. The operating results of these 1998 dispositions are included in the Company's 1998 consolidated results to the date of sale. For the third quarter of 1998, the combined net sales, operating earnings and earnings before provision for income taxes of these dispositions were approximately $35,700,000, $750,000 and $750,000, respectively. For the first nine months of 1998, the combined net sales, operating earnings and earnings before provision for income taxes of these dispositions were approximately $168,500,000, $5,400,000 and $5,400,000, respectively. The Company does not expect the effect of Businesses sold during 1998 to be significant to the Company's future operations. 21 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) RESULTS OF OPERATIONS - --------------------- The tables that follow present the unaudited net sales and operating earnings for the Company's principal segments for the third quarter and nine months ended October 2, 1999 and October 3, 1998, and the dollar amount and percentage change of such results as compared to the prior comparable period. The amounts in the tables for the prior comparable period have been reclassified to conform to the presentation for 1999.
Change in Third Quarter Third Quarter 1999 October 2, October 3, As Compared To 1998 1999 1998 $ % ----------- ---------- -------- -------- (Dollar amounts in thousands) Net sales: - ---------- Residential building products $162,402 $130,743 $ 31,659 24.2 Air conditioning and heating products 144,152 121,975 22,177 18.2 Windows, doors and siding 226,346 150,306 76,040 50.6 Other 20,593 19,481 1,112 5.7 -------- -------- -------- 553,493 422,505 130,988 31.0 Businesses sold --- 35,688 (35,688) (100.0) -------- -------- -------- $553,493 $458,193 $ 95,300 20.8 ======== ======== ======== Operating earnings (loss): - -------------------------- Residential building products $ 27,297 $ 16,275 $ 11,022 67.7 Air conditioning and heating products 19,342 16,345 2,997 18.3 Windows, doors and siding 17,711 14,519 3,192 22.0 Other, net (5,268) (3,602) (1,666) 46.3 -------- -------- -------- 59,082 43,537 15,545 35.7 Businesses sold --- 750 (750) (100.0) -------- -------- -------- $ 59,082 $ 44,287 $ 14,795 33.4 ======== ======== ========
22 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued)
Change in Nine Months Nine Months 1999 October 2, October 3, As Compared To 1998 1999 1998 $ % ----------- ---------- -------- -------- (Dollar amounts in thousands) Net sales: - ---------- Residential building products $ 477,770 $331,901 $145,869 43.9 Air conditioning and heating products 417,898 356,645 61,253 17.2 Windows, doors and siding 549,317 390,677 158,640 40.6 OTher 59,296 52,564 6,732 12.8 ---------- ---------- -------- 1,504,281 1,131,787 372,494 32.9 Businesses sold --- 168,521 (168,521) (100.0) ---------- ---------- -------- $1,504,281 $1,300,308 $203,973 15.7 ========== ========== ======== Operating earnings(loss): - ------------------------- Residential building products $ 69,878 $ 36,989 $32,889 88.9 Air conditioning and heating products 50,597 43,564 7,033 16.1 Windows, doors and siding 38,862 22,474 16,388 72.9 Other, net (14,418) (11,319) (3,099) (27.4) ---------- ---------- -------- 144,919 91,708 53,211 58.0 Businesses sold --- 5,426 (5,426) (100.0) ---------- ---------- -------- $ 144,919 $ 97,134 $ 47,785 49.2 ========== ========== ========
23 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1998 (Continued) The tables that follow, set forth, for the periods presented, (a) certain unaudited consolidated operating results, (b) the change in the amount and the percentage change of such results as compared to the prior comparable period, (c) the percentage which such results bear to net sales, and (d) the change of such percentages as compared to the prior comparable period. The results of operations for the third quarter and nine months ended October 2, 1999 are not necessarily indicative of the results of operations to be expected for any other interim period or the full year. Change in Third Quarter Third Quarter 1999 October 2, October 3, As Compared To 1998 1999 1998 $ % ----------- ---------- -------- -------- (Dollar amounts in millions) Net sales $553.5 $458.2 $95.3 20.8% Cost of products sold 396.0 331.2 (64.8) (19.6) Selling, general and administrative expense 93.3 78.7 (14.6) (18.6) Amortization of goodwill and intangible assets 5.1 4.0 (1.1) (27.5) ------ ----- ----- Operating earnings 59.1 44.3 14.8 33.4 Interest expense (24.3) (22.9) (1.4) (6.1) Investment income 1.7 3.1 (1.4) (45.2) ------ ----- ----- Earnings from continuing operations before pro- vision for income taxes 36.5 24.5 12.0 49.0 Provision for income Taxes 11.2 (4.7) (42.0) ------ ----- ----- Earnings from continuing operations 20.6 13.3 7.3 54.9 Earnings from discontinued operations --- .6 (0.6) (100.0) Extraordinary loss from Debt retirements --- (.1) 0.1 100.0 ------ ------ ----- Net earnings $ 20.6 $ 13.8 $ 6.8 49.3% ====== ====== ===== 24 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) Change in Percentage of net sales Percentage Third Quarter Ended For the Third October 2, October 3, Quarter 1999 as 1999 1998 Compared to 1998 ---------- ---------- ---------------- Net sales 100.0% 100.0% 0.0% Cost of products sold 71.5 72.3 0.8 Selling, general and administrative expense 16.9 17.2 0.3 Amortization of goodwill and intangible assets .9 .8 (0.1) ---- ---- ---- Operating earnings 10.7 9.7 1.0 Interest expense (4.4) (5.0) 0.6 Investment income .3 .6 (0.3) ---- ---- ---- Earnings from continuing operations before provision for income taxes 6.6 5.3 1.3 Provision for income taxes 2.9 2.4 (0.5) ---- ---- ---- Earnings from continuing operations 3.7 2.9 0.8 Earnings from discontinued operations --- .1 (0.1) Extraordinary loss from debt Retirements --- --- --- ---- ---- ---- Net earnings 3.7% 3.0% 0.7% ==== ==== ==== 25 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) Change in Nine Months Ended Nine Months 1999 as October 2, October 3, Compared To 1998 1999 1998 $ % ----------- ---------- -------- -------- (Dollar amounts in millions) Net sales $1,504.3 $1,300.3 $204.0 15.7% Cost of products sold 1,077.9 959.1 (118.8) (12.4) Selling, general and administrative expense 266.6 234.2 (32.4) (13.8) Amortization of goodwill and intangible assets 14.9 9.9 (5.0) (50.5) -------- -------- ----- Operating earnings 144.9 97.1 47.8 49.2 Interest expense (72.6) (62.1) (10.5) (16.9) Investment income 6.2 7.5 (1.3) (17.3) -------- -------- ----- Earnings from continuing operations before pro- vision for income taxes 78.5 42.5 36.0 84.7 Provision for income taxes 34.6 19.4 (15.2) (78.4) -------- -------- ----- Earnings from continuing operations 43.9 23.1 20.8 90.0 Earnings from discontinued operations --- .6 (.6) (100.0) Extraordinary loss from debt retirements --- (.1) 0.1 100.0 -------- -------- ------ Net earnings $ 43.9 $ 23.6 $ 20.3 86.0% ======== ======== ====== 26 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) Change in Percentage of net sales Percentage Nine Months Ended For the Nine October 2, October 