SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
Form 10-K
(Mark One) ------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number: 1-6112
------------------------
Nortek, Inc.
(exact name of Registrant as specified in its charter)
Delaware 05-0314991
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
50 Kennedy Plaza
Providence, Rhode Island 02903-2360
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (401) 751-1600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $1.00 par value New York Stock Exchange
Preference Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Special Common Stock, $1.00 par value
Indicate by check mark whether 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 __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [X].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 15, 1996 was $111,594,438. See Item 12.
The number of shares of Common Stock outstanding as of February 15, 1996 was
11,117,228. The number of shares of Special Common Stock outstanding as of
February 15, 1996 was 494,449.
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement for use at its 1996 Annual Meeting
of Shareholders are incorporated by reference into Part III.
PART I
Item 1. Business
The Company is a diversified manufacturer of residential and commercial
building products, operating within three principal product groups: the
Residential Building Products Group; the Air Conditioning and Heating ("HVAC")
Products Group; and the Plumbing Products Group. Through these product groups,
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 and professional
remodeling and renovation markets. (As used in this report, the terms "Company"
and "Nortek" refers to Nortek, Inc., together with its subsidiaries, unless the
context indicates otherwise. Such terms as "Company" and "Nortek" are used for
convenience only and are not intended as a precise description of any of the
separate corporations, each of which manages its own affairs.)
In 1995 the Company expanded through acquisitions (see Recent Developments
page 15). The operating results of the acquisitions are included in the
accompanying financial statements for only a portion of the fourth quarter
under the purchase method of accounting. As a result annual foreign sales and
earnings in the future are expected to become a larger portion of the Company's
totals. See Note 9, Notes to Consolidated Financial Statements, Item 8 of Part
II of this report, incorporated herein by reference for information on foreign
and domestic operations.
The Company's domestic performance is dependent to a significant extent
upon the levels of new residential construction, residential replacement and
remodeling and non-residential construction, which are affected by such factors
as interest rates, inflation, consumer spending habits and unemployment. In
1995 the Company's operations were affected by a decline in housing starts
throughout the United States and Canada. However, the actions taken to reduce
production costs and overhead levels and improve the efficiency and
profitability of the Company's operations have enabled it to be positioned for
growth. In the near term, the Company expects to operate in an environment of
relatively stable levels of construction and remodeling activity.
Inflation did not have a material effect on the Company's results of
operations and financial condition until mid-1994, when the Company experienced
significant increases in certain costs and expenses including raw material
costs. These material costs continued to increase in 1995.
Additional information concerning the Company's business is set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Item 7, Part II of this report (pages 22 through 32) and
incorporated herein by reference.
Residential Building Products Group
The Residential Building Products Group manufactures and distributes built-
in products primarily for the residential new construction, do-it-
yourself and professional remodeling and renovation markets. The principal
products sold by the Group are kitchen range hoods, bath fans, combination
units (fan, heater and light combinations) and bath cabinets. The Group is the
largest supplier in the United States and Canada of range hoods, bath fans and
combination units, indoor air quality products such as continuous-ventilation
systems and energy-recovery ventilators and one of the leading suppliers in
Western Europe, South America, the Middle East, Australia, New Zealand and the
Orient of luxury "Eurostyle" range hoods. Products are sold under the
Broan(R), Nautilus(R), Venmar (R), Flair, vanEE (R), Rangaire(R) and Best(R)
brand names, among others, to distributors and dealers of electrical and
lighting products, kitchen and bath dealers, retail home centers and OEMs
(original equipment manufacturers). Other products sold by this Group include,
among others, wireless security products, garage door openers, built-in home
intercoms and entertainment systems, home automation systems, door chimes,
central vacuum systems and fluorescent lighting fixtures.
Customers for the Group's products include residential and electrical
contractors, professional remodelers and do-it-yourself homeowners. The
Group's products are sold on a wholesale basis through distributors and dealers
of electrical and lighting products, on a retail basis through building supply
centers and to OEMs for inclusion in their product lines.
A key component of the Group's operating strategy is the introduction of
new products which capitalize on the strong Broan (R), Nautilus(R), Venmar(R),
Flair, vanEE(R), Rangaire(R) and Best(R) brand names and the extensive
distribution system of the Group's businesses. Recent product introductions
under these brand names include the Finesse (TM) contoured style range hood,
the Flair and vanEE(R) Super Compact Line of heat recovery cores and the
Broan(R) stainless steel trash compactor. Consumer preferences are important
in developing new products and establishing marketing strategies, and the
Company believes that the Group's ability to develop new and improved product
styles and features provides a significant competitive advantage.
With respect to certain product lines, several private label customers
account for a substantial portion of revenues. In 1995, approximately 16% of
the total sales of the Group were made to private label customers.
Production generally consists of fabrication from coil and sheet steel and
formed metal utilizing stamping, pressing and welding methods, assembly with
components and subassemblies purchased from outside sources (motors, fan
blades, heating elements, wiring harnesses, controlling devices, glass mirrors,
lighting fixtures, lumber, wood and polyethylene components, speakers, grilles
and similar electronic components, and compact disc and tape player mechanisms)
and painting, finishing and packaging.
The Group offers a broad array of products with various features and
styles across a range of price points. The Company believes that the Group's
variety of product offerings helps the Group maintain and improve its market
position for its principal products. At the same time, the Company believes
that the Group's status as a low-cost producer, in large part as a result of
cost reduction initiatives, provides the Group with a competitive advantage.
With respect to range hoods, bath fans, combination units and radio
intercoms, the Company believes that the Group's primary competitor is NuTone,
a subsidiary of Williams Holdings Companies. The market for bath cabinets is
highly fragmented with no single dominant supplier. The Group's other products
compete with many domestic and international suppliers in their various
markets. The Group competes with suppliers of competitive products primarily
on the basis of quality, distribution, delivery and price. Although the Group
believes it competes favorably with respect to each of these factors,
competition among suppliers of the Group's products is intense and certain of
these suppliers have greater financial and marketing resources than the Group.
The Group has 18 manufacturing plants and employed 2,763 full-time people
as of December 31, 1995, 341 of whom are covered by collective bargaining
agreements which expire in 1996, 2000 and 2001. The Company believes that the
Group's relationships with its employees are satisfactory.
Air Conditioning and Heating Products Group
The Air Conditioning and Heating Products Group manufactures and sells
HVAC systems for custom-designed commercial applications and for manufactured
and site-built residential housing. The Group's commercial products consist of
HVAC systems which are custom-designed to meet customer specifications for
commercial offices, manufacturing and educational facilities, hospitals, retail
stores and governmental buildings. Such systems are primarily designed to
operate on building rooftops (including large self-contained walk-in-units) or
on individual floors within a building, and range from 40 to 600 tons of
cooling capacity. The Group markets its commercial products under the
Governair(R), Mammoth(R) and Temtrol(TM) brand names. For manufactured and
site-built residential housing, the Group's products include central air
conditioners, heat pumps, furnaces and a wide range of accessories marketed
under the Intertherm(R) and Miller(R) brand names. Residential central air
conditioning products range from 1.5 to 5 tons of cooling capacity and furnaces
range from 45,000 BTU's to 144,000 BTU's of heating capacity. The Group's
residential products also include portable and permanent electric baseboard
heating products.
Commercial Products. The Group's commercial products include packaged rooftop
units and air handlers, custom walk-in units, individual floor units and heat
pumps. The market for commercial HVAC equipment is segmented between standard
and custom-designed equipment. Standard equipment can be manufactured at a
lower cost and therefore offered at substantially lower initial prices than
custom-designed equipment. As a result, suppliers of standard equipment
generally have a larger share of the overall commercial HVAC market than
suppliers of custom-designed equipment, including the Group. However, because
of certain building designs, shapes or other characteristics, the Company
believes there are many applications for which custom-designed equipment is
required or is more cost effective over the life of the building. Unlike
standard equipment, the Group's commercial HVAC equipment can be designed to
match the exact space, capacity and performance requirements of the customer.
The Group sells its commercial products primarily to contractors, owners and
developers of commercial office buildings, manufacturing and educational
facilities, hospitals, retail stores and governmental buildings. The Group
seeks to maintain strong relationships nationwide with design engineers, owners
and developers, the persons who are most likely to value the benefits and long-
term cost efficiencies of the Group's custom-designed equipment.
The Company estimates that more than half of the Group's commercial sales
in 1995 were attributable to replacement and retrofit activity, which typically
is less cyclical than new construction activity and generally commands higher
margins. The Group continues to develop product and marketing programs to
increase penetration in the growing replacement and retrofit market.
For many commercial applications, the ability to provide a custom-designed
system is the principal concern of the customer. The Group's packaged rooftop
and self-contained walk-in units maximize a building's rentable floor space
because they are located outside the building. In addition, factors relating
to the manner of construction and timing of installation of commercial HVAC
equipment can often favor custom-designed rather than standard systems. As
compared with site-built HVAC systems, the Group's systems are factory
assembled and then installed, rather than assembled on site, permitting
extensive testing prior to shipment. As a result, the Group's commercial
systems can be installed later in the construction process than site-built
systems, thereby saving the owner or developer construction and labor costs.
The Group's individual floor units offer flexibility in metering and billing, a
substantial advantage if a building is to be occupied in stages or where HVAC
usage varies significantly from floor to floor.
The Group's commercial products are marketed through independently owned
manufacturers' representatives and an in-house sales, marketing and engineering
group of 106 persons as of December 31, 1995. The independent representatives
are typically HVAC engineers, a factor which is significant in marketing the
Group's commercial products because of the design intensive nature of the
market segment in which the Group competes.
The Company believes that the Group is among the largest suppliers of
custom-designed commercial HVAC products in the United States. The Group's
four largest competitors in the commercial HVAC market are Brod & McClung, Inc.
(which sells under the "Pace" tradename), McQuay (a division of Snyder-General
Corporation), Miller-Picking (a division of York International Corporation) and
The Trane Company (a subsidiary of American Standard Inc.). The Group competes
primarily on the basis of engineering support, quality, flexibility in design
and construction and total installed system cost. Although the Company
believes that the Group competes favorably with respect to certain of these
factors, most of the Group's competitors have greater financial and marketing
resources than the Group and enjoy greater brand awareness. However, the
Company believes that the Group's ability to produce equipment that meets the
performance characteristics required by the particular product application
provides it with advantages not enjoyed by certain of these competitors.
Residential Products. The Group is one of the largest suppliers of air
conditioners, heat pumps and furnaces to the manufactured housing market in the
United States. In addition, the Group manufactures and markets HVAC products
for site-built homes, a business it entered in 1987. The Company's sales of
split system air conditioners for use in site-built and manufactured housing
accounted for approximately 10% of the Company's consolidated net sales for
1995.
The principal factors affecting the market for the Group's residential
HVAC products are the levels of manufactured housing shipments and housing
starts and the demand for replacement and modernization of existing equipment.
The Company anticipates that the replacement market will continue to expand as
a large number of previously installed heating and cooling products become
outdated or reach the end of their useful lives during the 1990s. This growth
may be accelerated by a tendency among consumers to replace older heating and
cooling products with higher efficiency models prior to the end of such
equipment's useful life. The Company estimates that slightly less than half of
the Group's net sales of residential HVAC products in 1995 were attributable to
the replacement market, which tends to be less cyclical than the new
construction market. The market for residential cooling products, including
those sold by the Group, is affected by spring and summer temperatures. The
Group does not sell window air conditioners, a segment of the market which is
highly seasonal and especially affected by spring and summer temperatures. The
Company believes that the Group's ability to offer both heating and cooling
products helps offset the effects of seasonality of the Group's sales.
The Group sells its manufactured housing products to builders of
manufactured housing and, through distributors, to manufactured housing dealers
and owners of such housing. The majority of sales to builders of manufactured
housing consist of furnaces designed and engineered to meet or exceed certain
standards mandated by federal agencies. These standards differ in several
important respects from the standards for furnaces used in site-built
residential homes. The after market channel of distribution includes sales of
both new and replacement air conditioning units and heat pumps and replacement
furnaces. The Company believes that the Group has one major competitor in this
market, Evcon Industries, a subsidiary of York International Corporation, which
markets its products under the "Evcon/Coleman" name.
A substantial portion of site-built residential products have been
introduced in the past several years, including a new line of furnaces and a
reengineered line of high efficiency air conditioners and heat pumps.
Residential HVAC products for use in site-built homes are sold through
independently-owned distributors who sell to HVAC dealers and contractors.
Competition in the site-built residential HVAC market is intense, and many
suppliers of such equipment have substantially greater financial and marketing
resources than the Group and enjoy greater brand awareness. In these markets,
the Group competes with, among others, Carrier Corporation, Lennox Industries,
The Trane Company and York International Corporation. The Group competes in
both the manufactured housing and site-built markets on the basis of breadth
and quality of its product line, distribution, product availability and price.
The Company believes that the Group competes favorably with respect to these
factors.
The Group has six manufacturing plants and employed 2,054 full-time people
as of December 31, 1995, 222 of whom are covered under a collective bargaining
agreement which expires in 1998. The Company believes that the Group's
relationships with its employees are satisfactory.
Plumbing Products Group
The Plumbing Products Group manufactures and sells vitreous china bathroom
fixtures (including lavatories, toilet bowls, flush tanks, bidets and urinals),
fiberglass and acrylic bathtubs, shower stalls and whirlpools, brass and die
cast faucets, bath cabinets and vanities and shower doors, and also markets
stainless steel and enameled steel tubs and sinks. In addition to its standard
product offerings, the Group also sells designer bathroom fixtures, 1.6 gallon
water-efficient toilets and a variety of products that are accessible to
physically challenged individuals. Products are sold under the URC(TM) and
Universal-Rundle(R) brand names principally to wholesale plumbing distributors
and retail home centers. End customers of the Group's products are generally
home builders, do-it-yourself homeowners, remodeling contractors and commercial
builders.
The Group sells its products to distributors and home centers primarily
through independently owned manufacturer's representatives supported by 50
sales and marketing personnel employed by the Group as of December 31, 1995.