3, Months 1999 as 1999 1998 Compared to 1998 ---------- ---------- ---------------- Net sales 100.0% 100.0% 0.0% Cost of products sold 71.7 73.7 2.0 Selling, general and administrative expense 17.7 18.0 0.3 Amortization of goodwill and intangible assets 1.0 .8 (0.2) ----- ------ ------ Operating earnings 9.6 7.5 2.1 Interest expense (4.8) (4.8) --- Investment income .4 .6 (0.2) ----- ------ ------ Earnings from continuing operations before provision for income taxes 5.2 3.3 1.9 Provision for income taxes 2.3 1.5 (0.8) ----- ------ ------ Earnings from continuing operations 2.9 1.8 1.1 Earnings from discontinued operations --- --- --- EXtraordinary loss from debt retirements --- --- --- ----- ------ ----- Net earnings 2.9% 1.8% 1.1% ===== ======= ===== Net sales increased approximately $95,300,000 or approximately 20.8%(or increased approximately $95,800,000 or approximately 20.9% excluding the effect of changes in foreign exchange rates) for the third quarter of 1999, as compared to 1998 and increased approximately $204,000,000 or approximately 15.7%(or increased approximately $205,500,000 or approximately 15.8% excluding the effect of changes in foreign exchange rates) for the first nine months of 1999, as compared to 1998, principally, as a result of acquisitions and higher sales volume, partially offset by the effect of Businesses sold. Acquisitions contributed approximately $18,900,000 of the total increase in net sales of approximately $31,700,000 in the third quarter and approximately $121,500,000 of the total increase in net sales of approximately $145,900,000 in the first nine months in the Residential Building Products Segment. Increased domestic sales volume, partially offset by the effects of changes in foreign exchange rates accounted for the balance of the increase in this segment. Net sales in the Air Conditioning and Heating Products Segment increased approximately $22,200,000 or 18.2% in the third quarter of 1999 and increased approximately $61,300,000 or 17.2% in the first nine months of 1999. The increase in net sales in this 27 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) segment is principally, as a result of higher sales volume of products sold to customers serving the residential site built and commercial markets partially offset by lower sales of products to customers serving the manufactured housing market in this segment. In the third quarter of 1999, this segment began to feel the impact of a slowdown in the manufactured housing industry. It is anticipated that the weakness in the manufactured housing industry will continue and will have an adverse effect on this segments sales over the next several quarters. This segments sales of air conditioning products sold to manufactured housing customers will improve as the industry takes steps to reduce its retail inventories of manufactured homes. Approximately $2,800,000 and $8,100,000 in the third quarter and first nine months of 1999, respectively, of the increase in net sales in this segment was from an acquisition. Net sales of the Windows, Doors and Siding Segment increased approximately $76,000,000 and $158,600,000 for the third quarter and first nine months, respectively. These increases arose primarily from net sales of acquisitions which contributed approximately $84,500,000 and $170,900,000 for the third quarter and first nine months, respectively, partially offset by the effect of lower sales volume of certain lower margin vinyl windows relocated to a low cost manufacturing facility as this operation closely controlled its sales as it continues the implementation of improved operating systems and cost-control measures. These overall net increases in net sales in the Company's three principal segments were partially offset by the effect of lower net sales attributable to Businesses sold in 1998 of approximately $35,700,000 and $168,500,000 in the third quarter and first nine months, respectively. As a result of the acquisitions in the second and third quarters of 1999 in the Windows, Doors and Siding Segment, the performance of this segment will be more seasonal than in prior years due to the effect of winter weather conditions normally expected in the fourth and first quarters in the U.S. and Canada. Cost of products sold as a percentage of net sales decreased from approximately 72.3% in the third quarter of 1998 to approximately 71.5% in the third quarter of 1999, and decreased from approximately 73.7% in the first nine months of 1998 to approximately 71.7% in the first nine months of 1999. Changes in the percentages were, in large part, affected by acquisitions and Businesses sold in 1998. Excluding the effect of Businesses sold, cost of products sold as a percentage of net sales decreased from approximately 72.0% in the third quarter of 1998 to approximately 71.5% in the third quarter of 1999 and decreased from approximately 73.2% in the first nine months of 1998 to approximately 71.7% in the first nine months of 1999. These decreases in the percentages principally 28 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) resulted from acquisitions (which, for the most part, have a lower level of cost of sales than the overall group of businesses owned prior to such acquisitions). To a lesser extent, the effect of higher sales levels in the Residential Building Products Segment without a proportionate increase in costs also contributed to the decreases in the percentages. These decreases in the percentages were partially offset by the effect of higher vinyl resin cost, due to higher oil prices, without a proportionate increase in sales prices, in the Windows, Doors and Siding Segment. The rising cost of vinyl resin is also expected to adversely impact cost of sales percentages in the fourth quarter of 1999. This situation should be mitigated, as price increases for this segments vinyl products are implemented over the next several quarters. Overall, changes in the cost of products sold as a percentage of net sales for one period as compared to another period may reflect a number of factors including changes in the relative mix of products sold, the effect of changes in sales prices, material costs and changes in productivity levels. Selling, general and administrative expense as a percentage of net sales decreased from approximately 17.2% in the third quarter of 1998 to approximately 16.9% in the third quarter of 1999 and from approximately 18.0% in the first nine months of 1998 to approximately 17.7% in the first nine months of 1999. These decreases in the percentages were principally affected as a result of acquisitions and Businesses sold in 1998. Excluding the effect of Businesses sold, selling, general and administrative expense as a percentage of net sales increased from approximately 16.8% in the third quarter of 1998 to approximately 16.9% in the third quarter of 1999, and decreased from approximately 17.8% in the first nine months of 1998 to approximately 17.7% in the first nine months of 1999. The decrease in the percentage in the first nine months is principally as a result of