The Group competes with many suppliers of plumbing and related products,
several of which have greater financial and marketing resources than the Group
and greater brand awareness. The Group's competitors include American Standard
Inc., Eljer Industries, Kohler Company and Mansfield, a subsidiary of Falcon
Building Products, Inc. The Group competes primarily on the basis of service,
quality, price, and breadth of product line offerings. The Group believes it
competes favorably by offering quality products and customer service at a
reasonable price and by developing products using new technologies.
The Plumbing Products Group has eight manufacturing facilities and
employed 1,325 full-time people as of December 31, 1995, approximately 916 of
whom are covered by collective bargaining agreements which expire in 1996 and
1997. The Company believes that the Group's relationships with its employees
are satisfactory.
RECENT DEVELOPMENTS
Acquisitions
On October 6, 1995, the Company acquired the assets of Rangaire Company of
Cleburne, Texas (range hoods and lighting fixtures). On October 31, 1995 the
Company acquired the capital stock of Best S.p.A. of Fabriano, Italy and
related entities (range hoods). On November 1, 1995, the Company acquired the
stock of Venmar Ventilation inc. of Drummondville, Quebec, Canada (continuous
ventilation-systems and energy-recovery ventilators). (See Note 2, Notes to
Consolidated Financial Statements, incorporated herein by reference.)
GENERAL CONSIDERATIONS
Employees
The Company employed approximately 6,423 persons at December 31, 1995.
Backlog
Backlog expected to be filled during 1996 was approximately $116,679,000
at December 31, 1995 ($111,705,000 at December 31, 1994). Backlog is not
regarded as a significant factor for operations where orders are generally for
prompt delivery. While backlog stated for December 31, 1995 is believed to be
firm, the possibility of cancellations makes it difficult to assess the
firmness of backlog with certainty.
Research and Development
The Company's research and development activities are principally new
product development and do not involve significant expenditures.
Patents and Trademarks
The Company holds numerous design and process patents that it considers
important, but no single patent is material to the overall conduct of its
business. It is the Company's policy to obtain and protect patents whenever
such action would be beneficial to the Company. The Company owns several
trademarks that it considers material to the marketing of its products,
including Broan(R), Nautilus(R), Venmar(R), vanEE(R), Rangaire(R), Best(R),
Governair(R), Mammoth(R), Temtrol(TM), Miller(R), Intertherm(R), Softheat(R),
Powermiser(R), URC(TM) and Universal-Rundle(R). The Company believes that its
rights in these trademarks are adequately protected.
Raw Materials
The Company purchases raw materials and most components used in its
various manufacturing processes. The principal raw materials purchased by the
Company are rolled sheet, formed and galvanized steel, copper, aluminum, plate
mirror glass, silica, lumber, plywood, paints, chemicals, resins and plastics.
The materials, molds and dies, subassemblies and components purchased from
other manufacturers, and other materials and supplies used in manufacturing
processes have generally been available from a variety of sources. Whenever
practical, the Company establishes multiple sources for the purchase of raw
materials and components to achieve competitive pricing, ensure flexibility and
protect against supply disruption. From time to time increases in raw material
costs can affect future supply availability due in part to raw material demands
by other industries.
Working Capital
The carrying of inventories to support distributors and to permit prompt
delivery of finished goods requires substantial working capital. Substantial
working capital is also required to carry receivables. The acquisitions made
by the Company in 1995 have historically financed a substantial portion of
their demands for working capital through various short term financing
arrangements and are expected to do so in the future. See "Liquidity and
Capital Resources" in Management's Discussion and Analysis of Financial
Condition and Results of Operations, beginning on page 29 of this report,
incorporated herein by reference.
Executive Officers of the Registrant
Name Age Position
Richard L. Bready 51 Chairman, President and
Chief Executive Officer
Almon C. Hall 49 Vice President, Controller
and Chief Accounting Officer
Richard J. Harris 59 Vice President and Treasurer
Siegfried Molnar 55 Senior Vice President -
Group Operations
Kenneth J. Ortman 60 Senior Vice President -
Group Operations
Kevin W. Donnelly 41 Vice President, General Counsel
and Secretary
The executive officers have served in the same or substantially similar
executive positions with the Company for at least the past five years.
Executive Officers are elected annually by the Board of Directors of the
Company and serve until their successors are chosen and qualified. Mr. Bready
has an employment agreement with the Company providing for his employment as
Chief Executive Officer through 1998. The Company's executive officers include
only those officers of the Company who perform policy-making functions for the
Company as a whole and have managerial responsibility for major aspects of the
Company's overall operations. A number of other individuals who serve as
officers of the Company or its subsidiaries perform policy-making functions and
have managerial responsibilities for the subsidiary or division by which they
are employed, although not for the Company overall. Certain of these
individuals could, depending on earnings of such unit, be more highly
compensated than some executive officers of the Company.
Item 2. Properties
Set forth below is a brief description of the location and general
character of the principal administrative and manufacturing facilities and
other material real properties of the Company, all of which the Company
considers to be in satisfactory repair. All properties are owned, except for
those indicated by an asterisk, which are leased.
Approximate
Location Description Square Feet
Union, IL Manufacturing/Warehouse/Administrative 174,000*
Hartford, WI Manufacturing/Warehouse/Administrative 402,000
Old Forge, PA Warehouse/Administrative 40,000
Bensenville, IL Warehouse/Administrative 69,000*
Mississauga, ONT Manufacturing/Administrative 108,000
Dallas, TX Manufacturing/Administrative 71,000
Carlsbad, CA Administrative 30,000
Hong Kong Manufacturing 20,000*
Waupaca, WI Manufacturing 35,000
Fabriano, Italy Manufacturing/Administrative 97,500*
Cerrento d'Esi, Italy Manufacturing/Administrative 135,000
Cleburne, TX Manufacturing/Administrative 210,000
Drummondville, QUE Manufacturing/Administrative 62,000*
St. Peters, MO Warehouse/Administrative 250,000*
St. Louis, MO Manufacturing 214,000
Boonville, MO Manufacturing 250,000*
Chaska, MN Manufacturing/Administrative 230,000*
Oklahoma City, OK Manufacturing/Administrative 122,000
Okarche, OK Manufacturing/Administrative 135,000
Los Angeles, CA Manufacturing/Administrative 177,000
New Castle, PA Manufacturing/Administrative 420,000
Hondo, TX Manufacturing/Administrative 404,000
Monroe, GA Manufacturing/Administrative 416,000
Union Point, GA Manufacturing/Administrative 191,000
Ottumwa, IA Manufacturing/Administrative 133,000
Grand Prairie, TX Manufacturing/Warehouse/Administrative 64,800*
Rensselaer, IN Manufacturing/Administrative 165,000
Chicago, IL Manufacturing/Administrative 100,000
Providence, RI Administrative 31,000*
Item 3. Legal Proceedings
The Company and its operating units are subject to numerous federal, state
and local laws and regulations, including environmental laws and regulations
that impose limitations on the discharge of pollutants into the air and water
and establish standards for the treatment, storage and disposal of solid and
hazardous wastes. The Company believes that it is in substantial compliance
with the material laws and regulations applicable to it. The Company and its
subsidiaries or former subsidiaries are involved in current, and may become
involved in future, remedial actions under federal and state environmental laws
and regulations which impose liability on companies to clean up, or contribute
to the cost of cleaning up, sites at which their hazardous wastes or materials
were disposed of or released. Such claims may relate to properties or business
lines acquired by the Company after a release has occurred. In other
instances, the Company may be partially liable under law or contract to other
parties that have acquired businesses or assets from the Company for past
practices relating to hazardous substances management. The Company believes
that all such claims asserted against it, or such obligations incurred by it,
will not have a material adverse effect upon the Company's financial condition
or results of operations. Expenditures in 1994 and 1995 to evaluate and
remediate such sites were not material. However, the Company is presently
unable to estimate accurately its ultimate financial exposure in connection
with identified or yet to be identified remedial actions due among other
reasons to: (i) uncertainties surrounding the nature and application of
environmental regulations, (ii) the Company's lack of information about
additional sites at which it may be listed as a potentially responsible party
("PRP"), (iii) the level of clean-up that may be required at specific sites and
choices concerning the technologies to be applied in corrective actions and
(iv) the time periods over which remediation may occur. Furthermore, since
liability for site remediation is joint and several, each PRP is potentially
wholly liable for other PRPs that become insolvent or bankrupt. Thus, the
solvency of other PRPs could directly affect the Company's ultimate aggregate
clean-up costs. In certain circumstances, the Company's liability for clean-up
costs may be covered in whole or in part by insurance or indemnification
obligations of third parties.
In addition to the legal matters described above, the Company and its
subsidiaries are parties to various legal proceedings incident to the conduct
of their businesses. None of these proceedings is expected to have a material
adverse effect, either individually or in the aggregate, on the Company's
financial position or results of operations. See Note 8, Notes to Consolidated
Financial Statements, Item 8 of Part II of this report, incorporated herein by
reference.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on November 16, 1995, the
following directors were elected by the following votes:
By the holders of Common Stock voting separately as a class.
NAME FOR WITHHELD
Class III (for a term expiring
at the 1998 Annual Meeting)
J. Peter Lyons 9,464,715 514,090
By the holders of Common Stock and Special Common Stock voting together as
a class.
NAME FOR WITHHELD
Class III (for a term expiring
at the 1998 Annual Meeting)
Philip B. Brooks 13,302,482 560,383
Richard J. Harris 13,310,507 552,358
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Stockholders of record of Nortek Common and Special Common Stock at
February 15, 1996, numbered approximately 3,811 and 2,914, respectively. There
were no dividends declared on the Common and Special Common in 1994 or 1995.
The high and low sales prices of Nortek's Common Stock traded on the New York
Stock Exchange in each quarter of 1994 and 1995 were:
1995
Quarter High Low
- ------- ---- ---
First 11 7/8 9 3/8
Second 10 3/4 8 1/8
Third 9 1/2 7 3/8
Fourth 12 1/4 7 7/8
1994
Quarter High Low
- ------- ---- ---
First 13 1/2 7 7/8
Second 9 7/8 7 7/8
Third 12 5/8 9 1/8
Fourth 12 5/8 10 1/4
See Note 6, Notes to Consolidated Financial Statements.
Item 6. Consolidated Selected Financial Data
Nortek, Inc. and Subsidiaries
For the Five Years Ended December 31, 1995
-----------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In Thousands Except Per Share Amounts)
Consolidated Summary of
Operations:
Net sales $776,210 $737,160 $744,113 $799,979 $917,049
Operating earnings 41,084 50,017 30,346 20,436 11,015
Loss on businesses sold --- (1,750) (20,300) (14,500) (15,200)
Earnings (loss) from
continuing operations 15,000 17,200 (12,600) (21,000) (34,700)
Loss from discontinued
operations --- --- --- (3,300) ---
Extraordinary gain (loss)
from debt retirements --- 200 (6,100) 100 7,600
Cumulative effect of
accounting changes --- 400 (2,100) --- ---
Net earnings (loss) 15,000 17,800 (20,800) (24,200) (27,100)
Financial Position:
Unrestricted cash, invest-
ments and marketable
securities $103,313 $105,080 $ 82,498 $ 73,748 $ 42,919
Working capital 160,753 173,459 117,926 132,587 139,657
Total assets 625,479 519,217 509,209 515,373 582,372
Total debt--
Current 42,050 4,629 37,539 6,810 4,875
Long-term 240,396 219,951 178,210 201,863 232,581
Current ratio 1.7:1 2.1:1 1.6:1 1.9:1 1.9:1
Debt to equity ratio 2.2:1 1.9:1 2.1:1 1.6:1 1.6:1
Depreciation and amorti-
zation 18,977 17,960 20,726 23,644 28,373
Capital expenditures 17,321 19,424 10,809 8,804 16,015
Stockholders' investment 131,291 117,790 104,007 126,906 152,929
Common and special common
shares outstanding 12,074 12,550 12,542 12,526 13,079
Per Share:
Earnings (loss) from continuing
operations--
Primary $1.19 $1.35 $(1.00) $(1.67) $(2.57)
Fully diluted 1.19 1.34 (1.00) (1.67) (2.57)
Net earnings (loss)--
Primary 1.19 1.40 (1.66) (1.92) (2.01)
Fully diluted 1.19 1.39 (1.66) (1.92) (2.01)
Stockholders' investment 10.87 9.39 8.29 10.13 11.69
See Notes 2, 9 to 11 and Note 13 of the Notes to Consolidated Financial
Statements, and Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Page 22, regarding the effect on operating
results of acquisitions, businesses sold and other matters. There have not
been any cash dividends declared or paid on the Company's Common or Special
Common Stock during the past five years.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company is a diversified manufacturer of residential and commercial
building products, operating within three principal product groups: the
Residential Building Products Group; the Air Conditioning and Heating Products
Group; and the Plumbing Products Group. Through these product groups, the
Company manufactures and sells, primarily in the United States, Canada and
Europe, a wide variety of products for the residential and commercial
construction, manufactured housing, and the do-it-yourself and professional
remodeling and renovation markets.
In March 1994, the Company sold its Retail Home Center Operations ("Dixieline")
and for purposes of this Management's Discussion and Analysis of Financial
Condition and Results of Operations, the results of operations attributable to
Dixieline have been excluded from all data reported as ongoing operations,
including net sales, cost of products sold, selling, general and administrative
expense and segment earnings. Total consolidated operating results of the
Company, however, include the operating results of Dixieline through October 2,
1993, the date that such business was accounted for as a business held for
sale. During the fourth quarter of 1995, the Company acquired three businesses,
which are included in the Residential Building Products Group, and accounted
for these acquisitions under the purchase method of accounting. Accordingly,
the results of such acquisitions are included in the Company's consolidated
results since the date of acquisition. (See Liquidity and Capital Resources
and Notes 1 and 2 of the Notes to Consolidated Financial Statements included
elsewhere herein.)