an increase in net sales in the Air Conditioning and Heating Products Segment without a proportionate increase in expense. The effect of the Windows, Doors and Siding segment acquisitions (which, for the most part, have a lower level of expense as a percentage of net sales than the overall group of businesses owned prior to such acquisitions) was offset by the effect of the acquisitions in the Residential Building Products Segment (which have a higher level of expense as a percentage of net sales than the overall group of businesses owned prior to such acquisitions.) Amortization of goodwill and intangible assets, as a percentage of net sales, increased from approximately 0.8% of net sales in the third quarter of 1998 to approximately 0.9% of net sales in the third quarter of 1999 and increased from 29 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) approximately 0.8% of net sales in the first nine months of 1998 to approximately 1.0% of net sales in the first nine months of 1999, principally as a result of acquisitions. Consolidated operating earnings increased approximately $14,800,000 from approximately $44,300,000 in the third quarter of 1998 as compared to approximately $59,100,000 in the third quarter of 1999 and increased approximately $47,800,000 from approximately $97,100,000 in the first nine months of 1998 as compared to approximately $144,900,000 for the first nine months of 1999. Businesses acquired in 1998 and 1999 contributed approximately $9,000,000 of the increase in the third quarter, of which approximately $6,300,000 was in the Windows, Doors and Siding Segment, and $2,700,000 was in the Residential Building Products Segment. Businesses acquired in 1998 and 1999 contributed approximately $34,900,000 of the increase in the first nine months of which approximately $15,300,000 was in the Windows, Doors and Siding Segment, $18,900,000 was in the Residential Building Products Segment and $700,000 was in the Air Conditioning and Heating Products Segment. The increase in operating earnings for the first nine months of 1999 includes approximately $10,300,000 of estimated synergies and cost reductions realized from the integration of NuTone into the Company's Residential Building Products Segment, net of approximately $2,600,000 of costs and expenses. Consolidated operating earnings have been reduced by depreciation and amortization expense of approximately $13,400,000 and approximately $11,100,000 for the third quarter of 1999 and 1998, respectively, and have been reduced by depreciation and amortization expense of approximately $40,100,000 and approximately $31,000,000 for the first nine months of 1999 and 1998, respectively. Businesses acquired contributed approximately $2,300,000 of the increase in depreciation and amortization expense in the third quarter of 1999, of which approximately $1,400,000 was in the Windows, Doors and Siding Segment, $800,000 was in the Residential Building Products Segment and $100,000 was in the Air Conditioning and Heating Products Segment. Businesses acquired contributed approximately $8,700,000 of the increase in depreciation and amortization expense in the first nine months of 1999, of which approximately $3,500,000 was in the Windows, Doors and Siding Segment, $5,000,000 was in the Residential Building Products Segment and $200,000 was in the Air Conditioning and Heating Products Segment. Depreciation and amortization expense relating to the operating results of Businesses sold in 1998 was approximately $300,000 and $1,400,000 for the third quarter and first nine months of 1998, respectively. The increase in operating earnings was also due, in part, to lower costs and expenses of approximately $1,100,000 in the first nine months, excluding the contribution from acquisitions, in the 30 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) Windows, Doors and Siding Segment; increased sales volume without a proportionate increase in costs and expenses in the Residential Building Products Segment of approximately $8,400,000 in the third quarter and $14,000,000 in the first nine months, excluding the contribution from acquisitions; and increased sales volume without a proportionate increase in costs and expenses in the Air Conditioning and Heating Products Segment of approximately $3,000,000 in the third quarter and $6,300,000 in the first nine months, excluding the contribution from acquisitions. These increases in operating earnings in the Air Conditioning and Heating Products Segment arose from higher sales levels of commercial and site-built residential products, partially offset in the third quarter of 1999, by lower operating earnings of air conditioning and heating products sold to the manufactured housing market as compared to the prior year due to a slow-down in the manufactured housing industry as noted above. The slowdown in the manufactured housing industry is expected to adversely effect this segment's operating earnings over the next several quarters. It is anticipated that this segment's operating earnings will begin to improve from increased sales of air conditioning products once the industry takes steps to reduce its retail inventories of manufactured homes.It is also expected, that over the next several quarters, the effect of this slowdown will continue to be somewhat offset by increased site-built residential air conditioning product sales in this segment. Operating earnings in the third quarter of 1999 in the Windows, Doors and Siding Segment decreased approximately $3,100,000 as compared to 1998, excluding the contribution from acquisitions, principally as a result of higher vinyl resin costs and lower sales levels of certain vinyl windows as noted above. The overall increases in operating earnings were partially offset by the effect of approximately $750,000 and $5,400,000 of operating earnings of Businesses sold in 1998 in the third quarter and first nine months of 1998, respectively. The integration of the recently acquired Caradon Acquired Companies is taking longer than expected and resulted in a lower contribution to earnings in the third quarter of 1999 than anticipated. The Company anticipates lower earnings levels then previously expected over the next several quarters in the Windows, Doors and Siding Segment due to the seasonality of this segment's 1999 acquisitions and as the effects of the integration of the Caradon Acquired Companies and the lower sales levels of certain vinyl windows, noted above, continue to be felt. The Company also expects future operating earnings in this segment to be adversely affected by higher vinyl resin costs until increases in sales prices to customers can be implemented over the next several quarters. Operating earnings of foreign operations, consisting primarily of the results of operations of the Company's Canadian and European subsidiaries which manufacture 31 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) built-in ventilation products and window and door systems, were approximately 8.6% and 5.2% of operating earnings (before corporate overhead) in the third quarter of 1999 and 1998, respectively, and were approximately 6.5% and 5.9% of operating earnings (before corporate overhead) in the first nine months of 1999 and 1998, respectively. The increase in foreign operating earnings as a percentage of operating earnings in the first nine months of 1999 as compared to 1998 is principally a result of the increased operating earnings from foreign acquisitions. Sales and earnings derived from the international market are subject to the risks of currency fluctuations. Interest expense in the third quarter of 1999 increased approximately $1,400,000 or approximately 6.1% as compared to the third quarter of 1998, and increased approximately $10,500,000 or approximately 16.9% in the first nine months of 1999 as compared to the first nine months of 1998 primarily as a result of the sale of the 8 7/8% Notes on July 31, 1998. This increase was partially offset by the paydown of approximately $27,700,000 of debt with a portion of the proceeds from the sale of businesses in 1998. Investment income decreased approximately $1,400,000 or approximately 45.2% in the third quarter of 1999 as compared to the third quarter of 1998 and decreased approximately $1,300,000 or approximately 17.3% in the first nine months of 1999 as compared to the first nine months of 1998. The decrease in the third quarter and the first nine months of 1999 is principally due to lower average invested balances as a result of funds used for acquisitions and lower yields earned on short-term investments and marketable securities. The provision for income taxes was approximately $15,900,000 for the third quarter of 1999, as compared to $11,200,000 for the third quarter of 1998 and approximately $34,600,000 for the first nine months of 1999, as compared to $19,400,000 for first nine months of 1998. The income tax rates differed from the United States Federal statutory rate of 35% principally as a result of state income tax provisions, nondeductible amortization expense (for tax purposes), the effect of foreign income tax on foreign source income, changes in tax reserves and the effect of product development tax credits from foreign operations. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company is highly leveraged and expects to continue to be highly leveraged for the foreseeable future. At October 2, 1999, the Company had consolidated debt of approximately $1,037,400,000 consisting of (i) $16,000,000 of short-term 32 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) borrowings and current maturities of long-term debt, (ii) $126,200,000 of notes, mortgage notes and other indebtedness,(iii) $209,300,000 of the 8 7/8% Notes, (iv) $307,800,000 of the 9 1/8% Senior Notes due 2007 ("9 1/8% Notes") (v) $174,200,000 of the 9 1/4% Senior Notes due 2007 ("9 1/4% Notes") and (vi) $203,900,000 of the 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes"). At October 2, 1999, the Company had consolidated unrestricted cash, cash equivalents and marketable securities of approximately $96,983,000 as compared to approximately $209,633,000 at December 31, 1998 and the Company's debt to equity ratio was approximately 4.0:1 at October 2, 1999 as compared to 4.7:1 at December 31, 1998. The Company's ability to pay interest on or to refinance its indebtedness depends on the successful integration of the operations of recent acquisitions and the Company's future performance, which is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. There can be no assurance that the Company will generate sufficient cash flow from the operation of its subsidiaries or that future financings will be available on acceptable terms or in amounts sufficient to enable the Company to service or refinance its indebtedness, or to make necessary capital expenditures. The Company has evaluated and expects to continue to evaluate possible acquisition transactions and possible dispositions of certain of its businesses on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible acquisitions or dispositions. Acquisitions in 1999 were principally funded through the use of unrestricted cash and investments. The indentures and other agreements governing the Company and its subsidiaries' indebtedness (including the indentures for the 8 7/8% Notes, the 9 1/8% Notes, the 9 1/4% Notes, the 9 7/8% Notes and the credit agreement covering the Ply Gem credit facility) contain restrictive financial and operating covenants including covenants that restrict the ability of the Company and its subsidiaries to complete acquisitions, pay dividends, incur indebtedness, make investments, sell assets and take certain other corporate actions. The Company expects to meet its cash flow requirements through fiscal 1999 from cash generated from operations, existing cash, cash equivalents and marketable securities, and financings, which may include securitization of accounts receivable and mortgage or capital lease financings. 33 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) On March 8, 1999 the Company acquired Webco, a designer and manufacturer of custom air handling equipment. For the year ended October 31, 1998, Webco had net sales of approximately $13,900,000. On April 23, 1999, the Company acquired the Caradon Acquired Companies from Caradon America Inc. and Caradon Limited, which are wholly owned subsidiaries of Caradon plc, a United Kingdom company. The Caradon Acquired Companies manufacture and sell premium residential windows, entry doors and patio doors to both the new construction and replacement markets. For the year ended December 31, 1998, the Caradon Acquired Companies had combined net sales of approximately $169,700,000. On May 28, 1999, the Company acquired Multiplex, a leading manufacturer and designer of high-performance, multi-room video distribution equipment for home automation/home entertainment. Multiplex had net sales of approximately $10,000,000 for the year ended December 31, 1998. On September 9, 1999 the Company acquired Kroy Building Products, Inc., ("Kroy") a leading manufacturer of vinyl fencing, railing profiles and vinyl decking systems for residential and light commercial applications. Kroy is located in York, Nebraska and had net sales of approximately $26,000,000 during the twelve months ended June 30, 1999. As the Company integrates the 1998 and 1999 acquisitions into its businesses, it expects to achieve significant synergies, cost savings and reductions during 1999, partially offset by certain costs and expenses. The Company's plans for eliminating certain activities for acquisitions acquired through the first quarter of 1999 have been finalized. The Company expects to record an estimated additional $1,000,000 to $2,000,000 of liabilities or adjustments for acquisition plans not yet finalized. Acquisition integration liabilities and adjustments relate principally to additional employee terminations and other exit costs of certain products and the consolidation of certain functions and operations at the acquired businesses. The total expenditures associated with exit costs related to the integration effort at October 2, 1999 are expected to be funded from the Company's operating cash flow. If significant difficulty is encountered during the integration process, or if such synergies and cost savings are not realized, the results of operations, cash flow and financial condition of the Company likely will be adversely affected. There can be no assurance that the Company will be able to successfully manage and integrate the 34 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) 1998 and 1999 acquisitions.