Results of Operations
The following tables set forth, for the three years ended December 31, 1995,
(a) certain consolidated operating results, (b) the percentage change of such
results as compared to the prior year, (c) the percentage which such results
bears to net sales and (d) the change of such percentages as compared to the
prior year:
Percentage
Change
-------------
Year Ended December 31, 1994 1993
----------------------- to to
1995 1994 1993 1995 1994
---- ---- ---- ---- ----
(Amounts in Millions)
Net sales $776.2 $737.2 $744.1 5.3% (.9)%
Cost of products sold 574.9 520.4 532.5 (10.5) 2.3
Selling, general and admini-
strative expense 160.2 166.8 181.3 4.0 8.0
Operating earnings 41.1 50.0 30.3 (17.8) 65.0
Interest expense (24.9) (26.2) (26.5) 5.0 1.1
Interest income 6.1 5.3 3.2 15.1 65.6
Net gain on investment and
marketable securities 2.0 --- 1.7 --- (100.0)
Loss on businesses sold --- (1.7) (20.3) 100.0 91.6
Earnings (loss) before provision
for income taxes 24.3 27.4 (11.6) (11.3) ---
Provision for income taxes 9.3 10.2 1.0 8.8 (920.0)
Earnings (loss)before extra-
ordinary gain (loss) 15.0 17.2 (12.6) (12.8) ---
Extraordinary gain (loss) from
debt retirements --- .2 (6.1)(100.0) ---
Cumulative effect of accounting
changes --- .4 (2.1)(100.0) ---
Net earnings (loss) 15.0 17.8 (20.8) (15.7) ---
Percentage
Percentage of Net Sales Change
-------------
Year Ended December 31, 1994 1993
----------------------- to to
1995 1994 1993 1995 1994
---- ---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% ---% ---%
Cost of products sold 74.1 70.6 71.5 (3.5) .9
Selling, general and admini-
strative expense 20.6 22.6 24.4 2.0 1.8
Operating earnings 5.3 6.8 4.1 (1.5) 2.7
Interest expense (3.2) (3.6) (3.6) .4 ---
Interest income .8 .7 .4 .1 .3
Net gain on investment and
marketable securities .2 --- .2 .2 (.2)
Loss on businesses sold --- (.2) (2.7) .2 2.5
Earnings (loss)before provision
for income taxes 3.1 3.7 (1.6) (.6) 5.3
Provision for income taxes 1.2 1.4 .1 .2 (1.3)
Earnings (loss)before extra-
ordinary gain (loss) 1.9 2.3 (1.7) (.4) 4.0
Extraordinary gain (loss)
from debt retirements --- --- (.8) --- .8
Cumulative effect of accounting
changes --- .1 (.3) (.1) .4
Net earnings (loss) 1.9 2.4 (2.8) (.5) 5.2
The following table presents the net sales for the Company's principal product
groups for the three years ended December 31, 1995, and the percentage change
of such results as compared to the prior year:
Percentage
Change
------
1994 1993
Year Ended December 31, to to
-----------------------
1995 1994 1993 1995 1994
---- ---- ---- ---- ----
(Amounts in Millions)
Net sales:
Residential Building
Products $281.2 $265.2 $257.2 6.0% 3.1%
Air Conditioning and
Heating Products 363.4 338.0 275.6 7.5 22.6
Plumbing Products 131.6 134.0 128.1 (1.8) 4.6
----- ----- ----- ----- -----
Net sales from ongoing
operations 776.2 737.2 660.9 5.3 11.5
Businesses sold --- --- 83.2 --- (100.0)
----- ----- ----- ---- -----
$776.2 $737.2 $744.1 5.3% (.9)%
===== ===== ===== ==== ======
Year Ended December 31, 1995 as Compared to the Year Ended December 31, 1994
Net sales from ongoing operations increased approximately $39,000,000, or
approximately 5.3%, as compared to 1994. Net sales from ongoing operations
increased principally as a result of increased shipments of new and replacement
air conditioning and heating ("HVAC") products to manufactured housing
customers, increased sales levels of commercial and industrial HVAC products by
the Air Conditioning and Heating Products Group and acquisitions which
contributed approximately $24,600,000 to net sales in 1995. These increases
were partially offset by lower sales volume and prices of vitreous china
products in the Plumbing Products Group.
Cost of products sold from ongoing operations as a percentage of net sales from
ongoing operations increased from approximately 70.6% in 1994 to approximately
74.1% in 1995, primarily as a result of higher material costs in each of the
Company's operating groups. Had all year end inventory values of ongoing
operations been stated on a FIFO basis, year end inventory would have been
approximately $10,550,000 higher in 1995, approximately $6,710,000 higher in
1994, and approximately $4,982,000 higher in 1993. Increased direct labor and
overhead costs in the Air Conditioning and Heating Products Group also
contributed to the increased percentage. To a lesser extent, decreased sales
levels without a proportionate decrease in overhead costs in Plumbing Products
was also a factor. The increase in the percentage was partially offset by
lower direct labor and overhead costs in the Residential Building Products
Group.
Selling, general and administrative expense from ongoing operations as a
percentage of net sales from ongoing operations decreased from approximately
22.6% in 1994 to approximately 20.6% in 1995, principally due to lower expense
on increased HVAC product net sales, primarily to residential and manufactured
housing customers and lower non-segment expense both as a result of the
Company's cost containment measures. To a lesser extent, decreased expenses in
the Plumbing Products Group was also a factor. The decrease in the percentage
was partially offset by the effect of approximately $3,200,000 of income in
1994 from the settlement of insurance claims and disputes.
Segment earnings from ongoing operations were approximately $48,700,000 for
1995, as compared to approximately $61,300,000 for 1994, as a result of the
effect of the factors discussed below. Segment earnings are operating earnings
before corporate and other expenses that are not directly attributable to the
Company's product groups. Acquisitions in 1995, included in the Residential
Building Products Group, contributed approximately $1,050,000 to segment
earnings in 1995. Segment earnings from ongoing operations have been reduced
by depreciation and amortization expense of approximately $17,600,000 and
$15,700,000 for 1995 and 1994, respectively. Acquisitions contributed
approximately $750,000 of the increase in depreciation and amortization expense
in 1995. The overall decline in segment earnings from ongoing operations was
due principally to increased material costs in each of the Company's operating
groups, partially offset by higher earnings from increased sales volume of HVAC
products, without a proportionate increase in expense, and lower selling,
general and administrative expense (as a percentage of net sales) in the Air
Conditioning and Heating Products and Plumbing Products Groups. Approximately
$1,600,000 of the decline in segment earnings resulted from the effect of
income in the second quarter of 1994 from the settlement of insurance claims
and disputes.
Foreign segment earnings in 1995, consisting primarily of the results of
operations of the Company's Canadian and European subsidiaries, which
manufacture built-in ventilating products, decreased to approximately 6.1% of
segment earnings from ongoing operations in 1995 from approximately 6.2% of
such earnings in 1994. This decrease was primarily due to a decline in
earnings in Canada due to the continued weakness in residential construction,
partially offset by acquisitions and the effect of an approximate 21% decline
in domestic segment earnings from ongoing operations in 1995.
Operating earnings in 1995 decreased approximately $8,900,000, or approximately
17.8%, as compared to 1994, primarily as a result of the factors discussed
above, including the effect of lower non-segment expense, net and approximately
$3,200,000 (including $1,600,000 relating to the Company's operating segments)
of income in the second quarter of 1994 from the settlement of insurance claims
and disputes.
Interest expense decreased approximately $1,300,000, or approximately 5.0% in
1995, as compared to 1994. In February 1994, the Company sold in a public
offering $218,500,000 of its 9 7/8% Notes and used a portion of the proceeds to
redeem, on March 24, 1994, approximately $153,000,000 of certain of the
Company's outstanding indebtedness. Interest expense (net of interest income)
for 1994 was approximately $1,300,000 greater than it would have been had the
debt redemption occurred on the same day as the financing. The effect of the
redemption of certain other outstanding indebtedness in 1994 was also a factor.
(See Note 2 of the Notes to Consolidated Financial Statement included elsewhere
herein.) The decrease in interest expense was partially offset by increased
interest expense as a result of acquisitions.
Interest income increased approximately $800,000, or approximately 15.1% in
1995, as compared to 1994, principally due to higher yields earned on short-
term investments and marketable securities, partially offset by lower average
invested balances of short-term investments and marketable securities.
In the third quarter of 1995, the Company sold its investment in the preferred
stock of Dixieline, which resulted in a pre-tax gain of $2,200,000. (See Notes
1 and 2 of the Notes to Consolidated Financial Statements included elsewhere
herein.)
The provision for income taxes was approximately $9,300,000 in 1995, as
compared to approximately $10,200,000 in 1994. The provision for income taxes
as a percentage of pre-tax earnings was approximately 38.3% in 1995 and 37.2%
in 1994. The provision for income taxes in 1995 has been reduced by
approximately $1,100,000, reflecting the reversal of tax valuation reserves no
longer required, of which $670,000 is as a result of the sale of certain
investment and marketable securities. The provision for income taxes in 1994
has been reduced by approximately $1,600,000, principally reflecting the
reversal of tax valuation reserves as a result of the realization of certain
tax assets. The income tax rates also differ from the United States federal
statutory rate of 35% as a result of state income tax provisions, nondeductible
amortization expense (for tax purposes) and the effect of foreign income tax on
foreign source income. (See Note 4 of the Notes to Consolidated Financial
Statements included elsewhere herein.)
Year Ended December 31, 1994 as Compared to the Year Ended December 31, 1993
Net sales from ongoing operations increased approximately $76,300,000, or
11.5%, as compared to 1993. Total net sales decreased approximately
$6,900,000, or approximately .9%, in 1994 as compared to 1993, as a result of
the sale of Dixieline, partially offset by the following factors. Net sales
from ongoing operations increased principally as a result of increased sales
volume of residential air conditioning and heating ("HVAC") products, increased
shipments of new and replacement HVAC products to manufactured housing
customers and increased sales levels of commercial and industrial HVAC
products. Increased sales of the Plumbing Products Group are principally due
to increased shipments of water efficient toilets, partially offset by
decreased sales levels (approximately $7,100,000) of bathroom fixtures as a
result of the restructure of certain product lines in the fourth quarter of
1993.
Cost of products sold from ongoing operations as a percentage of net sales from
ongoing operations decreased from approximately 71.1% in 1993 to approximately
70.6% in 1994. Total cost of products sold as a percentage of total net sales
decreased from approximately 71.5% in 1993 to approximately 70.6% in 1994, as a
result of the factors described below and the effect of Dixieline which
operated at higher cost levels than the Company's other product groups. Had
all year end inventory values of ongoing operations been stated on a FIFO
basis, year end inventory would have been approximately $6,710,000 higher in
1994, approximately $4,982,000 higher in 1993 and approximately $6,388,000
higher in 1992. The decrease in cost of products sold as a percentage of net
sales from ongoing operations was primarily attributable to an increase in
Plumbing Products Group net sales and increased sales of residential and
commercial HVAC products in the Air Conditioning and Heating Products Group,
all without a proportionate increase in costs. To a lesser extent, these
decreases in the percentage were partially offset by slightly higher cost
levels in the Residential Building Products Group, in part, due to the effect
of increased competition and the impact of consolidating certain manufacturing
facilities. The overall improvement in cost levels is due, in part, to the
Company's ongoing cost control efforts.
Selling, general and administrative expense from ongoing operations as a
percentage of net sales from ongoing operations decreased from approximately
24.3% in 1993 to approximately 22.6% in 1994. Total selling, general and
administrative expense as a percentage of total net sales decreased from
approximately 24.4% in 1993 to approximately 22.6% in 1994, as a result of the
factors described below and the effect of Dixieline which operated at higher
expense levels than the Company's other product groups. The decrease in
selling, general and administrative expense from ongoing operations as a
percentage of net sales from ongoing operations in 1994 was principally due to
lower non-segment expense, the effect of 1993 pre-tax losses of approximately
$2,800,000 from the restructure of certain product lines in the Plumbing
Products Group, approximately $1,600,000 as a result of the sale in October
1993 of certain real property and $700,000 in connection with the consolidation
of certain manufacturing facilities by the Company's Building Products Group,
and approximately $3,200,000 of income from the settlement of insurance claims
and disputes in 1994, combined with the effect of increased net sales from
ongoing operations in 1994. The effect of the percentage increase in net sales
in the Air Conditioning and Heating Products Group in excess of the percentage
increases in net sales by the Company's other product groups was also a factor
in the overall decrease in the percentage of ongoing net sales, since this
group operates at lower expense levels than the total expense level of ongoing
operations. These improvements in the percentage were partially offset by the
effect of approximately $11,300,000 of expenses relating to the implementation
of certain cost reduction activities and manufacturing process improvements in
each of the Company's operating groups, the cost of installing new systems,
marketing expenses as a result of competitive conditions and expenses of
certain litigation and other matters in dispute. Approximately $2,600,000 of
expenses relating to certain cost reduction activities and manufacturing
process improvements were incurred in 1993.
Segment earnings from ongoing operations were approximately $61,300,000 for
1994, as compared to approximately $47,200,000 for 1993. Total segment earnings
were approximately $61,300,000 for 1994, as compared to approximately
$46,900,000 for 1993 as a result of the effect of Dixieline and the following
factors. Segment earnings from ongoing operations have been reduced by
depreciation and amortization expense of approximately $15,700,000 and
$16,200,000 for 1994 and 1993, respectively. The increase in segment earnings
from ongoing operations principally was due to increased sales levels in the
Air Conditioning and Heating Products and Plumbing Products Groups, without a
proportionate increase in cost and from the effect of 1993 pre-tax losses of
approximately $2,800,000, $1,600,000 and $700,000 described above.
Approximately $1,500,000 of the increase in segment earnings in 1994 related to
income from the settlement of insurance claims. The increase in segment
earnings was partially offset by the effect of approximately $10,000,000 in
1994, of expenses incurred in connection with the implementation of certain
cost reduction activities and manufacturing process improvements in each of the
Company's operating groups, the cost of installing new systems, and marketing
expenses as a result of competitive conditions in the Residential Building
Products Group. Expenses incurred in connection with cost reduction activities
and manufacturing process improvements in 1993 were approximately $2,600,000.