(See Note D, I, J, K, L and N of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.) Unrestricted cash and cash equivalents decreased from approximately $87,876,000 at December 31, 1998 to approximately $71,998,000 at October 2, 1999. Marketable securities available for sale decreased from approximately $121,757,000 at December 31, 1998 to approximately $24,985,000 at October 2, 1999. The Company's investment in marketable securities at October 2, 1999 consisted primarily of certificates of deposit, commercial paper and bank issued money market instruments. At October 2, 1999, approximately $23,028,000 of the Company's cash and investments were pledged as collateral for insurance, employee benefits and other requirements and were classified as restricted in current assets in the Company's accompanying condensed consolidated balance sheet. Capital expenditures were approximately $41,400,000 for the year 1998, approximately $34,400,000 in the first nine months of 1999 and are expected to range between approximately $45,000,000 and $50,000,000 for all of 1999. The Company's Board of Directors has authorized a number of programs to purchase shares of the Company's Common and Special Common Stock. The most recent of these programs was announced on May 20, 1999, and allows the Company to purchase up to 500,000 shares of the Company's Common and Special Common Stock in open market or negotiated transactions, subject to market conditions, cash availability and provisions of the Company's outstanding debt instruments. As of November 5, 1999, the Company has purchased approximately 280,600 shares of its Common and Special Common Stock under this program for approximately $8,600,000 and accounted for such share purchases as Treasury Stock. At November 5, 1999, approximately $87,000,000 was available for the payment of cash dividends, stock purchases or other restricted payments as defined under the terms of the Company's most restrictive Indenture. The Company's working capital and current ratio decreased from approximately $337,207,000 and 2.0:1, respectively, to approximately $331,883,000 and 1.9:1, respectively, between December 31, 1998 and October 2, 1999, principally as a result of payments related to acquisitions partially offset by working capital acquired from such acquisitions and net of the factors described below. 35 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) Accounts receivable increased approximately $85,367,000 or approximately 41.6%, between December 31, 1998 and October 2, 1999, while net sales increased approximately $115,458,000 or approximately,26.4% in the third quarter of 1999 as compared to the fourth quarter of 1998. These increases are a result of the 1999 acquisitions, which contributed approximately $62,100,000 to net sales and approximately $37,247,000 to accounts receivable in the first nine months of 1999. 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. Increases or decreases in net sales near the end of any period generally result in significant changes in the amount of accounts receivable on the date of the balance sheet at the end of such period, as was the situation on October 2, 1999 as compared to December 31, 1998. The Company has not experienced any significant overall changes in credit terms, collection efforts, credit utilization or delinquency in accounts receivable in 1999. Inventories increased approximately $45,877,000 or approximately 28.2%, between December 31, 1998 and October 2, 1999. Acquisitions contributed approximately $27,047,000 to the increase in inventory for the first nine months of 1999. Accounts payable increased approximately $43,401,000 or approximately 36.1%, between December 31, 1998 and October 2, 1999. Acquisitions contributed approximately $17,471,000 to the increase in accounts payable. 36 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) Unrestricted cash and cash equivalents decreased approximately $15,878,000 from December 31, 1998 to October 2, 1999, principally as a result of the following: Condensed Consolidated Cash Flows ------------- Operating Activities-- Cash flow from operations, net.................. $104,861,000 Increase in accounts receivable, net............ (54,968,000) Increase in inventories......................... (23,480,000) Decrease in prepaids and other current assets... 2,276,000 Increase in accounts payable.................... 35,385,000 Decrease in accrued expenses and taxes.......... (13,092,000) Investing Activities--- Net cash paid for businesses acquired........... (113,018,000) Proceeds from the sale of marketable securities, net............................... 97,044,000 Capital expenditures............................ (34,400,000) Increase in restricted cash and investments..... (3,968,000) Financing Activities--- Increase in borrowings, net..................... 1,395,000 Purchase of Nortek Common and Special Common Stock.................................. (6,982,000) Other, net....................................... (6,931,000) ------------ $(15,878,000) ============ The impact of changes in foreign currency exchange rates on cash was not material and has been included in other, net. The Company's debt-to-equity ratio decreased from approximately 4.7:1 at December 31, 1998 to 4.0:1 at October 2, 1999, primarily as a result of the increase in equity due to net earnings for the first nine months of 1999 and the issuance of Common Stock as partial consideration for an acquisition. This was partially offset by the effect of the purchase of Nortek Common and Special Common Stock, changes in currency translation and the net increase in borrowings. (See the Consolidated Statement of Stockholders' Investment included elsewhere herein.) At December 31, 1998, the Company's wholly owned subsidiary, Ply Gem, had a net operating loss carry forward of approximately $61,300,000 that expires in 2011 and is subject to certain limitations imposed by the Internal Revenue Code. The Company expects to utilize approximately $40,000,000 of this net operating loss in its 1999 federal tax return, which will result in lower than expected federal income tax payments of approximately $14,000,000 for 1999. 