Foreign segment earnings in 1994 and 1993, consisting primarily of the results
of operations of the Company's Canadian subsidiary which manufactures built-in
ventilating products, declined to approximately 6.2% of segment earnings from
ongoing operations in 1994 from approximately 10.5% of such earnings in 1993.
This decline was primarily due to an approximate 36% increase in domestic
segment earnings from ongoing operations in 1994, as well as an approximate 20%
decrease in foreign segment earnings in 1994. The decrease in foreign segment
earnings was primarily the result of the continued weakness in the residential
construction market in Canada.
Operating earnings in 1994 increased approximately $19,700,000, or
approximately 65%, as compared to 1993 primarily as a result of the factors
discussed above and the effect of Dixieline's operating results. Operating
earnings also include approximately $1,700,000 of non-segment income from the
settlement in 1994 of insurance claims and disputes, partially offset by
approximately $1,300,000 of non-segment expense of certain litigation and other
matters in dispute in 1994. Dixieline's loss included in the Company's
consolidated operating results was approximately $300,000 in 1993. Dixieline's
operating results were no longer included in the Company's consolidated
operating results in 1994. (See Notes 1 and 2 of the Notes to Consolidated
Financial Statements included elsewhere herein.)
Interest expense decreased approximately $300,000, or approximately 1.1% in
1994, as compared to 1993. In February 1994, the Company sold in a public
offering $218,500,000 of its 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8%
Notes") and used the proceeds to redeem approximately $153,000,000 of certain
of the Company's outstanding indebtedness. Interest expense (net of interest
income) was approximately $1,300,000 greater in 1994 than it would have been
had the debt redemption occurred on the same day as the financing. This
increase was partially offset by the effect of the redemption of certain other
outstanding indebtedness in January 1994. The decrease in interest expense was
primarily due to the redemption and financing discussed above. (See Note 5 of
the Notes to Consolidated Financial Statements included elsewhere herein.)
Interest income in 1994 increased approximately $2,100,000, or approximately
65.6%, as compared to 1993. The increases were principally due to higher
average invested balances of short-term investments, marketable securities and
other investments, and the effect of slightly higher yields earned on
investment and marketable securities.
The net gain on investment and marketable securities was approximately
$1,650,000 for 1993, a portion of which was unrealized gains recorded in the
Company's Statement of Operations in 1993. Due to the adoption in 1994 of
Statement of Financial Accounting Standards ("SFAS") No. 115, such unrealized
gains and losses are now recorded as adjustments to stockholders' investment.
(See Note 10 of the Notes to Consolidated Financial Statements included
elsewhere herein.)
The pre-tax loss on businesses sold of approximately $1,750,000 in 1994 was
significantly lower than the approximate $20,300,000 loss in 1993, which was
related to Dixieline. (See Note 2 of Notes to Consolidated Financial
Statements included elsewhere herein.)
The provision for income taxes was approximately $10,200,000 for 1994 as
compared to approximately $1,000,000 for 1993. The provision for income taxes
as a percentage of the pre-tax earnings from continuing operations was
approximately 37.2% in 1994 and approximately 8.6% of the pre-tax loss from
continuing operations in 1993. The provision for income taxes in 1994 has been
reduced by approximately $1,600,000, principally reflecting the reversal of tax
valuation reserves as a result of the realization of certain tax assets. The
effect of nondeductible losses on businesses sold in both years and an increase
in income tax valuation reserves in 1993 were significant factors in the
percentages. The income tax rates also differ from the United States federal
statutory rate of 35% as a result of the effect of foreign income tax on
foreign source income, state income taxes and nondeductible amortization
expense (for tax purposes). (See Note 4 of the Notes to Consolidated Financial
Statements included elsewhere herein.)
The Company recorded an extraordinary gain of approximately $200,000 in 1994
resulting from the call for redemption and purchases in the open market of the
Company's 7 1/2% Convertible Debentures compared to an approximate $6,100,000
loss in 1993. The loss in 1993 resulted primarily from the call for redemption
on February 22, 1994 of certain of the Company's various Notes and Debentures
in connection with the refinancing described in Note 5 of Notes to Consolidated
Financial Statements.
The cumulative effect of accounting changes resulted in earnings of
approximately $400,000 in 1994 and a loss of approximately $2,100,000 in 1993
from the adoption of SFAS No. 115 and No. 106, respectively. (See Note 10 of
the Notes to Consolidated Financial Statements included elsewhere herein.)
Liquidity and Capital Resources
The Company's primary sources of liquidity in 1995 and 1994 have been funds
provided by subsidiary operations, unrestricted short-term investments and
marketable securities and in 1994 included funds from the sale of 9 7/8% Notes
(See Note 5 of the Notes to the Consolidated Financial Statements included
elsewhere herein) and proceeds from a business sold. Unrestricted cash,
investments and marketable securities were approximately $103,313,000 at
December 31, 1995 as compared to $105,080,000 at December 31, 1994.
On October 6, 1995, the Company completed the purchase of the assets, subject
to certain liabilities, of Rangaire Company of Cleburne, Texas ("Rangaire").
Rangaire manufactures and sells kitchen range hoods and lighting fixtures to
appliance and original equipment manufacturing customers and electrical
distributors. Rangaire also manufactures lighting fixtures for distribution
primarily in the southeastern United States.
On October 31, 1995, certain wholly owned subsidiaries of the Company completed
the acquisition of the capital stock of Best S.p.A. and related entities
("Best"). Best is a manufacturer of Eurostyle kitchen range hoods
headquartered in Fabriano, Italy. Best manufactures range hoods which are
distributed to Eastern and Western Europe, North and South America, the Middle
East, Australia, New Zealand and the Orient.
On November 1, 1995, Broan Ltd., a wholly owned subsidiary of the Company,
acquired the capital stock of Venmar Ventilation inc. of Canada, along with
related entities ("Venmar"). Venmar, a leader in the indoor air quality market
in Canada, manufactures continuous ventilation systems and energy recovery
ventilators for distribution primarily to Canadian and United States markets.
Venmar is headquartered in Drummondville, Quebec, Canada.
The aggregate purchase price for these acquisitions was approximately
$36,500,000, consisting of cash of approximately $33,400,000 and future
payments of approximately $3,100,000. The selling shareholders of certain of
these acquisitions are entitled to additional purchase price payments of up to
approximately $7,800,000, depending on subsequent operating results of such
acquisitions. Approximately $9,600,000 of the cash was borrowed under the
terms of a line of credit of one of the Company's subsidiaries. (See Note 2 of
the Notes to Consolidated Financial Statements included elsewhere herein.)
The Company's investment in marketable securities at December 31, 1995
consisted primarily of investments in United States Treasury securities. (See
Note 10 of Notes to Consolidated Financial Statements included elsewhere
herein.) At December 31, 1995, approximately $9,411,000 of the Company's cash
and investments were pledged as collateral for insurance and other requirements
and were classified as restricted in current assets in the Company's
accompanying consolidated balance sheet.
The indenture governing the 9 7/8% Notes restricts, among other things, the
payment of cash dividends, repurchase of the Company's capital stock and the
making of certain other restricted payments, the incurrence of additional
indebtedness, the making of certain investments, mergers, consolidations and
sale of assets (all as defined in the indenture). Upon certain asset sales (as
defined in the indenture), the Company will be required to offer to purchase,
at 100% principal amount plus accrued interest to the date of purchase, 9 7/8%
Notes in a principal amount equal to any net cash proceeds (as defined in the
indenture) that are not invested in properties and assets used primarily in the
same or related business to those owned and operated by the Company at the
issue date of the 9 7/8% Notes or at the date of such asset sale and such net
cash proceeds were not applied to permanently reduce Senior Indebtedness (as
defined in the indenture).
On November 16, 1995, the Company's Board of Directors authorized a program to
purchase up to 1,000,000 shares of the Company's Common Stock, subject to
market conditions and cash availability. The Company has purchased
approximately 615,500 shares of its Common Stock through February 13, 1996
under this program. (See below and Note 6 of the Notes to Consolidated
Financial Statements included elsewhere herein.)
At December 31, 1995, approximately $30,200,000 was available for the payment
of cash dividends or stock payments under the terms of the Company's indenture
governing the 9 7/8% Notes.
The Company's working capital and current ratio changed from approximately
$173,459,000 and approximately 2.1:1, respectively, at December 31, 1994 to
approximately $160,753,000 and approximately 1.7:1, respectively, at December
31, 1995, principally as a result of the factors described below. Working
capital included approximately $103,313,000 in 1995 and approximately
$105,080,000 in 1994 of unrestricted cash, investments and marketable
securities. The increase in current assets in 1995 includes approximately
$65,400,000 while the increase in current liabilities includes approximately
$71,400,000 from acquisitions. Acquisitions accounted for approximately
$35,900,000 of the increase in short-term indebtedness and current maturities
of long-term debt.
Accounts receivable increased approximately $26,330,000, or approximately
28.7%, between December 31, 1994 and December 31, 1995, while net sales
increased approximately 14.8% in the fourth quarter of 1995 as compared to the
fourth quarter of 1994. The increase in accounts receivable is principally due
to approximately $29,745,000 from acquisitions that occurred during the fourth
quarter of 1995 and as a result of increased net sales of new and replacement
products from residential and manufactured housing customers by the Air
Conditioning and Heating Products Group. The rate of change in accounts
receivable in certain periods may be different than the rate of change in sales
in such periods principally due to the timing of net sales. Significant
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 December 31,
1995 as compared to December 31, 1994. The Company has not experienced any
significant changes in credit terms, collection efforts, credit utilization or
delinquency in accounts receivable in 1995.
Liquidity and Capital Resources (Continued)
Inventories increased approximately $14,704,000, or approximately 15.4%,
between December 31, 1994 and December 31, 1995, including approximately
$22,034,000 from acquisitions.
Accounts payable increased approximately $20,350,000, or approximately 38.6%,
between December 31, 1994 and December 31, 1995, including approximately
$22,975,000 from acquisitions.
Unrestricted cash and investments increased approximately $5,650,000 from
December 31, 1994 to December 31, 1995, principally as a result of the
following:
Condensed
Consolidated
Cash Flows
----------
Operating activities--
Cash flow from operations, net $33,277,000
Decrease in accounts receivable, net 4,496,000
Decrease in inventories 5,820,000
Decrease in trade accounts payable (5,614,000)
Change in accrued expenses, taxes, prepaids,
other assets, liabilities, and other, net (4,132,000)
Investing activities--
Net cash paid for businesses acquired (27,543,000)
Net cash proceeds relating to businesses sold 1,129,000
Proceeds from the sale of property and equipment 1,831,000
Purchase of marketable securities (10,086,000)
Proceeds from the sale of marketable securities 20,772,000
Capital expenditures (16,091,000)
Financing activities--
Increase in borrowings, net of payments 9,107,000
Purchase of Nortek Common and Special Common Stock (4,664,000)
All other, net (2,652,000)
----------
$ 5,650,000
==========
The Company's debt-to-equity ratio increased from approximately 1.9:1 at
December 31, 1994 to 2.2:1 at December 31, 1995, primarily as a result of the
effect of increased indebtedness as a result of acquisitions and the purchase
of the Company's Common and Special Common Stock, partially offset by increased
stockholders' investment as a result of net earnings and changes in the
cumulative translation and marketable securities adjustments. (See Note 2 of
Notes to Consolidated Financial Statements and the Company's Consolidated
Statement of Stockholders' Investment included elsewhere herein.)
At December 31, 1995, the Company has approximately $1,800,000 of net U. S.
Federal prepaid income tax assets which are expected to be realized through
future operating earnings. (See Note 4 of Notes to the Consolidated Financial
Statements.)
The Company believes that its growth will be generated largely by internal
growth in each of its product groups, augmented by strategic acquisitions. The
Company regularly evaluates potential acquisitions which would increase or
expand the market penetration of, or otherwise complement, its current product
lines.
Inflation, Trends and General Considerations
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 recent periods, the Company's product
groups have operated in an environment of increasing levels of construction and
remodeling activity, including new housing starts which increased approximately
20% between 1990 and 1994, but declined approximately 8.5% in 1995. New
residential construction housing starts, however, remain below the levels
experienced in the mid-1980s. The Company's operations have been affected by
the difficult economic conditions in the northeastern United States, California
and Canada. However, the actions taken to reduce production costs and overhead
levels and improve the efficiency and profitability of the Company's operations
have enabled it to significantly increase operating earnings, as well as to
position the Company for growth. 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.
Inflation did not have a material effect on the Company's results of operations
and financial condition until mid-1994, when the Company experienced increases
in certain costs and expenses including raw material costs. In 1995, material
costs as a percentage of net sales increased by approximately 3.0%, as compared
to 1994. The Company has not been able to and there can be no assurance that
the Company will be able to sufficiently increase its sales prices in the
future.
Item 8. Financial Statements and Supplementary Data
Financial statements and supplementary data required by this Item 8 are set
forth at the pages indicated in Item 14(a) included elsewhere herein.
Item 9. Disagreements on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
See Election of Directors in the definitive Proxy Statement for the Company's
1996 Annual Meeting of Stockholders, incorporated herein by reference. See
also Part I, Item 1, Business-General Considerations-Executive Officers of the
Registrant.
Item 11. Executive Compensation
See Executive Compensation in the definitive Proxy Statement for the Company's
1996 Annual Meeting of Stockholders, incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
See Security Ownership of Certain Beneficial Owners and Management in the
definitive Proxy Statement for the Company's 1996 Annual Meeting of
Stockholders, incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
See Election of Directors in the definitive Proxy Statement for the Company's
1996 Annual Meeting of Stockholders, incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Schedules
The following documents are filed as part of this report:
1. Financial Statements: Page No.
Consolidated Statement of
Operations for the three
years ended December 31,
1995 36
Consolidated Balance Sheet
as of December 31, 1995
and 1994 37
Consolidated Statement of
Cash Flows for the three
years ended December 31,
1995 39
Consolidated Statement of
Stockholders' Investment
for the three years ended
December 31, 1995 40
Notes to Consolidated
Financial Statements 41
Report of Independent
Public Accountants 59
2. Financial Statement Schedules:
Schedule II Valuation
and Qualifying Accounts 60
Schedules I, III, IV and V, are omitted as not applicable or not required
under the rules of Regulation S-X.
3.The exhibits are listed in the Exhibit Index, which is incorporated
herein by reference.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the Registrant during the
last quarter of the period covered by this report:
October 12, 1995, Item 5 Other Events; Item 7 Financial Statements
and Exhibits.
November 9, 1995, Item 2, Acquisition or Disposition of Assets; Item
7, Financial Statements and Exhibits.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 7, 1996.
NORTEK, INC.
By:/s/Richard L. Bready
------------------------
Richard L. Bready
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, as of March 7, 1996.
/s/Richard L, Bready /s/D. Stevens Mcvoy
- --------------------------------- ------------------------------
Richard L. Bready, Chairman D. Stevens McVoy, Director
of the Board and President
(principal executive officer)
/s/Richard J. Harris /s/J. Peter Lyons
- ---------------------------------- -------------------------------
Richard J. Harris, Vice President J. Peter Lyons, Director
and Treasurer (principal financial
officer) and Director
/s/Almon C. Hall /s/ Dennis J. Mcgillicuddy
- --------------------------------- -------------------------------
Almon C. Hall, Vice President Dennis J. McGillicuddy, Director
and Controller (principal
accounting officer)
/s/ Philip B. Brooks /s/ Barry Silverstein
- --------------------------------- -------------------------------
Philip B. Brooks, Director Barry Silverstein, Director
Nortek, Inc. and Subsidiaries
Consolidated Statement of Operations
For the Years Ended December 31,
--------------------------------
1995 1994 1993
---- ---- ----
(In Thousands Except Per Share Amounts)
Net Sales $776,210 $737,160 $744,113
------- ------- -------
Costs and Expenses:
Cost of products sold 574,929 520,328 532,488
Selling, general and administrative
expense 160,197 166,815 181,279
------- ------- -------
735,126 687,143 713,767
------- ------- -------
Operating earnings 41,084 50,017 30,346
Interest expense (24,918) (26,162) (26,519)
Interest income 6,134 5,295 3,223
Net gain on investment and
marketable securities 2,000 --- 1,650
Loss on businesses sold --- (1,750) (20,300)
------- ------- -------
Earnings (loss) before provision
for income taxes 24,300 27,400 (11,600)
Provision for income taxes 9,300 10,200 1,000
------- ------- -------
Earnings (loss) before extraordinary
gain (loss) 15,000 17,200 (12,600)
Extraordinary gain (loss) from debt
retirements --- 200 (6,100)
------- ------- ------
Earnings (loss) before the cumulative
effect of accounting changes 15,000 17,400 (18,700)
Cumulative effect of accounting changes --- 400 (2,100)
------- ------- -------
Net Earnings (Loss) $ 15,000 $ 17,800 $(20,800)
======= ======= =======
Net Earnings (Loss) Per Share:
Earnings before extraordinary
gain (loss)
Primary $1.19 $1.35 $(1.00)
Fully diluted $1.19 $1.34 $(1.00)
Extraordinary gain (loss)
Primary --- .02 (.49)
Fully diluted --- .02 (.49)
Cumulative effect of accounting changes
Primary --- .03 (.17)
---- ---- -----
Fully diluted --- .03 (.17)
---- ---- -----
Net Earnings (Loss)
Primary $1.19 $1.40 $(1.66)
==== ==== =====
Fully diluted $1.19 $1.39 $(1.66)
==== ==== =====
Weighted Average Number of Shares:
Primary 12,569 12,707 12,622
====== ====== ======
Fully diluted 12,620 13,144 13,362
====== ====== ======
The accompanying notes are an integral part of these financial statements.
Nortek, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31,
------------------
Assets 1995 1994
---- ----
(Amounts in Thousands)
Current Assets:
Unrestricted
Cash and investments at cost, which
approximates market $ 82,756 $ 77,106
Marketable securities available for sale 20,557 27,974
Restricted
Cash, investments and marketable
securities at cost, which approximates
market 9,411 9,337
Accounts receivable, less allowances
of $4,546,000 and $4,030,000 118,017 91,687
Inventories
Raw materials 42,601 32,660
Work in process 14,319 9,497
Finished goods 53,132 53,191
------- -------
110,052 95,348
------- -------
Prepaid expenses and other current assets 16,927 7,542
U.S. Federal prepaid income taxes 19,100 19,800
------- -------
Total current assets 376,820 328,794
------- -------
Property and Equipment, at Cost:
Land 6,508 6,069
Buildings and improvements 69,125 55,639
Machinery and equipment 157,884 123,848
------- -------
233,517 185,556
Less accumulated depreciation 97,255 87,475
------- -------
Total property and equipment, net 136,262 98,081
------- -------
Other Assets:
Goodwill, less accumulated amortization
of $23,978,000 and $21,459,000 91,347 72,682
Deferred debt expense 7,574 8,502
Other 13,476 11,158
------- -------
112,397 92,342
------- -------
$625,479 $519,217
======= =======
The accompanying notes are an integral part of these financial statements.
Nortek, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31,
------------------
1995 1994
---- ----
(Amounts in Thousands)
Liabilities and Stockholders' Investment
Current Liabilities:
Notes payable and other short-term
obligations $ 30,226 $ 51
Current maturities of long-term debt 11,824 4,578
Accounts payable 73,047 52,697
Accrued expenses and taxes, net 100,970 98,009
------- -------
Total current liabilities 216,067 155,335
------- -------
Other Liabilities:
Deferred income taxes 27,780 18,232
Other 9,945 7,909
------- -------
37,725 26,141
------- -------
Notes, Mortgage Notes and Obligations
Payable, Less Current Maturities 240,396 219,951
------- -------
Commitments and Contingencies (Note 8)
Stockholders' Investment:
Preference stock, $1 par value; authorized
7,000,000 shares, none issued --- ---
Common stock, $1 par value; authorized
40,000,000 shares 15,883,427 and
15,814,246 shares issued 15,883 15,814
Special common stock, $1 par value;
authorized 5,000,000 shares 774,366 and
802,097 shares issued 774 802
Additional paid-in capital 134,690 134,627
Retained earnings 15,766 766
Cumulative translation, pension
and other adjustments (2,742) (6,168)
Less --treasury common stock at cost,
4,306,706 and 3,795,028 shares (31,351) (26,371)
--treasury special common stock
at cost, 276,784 and 271,574
shares (1,729) (1,680)
------- -------
Total stockholders' investment 131,291 117,790
------- -------
$625,479 $519,217
======= =======
The accompanying notes are an integral part of these financial statements.
Nortek, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
For the Years Ended
December 31,
------------------------
1995 1994 1993
---- ---- ----
(Amounts in Thousands)
Cash Flows from operating activities:
Net earnings (loss) $15,000 $17,800 $(20,800)
------ ------- -------
Adjustments to reconcile net earnings
(loss) to cash:
Depreciation and amortization 18,977 17,960 20,726
Net gain on investment and
marketable securities (2,000) --- (1,650)
Extraordinary (gain) loss from debt
retirements --- (250) 9,275
Loss on businesses sold --- 1,750 20,300
Cumulative effect of accounting changes --- (400) 3,100
Deferred federal income tax provision (credit)
before extraordinary items 1,300 300 (6,300)
Deferred federal income tax provision on
discontinued operations --- 2,200 ---
Deferred federal income tax provision (credit)
on extraordinary items --- 1,350 (3,175)
Changes in certain assets and liabilities,
net of effects from acquisitions and
dispositions:
Accounts receivable, net 4,496 (5,501) (11,033)
Prepaids and other current assets (289) (4,361) (937)
Inventories 5,820 (12,593) (2,854)
Accounts payable (5,614) 6,364 4,360
Accrued expenses and taxes (4,894) 4,242 (3,913)
Long-term assets, liabilities and other, net 1,051 (2,682) 5,326
------ ------ ------
Total adjustments to net earnings (loss) 18,847 8,379 33,225
------ ------ ------
Net cash provided by operating activities 33,847 26,179 12,425
------ ------ ------
Cash Flows from investing activities:
Capital expenditures (16,091) (19,424) (10,436)
Net cash paid for businesses acquired (27,543) --- ---
Proceeds from the sale of property and
equipment 1,831 114 5,242
Purchase of investments and marketable
securities (10,086) (5,032) (87,922)
Proceeds from the sale of investments
and marketable securities 20,772 --- 113,961
Net cash proceeds (payments) relating
to businesses sold or discontinued 1,129 12,465 (2,420)
Change in restricted cash and investments (331) (2,475) 2,552
Other, net (1,499) 51 (777)
------- ------- ------
Net cash provided by (used in)
investing activities (31,818) (14,301) 20,200
------- ------- ------
Cash Flows from financing activities:
Sale of Notes, net --- 209,195 ---
Purchase of debentures and notes payable --- (191,582) (1,383)
Increase in borrowings 10,763 --- 7,348
Payment of borrowings (1,656) (8,962) (4,124)
Purchase of Nortek Common and Special Common
Stock (4,664) --- ---
Other, net (822) (29) (1,327)
------- ------- ------
Net cash provided by financing
activities 3,621 8,622 514
------- ------- ------
Net increase in unrestricted cash and
investments 5,650 20,500 33,139
Unrestricted cash and investments
at the beginning of the year 77,106 56,606 23,467
------- ------- ------
Unrestricted cash and investments
at the end of the year $ 82,756 $ 77,106 $56,606
======= ======= ======
The accompanying notes are an integral part of these financial statements.
Nortek, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Investment
For the Three Years Ended December 31, 1995
Cumulative
Translation,
Addi- Retained Pension
Special tional Earnings and Other
Common Common Paid-in (Accumulat- Adjust-Treasury
Stock Stock Capital ed Deficit) ments Stock
------ ------ ------- ---------- -------- -------
Balance, December 31, (Amounts in Thousands)
1992 $15,602 $ 990 $134,599 $ 3,766 $ ---$(28,051)
140,432 shares of
special common stock
converted into 140,432
shares of common stock 141 (141) --- --- --- ---
16,400 shares of common
stock issued upon
exercise of stock options 16 --- 28 --- --- ---
Translation adjustment --- --- --- --- (1,337) ---
Pension adjustment --- --- --- --- (806) ---
Net loss --- --- --- (20,800) --- ---
------ ---- ------- ------- ------ -------
Balance, December 31,
1993 15,759 849 134,627 (17,034) (2,143) (28,051)
47,478 shares of
special common stock
converted into 47,478
shares of common stock 47 (47) --- --- --- ---
7,794 shares of common
stock issued upon
exercise of stock options 8 --- --- --- --- ---
Translation adjustment --- --- --- --- (780) ---
Pension adjustment --- --- --- --- 134 ---
Cumulative effect of an
accounting change --- --- --- --- (400) ---
Unrealized decline in
marketable securities --- --- --- --- (2,979) ---
Net earnings --- --- --- 17,800 --- ---
------ ---- ------- ------- ------ -------
Balance, December 31,
1994 15,814 802 134,627 766 (6,168) (28,051)
27,731 shares of special
common stock converted
into 27,731 shares of
common stock 28 (28) --- --- --- ---
41,450 shares of common
stock issued upon
exercise of stock
options 41 --- 63 --- --- ---
511,671 shares of
treasury stock
acquired --- --- --- --- --- (5,029)
Translation adjustment --- --- --- --- 701 ---
Pension adjustment --- --- --- --- (244) ---
Unrealized appreciation
in marketable
securities --- --- --- --- 2,969 ---
Net earnings --- --- --- 15,000 --- ---
Balance, December 31,
1995 $15,883 $ 774 $134,690 $15,766 $(2,742)$(33,080)
====== ==== ======= ====== ====== =======
The accompanying notes are an integral part of these financial statements.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Nortek, Inc. and
all of its significant wholly-owned subsidiaries (the "Company" or "Nortek")
after elimination of intercompany accounts and transactions. Certain amounts
in the prior years' financial statements have been reclassified to conform to
the presentation at December 31, 1995. On October 2, 1993, the Company began
to account for its Dixieline Lumber Company, Inc. subsidiary ("Dixieline") as a
business held for sale. As a result, Dixieline's operating results were no
longer included in the Company's consolidated operating results subsequent to
October 2, 1993. The Company sold this business on March 31, 1994.(See Note 2.)
Cash, Investments and Marketable Securities
Investments consist of short-term highly liquid investments which are readily
convertible into cash. Investments and marketable securities are carried at
approximate market price.
The Company has classified as restricted (in current assets in the accompanying
consolidated balance sheet) certain cash, investments and marketable securities
that are not fully available for use in its operations. At December 31, 1995,
approximately $9,411,000 of cash, investments and marketable securities has
been pledged as collateral for insurance and other requirements.
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair value of each
class of financial instruments for which it is practicable to estimate that
value:
Cash and Investments--
The carrying amount approximates fair value because of the short maturity
of those instruments.
Marketable Securities--
The fair value of marketable securities is based on quoted market prices.
At December 31, 1995, the fair value of marketable securities approximated
the amount on the Company's consolidated balance sheet.
Long-Term Debt--
At December 31, 1995, the fair value of long-term indebtedness was
approximately $7,200,000 lower than the amount on the Company's
consolidated balance sheet, based on quoted market prices. (See Note 5.)
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Inventories
Inventories in the accompanying consolidated balance sheet are valued at the
lower of cost or market. At December 31, 1995 and 1994, approximately
$56,221,000 and $64,589,000 of total inventories, respectively, were valued on
the last-in, first-out method (LIFO). Under the first-in, first-out method
(FIFO) of accounting, such inventories would have been approximately
$10,550,000 and $6,710,000 greater at December 31, 1995 and 1994, respectively.
All other inventories were valued under the FIFO method.
Sales Recognition
The Company recognizes sales upon the shipment of its products net of
applicable provisions for discounts and allowances. The Company also provides
for its estimate of warranty and bad debts at the time of shipment as selling,
general and administrative expense.