37 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) INFLATION, TRENDS AND GENERAL CONSIDERATIONS - -------------------------------------------- The Company has evaluated and expects to continue to evaluate possible acquisition transactions and the possible dispositions of certain of its businesses on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to possible acquisitions or dispositions. The Company's performance is dependent to a significant extent upon the levels of new residential construction, residential replacement and remodeling and non-residential construction, all of which are affected by such factors as interest rates, inflation and unemployment. In the near term, the Company expects to operate in an environment of relatively stable levels of construction and remodeling activity. However, increases in interest rates could have a negative impact on the level of housing construction and remodeling activity. The demand for the Company's products is seasonal, particularly in the Northeast and Midwest regions of the United States and in Canada where inclement weather during the winter months usually reduces the level of building and remodeling activity in both the home improvement and new construction markets. The Company's lower sales levels usually occur during the first and fourth quarters. Since a high percentage of the Company's manufacturing overhead and operating expenses are relatively fixed throughout the year, operating income and net earnings tend to be lower in quarters with lower sales levels. As a result of the recent acquisitions in the Windows, Doors and Siding Segment the performance of this group will be more seasonal than in prior years due to the number of businesses that are affected by winter weather conditions. In addition, the demand for cash to fund the working capital of the Company's subsidiaries is greater from late in the first quarter until early in the fourth quarter. MARKET RISK - ----------- As discussed more specifically below, the Company is exposed to market risks related to changes in interest rates, foreign currencies and commodity pricing. The Company uses derivative financial instruments periodically on a limited basis to hedge economic exposures. The Company does not enter into derivative financial instruments or other financial instruments for trading purposes. 38 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) There have been no significant changes in market risk from the December 31, 1998 disclosures included in the Company's Annual Report on Form 10-K. A. Interest rate risk The Company is exposed to market risk from changes in interest rates primarily through its investing and borrowing activities. In addition, the Company's ability to finance future acquisition transactions may be impacted if the Company is unable to obtain appropriate financing at acceptable interest rates. The Company's strategy for managing interest rate exposure is to invest in short-term, highly liquid investments and marketable securities. Short-term investments primarily consist of money market accounts, certificates of deposit and, corporate commercial paper with original maturities of 90 days or less. The Company manages its borrowing exposure to changes in interest rates by optimizing the use of fixed rate debt with extended maturities. In addition, the Company has hedged its exposure on a substantial portion of its variable rate debt by entering into interest rate swap agreements to lock in a fixed rate. B. Foreign currency risk The Company's results of operations are affected by fluctuations in the value of the U.S. dollar as compared to the value of currencies in foreign markets primarily related to changes in the Italian Lira and the Canadian Dollar. For the first nine months of 1999, the net impact of foreign currency changes was not material to the Company's financial condition or results of operations. The Company manages its exposure to foreign currency exchange risk principally by trying to minimize the Company's net investment in foreign assets through the use of strategic short and long-term borrowings at the foreign subsidiary level. The Company generally does not enter into derivative financial instruments to manage foreign currency exposure. At October 2, 1999, no foreign currency hedging contracts were outstanding. The Company's operations in Europe have not been materially impacted by the introduction of the European single currency, the Euro. 39 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) C. Commodity pricing risk The Company is subject to significant market risk with respect to the pricing of its principal raw materials, which include, among others, steel, copper, packaging material, plastics, resins, glass, wood and aluminum. If prices of these raw materials were to increase dramatically, the Company may not be able to pass such increases on to its customers and, as a result, gross margins could decline significantly. The Company manages its exposure to commodity pricing risk by continuing to diversify its product mix, strategic buying programs and vendor partnering. The Company generally does not enter into derivative financial instruments to manage commodity-pricing exposure. At October 2, 1999, the Company did not have any outstanding commodity forward contracts. YEAR 2000 DISCLOSURE - -------------------- The Year 2000 ("Y2K") issue refers to and arises from deficient computer programs and related products, such as embedded chips, which do not properly distinguish between a year that begins with "20" instead of "19" beginning on January 1, 2000. If not corrected, many businesses and processes could fail or create erroneous results. The extent of the potential impact of the Y2K problem is not yet known, and if not timely corrected, it could affect the global economy. As required by recent guidance from the Securities and Exchange Commission ("SEC") applicable to all public companies, the following disclosure provides detail regarding the Company's Y2K compliance. A. The Company's Readiness: To manage its Y2K program, the Company established a corporate-wide initiative and has divided its efforts into five areas: awareness (communication to employees, vendors and suppliers of the Y2K issue), assessment (a complete inventory of all aspects of the business that might be affected), remediation/validation (develop plans to correct all issues identified from the assessment stage), implementation (corrective measures taken to solve the Y2K issues identified) and contingency (alternative actions developed in the event that corrective measures are not implemented by Y2K or are not effective). Further, the Company has identified three key areas of concentration: 40 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (COntinued) information technology ("IT") systems, non-IT systems and third parties (suppliers and customers). The Company's subsidiaries are in various stages of completion of this initiative, including the implementation and contingency stages, for the Y2K issue. Certain of the Company's subsidiaries are simultaneously working on the implementation and contingency stages of this initiative. In the third quarter of 1999, the Company's subsidiaries made significant progress in the implementation and contingency stages. Overall the Company believes that it is in the contingency stage of addressing the Y2K issue. Although the Company believes that all IT and non-IT systems material to the Company's business will be Y2K compliant on or before December 31, 1999, it cannot predict the outcome or the success of its Y2K program, or that third party systems are or will be Y2K compliant, or that the costs required to address the Y2K initiative, or that the impact of a failure to achieve substantial Y2K compliance, will not have a material adverse effect on the Company's business, financial condition or results of operations. 