Foreign Currency Translation
The Company translates the assets and liabilities of its foreign subsidiaries
at the exchange rates in effect at year-end. Net sales and expenses are
translated using exchange rates in effect during the year. Gains and losses
from foreign currency translation are credited or charged to cumulative
translation adjustment included in stockholders' investment in the accompanying
consolidated balance sheet. Transaction gains or losses are recorded in
selling, general and administrative expense and have not been material.
Depreciation and Amortization
Depreciation and amortization of property and equipment is provided on a
straight-line basis over the estimated useful lives, which are generally as
follows:
Buildings and improvements 10-35 years
Machinery and equipment, including leases 3-15 years
Leasehold improvements term of lease
Expenditures for maintenance and repairs are expensed when incurred.
Expenditures for renewals and betterments are capitalized. When assets are
sold, or otherwise disposed of, the cost and accumulated depreciation are
eliminated and the resulting gain or loss is recognized.
Goodwill
The Company has classified as goodwill the cost in excess of fair value of the
net assets (including tax attributes) of companies acquired in purchase
transactions. Goodwill is being amortized on a straight-line method over 40
years. Amortization charged to continuing operations amounted to $2,519,000,
$2,407,000 and $2,418,000 for 1995, 1994 and 1993, respectively. At each
balance sheet date, the Company evaluates the realizability of goodwill based
on expectations of non-discounted cash flows and operating income for each
subsidiary having a material goodwill balance. Based on its most recent
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
analysis, the Company believes that no material impairment of goodwill exists
at December 31, 1995.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of", which is to become effective for the Company in 1996. SFAS No.
121 requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The statement
also requires that certain long-lived assets and identifiable intangibles that
are to be disposed, be reported at the lower of the carrying amount or fair
value less cost to sell. The Company has not completed its analysis with
respect to the provisions of SFAS No. 121 and accordingly has not determined
the effect on the Company's consolidated financial condition or results of
operations.
Net Earnings (Loss) Per Share
Net earnings (loss) per share amounts have been computed using the weighted
average number of common and common equivalent shares outstanding during each
year. Earnings (loss) per share calculations for 1993 do not include the
effect of common stock equivalents or convertible debentures (and the reduction
in related interest expense) because the assumed exercise of stock options and
conversion of debentures is anti-dilutive for the net loss per share amounts.
Special Common Stock is treated as the equivalent of Common Stock in
determining earnings per share results.
2. Acquisitions and Businesses Sold
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.
In the fourth quarter of 1995, several of the Company's wholly owned
subsidiaries completed the acquisition of the assets, subject to certain
liabilities, of Rangaire Company of Cleburne, Texas ("Rangaire"), all the
capital stock of Best S.p.A. of Fabriano, Italy and related entities ("Best")
and all the capital stock of Venmar Ventilation inc. of Drummondville,
Quebec, Canada ("Venmar"). The aggregate purchase price for these
acquisitions was approximately $36,500,000, consisting of cash of
approximately $33,400,000 and future payments of approximately $3,100,000.
The selling shareholders of certain of these acquisitions are entitled to
additional purchase price payments of up to approximately $7,800,000,
depending on subsequent operating results of such acquisitions.
Approximately $9,600,000 of the cash was borrowed under the terms of a line
of credit of one of the Company's subsidiaries.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
On March 31, 1994, the Company sold all the capital stock of Dixieline for
approximately $18,800,000 in cash and $6,000,000 in preferred stock of the
purchaser. In the third quarter of 1993, the Company provided a valuation
reserve of approximately $20,300,000 ($1.19 per share, net of tax) to reduce
the Company's net investment in Dixieline to estimated net realizable value.
No additional loss in 1994 was incurred in connection with this sale (see
Note 1). The combined unaudited net sales and pre-tax loss for businesses
sold in 1993 included in the consolidated statement of operations of the
Company was approximately $83,205,000 and $600,000, respectively, for the
year ended December 31, 1993. In the third quarter of 1995, the Company sold
its investment in the preferred stock of Dixieline, which resulted in a pre-
tax gain of approximately $2,200,000 ($.17 per share, net of tax), and is
included in net gain on investment and marketable securities in the Company's
accompanying consolidated statement of operations.
In January 1995, the Company paid approximately $1,750,000 ($.14 per share,
net of tax) as a final purchase price adjustment related to one of its
businesses sold and recorded a charge to earnings in the fourth quarter of
1994.
The following table presents the approximate unaudited pro forma operating
results of the Company for the year ended December 31, 1995 and December 31,
1994, as adjusted for the pro forma effect of acquisitions discussed above
and the debt financing and the debt redemptions discussed in Note 5, assuming
that these transactions occurred on January 1, 1994:
Year Ended December 31,
-----------------------
1995 1994
---- ----
(Amounts in Thousands except
per share amounts)
Net sales $886,210 $851,249
Operating earnings 47,355 59,965
Earnings before extraordinary gain 15,100 20,900
Fully diluted earnings per share $1.20 $1.62
In computing the pro forma earnings before extraordinary gain, earnings have
been reduced by net interest income on the aggregate cash portion of the
purchase price of such acquisitions at the historical rates earned by the
Company and by interest expense on indebtedness incurred in connection with the
acquisitions, net of the tax effect. Earnings before extraordinary gain have
also been reduced by amortization of goodwill and reflect net adjustments to
depreciation expense, as a result of an increase to estimated fair market value
of property and equipment. With respect to the effect of the debt financing and
debt redemptions discussed in Note 5, interest expense on the indebtedness
redeemed during the period that such indebtedness was outstanding was excluded
from operating results at an average interest rate of approximately 13.5%
(including amortization of debt discount and deferred debt expense) for the
periods presented, net of the tax effect. Interest expense was included on the
9 7/8% Notes at a rate of approximately 9 7/8, plus
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
amortization of deferred debt expense and debt discount, for the periods
presented, net of tax effect. Investment income was assumed earned on the
remaining cash proceeds from the debt financing at a rate of 3.5%.
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, 1994, or which may be reported in the future.
3. Cash Flows
Interest paid was $23,228,000, $22,119,000 and $26,981,000 in 1995, 1994 and
1993, respectively.
The following table summarizes the activity of businesses acquired in purchase
transactions included in the accompanying consolidated statement of cash flows
for the year ended December 31, 1995:
1995
----
(Amounts in Thousands)
Fair value of assets acquired $129,652
Liabilities assumed or created (96,224)
Cash paid for acquisitions 33,428
Less cash acquired (5,885)
-------
Net cash paid for acquisitions $ 27,543
=======
The following table summarizes the activity of businesses sold or discontinued
included in the accompanying consolidated statement of cash flows:
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
(Amounts in Thousands)
Fair value of assets sold $ --- $39,439 $ ---
Liabilities assumed by the purchaser --- (16,143) ---
Notes receivable and other non-cash proceeds
received as part of the proceeds --- (6,000) ---
Cash proceeds from the sale of Dixieline
preferred stock 2,874 --- ---
Cash payments relating to businesses
sold or discontinued, net (1,745) (4,831) (2,420)
------ ------ ------
Net cash proceeds (payments) relating
to businesses sold or discontinued $ 1,129 $12,465 $(2,420)
======= ====== ======
Significant non-cash financing and investing activities excluded from the
accompanying consolidated statement of cash flows include capitalized lease
additions of approximately $806,000 in 1995 and an increase of approximately
$2,969,000 and a decline of approximately $2,979,000 in the fair market value
of marketable securities available for sale for 1995 and 1994, respectively.
Non-cash financing and investing activities were not significant for the year
ended December 31, 1993.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
4. Income Taxes
The following is a summary of the components of earnings (loss) before
provision (credit) for income taxes and extraordinary gain or loss:
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
(Amounts in Thousands)
Domestic $21,600 $23,100 $(17,000)
Foreign 2,700 4,300 5,400
------ ------ -------
$24,300 $27,400 $(11,600)
====== ====== =======
The following is a summary of the provision (credit) for income taxes before
extraordinary gain or loss included in the accompanying consolidated statement
of operations:
Year Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
(Amounts in Thousands)
Federal income taxes--
Current $5,700 $ 7,125 $ 2,800
Deferred 1,300 300 (6,300)
----- ------ ------
7,000 7,425 (3,500)
Foreign 1,300 1,500 2,600
State 1,000 1,275 1,900
----- ------ ------
$9,300 $10,200 $ 1,000
===== ====== ======
Income tax payments, net of refunds, were approximately $3,739,000, $10,895,000
and $11,950,000 in 1995, 1994 and 1993, respectively.
The table below reconciles the federal statutory income tax rate to the
effective tax rate for earnings before extraordinary gain or loss of
approximately 38.3%, 37.2% and 8.6% in 1995, 1994 and 1993, respectively.
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
(Amounts in Thousands)
Income tax provision (credit) before
extraordinary gain or loss at the
Federal statutory rate $8,505 $ 9,590 $(4,060)
Net change from statutory
rate:
Change in valuation reserve, net (1,100) (1,625) 2,618
State taxes, net of federal tax effect 650 829 1,235
Amortization not deductible for
tax purposes 868 737 746
Businesses sold --- 613 (172)
Foreign source deemed income --- --- 700
Tax effect on foreign income 79 164 196
Other, net 298 (108) (263)
----- ------ ------
$9,300 $10,200 $ 1,000
===== ====== ======
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
The Company recorded a $1,000,000 income tax credit (principally deferred) in
the first quarter of 1993 relating to the cumulative effect of an accounting
change for certain post-retirement benefits. In the fourth quarter of 1993,
the Company recorded a $3,175,000 deferred income tax credit relating to the
extraordinary loss, arising from indebtedness called for redemption. (See Note
5.)
The tax effect of temporary differences which gave rise to significant portions
of deferred income tax assets and liabilities as of December 31, 1995 and
December 31, 1994 are as follows:
December 31,
---------------
1995 1994
---- ----
(Amounts in Thousands)
Prepaid (Deferred) Income Tax Assets
Arising From:
Accounts receivable $ 1,425 $ 1,399
Inventory (577) (468)
Insurance reserves 6,036 7,688
Other reserves, liabilities and
assets, net 12,216 11,181
------ ------
$19,100 $19,800
====== ======
Deferred (Prepaid) Income Tax Liabilities
Arising From:
Property and equipment, net $15,233 $12,406
Prepaid pension assets 1,323 1,230
Insurance reserves (273) (643)
Other reserves, liabilities and
assets, net 8,797 2,476
Capital loss carryforward (7,260) (6,217)
Unrealized loss on business sold --- (604)
Other tax assets (1,658) (3,642)
Valuation allowances 11,618 13,226
------ ------
$27,780 $18,232
====== ======
At December 31, 1995, the Company has U.S. Federal capital loss carryforwards
of approximately $19,600,000, of which $17,700,000 expires in the year 1997.
The Company has provided a valuation allowance equal to the tax effect of
capital loss carryforwards and certain other tax assets, since realization of
these tax assets cannot be reasonably assured. At December 31, 1995, the
Company has approximately $1,800,000 of net U.S. Federal prepaid income tax
assets which are expected to be realized through future operating earnings.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
5. Notes, Mortgage Notes and Obligations Payable
Short-term obligations at December 31, 1995 and 1994 consist of the following:
December 31,
------------
1995 1994
---- ----
(Amounts in Thousands)
Secured revolving lines of credit of
a Canadian subsidiary $ 4,173 $ 51
Secured lines of credit and bank advances
of the Company's European subsidiaries 21,972 ---
Other secured revolving lines of credit
of one of the Company's U. S. subsidiaries 3,830 ---
Other obligations 251 ---
------ ---
$30,226 $ 51
====== ===
These short-term obligations principally relate to subsidiaries acquired in
1995 and are secured by approximately $38,000,000 of accounts receivable and
inventory. These borrowings had an average weighted interest rate of
approximately 11.1% since the date of acquisition.
Notes, mortgage notes and debentures payable in the accompanying consolidated
balance sheet at December 31, 1995 and 1994 consist of the following:
December 31,
------------
1995 1994
---- ----
(Amounts in Thousands)
Mortgage notes payable $ 17,055 $ 6,774
Other, net of $750,000 unamortized
discount in 1995 18,185 887
9 7/8% Senior Subordinated Notes
due 2004 ("9 7/8% Notes"), net of
unamortized original issue discount
of $1,520,000 and $1,632,000 216,980 216,868
------- -------
252,220 224,529
Less amounts included in current
liabilities 11,824 4,578
------- -------
$240,396 $219,951
======= =======
In February 1994, the Company sold in a public offering $218,500,000 of its 9
7/8% Senior Subordinated Notes due 2004 at a discount of approximately
$1,717,000, which is being amortized over the life of the issue. Net proceeds
from the sale of the 9 7/8% Notes, after deducting underwriting commissions and
expenses, amounted to approximately $207,695,000, and on March 24, 1994, a
portion of such proceeds was used to redeem approximately $153,000,000 of
certain of the Company's outstanding principal amount of indebtedness and to
pay accrued interest. Interest expense, net of interest income, in the first
quarter of 1994 was approximately $1,300,000 greater than it would have been
had the debt redemption occurred on the same day as the financing. The call for
these debt redemptions resulted in an extraordinary loss of
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
approximately $6,100,000 ($.49 per share) net of an income tax credit of
approximately $3,175,000, which was recorded in the fourth quarter of 1993. See
Note 2 with respect to the pro forma effect of the debt redemptions.
The indenture governing the 9 7/8% Notes restricts, among other things, the
payment of cash dividends, repurchase of the Company's capital stock and the
making of certain other restricted payments, the incurrence of additional
indebtedness, the making of certain investments, mergers, consolidations and
sale of assets (all as defined in the indenture). Upon certain asset sales (as
defined in the indenture), the Company will be required to offer to purchase,
at 100% principal amount plus accrued interest to the date of purchase, 9 7/8%
Notes in a principal amount equal to any net cash proceeds (as defined in the
indenture) that are not invested in properties and assets used primarily in the
same or related business to those owned and operated by the Company at the
issue date of the 9 7/8% Notes or at the date of such asset sale and such net
cash proceeds were not applied to permanently reduce Senior Indebtedness (as
defined in the indenture). The 9 7/8% Notes are redeemable at the option of
the Company, in whole or in part, at any time and from time to time, at
104.214% on March 1, 1999, declining to 100% on March 1, 2002 and thereafter.
At December 31, 1995, approximately $30,200,000 was available for the payment
of cash dividends or stock payments under the terms of the Company's Indenture
governing the 9 7/8% Notes. (See Note 6.)
In the first half of 1994, the Company purchased $9,121,000 principal amount of
7 1/2% Convertible Debentures, which resulted in an extraordinary gain of
approximately $300,000, net of income taxes of approximately $150,000. On
October 24, 1994, the Company redeemed its remaining outstanding $6,373,000
principal amount of 7 1/2% Convertible Debentures, plus paid accrued interest
and a slight redemption premium. This redemption resulted in an extraordinary
loss of approximately $100,000, net of income taxes of $100,000 in the third
quarter of 1994. These purchases and redemptions resulted in a net
extraordinary gain of $200,000 ($.02 per share) for the year ended December 31,
1994.
In the fourth quarter of 1993, as a result of the call for redemption of
certain of the Company's indebtedness described above, the Company wrote off
approximately $8,100,000 of unamortized deferred debt expense and debt discount
and provided for a redemption premium of approximately $1,175,000, both of
which were recorded as an extraordinary loss.
Mortgage notes payable of approximately $17,055,000 outstanding at December 31,
1995 include various mortgage notes and other related indebtedness payable in
installments through 2009 and bearing interest at rates ranging from 7.5% to
13.5% and is collateralized by property and equipment with an aggregate net
book value of approximately $19,920,000 at December 31, 1995.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Other obligations of $18,185,000 outstanding at December 31, 1995 include
borrowings relating to equipment purchases and other borrowings bearing
interest at rates primarily ranging between 9% to 14% and maturing at various
dates through 2002. Approximately $12,881,000 of such indebtedness is
collateralized by property and equipment with an aggregate net book value of
approximately $25,305,000 at December 31, 1995.
The following is a summary of maturities of all of the Company's debt
obligations, excluding unamortized debt discount, due after December 31, 1996:
(Amounts in Thousands)
1997 $ 5,406
1998 5,566
1999 4,926
2000 3,449
Thereafter 223,319
-------
$242,666
=======
Amortization of discount and deferred costs was approximately $1,100,000,
$1,400,000 and $2,100,000 in 1995, 1994 and 1993, respectively.
6. Common Stock, Special Common Stock, Stock Options and Deferred
Compensation
Each share of Special Common Stock has 10 votes on all matters submitted to a
stockholder vote, except that the holders of Common Stock, voting separately as
a class, have the right to elect 25% of the directors to be elected at a
meeting, with the remaining 75% being elected by the combined vote of both
classes. Shares of Special Common Stock are generally non-transferable, but
are freely convertible on a share-for-share basis into shares of Common Stock.
The Company has a rights plan, which expires on April 11, 1996, and provides
for the right to purchase for $75, one one-hundredth of a share of $1.00 par
value Series A Participating Preference Stock for each right held. The rights
that are not currently exercisable are attached to each share of Common Stock
and may be redeemed by the Directors at $.01 per share at any time. After a
shareholder acquires beneficial ownership of 17% or more of the Company's
Common Stock and Special Common Stock, the rights will trade separately and
become exercisable entitling a rights holder to acquire additional shares of
the Company's Common Stock having a market value equal to twice the amount of
the exercise price of the right. In addition, after a person or group
("Acquiring Company") commences a tender offer or announces an intention to
acquire 30% or more of the Company's Common Stock and Special Common Stock, the
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
rights will trade separately and, under certain circumstances, will permit each
rights holder to acquire common stock of the Acquiring Company, having a market
value equal to twice the amount of the exercise price of the right.
At December 31, 1995, a total of 1,514,266 shares of Common Stock was reserved
as follows:
Stock option plans 739,900
Conversion of Special Common Stock 774,366
---------
1,514,266
=========
At December 31, 1995, 43,500 shares of Special Common Stock were reserved for
stock option plans.
The Company has several stock option plans which provide for the granting of
options to certain officers, employees and non-employee directors of the
Company. Options granted under the plans vest over periods ranging up to five
years and expire from eight to ten years from the date of grant. At December
31, 1995, 419,000 options are currently exercisable and 288,400 of additional
options are available for grant under these plans.
Options for 200,100 and 50,100 shares of Common and Special Common Stock became
exercisable during 1995 and 1994, respectively. Proceeds from options
exercised are credited to common stock and additional paid-in capital.
The following table summarizes the Common and Special Common Stock option
transactions for the three years ended December 31, 1995:
Number Option Price
of Shares Per Share Total
--------- --------- -----
Options outstanding at
December 31, 1992 240,300 $2.25-$15.69 $1,064,838
Granted 280,000 8.75 2,450,000
Exercised (16,400) 2.25-2.875 (44,000)
------- ----------- ---------
Options outstanding at
December 31, 1993 503,900 $2.25-$15.69 $3,470,838
Exercised (9,800) 2.875 (28,175)
------- ----------- ---------
Options outstanding at
December 31, 1994 494,100 $2.25-$15.69 $3,442,663
Exercised (42,600) 2.25-2.875 (119,850)
------- ----------- ---------
Options outstanding at
December 31, 1995 451,500 $2.25-$15.69 $3,322,813
======= =========== =========
As of February 13, 1996, the Company purchased during the first quarter,
approximately 428,800 shares of its Common Stock for approximately $4,898,771
in cash in negotiated and open market transactions and will account for such
shares as Treasury Stock.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
7. Pension, Retirement and Profit Sharing Plans
The Company and its subsidiaries have various pension, retirement and profit
sharing plans requiring contributions to qualified trusts and union
administered funds. Pension and profit sharing expense charged to operations
aggregated approximately $1,377,000 in 1995, $2,883,000 in 1994 and $1,683,000
in 1993. The Company's policy is to fund currently the actuarially determined
annual contribution. In the fourth quarter of 1995, benefits related to the
Company's existing defined benefit plans were frozen.
The Company's net pension expense for its defined benefit plans for 1995, 1994
and 1993 consists of the following components:
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
(Amounts in Thousands)
Service costs $1,273 $ 1,647 $ 1,685
Interest cost 2,364 2,261 1,989
Actual net income on plan assets (3,204) (2,155) (3,295)
Net amortization and deferred items 790 10 822
Net gain from freezing plan benefits (581) --- ---
----- ------ ------
Total expense $ 642 $ 1,763 $ 1,201
===== ====== ======
The following tables set forth the funded status of the Company's defined
benefit plans and amounts recognized in the Company's consolidated balance
sheet at December 31, 1995 and 1994:
Plan Assets Exceeding
Benefit Obligation
------------------
1995 1994
Actuarial present value of benefit ---- ----
(Amounts in Thousands)
obligations at September 30:
Vested benefits $22,259 $18,149
Non-vested benefits --- 630
------ ------
Accumulated benefit obligation 22,259 18,779
Effect of projected future compensation levels --- 5,373
------ ------
Projected benefit obligation 22,259 24,152
Plan assets at fair value at September 30 25,673 24,486
------ ------
Plan assets in excess of the projected
benefit obligation 3,414 334
Unrecognized net loss --- 5,401
Unrecognized net assets --- (2,412)
Unrecognized prior service costs --- (129)
------ ------
$ 3,414 $ 3,194
====== ======
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Accumulated Benefit
Obligation
Exceeding Plan Assets
---------------------
1995 1994
==== ====
(Amounts in Thousands)
Actuarial present value of benefit
obligations at September 30:
Vested benefits $5,069 $ 4,199
Non-vested benefits --- 232
----- ------
Accumulated benefit obligation 5,069 4,431
Plan assets at fair value at September 30 4,407 3,691
----- ------
Plan assets less than the accumulated
benefit obligation (662) (740)
Unrecognized net loss 916 807
Unrecognized prior service costs --- 602
Additional minimum liability (916) (1,409)
----- ------
$ (662) $ (740)
===== ======
Plan assets include commingled funds, marketable securities, insurance
contracts and cash and short-term investments. The weighted average discount
rate and rate of increase in future compensation levels used in determining the
actuarial present value of benefit obligations were 7 1/2 percent and 5
percent, respectively, in 1995, 8 percent and 5 1/2 percent, respectively, in
1994 and 7 1/8 percent and 5 1/2 percent, respectively, in 1993. The expected
long-term rate of return on assets was 8 1/2 percent in 1995, 1994 and 1993.
In 1995, a minimum pension liability resulted in a reduction in stockholders'
investment of approximately $916,000. In 1994 and 1993, a minimum pension
liability and an intangible asset for certain plans were recognized, resulting
in a reduction in the Company's stockholders' investment of approximately
$672,000 and $806,000, respectively.
In late 1995, the Company adopted a supplemental retirement plan for certain
employees, which was effective as of January 1, 1996. The actuarial present
value of the unfunded accumulated benefit obligation of this plan is
approximately $3,500,000 and will result in an additional minimum pension
liability and an intangible asset being recorded in 1996.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
8. Commitments and Contingencies
The Company provides accruals for all direct and indirect costs associated with
the estimated resolution of contingencies at the earliest date at which the
incurrence of a liability is deemed probable and the amount of such liability
can be reasonably estimated.
At December 31, 1995, the Company and its subsidiaries are obligated under
lease agreements for the rental of certain real estate and machinery and
equipment used in its operations. Minimum annual rental expense aggregates
approximately $29,992,000 at December 31, 1995. The obligations are payable as
follows:
1996 $ 5,047,000
1997 4,429,000
1998 3,802,000
1999 2,824,000
2000 1,713,000
Thereafter 12,177,000
Certain of these lease agreements provide for increased payments based on
changes in the consumer price index. Rental expense, from continuing
operations in the accompanying consolidated statement of operations, excluding
Dixieline, for the years ended December 31, 1995, 1994 and 1993 was
approximately $6,900,000, $7,000,000, and $6,600,000, respectively. Under
certain of these lease agreements, the Company and its subsidiaries are also
obligated to pay insurance and taxes.
The Company is subject to other contingencies, including additional legal
proceedings and claims arising out of its businesses that cover a wide range of
matters, including, among others, environmental matters, contract and
employment claims, product liability, warranty and modification, adjustment or
replacement of component parts of units sold, which may include product
recalls. The Company has used various substances in its products and
manufacturing operations which have been or may be deemed to be hazardous or
dangerous, and the extent of its potential liability, if any, under
environmental, product liability and workers' compensation statutes, rules,
regulations and case law is unclear. Further, due to the lack of adequate
information and the potential impact of present regulations and any future
regulations, there are certain circumstances in which no range of potential
exposure may be reasonably estimated.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
While it is impossible to ascertain the ultimate legal and financial liability
with respect to contingent liabilities, including lawsuits, the Company
believes that the aggregate amount of such liabilities, if any, in excess of
amounts provided, will not have a material adverse effect on the consolidated
financial position or results of operations of the Company.
The preparation of financial statements in conformity with generally accepted
accounting principles involves estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the financial statements and the reported
amounts of income and expenses during the reporting periods. Operating results
in the future could vary from the amounts derived from such estimates and
assumptions.
9. Operating and Geographic Segment Information and Concentration of Credit
Risk
The Company operates in one industry segment, Residential and Commercial
Building Products. No single customer accounts for 10% or more of consolidated
net sales. Prior to 1995, more than 90% of net sales and identifiable assets
were related to the Company's domestic operations. As a result of acquisitions
in 1995, the following information by geographic area is presented for 1995:
Net Identifiable
Sales Earnings Assets
Geographic areas: ----- -------- ------------
Domestic operations $733,264 $45,742 $341,555
European operations 13,298 769 71,180
Other foreign operations 42,432 2,189 68,056
Eliminations (12,784) --- (8,258)
------- ------ -------
776,210 48,700 472,533
Unallocated --- (7,616) 152,946
Interest expense --- (24,918) ---
Interest income --- 6,134 ---
Net gain on investment and
marketable securities --- 2,000 ---
------- ------- -------
Consolidated Totals $776,210 $ 24,300 $625,479
======= ======= =======
Unallocated assets consist primarily of cash, investments and marketable
securities and U. S. Federal prepaid income taxes.
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments with high
credit quality financial institutions and limits the amount of credit exposure
to any one financial institution. Concentrations of credit risk with respect
to trade receivables are limited due to the large number of customers
comprising the Company's customer base and their dispersion across many
different geographical regions. At December 31, 1995, the Company had no
significant concentrations of credit risk.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
10. Net Gain (Loss) on Marketable Securities
On January 1, 1994, the Company adopted the accounting requirements of SFAS No.
115 "Accounting for Certain Investments in Debt and Equity Securities", and
recorded as income the accumulated unrealized marketable security reserve
recorded at December 31, 1993 of approximately $400,000 ($.03 per share) as the
cumulative effect of an accounting change. Under the new accounting method,
the Company records unrealized gains or losses on such investment securities as
adjustments to stockholders' investment. Previously, such gains or losses were
recorded in the Company's consolidated statement of operations. During the
second quarter of 1995, the Company recorded a pre-tax loss of approximately
$200,000 ($.02 per share, net of tax) on the sale of marketable securities.
At December 31, 1995 and 1994, the reduction in the Company's stockholders'
investment under the new accounting method for gross unrealized losses was
approximately $410,000 and $3,379,000, respectively. At December 31, 1995,
there were no gross unrealized gains on the Company's marketable securities.
Prior periods have not been restated.