1. IT systems: The Company has, previously conducted a comprehensive review of its computer systems to identify those that could be affected by the Y2K issue. Substantially all of the Company's operating systems and database systems that were identified as not Y2K compliant have been replaced or modified. The Company presently believes that with minor replacement and modifications (conversion and testing in progress) to the remaining non Y2K compliant software, the Y2K problem will not pose significant operational problems for the Company's computer systems as so modified. 2. Non-IT systems: Non-IT systems are those that typically include "embedded" technology such as microcontrollers and chips. The Company has evaluated the effect of the Y2K problem on all non-IT systems including all telecommunications equipment, shop-floor controls, alarm systems and any other equipment that can potentially use microcontrollers, chips or other systems affected by the Y2K problem. 3. Third parties: Due to the pervasive use of computers by the Company's suppliers, customers, financial institutions, and other third parties, the Y2K problem could have a material impact on the Company if not timely addressed by such third parties. To assess third party readiness, the Company is surveying its principal suppliers and financial institutions and receiving responses that indicate that such parties are 41 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) in the process of adequately addressing the problem. In cases where key suppliers have not responded or are not adequately addressing the issue, the Company will determine what contingency plans will be necessary to protect the Company's interests. While the Company has not surveyed all its customers, it has received surveys from many of its principal customers that indicate that they are also addressing the problem. See the discussion under Contingency Plans/Risks. The Company operates in a decentralized environment and major computer systems are, therefore, in various states of readiness. The Company has 26 businesses with various IT systems that support 100% of the Company's anticipated net sales for 1999 including the six businesses acquired in 1999 and one business started in 1999. The Company estimates that the remediation effort for IT systems Y2K issues of 16 business units representing approximately 60% of net sales for 1999 are approximately 95% complete. The Company estimates that the remediation effort for the IT systems Y2K issues of nine business units representing approximately 29% of net sales for 1999 are approximately 85% complete, and one business unit representing approximately 11% of net sales for 1999 is approximately 75% complete. Substantially all of the non-IT systems, including telephone systems and office equipment, have been tested. Those found not to be Y2K compliant are in the process of being or have been replaced or repaired. Machinery and equipment testing and remediation are in process. Third party inquiry and contingency efforts are also in progress. Combined, the Company estimates the non-IT systems efforts are approximately 90% complete overall, while third party evaluations, including contingency planning, are 80% complete overall. B. Cost: The Company's estimate of expenditures for remediation directly related to correcting Y2K issues is approximately $6,000,000, including businesses acquired in 1999. The total estimated expenditures of approximately $6,000,000 consist of approximately $2,000,000 of IT computer hardware equipment costs, approximately $3,000,000 of IT software and non-IT computer hardware expenditures and approximately $1,000,000 of other non-IT expenditures. The Company has spent approximately $5,200,000 through October 2, 1999. All of the Company's Y2K compliance expenditures have been or are expected to be funded from the Company's operating cash flow. 42 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) The Company's Y2K compliance budget does not include significant amounts for hardware replacement because the Company has historically employed a strategy to continually upgrade its computer systems. Consequently, the Company's Y2K compliance budget has not required the diversion of funds from or the postponement of the implementation of other planned IT projects. Actual costs to be incurred by the Company may deviate from the estimates above, as a result of dependence on a number of factors which cannot be accurately predicted, including, among others, the extent and difficulty of the remaining remediation and other work to be done, the availability and cost of consultants, and the extent of testing required to demonstrate Y2K compliance. C. Contingency Plans/Risks: The Company is in the process of preparing appropriate contingency plans for significant internal or external exposures that are identified. While the Company is not presently aware of any such significant exposure, there can be no guarantee that the systems of third parties on which the Company relies will be converted in a timely manner, or that a failure to properly convert by another company would not have a material adverse effect on the Company. The Company's contingency plans for IT systems are being evaluated and addressed on an individual subsidiary by subsidiary basis. As all testing of all systems is not expected to be completed until early in the fourth quarter, not all contingency plans have been completed. In planning for issues not resolved or contemplated for IT systems, the Company plans to allocate internal resources and may retain dedicated consultants and vendor representatives to be available to take corrective action, if necessary. However, the Company will adjust existing and adopt additional plans if situations arise requiring modifications to existing contingency plans or new contingency plans, as required. The Company's contingency plans for non-IT systems are also being continuously evaluated and have also not been completed. The Company's subsidiaries do, however, have various business interruption contingency plans in place. These plans are in the process of being evaluated for Y2K scenarios and will be adjusted as appropriate. As discussed below, the Company will develop, if necessary, appropriate contingency plans to address additional issues the Company discovers will have an adverse impact on the Company's ability to conduct business. Based on current information, the Company believes that the Y2K problem will not have a material adverse effect on the Company, its business or its financial 43 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (COntinued) condition as a result of those issues directly under its control. However, there can be no assurance that Y2K remediation by the Company or third parties will be properly and timely completed, and failure to do so could have a material adverse effect on the Company, its business and its financial condition. The Company believes that the greatest risk presented by the Y2K problem is from third parties, such as suppliers, financial institutions, utility providers and customers, among others, who may not have adequately addressed the problem. A failure of any such third party's computer or other applicable systems in sufficient magnitude could materially and adversely affect the Company. The Company is not presently able to quantify this risk especially with respect to utility providers. The Company does not consider that catastrophic events resulting in massive and prolonged disruption of service such as a world-wide disruption of the financial system, failure of government, both domestic (local, state and federal) and foreign or a national disruption of electrical power are a reasonable most likely worst case Y2K scenario. Accordingly, the Company will not develop any plans for such catastrophic events. The Company recognizes the risks in its ability to conduct business if other key suppliers in utilities, communications, transportation, banking and government, both domestic (local, state and federal) and foreign, are not Y2K ready. The Company is monitoring news and progress reports pertaining to those critical services to determine the effect on the Company's ability to conduct business as a result of Y2K issues on the economy if those and other key suppliers in utilities, communications, transportation, banking and government, both domestic (local, state and federal) and foreign, cease to function. It is the Company's opinion that the most likely worst case scenario it faces for which it can make reasonable contingency plans are in two areas. One area of concern is the temporary loss of utilities, specifically power in certain areas of North America and Europe. The other concern is the inability of certain key suppliers of materials to deliver goods when a subsidiary needs them. Each of the Company's subsidiaries have or are making contingency plans to address both situations on an individual basis. Contingency plans for the temporary loss of power in a specific area are being addressed by each facility within each subsidiary. In some cases this type of disruption is expected to have a negligible impact as a specific subsidiary or facility may have plant shutdowns planned during this period or because this 44 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) period has traditionally been a time of low customer shipments. In other cases where the business is not seasonal, the use of generators is being investigated to power specific portions of specific facilities where available and reasonably priced. Increased inventory levels for the fourth quarter of 1999 are being investigated. In certain cases where generator usage is not a feasible alternative, production and shipments to customers may be scheduled during a period other than early January 2000 when a temporary loss of power might occur. Most subsidiaries are planning to have spot generators on-site to power specific areas of each building including computer systems. In many cases, a central computer system handles computer processing and LAN systems of the remote facilities of the subsidiary. For those subsidiaries with facilities in geographical areas where cold weather dominates the early part of each year, the risk of freezing temperatures is a concern. In those cases, spot-heating equipment is planned to maintain Company facilities at a temperature above which building damage can occur. Another major risk that the Company has identified as most likely is the loss of a critical supplier of materials. This risk has the potential to disrupt the Company's subsidiaries ability to deliver goods to its customers. Each subsidiary is performing an ongoing assessment of its critical suppliers to determine this risk. Each subsidiary's contingency plan will address each supplier identified as being critical and at risk. In some cases suppliers are being asked to stockpile a supply of materials specifically for the subsidiary. In other cases alternative suppliers are being evaluated and qualified. In some cases, as a last resort, a subsidiary will stockpile materials if the supplier is unable to perform that service for the subsidiary. In all cases, the working capital needs and requirements of the Company are being considered as part of the subsidiary's contingency plan. The Company's policy is not to increase working capital requirements as part of a particular contingency plan except where no other alternative contingency plan is expected to work. Contingency plans are continually evaluated and adjusted or new plans made as each individual situation changes. FORWARD-LOOKING STATEMENTS - -------------------------- This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this discussion and throughout this document, words, such as "intends," "plans," "estimates," "believes," "anticipates" and "expects" or similar expressions are intended to identify forward-looking statements. These statements are based on the Company's current plans and expectations and involve risks and uncertainties, over which 45 NORTEK, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 2, 1999 AND THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 1998 (Continued) the Company has no control, that could cause actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual future activities and operating results to differ include the availability and cost of certain raw materials costs, (including, among others, steel, copper, packaging materials, plastics resins, glass, wood and aluminum) and purchased components, the level of domestic and foreign construction and remodeling activity affecting residential and commercial markets, interest rates, employment, inflation, Y2K readiness, currency translation, consumer spending levels, operating in international economies, the rate of sales growth, price, and product and warranty liability claims. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Readers are also urged to carefully review and consider the various disclosures made by the Company, in this document, as well as the Company's periodic reports on Forms 10-K, 10-Q, 10-Q/A and 8-K, filed with the SEC. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (filed herewith). (b) No reports on Form 8-K were filed by the registrant during the period 46 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 November 16, 1999 47 EX-27 2
5 0000072423 NORTEK, INC. 1000 9-MOS DEC-31-1999 OCT-02-1999 74,629 45,382 303,076 12,350 208,584 712,537 475,570 153,908 1,808,497 380,654 1,021,392 0 0 19,578 241,302 1,808,497 1,504,281 1,504,281 1,077,901 1,077,901 0 0 72,564 78,500 34,600 43,900 0 0 0 43,900 $ 3.72 $ 3.65
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