The Company's marketable securities at December 31, 1995 consist primarily of
U. S. Government Treasury Notes due as follows:
Fair
Principal Market
Due Amount Cost Value
------ ---- -----
(Amounts in Thousands)
1-5 years $16,000 $16,295 $15,969
5-10 years 4,537 4,672 4,588
------ ------ ------
$20,537 $20,967 $20,557
====== ====== ======
During 1993, the Company recorded a pre-tax gain on investment and marketable
securities of $1,000,000 ($.05 per share, net of tax) in the first quarter, a
pre-tax gain of $450,000 ($.02 per share, net of tax) in the second quarter, a
$900,000 pre-tax gain ($.05 per share, net of tax) in the third quarter and a
pre-tax loss of $700,000 ($.04 per share, net of tax) in the fourth quarter.
11. Selling, General and Administrative Expense
In the second quarter of 1994, the Company recorded net pre-tax income of
approximately $3,200,000 ($.14 per share, net of tax) resulting from the
settlement of certain insurance claims and disputes.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
In the fourth quarter of 1993, the Company's Plumbing Products Group recorded a
pre-tax loss of approximately $2,800,000 ($.15 per share, net of tax) in
connection with the restructure of certain product lines. In the third quarter
of 1993, the Company recorded a pre-tax loss of approximately $1,600,000 ($.08
per share, net of tax) as a result of the sale in October 1993 of certain real
property and provided a pre-tax reserve of approximately $700,000 ($.04 per
share, net of tax) in connection with the consolidation of certain of its
manufacturing facilities.
12. Accrued Expenses and Taxes, Net
Accrued expenses and taxes, net, consist of the following at December 31, 1995
and 1994:
December 31,
-------------
1995 1994
---- ----
(Amounts in Thousands)
Insurance $ 22,496 $23,483
Payroll, management incentive and
accrued employee benefits 17,463 14,609
Interest 8,077 7,446
Accrued product warranty expense 6,850 6,968
Businesses sold or discontinued --- 1,750
Other, net 46,084 43,753
------- ------
$100,970 $98,009
======= ======
13. Summarized Quarterly Financial Data (Unaudited)
The following summarizes unaudited quarterly financial data for the years ended
December 31, 1995 and December 31, 1994:
For the Quarters Ended
----------------------
April 1 July 1 Sept. 30 Dec. 31
------- ------ ------ -------
(In Thousands Except Per Share Amounts)
1995
Net sales $184,809 $194,206 $193,567 $203,628
Gross profit 49,369 49,505 49,676 52,731
Earnings before extraordinary
gain or loss 2,500 3,200 5,200 4,100
Net earnings 2,500 3,200 5,200 4,100
Earnings per share before
extraordinary gain or loss:
Primary .20 .25 .41 .33
Fully diluted .20 .25 .41 .33
Net earnings per share:
Primary .20 .25 .41 .33
Fully diluted .20 .25 .41 .33
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
For the Quarters Ended
----------------------
April 2 July 2 Oct. 1 Dec. 31
------- ------ ------ -------
(In Thousands Except Per Share Amounts)
1994
Net sales $169,020 $193,722 $197,012 $177,406
Gross profit 49,718 57,678 58,075 51,361
Earnings before extraordinary
gain or loss 700 5,500 6,400 4,600
Net earnings 1,500 5,400 6,300 4,600
Earnings per share before
extraordinary gain or loss:
Primary .06 .44 .50 .36
Fully diluted .06 .43 .50 .36
Net earnings per share:
Primary .12 .43 .49 .36
Fully diluted .12 .42 .49 .36
See Notes 2, 5, 10 and 11 regarding certain other quarterly transactions
included in the operating results in the above table.
Increased net sales in the fourth quarter of 1995 as compared to the fourth
quarter of 1994 reflect the effect of businesses acquired in 1995. (See
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 2).
Report of Independent Public Accountants
To Nortek, Inc.:
We have audited the accompanying consolidated financial statements of Nortek,
Inc. (a Delaware corporation) and subsidiaries listed in Item 14(a)(1) of this
Form 10-K. These financial statements and the schedule referred to below are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nortek, Inc. and subsidiaries
as of December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
As explained in Note 10 to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for marketable
securities.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Item 14(a)(2) is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts,
February 20, 1996
SCHEDULE II
NORTEK, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
BALANCE CHARGED
AT TO COSTS CHARGED DEDUCTIONS BALANCE
BEGINNING ACQUI- AND TO OTHER FROM AT END
CLASSIFICATION OF YEAR SITIONS EXPENSES ACCOUNTS RESERVES OF YEAR
- -------------- ------- ------- -------- -------- ---------- -------
(Amounts in Thousands)
For the year ended
December 31, 1993:
Allowances for doubtful
accounts and sales
allowances $4,068 $ --- $1,832$ (125)(b) $(1,577)(a) $4,198
===== ===== ===== ====== ====== =====
For the year ended
December 31, 1994:
Allowances for doubtful
accounts and sales
allowances $4,198 $ --- $ 762$ 147 (c) $(1,077)(a) $4,030
===== ===== ===== ====== ===== =====
For the year ended
December 31, 1995:
Allowances for doubtful
accounts and sales
allowances $4,030 $ 719 $1,069$ 389 (c) $(1,661)(a) $4,546
===== ===== ===== ===== ====== =====
(a) Amounts written off, net of recoveries.
(b) Transfer of allowances for doubtful accounts of Dixieline to current assets
of business held for sale.
(c) Other
EXHIBIT INDEX
-------------
Exhibits marked with an asterisk are filed herewith. The remainder of the
exhibits have heretofore been filed with the Commission and are incorporated
herein by reference. Exhibits marked with a double asterisk identify each
management contract or compensatory plan or arrangement.
3.1 Restated Certificate of Incorporation of Nortek, Inc. (Exhibit 2
to Form 8-K filed April 23, 1987, File No. 1-6112).
3.2 Amendment to Restated Certificate of Incorporation of Nortek,
Inc. effective May 10, 1989 (Exhibit 3.2 to Form 10-K filed March 30,
1990, File No. 1-6112).
3.3 By-laws of Nortek, Inc. (as amended through November 30, 1993)
(Exhibit 3.3 to Form 10-K filed March 25, 1994, File No. 1-6112).
4.1 Rights Agreement dated as of March 31, 1986 as amended and
restated as of March 18, 1991 between the Company and State Street
Bank and Trust Company, as Rights Agent (Exhibit 1 to Form 8-K filed
March 26, 1991, File No. 1-6112).
4.2 Amendment No. 1 dated as of October 6, 1993 to Amended and
Restated Rights Agreement dated as of March 18, 1991 (Exhibit 1 to
Form 8-K filed October 12, 1993, File No. 1-6112).
4.3 Amendment No. 2 dated as of September 27, 1995 to Amended and
Restated Rights Agreement dated as of March 18, 1991 (Exhibit 1 to
Form 8-K filed October 12, 1995, File No. 1-6112).
4.4 Indenture dated as of February 14, 1994 between the Company and
State Street Bank and Trust Company, as Trustee, relating to the 9
7/8% Senior Subordinated Notes due 2004 (Exhibit 4.5 to Form 10-K
filed March 25, 1994, File No. 1-6112).
**10.1 Employment Agreement between Richard L. Bready and the
Company, dated as of January 1, 1984 (Exhibit 10.2 to Form 10-K filed
March 31, 1986, File No. 1-6112).
**10.2 Amendment dated as of March 3, 1988 to Employment Agreement
between Richard L. Bready and the Company dated as of January 1, 1984
(Exhibit 19.2 to Form 10-Q filed May 17, 1988, File No. 1-6112).
**10.3 Second Amendment dated as of November 1, 1990 to Employment
Agreement between Richard L. Bready and the Company dated as of
January 1, 1984 (Exhibit 10.3 to Form 10-K filed April 1, 1991, File
No. 1-6112).
**10.4 Deferred Compensation Agreement dated March 7, 1983 between
Richard L. Bready and the Company (Exhibit 10.4 to Registration
Statement No. 33-69778 filed February 9, 1994).
**10.5 Deferred Compensation Agreement dated March 7, 1983 between
Almon C. Hall and the Company (Exhibit 10.5 to Registration Statement
No. 33-69778 filed February 9, 1994).
**10.6 Deferred Compensation Agreement dated March 7, 1983 between
Richard J. Harris and the Company (Exhibit 10.6 to Registration
Statement No. 33-69778 filed February 9, 1994).
**10.7 1984 Stock Option Plan, as amended through May 27, 1987
(Exhibit 28.2 to Registration Statement No. 33-22527 filed June 15,
1988).
**10.8 Change in Control Severance Benefit Plan for Key Employees
adopted February 10, 1986, and form of agreement with employees
(Exhibit 10.19 to Form 10-K filed March 31, 1986, File No. 1-6112).
**10.9 1987 Stock Option Plan (Exhibit 28.3 to Registration
Statement No. 33-22527 filed June 15, 1988).
**10.10 Form of Indemnification Agreement between the Company and
its directors and certain officers (Appendix C to Proxy Statement
dated March 23, 1987 for Annual Meeting of Nortek Stockholders, File
No. 1-6112).
**10.11 1988 General Stock Option Plan (Appendix A to Proxy
Statement dated April 1, 1988 for Annual Meeting of Nortek
Stockholders, File No. 1-6112).
**10.12 1988 General Stock Option Plan III (Appendix C to Proxy
Statement dated April 12, 1989 for Annual Meeting of Nortek
Stockholders, File No. 1-6112).
10.13 Registration Rights Agreement dated as of October 31, 1990
between the Company and Bready Associates (Exhibit 4 to Schedule 13D
filed November 13, 1990 by Bready Associates relating to the Common
Stock, par value $1.00 per share, of the Company).
**10.14 1990 General Stock Option Plan (Appendix A to Proxy
Statement dated April 17, 1991 for Annual Meeting of Nortek
Stockholders, File No. 1-6112).
*11.1 Calculation of Shares Used in Determining Earnings Per
Share.
*21.1 List of subsidiaries.
*23.1 Consent of Independent Public Accountants
*27.1 Financial Data Schedule.
EXHIBIT 11.1
NORTEK, INC. AND SUBSIDIARIES
CALCULATION OF SHARES USED IN DETERMINING EARNINGS PER SHARE
1995 1994 1993
---- ---- ----
Calculation of the number of shares to
be used in computing earnings per share:
Weighted average common and special
common shares issued during the
period 16,625,166 16,609,828 16,598,819
Less average common and special common
shares held in the Treasury (4,180,560) (4,066,611) (4,066,602)
---------- ---------- ----------
Weighted average number of common and
special common shares outstanding
during the period 12,444,606 12,543,217 12,532,217
Dilutive effect of stock options
considered common stock equivalents 124,686 163,894 90,215
---------- ---------- ----------
Weighted average number of common and
common equivalent shares outstanding
during the period 12,569,292 12,707,111 12,622,432
========== ========== ==========
Calculation of the number of shares to
be used in computing fully diluted
earnings per share:
Weighted average number of common and
special common shares outstanding
during the period 12,444,606 12,543,217 12,532,217
Dilutive effect of stock options
considered common stock equivalents
computed under the treasury stock
method using the greater of the
price at the end of the period or
the average price during the
period 175,153 206,305 109,571
Dilutive effect of assuming conversion
of the Company's 7-1/2% convertible
debentures --- 394,792 720,507
---------- ---------- ----------
12,619,759 13,144,314 13,362,295
========== ========== ==========
Note: The loss per share calculation for the year ended December 31, 1993
does not include the effect of common stock equivalents or convertible
debentures (and the reduction in related expense) because the assumed
exercise of stock options and the conversion of debentures is anti-
dilutive for the loss per share amounts.
Exhibit 21.1
LIST OF SUBSIDIARIES
--------------------
Set forth below is a list of all subsidiaries of the Company as of December
31, 1995 the assets and operations of which are included in the Consolidated
Financial Statements of Nortek, Inc., except subsidiaries that, considered in
the aggregate as a single subsidiary, would not constitute a significant
subsidiary:
STATE OF
NAME OF SUBSIDIARY INCORPORATION
------------------ -------------
Broan Limited Ontario
9025-7205 Quebec Inc. Quebec
Venmar Ventilation inc. Quebec
Conservation Energy Systems, Inc. Quebec
Broan Mfg. Co., Inc. Wisconsin
Aubrey Manufacturing, Inc. Delaware
Monarch Metal Products Corporation Illinois
Jensen Industries, Inc. Delaware
Linear Corporation California
Linear H.K. Manufacturing Limited Hong Kong
We Monitor America Incorporated Colorado
Moore-O-Matic, Inc. Wisconsin
M & S Systems, Inc. Delaware
Nordyne Inc. Delaware
Commercial Environmental Systems
Group, Inc. Delaware
Mammoth, Inc. Delaware
Governair Corporation Oklahoma
Temtrol, Inc. Oklahoma
Nortek (UK) Limited United Kingdom
Nortek S.r.l. Italy
Best S.p.A. Italy
Best Deutschland GmbH Germany
Broan S.r.l. Italy
Maninvest S.r.l. Italy
Interglass S.r.l. Italy
Elektromec S.p.A. Italy
Elektra S.r.l. Italy
Rangaire, Inc. Delaware
Universal-Rundle Corporation Delaware
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Nortek, Inc.:
As independent public accountants, we hereby consent to the
incorporation of our report dated February 20, 1996, included in this Form 10-
K, into the Company's previously filed Registration Statements on Form S-8
(File Nos. 33-22527 and 33-47897).
/s/ARTHUR ANDERSEN LLP
Boston, Massachusetts,
March 7, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 90,167
<SECURITIES> 20,557
<RECEIVABLES> 122,563
<ALLOWANCES> 4,546
<INVENTORY> 110,052
<CURRENT-ASSETS> 376,820
<PP&E> 233,517
<DEPRECIATION> 97,255
<TOTAL-ASSETS> 625,479
<CURRENT-LIABILITIES> 216,067
<BONDS> 240,396
0
0
<COMMON> 16,657
<OTHER-SE> 114,634
<TOTAL-LIABILITY-AND-EQUITY> 625,479
<SALES> 776,210
<TOTAL-REVENUES> 776,210
<CGS> 574,929
<TOTAL-COSTS> 574,929
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,918
<INCOME-PRETAX> 24,300
<INCOME-TAX> 9,300
<INCOME-CONTINUING> 15,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,000
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.19
</TABLE>
